The Putnam Allstate Advisor - A
Allstate Life Insurance Company Prospectus Dated October 25, 1999
3100 Sanders Road
Northbrook, Illinois 60062
Telephone Number: 1-800/390-1277
Allstate Life Insurance Company ("Allstate") is offering the Putnam
Allstate Advisor - A, an individual and group flexible premium deferred variable
annuity contract ("Contract"). This prospectus contains information about the
Contract that you should know before investing. Please keep it for future
reference.
The Contract currently offers 25 investment alternatives ("investment
alternatives"). The investment alternatives include 3 fixed account options
("Fixed Account Options") and 22 variable sub-accounts ("Variable Sub-Accounts")
of the Allstate Life Insurance Company Separate Account A ("Variable Account").
Each Variable Sub-Account invests exclusively in the class IB shares of one of
the following mutual fund portfolios ("Funds") of Putnam Variable Trust:
<TABLE>
<CAPTION>
<S> <C>
Putnam VT Asia Pacific Growth Fund Putnam VT International New Opportunities Fund
Putnam VT Diversified Income Fund Putnam VT Investors Fund
Putnam VT The George Putnam Fund of Boston Putnam VT Money Market Fund
Putnam VT Global Asset Allocation Fund Putnam VT New Opportunities Fund
Putnam VT Global Growth Fund Putnam VT New Value Fund
Putnam VT Growth and Income Fund Putnam VT OTC & Emerging Growth Fund
Putnam VT Health Sciences Fund Putnam VT Research Fund
Putnam VT High Yield Fund Putnam VT Small Cap Value Fund
Putnam VT Income Fund Putnam VT Utilities Growth and Income Fund
Putnam VT International Growth Fund Putnam VT Vista Fund
Putnam VT International Growth and Income Fund Putnam VT Voyager Fund
</TABLE>
We (Allstate) have filed a Statement of Additional Information, dated
October 25, 1999, with the Securities and Exchange Commission ("SEC"). It
contains more information about the Contract and is incorporated herein by
reference, which means that it is legally a part of this prospectus. Its table
of contents appears on page 31 of this prospectus. For a free copy, please write
us at P.O. Box 94036, Palatine, Illinois 60094-4036, or call the telephone
number above, or go to the SEC's Web site (http://www.sec.gov). You can find
other information and documents about us, including documents that are legally
part of this prospectus, at the SEC's Web site.
The Securities and Exchange Commission has not approved or
disapproved the securities described in this prospectus, nor
has it passed on the accuracy or the adequacy of this
prospectus. Any one who tells you otherwise is committing a
federal crime.
IMPORTANT The Contracts may be distributed through broker-dealers that
NOTICES have relationships with banks or other financial institutions
or by employees of such banks. However, the Contracts are
not deposits, or obligations of, or guaranteed by such
institutions or any federal regulatory agency. Investment
in the Contracts involves investment risks, including possible
loss of principal.
The Contracts are not FDIC insured.
<PAGE>
Table of Contents
Overview
Important Terms 3
The Contract At A Glance 4
How the Contract Works 6
Expense Table 7
Financial Information 10
Contract Features
The Contract 11
Purchases 12
Contract Value 13
Investment Alternatives 14
The Variable Sub-Accounts 14
The Fixed Account Options 15
Transfers 15
Expenses 17
Access To Your Money 19
Income Payments 20
Death Benefits 23
Other Information
More Information 25
Taxes 28
Performance Information 30
Statement of Additional Information Table of Contents 31
Appendix A A-1
Appendix B A-2
<PAGE>
Important Terms
This prospectus uses a number of important terms that you may not be
familiar with. The index below identifies the page that describes each term. The
first use of each term in this prospectus appears in highlights.
Accumulation Phase 6
Accumulation Unit 10, 13
Accumulation Unit Value 10, 13
Allstate ("We") 1
Annuitant 11
Automatic Additions Program 12
Automatic Fund Rebalancing Program 16
Beneficiary 6
Cancellation Period 4, 12
*Contract 1
Contract Anniversary 4
Contract Owner ("You") 6
Contract Value 13
Contract Year 4
Dollar Cost Averaging Program 16
Due Proof of Death 23
Enhanced Beneficiary Protection Option 24
Fixed Account Options 1, 15
Funds 1, 14
Guarantee Period 15
Income Base 22, 23
Income Plan 20
Investment Alternatives 1, 14, 15
Issue Date 6
Maximum Anniversary Value 23
Net Purchase Payment Payout Phase 6
Payout Start Date 20
Retirement Income Guarantee Rider 22
Right to Cancel 12
SEC 1
Settlement Value 24
Systematic Withdrawal Program. 20
Valuation Date 12
Variable Account 1, 26
Variable Sub-Account 1, 14
* In certain states the Contract is available only as a group Contract. In
those states we issue you a certificate that represents your ownership and
that summarizes the provisions of the group Contract. References to
"Contract" in this prospectus include certificates, unless the context
requires otherwise.
<PAGE>
The Contract at a Glance
The following is a snapshot of the Contract. Please read the remainder
of this prospectus for more information.
Flexible Payments You can purchase a Contract
with as little as $1,000 ($500 for
Qualified Contracts, which are
Contracts issued with a qualified
plan). You can add to your Contract as
often and as much as you like, but
each payment must be at least $500
($50 for automatic payments). We may
limit the amount of any additional
purchase payment to a maximum of
$1,000,000. You must maintain a
minimum account size of $1,000.
Right to Cancel You may cancel your Contract
within 20 days of receipt or any
longer period as your state may
require ("Cancellation Period"). Upon
cancellation, we will return your
purchase payments adjusted, to the
extent state law permits, to reflect
the investment experience of any
amounts allocated to the Variable
Account.
Expenses You will bear the following expenses:
o Mortality and expense risk charge
equal to 0.80% of average daily net
assets (a higher amount applies if you
select the Enhanced Beneficiary
Protection Option)
o If you select a Retirement Income
Guarantee Rider you would pay an
additional fee at the annual rate of
0.05% or 0.30% (depending on the
option you select) of the Income Base
in effect on a Contract anniversary
("Contract Anniversary")
o Front end sales charge ranging from
5.75% to 0.50% of the amount of
purchase payments
o Withdrawal charges not to exceed
0.50% of purchase payments withdrawn
o Transfer fee equal to 0.50% of the
amount transferred after 12th transfer
in any Contract year ("Contract
Year"). We measure a Contract Year
from the date we issue your Contract
or a Contract Anniversary
o State premium tax (if your
state imposes one) In addition,
each Fund pays expenses that you
will bear indirectly if you invest in
a Variable Sub-Account
Investment Alternatives The Contract offers 25 investment
alternatives including:
o 3 Fixed Account Options (which
credit interest at rates we guarantee)
o 22 Variable Sub-Accounts investing
in Funds offering professional money
management by Putnam Investment
Management, Inc.
To find out current rates being paid
on the Fixed Account Options as well
as availability by state, or to find
out how the Variable Sub-Accounts have
performed, please call us at
1-800/390-1277.
Special Services For your convenience, we offer these
special services:
o Automatic Fund Rebalancing Program
o Automatic Additions Program
o Dollar Cost Averaging Program
o Systematic Withdrawal Program
Income Payments You can choose fixed income payments,
variable income payments, or a
combination of the two. You can
receive your income payments in one
of the following ways:
o life income with guaranteed payments
o a joint and survivor life income
with guaranteed payments
o guaranteed payments for a specified
period (5 to 30 years)
Allstate also offers 2 Retirement
Income Guarantee Riders that allow
you to lock in a dollar amount that
you can apply towards fixed income
payments.
Death Benefits If you die before the Payout
Start Date, we will pay the death
benefit described in the Contract. We
also offer an Enhanced Beneficiary
Protection Option.
Transfers Before the Payout Start Date, you may
transfer your Contract value
("Contract Value") among the
investment alternatives, with certain
restrictions. The minimum amount you
may transfer is $100 or the amount
remaining in the investment
alternative, if less. A charge will
apply after the 12th transfer in each
Contract Year.
Withdrawals You may withdraw some or all of your
Contract Value at anytime prior to the
Payout Start Date. In general, you
must withdraw at least $50 at a time.
A 10% federal tax penalty may apply if
you withdraw before you are 59 1/2
years old. A withdrawal charge also
may apply.
<PAGE>
How the Contract Works
The Contract basically works in two ways.
First, the Contract can help you (we assume you are the "Contract Owner")
save for retirement because you can invest in up to 25 investment alternatives
and pay no federal income taxes on any earnings until you withdraw them. You do
this during what we call the "Accumulation Phase" of the Contract. The
Accumulation Phase begins on the date we issue your Contract (we call that date
the "Issue Date") and continues until the Payout Start Date, which is the date
we apply your money to provide income payments. During the Accumulation Phase,
you may allocate your purchase payments to any combination of the Variable
Sub-Accounts and/or Fixed Account Options. If you invest in any of the Fixed
Account Options, you will earn a fixed rate of interest that we declare
periodically. If you invest in any of the Variable Sub-Accounts, your investment
return will vary up or down depending on the performance of the corresponding
Funds.
Second, the Contract can help you plan for retirement because you can use
it to receive retirement income for life and/or for a pre-set number of years,
by selecting one of the income payment options (we call these "Income Plans")
described on page 20. You receive income payments during what we call the
"Payout Phase" of the Contract, which begins on the Payout Start Date and
continues until we make the last payment required by the Income Plan you select.
During the Payout Phase, if you select a fixed income payment option, we
guarantee the amount of your payments, which will remain fixed. If you select a
variable income payment option, based on one or more of the Variable Sub-
Accounts, the amount of your payments will vary up or down depending on the
performance of the corresponding Funds. The amount of money you accumulate under
your Contract during the Accumulation Phase and apply to an Income Plan will
determine the amount of your income payments during the Payout Phase.
The timeline below illustrates how you might use your Contract.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
EFFECTIVE ACCUMULATION PHASE PAYOUT START PAYOUT PHASE
DATE DATE
- ----------------------------------------------------------------------------------------------------------------------------
You buy You save for retirement You elect to You can receive Or you can
a Contract receive income income payments receive income
payments or for a set period payments for life
receive a lump
sum payment
</TABLE>
As the Contract Owner, you exercise all of the rights and privileges
provided by the Contract. If you die, any surviving Contract Owner or, if there
is none, the Beneficiary will exercise the rights and privileges provided by the
Contract. See "The Contract." In addition, if you die before the Payout Start
Date, we will pay a death benefit to any surviving Contract Owner or, if there
is none, to your Beneficiary. See "Death Benefits."
Please call us at 1-800/390-1277 if you have any question about how the
Contract works.
<PAGE>
Expense Table
The table below lists the expenses that you will bear directly or
indirectly when you buy a Contract. The table and the examples that follow do
not reflect premium taxes that may be imposed by the state where you reside. For
more information about Variable Account expenses, see "Expenses," below. For
more information about Fund expenses, please refer to the accompanying
prospectus for the Funds.
Contract Owner Transaction Expenses
Sales Charge Imposed on Purchases (as a percentage of purchase payments)
Purchase Payment Amount Sales Charge Percentage
Less than $50,000 5.75%
At least $50,000 but less than $100,000 4.50%
At least $100,000 but less than $250,000 3.50%
At least $250,000 but less than $500,000 2.50%
At least $500,000 but less than $1,000,000 2.00%
At least $1,000,000 0.50%
Withdrawal Charge (as a percentage of purchase payments withdrawn)*
Number of Complete Years Since Purchase Payment Accepted: 0 1+
Applicable Charge: 0.50% 0%
Transfer Fee 0.50% of the amount transferred**
(applied solely to the thirteenth and
subsequent transfers within a Contract Year)
* Applies only to total purchase payments of at least $1,000,000.
** Excluding transfers due to dollar cost averaging and automatic fund
rebalancing.
Variable Account Annual Expenses (as a percentage of average daily net asset
value deducted from each Variable Sub-Account)
Mortality and Expense Risk Charge 0.80%*
Administrative Charge 0.00%
Total Variable Account Annual Expenses 0.80%
* If you select the Enhanced Beneficiary Protection Option, the mortality and
expense risk charge will be equal to 0.95% of your Contract's average daily
net assets in the Variable Account.
Retirement Income Guarantee Rider Expenses
If you select a Retirement Income Guarantee Rider, you would pay an additional
fee at the annual rate of 0.05% or 0.30% (depending on the Option you select) of
the Income Base in effect on a Contract Anniversary or date of surrender, if
applicable. A withdrawal adjustment may also apply. See "Retirement Income
Guarantee Riders" on page 21 for details.
<PAGE>
Fund Annual Expenses (After Voluntary Reductions and Reimbursements) (as a
percentage of Fund average daily net assets)(1)
<TABLE>
<CAPTION>
Fund Management 12b-1 Other Total Annual
Fees Fees Expenses Fund Expenses(1)
<S> <C> <C> <C> <C>
Putnam VT Asia Pacific Growth Fund 0.80% 0.15% 0.32% 1.27%
Putnam VT Diversified Income Fund 0.67% 0.15% 0.11% 0.93%
Putnam VT The George Putnam Fund of Boston(2) 0.49% 0.15% 0.36% 1.00%
Putnam VT Global Asset Allocation Fund 0.65% 0.15% 0.13% 0.93%
Putnam VT Global Growth Fund 0.60% 0.15% 0.12% 0.87%
Putnam VT Growth and Income Fund 0.46% 0.15% 0.04% 0.65%
Putnam VT Health Sciences Fund(2) 0.56% 0.15% 0.34% 1.05%
Putnam VT High Yield Fund 0.64% 0.15% 0.07% 0.86%
Putnam VT Income Fund 0.60% 0.15% 0.07% 0.82%
Putnam VT International Growth Fund 0.80% 0.15% 0.27% 1.22%
Putnam VT International Growth and Income Fund 0.80% 0.15% 0.19% 1.14%
Putnam VT International New Opportunities Fund(2) 1.18% 0.15% 0.42% 1.75%
Putnam VT Investors Fund(2) 0.52% 0.15% 0.33% 1.00%
Putnam VT Money Market Fund 0.45% 0.15% 0.08% 0.68%
Putnam VT New Opportunities Fund 0.56% 0.15% 0.05% 0.76%
Putnam VT New Value Fund 0.70% 0.15% 0.11% 0.96%
Putnam VT OTC & Emerging Growth Fund(2) 0.56% 0.15% 0.34% 1.05%
Putnam VT Research Fund(2) 0.37% 0.15% 0.48% 1.00%
Putnam VT Small Cap Value Fund(3) 0.80% 0.15% 0.59% 1.54%
Putnam VT Utilities Growth and Income Fund 0.65% 0.15% 0.07% 0.87%
Putnam VT Vista Fund 0.65% 0.15% 0.12% 0.92%
Putnam VT Voyager Fund 0.54% 0.15% 0.04% 0.73%
(1) Since the funds have not offered Class IB shares for a full fiscal year,
figures shown in the table (except for Putnam VT Small Cap Value Fund) are
for the period ended December 31, 1998 and are estimates based on the
corresponding expenses for the fund's Class A shares for the last fiscal
year. Each Fund commenced operations on April 30, 1998, except for the
Putnam VT Diversified Income, Growth and Income, and International Growth
Funds, which commenced operations on April 6, 1998, the Putnam VT Research
Fund, which commenced operations September 30, 1998, and the Putnam VT
Small Cap Fund, which commenced operations on April 30, 1999. Figures shown
in the table include amounts paid through expense offset and brokerage
service arrangements.
(2) Absent voluntary reductions and reimbursements for certain Funds (including
amounts paid through expense offset and brokerage service arrangements),
advisory fees, other expenses, and total annual fund expenses expressed as
a percentage of average net assets of the Funds would have been as follows:
Putnam VT The George Putnam Fund of Boston 0.65% 0.15% 0.36% 1.16%
Putnam VT Health Sciences Fund 0.70% 0.15% 0.34% 1.19%
Putnam VT International New Opportunities Fund 1.20% 0.15% 0.42% 1.77%
Putnam VT Investors Fund 0.65% 0.15% 0.33% 1.13%
Putnam VT OTC & Emerging Growth Fund 0.70% 0.15% 0.34% 1.19%
Putnam VT Research Fund 0.65% 0.15% 0.48% 1.28%
(3) Putnam VT Small Cap Value Fund commenced operations on April 30, 1999, the
management fee, other expenses and total annual fund operating expenses are
based on estimates for the fund's first full fiscal year.
</TABLE>
<PAGE>
Example
The example below shows the dollar amount of expenses that you would bear
directly or indirectly if you:
o invested $1,000 in a Variable Sub-Account,
o earned a 5% annual return on your investment,
o surrendered your Contract at the end of each time period; and
o elect Retirement Income Guarantee Rider 2 (assuming Income Base B).
The example does not include any taxes or tax penalties you may be required
to pay if you surrender your Contract.
Sub-Account 1 Year 3 Years
Putnam Asia Pacific Growth $82 $133
Putnam Diversified Income $79 $124
The George Putnam Fund $80 $126
Putnam Global Asset Allocation $79 $124
Putnam Global Growth $78 $122
Putnam Growth and Income $76 $115
Putnam Health Sciences $80 $127
Putnam High Yield $78 $122
Putnam Income $78 $120
Putnam International Growth $82 $132
Putnam International Growth and Income $81 $130
Putnam International New Opportunities $89 $155
Putnam Investors $80 $126
Putnam Money Market $76 $116
Putnam New Opportunities $77 $119
Putnam New Value $79 $124
Putnam OTC & Emerging Growth $80 $127
Putnam Research $80 $126
Putnam Small Cap Value $85 $141
Putnam Utilities Growth and Income $78 $122
Putnam Vista $78 $123
Putnam Voyager $77 $118
Please remember that you are looking at an example and not a representation
of past or future expenses. Your actual expenses may be lower or greater than
those shown above. Similarly, your rate of return may be lower or greater than
5%, which is not guaranteed. The above example assumes the election of the
Enhanced Beneficiary Protection Rider and the Retirement Income Guarantee Rider
2 with Income Base B applied. If one or both of the Riders were not elected, the
expense figures shown above would be slightly lower. The example also assumes a
5.75% sales charge.
<PAGE>
Financial Information
To measure the value of your investment in the Variable Sub-Accounts during
the Accumulation Phase, we use a unit of measure we call the "Accumulation
Unit." Each Variable Sub-Account has a separate value for its Accumulation Units
we call "Accumulation Unit Value." Accumulation Unit Value is analogous to, but
not the same as, the share price of a mutual fund.
The Contracts were first offered as of the date of this prospectus.
Accordingly, there are no Accumulation Unit Values to report for the Contracts.
The Variable Account commenced operations on April 30, 1999. Accordingly,
no year-end financial statements are included for the Variable Account.
The combined statutory basis financial statements of Allstate appear in the
Statement of Additional Information.
<PAGE>
The Contract
CONTRACT OWNER
The Putnam Allstate Advisor is a contract between you, the Contract Owner, and
Allstate, a life insurance company. As the Contract Owner, you may exercise all
of the rights and privileges provided to you by the Contract. That means it is
up to you to select or change (to the extent permitted):
o the investment alternatives during the Accumulation and Payout Phases,
o the amount and timing of your purchase payments and withdrawals,
o other programs you want to use to invest or withdraw money,
o the income payment plan you want to use to receive retirement income,
o the Annuitant (either yourself or someone else) on whose life the
income payments will be based,
o the Beneficiary or Beneficiaries who will receive the benefits that
the Contract provides when the last surviving Contract Owner or the
Annuitant dies, and
o any other rights that the Contract provides.
If you die, any surviving joint Contract Owner or, if none, the Beneficiary
will exercise the rights and privileges provided to them by the Contract. The
Contract cannot be jointly owned by both a non-natural person and a natural
person.
You can use the Contract with or without a qualified plan. A qualified plan
is a personal retirement savings plan, such as an IRA or tax-sheltered annuity,
that meets the requirements of the Internal Revenue Code. Qualified plans may
limit or modify your rights and privileges under the Contract. We use the term
"Qualified Contract" to refer to a Contract issued with a qualified plan. See
"Qualified Plans" on page 27.
You may change the Contract Owner at any time. Once we have received a
satisfactory written request for a change of Contract Owner, the change will
take effect as of the date you signed it. We are not liable for any payment we
make or other action we take before receiving any written request for a change
from you.
ANNUITANT
The Annuitant is the individual whose age determines the latest Payout Start
Date and whose life determines the amount and duration of income payments (other
than under Income Plans with guaranteed payments for a specified period). You
may name a new Annuitant only upon the death of the current Annuitant. You may
designate a joint Annuitant, who is a second person on whose life income
payments depend, at the time you select an Income Plan.
If you select an Income Plan that depends on the Annuitant or a joint
Annuitant's life, we may require proof of age and sex before income payments
begin and proof that the Annuitant or joint Annuitant is still alive before we
make each payment.
BENEFICIARY
The Beneficiary is the person who may elect to receive the death benefit or
become the new Contract Owner if the sole surviving Contract Owner dies before
the Payout Start Date. If the sole surviving Contract Owner dies after the
Payout Start Date, the Beneficiary will receive any guaranteed income payments
scheduled to continue.
You may name one or more Beneficiaries when you apply for a Contract. You
may change or add Beneficiaries at any time by writing to us before income
payments begin, unless you have designated an irrevocable Beneficiary. We will
provide a change of Beneficiary form to be signed and filed with us. Any change
will be effective at the time you sign the written notice. Until we receive your
written notice to change a Beneficiary, we are entitled to rely on the most
recent Beneficiary information in our files. We will not be liable as to any
payment or settlement made prior to receiving the written notice. Accordingly,
if you wish to change your Beneficiary, you should deliver your written notice
to us promptly.
If you did not name a Beneficiary or unless otherwise provided in the
Beneficiary designation, if a Beneficiary predeceases the Contract Owner and
there are no other surviving Beneficiaries, the new Beneficiary will be:
o your spouse or, if he or she is no longer alive,
o your surviving children equally, or if you have no surviving children,
o your estate.
If more than one Beneficiary survives you, we will divide the death benefit
among your Beneficiaries according to your most recent written instructions. If
you have not given us written instructions, we will pay the death benefit in
equal amounts to the Beneficiaries. If one of the Beneficiaries dies before you,
we will divide the death benefit among the surviving Beneficiaries.
MODIFICATION OF THE CONTRACT
Only an Allstate officer may approve a change in or waive any provision of the
Contract. Any change or waiver must be in writing. None of our agents has the
authority to change or waive the provisions of the Contract. We may not change
the terms of the Contract without your consent, except to conform the Contract
to applicable law or changes in the law. If a provision of the Contract is
inconsistent with state law, we will follow state law.
ASSIGNMENT
We will not honor an assignment of an interest in a Contract as collateral or
security for a loan. No Beneficiary may assign benefits under the Contract until
they are due. We will not be bound by any assignment until you sign it and file
it with us. We are not responsible for the validity of any assignment. Federal
law prohibits or restricts the assignment of benefits under many types of
retirement plans and the terms of such plans may themselves contain restrictions
on assignments. An assignment may also result in taxes or tax penalties. You
should consult with an attorney before trying to assign your Contract.
<PAGE>
Purchases
MINIMUM PURCHASE PAYMENTS
Your initial purchase payment must be at least $1,000 ($500 for a Qualified
Contract). All subsequent purchase payments must be $500 or more. You may make
purchase payments at any time prior to the Payout Start Date. The most we accept
without our prior approval is $1 million. We reserve the right to limit the
availability of the investment alternatives for additional investments. We also
reserve the right to reject any application.
AUTOMATIC ADDITIONS PROGRAM
You may make subsequent purchase payments of $50 or more per month by
automatically transferring money from your bank account. Please consult with
your sales representative for detailed information.
ALLOCATION OF NET PURCHASE PAYMENTS
At the time you apply for a Contract, you must decide how to allocate your net
purchase payment among the investment alternatives. Your net purchase payment is
your purchase payment less the applicable sales charge. The allocation you
specify on your application will be effective immediately. All allocations must
be in whole percents that total 100% or in whole dollars. You can change your
allocations by calling 1-800-390-1277.
We will allocate your net purchase payments to the investment alternatives
according to your most recent instructions on file with us. Unless you notify us
in writing otherwise, we will allocate subsequent purchase payments according to
the allocation for the previous purchase payment. We will effect any change in
allocation instructions at the time we receive written notice of the change in
good order.
We will credit the initial net purchase payment that accompanies your
completed application to your Contract within 2 business days after we receive
the payment at our home office. If your application is incomplete, we will ask
you to complete your application within 5 business days. If you do so, we will
credit your initial purchase payment to your Contract within that 5 business day
period. If you do not, we will return your purchase payment at the end of the 5
business day period unless you expressly allow us to hold it until you complete
the application. We will credit subsequent purchase payments to the Contract at
the close of the business day on which we receive the purchase payment at our
home office. All purchase payments credited will be net of the applicable sales
charge.
We use the term "business day" to refer to each day Monday through Friday
that the New York Stock Exchange is open for business. We also refer to these
days as "Valuation Dates." Our business day closes when the New York Stock
Exchange closes, usually 4 p.m. Eastern Time (3 p.m. Central Time). If we
receive your purchase payment after 3 p.m. Central Time on any Valuation Date,
we will credit your purchase payment using the Accumulation Unit Values computed
on the next Valuation Date.
RIGHT TO CANCEL
You may cancel the Contract by returning it to us within the Cancellation
Period, which is the 20 day period after you receive the Contract, or such
longer period that your state may require. You may return it by delivering it or
mailing it to us. If you exercise this "Right to Cancel," the Contract
terminates and we will pay you the full amount of your purchase payments
allocated to the Fixed Account. We also will return your purchase payments
allocated to the Variable Account adjusted, to the extent state law permits, to
reflect investment gain or loss that occurred from the date of allocation
through the date of cancellation. Any front end sales charge will also be
returned to you. We reserve the right to allocate your purchase payments to the
Putnam Money Market Variable Sub-Account during the Cancellation Period.
<PAGE>
Contract Value
Your Contract Value at any time during the Accumulation Phase is equal to
the sum of the value of your Accumulation Units in the Variable Sub-Accounts you
have selected, plus the value of your interest in the Fixed Account Options.
ACCUMULATION UNITS
To determine the number of Accumulation Units of each Variable Sub-Account to
allocate to your Contract, we divide (i) the amount of the net purchase payment
you have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value
of that Variable Sub-Account next computed after we receive your payment. For
example, if we receive a $10,000 net purchase payment allocated to a Variable
Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we
would credit 1,000 Accumulation Units of that Variable Sub-Account to your
Contract.
ACCUMULATION UNIT VALUE
As a general matter, the Accumulation Unit Value for each Variable Sub-Account
will rise or fall to reflect:
o changes in the share price of the Fund in which the Variable
Sub-Account invests, and
o the deduction of amounts reflecting the mortality and expense risk
charge and any provision for taxes that have accrued since we last
calculated the Accumulation Unit Value.
We determine withdrawal charges, Retirement Income Guarantee charges (if
applicable), and transfer fees separately for each Contract. They do not affect
the Accumulation Unit Value. Instead, we obtain payment of those charges and
fees by redeeming Accumulation Units. For details on how we compute Accumulation
Unit Value, please refer to the Statement of Additional Information.
We determine a separate Accumulation Unit Value for each Variable
Sub-Account on each Valuation Date. We also determine separate sets of
Accumulation Unit Values that reflect the cost of the Enhanced Beneficiary
Protection Option described on page 24 below.
You should refer to the prospectus for the Funds that accompanies this
prospectus for a description of how the assets of each Fund are valued, since
that determination directly bears on the Accumulation Unit Value of the
corresponding Variable Sub-Account and, therefore, your Contract Value.
<PAGE>
Investment Alternatives: The Variable Sub-Accounts
You may allocate all or a portion of your net purchase payments to up to 22
Variable Sub-Accounts. Each Variable Sub-Account invests in the shares of a
corresponding Fund. Each Fund has its own investment objective(s) and policies.
We briefly describe the Funds below.
For more complete information about each Fund, including expenses and risks
associated with the Fund, please refer to the accompanying prospectus for the
Fund. You should carefully review the Fund prospectuses before allocating
amounts to the Variable Sub-Accounts. Putnam Investment Management, Inc.
("Putnam Management") serves as the investment adviser to each Fund.
<TABLE>
<CAPTION>
Fund: Each Fund Seeks:
<S> <C>
Putnam VT Asia Pacific Growth Fund Capital appreciation
Putnam VT Diversified Income Fund High current income consistent with capital preservation
Putnam VT The George Putnam Fund of Boston To provide a balanced investment composed of a well-
diversified portfolio of stocks and bonds that will
produce both capital growth and current income
Putnam VT Global Asset Allocation Fund A high level of long-term total
return consistent with preservation of capital
Putnam VT Global Growth Fund Capital appreciation
Putnam VT Growth and Income Fund Capital growth and current income
Putnam VT Health Sciences Fund Capital appreciation
Putnam VT High Yield Fund High current income. Capital growth is a secondary objective
when consistent with high current income.
Putnam VT Income Fund Current income consistent with preservation of capital
Putnam VT International Growth Fund Capital appreciation
Putnam VT International Growth and Income Fund Capital growth. Current income is a secondary objective.
Putnam VT International New Opportunities Fund Long-term capital appreciation
Putnam VT Investors Fund Long-term growth of capital and any increased income that
results from this growth
Putnam VT Money Market Fund As high a rate of current income as Putnam
Management believes is consistent with preservation of
capital and maintenance of liquidity.
Putnam VT New Opportunities Fund Long-term capital appreciation
Putnam VT New Value Fund Long-term capital appreciation
Putnam VT OTC & Emerging Growth Fund Capital appreciation
Putnam VT Research Fund Capital appreciation
Putnam VT Small Cap Value Fund Capital appreciation
Putnam VT Utilities Growth and Income Fund Capital growth and current income
Putnam VT Vista Fund Capital appreciation
Putnam VT Voyager Fund Capital appreciation
</TABLE>
Amounts you allocate to Variable Sub-Accounts may grow in value, decline in
value, or grow less than you expect, depending on the investment performance of
the Funds in which those Variable Sub-Accounts invest. You bear the investment
risk that the Funds might not meet their investment objectives. Shares of the
Funds are not deposits, or obligations of, or guaranteed or endorsed by any bank
and are not insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other agency.
<PAGE>
Investment Alternatives: The Fixed Account Options
You may allocate all or a portion of your net purchase payments to the
Fixed Account. You may choose from among 3 Fixed Account Options, including 2
Dollar Cost Averaging Options, and the Standard Fixed Account Option. We will
credit a minimum annual interest rate of 3% to money you allocate to any of the
Fixed Account Options. The Fixed Account Options may not be available in all
states. Please consult with your sales representative for current information.
The Fixed Account supports our insurance and annuity obligations. The Fixed
Account consists of our general assets other than those in segregated asset
accounts. We have sole discretion to invest the assets of the Fixed Account,
subject to applicable law. Any money you allocate to a Fixed Account Option does
not entitle you to share in the investment experience of the Fixed Account.
DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS
You may establish a Dollar Cost Averaging Program, as described on page 16, by
allocating net purchase payments to the Fixed Account either for up to 6 months
(the "6 Month Dollar Cost Averaging Option") or for up to 12 months (the "12
Month Dollar Cost Averaging Option"). Your net purchase payments will earn
interest for the period you select at the current rates in effect at the time of
allocation. Rates may differ from those available for the Standard Fixed Account
Option described below.
You must transfer all of your money out of the 6 or 12 Month Dollar Cost
Averaging Options to other investment alternatives in equal monthly
installments. At the end of the applicable 6 or 12 month period, we will
transfer any remaining amounts in the 6 or 12 Month Dollar Cost Averaging
Options to the Putnam Money Market Variable Sub-Account unless you request a
different investment alternative. Transfers out of the 6 or 12 Month Dollar Cost
Averaging Options do not count towards the 12 transfers you can make without
paying a transfer fee.
You may not transfer money from other investment alternatives to either the
6 or 12 Month Dollar Cost Averaging Options.
The 6 or 12 Month Dollar Cost Averaging Options may not be available in
your state. Please check with your sales representative for availability.
STANDARD FIXED ACCOUNT OPTION
Each net purchase payment or transfer allocated to the Standard Fixed Account
Option earns interest at the current rate in effect at the time of allocation.
We guarantee that rate for a period of years we call Guarantee Periods. We are
currently offering Guarantee Periods of 1 year in length. In the future we may
offer Guarantee Periods of different lengths or stop offering some Guarantee
Periods. You select a Guarantee Period for each purchase or transfer. After the
initial Guarantee Period, we will guarantee a renewal rate.
<PAGE>
Investment Alternatives: Transfers
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase, you may transfer amounts among the investment
alternatives. We do not permit transfers into any Dollar Cost Averaging Fixed
Account Option. You may request transfers in writing on a form that we provided
or by telephone according to the procedure described below.
You may make 12 transfers per Contract Year without charge. A transfer fee
equal to 0.50% of the amount transferred applies to each transfer after the 12th
transfer in any Contract Year.
The minimum amount that you may transfer from the Standard Fixed Account
Option or a Variable Sub-Account is $100 or the total remaining balance in the
Standard Fixed Account Option or the Variable Sub-Account, if less. These
limitations do not apply to the 6-Month and 12-Month Dollar Cost Averaging Fixed
Account Options.
The most you can transfer from the Standard Fixed Account Option during any
Contract Year is the greater of (i) 30% of the Standard Fixed Account Option
balance as of the last Contract Anniversary or (ii) the greatest dollar amount
of any prior transfer from the Standard Fixed Account Option. This limitation
does not apply to the Dollar Cost Averaging Program. Also, if the interest rate
on any renewed Guarantee Period is at least one percentage point less than the
previous interest rate, you may transfer up to 100% of the monies receiving that
reduced rate within 60 days of the notification of the interest rate decrease.
We will process transfer requests that we receive before 3:00 p.m. Central
Time on any Valuation Date using the Accumulation Unit Values for that Date. We
will process requests completed after 3:00 p.m. on any Valuation Date using the
Accumulation Unit Values for the next Valuation Date. The Contract permits us to
defer transfers from the Fixed Account Options for up to 6 months from the date
we receive your request. If we decide to postpone transfers from any Fixed
Account Option for 30 days or more, we will pay interest as required by
applicable law. Any interest would be payable from the date we receive the
transfer request to the date we make the transfer.
We reserve the right to waive any transfer restrictions.
TRANSFERS DURING THE PAYOUT PHASE
During the Payout Phase, you may make transfers among the Variable Sub-Accounts
so as to change the relative weighting of the Variable Sub-Accounts on which
your variable income payments will be based. You may not convert any portion of
your fixed income payments into variable income payments.
You may not make any transfers for the first 6 months after the Payout
Start Date. Thereafter, you may make transfers among the Variable Sub-Accounts
or make transfers from the Variable Sub-Accounts to increase the proportion of
your income payments consisting of fixed income payments if Income Plan 3,
described below, is in effect. Your transfers must be at least 6 months apart.
TELEPHONE TRANSFERS
You may make transfers by telephone by calling 1-800-390-1277. The cut off time
for telephone transfer requests is 3:00 p.m. Central Time. In the event that the
New York Stock Exchange closes early, i.e., before 3:00 p.m. Central Time, or in
the event that the Exchange 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 Exchange on that particular day. We will not accept telephone
requests received from you at any telephone number other than the number that
appears in this paragraph or received after the close of trading on the
Exchange. If you own the Contract with a joint Contract Owner, unless we receive
contrary instructions, we will accept instructions from either you or the other
Contract Owner.
We use procedures that we believe provide reasonable assurance that the
telephone transfers are genuine. For example, we tape telephone conversations
with persons purporting to authorize transfers and request identifying
information. Accordingly, we disclaim any liability for losses resulting from
allegedly unauthorized telephone transfers. However, if we do not take
reasonable steps to help ensure that a telephone authorization is valid, we may
be liable for such losses.
EXCESSIVE TRADING LIMITS
We reserve the right to limit transfers in any Contract Year, or to refuse any
transfer request for a Contract Owner or certain Contract Owners, if:
o we believe, in our sole discretion, that excessive trading by such
Contract Owner or Owners, or a specific transfer request or group of
transfer requests, may have a detrimental effect on the Accumulation
Unit Values of any Variable Sub-Account or the share prices of the
corresponding Funds or would be to the disadvantage of other Contract
Owners; or
o we are informed by one or more of the corresponding Funds that they
intend to restrict the purchase or redemption of Fund shares because
of excessive trading or because they believe that a specific transfer
or group of transfers would have a detrimental effect on the prices of
Fund shares.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract Owners.
DOLLAR COST AVERAGING PROGRAM
You may automatically transfer a set amount from any Variable Sub-Account or
Fixed Account Option to any of the other Variable Sub-Accounts through our
Dollar Cost Averaging Program. The Program is available only during the
Accumulation Phase.
We will not charge a transfer fee for transfers made under this Program,
nor will such transfers count against the 12 transfers you can make each
Contract Year without paying a transfer fee.
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 this Program does not assure you of a greater profit from your
purchases under the Program nor will it prevent or necessarily reduce losses in
a declining market.
AUTOMATIC FUND 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 Fund Rebalancing
Program, we will automatically rebalance the Contract Value in each Variable
Sub-Account and return it to the desired percentage allocations. Money you
allocate to the Fixed Account will not be included in the rebalancing.
We will rebalance your account quarterly, semi-annually, or annually. We
will measure these periods 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 or by telephone. The new allocation will be effective with the first
rebalancing that occurs after we receive your written or telephone request. We
are not responsible for rebalancing that occurs prior to receipt of proper
notice of your request.
Example:
Assume that you want your initial net purchase payment split among 2
Variable Sub-Accounts. You want 40% to be in the Putnam Income Variable
Sub- Account and 60% to be in the Putnam Global 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
Putnam Income 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 Putnam Income Variable Sub-Account and use the
money to buy more units in the Putnam Global Variable Sub-Account so that
the percentage allocations would again be 40% and 60% respectively.
The Automatic Fund Rebalancing Program is available only during the
Accumulation Phase. The transfers made under the program do not count towards
the 12 transfers you can make without paying a transfer fee, and are not subject
to a transfer fee. We may sometimes refer to this Program as the "Putnam
Automatic Rebalancing Program."
Fund 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.
<PAGE>
Expenses
As a Contract Owner, you will bear, directly or indirectly, the charges and
expenses described below.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge daily at an annual rate of 0.80%
of the average daily net assets you have invested in the Variable Sub-Accounts.
The mortality and expense risk charge is for all the insurance benefits
available with your Contract (including our guarantee of annuity rates and the
death benefits), for certain expenses of the Contract, and for assuming the risk
(expense risk) that the current charges will be sufficient in the future to
cover the cost of administering the Contract. If the charges under the Contract
are not sufficient, then Allstate will bear the loss. If you select the Enhanced
Beneficiary Protection Option, Allstate will deduct a mortality and expense risk
charge equal, on an annual basis, to 0.95% of the average daily net assets you
have invested in the Variable Sub-Accounts (0.80% plus 0.15% for the Option).
Allstate reserves the right to raise the Enhanced Beneficiary Protection Option
charge to up to 0.25%. However, once your Option is in effect, Allstate cannot
change the fee that applies to your Contract. We charge the additional fee for
the Enhanced Beneficiary Protection Option to compensate us for the additional
risk that we accept by providing the Option.
We guarantee the mortality and expense risk charge and we cannot increase
it. We assess the mortality and expense risk charge during both the Accumulation
Phase and the Payout Phase.
RETIREMENT INCOME GUARANTEE CHARGE
We impose a separate charge for each Retirement Income Guarantee Rider. The
charges equal, on an annual basis, 0.05% of the income base for Retirement
Income Guarantee Rider 1 and 0.30% of the income base for Retirement Income
Guarantee Rider 2. We reserve the right to change the Rider fee. However, once
we issue your Rider, we cannot change the Rider fee that applies to your
Contract. The Rider 1 fee will never exceed 0.15% and the Rider 2 fee will never
exceed 0.50%. See "Retirement Income Guarantee Riders" for details.
TRANSFER FEE
We impose a fee upon transfers in excess of 12 during any Contract Year. The fee
is equal to 0.50% of the dollar amount transferred. We will not charge a
transfer fee on transfers that are part of a Dollar Cost Averaging Program or
Automatic Fund Rebalancing Program.
SALES CHARGE
We may assess a sales charge on all purchase payments ranging from 5.75% to
0.50% of the amount of the purchase payment. The sales charge percentage will
vary based upon the amount of the purchase payment(s) received. A schedule
showing how the sales charge is assessed appears on page 7, above.
We use the amounts obtained from the sales charge to pay sales commissions
and other promotional or distribution expenses associated with marketing the
Contracts. To the extent that the sales charge does not cover all sales
commissions and other promotional or distribution expenses, we may use any of
our corporate assets, including any profit which may arise from the mortality
and expense risk charge or any other charges or fee described above, to make up
any difference.
Reduction of Sales Charge. You may also be entitled to a reduced sales charge if
you (1) sign a letter of intent and invest a combined purchase payment amount of
$50,000 or more within a 13-month period; and/or (2) have related contracts with
us which qualify for rights of accumulation privileges. In addition, no sales
charge will apply to purchase payments made under Contracts issued to employees
of Allstate and certain other eligible organizations.
Letter of Intent: A letter of intent allows you to set your own investment goal
of $50,000 or more over a 13-month period. We base the sales charge on the
purchase payments you make during the 13-month period on your investment goal.
In essence, we reduce your sales charge on purchase payments made during the
13-month period as though you invested the total amount of purchase payments
(your investment goal) in one lump sum.
Example:
Assume as part of your Contract application you sign a letter of
intent indicating an investment goal of $50,000 over a 13-month period. The
sales charge corresponding to your investment goal is 4.50%. You make an
initial purchase payment of $20,000. We deduct a reduced sales charge of
4.50% from your initial purchase payment. Two months later you make a
subsequent purchase payment of $30,000. We again deduct a reduced sales
charge of 4.50% from your purchase payment. Without a letter of intent the
sales charge for each purchase payment would have been 5.75%.
You may elect to participate in the letter of intent program at any time.
However, we do not retroactively reduce sales charges on Purchase payments made
before we receive your letter of intent. If you choose to participate in this
program at the time you apply for the contract, you must complete the letter of
intent section on the application. If you elect to participate in the program
after your contract is issued, you must complete the appropriate form. The
letter of intent form is available by calling our Annuity Service Center at
1-800/390-1277.
You are not obligated to reach your investment goal. If you do not achieve
your investment goal by the end of the 13-month period or upon a full surrender
prior to the end of the 13-month period, we will deduct from your Contract the
difference between (1) the sales charge applicable to the actual amount of
purchase payments you made during the period and (2) the sales charge you
actually paid. These charges will be deducted from your Contract proportionately
from each investment alternative at the end of the 13-month period.
If you exceed your investment goal and reach the next breakpoint, the sales
charge deducted on the next payment is based on the next breakpoint level.
However, we do not retroactively reduce sales charges on previous purchase
payments.
At any time during the 13-month period, you may increase your investment
goal. You must inform us in writing. We include purchase payments received
during the 90 days prior to your notice in determining the sales charge on
purchase payments made from the date of notice through the end of the original
13-month period.
We reserve the right to modify, suspend or terminate this program at any
time. This program may not be available in all states.
Rights Of Accumulation: You may qualify for a reduced sales charge through
rights of accumulation. Rights of accumulation involves combining your current
purchase payment with your current Contract Value of this Contract and/or the
current Contract Values of eligible related contracts. If through accumulation
you reach the next breakpoint level, we reduce your sales charge accordingly.
Related contracts include certain other Putnam Allstate Advisor-A contracts
owned by you. There may be other requirements for qualification. For information
on which related contracts qualify for rights of accumulation privileges, please
contact your investment representative.
In order to use rights of accumulation to reduce your sales charge, for
each purchase payment, you or your investment representative must inform us in
writing of the related contracts.
The sales charge for purchase payments will be based on the breakpoint
corresponding to the sum of (1) your new purchase payment; and (2) your current
Contract Value; and (3) the current Contract Value(s) of your eligible related
contract(s).
Example:
Assume your Contract has a current Contract Value of $20,000. You have
a second Contract with us which qualifies for rights of accumulation that
has a current Contract Value of $25,000. You make a $5,000 purchase payment
order to your current Contract and include your rights of accumulation
number with your payment. To determine the sales charge applicable to your
purchase payment we first calculate the sum of (1) your current Contract
Value ($20,000); (2) the current Contract Value of your related Contract
($25,000); and (3) your current purchase payment ($5,000). The sum of these
values is $50,000. We deduct the sales charge corresponding to a $50,000
purchase payment, or 4.50%, from your $5,000 purchase payment.
We reserve the right to modify, suspend or terminate this program at
any time. This program may not be available in all states.
WITHDRAWAL CHARGE
We may assess a withdrawal charge of up to 0.50% of the purchase payment(s) you
withdraw. The charge declines to 0% after one complete year from the date we
received the purchase payment being withdrawn. Currently, the withdrawal charge
is only assessed on contracts which have total purchase payments in excess of
$1,000,000.
We will deduct withdrawal charges, if applicable, from the amount paid. For
purposes of the withdrawal charge, we will treat withdrawals as coming from the
oldest purchase payments first. However, for federal income tax purposes,
earnings are considered to come out first, which means you pay taxes on the
earnings portion of your withdrawal.
We do not apply a withdrawal charge in the following situations:
o on any Contract which has total purchase payments of less than
$1,000,000.
o on the Payout Start Date;
o upon payment of a death benefit (unless the settlement value option is
elected); or
o withdrawals taken to satisfy IRS minimum distribution rules for the
Contract.
Withdrawals also may be subject to tax penalties or income tax. You should
consult your own tax counsel or other tax advisers regarding any withdrawals.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for paying these taxes and
will deduct them from your Contract Value. Some of these taxes are due when the
Contract is issued, others are due when income payments begin or upon surrender.
Our current practice is not to charge anyone for these taxes until income
payments begin or when a total withdrawal occurs including payment upon death.
We may some time in the future discontinue this practice and deduct premium
taxes from the purchase payments. Premium taxes generally range from 0% to 4%,
depending on the state.
At the Payout Start Date, we deduct the charge for premium taxes from each
investment alternative in the proportion that the Contract Owner's value in the
investment alternative bears to the total Contract Value.
OTHER EXPENSES
Each Fund deducts advisory fees and other expenses from its assets. You
indirectly bear the charges and expenses of the Fund whose shares are held by
the Variable Sub-Accounts. These fees and expenses are described in the
accompanying prospectus for the Funds. For a summary of current estimates of
those charges and expenses, see page 8. We may receive compensation from the
Funds' investment adviser, distributor, or their affiliates for administrative
services we provide to the Funds.
<PAGE>
Access to Your Money
You can withdraw some or all of your Contract Value at any time prior to
the Payout Start Date. Withdrawals also are available under limited
circumstances on or after the Payout Start Date. See "Income Plans" on page 20.
The amount payable upon withdrawal is the Contract Value next computed
after we receive the request for a withdrawal at our home office, less any
applicable withdrawal charges, income tax withholding, applicable Retirement
Income Guarantee Rider fee, and any premium taxes. We will pay withdrawals from
the Variable Account within 7 days of receipt of the request, subject to
postponement in certain circumstances.
You can withdraw money from the Variable Account or the Fixed Account
Options. To complete a partial withdrawal from the Variable Account, we will
cancel Accumulation Units in an amount equal to the withdrawal and any
applicable withdrawal charge and premium taxes.
You must name the investment alternative from which you are taking the
withdrawal. If none is named, then the withdrawal request is incomplete and
cannot be honored.
In general, you must withdraw at least $50 at a time. If you request a
total withdrawal, we may require that you return your Contract to us.
<PAGE>
POSTPONEMENT OF PAYMENTS
We may postpone the payment of any amounts due from the Variable Account under
the Contract if:
1. the New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the Exchange is otherwise restricted,
2. an emergency exists as defined by the SEC, or
3. the SEC permits delay for your protection.
In addition, we may delay payments or transfers from the Fixed Account
Options for up to 6 months or shorter period if required by law. If we delay
payment or transfer for 30 days or more, we will pay interest as required by
law.
SYSTEMATIC WITHDRAWAL PROGRAM
You may choose to receive systematic withdrawal payments on a monthly,
quarterly, semi-annual, or annual basis at any time prior to the Payout Start
Date. Please consult your sales representative or call us at 1-800-390-1277 for
more information. Depending on fluctuations in the value of the Variable Sub-
Accounts and the value of the Fixed Account Options, systematic withdrawals may
reduce or even exhaust the Contract Value. Income taxes may apply to systematic
withdrawals. Please consult your tax adviser before taking any withdrawal.
MINIMUM CONTRACT VALUE
If your request for a partial withdrawal would reduce the Contract Value to less
than $1,000, we may treat it as a request to withdraw your entire Contract
Value. Your Contract will terminate if you withdraw all of your Contract Value.
We will, however, ask you to confirm your withdrawal request before terminating
your Contract. If we terminate your Contract, we will distribute to you its
Contract Value, less withdrawal and other charges and premium taxes.
<PAGE>
Income Payments
PAYOUT START DATE
The Payout Start Date is the day that we apply your Contract Value to an Income
Plan. The Payout Start Date must be:
o at least 30 days after the Issue Date; and
o no later than the day the Annuitant reaches age 90, or the 10th
Contract Anniversary, if later.
You may change the Payout Start Date at any time by notifying us in writing
of the change at least 30 days before the scheduled Payout Start Date. Absent a
change, we will use the Payout Start Date stated in your Contract.
INCOME PLANS
You may choose and change your choice of Income Plan until 30 days before the
Payout Start Date. If you do not select an Income Plan, we will make income
payments in accordance with Income Plan 1 with guaranteed payments for 10 years.
Three Income Plans are available under the Contract. Each is available to
provide:
o fixed income payments;
o variable income payments; or
o a combination of the two.
The three Income Plans are:
Income Plan 1 - Life Income with Guaranteed Payments. Under this plan, we make
periodic income payments for at least as long as the Annuitant lives. If the
Annuitant dies before we have made all of the guaranteed income payments, we
will continue to pay the remainder of the guaranteed income payments as required
by the Contract.
Income Plan 2 - Joint and Survivor Life Income with Guaranteed Payments. Under
this plan, we make periodic income payments for at least as long as either the
Annuitant or the joint Annuitant, named at the time the plan was selected, is
alive. If both the Annuitant and the joint Annuitant die before we have made all
of the guaranteed income payments, we will continue to pay the remainder of the
guaranteed income payments as required by the Contract.
Income Plan 3 - Guaranteed Payments for a Specified Period (5 Years to 30
Years). Under this plan, we make periodic income payments for the period you
have chosen. These payments do not depend on the annuitant's Life. We will
deduct the mortality and expense risk charge from the assets of the Variable
Sub-Accounts supporting this Plan even though we may not bear any mortality
risk.
The length of any guaranteed payment period under your selected Income Plan
generally will affect the dollar amount of each income payment. As a general
rule, longer guarantee periods result in lower income payments, all other things
being equal. For example, if you choose an Income Plan with payments that depend
on the life of the Annuitant but with no minimum specified period for guaranteed
payments, the income payments generally will be greater than the income payments
made under the same Income Plan with a minimum specified period for guaranteed
payments.
If you choose Income Plan 1 or 2, or, if available, another Income Plan
with payments that continue for the life of the Annuitant or joint Annuitant, we
may require proof of age and sex of the Annuitant or joint Annuitant before
starting income payments, and proof that the Annuitant or joint Annuitant are
alive before we make each payment. Please note that under such Income Plans, if
you elect to take no minimum guaranteed payments, it is possible that the payee
could receive only 1 income payment if the Annuitant and any joint Annuitant
both die before the second income payment, or only 2 income payments if they die
before the third income payment, and so on.
Generally, you may not make withdrawals after the Payout Start Date. One
exception to this rule applies if you are receiving variable income payments
that do not depend on the life of the Annuitant (such as under Income Plan 3).
In that case, you may terminate the Variable Account portion of the income
payments at any time and receive a lump sum equal to the present value of the
remaining variable payments due. A withdrawal charge may apply. We also assess
applicable premium taxes against all income payments.
We may make other Income Plans available. You may obtain information about
them by writing or calling us.
You may apply your Contract Value to an Income Plan. You must apply at
least the Contract Value in the Fixed Account on the Payout Start Date to fixed
income payments. If you wish to apply any portion of your Fixed Account balance
to provide variable income payments, you should plan ahead and transfer that
amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do
not tell us how to allocate your Contract Value among fixed and variable income
payments, we will apply your Contract Value in the Variable Account to variable
income payments and your Contract Value in the Fixed Account to fixed income
payments.
We will apply your Contract Value, less applicable taxes, to your Income
Plan on the Payout Start Date. We can make income payments in monthly,
quarterly, semi-annual or annual installments, as you select. If the amount
available to apply under an Income Plan is less than $2,000, however, and state
law permits, we may pay you the Contract Value, less any applicable taxes, in a
lump sum instead of the periodic payments you have chosen. In addition, if your
monthly payments would be less than $20, and state law permits, we may reduce
the frequency of your payments so that each payment will be at least $20.
VARIABLE INCOME PAYMENTS
The amount of your variable income payments depends upon the investment results
of the Variable Sub-Accounts you select, the premium taxes you pay, the age and
sex of the Annuitant, and the Income Plan you choose. We guarantee that the
payments will not be affected by (a) actual mortality experience and (b) the
amount of our administration expenses.
We cannot predict the total amount of your variable income payments. Your
variable income payments may be more or less than your total purchase payments
because (a) variable income payments vary with the investment results of the
underlying Funds; and (b) the Annuitant could live longer or shorter than we
expect based on the tables we use.
In calculating the amount of the periodic payments in the annuity tables in
the Contract, we assumed an annual investment rate of 3%. (We reserve the right
to offer other assumed investment rates). If the actual net investment return of
the Variable Sub-Accounts you choose is less than this assumed investment rate,
then the dollar amount of your variable income payments will decrease. The
dollar amount of your variable income payments will increase, however, if the
actual net investment return exceeds the assumed investment rate. The dollar
amount of the variable income payments stays level if the net investment return
equals the assumed investment rate. Please refer to the Statement of Additional
Information for more detailed information as to how we determine variable income
payments.
FIXED INCOME PAYMENTS
We guarantee income payment amounts derived from any Fixed Account Option for
the duration of the Income Plan. We calculate the fixed income payments by:
1. deducting any applicable premium tax; and
2. applying the resulting amount to the greater of (a) the appropriate value
from the income payment table in your Contract or (b) such other value as
we are offering at that time.
We may defer making fixed income payments for a period of up to six months
or whatever shorter time state law may require. If we defer payments for 30 days
or more, we will pay interest as required by law from the date we receive the
withdrawal request to the date we make payment.
RETIREMENT INCOME GUARANTEE RIDERS
For Contract Owners up to and including age 75, you have the option to add to
your Contract one of two Retirement Income Guarantee Riders (Rider 1 or Rider
2). Each Rider guarantees a minimum dollar amount (we call the "guaranteed
income benefit") to be applied to an Income Plan. You may elect this benefit up
to your latest Payout Start Date. The Riders may not be available in all states.
Eligibility. To qualify for this benefit, you must meet the following conditions
as of the Payout Start Date:
o You must elect a Payout Start Date that is on or after the 10th
anniversary of the date we issued the Rider (the "Rider Date");
o The Payout Start Date must occur during the 30 day period following a
Contract Anniversary;
o You must elect to receive fixed income payments; and
o The Income Plan you have selected must provide for payments guaranteed
for either a single life or joint lives with a specified period of at
least:
o 10 years, if the youngest Annuitant's age is 80 or less on the date
the amount is applied, or
o 5 years, if the youngest Annuitant's age is greater than 80 on the
date the amount is applied.
Retirement Income Guarantee Rider 1. This Rider guarantees that the amount you
apply to an Income Plan will not be less than the total of your purchase
payments less any withdrawals and any applicable taxes.
The current charge for this Rider, on an annual basis, is 0.05% multiplied
by the Income Base in effect on each Contract Anniversary. We deduct the fee
only from your assets in the Variable Sub-Account(s). In the case of a full
withdrawal of the Contract Value on any date other than the Contract
Anniversary, we will deduct from the amount paid upon withdrawal a Rider fee
that is pro rated to reflect the number of days the Rider was in effect during
the current Contract Year.
We calculate the Income Base that we use to determine the value of the
guaranteed income benefit as follows:
1. On the Rider Date, the income base is equal to the Contract Value.
2. After the Rider Date, we recalculate the Income Base when a purchase
payment or withdrawal is made as follows:
(a) For purchase payments, the Income Base is equal to the most recently
calculated Income Base plus the purchase payment.
(b) For withdrawals, the Income Base is equal to the most recently
calculated Income Base reduced by a withdrawal adjustment, described below.
In the absence of any withdrawals or purchase payments, the Income Base
will be equal to the Contract Value as of the Rider Date.
The withdrawal adjustment is equal to (1) divided by (2), with the result
multiplied by (3), where:
(1) = withdrawal amount,
(2) = the Contract Value immediately prior to the withdrawal, and
(3) = the most recently calculated Income Base.
See Appendix B for an example representative of how the Retirement Income
Guarantee Rider withdrawal adjustment applies.
The guaranteed income benefit amount is determined by applying the Income
Base, less any applicable taxes, to the guaranteed rates for the Income Plan
that you select. On the Payout Start Date, the income payment will be the
greater of (i) the income payment produced by the guaranteed income benefit and
(ii) the income payment provided in the fixed amount income payment provision of
the Contract.
Retirement Income Guarantee Rider 2. This Rider guarantees that the amount you
apply to an Income Plan will not be less than the greater of Income Base A or
Income Base B described below:
The current annual charge for this Rider is 0.30% multiplied by the Income
Base in effect on each Contract Anniversary. We deduct the fee only from the
Variable Sub-Account(s). In the case of a full withdrawal of the Contract Value
on any date other than the Contract Anniversary, we will deduct from the amount
paid upon withdrawal a Rider fee that is pro rated to reflect the number of days
the Rider was in effect during the current Contract Year.
The Income Base is the greater of Income Base A and Income Base B. We
determine each income base as follows:
Income Base A. On the Rider Date, Income Base A is equal to the Contract Value.
After the Rider Date, we recalculate Income Base A as follows on the Contract
Anniversary and when a purchase payment or withdrawal is made:
1. For purchase payments, Income Base A is equal to the most recently
calculated Income Base plus the purchase payment.
2. For withdrawals, Income Base A is equal to the most recently calculated
Income Base reduced by a withdrawal adjustment.
3. On each Contract Anniversary, Income Base A is equal to the greater of the
Contract Value on that date or the most recently calculated Income Base A.
In the absence of any withdrawals or purchase payments, Income Base A will
be equal to the greatest Contract Value as of the date and all Contract
Anniversary Contract Values between the Rider Date and the Payout Start Date. We
will recalculate Income Base A for purchase payments, for withdrawals and on
Contract Anniversaries until the first Contract Anniversary after the 85th
birthday of the oldest Contract Owner or, if no Contract Owner is a living
individual, the oldest Annuitant. After that date, we will recalculate Income
Base A for purchase payments and withdrawals.
Income Base B. On the Rider Date, Income Base B is equal to the Contract Value.
After the Rider Date, Income Base B, plus any subsequent purchase payments and
less a withdrawal adjustment for any subsequent withdrawals, will accumulate
daily at a rate equal to 6% per year until the first day of the month following
the oldest Contract owner's or, if the Contract Owner is not a living
individual, the Annuitant's 85th birthday.
For purposes of computing Income Base A or B, the withdrawal adjustment is
equal to (1) divided by (2), with the result multiplied by (3), where:
(1) = withdrawal amount,
(2) = the Contract Value immediately prior to the withdrawal, and
(3) = the most recently calculated Income Base.
See Appendix B for an example representative of how the Retirement Income
Guarantee Rider withdrawal adjustment applies.
We determine the guaranteed income benefit amount by applying the income
base, less any applicable taxes, to the guaranteed rates for the Income Plan
that you select. On the Payout Start Date, the income payment will be the
greater of (i) the income payment provided by the guaranteed income benefit or
(ii) the income payment provided in the fixed amount income payment provision of
the Contract.
CERTAIN EMPLOYEE BENEFIT PLANS
The Contracts offered by this prospectus contain income payment tables that
provide for different payments to men and women of the same age, except in
states that require unisex tables. We reserve the right to use income payment
tables that do not distinguish on the basis of sex to the extent permitted by
applicable law. In certain employment-related situations, employers are required
by law to use the same income payment tables for men and women. Accordingly, if
the Contract is to be used in connection with an employment-related retirement
or benefit plan and we do not offer unisex annuity tables in your state, you
should consult with legal counsel as to whether the purchase of a Contract is
appropriate.
<PAGE>
Death Benefits
We will pay a death benefit if, prior to the Payout Start Date:
1. any Contract Owner dies, or
2. the Annuitant dies.
We will pay the death benefit to the new Contract Owner as determined
immediately after the death. The new Contract Owner would be a surviving
Contract Owner or, if none, the Beneficiary. In the case of the death of the
Annuitant, we will pay the death benefit to the current Contract Owner.
DEATH BENEFIT AMOUNT
Prior to the Payout Start Date, the death benefit is equal to the greatest of
the following death benefit alternatives:
1. the Contract Value as of the date we determine the death benefit, or
2. the sum of all purchase payments made less withdrawals (See Appendix A for
an example of an applicable withdrawal adjustment); or
3. the most recent Maximum Anniversary Value prior to the date we determine
the death benefit (see "Maximum Anniversary Value" below).
We will determine the value of the death benefit as of the end of the
Valuation Date on which we receive a complete request for payment of the death
benefit. If we receive a request after 3 p.m. Central Time on a Valuation Date,
we will process the request as of the end of the following Valuation Date. A
request for payment of the death benefit must include Due Proof of Death. We
will accept the following documentation as "Due Proof of Death":
o a certified copy of a death certificate,
o a certified copy of a decree of a court of competent jurisdiction as
to the finding of death, or
o other documentation as we may accept in our sole discretion.
Maximum Anniversary Value. On the Issue Date, the Maximum Anniversary Value is
equal to the initial purchase payment. After the Issue Date, we recalculate the
Maximum Anniversary Value when a purchase payment or withdrawal is made or on a
Contract Anniversary as follows:
1. For purchase payments, the Maximum Anniversary Value is equal to the most
recently calculated Maximum Anniversary Value plus the purchase payment.
2. For withdrawals, the Maximum Anniversary Value is equal to the most
recently calculated Maximum Anniversary Value reduced by a withdrawal
adjustment, as defined below.
3. On each Contract Anniversary, the Maximum Anniversary Value is equal to the
greater of the Contract Value or the most recently calculated Maximum
Anniversary Value.
In the absence of any withdrawals or purchase payments, the Maximum
Anniversary Value will be the greatest of all anniversary Contract Values on or
prior to the date we calculate the death benefit.
We will recalculate the Maximum Anniversary Value until the first Contract
Anniversary after the 80th birthday of the oldest Contract Owner or, if no
Contract Owner is a living individual, the Annuitant. After that date, we will
recalculate the Maximum Anniversary Value only for purchase payments and
withdrawals. The Maximum Anniversary Value will never be greater than the
maximum death benefit allowed by any applicable state non-forfeiture laws.
ENHANCED BENEFICIARY PROTECTION OPTION
The Enhanced Beneficiary Protection Option is an optional benefit that you may
elect up to and including age 75. If you elect the Option, the death benefit
will be the greater of the death benefit alternatives (1) through (3) listed
above, or (4) the Enhanced Beneficiary Protection Option. The Enhanced
Beneficiary Protection Option may not be available in all states.
We will issue a rider to your Contract if you elect the Option. The
Enhanced Beneficiary Protection Option on the date we issue the Contract rider
("Rider Date") is equal to the Contract Value on that date. After the Rider
Date, the Enhanced Beneficiary Protection Option, plus any subsequent payments
and less a withdrawal adjustment, will accumulate daily at the rate of 5% per
year until the earlier of:
1. the date we determine the death benefit, or
2. the first Contract Anniversary following the 80th birthday of the oldest
Contract Owner or, if no Contract Owner is a living individual, the 80th
birthday of the oldest Annuitant.
The withdrawal adjustment is equal to (a) divided by (b), with the result
multiplied by (c), where:
(a) = the withdrawal amount,
(b) = the Contract Value immediately prior to the withdrawal, and
(c) = the value of the applicable death benefit alternative immediately prior
to the withdrawal.
See Appendix A for an example of an applicable death benefit withdrawal
adjustment.
We will determine the death benefit under the Enhanced Beneficiary
Protection Option in the same manner as described under "Death Benefit Amount."
DEATH BENEFIT PAYMENTS
Death of Contract Owner. Within 180 days of the date of your death, the new
Contract Owner may elect to:
1. receive the death benefit in a lump sum, or
2. apply an amount equal to the death benefit to one of the available Income
Plans described above. Income payments must be:
(a) over the life of the new Contract Owner,
(b) for a guaranteed number of payments from 5 to 30 years but not to
exceed the life expectancy of the new Contract Owner, or
(c) over the life of the new Contract Owner with a guaranteed number of
payments from 5 to 30 years but not to exceed the life expectancy of
the new Contract Owner.
Otherwise, the new Contract Owner will receive the Settlement Value. The
"Settlement Value" is the Contract Value, less any applicable withdrawal charge
and premium tax. We will calculate the Settlement Value as of the end of the
Valuation Date coinciding with the requested distribution date for payment or on
the mandatory distribution date of 5 years after the date of your death,
whichever is earlier. If we receive a request after 3 p.m. Central Time on a
Valuation Date, we will process the request as of the end of the following
Valuation Date. We are currently waiving the 180 day limit, but we reserve the
right to enforce the limitation in the future.
In any event, the entire value of the Contract must be distributed within 5
years after the date of death unless an Income Plan is elected or a surviving
spouse continues the Contract in accordance with the provisions described below.
If the new Contract Owner is your spouse, then he or she may elect one of
the options listed above or may continue the Contract in the Accumulation Phase
as if the death had not occurred. On the date the Contract is continued, the
Contract Value will equal the amount of the death benefit as determined as of
the Valuation Date on which we received Due Proof of Death (the next Valuation
Date if we receive Due Proof of Death after 3 p.m. Central Time). The Contract
may only be continued once. If the surviving spouse continues the Contract in
the Accumulation Phase, the surviving spouse may make a single withdrawal of any
amount within 1 year of the date of death without incurring a withdrawal charge.
Prior to the Payout start Date, the death benefit for the continued Contract
will be the greater of:
o purchase payments less withdrawals; or
o the Contract Value on the date we determine the death benefit; or
o the Maximum Anniversary Value as defined in the "Death Benefit Amount"
section, with the following changes:
o "Issue Date" is replaced by the date the Contract is continued,
o "Initial Purchase Payment" is replaced with the death benefit as
described at the end of the Valuation Period during which we received
Due Proof of Death.
For Contracts with the optional Enhanced Beneficiary Protection option:
o the Enhanced Beneficiary Protection value as defined in the Rider,
with the following changes:
o "Rider Date" is replaced by the date the Contract is continued
o "Contract Value" is replaced with the death benefit as described at
the end of the Valuation Period during which we received Due Proof of
Death.
If the new Contract Owner is a corporation, trust, or other non-natural
person, then the new Contract Owner may elect, within 180 days of your death, to
receive the death benefit in lump sum or may elect to receive the Settlement
Value in a lump sum within 5 years of death. We are currently waiving the 180
day limit, but we reserve the right to enforce the limitation in the future.
Death of Annuitant. If the Annuitant who is not also the Contract Owner dies
prior to the Payout Start Date, the Contract Owner must elect one of the
applicable options described below.
If the Contract Owner is a natural person, the Contract Owner may elect to
continue the Contract as if the death had not occurred, or, if we receive Due
Proof of Death within 180 days of the date of the Annuitant's death, the
Contract Owner may choose to:
1. receive the death benefit in a lump sum; or
2. apply the death benefit to an Income Plan that must begin within 1 year of
the date of death.
If the Contract Owner elects to continue the Contract or to apply the death
benefit to an Income Plan, the new Annuitant will be the youngest Contract
Owner, unless the Contract Owner names a different Annuitant.
If the Contract Owner is a non-natural person, the non-natural Contract
Owner may elect, within 180 days of the Annuitant's date of death, to receive
the death benefit in a lump sum or may elect to receive the Settlement Value
payable in a lump sum within 5 years of the Annuitant's date of death. If the
non- natural Contract Owner does not make one of the above described elections,
the Settlement Value must be withdrawn by the non-natural Contract Owner on or
before the mandatory distribution date 5 years after the Annuitant's death. We
are currently waiving the 180 day limit, but we reserve the right to enforce the
limitation in the future.
<PAGE>
More Information
ALLSTATE
Allstate is the issuer of the Contract. Allstate is an Illinois stock life
insurance company organized in 1957.
Allstate is licensed to operate in the District of Columbia, Puerto Rico,
and all states except New York. We intend to offer the Contract in those
jurisdictions in which we are licensed. Our home office is located at 3100
Sanders Road, Northbrook, Illinois, 60062.
Allstate is a wholly owned subsidiary of Allstate Insurance Company, a
stock property-liability insurance company incorporated under the laws of
Illinois. All of the outstanding capital stock of Allstate Insurance Company is
owned by The Allstate Corporation.
Several independent rating agencies regularly evaluate life insurers'
claims-paying ability, quality of investments, and overall stability. A.M. Best
Company assigns A+ (Superior) to Allstate. Standard & Poor's Insurance Rating
Services assigns an AA+ (Very Strong) financial strength rating and Moody's
assigns an Aa2 (Excellent) financial strength rating to Allstate. These ratings
do not reflect the investment performance of the Variable Account. We may from
time to time advertise these ratings in our sales literature.
THE VARIABLE ACCOUNT
Allstate established the Allstate Life Insurance Company Separate Account A on
January 27, 1999. We have registered the Variable Account with the SEC as a unit
investment trust. The SEC does not supervise the management of the Variable
Account or Allstate.
We own the assets of the Variable Account. The Variable Account is a
segregated asset account under Illinois law. That means we account for the
Variable Account's income, gains and losses separately from the results of our
other operations. It also means that only the assets of the Variable Account
that are in excess of the reserves and other Contract liabilities with respect
to the Variable Account are subject to liabilities relating to our other
operations. Our obligations arising under the Contracts are general corporate
obligations of Allstate.
The Variable Account consists of 22 Variable Sub-Accounts, each of which
invests in a corresponding Fund. We may add new Variable Sub-Accounts or
eliminate one or more of them, if we believe marketing, tax, or investment
conditions so warrant. We do not guarantee the investment performance of the
Variable Account, its Sub-Accounts or the Funds. We may use the Variable Account
to fund our other annuity contracts. We will account separately for each type of
annuity contract funded by the Variable Account.
THE FUNDS
Dividends and Capital Gain Distributions. We automatically reinvest all
dividends and capital gains distributions from the Funds in shares of the
distributing Funds at their net asset value.
Voting Privileges. As a general matter, you do not have a direct right to vote
the shares of the Funds held by the Variable Sub-Accounts to which you have
allocated your Contract Value. Under current law, however, you are entitled to
give us instructions on how to vote those shares on certain matters. Based on
our present view of the law, we will vote the shares of the Funds that we hold
directly or indirectly through the Variable Account in accordance with
instructions that we receive from Contract Owners entitled to give such
instructions.
As a general rule, before the Payout Start Date, the Contract Owner or
anyone with a voting interest is the person entitled to give voting
instructions. The number of shares that a person has a right to instruct will be
determined by dividing the Contract Value allocated to the applicable Variable
Sub-Account by the net asset value per share of the corresponding Fund as of the
record date of the meeting. After the Payout Start Date the person receiving
income payments has the voting interest. The payee's number of votes will be
determined by dividing the reserve for such Contract allocated to the applicable
Sub-account by the net asset value per share of the corresponding Fund. The
votes decrease as income payments are made and as the reserves for the Contract
decrease.
We will vote shares attributable to Contracts for which we have not
received instructions, as well as shares attributable to us, in the same
proportion as we vote shares for which we have received instructions, unless we
determine that we may vote such shares in our own discretion. We will apply
voting instructions to abstain on any item to be voted upon on a pro-rata basis
to reduce the votes eligible to be cast.
We reserve the right to vote Fund shares as we see fit without regard to
voting instructions to the extent permitted by law. If we disregard voting
instructions, we will include a summary of that action and our reasons for that
action in the next semi-annual financial report we send to you.
Changes in Funds. If the shares of any of the Funds are no longer available for
investment by the Variable Account or if, in our judgment, further investment in
such shares is no longer desirable in view of the purposes of the Contract, we
may eliminate that Fund and substitute shares of another eligible investment
fund. Any substitution of securities will comply with the requirements of the
Investment Company Act of 1940. We also may add new Variable Sub-Accounts that
invest in additional mutual funds. We will notify you in advance of any change.
Conflicts of Interest. The Funds sell their shares to separate accounts
underlying both variable life insurance and variable annuity contracts. It is
conceivable that in the future it may be unfavorable for variable life insurance
separate accounts and variable annuity separate accounts to invest in the same
Fund. The board of directors of the Funds monitors for possible conflicts among
separate accounts buying shares of the Funds. Conflicts could develop for a
variety of reasons. For example, differences in treatment under tax and other
laws or the failure by a separate account to comply with such laws could cause a
conflict. To eliminate a conflict, the Funds' board of directors may require a
separate account to withdraw its participation in a Fund. A Fund's net asset
value could decrease if it had to sell investment securities to pay redemption
proceeds to a separate account withdrawing because of a conflict.
THE CONTRACT
Distribution. Allstate Life Financial Services, Inc. ("ALFS"), located at 3100
Sanders Road, Northbrook, IL 60062-7154, serves as principal underwriter of the
Contracts. ALFS is a wholly owned subsidiary of Allstate. ALFS is a registered
broker dealer under the Securities and Exchange Act of 1934, as amended
("Exchange Act"), and is a member of the National Association of Securities
Dealers, Inc. Contracts are sold by registered representatives of unaffiliated
broker-dealers or bank employees who are licensed insurance agents appointed by
Allstate, either individually or through an incorporated insurance agency and
have entered into a selling agreement with ALFS to sell the Contract.
We will pay commissions to broker-dealers who sell the Contracts.
Commissions paid may vary, but we estimate that the total commission paid on all
Contract sales will not exceed 5.75% of all purchase payments. From time to
time, we may pay or permit other promotional incentives, in cash or credit or
other compensation. The commission is intended to cover distribution expenses.
In some states, Contracts may be sold by representatives or employees of banks
which may be acting as broker-dealers without separate registration under the
Exchange Act, pursuant to legal and regulatory exceptions.
Allstate may pay ALFS a commission for distribution of the Contracts. The
underwriting agreement with ALFS provides that we will reimburse ALFS for
expenses incurred in distributing the Contracts, including any liability to
Contract Owners arising out of services rendered or Contracts issued.
Administration. We have primary responsibility for all administration of the
Contracts and the Variable Account.
We provide the following administrative services, among others:
o issuance of the Contracts;
o maintenance of Contract Owner records;
o Contract Owner services;
o calculation of unit values;
o maintenance of the Variable Account; and
o preparation of Contract Owner reports.
We will send you Contract statements and transaction confirmations at least
annually. You should notify us promptly in writing of any address change. You
should read your statements and confirmations carefully and verify their
accuracy. You should contact us promptly if you have a question about a periodic
statement. We will investigate all complaints and make any necessary adjustments
retroactively, but you must notify us of a potential error within a reasonable
time after the date of the questioned statement. If you wait too long, we will
make the adjustment as of the date that we receive notice of the potential
error.
We will also provide you with additional periodic and other reports,
information and prospectuses as may be required by federal securities laws.
QUALIFIED PLANS
If you use the Contract with a qualified plan, the plan may impose different or
additional conditions or limitations on withdrawals, waivers of withdrawal
charges, death benefits, Payout Start Dates, income payments, and other Contract
features. In addition, adverse tax consequences may result if qualified plan
limits on distributions and other conditions are not met. Please consult your
qualified plan administrator for more information.
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds, Washington, D.C., has advised Allstate on
certain federal securities law matters. All matters of Illinois law pertaining
to the Contracts, including the validity of the Contracts and Allstate's right
to issue such Contracts under Illinois insurance law, have been passed upon by
Michael J. Velotta, General Counsel of Allstate.
YEAR 2000
Allstate is heavily dependent upon complex computer systems for all phases of
its operations, including customer service, and policy and contract
administration. Since many of Allstate'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"). Allstate believes that many of its
counterparties and suppliers also have Year 2000 Issues which could affect
Allstate. In 1995, Allstate Insurance Company commenced a plan intended to
mitigate and/or prevent the adverse effects of the Year 2000 Issue. 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 Allstate actively working with its major external counterparties
and suppliers to assess their compliance efforts and Allstate's exposure to
them. Allstate 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.
<PAGE>
Taxes
The following discussion is general and is not intended as tax advice.
Allstate makes no guarantee regarding the tax treatment of any Contract or
transaction involving a Contract.
Federal, state, local and other tax consequences of ownership or receipt of
distributions under an annuity contract depend on your individual circumstances.
If you are concerned about any tax consequences with regard to your individual
circumstances, you should consult a competent tax adviser.
TAXATION OF ANNUITIES IN GENERAL
Tax Deferral. Generally, you are not taxed on increases in the Contract Value
until a distribution occurs. This rule applies only where:
1. the Contract owner is a natural person,
2. the investments of the Variable Account are "adequately diversified"
according to Treasury Department regulations, and
3. Allstate is considered the owner of the Variable Account assets for federal
income tax purposes.
Non-natural Owners. As a general rule, annuity contracts owned by non-natural
persons such as corporations, trusts, or other entities are not treated as
annuity contracts for federal income tax purposes. The income on such contracts
is taxed as ordinary income received or accrued by the owner during the taxable
year. Please see the Statement of Additional Information for a discussion of
several exceptions to the general rule for contracts owned by non-natural
persons.
Diversification Requirements. For a Contract to be treated as an annuity for
federal income tax purposes, the investments in the Variable Account must be
"adequately diversified" consistent with standards under Treasury Department
regulations. If the investments in the Variable Account are not adequately
diversified, the Contract will not be treated as an annuity contract for federal
income tax purposes. As a result, the income on the Contract will be taxed as
ordinary income received or accrued by the owner during the taxable year.
Although Allstate does not have control over the Funds or their investments, we
expect the Funds to meet the diversification requirements.
Ownership Treatment. The IRS has stated that you will be considered the owner of
Variable Account assets if you possess 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 the regulations do not provide guidance concerning circumstances in which
investor control of the Variable Account investments may cause an investor to be
treated as the owner of the Variable Account. The Treasury Department also
stated that future guidance would be issued regarding the extent that Owners
could direct sub-account investments without being treated as Owners of the
underlying assets of the separate account.
Your rights under the Contract are different than those described by the
IRS in rulings in which it found that contract Owners were not Owners of
separate account assets. For example, you have the choice to allocate premiums
and Contract Values among more investment alternatives. Also, you may be able to
transfer among investment alternatives more frequently than in such rulings.
These differences could result in you being treated as the owner of the Variable
Account. If this occurs, income and gain from the Variable Account assets would
be includible in your gross income. Allstate does not know what standards will
be set forth in any regulations or rulings which the Treasury Department may
issue. It is possible that future standards announced by the Treasury Department
could adversely affect the tax treatment of your Contract. We reserve the right
to modify the Contract as necessary to attempt to prevent you from being
considered the federal tax owner of the assets of the Variable Account. However,
we make no guarantee that such modification to the Contract will be successful.
Taxation of Partial and Full Withdrawals. If you make a partial withdrawal under
a non-Qualified Contract, amounts received are taxable to the extent the
Contract Value, without regard to surrender charges, exceeds the investment in
the Contract. The investment in the Contract is the gross premium paid for the
contract minus any amounts previously received from the Contract if such amounts
were properly excluded from your gross income. If you make a partial withdrawal
under a Qualified Contract, the portion of the payment that bears the same ratio
to the total payment that the investment in the Contract (i.e., nondeductible
IRA contributions, after tax contributions to qualified plans) bears to the
Contract Value, is excluded from your income. If you make a full withdrawal
under a non-Qualified Contract or a Qualified Contract, the amount received will
be taxable only to the extent it exceeds the investment in the Contract.
"Nonqualified distributions" from Roth IRAs are treated as made from
contributions first and are included in gross income only to the extent that
distributions exceed contributions. "Qualified distributions" from Roth IRAs are
not included in gross income. "Qualified distributions" are any distributions
made more than five taxable years after the taxable year of the first
contribution to any Roth IRA and which are:
o made on or after the date the individual attains age 59 1'2,
o made to a beneficiary after the Contract Owner's death,
o attributable to the Contract Owner being disabled, or
o for a first time home purchase (first time home purchases are subject
to a lifetime limit of $10,000).
If you transfer a non-Qualified Contract without full and adequate
consideration to a person other than your spouse (or to a former spouse incident
to a divorce), you will be taxed on the difference between the Contract Value
and the investment in the Contract at the time of transfer. Except for certain
Qualified Contracts, any amount you receive as a loan under a Contract, and any
assignment or pledge (or agreement to assign or pledge) of the Contract Value is
treated as a withdrawal of such amount or portion.
Taxation of Annuity Payments. Generally, the rule for income taxation of annuity
payments received from a nonqualified contract provides for the return of your
investment in the Contract in equal tax-free amounts over the payment period.
The balance of each payment received is taxable. For fixed annuity payments, the
amount excluded from income is determined by multiplying the payment by the
ratio of the investment in the Contract (adjusted for any refund feature or
period certain) to the total expected value of annuity payments for the term of
the Contract. If you elect variable annuity payments, the amount excluded from
taxable income is determined by dividing the investment in the Contract by the
total number of expected payments. The annuity payments will be fully taxable
after the total amount of the investment in the Contract is excluded using these
ratios. If you die, and annuity payments cease before the total amount of the
investment in the Contract is recovered, the unrecovered amount will be allowed
as a deduction for your last taxable year.
Taxation of Annuity Death Benefits. Death of a Contract Owner, or death of the
Annuitant if the Contract is owned by a non-natural person, will cause a
distribution of death benefits from a Contract. Generally, such amounts are
included in income as follows:
1. if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal, or
2. if distributed under an Income Plan, the amounts are taxed in the same
manner as an income payment. Please see the Statement of Additional
Information for more detail on distribution at death requirements.
Penalty Tax on Premature Distributions. A 10% penalty tax applies to the taxable
amount of any premature distribution from a non-Qualified Contract. The penalty
tax generally applies to any distribution made prior to the date you attain age
591'2. However, no penalty tax is incurred on distributions:
1. made on or after the date the Contract Owner attains age 59-1/2,
2. made as a result of the Contract Owner's death or disability,
3. made in substantially equal periodic payments over the Contract Owner's
life or life expectancy,
4. made under an immediate annuity, or
5. attributable to investment in the Contract before August 14, 1982.
You should consult a competent tax advisor to determine if any other
exceptions to the penalty apply to your situation. Similar exceptions may apply
to distributions from Qualified Contracts.
Aggregation of Annuity Contracts. All non-qualified deferred annuity contracts
issued by Allstate (or its affiliates) to the same Conract Owner during any
calendar year will be aggregated and treated as one annuity contract for
purposes of determining the taxable amount of a distribution.
TAX QUALIFIED CONTRACTS
Contracts may be used as investments with certain qualified plans such as:
o Individual Retirement Annuities or Accounts (IRAs) under Section 408
of the Code;
o Roth IRAs under Section 408A of the Code;
o Simplified Employee Pension Plans under Section 408(k) of the Code;
o Savings Incentive Match Plans for Employees (SIMPLE) Plans under
Section 408(p) of the Code;
o Tax Sheltered Annuities under Section 403(b) of the Code;
o Corporate and Self Employed Pension and Profit Sharing Plans; and
o State and Local Government and Tax-Exempt Organization Deferred
Compensation Plans.
Allstate reserves the right to limit the availability of the Contract for
use with any of the Qualified Plans listed above. In the case of certain
qualified plans, the terms of the plans may govern the right to benefits,
regardless of the terms of the Contract.
Restrictions Under Section 403(b) Plans. Section 403(b) of the Tax Code provides
tax-deferred retirement savings plans for employees of certain non-profit and
educational organizations. Under Section 403(b), any contract used for a 403(b)
plan must provide that distributions attributable to salary reduction
contributions made after 12/31/88, and all earnings on salary reduction
contributions, may be made only on or after the date the employee:
o attains age 59-1/2,
o separates from service,
o dies,
o becomes disabled, or
o on account of hardship (earnings on salary reduction contributions may
not be distributed on the account of hardship).
These limitations do not apply to withdrawals where Allstate is directed to
transfer some or all of the contract value to another 403(b) plan.
INCOME TAX WITHHOLDING
Allstate is required to withhold federal income tax at a rate of 20% on all
"eligible rollover distributions" unless you elect to make a "direct rollover"
of such amounts to an IRA or eligible retirement plan. Eligible rollover
distributions generally include all distributions from Qualified Contracts,
excluding IRAs, with the exception of:
1. required minimum distributions, or
2. a series of substantially equal periodic payments made over a period of at
least 10 years, or,
3. over the life (joint lives) of the participant (and beneficiary).
Allstate may be required to withhold federal and state income taxes on any
distributions from non-Qualified Contracts or Qualified Contracts that are not
eligible rollover distributions, unless you notify us of your election to not
have taxes withheld.
<PAGE>
Performance Information
We may advertise the performance of the Variable Sub-Accounts, including
yield and total return information. Total return represents the change, over a
specified period of time, in the value of an investment in a Variable Sub-
Account after reinvesting all income distributions. Yield refers to the income
generated by an investment in a Variable Sub-Account over a specified period.
All performance advertisements will include, as applicable, standardized yield
and total return figures that reflect the deduction of insurance charges, the
sales charge and withdrawal charge. Performance advertisements also may include
total return figures that reflect the deduction of insurance charges, but not
sales charges or withdrawal charge. The deduction of such charges would reduce
the performance shown. In addition, performance advertisements may include
aggregate, average, year-by-year, or other types of total return figures.
Performance information for periods prior to the inception date of the
Variable Sub-Accounts will be based on the historical performance of the
corresponding Funds for the periods beginning with the inception dates of the
Funds and adjusted to reflect current Contract expenses. You should not
interpret these figures to reflect actual historical performance of the Variable
Account.
We may include in advertising and sales materials tax deferred compounding
charts and other hypothetical illustrations that compare currently taxable and
tax deferred investment programs based on selected tax brackets. Our
advertisements also may compare the performance of our Variable Sub-Accounts
with: (a) certain unmanaged market indices, including but not limited to the Dow
Jones Industrial Average, the Standard & Poor's 500, and the Shearson Lehman
Bond Index; and/or (b) other management investment companies with investment
objectives similar to the underlying funds being compared. In addition, our
advertisements may include the performance ranking assigned by various
publications, including the Wall Street Journal, Forbes, Fortune, Money,
Barron's, Business Week, USA Today, and statistical services, including Lipper
Analytical Services Mutual Fund Survey, Lipper Annuity and Closed End Survey,
the Variable Annuity Research Data Survey, and SEI.
<PAGE>
Statement of Additional Information
Table of Contents
Additions, Deletions, or Substitutions of Investments 2
The Contract 3
Performance Information 4
Calculation of Accumulation Unit Values 9
Calculation of Variable Income Payments 10
General Matters 11
Federal Tax Matters 12
Qualified Plans 13
Experts 15
Combined Statutory Basis Financial Statements F-1
-----------
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO
PROVIDE ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN
THIS PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS.
<PAGE>
Appendix A
Withdrawal Adjustment Example - Death Benefits
Issue Date: January 1, 1999
Initial Purchase Payment: $50,000
<TABLE>
<CAPTION>
Date Type Beginning Transaction Contract Purchase Maximum Enhanced
of Contract Amount Value Payment Anniversary Beneficiary
Occurrence Value After Value Value Value
Occurrence*
Death Benefit Amount
<S> <C> <C> <C> <C> <C> <C> <C>
1/1/99 Issue Date - $50,000 $47,750 $50,000 $50,000 $50,000
1/1/00 Contract Anniversary $55,000 - $55,000 $50,000 $55,000 $53,000
7/1/00 Partial Withdrawal $60,000 $15,000 $45,000 $35,000 $41,250 $39,750
</TABLE>
The Purchase Payment Value is reduced by the amount of the withdrawal. The
withdrawal adjustment reduces the Maximum Anniversary Value and Enhanced
Beneficiary Value by the same proportion as the Contract Value.
<TABLE>
<CAPTION>
Purchase Payment Value Death Benefit
<S> <C> <C>
Partial Withdrawal Amount (w) $15,000
Value of Applicable Death Benefit Amount Immediately Prior to Partial Withdrawal (d) $50,000
Adjusted Death Benefit $35,000
Maximum Anniversary Value Death Benefit
Partial Withdrawal Amount (w) $15,000
Contract Value Immediately Prior to Partial Withdrawal (a) $60,000
Value of Applicable Death Benefit Amount Immediately Prior to Partial Withdrawal (d) $55,000
Withdrawal Adjustment [(w)/(a)]*(d) $13,750
Adjusted Death Benefit $41,250
Enhanced Beneficiary Protection Value Death Benefit
Partial Withdrawal Amount (w) $15,000
Contract Value Immediately Prior to Partial Withdrawal (a) $60,000
Value of Applicable Death Benefit Amount Immediately Prior to Partial Withdrawal (d) $53,000
Withdrawal Adjustment [(w)/(a)]*(d) $13,250
Adjusted Death Benefit $39,750
</TABLE>
* Assumes 4.50% Sales Charge deducted from initial purchase payment.
<PAGE>
Appendix B
Withdrawal Adjustment Example -
Retirement Income Guarantee Riders
Issue Date: January 1, 1999
Initial Purchase Payment: $50,000
<TABLE>
<CAPTION>
Date Type Beginning Transaction Contract Purchase Maximum 6%
of Contract Amount Value Payment Anniversary Roll-Up
Occurrence Value After Value Value Value
Occurrence*
Income Benefit Amount
<S> <C> <C> <C> <C> <C> <C> <C>
1/1/99 Issue Date - $50,000 $47,750 $50,000 $50,000 $50,000
1/1/00 Contract Anniversary $55,000 - $55,000 $50,000 $55,000 $53,000
7/1/00 Partial Withdrawal $60,000 $15,000 $45,000 $37,500 $41,250 $39,750
</TABLE>
The withdrawal adjustment equals the partial withdrawal amount divided by
the Contract Value immediately prior to the partial withdrawal multiplied by the
value of the applicable benefit amount immediately prior to the partial
withdrawal.
<TABLE>
<CAPTION>
Purchase Payment Value Income Benefit
<S> <C> <C>
Partial Withdrawal Amount (w) $15,000
Contract Value Immediately Prior to Partial Withdrawal (a) $60,000
Value of Applicable Income Benefit Amount Immediately Prior to Partial Withdrawal (d) $50,000
Withdrawal Adjustment [(w)/(a)]*(d) $12,500
Adjusted Income Benefit $37,500
Maximum Anniversary Value Income Benefit
Partial Withdrawal Amount (w) $15,000
Contract Value Immediately Prior to Partial Withdrawal (a) $60,000
Value of Applicable Income Benefit Amount Immediately Prior to Partial Withdrawal (d) $55,000
Withdrawal Adjustment [(w)/(a)]*(d) $13,750
Adjusted Income Benefit $41,250
6% Roll-Up Value Income Benefit
Partial Withdrawal Amount (w) $15,000
Contract Value Immediately Prior to Partial Withdrawal (a) $60,000
Value of Applicable Death Benefit Amount Immediately Prior to Partial Withdrawal (d) $53,000
Withdrawal Adjustment [(w)/(a)]*(d) $13,250
Adjusted Death Benefit $39,750
</TABLE>
* Assumes 4.50% Sales Charge deducted from initial purchase payment.
<PAGE>
The Putnam Allstate Advisor Series
Allstate Life Insurance Company Statement of Additional Information
3100 Sanders Road dated October 25, 1999
Northbrook, Illinois 60062
1-800-390-1277
This Statement of Additional Information supplements the information in the
prospectus for each of the two forms of The Putnam Allstate Advisor that we
offer. (For convenience, we sometimes refer to the Contracts as the Putnam
Allstate Advisor or the Putnam Allstate Advisor-A.) This Statement of Additional
Information is not a prospectus. You should read it with the respective
prospectus dated April 30, 1999 for the Putnam Allstate Advisor, and dated
October 25, 1999 for the Putnam Allstate Advisor-A. You may obtain a prospectus
by calling or writing us at the address or telephone number listed above.
Except as otherwise noted, this Statement of Additional Information uses the
same defined terms as the prospectus for each of the two forms Putnam Allstate
Advisor Variable Annuity Contracts that we offer.
TABLE OF CONTENTS
Description Page
Additions, Deletions or Substitutions of Investments................. 2
The Contract......................................................... 3
Performance Information.............................................. 4
Calculation of Accumulation Unit Values.............................. 9
Calculation of Variable Income Payments.............................. 10
General Matters...................................................... 11
Federal Tax Matters.................................................. 12
Qualified Plans...................................................... 13
Experts.............................................................. 15
Combined Statutory Basis Financial Statements........................ F-1
<PAGE>
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
- -------------------------------------------------------------------------------
We may add, delete, or substitute the Fund shares held by any Variable
Sub-Account to the extent the law permits. We may substitute shares of any Fund
with those of another Fund of the same or different mutual fund if the shares of
the Fund are no longer available for investment, or if we believe investment in
any Fund would become inappropriate in view of the purposes of the Variable
Account.
We will not substitute shares attributable to a Contract Owner's interest in a
Variable Sub-Account until we have notified the Contract Owner of the change,
and until the Securities and Exchange Commission has approved the change, to the
extent such notification and approval are required by law. Nothing contained in
this Statement of Additional Information shall prevent the Variable Account from
purchasing other securities for other series or classes of contracts, or from
effecting a conversion between series or classes of contracts on the basis of
requests made by Contract Owners.
We also may establish additional Variable Sub-Accounts or series of Variable
Sub-Accounts. Each additional Variable Sub-Account would purchase shares in a
new Fund of the same or different mutual fund. We may establish new Variable
Sub-Accounts when we believe marketing needs or investment conditions warrant.
We determine the basis on which we will offer any new Variable Sub-Accounts in
conjunction with the Contract to existing Contract Owners. We may eliminate one
or more Variable Sub-Accounts if, in our sole discretion, marketing, tax or
investment conditions so warrant.
We may, by appropriate endorsement, change the Contract as we believe necessary
or appropriate to reflect any substitution or change in the Funds. If we believe
the best interests of persons having voting rights under the Contracts would be
served, we may operate the Variable Account as a management company under the
Investment Company Act of 1940 or we may withdraw its registration under such
Act if such registration is no longer required.
<PAGE>
THE CONTRACT
- -------------------------------------------------------------------------------
The Contract is primarily designed to aid individuals in long-term financial
planning. You can use it for retirement planning regardless of whether the
retirement plan qualifies for special federal income tax treatment.
PURCHASE OF CONTRACTS
We offer the Contracts to the public through banks as well as brokers licensed
under the federal securities laws and state insurance laws. The principal
underwriter for the Variable Account, Allstate Life Financial Services, Inc.
("ALFS"), distributes the Contracts. ALFS is an affiliate of Allstate. The
offering of the Contracts is continuous. We do not anticipate discontinuing the
offering of the Contracts, but we reserve the right to do so at any time.
TAX-FREE EXCHANGES (1035 EXCHANGES, ROLLOVERS AND TRANSFERS)
We accept purchase payments that are the proceeds of a Contract in a transaction
qualifying for a tax-free exchange under Section 1035 of the Internal Revenue
Code ("Code"). Except as required by federal law in calculating the basis of the
Contract, we do not differentiate between Section 1035 purchase payments and
non-Section 1035 purchase payments.
We also accept "rollovers" and transfers from Contracts qualifying as
tax-sheltered annuities ("TSAs"), individual retirement annuities or accounts
("IRAs"), or any other Qualified Contract that is eligible to "rollover" into an
IRA. We differentiate among non-Qualified Contracts, TSAs, IRAs and other
Qualified Contracts to the extent necessary to comply with federal tax laws. For
example, we restrict the assignment, transfer, or pledge of TSAs and IRAs so the
Contracts will continue to qualify for special tax treatment. A Contract Owner
contemplating any such exchange, rollover or transfer of a Contract should
contact a competent tax adviser with respect to the potential effects of such a
transaction.
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time we may advertise the "standardized," "non-standardized," and
"adjusted historical" total returns of the Variable Sub-Accounts, as described
below. Please remember that past performance is not an estimate or guarantee of
future performance and does not necessarily represent the actual experience of
amounts invested by a particular Contract Owner.
STANDARDIZED TOTAL RETURNS
A Variable Sub-Account's standardized total return represents the average annual
total return of that Sub-Account over a particular period. We compute
standardized total return by finding the annual percentage rate that, when
compounded annually, will accumulate a hypothetical $1,000 purchase payment to
the redeemable value at the end of the one, five or ten year period, or for a
period from the date of commencement of the Variable Sub-Account's operations,
if shorter than any of the foregoing. We use the following formula prescribed by
the SEC for computing standardized total return:
1000(1 + T)n = ERV
where:
T = average annual total return
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of 1, 5, or 10 year periods or
shorter period
n = number of years in the period
1000 = hypothetical $1,000 investment
We also assume that the maximum sales charge of 5.75% is deducted from the
initial $1,000 payment. When factoring in the withdrawal charge assessed upon
redemption, we exclude the Free Withdrawal Amount, which is the amount you can
withdraw from the Contract without paying a withdrawal charge. We also use the
withdrawal charge that would apply upon redemption at the end of each period.
Thus, for example, when factoring in the withdrawal charge for a one year
standardized total return calculation, we would use the withdrawal charge that
applies to a withdrawal of a purchase payment made one year prior.
When factoring in the contract maintenance charge, we pro rate the charge by
dividing (i) the contract maintenance charge by (ii) an assumed contract size of
$45,000. We then multiply the resulting percentage by a hypothetical $1,000
investment.
The standardized total returns for the Putnam Allstate Advisor Variable
Sub-Accounts for the periods ended June 30, 1999 are set out below. No
standardized total returns are available for the Putnam Allstate Advisor-A
Variable Sub-Accounts, which commenced operations as of the date of this
Statement of Additional Information.
<PAGE>
Putnam Allstate Advisor Contract
The Variable Sub-Accounts commenced operations on April 30, 1999.
(Without the Enhanced Beneficiary Protection Option or Retirement Income
Guarantee Rider)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 4.66
Putnam Diversified Income -8.33
The George Putnam Fund -6.41
Putnam Global Asset Allocation -6.06
Putnam Global Growth -5.47
Putnam Growth and Income -2.86
Putnam Health Sciences -2.47
Putnam High Yield -7.85
Putnam Income -8.18
Putnam International Growth -4.14
Putnam International Growth and Income -5.28
Putnam International New Opportunities 1.53
Putnam Investors -2.58
Putnam Money Market -5.51
Putnam New Opportunities -1.14
Putnam New Value -5.11
Putnam OTC & Emerging Growth -1.77
Putnam Research -3.36
Putnam Small Cap Value 4.20
Putnam Utilities Growth and Income -1.42
Putnam Vista -1.37
Putnam Voyager -1.58
- --------------------
<PAGE>
(With the Enhanced Beneficiary Protection Option)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 4.63
Putnam Diversified Income -8.36
The George Putnam Fund -6.43
Putnam Global Asset Allocation -6.09
Putnam Global Growth -2.88
Putnam Growth and Income -5.49
Putnam Health Sciences -2.49
Putnam High Yield -7.88
Putnam Income -8.21
Putnam International Growth -4.17
Putnam International Growth and Income -5.31
Putnam International New Opportunities 1.51
Putnam Investors -2.61
Putnam Money Market -5.54
Putnam New Opportunities -1.16
Putnam New Value -5.13
Putnam OTC & Emerging Growth -1.79
Putnam Research -3.39
Putnam Small Cap Value 4.18
Putnam Utilities Growth and Income -1.45
Putnam Vista -1.40
Putnam Voyager -1.61
- --------------------
<PAGE>
(With Retirement Income Guarantee Rider 2)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 4.34
Putnam Diversified Income -8.65
The George Putnam Fund -6.73
Putnam Global Asset Allocation -6.38
Putnam Global Growth -5.79
Putnam Growth and Income -3.17
Putnam Health Sciences -2.78
Putnam High Yield -8.17
Putnam Income -8.50
Putnam International Growth -4.46
Putnam International Growth and Income -5.60
Putnam International New Opportunities 1.22
Putnam Investors -2.90
Putnam Money Market -5.83
Putnam New Opportunities -1.46
Putnam New Value -5.42
Putnam OTC & Emerging Growth -2.08
Putnam Research -3.68
Putnam Small Cap Value 3.89
Putnam Utilities Growth and Income -1.74
Putnam Vista -1.69
Putnam Voyager -1.90
- --------------------
<PAGE>
(With the Enhanced Beneficiary Protection Option and Retirement Income Guarantee
Rider 2)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 4.31
Putnam Diversified Income -8.67
The George Putnam Fund -6.75
Putnam Global Asset Allocation -6.41
Putnam Global Growth -3.20
Putnam Growth and Income -5.81
Putnam Health Sciences -2.81
Putnam High Yield -8.19
Putnam Income -8.52
Putnam International Growth -4.49
Putnam International Growth and Income -5.63
Putnam International New Opportunities 1.19
Putnam Investors -2.93
Putnam Money Market -5.86
Putnam New Opportunities -1.48
Putnam New Value -5.45
Putnam OTC & Emerging Growth -2.11
Putnam Research -3.70
Putnam Small Cap Value 3.86
Putnam Utilities Growth and Income -1.77
Putnam Vista -1.71
Putnam Voyager -1.93
- --------------------
NON-STANDARDIZED TOTAL RETURNS
From time to time, we also may quote rates of return that reflect changes in the
values of each Variable Sub-Account's accumulation units. We may quote these
"non-standardized total returns" on an annualized, cumulative, year-by-year, or
other basis. These rates of return take into account asset-based charges, such
as the mortality and expense risk charge and administration charge (not
applicable to Putnam Allstate Advisor-A contract). However, these rates of
return do not reflect sales charges (Putnam Allstate Advisor-A contract only),
withdrawal charges, or any other Contract charges. The latter charges, if
reflected, would reduce the performance shown.
Annualized returns reflect the rate of return that, when compounded annually,
would equal the cumulative rate of return for the period shown. We compute
annualized returns according to the following formula:
Annualized Return = (1 + r)1/n -1
where r = cumulative rate of return for the period shown,
and n = number of years in the period.
The method of computing annualized rates of return is similar to that for
computing standardized performance, described above, except that rather than
using a hypothetical $1,000 investment and the ending redeemable value thereof,
we use the changes in value of an accumulation unit.
Cumulative rates of return reflect the cumulative change in value of an
accumulation unit over the period shown. Year-by-year rates of return reflect
the change in value of an accumulation unit during the course of each year
shown. We compute these returns by dividing the accumulation unit value at the
end of each period shown, by the accumulation unit value at the beginning of
that period, and subtracting one. We compute other total returns on a similar
basis.
We may quote non-standardized total returns for 1, 3, 5 and 10 year periods, or
period since inception of the Variable Sub-Account's operations, as well as
other periods, such as "year-to-date" (prior calendar year end to the day stated
in the advertisement); "year to most recent quarter" (prior calendar year end to
the end of the most recent quarter); the prior calendar year; and the "n" most
recent calendar years.
The non-standardized total returns for the Putnam Allstate Advisor Variable
Sub-Accounts for the periods ended June 30, 1999 are set out below. No
nonstandardized total returns are available for the Putnam Allstate Advisor A
Share Variable Sub-Accounts, which commenced operations as of the date of this
Statement of Additional Information.
<PAGE>
Putnam Allstate Advisor Contract
The Variable Sub-Accounts commenced operations on April 30, 1999.
(Without the Enhanced Beneficiary Protection Option or Retirement Income
Guarantee Rider)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 10.68
Putnam Diversified Income -2.31
The George Putnam Fund -.39
Putnam Global Asset Allocation -.05
Putnam Global Growth .55
Putnam Growth and Income 3.16
Putnam Health Sciences 3.55
Putnam High Yield -1.83
Putnam Income -2.16
Putnam International Growth 1.87
Putnam International Growth and Income .73
Putnam International New Opportunities 7.55
Putnam Investors 3.43
Putnam Money Market .50
Putnam New Opportunities 4.88
Putnam New Value .91
Putnam OTC & Emerging Growth 4.25
Putnam Research 2.66
Putnam Small Cap Value 10.22
Putnam Utilities Growth and Income 4.59
Putnam Vista 4.65
Putnam Voyager 4.44
- --------------------
<PAGE>
(With the Enhanced Beneficiary Protection Option)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 10.65
Putnam Diversified Income -2.34
The George Putnam Fund -.42
Putnam Global Asset Allocation -.07
Putnam Global Growth 3.13
Putnam Growth and Income .52
Putnam Health Sciences 3.52
Putnam High Yield -1.86
Putnam Income 2.19
Putnam International Growth 1.85
Putnam International Growth and Income .71
Putnam International New Opportunities 7.52
Putnam Investors 3.41
Putnam Money Market .48
Putnam New Opportunities 4.85
Putnam New Value .88
Putnam OTC & Emerging Growth 4.22
Putnam Research 2.63
Putnam Small Cap Value 10.19
Putnam Utilities Growth and Income 4.57
Putnam Vista 4.62
Putnam Voyager 4.41
- --------------------
<PAGE>
(With Retirement Income Guarantee Rider 2)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 10.68
Putnam Diversified Income -2.31
The George Putnam Fund -.39
Putnam Global Asset Allocation -.05
Putnam Global Growth .55
Putnam Growth and Income 3.16
Putnam Health Sciences 3.55
Putnam High Yield -1.83
Putnam Income -2.16
Putnam International Growth 1.87
Putnam International Growth and Income .73
Putnam International New Opportunities 7.55
Putnam Investors 3.43
Putnam Money Market .50
Putnam New Opportunities 4.88
Putnam New Value .91
Putnam OTC & Emerging Growth 4.25
Putnam Research 2.66
Putnam Small Cap Value 10.22
Putnam Utilities Growth and Income 4.59
Putnam Vista 4.65
Putnam Voyager 4.44
- --------------------
<PAGE>
(With the Enhanced Beneficiary Protection Option and Retirement Income Guarantee
Rider 2)
Since Inception
of
Variable Sub-Account Sub-Account
Putnam Asia Pacific Growth 10.65
Putnam Diversified Income -2.34
The George Putnam Fund -.42
Putnam Global Asset Allocation -.07
Putnam Global Growth 3.13
Putnam Growth and Income .52
Putnam Health Sciences 3.52
Putnam High Yield -1.86
Putnam Income -2.19
Putnam International Growth 1.85
Putnam International Growth and Income .71
Putnam International New Opportunities 7.52
Putnam Investors 3.41
Putnam Money Market .48
Putnam New Opportunities 4.85
Putnam New Value .88
Putnam OTC & Emerging Growth 4.22
Putnam Research 2.63
Putnam Small Cap Value 10.19
Putnam Utilities Growth and Income 4.57
Putnam Vista 4.62
Putnam Voyager 4.41
- --------------------
ADJUSTED HISTORICAL TOTAL RETURNS
We may advertise the total return for periods prior to the date that the
Variable Sub-Accounts commenced operations. We will calculate such "adjusted
historical total returns" using the performance of the underlying Funds and
adjusting such performance to reflect the current level of charges that apply to
the Variable Sub-Accounts under the Contract.
The adjusted historical total returns for the Variable Sub-Accounts for the
periods ended June 30, 1999 are set out below.
<PAGE>
Putnam Allstate Advisor Contract
(Without the Enhanced Beneficiary Protection Option or a Retirement Income
Guarantee Rider)
<TABLE>
<CAPTION>
Ten Years or Since
Variable Sub-Account One Year Five Years Inception of Fund*
<S> <C> <C> <C>
Putnam Asia Pacific Growth 39.16 N/A 3.00
Putnam Diversified Income -5.03 5.51 4.26
The George Putnam Fund 9.27 N/A 7.49
Putnam Global Asset Allocation 5.71 14.54 11.47
Putnam Global Growth 11.76 15.38 11.49
Putnam Growth and Income 17.94 21.44 15.12
Putnam Health Sciences .39 N/A .82
Putnam High Yield -7.02 7.41 8.73
Putnam Income .80 6.48 7.03
Putnam International Growth 10.15 N/A 18.02
Putnam International Growth and Income 8.36 N/A 16.86
Putnam International New Opportunities 17.66 N/A 12.91
Putnam Investors 19.77 N/A 22.45
Putnam Money Market 3.85 4.10 4.15
Putnam New Opportunities 16.75 24.72 22.33
Putnam New Value 15.88 N/A 14.30
Putnam OTC & Emerging Growth 15.53 N/A 15.26
Putnam Research N/A N/A 46.15
Putnam Small Cap Value N/A N/A 79.02
Putnam Utilities Growth and Income 13.10 17.31 13.11
Putnam Vista 14.20 N/A 21.43
Putnam Voyager 20.43 24.82 18.53
- --------------------
</TABLE>
* Each of the above Funds (Class IB) corresponding to the Variable Sub-Accounts
commenced operations on April 30, 1998, except for the Putnam VT Diversified
Income, Growth and Income, and International Growth Funds, which commenced
operations on April 6, 1998, and the Putnam VT Research Fund, which commenced
operations September 30, 1998. For periods prior to the inception dates of the
Funds (Class IB), the performance shown is based on the historical performance
of the Funds (Class IA), adjusted to reflect the current expenses of the Funds
(Class IB). The inception dates for the Funds (Class IA) are as follows:
Global Asset Allocation, Growth and Income, High Yield, Money Market, U.S.
Government and High Quality Bond, Voyager commenced operations on February 1,
1988; Global Growth commenced operations on May 1, 1990; Utilities Growth and
Income commenced operations on May 1, 1992; Diversified Income commenced
operations on September 15, 1993; New Opportunities commenced operations on May
2, 1994; Asia Pacific Growth commenced operations on May 1, 1995; International
Growth, International Growth and Income, International New Opportunities, New
Value and Vista commenced operations on January 2, 1997; The George Putnam Fund
of Boston, Health Sciences, Investors and OTC & Emerging Growth commenced
operations on April 30, 1998.
<PAGE>
(With the Enhanced Beneficiary Protection Option and Retirement Income Guarantee
Rider 2)*
<TABLE>
<CAPTION>
Ten Years or Since
Variable Sub-Account One Year Five Years Inception of Fund**
<S> <C> <C> <C>
Putnam Asia Pacific Growth 38.42 N/A 2.40
Putnam Diversified Income -5.54 4.89 3.64
The George Putnam Fund 8.69 N/A 6.91
Putnam Global Asset Allocation 5.15 13.87 10.81
Putnam Global Growth 14.05 15.29 11.13
Putnam Growth and Income 14.35 20.11 14.14
Putnam Health Sciences -.14 N/A .28
Putnam High Yield -7.52 6.78 8.08
Putnam Income .27 5.86 6.39
Putnam International Growth 9.57 N/A 17.34
Putnam International Growth and Income 7.79 N/A 16.19
Putnam International New Opportunities 17.04 N/A 12.26
Putnam Investors 19.13 N/A 21.79
Putnam Money Market 3.30 3.49 3.53
Putnam New Opportunities 16.13 23.98 21.61
Putnam New Value 15.27 N/A 13.64
Putnam OTC & Emerging Growth 14.92 N/A 14.63
Putnam Research N/A N/A 45.42
Putnam Small Cap Value N/A N/A 78.74
Putnam Utilities Growth and Income 12.51 16.62 12.44
Putnam Vista 13.60 N/A 20.73
Putnam Voyager 19.79 24.08 17.83
- --------------------
</TABLE>
*Performance figures have been adjusted to reflect the current charge
for the Enhanced Beneficiary Protection Option and Retirement Income Guarantee
Rider 2 as if those features had been available throughout the periods shown.
** The inception dates for the Funds appear in the first footnote to
the preceding table. For periods prior to the inception dates of the Funds
(Class IB), the performance shown is based on the historical performance of the
Funds (Class IA), adjusted to reflect the current expenses of the Funds (Class
IB). The inception dates for the Funds (Class IA) are shown on the first note to
the preceding table.
<PAGE>
(With the Enhanced Beneficiary Protection Option)*
<TABLE>
<CAPTION>
Ten Years or Since
Variable Sub-Account One Year Five Years Inception of Fund**
<S> <C> <C> <C>
Putnam Asia Pacific Growth 38.42 N/A 2.40
Putnam Diversified Income -5.54 4.89 3.64
The George Putnam Fund 8.69 N/A 6.91
Putnam Global Asset Allocation 5.15 13.87 10.32
Putnam Global Growth 14.05 15.29 11.13
Putnam Growth and Income 14.35 20.11 14.97
Putnam Health Sciences -.14 N/A .28
Putnam High Yield -7.52 6.78 8.08
Putnam Income .27 5.86 6.39
Putnam International Growth 9.57 N/A 17.34
Putnam International Growth and Income 7.79 N/A 16.19
Putnam International New Opportunities 17.04 N/A 12.26
Putnam Investors 19.13 N/A 21.79
Putnam Money Market 3.30 3.49 3.53
Putnam New Opportunities 16.13 23.98 21.61
Putnam New Value 15.27 N/A 13.64
Putnam OTC & Emerging Growth 14.92 N/A 14.63
Putnam Research N/A N/A 45.42
Putnam Small Cap Value N/A N/A 78.74
Putnam Utilities Growth and Income 12.51 16.62 12.44
Putnam Vista 13.60 N/A 20.73
Putnam Voyager 19.79 24.08 17.32
- --------------------
</TABLE>
*Performance figures have been adjusted to reflect the current charge
for the Enhanced Beneficiary Protection Option as if that feature had been
available throughout the periods shown.
** The inception dates for the Funds appear in the first footnote to
the preceding table. For periods prior to the inception dates of the Funds
(Class IB), the performance shown is based on the historical performance of the
Funds (Class IA), adjusted to reflect the current expenses of the Funds (Class
IB). The inception dates for the Funds (Class IA) are shown on the first note to
the preceding table.
<PAGE>
(With Retirement Income Guarantee Rider 2)
<TABLE>
<CAPTION>
Ten Years or Since
Variable Sub-Account One Year Five Years Inception of Fund**
<S> <C> <C> <C>
Putnam Asia Pacific Growth 39.16 N/A 3.00
Putnam Diversified Income -5.03 5.51 4.26
The George Putnam Fund 9.27 N/A 7.49
Putnam Global Asset Allocation 5.71 14.54 11.47
Putnam Global Growth 11.76 15.38 11.49
Putnam Growth and Income 17.94 21.44 15.12
Putnam Health Sciences .39 N/A .82
Putnam High Yield -7.02 7.41 8.73
Putnam Income .80 6.48 7.03
Putnam International Growth 10.15 N/A 18.02
Putnam International Growth and Income 8.36 N/A 16.86
Putnam International New Opportunities 17.66 N/A 12.91
Putnam Investors 19.77 N/A 22.45
Putnam Money Market 3.85 4.10 4.15
Putnam New Opportunities 16.75 24.72 22.33
Putnam New Value 15.88 N/A 14.30
Putnam OTC & Emerging Growth 15.53 N/A 15.26
Putnam Research N/A N/A 46.15
Putnam Small Cap Value N/A N/A 79.02
Putnam Utilities Growth and Income 13.10 17.31 13.11
Putnam Vista 14.20 N/A 21.43
Putnam Voyager 20.43 24.82 18.53
- --------------------
</TABLE>
*Performance figures have been adjusted to reflect the current charge
for Retirement Income Guarantee Rider 2 as if that feature had been available
throughout the periods shown. For purposes of computing the Rider fee, we
assumed that Income Base B applied, that there were no additional purchase
payments or withdrawals, and that the Contract Issue Date coincided with the
inception date of the Fund (Class IA).
** The inception dates for the Funds appear in the first footnote to
the preceding table. For periods prior to the inception dates of the Funds
(Class IB), the performance shown is based on the historical performance of the
Funds (Class IA), adjusted to reflect the current expenses of the Funds (Class
IB). The inception dates for the Funds (Class IA) are shown on the first note to
the first table above.
<PAGE>
Calculation of Accumulation Unit Values
- -------------------------------------------------------------------------------
The value of Accumulation Units will change each Valuation Period according to
the investment performance of the Fund shares purchased by each Variable
Sub-Account and the deduction of certain expenses and charges. A "Valuation
Period" is the period from the end of one Valuation Date and continues to the
end of the next Valuation Date. A Valuation Date ends at the close of regular
trading on the New York Stock Exchange (currently 3:00 p.m.Central Time).
The Accumulation Unit Value of a Variable Sub-Account for any Valuation Period
equals the Accumulation Unit Value as of the immediately preceding Valuation
Period, multiplied by the Net Investment Factor (described below) for that
Sub-Account for the current Valuation Period.
NET INVESTMENT FACTOR
The Net Investment Factor for a Valuation Period is a number representing the
change, since the last Valuation Period, in the value of Variable Sub-Account
assets per Accumulation Unit due to investment income, realized or unrealized
capital gain or loss, deductions for taxes, if any, and deductions for the
mortality and expense risk charge and administrative expense charge. We
determine the Net Investment Factor for each Variable Sub-Account for any
Valuation Period by dividing (A) by (B) and subtracting (C) from the result,
where:
(A) is the sum of:
(1) the net asset value per share of the Fund underlying the
Variable Sub-Account determined at the end of the current
Valuation Period; plus,
(2) the per share amount of any dividend or capital gain
distributions made by the Fund underlying the Variable
Sub-Account during the current Valuation Period;
(B) is the net asset value per share of the Fund underlying the Variable
Sub-Account determined as of the end of the immediately preceding
Valuation Period; and
(C) is the mortality and expense risk charge corresponding to the portion
of the current calendar year that is in the current Valuation Period.
<PAGE>
CALCULATION OF VARIABLE INCOME PAYMENTS
- -------------------------------------------------------------------------------
We calculate the amount of the first variable income payment under an Income
Plan by applying the Contract Value allocated to each Variable Sub-Account less
any applicable premium tax charge deducted at the time, to the income payment
tables in the Contract. We divide the amount of the first variable annuity
income payment by the Variable Sub-Account's then current Annuity Unit value to
determine the number of annuity units ("Annuity Units") upon which later income
payments will be based. To determine income payments after the first, we simply
multiply the number of Annuity Units determined in this manner for each Variable
Sub-Account by the then current Annuity Unit value ("Annuity Unit Value") for
that Variable Sub-Account.
CALCULATION OF ANNUITY UNIT VALUES
Annuity Units in each Variable Sub-Account are valued separately and Annuity
Unit Values will depend upon the investment experience of the particular Fund in
which the Variable Sub-Account invests. We calculate the Annuity Unit Value for
each Variable Sub-Account at the end of any Valuation Period by:
o multiplying the Annuity Unit Value at the end of the immediately preceding
Valuation Period by the Variable Sub-Account's Net Investment Factor
(described in the preceding section) for the Period; and then
o dividing the product by the sum of 1.0 plus the assumed investment rate for
the Valuation Period.
The assumed investment rate adjusts for the interest rate assumed in the
income payment tables used to determine the dollar amount of the first variable
income payment, and is at an effective annual rate which is disclosed in the
Contract.
We determine the amount of the first variable income payment paid under an
Income Plan using the income payment tables set out in the Contracts. The
Contracts include tables that differentiate on the basis of sex, except in
states that require the use of unisex tables.
<PAGE>
GENERAL MATTERS
- ------------------------------------------------------------------------------
INCONTESTABILITY
We will not contest the Contract after we issue it.
SETTLEMENTS
The Contract must be returned to us prior to any settlement. We must receive due
proof of the Contract Owner(s) death (or Annuitant's death if there is a
non-natural Contract Owner) before we will settle a death claim.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
We hold title to the assets of the Variable Account. We keep the assets
physically segregated and separate and apart from our general corporate assets.
We maintain records of all purchases and redemptions of the Fund shares held by
each of the Variable Sub-Accounts.
The Funds do not issue stock certificates. Therefore, we hold the Variable
Account's assets in open account in lieu of stock certificates. See the Funds'
prospectuses for a more complete description of the custodian of the Funds.
PREMIUM TAXES
Applicable premium tax rates depend on the Contract Owner's state of residency
and the insurance laws and our status in those states where premium taxes are
incurred. Premium tax rates may be changed by legislation, administrative
interpretations, or judicial acts.
TAX RESERVES
We do not establish capital gains tax reserves for any Variable Sub-Account nor
do we deduct charges for tax reserves because we believe that capital gains
attributable to the Variable Account will not be taxable. However, we reserve
the right to deduct charges to establish tax reserves for potential taxes on
realized or unrealized capital gains.
<PAGE>
FEDERAL TAX MATTERS
- -------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. WE MAKE
NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR TRANSACTION
INVOLVING A CONTRACT.
Federal, state, local and other tax consequences of ownership or receipt of
distributions under an annuity contract depend on the individual circumstances
of each person. If you are concerned about any tax consequences with regard to
your individual circumstances, you should consult a competent tax adviser.
TAXATION OF ALLSTATE LIFE INSURANCE COMPANY
Allstate is 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 Allstate, and its operations form a part of Allstate, it will not be taxed
separately as a "Regulated Investment Company" under Subchapter M of the Code.
Investment income and realized capital gains of the Variable Account are
automatically applied to increase reserves under the Contract. Under existing
federal income tax law, Allstate believes that the Variable Account investment
income and capital gains will not be taxed to the extent that such income and
gains are applied to increase the reserves under the Contract. Accordingly,
Allstate does not anticipate that it will incur any federal income tax liability
attributable to the Variable Account, and therefore Allstate does not intend to
make provisions for any such taxes. If Allstate is taxed on investment income or
capital gains of the Variable Account, then Allstate may impose a charge against
the Variable Account in order to make provision for such taxes.
EXCEPTIONS TO THE NON-NATURAL OWNER RULE
There are several exceptions to the general rule that annuity contracts held by
a non-natural owner are not treated as annuity contracts for federal income tax
purposes. Contracts will generally be treated as held by a natural person if the
nominal owner is a trust or other entity which holds the Contract as agent for a
natural person. However, this special exception will not apply in the case of an
employer who is the nominal owner of an annuity contract under a non-qualified
deferred compensation arrangement for its employees. Other exceptions to the
non-natural owner rule are: (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent; (2) certain Qualified Contracts; (3)
Contracts purchased by employers upon the termination of certain qualified
plans; (4) certain Contracts used in connection with structured settlement
agreements, and (5) Contracts purchased with a single premium when the annuity
starting date is no later than a year from purchase of the annuity and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
IRS REQUIRED DISTRIBUTION AT DEATH RULES
In order to be considered an annuity contract for federal income tax purposes,
the Contract must provide: (1) if any Contract Owner dies on or after the Payout
Start Date but before the entire interest in the Contract has been distributed,
the remaining portion of such interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of the Owner's
death; (2) if any Contract Owner dies prior to the Payout Start Date, the entire
interest in the Contract will be distributed within 5 years after the date of
the Owner's death. These requirements are satisfied if any portion of the
Contract Owner's interest that is payable to (or for the benefit of) a
designated Beneficiary is distributed over the life of such Beneficiary (or over
a period not extending beyond the life expectancy of the Beneficiary) and the
distributions begin within 1 year of the Owner's death. If the Contract Owner's
designated Beneficiary is the surviving spouse of the Owner, the Contract may be
continued with the surviving spouse as the new Contract Owner. If the Contract
Owner is a non-natural person, then the Annuitant will be treated as the
Contract Owner for purposes of applying the distribution at death rules. In
addition, a change in the Annuitant on a Contract owned by a non-natural person
will be treated as the death of the Contract Owner.
<PAGE>
QUALIFIED PLANS
- -------------------------------------------------------------------------------
The Contract may be used with several types of qualified plans. Allstate
reserves the right to limit the availability of the Contract for use with any of
the Qualified Plans listed below. The tax rules applicable to participants in
such qualified plans vary according to the type of plan and the terms and
conditions of the plan itself. Adverse tax consequences may result from excess
contributions, premature distributions, distributions that do not conform to
specified commencement and minimum distribution rules, excess distributions and
in other circumstances. Contract Owners and participants under the plan and
Annuitants and Beneficiaries under the Contract may be subject to the terms and
conditions of the plan regardless of the terms of the Contract.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity (IRA).
Individual Retirement Annuities are subject to limitations on the amount that
can be contributed and on the time when distributions may commence. Certain
distributions from other types of qualified plans may be "rolled over" on a
tax-deferred basis into an Individual Retirement Annuity. An IRA generally may
not provide life insurance, but it may provide a death benefit that equals the
greater of the premiums paid and the Contract's Cash Value. The Contract
provides a death benefit that in certain circumstances may exceed the greater of
the payments and the Contract Value. It is possible that the death benefit could
be viewed as violating the prohibition on investment in life insurance contracts
with the result that the Contract would not be viewed as satisfying the
requirements of an IRA.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth Individual
Retirement Annuity. Roth Individual Retirement Annuities are subject to
limitations on the amount that can be contributed and on the time when
distributions may commence. "Qualified distributions" from Roth Individual
Retirement Annuities are not includible in gross income. "Qualified
distributions" are any distributions made more than five taxable years after the
taxable year of the first contribution to the Roth Individual Retirement
Annuity, and which are made on or after the date the individual attains age 59
1/2, made to a beneficiary after the owner's death, attributable to the owner
being disabled or for a first time home purchase (first time home purchases are
subject to a lifetime limit of $10,000). "Nonqualified distributions" are
treated as made from contributions first and are includible in gross income to
the extent such distributions exceed the contributions made to the Roth
Individual Retirement Annuity. The taxable portion of a "nonqualified
distribution" may be subject to the 10% penalty tax on premature distributions.
Subject to certain limitations, a traditional Individual Retirement Account or
Annuity may be converted or "rolled over" to a Roth Individual Retirement
Annuity. The taxable portion of a conversion or rollover distribution is
includible in gross income, but is exempted from the 10% penalty tax on
premature distributions.
SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' individual retirement
annuities if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to their individual retirement annuities. Employers intending to use
the Contract in connection with such plans should seek competent advice.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS)
Sections 408(p) and 401(k) of the Code allow employers with 100 or fewer
employees to establish SIMPLE retirement plans for their employees. SIMPLE plans
may be structured as a SIMPLE retirement account using an employee's IRA to hold
the assets or as a Section 401(k) qualified cash or deferred arrangement. In
general, a SIMPLE plan consists of a salary deferral program for eligible
employees and matching or nonelective contributions made by employers. Employers
intending to use the Contract in conjunction with SIMPLE plans should seek
competent tax and legal advice.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase annuity contracts for them, and subject
to certain limitations, to exclude the purchase payments from the employees'
gross income. An annuity contract used for a Section 403(b) plan must provide
that distributions attributable to salary reduction contributions made after
12/31/88, and all earnings on salary reduction contributions, may be made only
on or after the date the employee attains age 59 1/2, separates from service,
dies, becomes disabled or on the account of hardship (earnings on salary
reduction contributions may not be distributed for hardship). These limitations
do not apply to withdrawals where Allstate is directed to transfer some or all
of the Contract Value to another 403(b) plan.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax favored retirement plans for employees. The Self-Employed
Individuals Retirement Act of 1962, as amended, (commonly referred to as "H.R.
10" or "Keogh") permits self-employed individuals to establish tax favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of annuity contracts in order to provide benefits under the
plans.
STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION
DEFERRED COMPENSATION PLANS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the Contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as owner of the Contract has the sole right to the proceeds of the
Contract. Generally, under the non-natural owner rules, such Contracts are not
treated as annuity contracts for federal income tax purposes. Under these plans,
contributions made for the benefit of the employees will not be includible in
the employees' gross income until distributed from the plan. However, under a
Section 457 plan all the compensation deferred under the plan must remain solely
the property of the employer, subject only to the claims of the employer's
general creditors, until such time as made available to the employee or a
beneficiary.
<PAGE>
EXPERTS
- ------------------------------------------------------------------------------
The combined statutory basis financial statements of Allstate appearing in this
Statement of Additional Information (which is incorporated by reference in the
prospectus of Allstate Life Insurance Company Separate Account A of Allstate
Life Insurance Company) have been audited by Deloitte & Touche, LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
COMBINED STATUTORY BASIS FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The combined statutory basis financial statements of Allstate and the
accompanying Report of Independent Auditors appear on the pages that follow. The
financial statements of Allstate included herein should be considered only as
bearing upon the ability of Allstate to meet its obligations under the
Contracts.
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
-------------------------------
Combined Financial Statements (Statutory Basis)
for the Years Ended December 31, 1998 and
1997 and Independent Auditors' Report
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF
ALLSTATE LIFE INSURANCE COMPANY:
We have audited the accompanying combined statutory basis statements of
financial position of Allstate Life Insurance Company (a wholly-owned subsidiary
of Allstate Insurance Company) and U.S. domiciled, life and accident and health
insurance subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related combined statutory basis statements of operations, capital and surplus,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company'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 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.
As described in Note 2 to the financial statements, the Company has prepared
these combined financial statements using accounting practices prescribed or
permitted by the insurance department of the applicable state of domicile, which
is a comprehensive basis of accounting other than generally accepted accounting
principles. The effects on the combined financial statements of the differences
between statutory basis of accounting and generally accepted accounting
principles, are material.
In our opinion, because of the effects of the differences between the two bases
of accounting referred to in the preceding paragraph, such combined financial
statements do not present fairly, in conformity with generally accepted
accounting principles, the financial position of Allstate Life Insurance Company
and U.S. domiciled, life and accident and health insurance subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Allstate Life
Insurance Company and, U.S. domiciled, life and accident and health insurance
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, on the basis of
accounting described in Note 2.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
April 2, 1999
F-2
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
COMBINED STATEMENTS OF FINANCIAL POSITION
(Statutory Basis)
DECEMBER 31,
---------------------------
($ in thousands) 1998 1997
------------- -------------
ASSETS
Cash and invested assets
Bonds (fair value $25,480,639 and $24,315,518) $23,359,823 $22,487,471
Preferred stocks (alternative carrying value
$325,954 and $271,468) 294,478 231,794
Common stocks (cost $232,780 and $246,739) 428,034 443,135
Mortgage loans on real estate 3,316,586 2,987,144
Real estate 25,196 246,550
Policy loans 570,001 528,367
Cash 90,715 65,060
Short-term investments 420,013 102,178
Other invested assets 232,855 300,536
Allocation of assets from the Separate Accounts - 28,869
---------- -----------
Cash and invested assets 28,737,701 27,421,104
Investment income due and accrued 342,535 335,034
Life and accident and health insurance
premiums due and deferred 129,692 120,652
Other assets 69,655 98,527
Assets related to Separate Accounts 10,877,884 8,207,364
---------- -----------
Total assets $40,157,467 $36,182,681
=========== ===========
LIABILITIES
Policy benefit and other insurance reserves $26,073,039 $25,160,084
Interest maintenance reserve 116,821 79,702
Federal income taxes due or accrued 30,813 31,260
Payable to parent and affiliates 64,045 63,619
Other liabilities and accrued expenses 162,900 68,761
Asset valuation reserve 374,475 366,553
Allocation of assets to the Separate Accounts 32,164 -
Liabilities related to Separate Accounts 10,877,884 8,207,364
----------- ----------
Total liabilities 37,732,141 33,977,343
---------- ----------
CAPITAL AND SURPLUS
Preferred capital stock 174,999 162,279
Capital paid up (common stock, $214 and $200 par
value, in 1998 and 1997, respectively; 22,700 and
21,400 shares authorized, issued and outstanding
in 1998 and 1997, respectively) 4,858 4,280
Gross paid in and contributed capital 556,526 556,826
Unassigned surplus 1,688,943 1,481,953
----------- ---------
Total capital and surplus 2,425,326 2,205,338
----------- -----------
Total liabilities, capital and surplus $40,157,467 $36,182,681
=========== ===========
See notes to combined financial statements (statutory basis).
F-3
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE LIFE INSURANCE COMPANY
COMBINED STATEMENTS OF OPERATIONS
(Statutory Basis)
YEAR ENDED DECEMBER 31,
------------------------
<S> <C> <C>
($ in thousands) 1998 1997
----------- -----------
REVENUES
Premiums and annuity considerations $ 6,016,947 $ 5,036,034
Net investment income, including amortization of the
interest maintenance reserve of $82,428 and $42,847 2,132,327 2,097,481
Income from fees associated with Separate Accounts 119,987 86,414
Operations from Separate Accounts -- (1,829)
Other income 156,397 108,267
----------- -----------
8,425,658 7,326,367
----------- -----------
POLICY BENEFITS AND EXPENSES
Provision for policy benefits 4,369,917 3,892,440
Commissions and general insurance expenses 993,773 886,677
Insurance taxes, licenses and fees 66,870 67,585
Net transfers to Separate Accounts 1,393,665 918,406
Maturities and other scheduled payments 1,258,517 1,099,014
----------- -----------
8,082,742 6,864,122
----------- -----------
Net gain from operations before dividends to policyholders,
federal income taxes and net realized capital gains 342,916 462,245
Dividends to policyholders 169 219
----------- -----------
Net gain from operations after dividends to policyholders and
before federal income taxes and net realized capital gains 342,747 462,026
Federal income taxes 105,789 160,091
----------- -----------
Net gain from operations after dividends to policyholders and
federal income taxes and before net realized capital gains 236,958 301,935
Net realized capital gains less federal income taxes and
amounts transferred to the interest maintenance reserve 148,863 68,498
----------- -----------
Net income $ 385,821 $ 370,433
=========== ===========
<FN>
See notes to combined financial statements (statutory basis).
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE LIFE INSURANCE COMPANY
COMBINED STATEMENTS OF CAPITAL AND SURPLUS
(Statutory Basis)
YEAR ENDED DECEMBER 31,
-------------------------
<S> <C> <C>
($ in thousands) 1998 1997
----------- -----------
CAPITAL AND SURPLUS, BEGINNING OF YEAR $ 2,205,338 $ 1,849,905
Net income 385,821 370,433
Change in net unrealized capital gains (32,471) 41,845
Change in non-admitted assets (12,170) (9,699)
Change in reserve on account of change in valuation basis (15,816) --
Change in asset valuation reserve (7,922) 90,693
Federal income tax prior-period adjustment -- (27,029)
Net deferrral (amortization) of gain on disposition of credit business (2,076) 9,219
Dividends to stockholders (108,376) (133,652)
Capital contributions 12,998 13,623
----------- -----------
CAPITAL AND SURPLUS, END OF YEAR $ 2,425,326 $ 2,205,338
=========== ===========
<FN>
See notes to combined financial statements (statutory basis).
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE LIFE INSURANCE COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(Statutory Basis)
YEAR ENDED DECEMBER 31,
---------------------------
<S> <C> <C>
($ in thousands) 1998 1997
------------ ------------
CASH FROM OPERATIONS
Premiums and annuity considerations $ 4,654,152 $ 2,849,838
Annuity and other fund deposits 1,241,216 2,084,764
Investment income received 1,948,065 1,964,536
Other premiums, considerations and deposits 114,532 89,849
Income from fees associated with Separate Accounts 119,987 86,414
Allowances and reserve adjustments received
on reinsurance ceded 127,034 99,829
Other income received 14,458 5,388
Life and accident and health claims,
surrender benefits and other benefits paid (4,733,438) (4,171,885)
Commissions, other expenses and taxes paid
(excluding federal income taxes) (1,046,252) (941,673)
Net transfers to Separate Accounts (1,373,785) (1,025,577)
Dividends paid to policyholders (188) (212)
Federal income taxes paid (excluding tax on capital gains) (106,233) (118,743)
------------ ------------
Net cash from operations 959,548 922,528
------------ ------------
CASH FROM INVESTMENTS
Proceeds from investments sold, matured or repaid,
net of tax 10,452,592 9,518,100
Cost of long-term investments acquired (11,075,203) (10,453,422)
Net increase in policy loans (41,633) (38,041)
------------ ------------
Net cash from (used for) investments (664,244) (973,363)
------------ ------------
CASH FROM FINANCING AND MISCELLANEOUS SOURCES
Surplus paid in 12,720 13,343
Dividends to stockholders (108,098) (133,372)
Other 143,564 29,596
------------ ------------
Net cash from (used for) financing and
miscellaneous sources 48,186 (90,433)
------------ ------------
Net change in cash and short-term investments 343,490 (141,268)
Cash and short-term investments at beginning of year 167,238 308,506
------------ ------------
Cash and short-term investments at end of year $ 510,728 $ 167,238
============ ============
<FN>
See notes to combined financial statements (statutory basis).
</FN>
</TABLE>
F-6
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
1. GENERAL
BASIS OF PRESENTATION
The accompanying combined statutory basis financial statements include
the accounts of Allstate Life Insurance Company ("ALIC") and its wholly
owned U.S. domiciled life, accident and health insurance subsidiaries,
Northbrook Life Insurance Company ("NLIC"), Lincoln Benefit Life Company
("LBL"), Surety Life Insurance Company ("SLIC"), Glenbrook Life and Annuity
Company ("GLAC"), and Allstate Life Insurance Company of New York ("ALNY")
(collectively the "Company"). ALIC is wholly owned by Allstate Insurance
Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation").
To conform with the 1998 presentation, certain amounts in the prior
year's financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets a broad line of life insurance, annuity and group
pension products countrywide. Life insurance includes traditional products
such as whole life and term life insurance, as well as universal life and
other interest-sensitive life products. Annuities include deferred
annuities, such as variable annuities and fixed rate single and flexible
premium annuities, and immediate annuities such as structured settlement
annuities. The Company's group pension products include guaranteed
investment contracts and retirement annuities. In 1998, annuity premiums
and deposits represented approximately 75% of the Company's total statutory
premiums and deposits.
The Company utilizes various modeling techniques in managing the
relationship between assets and liabilities. The fixed income securities
supporting the Company's obligations have been selected to meet, to the
extent possible, the anticipated cash flow requirements of the related
liabilities. The Company employs strategies to minimize its exposure to
interest rate risk and to maintain investments which are sufficiently
liquid to meet obligations to contractholders in various interest rate
scenarios.
The Company monitors economic and regulatory developments which have
the potential to impact its business. Such events would present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and
interest-sensitive life insurance is enhanced by the tax incentives
available under current law. Any legislative changes which lessen these
incentives are likely to negatively impact the demand for these products.
Although the Company currently benefits from agreements with financial
services entities which market and distribute its products, consolidation
within that industry and specifically, a change in control of those
entities with which the Company partners, could affect the Company's sales.
Additionally, traditional demutualizations of mutual insurance
companies and enacted and pending state legislation to permit mutual
insurance companies to convert to a hybrid structure known as a mutual
holding company could have a number of significant effects on the Company
by (1) increasing industry competition through consolidation caused by
mergers and acquisitions related to the new corporate form of business; and
(2) increasing competition in the capital markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATUTORY BASIS OF PRESENTATION
The combined financial statements were prepared in accordance with
accounting practices prescribed or permitted by the insurance department of
the applicable state of domicile. 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
accounting practices not so prescribed. The Company has received permission
to include investment income, unrealized gains and losses and realized
gains and losses on hedging investments used to hedge the equity risk
embedded in equity indexed annuity products in investment income. This
permitted practice does not materially effect surplus or risk-based
capital.
F-7
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
The NAIC authorized a project to codify statutory accounting practices
among the various states. The NAIC has approved revised statutory
accounting principles as a result of the codification project. Dates for
adoption and implementation, however, will be determined on an individual
state basis. The requirements are not expected to have a material impact on
the statutory surplus of the Company.
Accounting practices and procedures of the NAIC as prescribed or
permitted by the insurance department of the applicable state of domicile
comprise a comprehensive basis of accounting other than generally accepted
accounting principles ("GAAP"). The more significant differences are as
follows:
a. Certain costs of acquiring new business, principally agents'
remuneration, certain underwriting costs and direct mail solicitation
costs, are expensed as incurred rather than deferred and amortized to
income as premiums are earned.
b. Statutory policy reserves are based on mortality and interest
assumptions prescribed or permitted by statutes, without consideration
of withdrawals. Statutory policy reserves generally differ from policy
reserves under GAAP, which are based on the Company's estimates of
mortality, interest and withdrawals. The effect, if any,on reserves
due to a change in reserve on account of change in valuation basis is
recorded directly to unassigned surplus rather than included in the
determination of net gain from operations.
c. The asset valuation reserve ("AVR") is determined by formula and is
based on the Company's holdings of mortgages, real estate, bonds,
stocks and other invested assets. This valuation reserve requires
appropriation of surplus to provide for possible losses on these
investments. Realized and unrealized capital gains and losses, other
than those resulting from interest rate changes, are added or charged
to the AVR. Changes in the AVR are recorded directly to unassigned
surplus. Under GAAP, provisions are recognized for declines in the
value of fixed income securities that are other than temporary and
impaired mortgage loans. Such writedowns are included in realized
capital gains and losses.
d. The interest maintenance reserve ("IMR") is used to defer realized
capital gains and losses, net of tax, on sales, calls and maturities
of bonds and certain other investments which result from interest rate
changes. These gains and losses are then amortized into investment
income over the expected remaining life of the investments sold. This
reserve is not provided under GAAP.
e. Bonds are generally stated at amortized cost rather than fair value.
f. Certain assets, principally prepaid commissions, computer software and
furniture and equipment, are designated as "non-admitted assets," and
are charged directly to unassigned surplus in the statutory financial
statements.
g. Taxes are provided for amounts currently due or recoverable. Deferred
income taxes resulting from temporary differences between the
statutory financial statement and tax bases of assets and liabilities
are not reflected in the statutory financial statements.
h. Premium receipts and benefits on universal life-type and investment
contracts are recorded as revenue and expense for statutory purposes.
Under GAAP, revenues on universal life-type contracts are comprised of
contract charges and fees which are recognized when assessed against
the policyholder account balance, and revenues on investment contracts
include contract charges and fees for contract administration and
surrenders. Additionally, premium receipts on universal life-type and
investment contracts are considered deposits and are recorded as
interest-bearing liabilities.
i. Certain postretirement benefits are accrued when employees are
eligible for such benefits rather than over the period employees
become eligible.
F-8
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
j. Pension cost is equal to the amount to be funded in accordance with
accepted actuarial cost methods rather than recognizing pension cost
over the period the participants render service to the Company and
recording a liability currently for all unfunded costs.
k. Reinsurance recoverables on unpaid losses are reported as a reduction
of policy benefit and other insurance reserves rather than reported as
an asset.
l. The assets and reserves relating to market value adjusted annuity
contracts are reflected as assets and liabilities related to Separate
Accounts and are carried at fair value. Premium receipts and benefits
on these contracts are recorded as revenue and expense and are
transferred to the Separate Accounts. Under GAAP, these assets are
reported as bonds and mortgage loans. Bonds designated as available
for sale are carried at fair value and mortgage loans are carried at
outstanding principal balance, net of unamortized premium or discount
and valuation allowances. Liabilities are reported as contractholder
funds. Revenues are comprised of contract charges and fees or contract
administration and surrenders.
INVESTMENTS
Investments are stated at values prescribed by the NAIC. Bonds,
including collateralized mortgage obligations and other structured
securities, are stated at amortized cost or, for lower credit ratings at
the lower of amortized cost or NAIC fair value. Preferred stocks are stated
at the lower of cost or fair value. Short-term investments are stated at
amortized cost, which approximates fair value.
Mortgage loans are carried at amortized cost. The maximum and minimum
lending rates were 8.1% and 6.3%,respectively, for loans made in 1998. The
maximum percentage of any one loan to the value of the security at the time
of the loan, exclusive of insured or guaranteed or purchase money mortgages
was 80.4% for loans made in 1998. Fire insurance is required on all
properties securing mortgage loans in an amount which is at least equal to
the lesser of either the insurable value of the improvements or the
outstanding principal balance of the loan. Such coverage either exceeds the
outstanding principal balance less the value of the land or provides
coverage equal to the replacement cost of the improvements.
Investments in real estate and properties acquired in satisfaction of
debt are stated at lower of depreciated cost or fair value.
Common stocks are carried at market value. Policy loans are carried at
the unpaid principal balances. Investment income consists primarily of
interest and dividends. Interest is recognized on an accrual basis and
dividends are recorded at the ex-dividend date. Interest income on
mortgage-backed and asset-backed securities is determined on the effective
yield method based on estimated principal repayments. Accrual of income is
suspended for bonds and mortgage loans 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.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments include swaps, futures, forwards and
options, including caps and floors. When derivatives meet specific criteria
they may be designated as accounting hedges and accounted for on either a
fair value, deferral, or accrual basis, depending upon the nature of the
hedge strategy, the method used to account for the hedged items and the
derivative used. Derivatives that are not designated as accounting hedges
are accounted for on a fair value basis.
If, subsequent to entering into a hedge transaction, the derivative
becomes ineffective (including if the hedged item is sold or otherwise
extinguished or the occurrence of a hedged anticipatory transaction is no
longer probable), the Company terminates the derivative position. Gains and
losses on these terminations are reported in realized capital gains and
losses in the period they occur. The Company may also terminate derivatives
as a result of other events or circumstances. Gains and losses on these
terminations are either deferred and amortized over the remaining life of
either the hedge or the hedged item, whichever is shorter, or are reported
in capital and surplus, consistent with the accounting for the hedged item.
F-9
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
FAIR VALUE ACCOUNTING Under fair value accounting, realized and
unrealized gains and losses on derivatives are recognized in either
earnings, or capital and surplus when they occur.
The Company accounts for certain equity-indexed options as hedges on a
fair value basis when certain criteria are met. The derivative must reduce
the primary market risk exposure (e.g., interest rate risk or equity price
risk, foreign currency risk) of the hedged item in conjunction with the
specific hedge strategy; be designated as a hedge at the inception of the
transaction; and have a notional amount and term that does not exceed the
carrying value and expected maturity, respectively, of the hedged item. In
addition, options must have a reference index (e.g., S&P 500) that is the
same as, or highly correlated with, the reference index of the hedged item.
For certain equity-indexed options, changes in fair value are reported
net of tax in capital and surplus exclusive of interest accruals. Changes
in fair value of certain other equity-indexed options are reflected as an
adjustment of the hedged item. Premiums paid for equity-indexed options are
reported as equity securities and amortized to net investment income over
the lives of the agreements.
The Company also has certain derivatives for which hedge accounting is
not applied and therefore are accounted for on a fair value basis. These
derivatives primarily consist of equity indexed instruments and certain
interest rate futures. Gains and losses on these derivatives are recognized
in net investment income or realized capital gains and losses during the
period as incurred.
DEFERRAL ACCOUNTING Under deferral accounting, gains and losses on
derivatives are deferred on the statement of financial position and
recognized in earnings in conjunction with earnings on the hedged item. The
Company accounts for interest rate futures and certain foreign currency
forwards as hedges using deferral accounting for anticipatory investment
purchases and sales, when the criteria for futures and forwards are met.
For futures or forwards contracts, the derivative must reduce the primary
market risk exposure on an enterprise or transaction basis in conjunction
with the hedge strategy; be designated as a hedge at the inception of the
transaction; and be highly correlated with fair value of or interest income
or expense associated with the hedged item at inception and throughout the
hedge period. In addition, anticipated transactions must be probable of
occurrence and their significant terms and characteristics identified.
Changes in fair values of these derivatives are initially deferred as
other liabilities and accrued expenses. Once the anticipated transaction
occurs, the deferred gains or losses are considered part of the cost basis
of the asset and reported net of tax in capital and surplus or recognized
as a gain or loss from disposition of the asset, as appropriate. The
Company reports initial margin deposits on futures in short-term
investments. Fees and commissions paid on these derivatives are also
deferred as an adjustment to the carrying value of the hedged item.
ACCRUAL ACCOUNTING Under accrual accounting, interest income or
expense related to the derivative is accrued and recorded as an adjustment
to the interest income or expense on the hedged item. The Company accounts
for interest rate swaps, caps, floors, and certain foreign currency swaps
as hedges on an accrual basis when certain criteria are met (as discussed
above under fair value accounting for options).
Premiums paid for interest rate caps and floors are reported as other
investments and amortized to net investment income over the lives of the
agreements.
PREMIUM REVENUE
Premiums for traditional life, individual accident and health
insurance, fixed periodic premium annuities, and group life and accident
and health insurance are recognized as revenue when due. Premiums for all
single and flexible premium life and annuity products are recognized as
revenue when collected.
F-10
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuities,
variable life policies and certain guaranteed investment contracts, and
market value adjusted annuities, the assets and liabilities of which are
legally segregated and reflected in the accompanying combined statements of
financial position as assets and liabilities of the Separate Accounts. The
assets of the Separate Accounts are carried at fair value. The assets and
liabilities related to Separate Accounts represent funds of GLAC, NLIC,
ALNY and LBL variable annuity and variable life contracts, the Allstate
Life Insurance Company Separate Account guaranteed indexed contracts
("SAGIC") and guaranteed indexed separate account ("GISA") and ALIC and
ALNY market value adjusted annuity contracts (collectively, the "Separate
Accounts").
Separate Account premium deposits, benefit expenses and contract
charges for investment management and policy administration are recorded by
the Company and reflected in the accompanying statements of operations.
Separate Accounts which contain the variable annuities, variable life and
SAGIC are unit investment trusts and are generally registered with the
Securities and Exchange Commission ("SEC"). Investment income and realized
and unrealized capital gains and losses of the variable annuity, variable
life and SAGIC, assets other than the portion related to the Company's
ownership in the Separate Accounts, accrue directly to the contractholders
and, therefore, are not included in the Company's combined statements of
operations.
The market value adjusted annuities are non-unitized investment
products, and are registered with the SEC. Investment income, including
realized and unrealized capital gains and losses related to the assets
which support the market value adjusted annuities, accrues to the Company.
Investment income, premium deposits and benefit expenses are recorded by
the Company and reflected in the accompanying combined statements of
operations in "Net transfers to Separate Accounts." Reserve liabilities for
such contracts are valued using a market interest rate.
The guaranteed indexed separate account contracts are non-unitized
investment products. Investment income, including realized and unrealized
capital gains and losses related to the assets which support the guaranteed
indexed Separate Account contracts accrues to the Company. Investment
income, premium deposits and benefit expenses are recorded by the Company
and reflected in the accompanying combined statements of operations in "Net
transfers to Separate Accounts". Reserve liabilities for such contracts are
valued using a market interest rate. ALIC guarantees the principal and a
rate of return based on an established index. ALIC maintains assets in the
Separate Account that are sufficient to fund the guaranteed benefits of the
contract.
RESERVES FOR POLICY BENEFITS
Policy benefit reserves for traditional and flexible premium insurance
are computed actuarially according to the Commissioners' Reserve Valuation
Method with interest and mortality applied in compliance with statutory
regulations. Benefit reserves for annuity products are calculated according
to the Commissioners' Annuity Reserve Valuation Method ("CARVM") with
appropriate statutory interest and mortality assumptions. Reserve interest
rates ranged from 2.0% to 7.25% for life products and from 2.5% to 11.25%
for annuity products.
Policy benefit reserves for group life and accident and health
insurance include claim reserves and unearned premiums. Claim reserves,
including incurred but not reported claims, represent management's estimate
of the ultimate liability associated with unpaid policy claims, based
primarily upon analysis of past experience.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to invest, commitments to extend mortgage loans and
financial guarantees have only off-balance-sheet risk because their
contractual amounts are not recorded in the Company's combined statements
of financial position.
F-11
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
USE OF ESTIMATES
The preparation of financial statements in conformity with statutory
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
BUSINESS OPERATIONS
The Company utilizes services and business facilities owned, or leased
and operated by AIC in conducting its business activities. The Company
reimburses AIC for operating expenses incurred by AIC in providing these
services to the Company. The cost to the Company is determined by various
allocation methods and is primarily related to the level of the services
provided. Expenses allocated to the Company were $461,231 and $424,108 in
1998 and 1997, respectively.
STRUCTURED SETTLEMENT ANNUITIES
AIC, through an affiliate, purchased $63,842 and $51,557 of structured
settlement annuities from the Company in 1998 and 1997, respectively, at
prices determined based on prevailing interest rates at the time of
purchase. The provision for policy benefits was increased by approximately
94% of such premium received in each of these years. The affiliate, which
is not an insurance company, purchases surety bonds from AIC to guaranty
payment of future benefits. AIC received $469 and $396 in 1998 and 1997,
respectively.
REINSURANCE
Premiums earned include reinsurance assumed from AIC pertaining to
group credit disability business. The effect of these transactions on
premiums earned and net income is not material.
ALIC has reinsurance agreements with NLIC, LBL, SLIC, and GLAC. These
agreements stipulate that ALIC reinsures substantially all of the contract
liability of each subsidiary company, along with all contract related
premiums and expenses. ALIC also reinsures certain policies of ALNY for
amounts in excess of ALNY's retention. The reinsurance ceded contracts do
not discharge the subsidiary company as the primary insurer.
In 1997, ALIC and LBL amended their reinsurance treaty in order to
retrocede all credit life and credit health policies and certificates back
to LBL. Simultaneously, LBL and Protective Life Insurance Company
("Protective"), an unaffiliated insurer, entered into a 100% coinsurance
agreement to cede all of these policies and certificates to Protective.
ALIC paid LBL a $41.4 million reinsurance premium which LBL then paid to
Protective. LBL paid ALIC an $18.5 million commission allowance and
received an $18.5 million commission allowance from Protective. During
1997, ALIC recognized a pretax gain of $23.0 million on the transaction of
which $10.3 million, after tax, was credited directly to surplus. The
unamortized deferred gain after tax, at December 31, 1998 was $7.1 million.
LOAN AGREEMENT
ALIC, NLIC, and GLAC entered into an intercompany loan agreement with
the Corporation on February 1, 1996. As of December 31, 1998, no borrowings
were outstanding.
F-12
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
CAPITAL CONTRIBUTIONS AND DIVIDENDS
In 1998 and 1997, ALIC paid common stock dividends of $97,000 and
$131,237, respectively, to AIC. On December 31, 1998 and 1997, ALIC
authorized an additional 1,300 and 1,400 shares, respectively, and issued
these shares in an aggregate amount of $278 and $280, at December 31, 1998
and 1997, respectively, representing a stock dividend to AIC.
In 1998 and 1997, ALIC paid preferred stock Series A dividends of
$3,025 and $2,136, respectively, to The Northbrook Corporation, a wholly
owned subsidiary of AIC. ALIC issued 127,200 and 133,430 shares of Series A
redeemable preferred stock, net of redemptions, to The Northbrook
Corporation for which it received net proceeds of $12,720 and $13,343 in
1998 and 1997, respectively. As of December 31, 1998, ALIC has 579,990
shares of Series A preferred stock outstanding. Cash dividends are at a
rate reasonably equivalent to short-term interest rates as determined from
time to time (but not more frequently than quarterly) by the Board of
Directors by reference to a widely accepted floating index of short-term
rates. Par value is $100 per share. Liquidation value is $100 per share
plus accrued and unpaid dividends. The shares are redeemable at the option
of ALIC at any time five years after the issue date at a price of $100 plus
accrued and unpaid dividends.
In 1998 and 1997, ALIC paid preferred stock, Series B dividends of
$8,073 and $8,095, respectively, to AIC. Cash dividends on preferred stock
Series B shares are at a rate per annum equal to 6.9%, payable annually in
arrears on the last business day of each year to the shareholder of record
on the immediately preceding business day. Dividends shall accrue and be
cumulative from the date the last dividend was paid. The dividend payable
shall be computed on the basis of a 365 day year and the actual number of
days such share is outstanding, including the date of issue of the share
and the date of the dividend payment. Par value is $100 per share.
Liquidation value is $100 per share plus accrued and unpaid dividends. The
shares are redeemable at the option of the Company at any time five years
after the issue date at a price of $100 plus accrued and unpaid dividends.
On December 4, 1997, ALIC sold all of the outstanding capital stock of
Glenbrook Life Insurance Company ("GLIC") to Sears Roebuck and Co. ALIC
received proceeds of $10.4 million and recognized a $3.5 million gain on
the sale. Prior to the sale, GLIC declared an extraordinary dividend
payable to ALIC, of which $3.2 million was recognized as dividend income
and $4.8 million was recorded as a retirement of common stock.
Additionally, ALIC contributed capital of $1.5 million to GLIC prior to
sale.
4. STRATEGIC ALLIANCE
NLIC has a strategic alliance with Dean Witter Reynolds Inc. ("Dean
Witter"), a wholly owned subsidiary of Morgan Stanley Dean Witter, to
develop, market and distribute proprietary annuity and life insurance
products through Dean Witter account executives. Dean Witter provides a
portion of the funding for these products through loans to an affiliate of
the Company. Morgan Stanley Dean Witter's, wholly owned subsidiary, Dean
Witter Intercapital Inc., is the investment manager for the Dean Witter
Variable Investment Series, one of the funds in which the assets of the
NLIC Separate Accounts are invested. Morgan Stanley Dean Witter's wholly
owned subsidiary, Morgan Stanley Asset Management Inc., is the investment
manager of Morgan Stanley Universal Funds, Inc., one of the funds in which
the assets of the NLIC Separate Accounts are invested. Morgan Stanley Dean
Witter's wholly owned subsidiary, Van Kampen American Capital Asset
Management, Inc.is the investment manager of Van Kampen American Capital
Life Invesment Trust, one of the funds in which the assets of the NLIC
Separate Accounts are invested.
Under the terms of the strategic alliance, NLIC has agreed to use Dean
Witter as an exclusive distribution channel for its products. Although the
strategic alliance is cancelable by either party, termination of the
alliance would not impact existing policies and contracts.
F-13
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
5. INVESTMENTS
The statement value, which is principally amortized cost, gross
unrealized gains and losses, and fair value for bonds are as follows:
GROSS UNREALIZED
STATEMENT ---------------- FAIR
VALUE GAINS LOSSES VALUE
AT DECEMBER 31,1998 ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. government and agencies $ 2,010,246 $ 751,820 $ (2,749) $ 2,759,317
Municipal 539,751 51,757 (367) 591,141
Foreign government 22,449 529 (4,195) 18,783
Corporate 13,373,900 1,150,468 (60,629) 14,463,739
Mortgage-backed securities 5,645,370 235,706 (27,320) 5,853,756
Asset-backed securities 1,768,107 28,825 (3,028) 1,793,904
----------- ----------- ----------- -----------
Total $23,359,823 $ 2,219,105 $ (98,288) $25,480,640
=========== =========== =========== ===========
GROSS UNREALIZED
STATEMENT ---------------- FAIR
VALUE GAINS LOSSES VALUE
AT DECEMBER 31,1997 ----------- ----------- ----------- -----------
U.S.government and agencies $ 1,904,149 $ 546,212 $ (1,242) $ 2,449,119
Municipal 674,585 38,060 (971) 711,674
Foreign government 3,079 230 -- 3,309
Corporate 12,555,812 1,010,472 (15,032) 13,551,252
Mortgage-backed securities 5,484,523 240,712 (19,529) 5,705,706
Asset-backed securities 1,865,323 29,853 (718) 1,894,458
----------- ----------- ----------- -----------
Total $22,487,471 $ 1,865,539 $ (37,492) $24,315,518
=========== =========== =========== ===========
SCHEDULED MATURITIES
The scheduled maturities for bonds are as follows at December 31, 1998:
STATEMENT FAIR
VALUE VALUE
----------- -----------
Due in one year or less $ 690,980 $ 697,654
Due after one year through five years 3,895,607 4,095,717
Due after five years through ten years 5,921,147 6,237,738
Due after ten years 5,880,516 7,228,618
----------- -----------
16,388,250 18,259,727
Mortgage-and asset-backed securities 6,971,573 7,220,913
----------- -----------
Total $23,359,823 $25,480,640
=========== ===========
Actual maturities may differ from those scheduled as a result of
prepayment by the issuers.
</TABLE>
F-14
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31
1998 1997
----------- -----------
Bonds $ 1,767,954 $ 1,725,432
Preferred stock 20,451 11,715
Common stock 9,025 47,007
Mortgage loans 259,402 267,130
Real estate 41,072 58,584
Policy loans 37,783 35,606
Short-term 15,098 12,196
Other (26,109) (29,403)
----------- -----------
Investment income 2,124,676 2,128,267
Investment expense 74,777 73,631
----------- -----------
Net investment income $ 2,049,899 $ 2,054,636
=========== ===========
REALIZED CAPITAL GAINS
YEAR ENDED DECEMBER 31
1998 1997
----------- -----------
Realized capital gains $ 412,846 $ 209,090
Income tax expense (144,437) (75,188)
----------- -----------
268,409 133,902
Amount transferred to IMR (119,546) (65,404)
----------- -----------
Realized capital gains, after tax $ 148,863 $ 68,498
=========== ===========
Proceeds from sales of bonds were $3,331,162 and $2,482,982 in 1998 and
1997, respectively. Gross gains of $64,521 and $32,518 and gross losses of
$28,436 and $28,754 were realized on sales of bonds during 1998 and 1997,
respectively.
INVESTMENT CONCENTRATION FOR MUNICIPAL BOND AND COMMERCIAL MORTGAGE
PORTFOLIOS AND OTHER INVESTMENT INFORMATION
The Company maintains a diversified portfolio of state and municipal bonds.
The largest concentrations in the portfolio are presented below. Except for the
following, holdings in no other state exceeded 5.0% of the portfolio at December
31, 1998 and 1997:
(% OF TOTAL STATE AND MUNICIPAL BONDS CARRYING VALUE)
1998 1997
---- ----
California 34.3% 34.5%
Illinois 13.5 11.1
Ohio 12.7 10.5
New York 10.9 10.6
Georgia 1.2 5.4
F-15
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
The Company's mortgage loans are collateralized by a variety of commercial
real estate property types located throughout the United States. Substantially
all of the commercial mortgage loans are non-recourse to the borrower. The
states with the largest portion of the commercial mortgage loan portfolio are
listed below. Except for the following, holdings in no other state exceed 5.0%
of the portfolio at December 31, 1998 and 1997:
(% OF COMMERCIAL MORTGAGES CARRYING VALUE)
1998 1997
---- ----
California 23.0% 23.5%
New York 9.5 9.9
Illinois 7.7 7.3
Florida 5.6 5.3
Connecticut 5.0 4.4
Texas 4.9 6.2
Pennsylvania 4.8 5.6
The types of properties collateralizing the commercial mortgage loans
at December 31, are as follows:
(% OF COMMERCIAL MORTGAGES CARRYING VALUE)
1998 1997
---- ----
Retail 30.8% 33.2%
Office buildings 28.1 24.4
Warehouse 16.4 18.8
Apartment complexes 16.8 16.9
Industrial 2.5 2.4
Other 5.4 4.3
----- -----
100.0% 100.0%
===== =====
The contractual maturities of the commercial mortgage loan portfolio as of
December 31, 1998, for loans that were not in foreclosure are as follows:
NUMBER OF LOANS STATEMENT VALUE PERCENT
--------------- --------------- -------
1999 35 $ 189,048 5.7%
2000 48 299,385 9.1
2001 56 259,333 7.9
2002 43 210,589 6.4
2003 50 265,197 8.1
Thereafter 371 2,067,595 62.8
--- ----------- -----
Total 603 $ 3,291,147 100.0%
=== =========== =====
In 1998, $308,652 of commercial mortgage loans were contractually due. Of
these, 55.7% were paid as due, 32.7% were refinanced at prevailing market terms,
3.0% were foreclosed or are in the process of foreclosure, and 8.6% were in the
process of refinancing or restructuring discussions.
At December 31, 1998 statement value of investments, excluding common
stock, that were non-income producing during 1998, was $100.
At December 31, 1998, bonds with a statement value of $62,469 were on
deposit with regulatory authorities as required by law.
F-16
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
6. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving derivative financial instruments and other off-balance-sheet financial
instruments. 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 recoverables) and liabilities
(including policy benefit and other insurance reserves) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, including accrued investment
income, cash and claims payments outstanding are generally of a short-term
nature. It is assumed that their carrying value approximates fair value.
FINANCIAL ASSETS
The statement value and fair value of financial assets at December 31, are
as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
STATEMENT FAIR STATEMENT FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Bonds $23,359,823 $25,480,640 $22,487,471 $24,315,518
Preferred stocks 294,478 325,954 231,794 271,468
Common stocks 428,034 428,034 443,135 443,135
Mortgage loans on real estate 3,316,556 3,548,495 2,987,144 3,163,241
Short-term investments 420,013 420,013 102,178 102,178
Policy loans 570,001 570,001 528,367 528,367
Assets related to
Separate Accounts 10,877,884 10,877,884 8,207,364 8,207,364
</TABLE>
Statement value and fair value include the effects of derivative financial
instruments where applicable.
Fair values for bonds are based upon the prices reported in the NAIC
Valuation of Securities Manual. External pricing sources are used for those
securities in which NAIC prices are unlisted. Non-quoted securities are valued
based on discounted cash flows using current interest rates for similar
securities. Common and preferred stocks are valued based principally on quoted
market prices. Non-combined subsidiaries are valued at book value. Mortgage
loans are valued based on discounted contractual cash flows. Discount rates are
selected using current rates at which similar loans would be made to borrowers
with similar characteristics, using similar properties as collateral. Loans that
exceed 100% loan-to-value are valued at the estimated fair value of the
underlying collateral. Short-term investments are highly liquid investments with
maturities of less than one year whose statement value approximates fair value.
The statement value of policy loans approximates its fair value. Assets
related to Separate Accounts are carried in the combined statements of financial
position at fair value based on quoted market prices.
F-17
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory Basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
FINANCIAL LIABILITIES
The statement value and fair value of financial liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
STATEMENT FAIR STATEMENT FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Reserves for investment contracts $15,622,197 $15,742,617 $15,431,332 $15,670,481
Liabilities related to
Separate Accounts 10,877,884 10,877,884 8,207,364 8,207,364
The fair value of benefit reserves for non-life contingent annuity products
("reserves for 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. Liabilities related to Separate
Accounts are carried at the fair value of the underlying assets.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments include swaps, futures, forwards and
options, including caps and floors. The Company primarily uses derivative
financial instruments to reduce its exposure to market risk (principally
interest rate, equity price and foreign currency risk), in conjunction with
asset/liability management. The Company does not hold or issue these instruments
for trading purposes.
The following table summarizes the contract or notional amount, credit
exposure, fair value and carrying value of the Company's derivative financial
instruments at December 31, as follows:
1998
---------------------------------------------------------------
CONTRACT/ STATEMENT
NOTIONAL CREDIT FAIR VALUE ASSETS/
AMOUNT EXPOSURE VALUE (LIABILITIES)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Interest rate swap agreements
Pay floating rate, receive fixed rate $ 413,443 $ 18,099 $ 27,471 $ --
Pay fixed rate, receive floating rate 960,069 -- (31,966) --
Pay floating rate, receive floating rate 72,700 -- (501) --
Financial futures and forward contracts 127,200 -- (108) 835
Euro Dollars Futures 100,000 2 2 --
Interest rate cap and floor agreements 3,044,000 2,757 2,757 4,858
-------------- -------------- -------------- --------------
Total interest rate contracts 4,717,412 20,858 (2,345) 5,693
-------------- -------------- -------------- --------------
EQUITY AND COMMODITY CONTRACTS
Commodity and total return swap agreements 97,772 264 264 --
Options, warrants and financial futures 625,299 206,628 206,628 160,762
-------------- -------------- -------------- --------------
Total equity and commodity contracts 723,071 206,892 206,892 160,762
-------------- -------------- -------------- --------------
FOREIGN CURRENCY CONTRACTS
Foreign currency swap agreements 78,716 -- (3,205) --
-------------- -------------- -------------- --------------
Total derivative financial instruments $ 5,519,199 $ 227,750 $ 201,342 $ 166,455
============== ============== ============== ==============
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
1997
--------------------------------------------------
Contract/ Statement
Notional Credit Fair Value Assets/
Amount Exposure Value (Liabilities)
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
INTEREST RATE CONTRACTS
Interest rate swap agreements
Pay floating rate, receive fixed rate $ 430,528 $ 13,543 $ 20,303 $ -
Pay fixed rate, receive floating rate 496,241 - (14,127) -
Pay floating rate, receive floating rate 115,330 - (1,024) -
Financial futures and forward contracts 126,300 - (181) (814)
Interest rate cap and floor agreements 3,474,250 3,975 3,975 7,221
---------- ---------- ---------- ----------
Total interest rate contracts 4,642,649 17,518 8,946 6,407
---------- ---------- ---------- ----------
EQUITY AND COMMODITY CONTRACTS
Commodity and total return swap agreements 12,000 - (737) --
Options, warrants and financial futures 850,929 244,024 244,024 202,409
---------- ---------- ---------- ----------
Total equity and commodity contracts 862,929 244,024 243,287 202,409
---------- ---------- ---------- ----------
FOREIGN CURRENCY CONTRACTS
Foreign currency swap agreements 48,093 - (2,363) -
---------- ---------- ---------- ----------
Total derivative financial instruments $5,553,671 $ 261,542 $ 249,870 $ 208,816
========== ========== ========== ==========
</TABLE>
The contract or notional amounts are used to calculate the exchange of
contractual payments under the agreements and are not representative of the
potential for gain or loss on these agreements.
Credit exposure represents the Company's potential loss if all of the
counterparties failed to perform under the contractual terms of the contracts
and all collateral, if any, became worthless. This exposure is measured by the
fair value of contracts with a positive fair value at the reporting date reduced
by the effect, if any, of master netting agreements.
The Company manages its exposure to credit risk by utilizing highly rated
counterparties, establishing risk control limits, executing legally enforceable
master netting agreements and obtaining collateral where appropriate. To date,
the Company has not incurred any losses on derivative financial instruments due
to counterparty nonperformance.
Fair value is the estimated amount that the Company would receive (pay) to
terminate or assign the contracts at the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer and
exchange quotes are utilized to value the Company's derivatives.
INTEREST RATE SWAP AGREEMENTS involve the exchange, at specified intervals,
of interest payments calculated by reference to an underlying notional amount.
The Company generally enters into swap agreements to change the interest rate
characteristics of existing assets to more closely match the interest rate
characteristics of the corresponding liabilities.
The Company did not record any material deferred gains or losses on swaps
nor realize any material gains or losses on swap terminations in 1998 or 1997.
The Company paid a weighted average floating interest rate of 5.6% and
received a weighted average fixed interest rate of 6.8% in 1998. The Company
paid a weighted average fixed interest rate of 6.5% and received a weighted
average floating interest rate of 6.0% in 1998.
F-19
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
FINANCIAL FUTURES AND FORWARD CONTRACTS are commitments to either purchase
or sell designated financial instruments at a future date for a specified price
or yield. They may be settled in cash or through delivery. As part of its
asset/liability management, the Company generally utilizes futures and forward
contracts to manage its market risk related to equity securities, and
anticipatory investment purchases and sales, as well as to reduce market risk
associated with certain annuity contracts. Futures and forwards used as hedges
of anticipatory transactions pertain to identified transactions which are
probable to occur and are generally completed within 90 days. Futures contracts
have limited off-balance-sheet credit risk as they are executed on organized
exchanges and require security deposits, as well as the daily cash settlement of
margins.
INTEREST RATE CAP AND FLOOR AGREEMENTS give the holder the right to receive
at a future date, the amount, if any, by which a specified market interest rate
exceeds the fixed cap rate or falls below the fixed floor rate, applied to a
notional amount. The Company purchases interest rate cap and floor agreements to
reduce its exposure to rising or falling interest rates relative to certain
existing assets and liabilities in conjunction with asset/liability management.
COMMODITY SWAP AGREEMENTS involve the exchange of floating-rate interest
payments for the total return on a commodity index. The Company enters into
commodity swap transactions to mitigate market risk on the fixed income and
equity securities portfolios.
EQUITY-INDEXED OPTION CONTRACTS provide returns based on a specified equity
index applied to the option's notional amount. The Company purchases and writes
equity-indexed options to achieve equity appreciation or to reduce the market
risk associated with certain annuity contracts. Where required, counterparties
post collateral to minimize credit risk.
EQUITY-INDEXED FINANCIAL FUTURES provide returns based on a specific equity
index applied to the futures' contract amount. The Company utilizes
equity-indexed futures to reduce the market risk associated with certain annuity
contracts.
DEBT WARRANTS provide the right to purchase a specified new issue of debt
at a predetermined price. The Company purchases debt warrants to protect against
long-term call risk.
FOREIGN CURRENCY CONTRACTS involve the future exchange or delivery of
foreign currency on terms negotiated at the inception of the contract. The
Company enters into these agreements primarily to manage the currency risk
associated with investing in foreign securities.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments that the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions. The Company
mitigates this risk through established risk control limits set by senior
management. In addition, the change in the value of the Company's derivative
financial instruments designated as hedges are generally offset by changes in
the value of the related assets and liabilities.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
A summary of the contractual amounts and fair values of off-balance-sheet
financial instruments at December 31, follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ------------------------
CONTRACTUAL FAIR CONTRACTUAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Commitments to invest $ 34,126 N/A $ 18,208 N/A
Commitments to extend mortgage loans 87,000 870 111,305 1,113
Credit guarantees 92,778 - 96,714 -
</TABLE>
F-20
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
Except for credit guarantees, the contractual amounts represent the amount
at risk if the contract is fully drawn upon, the counterparty defaults and the
value of any underlying security becomes worthless. Unless noted otherwise, the
Company does not require collateral or other security to support
off-balance-sheet financial instruments with credit risk.
Commitments to invest generally represent commitments to acquire financial
interests or instruments. The Company enters into these agreements to allow for
additional participation in certain limited partnership investments. Because the
equity investments in the limited partnerships are not actively traded, it is
not practicable to estimate the fair value of these commitments.
Commitments to extend mortgage loans are agreements to lend to a borrower,
provided there is no violation of any condition established in the contract. The
Company enters these agreements to commit to future loan fundings at a
predetermined interest rate. Commitments generally have fixed expiration dates
or other termination clauses. Commitments to extend mortgage loans, which are
secured by the underlying properties, are valued based on estimates of fees
charged by other institutions to make similar commitments to similar borrowers.
Financial guarantees represent conditional commitments to repurchase notes
from a creditor upon default of the debtor. The Company enters into these
agreements primarily to provide financial support for certain equity investees.
Financial guarantees are valued based on estimates of payments that may occur
over the life of the guarantees. At December 31, 1998 and 1997, there were no
guarantees outstanding.
Credit guarantees written represent conditional commitments to exchange
identified AAA or AA rated credit risk for identified A rated credit risk upon
bankruptcy or other event of default of the referenced credits. The Company
receives fees for assuming the referenced credit risks, which are reported in
net investment income when earned over the lives of the commitments. The Company
enters into these transactions in order to achieve higher yields than if the
referenced credits were directly owned.
The Company's maximum amount at risk, assuming bankruptcy or other default
of the referenced credits and the value of the referenced credits become
worthless, is the fair value of the identified AAA or AA rated securities. The
identified AAA or AA rated securities had a fair value of $95,233 at December
31, 1998. The Company includes the impact of credit guarantees in its analysis
of credit risk, and the referenced credits were current with respect to their
contractual terms at December 31, 1998.
7. INCOME TAXES
The Company joins the Corporation and its other eligible domestic
subsidiaries (the "Allstate Group") in the filing of a consolidated federal
income tax return and is party to a federal income tax allocation agreement (the
"Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the
Company pays to or receives from the Corporation the amount, if any, by which
the Allstate Group's federal income tax liability was affected by virtue of
inclusion of the Company in the consolidated federal return. Effectively, this
results in the Company's annual income tax provision being computed, with
adjustments, as if the Company filed a separate return.
Prior to Sears, Roebuck and Co's ("Sears") distribution ("Sears
distribution") on June 30, 1995 of its 80.3% ownership in the Corporation to
Sears shareholders, the Allstate Group,including the Company, joined with Sears
and its domestic business units (the "Sears Group")in the filing of a
consolidated federal income tax return (the Sears Tax Group") and were parties
to a federal income tax allocation agreement (the "Tax Sharing Agreement").
Under the Tax Sharing Agreement, the Company, through the Corporation, paid to
or received from the Sears Group the amount, if any, by which the Sears Tax
Group's federal income tax liability was affected by virtue of inclusion of the
Company in the consolidated federal income tax return.
F-21
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
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
adjustments 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 Company paid income taxes of $250,673 and $193,951 in 1998 and 1997,
respectively. The Company had income taxes payable of $30,813 and $31,260 at
December 31, 1998 and 1997, respectively.
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, $94,262,
will result in federal income taxes payable of $32,992 if distributed to the
Corporation. 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.
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
---- ----
Statutory federal income tax rate 35.0% 35.0 %
Deferred acquisition costs 2.8 3.3
Investment related items (5.3) (2.6)
Net difference between statutory and tax basis reserves 0.8 1.2
Intangibles related to acquisitions 2.9 -
Other (3.1) (1.9)
---- ----
Effective federal income tax rate 33.1 % 35.0 %
===== ====
8. BENEFIT PLANS
PENSION PLANS AND OTHER POSTRETIREMENT PLANS
Defined benefit pension plans, sponsored by AIC, cover domestic and
Canadian full-time employees and certain part-time employees. Benefits under the
pension plans are based upon the employee's length of service, average annual
compensation and estimated social security retirement benefits. AIC's funding
policy for the pension plans is to make annual contributions in accordance with
accepted actuarial cost methods. The cost to the Company for participation in
the plans was $9,906 and $10,603 in 1998 and 1997, respectively.
AIC provides certain health care and life insurance benefits for retired
employees. Qualified employees may become eligible for these benefits if they
retire in accordance with AIC's established retirement policy and are
continuously insured under AIC's group plans or other approved plans for ten or
more years prior to retirement. AIC shares the cost of the retiree medical
benefits with retirees based on years of service, with AIC's share being subject
to a 5% limit on annual medical cost inflation after retirement. AIC's
post-retirement benefit plans currently are not funded. AIC has the right to
modify or terminate these plans. Total unfunded postretirement benefit
obligation amounted to $313,984 and $261,720 at December 31, 1998 and 1997,
respectively.
F-22
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(Statutory basis)
YEARS ENDED DECEMBER 31, 1998 AND 1997
($ in thousands)
PROFIT SHARING FUND
Employees of the Corporation are also eligible to become members of The
Savings and Profit Sharing Fund of Allstate Employees ("Allstate Plan"),
sponsored by the Corporation. The Corporation's contributions are based on its
matching obligation and the Corporation's operating results performance.
The Company's defined contribution to the Allstate Plan was $2,941 and
$2,650 in 1998 and 1997, respectively.
9. DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The payment of shareholder dividends by insurance companies without the prior
approval of the state insurance regulator is limited to formula amounts based on
net income and capital and surplus, determined in accordance with statutory
accounting practices, as well as the timing and amount of dividends paid in the
preceding twelve months. The maximum amount of dividends that ALIC can
distribute during 1999 without prior approval of the Illinois Department of
Insurance is $353,331.
10. LINES OF CREDIT
ALIC, along with the Corporation and AIC, maintains a bank line of credit
totaling $1,500,000 which expires on December 20, 2001. The bank line provides
for loans at a spread above prevailing referenced interest rates. ALIC, the
Corporation and AIC pay commitment fees in connection with the line of credit.
As of December 31, 1998, no amounts were outstanding under the bank line of
credit.
11. LEASE COMMITMENTS
The Company leases certain office facilities and computer equipment. Total
rent expense for all leases was $2,564 and $1,931 in 1998 and 1997,
respectively. Minimum rental commitments under non-cancelable operating leases
with an initial or remaining term of more than one year as of December 31, are
as follows:
1998
----
1999 $2,633
2000 2,425
2001 939
2002 782
2003 36
Thereafter 276
------
$7,091
======
* * *
F-23
