<PAGE>
DEAN WITTER VARIABLE ANNUITY
Northbrook Life Insurance Company Prospectus dated May 1, 2000
P.O. Box 94040
Palatine, IL 60062
Telephone Number: 1-800-654-2397
Northbrook Life Insurance Company ("Northbrook") has issued the Dean Witter
Variable Annuity, 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 13 investment alternatives ("investment
alternatives"). The investment alternatives include a fixed account option
("Fixed Account") and 12 variable sub-accounts ("Variable Sub-Accounts") of the
Northbrook Variable Annuity Account ("Variable Account"). Each Variable
Sub-Account invests exclusively in shares of the following mutual fund
portfolios ("Portfolios") of the Morgan Stanley Dean Witter Variable Investment
Series ("Fund"):
MONEY MARKET PORTFOLIO GLOBAL DIVIDEND GROWTH PORTFOLIO
QUALITY INCOME PLUS PORTFOLIO EUROPEAN GROWTH PORTFOLIO
HIGH YIELD PORTFOLIO PACIFIC GROWTH PORTFOLIO
UTILITIES PORTFOLIO CAPITAL GROWTH PORTFOLIO
INCOME BUILDER PORTFOLIO EQUITY PORTFOLIO
DIVIDEND GROWTH PORTFOLIO STRATEGIST PORTFOLIO
We (Northbrook) have filed a Statement of Additional Information, dated May 1,
2000, 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 35 of this prospectus. For a free copy, please write or call us
at the address or 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 a 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
IMPORTANT prospectus, nor has it passed on the accuracy or the adequacy
NOTICES of this prospectus. Anyone who tells you otherwise is
committing a federal crime.
Investments in the Contracts involves investment risks,
including possible loss of principal.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C>
Important Terms 3
The Contract At A Glance 4
Overview How the Contract Works 5
Expense Table 6
Financial Information 8
The Contract 9
Purchases 11
Contract Value 12
Investment Alternatives 13
The Variable Sub-Accounts 13
Contract The Fixed Account 14
Features Transfers 15
Expenses 17
Access To Your Money 19
Income Payments 20
Death Benefits 23
More Information:
Northbrook 25
The Variable Account 25
The Portfolios 26
The Contract 26
Other Qualified Plans 27
Information Legal Matters 27
Year 2000 27
Taxes 28
Performance Information 31
Appendix A - Accumulation Unit Values 32
Statement of Additional Information 37
Table of Contents
</TABLE>
2
<PAGE>
IMPORTANT TERMS
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This prospectus uses a number of important terms with which you may not be
familiar. The index below identifies the page that describes each term. The
first use of each term in this prospectus appears in highlighted text.
Page
<TABLE>
<CAPTION>
<S> <C>
Accumulation Phase 8
Accumulation Unit 8
Accumulation Unit Value 4
Annuitant 4
Automatic Additions Program 4
Automatic Income Withdrawals 4
Beneficiary 5
Contract* 1
Contract Owner ("You") 5
Contract Value 4
Contract Year 4
Death Benefit 4
Fixed Account 1
Free Withdrawal Amount 4
Fund 1
Income Plan 5
Investment Alternatives 1
Issue Date 5
Northbrook ("We") 1
Payout Phase 5
Payout Start Date 4
Portfolios 1
Qualified Contracts 9
SEC 1
Settlement Value 23
Valuation Date 11
Variable Account 1
Variable Sub-Account 1
</TABLE>
*If you purchase a group Contract, we will issue you a certificate that
represents your ownership and that summarizes the provisions on the group
Contract. References to "Contract" in this prospectus include certificates
unless the context requires otherwise. In certain states the Contract is
available only as a group Contract.
3
<PAGE>
THE CONTRACT AT A GLANCE
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<TABLE>
<CAPTION>
The following is a snapshot of the Contract. Please read the remainder of this
prospectus for more information.
<S> <C>
Flexible Payments We are no longer offering new Contracts. You
can add to your current Contract as often and as much
as you like, but each payment must be at least $25.
We may limit the total payments you can make in a
"Contract Year," which we measure from the date we
issue your Contract and each Contract anniversary
("Contract Anniversary").
- -------------------------------------------------------------------------------
Expenses You will bear the following expenses:
o Total Variable Account annual fees equal to 1.00%
of average daily net assets
o Annual contract maintenance charge of $30
o Withdrawal charges ranging from 0% to 6% of
purchase payments withdrawn (with certain
exceptions)
o State premium tax (if your state imposes one)
In addition, each Portfolio pays expenses that you
will bear indirectly if you invest in a Variable
Sub-Account.
- -------------------------------------------------------------------------------
Investment The Contract offers 13 investment alternatives
Alternatives including:
o The Fixed Account (which credits interest at rates
we guarantee), and
o 12 Variable Sub-Accounts investing in Portfolios
offering professional money management by Morgan
Stanley Dean Witter Advisors, Inc.
To find out current rates being paid on the Fixed
Account, or to find out how the Variable Sub-Accounts
have performed, call us at 1-800-654-2397.
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Special Services For your convenience, we offer these special services:
o Automatic Additions Program
o Automatic Income Withdrawals
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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 payments guaranteed for 10 years
o joint and survivor life income
o guaranteed payments for a specified period
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Death Benefits If you or the Annuitant dies before the
Payout Start Date, we will pay the death benefit
described in the Contract.
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Transfers Before the Payout Start Date, you may transfer your
Contract value ("Contract Value") among the
investment alternatives, with certain restrictions.
Transfers must be at least $100 or the total amount
in the investment alternative, whichever is less.
- --------------------------------------------------------------------------------
Withdrawals You may withdraw some or all of your Contract Value
at anytime prior to the Payout Start Date. Full
or partial withdrawals are available under
limited circumstances on or after the Payout Start
Date. You may take partial withdrawals
automatically through monthly Automatic Income
Withdrawals. In general, you must withdraw at least
$500 at a time or the total amount in the investment
alternative, if less. A 10% federal tax penalty may
apply if you withdraw before you are 59 1/2 years
old. A withdrawal charge also may apply.
</TABLE>
4
<PAGE>
HOW THE CONTRACT WORKS
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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 13 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 the Fixed Account. If you invest in the Fixed Account, 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 Portfolios.
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 Portfolios. 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>
Issue Payout Start
Date Accumulation Phase Date Payout Phase
- ---------------------------------------------------------------------------------------------------------------------------------
You buy You save for retirement
a contract You elect to receive You can receive Or you can
income payments or receive income receive income
receive a lump sum payments for a payments for
payment set period life
</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 1-800-654-2397 if you have any question about how the
Contract works.
5
<PAGE>
EXPENSE TABLE
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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 Portfolio expenses, please refer to the accompanying
prospectus for the Fund.
CONTRACT OWNER TRANSACTION EXPENSES
Withdrawal Charge (as a percentage of amount withdrawn)*
Number of Complete Years
Since We Received the Purchase
Payment Being Withdrawn: 0 1 2 3 4 5 6+
Applicable Charge: 6% 5% 4% 3% 2% 1% 0%
Annual Contract Maintenance Charge $30.00
Transfer Fee None
*Each Contract Year you may make one withdrawal of up to 10% of your aggregate
purchase payments, excluding those made one year before the withdrawal, without
incurring a withdrawal charge. The cumulative total of all withdrawal charges is
guaranteed never to exceed 7% of your purchase payments (not including earnings
attributable to these payments).
VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of daily net asset value deducted from each
Variable Sub-Account)
Mortality and Expense Risk Charge 1.00%
Total Variable Account Annual Expenses 1.00%
PORTFOLIO ANNUAL EXPENSES (After Voluntary Reductions and Reimbursements) (as a
percentage of Portfolio average daily net assets)(1)
<TABLE>
<CAPTION>
Portfolio Management Other Total Portfolio
Fees Expenses Annual Expenses
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter Variable Investment Series
- -------------------------------------------------------------------------------------------------------------
Money Market 0.50% 0.02% 0.52%
- -------------------------------------------------------------------------------------------------------------
Quality Income Plus 0.50% 0.02% 0.52%
- -------------------------------------------------------------------------------------------------------------
High Yield 0.50% 0.03% 0.53%
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Utilities 0.64% 0.03% 0.67%
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Income Builder 0.75% 0.06% 0.81%
- -------------------------------------------------------------------------------------------------------------
Dividend Growth 0.51% 0.01% 0.52%
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Capital Growth 0.65% 0.07% 0.72%
- -------------------------------------------------------------------------------------------------------------
Global Dividend Growth 0.75% 0.08% 0.83%
- -------------------------------------------------------------------------------------------------------------
European Growth 0.95% 0.09% 1.04%
- -------------------------------------------------------------------------------------------------------------
Pacific Growth 0.95% 0.47% 1.42%
- -------------------------------------------------------------------------------------------------------------
Equity 0.49% 0.02% 0.51%
- -------------------------------------------------------------------------------------------------------------
Strategist 0.50% 0.02% 0.52%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Figures shown in the Table are for the year ended December 31, 1999.
6
<PAGE>
EXAMPLE 1
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, and
o surrendered your Contract, or you began receiving income payments
for a specified period of less than 120 months at the end of each
time period.
The example does not include any taxes or tax penalties you may be required to
pay if you surrender your Contract.
<TABLE>
<CAPTION>
Variable Sub-Account 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Money Market $63 $80 $97 $188
Quality Income Plus $63 $80 $97 $188
High Yield $63 $81 $98 $189
Utilities $64 $85 $105 $205
Income Builder $66 $89 $112 $220
Dividend Growth $63 $80 $97 $188
Capital Growth $65 $86 $108 $210
Global Dividend Growth $66 $90 $113 $222
European Growth $68 $96 $124 $244
Pacific Growth $72 $107 $144 $284
Equity $63 $80 $97 $187
Strategist $63 $80 $97 $188
EXAMPLE 2
Same assumptions as Example 1 above, except that you decided not to surrender
your Contract, or you began receiving income payments for a specified period of
at least 120 months at the end of each period.
Variable Sub-Account 1 Year 3 Years 5 Years 10 Years
Money Market $16 $50 $86 $188
Quality Income Plus $16 $50 $86 $188
High Yield $16 $51 $87 $189
Utilities $18 $55 $94 $205
Income Builder $19 $59 $102 $220
Dividend Growth $16 $50 $86 $188
Capital Growth $18 $56 $97 $210
Global Dividend Growth $19 $60 $103 $222
European Growth $22 $66 $114 $244
Pacific Growth $25 $78 $133 $284
Equity $16 $50 $86 $187
Strategist $16 $50 $86 $188
</TABLE>
Please remember that you are looking at examples 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. To reflect the contract maintenance charge in the
examples, we estimated an equivalent percentage charge, based on an average
contract size of $47,771.
7
<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.
Attached as Appendix A to this prospectus are tables showing the Accumulation
Unit Values of each Variable Sub-Account since 1990, or inception, if later. To
obtain a fuller picture of each Variable Sub-Account's finances, please refer to
the Variable Account's financial statements contained in the Statement of
Additional Information. The financial statements of Northbrook also appear in
the Statement of Additional Information.
8
<PAGE>
THE CONTRACT
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CONTRACT OWNER
The Variable Annuity is a contract between you, the Contract owner, and
Northbrook, 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 the 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 dies, and
o any other rights that the Contract provides.
If you die, any surviving Contract owner, or, if none, the Beneficiary will
exercise the rights and privileges provided to them by the Contract.
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 used with a qualified plan. See
"Qualified Plans" on page 27.
ANNUITANT
The Annuitant is the individual whose life span we use to determine income
payments as well as the latest Payout Start Date. You initially designate an
Annuitant in your application.
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
name different Beneficiaries in the event of the Owner's death or the
Annuitant's death. You may change or add Beneficiaries at any time while you or
the Annuitant, as applicable, is living by writing to us, 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, whether or not you or the Annuitant, as applicable,
is living when we receive the 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 named Beneficiary is no longer living and there
are no other surviving Beneficiaries, the new Beneficiary will be you or your
estate. If more than one Beneficiary survives you, or the Annuitant, as
applicable, 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 surviving
Beneficiaries.
9
<PAGE>
MODIFICATION OF THE CONTRACT
Only a Northbrook 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
You may assign the Contract prior to the Payout Start Date and during the
Annuitant's life, subject to the rights of any irrevocable Beneficiary. No
Beneficiary may assign benefits under the Contract until they are payable to the
Beneficiary. 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.
10
<PAGE>
PURCHASES
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MINIMUM PURCHASE PAYMENTS
You may make additional purchase payments of at least $25 at any time prior to
the Payout Start Date. We reserve the right to limit the amount of purchase
payments we will accept.
AUTOMATIC ADDITIONS PROGRAM
You may make subsequent purchase payments of at least $25 by automatically
transferring amounts from your bank account or your Morgan Stanley Dean Witter
Active Assets(TM) Account. Please consult your Morgan Stanley Dean Witter
Financial Advisor for details.
ALLOCATION OF PURCHASE PAYMENTS
At the time you apply for a Contract, you must decide how to allocate your
purchase payments among the investment alternatives. 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. The minimum you may allocate
to any investment alternative is $100. You can change your allocations by
notifying us in writing.
We will allocate your 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 additional purchase payments to the Contract at the close of the
business day on which we receive the purchase payment at our headquarters. We
are open for business 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 4:00
p.m. Eastern Time (3:00 p.m. Central Time). If we receive your purchase
payment after 3:00 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.
11
<PAGE>
CONTRACT VALUE
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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 investment in the Fixed Account.
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 purchase payment or
transfer 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 or transfer. For example, if we receive a $10,000 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. Withdrawals and transfers from a Variable
Sub-Account would, of course, reduce the number of Accumulation Units of that
Sub-Account allocated 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 Portfolio 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 contract maintenance charges, and withdrawal charges, separately
for each Contract. They do not affect Accumulation Unit Value. Instead, we
obtain payment of those charges by redeeming Accumulation Units. For details on
how we calculate 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.
You should refer to the prospectus for the fund that accompanies this prospectus
for a description of how the assets of each portfolio are valued, since that
determination directly bears on the Accumulation Unit Value of the corresponding
Variable Sub-Account and, therefore, your Contract Value.
12
<PAGE>
INVESTMENT ALTERNATIVES: THE VARIABLE SUB-ACCOUNTS
- ------------------------------------------------------------------------------
You may allocate your purchase payments to up to 12 Variable Sub-Accounts. Each
Variable Sub-Account invests in the shares of a corresponding Portfolio. Each
Portfolio has its own investment objective(s) and policies. We briefly describe
the Portfolios below.
For more complete information about each Portfolio, including expenses and risks
associated with the Portfolio, please refer to the accompanying prospectus for
the Fund. You should carefully review the Fund prospectus before allocating
amounts to the Variable Sub-Accounts.
<TABLE>
<CAPTION>
Portfolio: Each Portfolio Seeks: Investment Adviser:
<S> <C> <C>
Money Market High current income, preservation of capital, Morgan Stanley
and liquidity Dean Witter
Advisors, Inc.
Quality Income Plus High current income and, as a secondary
objective, capital appreciation when
consistent with its primary objective
High Yield High current income and, as a secondary objective,
capital appreciation when consistent with its primary
objective
Utilities Current income and long-term growth of
capital appreciation
Income Builder Reasonable income and, as a secondary objective,
growth of capital
Dividend Growth Reasonable current income and long-term growth
of income and capital
Capital Growth Long-term capital growth
Global Dividend Growth Reasonable current income and long-term growth of
income and capital
European Growth To maximize the capital appreciation of its investments
Pacific Growth To maximize the capital appreciation of its investments
Equity Growth of capital and, as a secondary objective, income
when consistent with its primary objective
Strategist High total investment return
</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 Portfolios in which those Variable Sub-Accounts invest. You bear the
investment risk that the Portfolios might not meet their investment objectives.
Shares of the Portfolios 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.
13
<PAGE>
INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT
- ------------------------------------------------------------------------------
You may allocate all or a portion of your purchase payments to the Fixed
Account. 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 the Fixed Account
does not entitle you to share in the investment experience of the Fixed Account.
We bear the investment risk for all amounts that you allocate to the Fixed
Account. That is because we credit amounts that you allocate to the Fixed
Account at a net effective rate of at least 4.0% per year. We may use a higher
rate that we determine periodically. We credit this rate, regardless of the
actual investment experience of the Fixed Account.
Money that you deposit in the Fixed Account earns the interest rate that is in
effect at the time of your allocation or transfer until the first renewal date.
The first renewal date is January 1 following the date of your allocation or
transfer of money into the Fixed Account. Subsequent renewal dates are on
anniversaries of the first renewal date. On or about each renewal date, we will
notify you of the interest rate for the next calendar year. We may declare more
than one interest rate for different monies based on their date of allocation or
transfer to the Fixed Account.
14
<PAGE>
INVESTMENT ALTERNATIVES: TRANSFERS
- ------------------------------------------------------------------------------
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase, you may transfer Contract Value among the
investment alternatives. You may request transfers in writing on a form that we
provide or by telephone according to the procedure described below. The minimum
amount that you may transfer is $100 or the total amount in the investment
alternative, whichever is less.
You may transfer amounts from the Variable Sub-Accounts to the Fixed Account
only once every 30 days. If you invested amounts in the Fixed Account prior to
its revision, you may transfer these amounts only once every six months.
We limit the maximum amount which may be transferred from the revised Fixed
Account to the Variable Account in any calendar year to the greater of $1,000 or
25% of the value in the revised Fixed Account as of December 31 of the prior
calendar year (except with respect to amounts which were allocated to the Fixed
Account prior to the date of availability).
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. We may restrict transfers
to once every 30 days. If we do so, we will give you at least 30 days notice of
that restriction.
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
to change the relative weighting of the Variable Sub-Accounts on which your
variable income payments will be based. In addition, you will have a limited
ability to make transfers from the Variable Sub-Accounts to increase the
proportion of your income payments consisting of fixed income payments. You may
not, however, convert any portion of your right to receive 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. Your transfers must be at
least 6 months apart.
TELEPHONE TRANSFERS
You may make transfers by telephone by calling 1-800-654-2397 if you first send
us a completed authorization form. 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
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 joint Contract owner.
We may suspend, modify or terminate the telephone transfer privilege at any time
without notice.
15
<PAGE>
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.
16
<PAGE>
EXPENSES
- -------------------------------------------------------------------------------
As a Contract owner, you will bear, directly or indirectly, the charges and
expenses described below.
CONTRACT MAINTENANCE CHARGE
During the Accumulation Phase, on each Contract Anniversary, we will deduct a
$30 contract maintenance charge from your Contract Value invested in each
Variable Sub-Account in proportion to the amount invested. During the Payout
Phase, we will deduct the charge proportionately from each income payment. If
you surrender your Contract, we will deduct the full contract maintenance
charge.
The charge is to compensate us for the cost of administering the Contracts and
the Variable Account. Maintenance costs include expenses we incur in billing and
collecting purchase payments; keeping records; processing death claims, cash
withdrawals, and policy changes; proxy statements; calculating Accumulation Unit
Values and income payments; and issuing reports to Contract owners and
regulatory agencies. We cannot increase the charge.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge daily at an annual rate of 1.00%
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 not be sufficient in the future to
cover the cost of administering the Contract. If the charges under the Contract
are not sufficient, then we will bear the loss.
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.
WITHDRAWAL CHARGE
We may assess a withdrawal charge of 6% of the amount you withdraw if the
purchase payment being withdrawn has been invested in the Contract for less than
1 year. The charge declines annually to 0% after 6 complete years from the day
we receive the purchase payment being withdrawn. A schedule showing how the
charge declines is shown on page 6, above. During each Contract Year, you can
make one withdrawal up to 10% of the aggregate amount of your purchase payments,
excluding those made less than one year before the withdrawal, without paying
the charge. Unused portions of this 10% "Free Withdrawal Amount" are not carried
forward to future Contract Years. The maximum portion of the Free Withdrawal
Amount you may withdraw from the Fixed Account is limited to the proportion that
your value in the Fixed Account bears to your Total Contract Value. We guarantee
that the total withdrawal charges you pay will not exceed 7% of your purchase
payments.
We will deduct withdrawal charges, if applicable, from the amount paid. For
purposes of the withdrawal charge and the Free Withdrawal Amount, we will treat
withdrawals as coming from the oldest purchase payments first. However, for
federal income tax purposes, please note that withdrawals are considered to have
come first from earnings which means you pay taxes on the earnings portion of
your withdrawal.
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In certain cases, we may deduct a withdrawal charge when you take distributions
required by federal tax law (see the Statement of Additional Information for
"IRS Required Distribution at Death Rules"). We may deduct withdrawal charges
from the Contract Value you apply to an Income Plan with a specified period of
less than 120 months.
We use the amounts obtained from the withdrawal charge to pay sales commissions
and other promotional or distribution expenses associated with marketing the
Contracts. To the extent that the withdrawal charge does not cover all sales
commissions and other promotional or distribution expenses, we may use any of
our corporate assets, including potential profit which may arise from the
mortality and expense risk charge or any other charges or fee described above,
to make up any difference.
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.
DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES
We are not currently making a provision for taxes. In the future, however, we
may make a provision for taxes if we determine, in our sole discretion, that we
will incur a tax as a result of the operation of the Variable Account. We will
deduct for any taxes we incur as a result of the operation of the Variable
Account, whether or not we previously made a provision for taxes and whether or
not it was sufficient. Our status under the Internal Revenue Code is briefly
described in the Statement of Additional Information.
OTHER EXPENSES
Each Portfolio deducts advisory fees and other expenses from its assets. You
indirectly bear the charges and expenses of the Portfolios whose shares are held
by the Variable Sub-Accounts. These fees and expenses are described in the
accompanying prospectus for the Fund. For a summary of current estimates of
those charges and expenses, see page 6. We may receive compensation from the
investment adviser or administrator of the Fund for administrative services we
provide to the Fund.
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ACCESS TO YOUR MONEY
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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 withdrawal
charges, contract maintenance charges, income tax withholding, penalty tax, and
any premium taxes.
You can withdraw money from the Variable Account or the Fixed Account. 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. We will pay withdrawals from the Variable
Account within 7 days of receipt of the request, subject to postponement in
certain circumstances.
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 $500 at a time. You also may withdraw a
lesser amount if you are withdrawing your entire interest in a Variable
Sub-Account.
AUTOMATIC INCOME WITHDRAWALS
You may also take partial withdrawal automatically through Automatic Income
Withdrawals. You may request Automatic Income Withdrawals of $100 or more at any
time before the Payout Starting Date. Please consult with your Morgan Stanley
Dean Witter Financial Advisor for detailed information about Automatic Income
Withdrawals.
If you request a total withdrawal, you must return your Contract to us. We also
will deduct a contract maintenance charge of $30.
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 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. Any interest would
be payable from the date we receive the withdrawal request to the date we make
the payment or transfer.
MINIMUM CONTRACT VALUE
If your request for a partial withdrawal would reduce your Contract Value to
less than $500, 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 applicable charges, and taxes.
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INCOME PAYMENTS
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PAYOUT START DATE
The Payout Start Date is the day that money is applied to an Income Plan. The
Payout Start Date must be:
o at least 30 days after the Issue Date;
o the first day of a calendar month; and
o no later than the first day of the calendar month after the
Annuitant's 85th birthday, 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 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.
After the Payout Start Date, you may not make withdrawals (except as described
below) or change your choice of Income Plan.
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 Payments Guaranteed for 10 Years. 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. Under this plan, we make
periodic income payments for as long as either the Annuitant or the joint
Annuitant is alive.
Income Plan 3 -- Guaranteed Payments for a Specified Period. Under this
plan, we make periodic income payments for the period you have chosen.
These payments do not depend on the Annuitant's life. A withdrawal charge
may apply if the specified period is less than 120 months. We will deduct
the mortality and expense risk charge from the Variable Sub-Account assets
that support variable income payments 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 amounts 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.
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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 will
require proof of age and sex of the Annuitant or joint Annuitant before starting
income payments, and proof that the Annuitant or joint Annuitant is alive before
we make each payment. If you choose an Income Plan with no guaranteed payments,
it is possible for the payee to receive only one income payment if the Annuitant
and any joint Annuitant die prior to the second income payment, or two income
payments if they die prior to 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 all or part of 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 associated with the amount withdrawn.
To determine the present value of any remaining variable income payments being
withdrawn, we use a discount rate equal to the assumed annual investment rate
that we use to compute such variable income payments. The minimum amount you may
withdraw under this feature is $1,000. A withdrawal charge may apply. We deduct
applicable premium taxes from the Contract Value at the Payout Start Date. We
may make other Income Plans available. You may obtain information about them by
writing or calling us.
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. If the amount available to apply under an Income Plan is
less than $2,000 or not enough to provide an initial payment of at least $20,
and state law permits, we may:
o pay you the Contract Value, less any applicable taxes, in a lump sum
instead of the periodic payments you have chosen, or
o 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 Portfolios; 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 4%. If 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. You should consult the
Statement of Additional Information for more detailed information as to how we
determine variable income payments.
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FIXED INCOME PAYMENTS
We guarantee income payment amounts derived from the Fixed Account for the
duration of the Income Plan. We calculate the fixed income payments by:
o deducting any applicable premium tax; and
o 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 6 months or any
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.
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.
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DEATH BENEFITS
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We will pay a death benefit prior to the Payout Start Date on:
1) the death of any Contract owner, or
2) the death of the Annuitant, if the Contract owner is not the
same person as the Annuitant.
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(s) or, if none, the Beneficiary(ies), or, if none, the
Contract owner's estate.
DEATH BENEFIT AMOUNT
Prior to the Payout Start Date, the death benefit is equal to the greater of:
(1) the Contract Value, and (2) the sum of all purchase payments, less amounts,
including withdrawal charges, deducted in connection with any partial
withdrawals. We will calculate the value of the death benefit as of the date we
receive a complete request for payment of the death benefit.
A claim for a distribution on death 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 any other proof acceptable to us.
DEATH BENEFIT PAYMENTS
Upon death of the Contract owner, the new Contract owner generally has the
following options:
1) receive the death benefit in a lump sum or apply the death benefit to
an Income Plan; or
2) continue the Contract, subject to certain conditions.
Option 1 is only available if we receive Due Proof of Death within 180 days of
the date of death. We are currently waiving the 180 day limitation but may
enforce it in the future.
If Option 2 is elected, and the new Contract owner is a natural person, the
following conditions apply:
1) the Contract is continued subject to charges, including all applicable
withdrawal charges; and
2) if the prior Contract owner was also the Annuitant, the new Contract owner
will become the new Annuitant.
A surviving spouse may continue the Contract in the Accumulation Phase as if the
death had not occurred. Otherwise, the new Contract owner may continue the
Contract and elect either of the following options:
1) receive income payments under an Income Plan, with income payments
beginning within one year of the date of death. Income payments must be
made over the life of the new Contract owner, or a period not to
exceed the life expectancy of the new Contract owner; or
2) receive, within 5 years of the date of death, the "Settlement Value,"
which is the Contract Value, less withdrawal charges and taxes.
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If , however, the new Contract owner is a non-natural person, the new Contract
owner has the following options when continuing the Contract:
1) elect to receive the Settlement Value within 5 years of the date of
death; or
2) receive the Settlement Value as a single lump sum payment 5 years
after the date of death.
Option 1 is only available if we receive Due Proof of Death within 180 days of
the date of death. We are currently waiving the 180 day limitation but may
enforce it in the future.
Please refer to your Contract for more details on the above options.
If the Annuitant dies, we will pay the named Beneficiary a death benefit as
described above, depending on whether the Beneficiary is a natural or
non-natural person. Please refer to your Contract for more details.
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MORE INFORMATION
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NORTHBROOK
Northbrook is the issuer of the Contract. Northbrook is a stock life insurance
company which was organized under the insurance laws of the State of Arizona in
1998. Previously, from 1978 to 1998, Northbrook had been organized under the
laws of the State of Illinois. Northbrook is currently licensed to operate in
all states (except New York), the District of Columbia, and Puerto Rico. We
intend to offer the Contract in those jurisdictions in which we are licensed.
Our headquarters are located at 3100 Sanders Road, Northbrook, Illinois, 60062.
Northbrook is a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), an Illinois stock life insurance company. Allstate Life is a
wholly owned subsidiary of Allstate Insurance Company, an Illinois stock
property-liability insurance company. All of the outstanding capital stock of
Allstate Insurance Company is owned by The Allstate Corporation.
Northbrook and Allstate Life entered into a reinsurance agreement effective
December 31, 1987. Under the reinsurance agreement, Allstate Life reinsures all
of Northbrook's liabilities under the Contracts. The reinsurance agreement
provides us with financial backing from Allstate Life. It does not, however,
create a direct contractual relationship between Allstate Life and you. In other
words, the obligations of Allstate Life under the reinsurance agreement are to
Northbrook; Northbrook remains the sole obligor under the Contract to you.
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 Life which automatically reinsures all
net business of Northbrook. A.M. Best Company also assigns Northbrook the rating
of A+(r) because Northbrook automatically reinsures all net business with
Allstate Life. 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 Northbrook. Northbrook shares the same ratings of
its parent, Allstate Life. 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
Northbrook established the Northbrook Variable Annuity Account on February 14,
1983. 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
Northbrook.
We own the assets of the Variable Account. The Variable Account is a segregated
asset account under Arizona insurance 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 Northbrook.
The Variable Account consists of 12 Variable Sub-Accounts, each of which invests
in a corresponding Portfolio. 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 Portfolios. 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.
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THE PORTFOLIOS
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Dividends and Capital Gain Distributions. We automatically reinvest all
dividends and capital gains distributions from the Portfolios in shares of the
distributing Portfolio at their net asset value.
Voting Privileges. As a general matter, you do not have a direct right to vote
the shares of the Portfolios 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 Portfolios 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 Portfolio 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 reserves for such Contract allocated to the applicable Variable
Sub-Account by the net asset value per share of the corresponding Portfolio as
of the record date of the meeting. 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 Portfolio 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 Portfolios. If the shares of any of the Portfolios 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 Portfolio 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 such change.
Conflicts of Interest. Certain of the Portfolios 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 Portfolio. The board of directors of the Fund monitors for possible
conflicts among separate accounts buying shares of the Portfolios. 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 Fund's board of
directors may require a separate account to withdraw its participation in a
Portfolio. A Portfolio'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. Dean Witter Reynolds Inc. ("Dean Witter"), located at Two World
Trade Center, 74th Floor, New York, NY 10048, serves as principal underwriter of
the Contracts. Dean Witter is a wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. Dean Witter is a registered broker-dealer under the Securities
Exchange Act of 1934, as amended, and is a member of the National Association of
Securities Dealers. Dean Witter is also registered with the SEC as an investment
adviser.
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We may pay up to a maximum sales commission of 5.75% of purchase payments and an
annual sales administration expense of up to 0.125% of the average net assets of
the Contracts to Dean Witter. In addition, Dean Witter may pay annually to its
representatives from its profits an amount equal to 0.10% of the net assets of
the Variable Account attributable to Contracts issued and sold after 1984 and
any subsequent additions thereon.
The General Agency Agreement between Northbrook and Dean Witter provides that
Northbrook will indemnify Dean Witter for certain damages that may be caused by
actions or statements or omissions, by Northbrook.
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 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 reserve the right to 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 Northbrook on
certain federal securities law matters. All matters of state law pertaining to
the Contracts, including the validity of the Contracts and Northbrook's right to
issue such Contracts under state insurance laws, have been passed upon by
Michael J. Velotta, General Counsel of Northbrook.
YEAR 2000
Northbrook is heavily dependent upon complex computer systems for all phases of
its operations, including customer service, and policy and contract
administration. Since many of Northbrook's older computer software programs
recognized only the last two digits of the year in any date, some software may
have failed to operate properly after the year 1999 if the software had not been
reprogrammed or replaced ("Year 2000 Issue"). Northbrook believes that many of
its countrerparties and suppliers also had potential Year 2000 Issues which
could have affected Northbrook. In 1995, Allstate Insurance Company commenced a
four phase plan intended to mitigate and/or prevent the adverse effects of Year
2000 Issues. These strategies included normal development and enhancement of new
and existing systems, to make them Year 2000 compliant. The plan also included
Northbrook actively working with its major external counterparties and suppliers
to assess their compliance efforts and Northbrook's exposure to them. As of the
date of this prospectus, Northbrook believes that the Year 2000 Issue was
successfully resolved and that such resolution will not materially affect its
results of operations, liquidity or financial position.
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TAXES
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The following discussion is general and is not intended as tax advice.
Northbrook 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) Northbrook 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 Contract owner during the taxable
year. Although Northbrook does not have control over the Portfolios or their
investments, we expect the Portfolios 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 separate account investments may cause an investor to be
treated as the owner of the separate 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. Northbrook 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.
28
<PAGE>
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 5 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 non-Qualified 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 annuity option, the amounts are taxed in the same
manner as an annuity 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
59 1/2 No penalty tax is incurred, however, 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.
29
<PAGE>
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 Northbrook (or its affiliates) to the same Contract 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.
The income on qualified plan and IRA investments is tax deferred and variable
annuities held by such plans do not receive any additional tax deferral. You
should review the annuity features, including all benefits and expenses, prior
to purchasing a variable annuity in a qualified plan or IRA. Northbrook 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:
1) on or after the date of employee
o attains age 59 1/2,
o separates from service,
o dies,
o becomes disabled, or
2) 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 Northbrook is directed to
transfer some or all of the Contract Value to another 403(b) plan.
INCOME TAX WITHHOLDING
Northbrook 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;
2) a series of substantially equal periodic payments made over a period
of at least 10 years over the life (joint lives) of the participant
(and beneficiary).
Northbrook 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.
30
<PAGE>
PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
We may advertise the performance of the Variable Sub-Accounts, including yield
and total return information. Yield refers to the income generated by an
investment in a Variable Sub-Account over a specified period. 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.
All performance advertisements will include, as applicable, standardized yield
and total return figures that reflect the deduction of insurance charges, the
contract maintenance charge, and withdrawal charge. Performance advertisements
also may include total return figures that reflect the deduction of insurance
charges, but not the contract maintenance or withdrawal charges. 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
Portfolios for the periods beginning with the inception dates of the Portfolios
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; 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.
31
<PAGE>
APPENDIX A
ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS
OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT*
<TABLE>
<CAPTION>
1990 1991 1992
<S> <C> <C> <C>
MONEY MARKET SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $14.532 $15.530 $16.260
Accumulation Unit Value, End of Period. $15.530 $16.260 $16.651
Number of Units Outstanding, End of Period 7,300,227 4,993,305 3,142,381
QUALITY INCOME PLUS SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. $12.097 $12.798 $15.016
Accumulation Unit Value, End of Period. $12.798 $15.016 $16.096
Number of Units Outstanding, End of Period. 4,292,424 4,272,603 4,167,157
HIGH YIELD SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $14.993 $10.864 $17.064
Accumulation Unit Value, End of Period $10.864 $17.064 $20.008
Number of Units Outstanding, End of Period. 2,487,589 1,973,508 1,677,444
UTILITIES SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $10.000 $10.365 $12.372
Accumulation Unit Value, End of Period $10.365 $12.372 $13.797
Number of Units Outstanding, End of Period 3,364,215 3,655,014 3,883,303
INCOME BUILDER SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. -- -- --
Accumulation Unit Value, End of Period. -- -- --
Number of Units Outstanding, End of Period. -- -- --
DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. $10.000 $9.143 $11.564
Accumulation Unit Value, End of Period. $9.143 $11.564 $12.383
Number of Units Outstanding, End of Period. 5,838,210 5,646,884 6,048,975
GLOBAL DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. -- -- --
Accumulation Unit Value, End of Period. -- -- --
Number of Units Outstanding, End of Period. -- -- --
EUROPEAN GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. -- $10.000 $10.050
Accumulation Unit Value, End of Period. -- $10.050 $10.347
Number of Units Outstanding, End of Period. -- 101,037 251,802
PACIFIC GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. -- -- --
Accumulation Unit Value, End of Period. -- -- --
Number of Units Outstanding, End of Period. -- -- --
32
<PAGE>
1990 1991 1992
CAPITAL GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. -- $10.000 $12.735
Accumulation Unit Value, End of Period. -- $12.735 $12.814
Number of Units Outstanding, End of Period. -- 468,488 681,326
EQUITY SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. $18.580 $17.728 $27.916
Accumulation Unit Value, End of Period. $17.728 $27.916 $27.681
Number of Units Outstanding, End of Period. 2,302,425 2,025,964 1,886,301
STRATEGIST SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period. $12.284 $12.351 $15.684
Accumulation Unit Value, End of Period. $12.351 $15.684 $16.651
Number of Units Outstanding, End of Period. 5,424,907 4,805,519 4,762,207
1993 1994 1995 1996
MONEY MARKET SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $16.651 $16.940 $17.411 $18.215
Accumulation Unit Value, End of Period. $16.940 $17.411 $18.215 $18.955
Number of Units Outstanding, End of Period 2,402,295 2,408,602 1,486,360 1,225,023
QUALITY INCOME PLUS SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $16.096 $18.010 $16.648 $20.498
Accumulation Unit Value, End of Period. $18.010 $16.648 $20.498 $20.608
Number of Units Outstanding, End of Period 3,998,449 2,779,045 2,159,205 1,301,162
HIGH YIELD SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $20.008 $24.609 $23.759 $27.055
Accumulation Unit Value, End of Period. $24.609 $23.759 $27.055 $29.993
Number of Units Outstanding, End of Period 1,537,549 1,202,135 906,011 712,341
UTILITIES SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $13.797 $15.804 $14.235 $18.132
Accumulation Unit Value, End of Period. $15.804 $14.235 $18.132 $19.509
Number of Units Outstanding, End of Period 3,932,991 2,814,866 2,298,190 1,419,955
INCOME BUILDER SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period - - - -
Accumulation Unit Value, End of Period. - - - -
Number of Units Outstanding, End of Period - - - -
DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $12.383 $14.019 $13,425 $18.128
Accumulation Unit Value, End of Period. $14.019 $13.425 $18.128 $22.248
Number of Units Outstanding, End of Period 5,878,916 5,229,279 4,402,940 3,144,203
33
<PAGE>
1993 1994 1995 1996
GLOBAL DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period - $10.000 $9.942 $12.012
Accumulation Unit Value, End of Period. - $9.942 $12.012 $13.984
Number of Units Outstanding, End of Period - 951,857 852,851 725,977
EUROPEAN GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $10.347 $14.433 $15.484 $19.299
Accumulation Unit Value, End of Period. $14.433 $15.484 $19.299 $24.837
Number of Units Outstanding, End of Period 767,814 868.638 649,852 545,184
PACIFIC GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period - $10.000 $9.248 $9.682
Accumulation Unit Value, End of Period. - $9.248 $9.682 $9.957
Number of Units Outstanding, End of Period - 644,451 608,464 523,417
CAPITAL GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $12.814 $11.799 $11.533 $15.177
Accumulation Unit Value, End of Period. $11.799 $11.533 $15.177 $16.760
Number of Units Outstanding, End of Period 457,147 321,342 256,312 192,504
EQUITY SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $27.681 $32.807 $30.885 $43.585
Accumulation Unit Value, End of Period. $32.807 $30.885 $43.585 $48.483
Number of Units Outstanding, End of Period 1,800,750 1,652,850 1,314,532 968,987
STRATEGIST SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $16.651 $18.199 $18.728 $20.284
Accumulation Unit Value, End of Period. $18.199 $18.728 $20.284 $23.098
Number of Units Outstanding, End of Period 4,409,391 3,994,684 2,708,051 1,937,096
1997 1998 1999
MONEY MARKET SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $18.955 $19.748 $20.578
Accumulation Unit Value, End of Period. $19.748 $20.578 $21.340
Number of Units Outstanding, End of Period 937,820 945,513 787,804
QUALITY INCOME PLUS SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $20.608 $22.671 $24.315
Accumulation Unit Value, End of Period. $22.671 $24.315 $23.106
Number of Units Outstanding, End of Period 927,584 754,206 586,462
HIGH YIELD SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $29.993 $33.219 $30.869
Accumulation Unit Value, End of Period. $33.219 $30.869 $30.135
Number of Units Outstanding, End of Period 587.053 492,928 391,028
34
<PAGE>
1997 1998 1999
UTILITIES SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $19.509 $24.559 $30.037
Accumulation Unit Value, End of Period. $24.559 $30.037 $33.581
Number of Units Outstanding, End of Period 883,371 741,971 532,620
INCOME BUILDER SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period - $12,120 $12.389
Accumulation Unit Value, End of Period. $12.120 $12,389 $13.131
Number of Units Outstanding, End of Period 60,458 50,807 22,407
DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $22.248 $27.667 $31.130
Accumulation Unit Value, End of Period. $27.667 $31.130 $30.249
Number of Units Outstanding, End of Period 2,485,592 2,007,199 1,583,594
GLOBAL DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $13.984 $15.511 $17.282
Accumulation Unit Value, End of Period. $15.511 $17.282 $19.616
Number of Units Outstanding, End of Period 604,338 424,746 315,806
EUROPEAN GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $24.837 $28.545 $35.033
Accumulation Unit Value, End of Period. $28.545 $35.033 $44.783
Number of Units Outstanding, End of Period 441,921 369,513 284,448
PACIFIC GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $9.957 $6.142 $5.448
Accumulation Unit Value, End of Period. $6.142 $5.448 $8.959
Number of Units Outstanding, End of Period 290,930 277,001 286,782
CAPITAL GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $16.760 $20.666 $24.478
Accumulation Unit Value, End of Period. $20.666 $24.478 $32.303
Number of Units Outstanding, End of Period 148,763 125,509 104,451
EQUITY SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $48.483 $65.969 $85.154
Accumulation Unit Value, End of Period. $65.969 $85.154 $133.781
Number of Units Outstanding, End of Period 782,723 641,223 604,315
STRATEGIST SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period $23.098 $26.006 $32.615
Accumulation Unit Value, End of Period. $26.006 $32.615 $37.855
Number of Units Outstanding, End of Period 1,477,411 1,141,504 973,498
- -------------------------------------------------------------------------------------------------
</TABLE>
*The Money Market, High Yield and Equity Sub-Accounts commenced operations on
March 9, 1984. The Quality Income Plus and Strategist Sub-Accounts commenced
operations on March 1, 1987. The Utilities and Dividend Growth Sub-Accounts
commenced operations on March 1, 1990. The Capital Growth and European Growth
Sub-Accounts commenced operations on March 1, 1991. The Global Dividend Growth
and Pacific Growth Sub-Accounts commenced operations on February 23, 1994. The
Income Builder Sub-Account commenced operations on January 21, 1997. The
Accumulation Unit Value for each of these Sub-Accounts was initially set at
$10.000.
35
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
DESCRIPTION
Additions, Deletions or Substitutions of Investments
The Contract
Purchases
Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers)
Calculation of Accumulation Unit Values
Calculation of Variable Income Payments
Calculation of Annuity Unit Values
General Matters
Incontestability
Settlements
Safekeeping of the Variable Account's Assets
Premium Taxes
Tax Reserves
Federal Tax Matters
Qualified Plans
Experts
Financial Statements
36
<PAGE>
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>
DEAN WITTER VARIABLE ANNUITY
Northbrook Life and Annuity Company
Statement of Additional Information dated May 1, 2000
NORTHBROOK VARIABLE ANNUITY ACCOUNT
POST OFFICE BOX 94040
PALATINE, IL 60094-4040
1 (800) 654 - 2397
This Statement of Additional Information supplements the information in the
prospectus for the Dean Witter Variable Annuity Contract that we offer. This
Statement of Additional Information is not a prospectus. You should read it in
conjunction with the prospectus, dated May 1, 2000, for the Contract. You may
obtain a prospectus by calling or writing us at the address or telephone number
listed above, or by calling or writing your Morgan Stanley Dean Witter Financial
Advisor.
Except as otherwise noted, this Statement of Additional Information uses the
same defined terms as the prospectus for the Dean Witter Variable Annuity
Contracts that we offer.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
DESCRIPTION PAGE
<S> <C>
Additions, Deletions or Substitutions of Investments 2
The Contract 3
Purchases 3
Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers) 3
Calculation of Accumulation Unit Values 4
Calculation of Variable Income Payments 5
Calculation of Annuity Unit Values 5
General Matters 6
Incontestability 6
Settlements 6
Safekeeping of the Variable Account's Assets 6
Premium Taxes 6
Tax Reserves 6
Federal Tax Matters 7
Qualified Plans 8
Experts 10
Financial Statements 11
</TABLE>
<PAGE>
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
We may add, delete, or substitute the Portfolio shares held by any Variable
Sub-Account to the extent the law permits. We may substitute shares of any
Portfolio with those of another Portfolio of the same or different mutual
Portfolio if the shares of the Portfolio are no longer available for investment,
or if we believe investment in any Portfolio 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 Portfolio 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 Portfolios. 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.
2
<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
Dean Witter Reynolds Inc., is the principal underwriter and distributor of the
Contracts. We are no longer offering the Contract, though we are still accepting
purchase payments under existing Contracts.
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.
3
<PAGE>
CALCULATION OF ACCUMULATION UNIT VALUES
The value of Accumulation Units will change each Valuation Period according to
the investment performance of the Portfolio 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 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 Portfolio 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 Portfolio underlying the Variable Sub-Account during the current
Valuation Period;
(B) is the net asset value per share of the Portfolio underlying the Variable
Sub-Account determined as of the end of the immediately preceding Valuation
Period; and
(C) is the annualized mortality and expense risk charge divided by the number of
days in the curent calendar year and then multiplied by the number of calendar
days in the current Valuation Period.
4
<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
Portfolio 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:
* 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
* 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.
5
<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 Portfolio shares
held by each of the Variable Sub-Accounts.
The Portfolios do not issue stock certificates. Therefore, we hold the Variable
Account's assets in open account in lieu of stock certificates. See the
Portfolios' prospectuses for a more complete description of the custodian of the
Portfolios.
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.
6
<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 NORTHBROOK LIFE INSURANCE COMPANY
Northbrook 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 Northbrook, and its operations form a part of Northbrook, 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, Northbrook 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,
Northbrook does not anticipate that it will incur any federal income tax
liability attributable to the Variable Account, and therefore Northbrook does
not intend to make provisions for any such taxes. If Northbrook is taxed on
investment income or capital gains of the Variable Account, then Northbrook 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,
an annuity contract must provide: (1) if any owner dies on or after the annuity
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 owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which 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 one year of the owner's death. If the owner's
designated beneficiary is the surviving spouse of the owner, the contract may be
continued with the surviving spouse as the new owner. If the owner of the
contract is a non-natural person, then the annuitant will be treated as the
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 owner.
7
<PAGE>
QUALIFIED PLANS
The Contract may be used with several types of qualified plans. The income on
qualified plan and IRA investments is tax deferred and variable annuities held
by such plans do not receive any additional tax deferral. You should review the
annuity features, including all benefits and expenses, prior to purchasing a
variable annuity in a qualified plan or IRA. Northbrook 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. In
particular, employers should consider that 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.
8
<PAGE>
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 Northbrook 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.
9
<PAGE>
EXPERTS
The financial statements and the related financial statement schedule of
Northbrook Life Insurance Company as of December 31, 1999 and 1998, and for each
of the three years in the period ended December 31, 1999, that appear in this
Statement of Additional Information 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.
The financial statements of the Variable Account as of December 31, 1999, and
for the periods in the two years then ended, that appear in this Statement of
Additional Information 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.
10
<PAGE>
FINANCIAL STATEMENTS
The financial statements of the Variable Account as of December 31, 1999 and for
the periods in the two years then ended, the financial statements and related
financial statement schedule of Northbrook Life Insurance Company as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, and the accompanying Independent Auditors' Reports, appear in the
pages that follow. The financial statements of Northbrook Life Insurance Company
included herein should be considered only as bearing upon the ability of
Northbrook Life Insurance Company to meet its obligations under the Contacts.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statements of Financial Position of Northbrook
Life Insurance Company (the "Company", an affiliate of The Allstate Corporation)
as of December 31, 1999 and 1998, and the related Statements of Operations and
Comprehensive Income, Shareholder's Equity and Cash Flows for each of the three
years in the period ended December 31, 1999. Our audits also included Schedule
IV - Reinsurance. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 25, 2000
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
December 31,
-----------------------------
1999 1998
------------- ------------
($ in thousands, except par value data)
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $89,205 and $81,156) $ 86,998 $ 86,336
Short-term 3,170 5,083
------------ ------------
Total investments 90,168 91,419
Cash 21 --
Reinsurance recoverable from
Allstate Life Insurance Company 2,022,502 2,148,091
Other assets 5,997 6,705
Separate Accounts 8,211,996 7,031,083
------------ ------------
TOTAL ASSETS $ 10,330,684 $ 9,277,298
============ ============
LIABILITIES
Reserve for life-contingent contract benefits $ 150,587 $ 145,055
Contractholder funds 1,871,933 2,003,122
Current income taxes payable 2,171 1,830
Deferred income taxes 746 3,316
Payable to affiliates, net 5,990 5,085
Separate Accounts 8,211,996 7,031,083
------------ ------------
TOTAL LIABILITIES 10,243,423 9,189,491
============ ============
Commitments and Contingent Liabilities (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 56,600 56,600
Retained income 29,596 25,340
Accumulated other comprehensive (loss) income:
Unrealized net capital (losses) gains (1,435) 3,367
------------ ------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (1,435) 3,367
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 87,261 87,807
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 10,330,684 $ 9,277,298
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
($ in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES
Net investment income $ 6,010 $ 5,691 $ 5,146
Realized capital gains and losses 510 2 (68)
------- ------- -------
Income from operations
before income tax expense 6,520 5,693 5,078
Income tax expense 2,264 1,995 1,756
------- ------- -------
NET INCOME 4,256 3,698 3,322
------- ------- -------
Other comprehensive (loss) income, after-tax
Change in unrealized net capital gains and losses (4,802) 825 1,256
------- ------- -------
COMPREHENSIVE (LOSS) INCOME $ (546) $ 4,523 $ 4,578
======= ======= =======
</TABLE>
See notes to financial statements.
3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
($ in thousands)
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL CAPITAL PAID-IN $ 56,600 $ 56,600 $ 56,600
-------- -------- --------
RETAINED INCOME
Balance, beginning of year $ 25,340 $ 21,642 $ 18,320
Net income 4,256 3,698 3,322
-------- -------- --------
Balance, end of year 29,596 25,340 21,642
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance, beginning of year $ 3,367 $ 2,542 $ 1,286
Change in unrealized net capital gains
and losses (4,802) 825 1,256
-------- -------- --------
Balance, end of year (1,435) 3,367 2,542
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY $ 87,261 $ 87,807 $ 83,284
======== ======== ========
</TABLE>
See notes to financial statements.
4
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
($ in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,256 $ 3,698 $ 3,322
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization and other non-cash items 559 518 516
Realized capital gains and losses (510) (2) 68
Changes in:
Life-contingent contract benefits and
contractholder funds (68) 273 205
Income taxes payable 355 1,866 (480)
Other operating assets and liabilities 924 4,126 (264)
-------- -------- --------
Net cash provided by operating activities 5,516 10,479 3,367
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 17,992 1,922 1,606
Investment collections 6,555 10,253 10,036
Investment purchases (32,050) (20,690) (18,568)
Change in short-term investments, net 2,008 (1,964) 3,559
-------- -------- --------
Net cash used in investing activities (5,495) (10,479) (3,367)
-------- -------- --------
NET INCREASE IN CASH 21 -- --
CASH AT THE BEGINNING OF YEAR -- -- --
-------- -------- --------
CASH AT END OF YEAR $ 21 $ -- $ --
======== ======== ========
</TABLE>
See notes to financial statements.
5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
1. GENERAL
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Northbrook Life
Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"). These financial statements have been prepared in conformity with
generally accepted accounting principles.
To conform with the 1999 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets savings and life insurance products exclusively through Dean
Witter Reynolds, Inc. ("Dean Witter") (see Note 4), a wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. Savings products include deferred annuities and
immediate annuities without life contingencies. Deferred annuities include fixed
rate, market value adjusted, and variable annuities. Life insurance consists of
interest-sensitive life, immediate annuities with life contingencies, and
variable life insurance. In 1999, substantially all of the Company's statutory
premiums and deposits were from annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary surrender or withdrawal by customers, subject to applicable
surrender charges. These policies and contracts are reinsured primarily with
ALIC (see Note 3), which invests premiums and deposits to provide cash flows
that will be used to fund future benefits and expenses.
The Company monitors economic and regulatory developments which have the
potential to impact its business. Recently enacted federal legislation will
allow for banks and other financial organizations to have greater participation
in the securities and insurance businesses. This legislation may present an
increased level of competition for sales of the Company's products. Furthermore,
the market for deferred annuities and interest-sensitive life insurance is
enhanced by the tax incentives available under current law. Any legislative
changes which lessen these incentives are likely to negatively impact the demand
for these products.
Additionally, traditional demutualizations of mutual insurance companies and
enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; and (2) increasing competition in the
capital markets.
The Company is authorized to sell life and savings products in all states except
New York, as well as in the District of Columbia and Puerto Rico. The top
geographic locations for statutory premiums and deposits for the Company were
California, Florida, and Texas for the year ended December 31, 1999. No other
jurisdiction accounted for more than 5% of statutory premiums and deposits.
Substantially all premiums and deposits are ceded to ALIC under reinsurance
agreements.
6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are recognized for declines in the value of
fixed income securities that are other than temporary. Such writedowns are
included in realized capital gains and losses. Short-term investments are
carried at cost or amortized cost, which approximates fair value.
Investment income consists primarily of interest and short-term investment
dividends. Interest is recognized on an accrual basis and dividends are recorded
at the ex-dividend date. Interest income on mortgage-backed securities is
determined on the effective yield method, based on the estimated principal
repayments. Accrual of income is suspended for fixed income securities that are
in default or when the receipt of interest payments is in doubt. Realized
capital gains and losses are determined on a specific identification basis.
REINSURANCE RECOVERABLE
The Company has reinsurance agreements whereby substantially all premiums,
contract charges, credited interest, policy benefits and certain expenses are
ceded to ALIC. Such amounts are reflected net of such reinsurance in the
statements of operations and comprehensive income. Investment income earned on
the assets which support contractholder funds and the reserve for
life-contingent contract benefits is not included in the Company's financial
statements as those assets are owned and managed under terms of reinsurance
agreements. Reinsurance recoverable and the related reserve for life-contingent
contract benefits and contractholder funds are reported separately in the
statements of financial position. The Company continues to have primary
liability as the direct insurer for risks reinsured.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED
Interest-sensitive life contracts are insurance contracts whose terms are not
fixed and guaranteed. The terms that may be changed include premiums paid by the
contractholder, interest credited to the contractholder account balance and one
or more amounts assessed against the contractholder. Premiums from these
contracts are reported as deposits to contractholder funds. Contract charge
revenue consists of fees assessed against the contractholder account balance for
cost of insurance (mortality risk), contract administration and surrender
charges. Contract benefits include interest credited to contracts and claims
incurred in excess of the related contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed rate
annuities, market value adjusted annuities and immediate annuities without life
contingencies are considered investment contracts. Deposits received for such
contracts are reported as deposits to contractholder funds. Contract charge
revenue for investment contracts consists of charges assessed against the
contractholder account balance for contract
7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
administration and surrender charges. Contract benefits include interest
credited and claims incurred in excess of the related contractholder account
balance.
Crediting rates for fixed rate annuities and interest-sensitive life contracts
are adjusted periodically by the Company to reflect current market conditions.
Investment contracts also include variable annuity and variable life contracts
which are sold as Separate Accounts products. The assets supporting these
products are legally segregated and available only to settle Separate Accounts
contract obligations. Deposits received are reported as Separate Accounts
liabilities. The Company's contract charge revenue for these contracts consists
of charges assessed against the Separate Accounts fund balances for contract
maintenance, administration, mortality, expense and surrenders.
All premiums, contract charges, contract benefits and interest credited are
reinsured.
INCOME TAXES
The income tax provision is calculated under the liability method and presented
net of reinsurance. Deferred tax assets and liabilities are recorded based on
the difference between the financial statement and tax bases of assets and
liabilities at the enacted tax rates. Deferred income taxes arise primarily from
unrealized capital gains and losses on fixed income securities carried at fair
value and differences in the tax bases of investments.
SEPARATE ACCOUNTS
The Company issues deferred variable annuity and variable life contracts, the
assets and liabilities of which are legally segregated and recorded as assets
and liabilities of the Separate Accounts. Absent any contract provisions wherein
the Company contractually guarantees either a minimum return or account value to
the beneficiaries of the contractholders in the form of a death benefit, the
contractholders bear the investment risk that the Separate Accounts' funds may
not meet their stated investment objectives.
The assets of the Separate Accounts are carried at fair value. Separate Accounts
liabilities represent the contractholders' claims to the related assets and are
carried at the fair value of the assets. In the event that the asset value of
certain contractholder accounts are projected to be below the value guaranteed
by the Company, a liability is established through a charge to earnings.
Investment income and realized capital gains and losses of the Separate Accounts
accrue directly to the contractholders and therefore, are not included in the
Company's statements of operations and comprehensive income. Revenues to the
Company from Separate Accounts consist of contract maintenance and
administration fees, and mortality, surrender and expense charges.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to immediate
annuities with life contingencies and certain variable annuity contract
guarantees, is computed on the basis of assumptions as to mortality, future
investment yields, terminations and expenses at the time the policy is issued.
These assumptions include provisions for adverse deviation and generally vary by
such characteristics as type of coverage, year
8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
of issue and policy duration. Detailed reserve assumptions and reserve interest
rates are outlined in Note 7.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of interest-sensitive life and
certain investment contracts. Deposits received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received, net of
commissions, and interest credited to the benefit of the contractholder less
withdrawals, mortality charges and administrative expenses. Detailed information
on crediting rates and surrender and withdrawal protection on contractholder
funds are outlined in Note 7.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In 1999, the Company adopted Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." The SOP
provides guidance concerning when to recognize a liability for insurance-related
assessments and how those liabilities should be measured. Specifically,
insurance-related assessments should be recognized as liabilities when all of
the following criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an entity
to pay an assessment has occurred and 3) the amount of the assessment can be
reasonably estimated. Adoption of this statement was not material to the
Company's results of operations or financial position.
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements whereby substantially all premiums,
contract charges, credited interest, policy benefits and certain expenses are
ceded to ALIC and reflected net of such reinsurance in the statements of
operations and comprehensive income. Reinsurance recoverable and the related
reserve for life-contingent contract benefits and contracholder funds are
reported separately in the statements of financial position. The Company
continues to have primary liability as the direct insurer for risks reinsured.
Investment income earned on the assets which support contractholder funds and
the reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed under the
terms of the reinsurance agreements. The following amounts were ceded to ALIC
under reinsurance agreements.
9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Premiums $ 2,966 $ 2,528 $ 1,979
Contract charges 118,290 102,218 83,559
Credited interest, policy benefits, and certain
expenses 222,513 217,428 201,526
</TABLE>
BUSINESS OPERATIONS
The Company utilizes services provided by AIC and ALIC and business facilities
owned or leased, and operated by AIC in conducting its business activities. The
Company reimburses AIC and ALIC for the operating expenses incurred on behalf of
the Company. The Company is charged for the cost of these operating expenses
based on the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $33,892, $26,230 and $23,978 in 1999, 1998 and 1997, respectively. Of these
costs, the Company retains investment related expenses. All other costs are
ceded to ALIC under reinsurance agreements.
4. EXCLUSIVE DISTRIBUTION AGREEMENT
The Company has a strategic alliance with Dean Witter to develop, market and
distribute proprietary savings and life insurance products through Morgan
Stanley Dean Witter Financial Advisors. Affiliates of Dean Witter are the
investment managers for the Morgan Stanley Dean Witter Variable Investment
Series, Morgan Stanley Universal Funds, Inc. and the Van Kampen American Capital
Life Investment Trust, the funds in which certain assets of the Separate
Accounts products are invested. Under the terms of the alliance, the Company has
agreed to use Dean Witter as an exclusive distribution channel for the Company's
products. In addition to the Company's products, Dean Witter markets other
products which compete with those of the Company.
Pursuant to the alliance agreement, Dean Witter provides approximately half of
the statutory capital necessary to maintain these products on the Company's
books through loans to a subsidiary of AIC. AIC unconditionally guarantees the
repayment of these loans. The Company shares approximately half the net profits
with Dean Witter on contracts written under the alliance.
The strategic alliance is cancelable for new business by either party by giving
30 days written notice, however, the Company believes the benefits derived by
Dean Witter will preserve the alliance.
10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
5. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED --------------------------- FAIR
COST GAINS LOSSES VALUE
--------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
U.S. government and agencies $ 8,660 $ 131 $ (57) $ 8,734
Municipal 1,155 6 (108) 1,053
Corporate 61,049 26 (2,541) 58,534
Mortgage-backed securities 18,341 822 (486) 18,677
------- ------- ------- -------
Total fixed income securities $89,205 $ 985 $(3,192) $86,998
======= ======= ======= =======
AT DECEMBER 31, 1998
U.S. government and agencies $ 8,648 $ 1,469 $ -- $10,117
Municipal 590 11 -- 601
Corporate 33,958 1,634 (16) 35,576
Mortgage-backed securities 37,960 2,250 (168) 40,042
------- ------- ------- -------
Total fixed income securities $81,156 $ 5,364 $ (184) $86,336
======= ======= ======= =======
</TABLE>
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1999:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Due in one year or less $ 50 $ 50
Due after one year through five years 16,690 16,538
Due after five years through ten years 46,933 44,542
Due after ten years 7,191 7,191
------- ------
70,864 68,321
Mortgage-backed securities 18,341 18,677
------- -------
Total $89,205 $86,998
======= =======
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed income securities $ 5,881 $ 5,616 $ 5,364
Short-term investments 261 190 84
------- ------- -------
Investment income, before expense 6,142 5,806 5,448
Investment expense 132 115 302
------- ------- -------
Net investment income $ 6,010 $ 5,691 $ 5,146
======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1999 1998 1997
------- ------- -------
Fixed income securities $ 510 $ 2 $ (70)
Short-term investments -- -- 2
------- ------- -------
Realized capital gains and losses 510 2 (68)
Income taxes (178) (1) 24
------- ------- -------
Realized capital gains and losses, after tax $ 332 $ 1 $ (44)
======= ======= =======
</TABLE>
Excluding calls and prepayments, gross gains of $629 were realized on sales of
fixed income securities during 1999 and gross losses of $119, $9 and $70 were
realized on sales of fixed income securities during 1999, 1998 and 1997,
respectively. There were no gross gains realized on sales of fixed income
securities during 1998 and 1997.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
COST/ FAIR GROSS UNREALIZED UNREALIZED
AMORTIZED COST VALUE GAINS LOSSES NET LOSSES
-------------- ----- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 89,205 $ 86,998 $ 985 $ (3,192) $ (2,207)
======== ======== ======== ========
Deferred income taxes 772
--------
Unrealized net capital losses $ (1,435)
========
CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31, 1999 1998 1997
-------- -------- --------
Fixed income securities $ (7,387) $ 1,269 $ 1,932
Deferred income taxes 2,585 (444) (676)
-------- -------- --------
(Decrease) increase in unrealized net
capital gains $ (4,802) $ 825 $ 1,256
======== ======== ========
</TABLE>
SECURITIES ON DEPOSIT
At December 31, 1999, fixed income securities with a carrying value of $7,856
were on deposit with regulatory authorities as required by law.
12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
6. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including
interest-sensitive life insurance reserves and deferred income taxes) are not
considered financial instruments and are not carried at fair value. Other assets
and liabilities considered financial instruments, such as accrued investment
income and cash are generally of a short-term nature. Their carrying values are
assumed to approximate fair value.
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed income securities $ 86,998 $ 86,998 $ 86,336 $ 86,336
Short-term investments 3,170 3,170 5,083 5,083
Separate Accounts 8,211,996 8,211,996 7,031,083 7,031,083
</TABLE>
Fair values for fixed income securities are based on quoted market prices where
available. Non-quoted securities are valued based on discounted cash flows using
current interest rates for similar securities. Short-term investments are highly
liquid investments with maturities of less than one year whose carrying value
are deemed to approximate fair value. Separate Accounts assets are carried in
the statements of financial position at fair value based on quoted market
prices.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $1,735,843 $1,675,910 $1,839,114 $1,814,684
Separate Accounts 8,211,996 8,211,996 7,031,083 7,031,083
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
7. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, the reserve for life-contingent contract benefits consists of
the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Immediate annuities:
Structured settlement annuities $109,907 $108,215
Other immediate annuities 40,680 36,840
-------- --------
Total life-contingent contract benefits $150,587 $145,055
======== ========
</TABLE>
The assumptions for mortality generally utilized in calculating reserves
include, the U.S. population with projected calendar year improvements and age
setbacks for impaired lives for structured settlement annuities; and the 1983
group annuity mortality table for other immediate annuities. Interest rate
assumptions vary from 3.5% to 10.0% for immediate annuities. Other estimation
methods used include the present value of contractually fixed future benefits
for structured settlement annuities and other immediate annuities.
Premium deficiency reserves are established, if necessary, for the structured
settlement annuity business, to the extent the unrealized gains on fixed income
securities would result in a premium deficiency had those gains actually been
realized. The Company did not have a premium deficiency reserve at December 31,
1999 and 1998.
At December 31, contractholder funds consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest-sensitive life $ 173,867 $ 178,589
Fixed annuities:
Immediate annuities 78,197 77,291
Deferred annuities 1,619,869 1,747,242
---------- ----------
Total contractholder funds $1,871,933 $2,003,122
========== ==========
</TABLE>
Contractholder funds are equal to deposits received net of commissions and
interest credited to the benefit of the contractholder less withdrawals,
mortality charges and administrative expenses. Interest rates credited range
from 4.0% to 7.2% for interest-sensitive life contracts; 3.5% to 10.2% for
immediate annuities and 3.4% to 8.0% for deferred annuities. Withdrawal and
surrender charge protection includes: i) for interest- sensitive life, either a
percentage of account balance or dollar amount grading off generally over 20
years; and, ii) for deferred annuities not subject to a market value adjustment,
either a declining or a level percentage charge generally over nine years or
less. Approximately 25% of deferred annuities are subject to a market value
adjustment.
14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
8. CORPORATION RESTRUCTURING
On November 10, 1999, the Corporation announced a series of strategic
initiatives to aggressively expand its selling and service capabilities. The
Corporation also announced that it is implementing a program to reduce expenses
by approximately $600 million. The reduction will result in the elimination of
approximately 4,000 current non-agent positions, across all employment grades
and categories by the end of 2000, or approximately 10% of the Corporation's
non-agent work force. The impact of the reduction in employee positions is not
expected to materially impact the results of operations of the Company.
These cost reductions are part of a larger initiative to redeploy the cost
savings to finance new initiatives including investments in direct access and
internet channels for new sales and service capabilities, new competitive
pricing and underwriting techniques, new agent and claim technology and enhanced
marketing and advertising. As a result of the cost reduction program, the
Corporation recorded restructuring and related charges of $81 million pretax
during the fourth quarter of 1999. The Corporation anticipates that additional
pretax restructuring related charges of approximately $100 million will be
expensed as incurred throughout 2000. The Company's allocable share of these
expenses were immaterial in 1999 and are expected to be immaterial in 2000.
9. INCOME TAXES
The Company joins the Corporation and its other eligible domestic subsidiaries
(the "Allstate Group") in the filing of a consolidated federal income tax return
and is party to a federal income tax allocation agreement (the "Allstate Tax
Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the Company pays
to or receives from the Corporation the amount, if any, by which the Allstate
Group's federal income tax liability is affected by virtue of inclusion of the
Company in the consolidated federal income tax return. Effectively, this results
in the Company's annual income tax provision being computed, with adjustments,
as if the Company filed a separate return.
Prior to June 30, 1995, the Corporation was a subsidiary of Sears Roebuck & Co.
("Sears") and, with its eligible domestic subsidiaries, was included in the
Sears consolidated federal income tax return and federal income tax allocation
agreement. Effective June 30, 1995, the Corporation and Sears entered into a new
tax sharing agreement, which governs their respective rights and obligations
with respect to federal income taxes for all periods during which the
Corporation was a subsidiary of Sears, including the treatment of audits of tax
returns for such periods.
The Internal Revenue Service ("IRS") has completed its review of the Allstate
Group's federal income tax returns through the 1993 tax year. Any adjustments
that may result from IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or results of operations of
the Company.
15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
DEFERRED ASSETS
Unrealized net capital losses $ 772 $ --
------- -------
Total deferred assets 772 --
DEFERRED LIABILITIES
Difference in tax bases of investments (1,518) (1,503)
Unrealized net capital gains -- (1,813)
------- -------
Total deferred liabilities (1,518) (3,316)
------- -------
Net deferred liability $ (746) $(3,316)
======= =======
</TABLE>
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 2,249 $ 1,797 $ 1,843
Deferred 15 198 (87)
------- ------- -------
Total income tax expense $ 2,264 $ 1,995 $ 1,756
======= ======= =======
</TABLE>
The Company paid income taxes of $1,908, $129 and $2,236 in 1999, 1998 and 1997,
respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.1) (0.2) (0.4)
Other (0.2) 0.2 --
----- ----- -----
Effective income tax rate 34.7% 35.0% 34.6%
===== ===== =====
</TABLE>
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, 1999, approximately $16,
will result in federal income taxes payable of $6 if distributed by the Company.
No provision for taxes has been made as the Company has no plan to distribute
amounts from this account. No further additions to the account have been
permitted since the Tax Reform Act of 1984.
10. STATUTORY FINANCIAL INFORMATION
The Company's statutory capital and surplus was $83,746 and $68,883 at December
31, 1999 and 1998, respectively. The Company's statutory net income was $4,840,
$3,518 and $2,908 for the years ended December 31, 1999, 1998 and 1997,
respectively.
16
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Arizona Department of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The Company does not follow any permitted statutory accounting
practices that have a significant impact on statutory surplus or statutory net
income.
The NAIC's codification initiative has produced a comprehensive guide of
statutory accounting principles, which the Company will implement in January
2001. The Company's state of domicile, Arizona, has passed legislation revising
various statutory accounting requirements to conform to codification. These
requirements are not expected to have a material impact on the statutory surplus
of the Company.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by the Company without the prior approval of the state
insurance regulator is limited to formula amounts based on net income and
capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 2000 without prior approval of the Arizona Department of Insurance is
$4,840.
RISKED-BASED CAPITAL
The NAIC has a standard for assessing the solvency of insurance companies, which
is referred to as risk-based capital ("RBC"). The requirement consists of a
formula for determining each insurer's RBC and a model law specifying regulatory
actions if an insurer's RBC falls below specified levels. The RBC formula for
life insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. At December 31, 1999, RBC for the
Company was significantly above levels that would require regulatory action.
17
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
11. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax basis for
the year ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ---------------------------- -----------------------------
After- After- After-
PRETAX TAX TAX PRETAX TAX TAX PRETAX TAX TAX
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNREALIZED CAPITAL GAINS
AND LOSSES:
- --------------------------------
Unrealized holding (losses)
gains arising during
the period $(6,877) $ 2,407 $(4,470) $ 1,271 $ (445) $ 826 $ 1,862 $ (652) $ 1,210
Less: reclassification
adjustments 510 (178) 332 2 (1) 1 (70) 24 (46)
------- ------- ------- ------- ------- ------- ------- ------- -------
Unrealized net capital
(losses) gains (7,387) 2,585 (4,802) 1,269 (444) 825 1,932 (676) 1,256
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
(loss) income $(7,387) $ 2,585 $(4,802) $ 1,269 $ (444) $ 825 $ 1,932 $ (676) $ 1,256
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social, economic
and regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing banks
from engaging in the securities and insurance business, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and proposed legislation to prohibit the use of gender in
determining insurance rates and benefits. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. In the opinion of management, the ultimate liability, if any, arising
from such pending or threatened litigation is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a state can
be assessed, up to prescribed limits, for certain obligations of insolvent
insurance companies to policyholders and claimants. The Company's expenses
related to these funds have been immaterial. These expenses are ceded to ALIC
under reinsurance agreements.
MARKETING AND COMPLIANCE ISSUES
Companies operating in the insurance and financial services markets have come
under the scrutiny of regulators with respect to market conduct and compliance
issues. Under certain circumstances, companies have been held responsible for
providing incomplete or misleading sales materials and for replacing existing
policies with policies that were less advantageous to the policyholder. The
Company monitors its sales materials and
18
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
enforces compliance procedures to mitigate any exposure to potential litigation.
The Company is a member of the Insurance Marketplace Standards Association, an
organization which advocates ethical market conduct.
19
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 474,824 $ 474,824 $ -
========= ========= =======
Premiums and contract charges:
Life and annuities $ 121,351 $ 121,351 $ -
========= ========= =======
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 494,256 $494,256 $ -
========== ======== =======
Premiums and contract charges:
Life and annuities $ 104,746 $ 104,746 $ -
========= ========= =======
GROSS NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 515,890 $515,890 $ -
========= ======== =======
Premiums and contract charges:
Life and annuities $ 85,538 $ 85,538 $ -
========= ======== =======
</TABLE>
20
<PAGE>
--------------------------------------------
NORTHBROOK VARIABLE ANNUITY ACCOUNT
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND THE PERIODS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998, AND INDEPENDENT AUDITORS'
REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Northbrook Life Insurance Company:
We have audited the accompanying statement of net assets of Northbrook Variable
Annuity Account as of December 31, 1999 (including the assets of each of the
individual sub-accounts which comprise the Account as disclosed in Note 1), and
the related statements of operations for the period then ended and the
statements of changes in net assets for each of the periods in the two year
period then ended for each of the individual sub-accounts which comprise the
Account. These financial statements are the responsibility of 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. Our procedures included
confirmation of securities owned at December 31, 1999 by correspondence with the
account custodians. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Northbrook Variable Annuity Account as of
December 31, 1999 (including the assets of each of the individual sub-accounts
which comprise the Account), and the results of operations for each of the
individual sub-accounts for the period then ended and the changes in their net
assets for each of the periods in the two year period then ended in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 27, 2000
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Allocation to Sub-Accounts investing in the Morgan Stanley Dean Witter Variable Investment Series:
Money Market, 16,813,665 shares (cost $16,813,665) $ 16,813,665
Quality Income Plus, 1,374,693 shares (cost $14,015,675) 13,554,470
High Yield, 2,722,087 shares (cost $17,380,966) 11,786,635
Utilities, 781,239 shares (cost $10,389,573) 17,890,365
Income Builder, 25,726 shares (cost $288,481) 294,306
Dividend Growth, 2,615,427 shares (cost $37,945,037) 47,914,616
Global Dividend Growth, 429,129 shares (cost $5,124,480) 6,196,624
European Growth, 404,879 shares (cost $8,375,025) 12,741,555
Pacific Growth, 303,067 shares (cost $2,157,204) 2,570,005
Capital Growth, 142,224 shares (cost $2,504,764) 3,374,980
Equity, 1,500,850 shares (cost $40,333,637) 80,865,775
Strategist, 1,929,923 shares (cost $23,536,905) 36,861,524
--------------
Total Assets 250,864,520
LIABILITIES
Payable to Northbrook Life Insurance Company:
Accrued contract maintenance charges 60,941
--------------
Net Assets $250,803,579
=============
</TABLE>
See notes to financial statements.
2
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Investment Series
-----------------------------------------------------------------------
For the Year Ended December 31, 1999
-----------------------------------------------------------------------
Quality
Money Income High Income
Market Plus Yield Utilities Builder
------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 863,757 $ 1,017,193 $ 1,902,127 $ 857,187 $ 29,026
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (183,952) (158,431) (135,102) (195,270) (4,367)
------------- ------------- ------------- ------------- -----------
Net investment income (loss) 679,805 858,762 1,767,025 661,917 24,659
------------- ------------- ------------- ------------- -----------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 10,595,930 4,566,527 3,888,129 6,989,943 356,894
Cost of investments sold 10,595,930 4,485,933 5,389,276 4,228,471 363,575
------------- ------------- ------------- ------------- -----------
Net realized gains (losses) - 80,594 (1,501,147) 2,761,472 (6,681)
------------- ------------- ------------- ------------- -----------
Change in unrealized gains (losses) - (1,829,277) (533,350) (1,416,794) (9,369)
------------- ------------- ------------- ------------- -----------
Net gains (losses) on investments - (1,748,683) (2,034,497) 1,344,678 (16,050)
------------- ------------- ------------- ------------- -----------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ 679,805 $ (889,921) $ (267,472) $ 2,006,595 $ 8,609
============= ============= ============= ============ ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Investment Series
--------------------------------------------------------------------------
For the Year Ended December 31, 1999
--------------------------------------------------------------------------
Global
Dividend Dividend European Pacific Capital
Growth Growth Growth Growth Growth
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 9,425,817 $ 590,835 $1,160,256 $ 17,178 $ 347,171
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (584,400) (64,902) (118,499) (19,904) (27,469)
-------------- ------------ ------------ ------------ ------------
Net investment income (loss) 8,841,417 525,933 1,041,757 (2,726) 319,702
-------------- ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 14,477,598 2,418,344 4,719,186 2,007,341 1,376,641
Cost of investments sold 9,908,825 2,023,227 3,452,860 2,173,593 1,102,973
-------------- ------------ ------------ ------------ ------------
Net realized gains (losses) 4,568,773 395,117 1,266,326 (166,252) 273,668
-------------- ------------ ------------ ------------ ------------
Change in unrealized gains (losses) (15,049,317) (126,239) 593,651 1,167,133 182,259
-------------- ------------ ------------ ------------ ------------
Net gains (losses) on investments (10,480,544) 268,878 1,859,977 1,000,881 455,927
-------------- ------------ ------------ ------------ ------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ (1,639,127) $ 794,811 $2,901,734 $ 998,155 $ 775,629
============== ============ ============ ============ ============
</TABLE>
See notes to financial statements.
4
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter
Variable Investment Series
-----------------------------------------------
For the Year Ended December 31, 1999
-----------------------------------------------
Capital
Equity Appreciation Strategist
------------- ------------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 7,252,640 $ 4,247 $ 798,353
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (605,379) (790) (364,027)
------------- ------------- -------------
Net investment income (loss) 6,647,261 3,457 434,326
------------- ------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 9,323,291 433,584 6,890,898
Cost of investments sold 5,509,137 416,753 4,723,546
------------- ------------- -------------
Net realized gains (losses) 3,814,154 16,831 2,167,352
------------- ------------- -------------
Change in unrealized gains (losses) 18,946,881 6,013 2,843,943
------------- ------------- -------------
Net gains (losses) on investments 22,761,035 22,844 5,011,295
------------- ------------- -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $29,408,296 $ 26,301 $ 5,445,621
============= ============= =============
</TABLE>
See notes to financial statements.
5
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Investment Series
----------------------------------------------------------------------------------------
Money Market Quality Income Plus High Yield
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 679,805 $ 1,398,311 $ 858,762 $ 1,017,070 $ 1,767,025 $ 2,627,725
Net realized gains (losses) - - 80,594 794,680 (1,501,147) (972,195)
Change in unrealized gains (losses) - - (1,829,277) (46,206) (533,350) (1,702,486)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting from
operations 679,805 1,398,311 (889,921) 1,765,544 (267,472) (46,956)
------------- ------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 26,880 95,341 28,456 20,281 14,501 59,590
Benefit payments (1,281,638) (97,840) (412,882) (497,567) (397,317) (610,800)
Payments on termination (4,617,642) (4,037,711) (2,641,127) (4,304,683) (1,825,390) (3,140,770)
Contract maintenance charges (7,570) (8,506) (6,442) (8,517) (7,396) (10,200)
Transfers among the sub-accounts
and with the Fixed Account - net 2,552,821 3,586,794 (865,516) 334,287 (949,237) (535,835)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions (3,327,149) (461,922) (3,897,511) (4,456,199) (3,164,839) (4,238,015)
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS (2,647,344) 936,389 (4,787,432) (2,690,655) (3,432,311) (4,284,971)
NET ASSETS AT BEGINNING OF PERIOD 19,456,925 18,520,536 18,338,609 21,029,264 15,216,082 19,501,053
------------- ------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $16,809,581 $19,456,925 $13,551,177 $18,338,609 $11,783,771 $15,216,082
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
6
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Investment Series
----------------------------------------------------------------------------------------
Utilities Income Builder Dividend Growth
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 661,917 $ 1,444,756 $ 24,659 $ 38,216 $ 8,841,417 $ 6,512,718
Net realized gains (losses) 2,761,472 2,687,097 (6,681) 38,029 4,568,773 7,677,735
Change in unrealized gains (losses) (1,416,794) 664,255 (9,369) (40,153) (15,049,317) (5,465,658)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting from
operations 2,006,595 4,796,108 8,609 36,092 (1,639,127) 8,724,795
------------- ------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 24,978 27,066 2,250 1,040 221,083 110,724
Benefit payments (488,847) (225,704) (10,834) - (990,566) (536,627)
Payments on termination (4,665,086) (4,551,361) (166,664) (270,529) (10,098,090) (12,886,650)
Contract maintenance charges (7,877) (10,449) (92) (127) (21,985) (29,306)
Transfers among the sub-accounts
and with the Fixed Account - net (1,270,095) 555,897 (168,463) 129,984 (2,052,057) (1,667,156)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions (6,406,927) (4,204,551) (343,803) (139,632) (12,941,615) (15,009,015)
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS (4,400,332) 591,557 (335,194) (103,540) (14,580,742) (6,284,220)
NET ASSETS AT BEGINNING OF PERIOD 22,286,351 21,694,794 629,429 732,969 62,483,719 68,767,939
------------- ------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $17,886,019 $22,286,351 $ 294,235 $ 629,429 $47,902,977 $62,483,719
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
7
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Investment Series
----------------------------------------------------------------------------------------
Global Dividend Growth European Growth Pacific Growth
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 525,933 $ 962,717 $ 1,041,757 $ 876,269 $ (2,726) $ 65,905
Net realized gains (losses) 395,117 511,305 1,266,326 1,928,994 (166,252) (538,697)
Change in unrealized gains (losses) (126,239) (621,287) 593,651 (133,338) 1,167,133 263,080
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from operations 794,811 852,735 2,901,734 2,671,925 998,155 (209,712)
------------- ------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 52,862 89,142 6,433 66,486 26,513 24,873
Benefit payments (65,248) (25,589) (106,235) (36,710) (8,152) (1,294)
Payments on termination (1,683,408) (1,656,988) (1,777,871) (1,928,166) (605,369) (231,649)
Contract maintenance charges (2,461) (3,026) (3,598) (4,871) (888) (620)
Transfers among the sub-accounts
and with the Fixed Account - net (241,800) (1,290,036) (1,227,310) (437,956) 649,956 140,786
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions (1,940,055) (2,886,497) (3,108,581) (2,341,217) 62,060 (67,904)
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS (1,145,244) (2,033,762) (206,847) 330,708 1,060,215 (277,616)
NET ASSETS AT BEGINNING OF PERIOD 7,340,362 9,374,124 12,945,307 12,614,599 1,509,166 1,786,782
------------- ------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $ 6,195,118 $ 7,340,362 $ 12,738,460 $ 12,945,307 $ 2,569,381 $ 1,509,166
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
8
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Investment Series
----------------------------------------------------------------------------------------
Capital Growth Equity Capital Appreciation
---------------------------- ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 319,702 $ 203,053 $ 6,647,261 $ 6,041,763 $ 3,457 $ (712)
Net realized gains (losses) 273,668 231,042 3,814,154 6,019,217 16,831 (17,562)
Change in unrealized gains (losses) 182,259 77,807 18,946,881 2,144,805 6,013 (18,940)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from operations 775,629 511,902 29,408,296 14,205,785 26,301 (37,214)
------------- ------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 4,615 2,643 91,134 228,786 1,957 23,885
Benefit payments - (40,958) (499,171) (722,051) - -
Payments on termination (409,672) (541,219) (7,139,312) (10,798,607) (26,803) (55,817)
Contract maintenance charges (1,083) (1,394) (27,940) (23,764) 72 (92)
Transfers among the sub-accounts
and with the Fixed Account - net (67,543) 66,893 4,410,127 77,540 (358,798) (196,358)
------------- ------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions (473,683) (514,035) (3,165,162) (11,238,096) (383,572) (228,382)
------------- ------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS 301,946 (2,133) 26,243,134 2,967,689 (357,271) (265,596)
NET ASSETS AT BEGINNING OF PERIOD 3,072,214 3,074,347 54,602,997 51,635,308 357,271 622,867
------------- ------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $ 3,374,160 $ 3,072,214 $ 80,846,131 $ 54,602,997 $ - $ 357,271
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
9
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter
Variable Investment Series
--------------------------------------
Strategist
--------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 434,326 $ 3,983,648
Net realized gains (losses) 2,167,352 3,366,984
Change in unrealized gains (losses) 2,843,943 1,469,828
------------------ ------------------
Change in net assets resulting from operations 5,445,621 8,820,460
------------------ ------------------
FROM CAPITAL TRANSACTIONS
Deposits 93,028 33,889
Benefit payments (994,019) (559,688)
Payments on termination (4,374,355) (8,462,527)
Contract maintenance charges (17,442) (20,848)
Transfers among the sub-accounts
and with the Fixed Account - net (530,007) (1,003,019)
------------------ ------------------
Change in net assets resulting
from capital transactions (5,822,795) (10,012,193)
------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS (377,174) (1,191,733)
NET ASSETS AT BEGINNING OF PERIOD 37,229,744 38,421,477
------------------ ------------------
NET ASSETS AT END OF PERIOD $ 36,852,570 $ 37,229,744
================== ==================
</TABLE>
See notes to financial statements.
10
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
Northbrook Variable Annuity Account (the "Account"), a unit investment
trust registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, is a Separate Account of Northbrook Life
Insurance Company ("Northbrook Life"). The assets of the Account are
legally segregated from those of Northbrook Life. Northbrook Life is wholly
owned by Allstate Life Insurance Company, a wholly owned subsidiary of
Allstate Insurance Company, which is wholly owned by The Allstate
Corporation.
Northbrook Life has issued the Dean Witter Variable Annuity, the deposits
of which are invested at the direction of the contractholders in the
sub-accounts that comprise the Account. The Account accepts additional
deposits from existing contractholders, but is closed to new customers.
Absent any contract provisions wherein Northbrook Life contractually
guarantees either a minimum return or account value to the beneficiaries
of the contractholders in the form of a death benefit, the contractholders
bear the investment risk that the sub-accounts may not meet their stated
objectives. The sub-accounts invest in the following underlying mutual fund
portfolios of the Morgan Stanley Dean Witter Variable Investment Series
(the "Funds").
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
Money Market Global Dividend Growth
Quality Income Plus European Growth
High Yield Pacific Growth
Utilities Capital Growth
Income Builder Equity
Dividend Growth Strategist
Northbrook Life provides insurance and administrative services to the
contractholders for a fee. Northbrook Life also maintains a fixed account
("Fixed Account"), to which contractholders may direct their deposits and
receive a fixed rate of return. Northbrook Life has sole discretion to
invest the assets of the Fixed Account, subject to applicable law.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS - Investments consist of shares of the Fund and
are stated at fair value based on quoted market prices at December 31,
1999.
INVESTMENT INCOME - Investment income consists of dividends declared by the
Fund and is recognized on the ex-dividend date.
REALIZED GAINS AND LOSSES - Realized gains and losses represent the
difference between the proceeds from sales of portfolio shares by the
Account and the cost of such shares, which is determined on a weighted
average basis.
FEDERAL INCOME TAXES - The Account intends to qualify as a segregated asset
account as defined in the Internal Revenue Code ("Code"). As such, the
operations of the Account are included in the tax return of Northbrook
Life. Northbrook Life is taxed as a life insurance company under the Code.
No federal income taxes are allocable to the Account as the Account did not
generate taxable income.
11
<PAGE>
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. EXPENSES
CONTRACT MAINTENANCE CHARGE - Northbrook Life deducts an annual maintenance
charge of $30 on each contract anniversary and guarantees that this charge
will not increase over the life of the contract.
MORTALITY AND EXPENSE RISK CHARGE - Northbrook Life assumes mortality and
expense risks related to the operations of the Account and deducts charges
daily at a rate equal to 1.00% per annum of the daily net assets of the
Account. The mortality and expense risk charge covers insurance benefits
available with the contract and certain expenses of the contract. It also
covers the risk that the current charges will not be sufficient in the
future to cover the cost of administering the contract. Northbrook Life
guarantees that the amount of this charge will not increase over the life
of the contract.
12
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Dean Witter Variable Annuity
-----------------------------------------------------------------------------
Unit activity during 1999:
----------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
----------------- ---------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Sub-Accounts:
Money Market 945,513 395,135 (552,844) 787,804 $ 21.34
Quality Income Plus 754,206 25,848 (193,592) 586,462 23.11
High Yield 492,928 20,054 (121,954) 391,028 30.14
Utilities 741,971 15,138 (224,489) 532,620 33.58
Income Builder 50,807 486 (28,886) 22,407 13.13
Dividend Growth 2,007,199 35,048 (458,653) 1,583,594 30.25
Global Dividend Growth 424,746 20,278 (129,218) 315,806 19.62
European Growth 369,513 40,021 (125,086) 284,448 44.78
Pacific Growth 277,001 295,000 (285,219) 286,782 8.96
Capital Growth 125,509 31,300 (52,358) 104,451 32.30
Equity 641,223 70,315 (107,223) 604,315 133.78
Strategist 1,141,504 29,574 (197,580) 973,498 37.86
Capital Appreciation 34,963 4,575 (39,538) - -
Units relating to accrued contract maintenance charges are included in units redeemed.
13
</TABLE>
