<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1996
REGISTRATION NO. 33-84480
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
POST-EFFECTIVE AMENDMENT NO. 2[X]
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
NORTHBROOK LIFE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
ILLINOIS 6311
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
36-3001527
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
----------------
3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
----------------
MICHAEL J. VELOTTA, ESQUIRE
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
NORTHBROOK LIFE INSURANCE COMPANY
3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
(847) 402-2400
(NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
CHRISTINE A. EDWARDS, ESQ.
GREGOR B. MCCURDY, ESQ.
DEAN WITTER REYNOLDS, INC.
ROUTIER AND JOHNSON, P.C.
1700 K STREET N.W. TWO WORLD TRADE CENTER
SUITE 1003 NEW YORK, N.Y. 10048
WASHINGTON, D.C. 20006
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: The Annuity
Contract covered by this registration statement is to be issued promptly and
from time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box [X].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM AMOUNT
CLASS OF AMOUNT OFFERING AGGREGATE OF
SECURITIES TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT PRICE FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred Annuity Contracts and
Participating Interests therein * * * *
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</TABLE>
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*A maximum aggregate offering price of $500,000,000 was previously
registered. No additional amount of securities is being registered by this
post-effective amendment to the registration statement.
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<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND
CAPTION HEADING IN PROSPECTUS
- ------------------------ ---------------------
<S> <C>
1. Forepart of the Registra-
tion Statement and Outside
Front Cover Page of Pro-
spectus................... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of Pro-
spectus................... Inside Front Cover
3. Summary Information, Risk
Factors and Ratio of Earn-
ings to Fixed Charges..... Inside Front Cover; The Accumulation Phase
4. Use of Proceeds........... Investments by the Company
5. Determination of Offering
Price..................... Not Applicable
6. Dilution.................. Not Applicable
7. Selling Security Holders.. Not Applicable
8. Plan of Distribution...... The Purchase of the Contract; Distribution of
the Contracts
9. Description of Securities The Purchase of the Contract; The Accumulation
to be Registered.......... Phase; The Parties to the Contract; The Death
Benefit Provisions; The Payout Phase; Amendment
of the Contracts; Federal Tax Matters
10. Interests of Named Experts
and Counsel............... Not Applicable
11. Information with Respect The Company; Selected Financial Data;
to the Registrant......... Competition; Employees; Properties; State
Regulation; Executive Officers and Directors;
Executive Compensation; Legal Proceedings
12. Disclosure of Commission
Position on Indemnifica-
tion for Securities Act
Liabilities............... Not Applicable
</TABLE>
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
(800) 654-2397
GROUP AND INDIVIDUAL DEFERRED ANNUITY CONTRACTS
DISTRIBUTED BY
DEAN WITTER REYNOLDS INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
----------------
This Prospectus describes the group and individual Flexible Premium Deferred
Annuity Contract ("Contract") offered by Northbrook Life Insurance Company
("Company"), a wholly owned subsidiary of Allstate Life Insurance Company. Dean
Witter Reynolds Inc. ("Dean Witter") is the principal underwriter and
distributor of the Contracts. In certain states the Contract is only available
as a group Contract. In these states a Certificate (hereinafter referred to as
"Contract"), which summarizes the provisions of the Master Group Policy issued
to Dean Witter, is issued to customers of Dean Witter.
The Contract has the flexibility to allow you to shape an annuity to fit your
particular needs. It is designed to aid you in your choice of short-term, mid-
term, or long-term financial planning and can be used for retirement planning
regardless of whether the plan qualifies for special federal income tax
treatment. Presently, the Company will accept an initial Purchase Payment of
$1,000, but reserves the right to increase this amount to no more than $4,000
($1,000 for a Qualified Contract). Additional Purchase Payments of $1,000 or
more may be added to the Contract.
Partial Withdrawals and surrenders under the Contract may be subject to a
Market Value Adjustment. Therefore, the Owner bears some investment risk under
the Contract.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC-
TUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
THE CONTRACTS MAY NOT BE AVAILABLE IN ALL STATES. PLEASE CHECK WITH YOUR DEAN
WITTER ACCOUNT EXECUTIVE FOR AVAILABILITY IN YOUR STATE.
At least once each Contract year, the Company will send the Owner an annual
statement that contains certain information pertinent to the individual Owner's
Contract. The annual statement details values and specific Contract data that
applies to each particular Contract. The annual statement does not contain
financial statements of the Company. The Company, however, is subject to the
informational requirements of the Securities Exchange Act of 1934 and in
accordance therewith files reports and other information with the Securities
and Exchange Commission. Reports and other information filed by the Company can
be inspected at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 at prescribed rates.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY............................... 3
THE CONTRACTS.......................... 5
The Purchase of the Contract......... 5
The Accumulation Phase............... 6
The Parties to the Contract.......... 11
The Death Benefit Provisions......... 11
The Payout Phase..................... 12
AMENDMENT OF THE CONTRACTS............. 14
DISTRIBUTION OF THE CONTRACTS.......... 14
FEDERAL TAX MATTERS.................... 15
Introduction......................... 15
Taxation of the Company.............. 15
Taxation of Annuities in General..... 15
Qualified Plans...................... 16
Other Considerations................. 17
THE COMPANY............................ 18
Business............................. 18
Reinsurance Agreement................ 18
Investments by the Company........... 18
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SELECTED FINANCIAL DATA................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Results of Operations................ 21
Financial Position................... 21
Liquidity and Capital Resources...... 22
COMPETITION............................ 22
EMPLOYEES.............................. 22
PROPERTIES............................. 22
STATE AND FEDERAL REGULATION........... 23
EXECUTIVE OFFICERS AND DIRECTORS OF THE
COMPANY............................... 23
EXECUTIVE COMPENSATION................. 25
LEGAL PROCEEDINGS...................... 26
EXPERTS................................ 26
LEGAL MATTERS.......................... 26
FINANCIAL STATEMENTS................... F-1
APPENDIX A............................. A-1
</TABLE>
2
<PAGE>
GLOSSARY
Account Value--The Account Value is the sum of all Sub-Account Values.
Accumulation Phase--The Accumulation Phase is the first of two phases in the
life of the Contract. The Accumulation Phase begins on the Issue Date. The Ac-
cumulation Phase will continue until the Payout Start Date, unless the Contract
is terminated before that date.
Adjusted Account Value--The Account Value adjusted by the Market Value Ad-
justment less any applicable taxes. The Adjusted Account Value is only used in
the Payout Phase.
Age--Age on last birthday.
Annuitant--The person designated in the Contract whose life determines the
duration of Income Payments involving life contingencies. The Annuitant in-
cludes any Joint Annuitant.
Automatic Additions--Additional Purchase Payments of $1000 or more which are
made automatically from the Owner's bank account or Dean Witter Active
Assets(TM) Account. Automatic Additions are available monthly, quarterly, semi-
annually and annually.
Automatic Laddering Program--A program which allows the Owner to choose, in
advance, one renewal Guarantee Period for all renewing Sub-Accounts. The Owner
can participate in the Automatic Laddering Program at any time during the Accu-
mulation Phase, including on the Issue Date. The Automatic Laddering Program
automatically continues and the Owner can discontinue participation upon writ-
ten notice to the Company.
Beneficiary--The person(s) designated in the Contract who, during the Accumu-
lation Phase, after the death of all Owners, may elect to receive the Death
Benefit or continue the Contract. If the sole surviving Owner dies after the
Payout Start Date, the Beneficiary will receive any guaranteed Income Payments
scheduled to continue.
Cash Surrender Value--The Cash Surrender Value is the Account Value adjusted
by any applicable Market Value Adjustment less any applicable Withdrawal
Charges and premium tax.
Company--The issuer of the Contract, Northbrook Life Insurance Company, is a
wholly- owned subsidiary of Allstate Life Insurance Company, a wholly-owned
subsidiary of Allstate Insurance Company ("Allstate"). Allstate is a wholly-
owned subsidiary of The Allstate Corporation.
Contract/Certificate--The Northbrook Life Insurance Company flexible premium
deferred annuity contract, known as "The Custom Annuity Plus," that is de-
scribed in this prospectus.
Date of Death--The Date that an Owner and/or Annuitant dies.
Death Benefit--The Death Benefit is the greater of: (1) the Account Value or
(2) the Cash Surrender Value.
Due Proof of Death--one of the following:
(a) A certified copy of a death certificate.
(b) A certified copy of a decree of a court of competent jurisdiction as
to the finding of death.
(c) Any other proof satisfactory to the Company.
Full Surrender--Termination of the Contract.
Guarantee Period--A period of years for which a specified effective annual
interest rate is guaranteed.
Income Payments--A series of periodic payments under an Income Plan. Income
Payments are made by the Company to the Owner during the Payout Phase of the
Contract.
3
<PAGE>
Income Plan--A plan which provides Income Payments during the Payout Phase of
the Contract.
Issue Date--The date the Contract becomes effective.
Joint Annuitant--The person, along with the Annuitant, whose life determines
the duration of Income Payments under a joint and last survivor annuity.
Market Value Adjustment--The Market Value Adjustment is the adjustment made
to the money distributed prior to the end of the Guarantee Period from one or
more Sub-Accounts under the Contract to reflect the impact of changes in inter-
est rates between the time each Sub-Account was established and the time of
distribution.
Non-Qualified Contracts--Contracts that do not qualify for special federal
tax treatment.
Owner--With respect to individual Contracts, the person designated as the
Owner in the Contract. With respect to group Contracts, the person designated
as the Owner in a group Certificate. The Owner will receive the Death Benefit
upon the death of the Annuitant, who is not also an Owner.
Partial Withdrawal--Disbursement of a portion of the Account Value.
Payout Phase--The Payout Phase is the second of the two phases in the life of
the Contract. It begins on the Payout Start Date.
Payout Start Date--The date Income Payments are to begin under the Contract.
Preferred Withdrawal Amount--A portion of the Account Value which may be an-
nually withdrawn from each Sub-Account without incurring a Withdrawal Charge or
a Market Value Adjustment.
Purchase Payments--The premiums paid by the Owner to the Company.
Qualified Contracts--Contracts issued under plans that qualify for special
federal income tax treatment.
Sub-Accounts--Sub-Accounts are distinguished by Guarantee Period(s) and the
dates the period(s) begins. Sub-Accounts are established when Purchase Payments
are made; and when previous Sub-Accounts expire and a new Guarantee Period is
selected.
Sub-Account Value--The Sub-Account Value is the accumulation of funds allo-
cated to that Sub-Account and interest credited.
Systematic Withdrawals--Periodic Partial Withdrawals of $100 or more may be
deposited in a bank account or a Dean Witter Active Assets(TM) Account. System-
atic Withdrawals are available monthly, quarterly, semi-annually and annually.
Withdrawal Charge--The charge that will be assessed by the Company on Full
Surrenders or Partial Withdrawals in excess of the Preferred Withdrawal Amount.
4
<PAGE>
THE CONTRACTS
THE PURCHASE OF THE CONTRACT
1. WHAT IS THE PURPOSE OF THE CONTRACT?
The Contract described in this Prospectus is designed to aid you in your
choice of short-term, mid-term, or long-term financial planning and can be
used for retirement planning regardless of whether the plan qualifies for spe-
cial federal income tax treatment. The Contract has an Accumulation Phase and
a Payout Phase. The Accumulation Phase is the first of the two phases and be-
gins on the Issue Date and continues until the Payout Start Date. During the
Accumulation Phase, interest is credited to the Purchase Payment(s) and both a
cash withdrawal benefit and a Death Benefit are available. The Payout Phase
begins on the Payout Start Date and provides Income Payments under an Income
Plan. The Payout Phase continues until the Company makes the last payment as
provided by the Income Plan.
2. HOW IS A CONTRACT PURCHASED?
By submitting a Purchase Payment to an Account Executive of Dean Witter, the
principal underwriter of the Contracts. Presently, the Company will accept an
initial Purchase Payment of $1,000, but reserves the right to increase this
amount to no more than $4,000 ($1,000 for a Qualified Contract). The Owner
must select the Guarantee Period(s) in which to allocate the Purchase Payment.
Additional Purchase Payments of $1,000 or more may be added to the Contract.
Guarantee Periods will be offered at the Company's discretion and may range
from one to ten years. No less than $1,000 may be allocated to any one Guaran-
tee Period. The Company will apply Purchase Payments to the Contract within
seven days of the receipt of the Purchase Payment and required issuing infor-
mation. The Company reserves the right to limit or increase the amount of Pur-
chase Payments it will accept.
3. DOES THIS CONTRACT HAVE A FREE-LOOK PROVISION?
Yes. The Owner may cancel the Contract anytime within 20 days after the re-
ceipt of the Contract and receive a full refund of the entire Purchase Pay-
ment.
4. CAN ADDITIONS BE MADE TO THE CONTRACT AFTER THE INITIAL PURCHASE PAYMENT?
Yes, additional Purchase Payments may be made at any time during the Accumu-
lation Phase of the Contract. Subsequent Purchase Payments must be at least
$1,000 and may be made from a bank account or a Dean Witter Active AssetsTM
Account through Automatic Additions (the Automatic Additions Program is not
available for Qualified Contracts issued pursuant to a Dean Witter Custodial
Account). For each Purchase Payment, the Owner must select a Guarantee Peri-
od(s) to which the Purchase Payment will be allocated. The Company reserves
the right to limit the number of additional purchase payments.
5. ONCE A CONTRACT IS PURCHASED, HOW IS THE OWNER INFORMED AS TO THE STATUS OF
THE CONTRACT?
There are several ways an Owner may receive information about the Contract.
At least once a year, prior to the Payout Start Date, the Owner will be sent a
statement containing Account Value information of the Contract. The Owner may
also direct questions about the Contract to his/her Dean Witter Account Execu-
tive. Another option the Owner has is to call the Company's customer support
unit directly at 1-800-654-2397.
5
<PAGE>
THE ACCUMULATION PHASE
6. HOW IS INTEREST CREDITED TO THE CONTRACT?
Interest will be credited to initial Purchase Payments from the Issue Date.
Interest will be credited
to subsequent Purchase Payments from the date of receipt. No deductions are
made from Purchase Payments. Therefore, the full amount of every Purchase Pay-
ment is invested in a Sub-Account for accumulation of interest. Interest is
credited daily to each Guarantee Period in the Contract and is based upon the
interest rate of the Guarantee Period which has been chosen.
6
<PAGE>
The following example illustrates how a Sub-Account Value would grow given an
assumed Purchase Payment, Guarantee Period, and effective annual interest rate.
The effective annual interest rate is defined as the yield resulting when in-
terest credited at the underlying daily rate has compounded for a full year.
EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD
<TABLE>
<S> <C>
Purchase Payment: .................................................. $10,000.00
Guarantee Period: .................................................. 5 years
Effective Annual Rate: .............................................
----------
</TABLE>
END OF CONTRACT YEAR:
<TABLE>
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<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Beginning Sub-Account
Value $10,000.00
X (1 + Effective Annual
Rate)
----------
$
==========
Sub-Account Value at end
of Contract $
year 1 X (1 + Effective
Annual Rate)
----------
$
==========
Sub-Account Value at end
of Contract $
year 2 X (1 + Effective
Annual Rate)
----------
$
==========
Sub-Account Value at end
of Contract $
year 3 X (1 + Effective
Annual Rate)
----------
$
==========
Sub-Account Value at end
of Contract
year 4 X (1 + Effective
Annual Rate)
Sub-Account Value at end of
Guarantee Period: $
----------
$
==========
</TABLE>
Total Interest Credited in Guarantee Period: $ ($ -
$ )
NOTE: The above illustration assumes no withdrawals of any amount during the
entire five year period. A Market Value Adjustment and Withdrawal Charge would
apply to any such interim withdrawal in excess of the Preferred Withdrawal
Amount. The hypothetical interest rates are for illustrative purposes only and
are not intended to predict future interest rates to be declared under the Con-
tract. Actual interest rates declared for any given Guarantee Period may be
more or less than those shown.
7
<PAGE>
The Company has no specific formula for determining the rate of interest
that it will declare initially or in the future. Such interest rates will be
reflective of investment returns available at the time of the determination.
In addition, the management of the Company may also consider various other
factors in determining interest rates, including regulatory and tax require-
ments, sales commissions and administrative expenses borne by the Company,
general economic trends, and competitive factors.
THE MANAGEMENT OF THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO THE
INTEREST RATES TO BE DECLARED. THE COMPANY CAN NEITHER PREDICT NOR GUARANTEE
FUTURE INTEREST RATES TO BE DECLARED.
7. WHAT HAPPENS TO THE SUB-ACCOUNT VALUE AT THE END OF A GUARANTEE PERIOD?
Prior to the end of a Guarantee Period, a notice will be mailed to the Owner
outlining the options available at the end of a Guarantee Period. Within 30
days after the end of a Guarantee Period the Owner may:
^ take no action and the Company will automatically renew the Sub-Account
Value to a Guarantee Period of the same duration to be established on
the day the previous Guarantee Period expired; or
^ notify the Company to apply the Sub-Account Value to a Guarantee Period
of a new duration to be established on the day the previous Guarantee
Period expired; or
^ receive a portion of the Sub-Account Value or the entire Sub-Account
Value through a Partial Withdrawal without incurring a Withdrawal Charge
or Market Value Adjustment. In this case, the amount withdrawn will be
deemed to have been renewed at the shortest Guarantee Period then being
offered with current interest credited from the date the Guarantee Pe-
riod expired.
8. IS IT POSSIBLE TO PRESELECT A RENEWAL GUARANTEE PERIOD AT THE POINT OF PUR-
CHASE?
Yes. The Automatic Laddering Program allows the Owner to choose, in advance,
one renewal Guarantee Period for all renewing Sub-Accounts. The Owner can se-
lect the Automatic Laddering Program at any time during the Accumulation
Phase, including on the Issue Date. The Automatic Laddering Program will con-
tinue until the Owner gives written notice to the Company.
9. CAN A PARTIAL WITHDRAWAL OR A FULL SURRENDER BE TAKEN AT ANY TIME?
Yes. As long as the Contract is still in the Accumulation Phase and has not
entered the Payout Phase, the Owner may withdraw money from the Contract or
surrender the Contract at any time (a Withdrawal Charge and Market Value Ad-
justment and taxes may apply). Partial Withdrawals may be taken automatically
through Systematic Withdrawals (a Dean Witter Account Executive should be con-
sulted for information regarding Systematic Withdrawals). The Owner must spec-
ify the Sub-Account from which the withdrawal will be taken. If any Partial
Withdrawal reduces a Sub-Account Value to less than $1,000, the withdrawal
will be treated as a request to withdraw the entire Sub-Account Value. The
Company may defer payment of any Partial Withdrawal or Full Surrender for a
period not exceeding six months from the date of the receipt of the request.
10. IF A PARTIAL WITHDRAWAL OR FULL SURRENDER IS REQUESTED, HOW IS THE AMOUNT
RECEIVED DETERMINED?
The main component in determining the amount received by the Owner is the
amount which was requested, however, there may be adjustments to the requested
amount. A Withdrawal Charge may
8
<PAGE>
reduce the amount requested. A Market Value Adjustment may apply which will
reduce or increase the amount requested. Premium taxes and federal income tax
withholding may apply and would reduce the amount requested. In summary:
The amount received by the Owner under a Partial Withdrawal or surrender re-
quest equals the amount requested less a Withdrawal Charge (if applicable)
plus or minus a Market Value Adjustment (if applicable) less premium taxes and
withholding (if applicable).
The questions which follow further clarify the components used in determin-
ing the amount received upon a Partial Withdrawal or Full Surrender.
11. UPON A FULL SURRENDER OF THE ENTIRE CONTRACT, IS IT POSSIBLE THAT THE MAR-
KET VALUE ADJUSTMENT AND WITHDRAWAL CHARGE COULD CAUSE THE AMOUNT RECEIVED
TO BE LESS THAN THE INITIAL PURCHASE PAYMENT AND ANY SUBSEQUENT PURCHASE
PAYMENTS?
No. This Contract contains a return of Purchase Payment guarantee which
states the amount received upon a Full Surrender is guaranteed never to be
less than the sum of the initial and any subsequent Purchase Payments less
amounts previously received (prior to withholding and the deduction of any
taxes if applicable). To the extent that premium taxes are assessed against
the Contract or income tax is withheld, the amount received upon a Full Sur-
render may be less than the initial and any subsequent Purchase Payments.
The renewal of any individual Sub-Account(s) within the entire Contract does
not in any way change the return of Purchase Payment guarantee provided by
this Contract. Upon Sub-Account renewal the return of Purchase Payment guaran-
tee will not be adjusted to include any accrued interest, but will continue to
apply to the initial and any subsequent Purchase Payments.
12. UPON A PARTIAL WITHDRAWAL OR FULL SURRENDER, IS THE ENTIRE AMOUNT RE-
QUESTED SUBJECT TO A WITHDRAWAL CHARGE AND A MARKET VALUE ADJUSTMENT?
No. Only amounts in excess of any remaining Preferred Withdrawal Amount
within a Sub-Account will be subject to a Withdrawal Charge and a Market Value
Adjustment. A Preferred Withdrawal Amount is available in every Sub-Account
year of a Guarantee Period and is equal to 10% of the Purchase Payment allo-
cated to the Guarantee Period. Any unused Preferred Withdrawal Amount in a
Sub-Account year may not be used to increase the Preferred Withdrawal Amount
in a subsequent Sub-Account year nor may it be used to increase the Preferred
Withdrawal Amount in another Guarantee Period.
In addition to the Preferred Withdrawal Amount, any amounts withdrawn from
Sub-Accounts which are within the first 30 days of their renewal Guarantee Pe-
riods will be completely free from any Withdrawal Charge and Market Value Ad-
justment.
13. WHAT IS THE WITHDRAWAL CHARGE UPON A PARTIAL WITHDRAWAL OR FULL SURRENDER?
The Withdrawal Charge is 6% of all amounts withdrawn or surrendered which
are not exempt from charge as discussed in question 12, above.
14. WHAT IS THE MARKET VALUE ADJUSTMENT UPON A PARTIAL WITHDRAWAL OR FULL SUR-
RENDER?
The Market Value Adjustment will be applied to all amounts withdrawn or sur-
rendered which are not exempt from adjustment as discussed in question 12.
The Market Value Adjustment is to reflect the relationship between the cur-
rent effective annual interest rate for the duration remaining in the Guaran-
tee Period at the time of the request for Partial With-
9
<PAGE>
drawal or Full Surrender, and the effective annual interest rate guaranteed
for that Sub-Account. Since current interest rates are based, in part, upon
investment yields available at the time, the effect of the Market Value Ad-
justment will be closely related to the levels of such yields. As such, the
Owner bears some investment risk under the Contract.
It is possible, therefore, that, should such yield increase significantly
from the time the Purchase Payment was made, coupled with the application of
the Withdrawal Charge, less premium taxes and withholding (if applicable), the
amount received by the Owner upon full surrender of the Contract would be less
than the Purchase Payment plus interest at the minimum guaranteed interest
rate under the Contract. HOWEVER, THE COMPANY GUARANTEES THAT THE AMOUNT RE-
CEIVED UPON SURRENDER WILL BE AT LEAST EQUAL TO THE PURCHASE PAYMENTS LESS ANY
PRIOR PARTIAL WITHDRAWALS.
Generally, if the effective annual interest rate for the Sub-Account is
lower than the applicable current effective annual interest rate (interest
rate for a duration equal to the time remaining in the Sub-Account), then the
Market Value Adjustment will result in a lower payment upon Partial Withdrawal
or Full Surrender. Similarly, if the effective annual interest rate for the
Sub-Account is higher than the applicable current effective annual interest
rate, then the Market Value Adjustment will result in a higher payment upon
Partial Withdrawal or Full Surrender.
For example, assume the Owner purchases a Contract and selects an initial
Guarantee Period of five years and the Company's effective annual rate for
that duration is 5.65%. Assume that at the end of 3 years, the Owner makes a
Partial Withdrawal. If the current interest rate for a 2 year Guarantee Period
is 5.35%, then the Market Value Adjustment will be positive, which will result
in an increase in the amount payable to the Owner upon the Partial Withdrawal.
Similarly, if the current interest rate for the 2 year Guarantee Period is
5.95%, then the Market Value Adjustment will be negative, which will result in
a decrease in the amount payable to the Owner upon a Partial Withdrawal.
The formula for calculating the Market Value Adjustment is set forth in Ap-
pendix A to this prospectus which also contains additional illustrations of
the application of the Market Value Adjustment.
15. THE IRS REQUIRES ANNUAL WITHDRAWALS TO BE TAKEN FROM QUALIFIED CONTRACTS
UPON ATTAINMENT OF AGE 70 1/2. WILL THESE WITHDRAWALS INCUR WITHDRAWAL
CHARGES AND MARKET VALUE ADJUSTMENTS?
No. Both the Withdrawal Charge and Market Value Adjustment will be waived on
withdrawals taken to satisfy IRS required distribution rules for this Con-
tract.
16. WHAT ARE THE TAX IMPLICATIONS ASSOCIATED WITH THE CONTRACT?
It varies based upon the Owner's circumstances. Generally, the two areas
which may give rise to a taxable situation are personal federal and state in-
come taxation and taxation of the Company.
With respect to personal federal and state income tax, an annuity contract
Owner who is a natural person is not taxed on increases in the Account Value
until a distribution occurs. For federal income tax purposes, distributions
include the receipt of proceeds from loans and an assignment or pledge of any
portion of the value of the Contract, as well as withdrawals, Income Payments,
or Death Benefits. In addition, personal federal and state income tax with-
holding may be deducted from Partial Withdrawal and Full Surrender payments.
Amounts withheld for personal taxes do not necessarily represent the Owner's
entire income tax liability.
With respect to taxation of the Company, premium taxes and other applicable
taxes imposed on the Company may be deducted from the Contract's
10
<PAGE>
Purchase Payment or Account Value upon Full Surrender or annuitization of the
Contract. Current premium tax rates range from 0 to 3.5%, but are subject to
change by state regulation.
There are several exceptions to the above generalizations. More complete in-
formation can be found in the "Federal Tax Matters" section found on page 15
of this prospectus.
THE PARTIES TO THE CONTRACT
17. WHAT RIGHTS DOES AN OWNER HAVE IN THIS CONTRACT?
This Contract offers the Owner several rights. The Owner may:
. receive any withdrawals or periodic Income Payments from the Contract,
unless the Owner has directed the Company to pay them to someone else;
. name and change the Owner, Beneficiary, and Annuitant. The Annuitant can
be changed only if Owner is a natural person;
. assign interest in the Contract;
. elect a Death Benefit option upon death of a co-owner or Annuitant; and
. terminate the Contract.
The above may be subject to the rights of any irrevocable Beneficiary.
18. WHAT PURPOSE DOES THE ANNUITANT SERVE?
The Annuitant's life determines the Income Payments which will begin on the
Payout Start Date. This Contract requires an Annuitant at all times during the
Accumulation Phase and on the Payout Start Date. The Annuitant must be a natu-
ral person. A Death Benefit may be payable upon the death of the Annuitant.
19. WHO IS THE BENEFICIARY TO THE CONTRACT?
The Beneficiary varies based upon who the Owner is, and the designation of
the parties to the Contract by the Owner.
If the Owner is a natural person, the Beneficiary will be determined from
the most recent written request of the Owner. If the Owner does not name a
Beneficiary or if the Beneficiaries named are no longer living, the Benefi-
ciary will be:
. the Owner's spouse if living;
. otherwise, the Owner's children, equally, if living;
. otherwise, the Owner's estate.
If the Owner is a grantor trust, then the Beneficiary will be that same
grantor trust.
If the Owner is a non-natural person other than a grantor trust, the Owner
is also the Beneficiary, unless a different Beneficiary has been named.
20. WHAT PURPOSE DOES THE BENEFICIARY SERVE?
The Beneficiary becomes the new Owner if the sole surviving Owner dies prior
to the Payout Start Date. If the sole surviving Owner dies after the Payout
Start Date, the Beneficiary will receive any guaranteed Income Payments sched-
uled to continue.
THE DEATH BENEFIT PROVISIONS
21. UPON DEATH OF THE OWNER, WHO IS THE NEW OWNER OF THE CONTRACT?
The new Owner is any surviving joint Owner(s) or if none, the Beneficiary.
22. UPON DEATH OF THE OWNER, WHAT OPTIONS DOES THE NEW OWNER HAVE?
In most cases, the new Owner of the Contract has the following three op-
tions:
. receive the Cash Surrender Value within 5 years of the date of death; or
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<PAGE>
. receive the Death Benefit in a lump sum. The Death Benefit is equal to
the greater of the Account Value and the Cash Surrender Value; or
. apply the Death Benefit to 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 Owner, or a period not to exceed the life expectancy
of the new Owner.
If the new Owner is the spouse of the deceased Owner, the new Owner may elect
to continue the Contract. See question 23, below.
If the new Owner is a non-natural person, then the Owner must receive the
Death Benefit in a lump sum.
Deaths should be reported to the Company as quickly as possible. If the Com-
pany is not notified within 180 days of the date of death, the only option
available to the new Owner is to receive the Cash Surrender Value within 5
years of the date of death. Any remaining funds will be distributed at the end
of 5-year period. The Contract should be referred to for the conditions and
stipulations which apply to each of the above options.
23. FOR A CONTRACT WITH SPOUSAL CO-OWNERS, WHAT HAPPENS TO THE CONTRACT UPON
THE DEATH OF ONE OF THE SPOUSES?
In addition to the options available in question 22, a surviving spousal
Owner has the following additional options:
. continue the Contract as if the death had not occurred; and
. if the Contract is continued, one withdrawal within the year of death is
allowed which will not be assessed a Withdrawal Charge (a Market Value
Adjustment will apply). The amount which may be withdrawn is limited
only by the amount of the available Death Benefit.
24. IF THE OWNER IS NOT THE ANNUITANT AND THE ANNUITANT DIES, WHAT HAPPENS TO
THE CONTRACT?
In most cases, the Owner has the following three options:
. continue the Contract as if the death had not occurred. The new Annui-
tant will be the youngest Owner unless the Owner names a different Annu-
itant; or
. receive the Death Benefit in a lump sum. The Death Benefit is equal to
the greater of the Account Value and the Cash Surrender Value; or
. apply the Death Benefit to an Income Plan.
Deaths should be reported to the Company as quickly as possible. If the Com-
pany is not notified within 180 days of the date of death, the only option
available to the Owner is to continue the Contract as if the death had not oc-
curred. The Contract should be referred to for the conditions and stipulations
which apply to each of the above options.
THE PAYOUT PHASE
25. WHAT IS THE PAYOUT START DATE?
This is the date on which the Accumulation Phase ceases and the Payout Phase
begins. During the Payout Phase, the Owner receives Income Payments, based upon
an Income Plan selected by the Owner, from the Contract. The Payout Phase will
continue until the Company makes the last payment as provided by the Income
Plan chosen. The Owner may choose any Payout Start Date as long as it is on or
before the later of:
. the Annuitant's 90th birthday; or
. the 10th anniversary of the Contract's Issue Date.
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<PAGE>
Unless the Owner notifies the Company in writing, the Payout Start Date will
depend on whether the Owner has a Non-Qualified or Qualified Contract. For Non-
Qualified Contracts, the Payout Start Date will be the latest permissible date
as outlined above. For Qualified Contracts, the Owner may be limited by the
plan under which the Contract is issued. In general, the Payout Start Date for
a Qualified Contract is:
^ April 1st of the calendar year following the year in which the Annuitant
reaches age 70 1/2 if the Annuitant's age on the Issue Date is less than
70 1/2;
^ April 1st of the year following issue if the Annuitant's age at any time
during the calendar year in which the Contract is issued is equal to 70
1/2; or
^ December 31st of the year following issue if the Annuitant's age at all
times during the calendar year in which the Contract is issued is
greater than 70 1/2.
26. WHAT TYPES OF INCOME PLANS ARE AVAILABLE IN THE CONTRACT?
Income Payments are made under an Income Plan which may be chosen by the Own-
er. The types of Income Plans which are available are as follows:
^ Life income with or without guaranteed payments. If the Annuitant dies
before all the guaranteed payments have been made, the remainder of the
guaranteed payments will be made to the Owner; or
^ Joint and survivor life income with or without guaranteed payments. If
both the Annuitant and Joint Annuitant die before the guaranteed pay-
ments have been made, the remainder of the guaranteed payments will be
made to the Owner; or
^ Guaranteed payments for a specified period. Payments under this option
do not depend on the continuation of the Annuitant's life.
Any period for which payments are guaranteed may range from 60 to 360 months.
If any Owner dies, guaranteed Income Payments will continue as scheduled. Up to
30 days before the Payout Start Date, the Owner may change the Income Plan or
request any other form of Income Plan agreeable to both the Company and the
Owner. If the Company does not receive a written choice from the Owner, the In-
come Plan will be life income with 120 monthly payments guaranteed. If an In-
come Plan is chosen which depends on the Annuitant's or Joint Annuitant's life,
proof of age will be required before Income Payments begin. The Company re-
serves the right to accept other Income Plans.
27. HOW ARE THE INCOME PAYMENTS FROM AN INCOME PLAN DETERMINED?
To determine the Income Payments, the Adjusted Account Value will be applied
to the greater of:
^ payment plan rates declared by the Company; or
^ guaranteed payment plan rates as described in the Contract.
If the Adjusted Account Value is less than $2000, or if the monthly Income
Payments determined under the Income Plan are less than $20, the Company may
pay the Adjusted Account Value in a lump sum or change the payment frequency to
an interval which results in Income Payments of at least $20.
The Contracts are based on life annuity tables that provide for different
benefit payments to men and women of the same age (except in states which re-
quire unisex annuity tables). Nevertheless, in accordance with the U.S. Supreme
Court's decision in Arizona Governing Committee v. Norris, in certain employ-
ment-related situations, annuity tables that do not vary on the basis of sex
may be used. Ac-
13
<PAGE>
AMENDMENT OF THE CONTRACTS
DISTRIBUTION OF THE CONTRACTS
cordingly, if the Contract is to be used in connection with an employment-re-
lated retirement or benefit plan, consideration should be given in consulta-
tion with legal counsel, to the impact of Norris on any such plan before mak-
ing any contributions under these Contracts.
The dollar amount of Income Payments is generally affected by the duration
of the Income Plan selected. For example, if an Income Plan guaranteed for
life is chosen, the Income Payments may be greater or less than Income Pay-
ments under an Income Plan for a specified period depending on the life expec-
tancy of the Annuitant. Also, the Company may require proof that the Annuitant
or Joint Annuitant is still alive before the Company makes each payment that
depends on their continued life.
28. CAN PARTIAL WITHDRAWALS BE TAKEN FROM THE CONTRACT OR CAN THE CONTRACT BE
SURRENDERED ONCE IT HAS ENTERED THE PAYOUT PHASE?
No. After the Adjusted Account Value has been applied to an Income Plan on
the Payout Start Date, the Income Plan can not be changed, the exchange of the
Adjusted Account Value for an Income Plan can not be reversed, and no with-
drawals can be made.
The Company reserves the right to amend the Contracts to meet the require-
ments of applicable federal or state laws or regulations. The Company will no-
tify the Owner of any such amendments.
The Contracts will be distributed exclusively by Dean Witter which serves as
the principal underwriter of the Contracts under a General Agents' Agreement
with the Company.
Dean Witter is a wholly-owned subsidiary of Dean Witter, Discover & Co.
("Dean Witter Discover"). Dean Witter is located at Two World Trade Center,
New York, New York. Dean Witter is a member of the New York Stock Exchange and
the National Association of Securities Dealers.
The Company may pay up to a maximum sales commission of 8% both upon sale of
the Contract and upon renewal of a Guarantee Period. In addition, sale of the
Contract may count toward incentive program awards for the Account Executive.
The General Agents' Agreement between the Company and Dean Witter provides
that the Company will indemnify Dean Witter for certain damages that may be
caused by actions, statements or omissions by the Company.
14
<PAGE>
FEDERAL TAX MATTERS
INTRODUCTION
The Contract was designed for use by individuals in retirement plans which
may or may not be plans qualified for special tax treatment under Section 401,
403, 408, or 457 of the Internal Revenue Code ("Code"). The ultimate effect of
federal income taxes on the Account Value, on Income Payments and on the eco-
nomic benefit to the Owner, the Annuitant or the Beneficiary depends on the
type of retirement plan for which the Contract is purchased, on the tax and em-
ployment status of the individual concerned and on the Company's tax status.
THE TAX DISCUSSION BELOW IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. Any per-
son concerned about these tax implications should consult a competent tax ad-
viser. This discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted by the Internal Reve-
nue Service. No representation is made as to the likelihood of continuation of
these present federal income tax laws or of the current interpretations by the
Internal Revenue Service. Moreover, no attempt has been made to consider any
applicable state or other tax laws.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter L
of the Code. The following discussion assumes that the Company will continue to
be taxed as a life insurance company under Part I of Subchapter L.
TAXATION OF ANNUITIES IN GENERAL
The following discussion assumes that the Contract will qualify as an annuity
contract for federal income tax purposes. Such qualifications are discussed be-
low.
Generally, an annuity contract owner who is a natural person is not taxed on
increases in the Account Value until a distribution occurs. For federal income
tax purposes, distributions include the receipt of proceeds from loans and an
assignment or pledge of any portion of the value of the Contract, as well as
withdrawals, Income Payments, or Death Benefits. The exception to this rule is
that Owners who are not natural persons generally must include in income any
increase during the taxable year in the Account Value (once the Account Value
exceeds the investment in the Contract). However, there are exceptions to this
non-natural owner rule and you should discuss these with your tax adviser. The
following discussion only applies to Contracts owned by natural persons.
Generally, in the case of a surrender, withdrawal, loan, assignment or pledge
under a Non-Qualified Contract before the Payout Start Date, amounts received
are first treated as taxable income to the extent that the Account Value of the
Contract immediately before the surrender exceeds the "investment in the con-
tract" (as defined in the Code) at that time. Any additional amount is not tax-
able. The Account Value is the sum of all Sub-Account Values. No matter which
sub-account a withdrawl is made from, all Sub-Account Values are combined and
the Account Value is used to determine the amount of taxable income.
The recipient of periodic Income Payments under the Contract is, in general,
taxed on a portion of each payment. Generally, for Income Payments (prior to
recovery of the investment in the Contract), there is no tax on the amount of
each payment which represents the same ratio that the "investment in the con-
tract" bears to the total expected value of the Income Payments for the term of
the payments; however, the remainder of each Income Payment is taxable. After
the Owner's investment in the contract has been recovered, the full amount of
any additional payments will be taxed.
The taxable portion of a distribution (in the form of an Income Payment or a
lump sum payment) is taxed as ordinary income.
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<PAGE>
Premature distributions from Non-Qualified Contracts may be subject to a pen-
alty equal to ten percent (10%) of the amount treated as taxable income. The
penalty applies to the taxable portion of any distribution except those (1)
made on or after the Owner attains age 59 1/2; (2) made as a result of the Own-
er's death or disability; (3) received in substantially equal installments as a
life annuity or over a period not exceeding the life expectancy of the Owner;
or (4) allocable to investments in the Contract prior to August 14, 1982. NOTE:
the penalty may apply to a distribution received which results from the death
of an Annuitant who is not also an Owner. Other tax penalties may apply to cer-
tain distributions under Qualified Contracts.
All Non-Qualified deferred annuity contracts that are issued by the Company
(or its affiliates) to the same Owner during any calendar year will be aggre-
gated and treated as one annuity contract for purposes of determining the
amount includable in gross income under section 72(e) of the Code. Accordingly,
an Owner should consult a competent tax adviser when purchasing more than one
Non-Qualified Deferred Annuity Contract in one calendar year.
Transfer of ownership of a Contract, the designation of an Annuitant or a
Beneficiary who is not also the Owner, or the exchange of a Contract may result
in certain tax consequences to the Owner that are not discussed herein. An
Owner contemplating any such transfer, assignment, or exchange of a Contract
should contact a competent tax adviser with respect to the potential tax ef-
fects of such a transaction.
In order to be treated as an annuity contract for federal income tax purpos-
es, Section 72(s) of the Code requires any Non-Qualified Contract issued after
January 18, 1985 to provide that (a) if any Owner dies on or after the Payout
Start Date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at
least as rapidly under the method of distribution being used as of the date of
that Owner's death; and (b) if any Owner dies prior to the Payout Start Date,
the entire interest in the Contract will be distributed within five years after
the date of the Owner's death. These requirements shall be considered satisfied
with respect to any portion of the Owner's interest which is payable to, or for
the benefit of, a "designated beneficiary," if such portion is distributed over
the life of such "designated beneficiary" or over a period not extending beyond
the life expectancy of that Beneficiary and such distributions begin within one
year of that Owner's death. The Owner's "designated beneficiary" is the surviv-
ing Owner(s) or the person(s) designated by such Owner as a Beneficiary. The
"designated beneficiary" is the person to whom ownership of the Contract passes
by reason of 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.
Non-Qualified Contracts contain provisions which are intended to comply with
the requirements of section 72(s) of the Code, although regulations interpret-
ing these requirements have not yet been issued. The Company intends to review
such provisions and modify them if necessary to assure that they comply with
the requirements of Code Section 72(s) when clarified by regulation or other-
wise.
Other rules may apply to Qualified Contracts.
QUALIFIED PLANS
The Contract is designed for use with several types of qualified plans. 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 in itself. Adverse
tax consequences may result from contributions in excess of specified limits,
distributions prior to age 59 1/2, distributions that do not conform to speci-
fied commencement and minimum distribution rules, aggregate distributions in
excess of a specified annual amount and in other
16
<PAGE>
circumstances. Therefore, the Company makes no attempt to provide more than
general information about the use of the Contracts with the various types of
qualified plans. Owners and participants under qualified plans as well as
Annuitants and Beneficiaries are cautioned that the rights of any person to any
benefits under qualified plans may be subject to the terms and conditions of
the plans themselves regardless of the terms and conditions of the Contract is-
sued in connection therewith. Purchasers of the Contracts for use with any
qualified plan should seek competent advice regarding the suitability of the
Contract.
(a) Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain not-for-profit organizations to purchase an-
nuity contracts for their employees are excludable from the gross income of the
employee, subject to certain limitations. In accordance with the requirements
of Section 403(b), any contract used for a Section 403(b) Plan will prohibit
distributions of (i) elective contributions made in years beginning after De-
cember 31, 1988, (ii) earnings on those contributions, and (iii) earnings on
amounts attributable to elective contributions held as of the end of the last
year beginning before January 1, 1989. However, distributions of such amounts
will be allowed upon death of an employee, attainment of age 59 1/2, separation
from service, disability, or financial hardship, except that income attribut-
able to elective contributions may not be distributed in the case of hardship.
(b) H.R. 10 Plans. The Self-Employed Individuals Tax Retirement Act of 1962,
as amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals to establish qualified plans for themselves and their employees.
These plans are limited by law to maximum permissible contributions, distribu-
tion dates, and nonforfeitability of interests. In order to establish such a
plan, a plan document, usually in a form approved in advance by the Internal
Revenue Service, is adopted and implemented by the employer.
(c) Individual Retirement Annuities. Sections 219 and 408 of the Code permit
individuals or their employers to contribute to an individual retirement pro-
gram known as an "Individual Retirement Annuity." Individual Retirement Annui-
ties are subject to limitations on the amount which may be contributed and on
the time when distribution may commence. In addition, distributions from cer-
tain other types of qualified plans may be placed into an Individual Retirement
Annuity on a tax-deferred basis.
(d) Corporate Pension and Profit-Sharing Plans. Sections 401(a) and 403(a) of
the Code permit corporate employers to establish various types of retirement
plans for employees. Such retirement plans may permit the purchase of the Con-
tracts to provide benefits under the plans.
(e) State and Local Governments Deferred Compensation Plans. Section 457 of
the Code, while not actually providing for a qualified plan as that term is
normally used, provides for certain Deferred Compensation Plans with respect to
service to state governments, local governments, political subdivisions, agen-
cies, instrumentalities and certain affiliates of such entities and certain tax
exempt organizations which enjoy special treatment. Under such plans a partici-
pant may specify the form of investment in which his or her participation will
be made. All such investments, however, are owned by and subject to the claims
of general creditors of the sponsoring employer.
OTHER CONSIDERATIONS
The Company is required to withhold federal income tax at a rate of 20% on
all distributions which constitute "eligible rollover distributions," unless
the recipient elects to rollover such amounts to another qualified plan or IRA
in a direct rollover. Eligible rollover distributions generally include all
distributions from qualified plans, excluding IRA's and 457 plans, with the ex-
ception of (1) minimum distributions pursuant to Section 401(a)(9), and (2) a
series of substantially equal periodic payments
17
<PAGE>
THE COMPANY
made over a period of at least 10 years, or the life (joint lives) of the par-
ticipant (and beneficiaries). In addition, some states require that state in-
come tax be withheld.
For any distributions which do not constitute "eligible rollover distribu-
tions," the Company is required to withhold federal and, where required, state
income taxes on all distributions, unless the recipient elects not to have
taxes withheld and properly notifies the Company of that election.
The foregoing comments about the federal tax consequences under these Con-
tracts are not exhaustive, and special rules are provided with respect to other
tax situations not discussed in this prospectus. Before making an investment, a
qualified tax adviser should be consulted. Further, the federal income tax con-
sequences discussed herein reflect current law.
Federal estate, state and local estate, inheritance, and other tax conse-
quences of ownership or receipt of distributions under a Contract depend on the
individual circumstances of each Owner or recipient of the distribution. A com-
petent tax adviser should be consulted for further information.
BUSINESS
Incorporated in 1978 as a stock life insurance company under the laws of the
State of Illinois, the Company has done business continuously since that time
as "Northbrook Life Insurance Company." The Company's products, group and indi-
vidual annuities and life insurance, have been approved by the various states
where offered.
The Company is a wholly-owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), a stock life insurance company incorporated under the laws
of Illinois. Allstate Life is a wholly-owned subsidiary of Allstate Insurance
Company, a stock property-liability insurance company incorporated under the
laws of Illinois. With the exception of directors' qualifying shares, all of
the outstanding capital stock of Allstate is owned by The Allstate Corporation
("Corporation"). In June 1995, Sears, Roebuck and Co. distributed in a tax-free
dividend to its stockholders its remaining 80.3% ownership interest of the Cor-
poration.
REINSURANCE AGREEMENT
The Company and Allstate Life entered into a reinsurance agreement, effective
December 31, 1987, under which the Company automatically reinsures substan-
tially all of its fixed annuity business, with the exception of certain Quali-
fied Contracts (as discussed in the following paragraph), with Allstate Life.
Under the reinsurance agreement, Purchase Payments under general account con-
tracts are automatically transferred to Allstate Life and become invested with
the assets of Allstate Life, and Allstate Life accepts 100% of the liability
under such contracts. (See, "Management's Discussion and Analysis of Financial
Condition and Results of Operations", pg. 21). However, the obligations of
Allstate Life under the reinsurance agreement are to the Company; the Company
remains the sole obligor under the Contracts to the Owners. Because the rein-
surance obligations of Allstate Life to the Company would be subordinated by
operation of current state insurance rehabilitation and liquidation laws to the
obligations of Allstate Life to its direct policyholders, Allstate Life has es-
tablished a trust arrangement involving the pledge of assets for the benefit of
the Company, in an amount at least equal to the net statutory reserves under
the Contracts, under the terms of which legal title to such assets would trans-
fer to the Company in the event that Allstate Life should become impaired or
insolvent. Such arrangement should have the effect of avoiding the risk of sub-
ordination by operation of state insurance rehabilitation and liquidation laws.
Purchase Payments of Qualified Contracts issued in conjunction with a Section
401(a), 401(k) or 403(b)
18
<PAGE>
plan, will be invested in the general account of the Company. The Company and
Allstate Life have entered into a modified coinsurance agreement under which
Allstate Life will continue to reinsure all of the Company's general account
obligations under such Qualified Contracts; the reserves for such Qualified
Contracts will be held in the Company's general account and, therefore, will
not be subject to the trust arrangement described above.
INVESTMENTS BY THE COMPANY
The Company's general account assets, like the general account assets of
other insurance companies including Allstate Life, must be invested in accor-
dance with applicable state laws. These laws govern the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred stocks, real estate mortgages, real estate and certain other
investments. All of the Company's general account assets are available to meet
the Company's obligations.
The Company will primarily invest its general account assets in investment-
grade fixed income securities including the following:
Securities issued by the United States Government or its agencies or in-
strumentalities, which may or may not be guaranteed by the United States
Government;
Debt instruments, including, but not limited to, issues of or guaranteed by
banks or bank holding companies, and of corporations, which are deemed by
the Company's management to have qualities appropriate for inclusion in
this portfolio;
Commercial mortgages, mortgage-backed securities collateralized by real es-
tate mortgage loans, or securities collateralized by other assets, that are
insured or guaranteed by the Federal Home Loan Mortgage Association, the
Federal National Mortgage Association or the Government National Mortgage
Association, or that have an investment grade at time of purchase within
the four highest grades assigned by Moody's Investors Services, Inc. (Aaa,
Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any
other nationally recognized rating service;
Commercial paper, cash, or cash equivalents, and other short-term invest-
ments having a maturity of less than one year that are considered by the
Company's management to have investment quality comparable to securities
having the ratings stated above.
In addition, interest rate swaps, futures, options, rate caps, and other
hedging instruments may be used solely for non-speculative hedging purposes.
Anticipated use of these financial instruments shall be limited to protecting
the value of portfolio sales or purchases, or to enhance yield through the cre-
ation of a synthetic security.
In addition, the Company maintains certain unitized Separate Accounts which
invest in shares of an open-end investment company registered under the Invest-
ment Company Act of 1940. These Separate Account assets, which relate to the
Company's variable annuity contracts, do not support the Company's obligations
under the Contracts.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus beginning on page F-1.
NORTHBROOK LIFE INSURANCE COMPANY
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR-END FINANCIAL DATA 1995 1994 1993 1992 1991
- ----------------------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For The Years Ended
December 31:
Income Before Taxes..... $ 4,849 $ 2,688 $ 3,257 $ 3,153 $ 3,743
Net Income.............. 3,163 1,733 2,507 2,965 2,729
As of December 31:
Total Assets/1/........ 6,071,603 5,764,233 5,886,038 5,623,675 5,050,071
</TABLE>
- -------
/1/The Company adopted SFAS No. 115, "Accounting for Certain Instruments in
Debt and Equity Securities" on December 31, 1993. See Note 3 to the Financial
Statements.
20
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following highlights significant factors influencing results of opera-
tions and financial position.
Northbrook Life Insurance Company ("the Company"), which is wholly owned by
Allstate Life Insurance Company ("Allstate Life"), issues single and flexible
premium fixed annuity contracts and universal life insurance policies. In addi-
tion, the Company issues flexible premium deferred variable annuity contracts,
the assets and liabilities of which are legally segregated and reflected in the
accompanying statements of financial position as the assets and liabilities of
the Separate Accounts. Dean Witter Reynolds is the sole distributor of the
Company's products and also manages the funds in which the assets of the Sepa-
rate Accounts are invested.
The Company reinsures substantially all of its annuity deposits and life in-
surance in force with Allstate Life. Accordingly, the financial results re-
flected in the Company's statements of operations relate only to the investment
of those assets of the Company that are not transferred to Allstate Life under
the reinsurance treaties.
Variable annuity assets and liabilities are carried at fair value in the
statements of financial position. Investment income and realized gains and
losses of the Separate Account investments accrue directly to the
contractholders (net of fees) and, therefore, are not included in the Company's
statements of operations.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Net investment income................................. $ 4,782 $ 2,881 $ 2,934
======= ======= =======
Realized capital gain (losses), after tax............. $ 44 $ (125) $ 210
======= ======= =======
Net income............................................ $ 3,163 $ 1,733 $ 2,507
======= ======= =======
Fixed income securities, at amortized cost............ $59,142 $61,581 $34,529
======= ======= =======
</TABLE>
In 1995, net investment income increased $1.9 million. This increase related
to an increased level of investments which resulted from a $25 million capital
contribution from Allstate Life during December 1994. Net investment income de-
creased in 1994 over 1993, primarily due to slightly lower portfolio yields,
partially offset by the increase in investments during the year.
Realized capital gains after tax were $44 thousand in 1995 compared to capi-
tal losses of $125 thousand in 1994. Overall, the market values of fixed income
securities were higher in 1995 than in 1994, which resulted in gains in 1995
and losses in 1994 when certain fixed income securities were sold in response
to changes in market conditions.
Net income increased $1.4 million in 1995 reflecting the increase in net in-
vestment income and realized capital gains. The $0.8 million decrease in 1994
from 1993 is primarily attributable to increased realized capital losses and a
higher effective income tax rate in 1994.
FINANCIAL POSITION
<TABLE>
<CAPTION>
1995 1994
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
Fixed income securities, at fair value.................. $ 63,229 $ 59,191
========== ==========
Unrealized net capital gains (losses)(/1/).............. $ 4,087 $ (2,390)
========== ==========
Separate Account assets, at fair value.................. $3,354,910 $2,604,623
========== ==========
Contractholder funds.................................... $2,497,278 $2,950,532
========== ==========
Reinsurance recoverable from Allstate Life.............. $2,636,981 $3,085,781
========== ==========
</TABLE>
- --------
(1) Unrealized net capital gains (losses) exclude the effect of deferred income
taxes.
21
<PAGE>
Fixed income securities are classified as available for sale and carried in
the statements of financial position at fair value. Although the Company gener-
ally intends to hold its fixed income securities for the long-term, such clas-
sification affords the Company flexibility in managing the portfolio in re-
sponse to changes in market conditions.
At December 31, 1995 unrealized capital gains were $4.1 million compared to
an unrealized capital loss of $2.4 million at December 31, 1994. The signifi-
cant change in the unrealized capital gain/loss position is primarily attribut-
able to declining interest rates.
Contractholder funds decreased by $453 million and reinsurance recoverable
from Allstate Life under reinsurance treaties decreased by $449 million, re-
flecting policyholder transfers from fixed annuities to variable annuities and
fixed annuity surrenders. Reinsurance recoverable from Allstate Life relates to
policy benefit obligations ceded to Allstate Life.
Separate Accounts increased by $750 million attributable to sales of variable
annuities, the favorable investment performance of the Separate Account funds,
and the policyholder transfers previously described.
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, Allstate Life made a $25 million capital contribution to
the Company.
Under the terms of intercompany reinsurance agreements, assets of the Company
that relate to insurance in force, excluding Separate Account assets, are
transferred to Allstate Life who maintains the investment portfolios which sup-
port the Company's products.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other enti-
ties competing in the sale of insurance and annuities. There are approximately
2,000 stock, mutual and other types of insurers in business in the United
States. Several independent rating agencies regularly evaluate life insurer's
claims-paying ability, quality of investments and overall stability. A.M. Best
Company assigns A+ (Superior) to Allstate Life which automatically reinsures
all net business of the Company. A.M. Best Company also assigns the Company the
rating of A+(r) because the
Company automatically reinsures all business
with Allstate Life. Standard & Poor's Insurance
Rating Services assigns AA+ (Excellent) to the Company's claims-paying ability
and Moody's assigns Aa3 (excellent) financial stability rating to the Company.
The Company shares the same ratings of its parent, Allstate Life.
EMPLOYEES
As of December 31, 1995, Northbrook Life has approximately 178 employees at
Allstate Life's Home Office in Northbrook, Illinois.
PROPERTIES
The Company occupies office space provided by its parent, Allstate Life, in
Northbrook, Illinois. Expenses associated with these offices are allocated on a
direct and indirect basis to the Company.
22
<PAGE>
STATE AND FEDERAL REGULATION
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The insurance business of the Company is subject to comprehensive and de-
tailed regulation and supervision throughout the United States.
The laws of the various jurisdictions establish supervisory agencies with
broad administrative powers with respect to licensing to transact business,
overseeing trade practices, licensing agents, approving policy forms, estab-
lishing reserve requirements, fixing maximum interest rates on life insurance
policy loans and minimum rates for accumulation of surrender values, prescrib-
ing the form and content of required financial statements and regulating the
type and amounts of investments permitted. Each insurance company is required
to file detailed annual reports with supervisory agencies in each of the juris-
dictions in which it does business and its operations and accounts are subject
to examination by such agencies at regular intervals.
Under insurance guaranty fund law, in most states, insurers doing business
therein can be assessed up to prescribed limits for contract owner losses in-
curred as a result of company insolvencies. The amount of any future assess-
ments on the Company under these laws cannot be reasonably estimated. Most of
these laws do provide, however, that an assessment may be excused or deferred
if it would threaten an insurer's own financial strength.
In addition, several states, including Illinois, regulate affiliated groups
of insurers, such as the Company and its affiliates, under insurance holding
company legislation. Under such laws, intercompany transfers of assets and div-
idend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may signifi-
cantly affect the insurance business include employee benefit regulation, con-
trols on medical care costs, removal of barriers preventing banks from engaging
in the insurance business, tax law changes affecting the taxation of insurance
companies, the tax treatment of insurance products and its impact on the rela-
tive desirability of various personal investment vehicles, and proposed legis-
lation to prohibit the use of gender in determining insurance and pension rates
and benefits.
The directors and executive officers are listed below, together with informa-
tion as to their ages, dates of election and principal business occupations
during the last five years (if other than their present business occupations).
Except as otherwise indicated, the directors and executive officers of the Com-
pany have been associated with the Company for more than five years in the po-
sition shown or in other positions.
LOUIS G. LOWER, II, 50, Chairman of the Board of Directors and Chief Executive
Officer (1995)*
He is also the President of Allstate Life Insurance Company; President and
Chairman of the Board of Allstate Life Insurance Company of New York; Chairman
of the Board of Allstate Settlement Corporation; Chairman of the Board and
Chief Executive Officer of Glenbrook Life Insurance Company, Glenbrook Life and
Annuity Company, Lincoln Benefit Life Company and Surety Life Insurance
23
<PAGE>
Company; and a Director of Allstate Insurance Company and Allstate Life Finan-
cial Services, Inc.
MICHAEL J. VELOTTA, 50, Vice President, Secretary, General Counsel, and
Director (1993)*
He is also Vice President, Secretary, General Counsel and Director of
Allstate Life Insurance Company, Allstate Life Insurance Company of New York,
Glenbrook Life Insurance Company, Glenbrook Life and Annuity Company and
Surety Life Insurance Company; and a Director of Lincoln Benefit Life Company
and Allstate Life Financial Services, Inc. From 1989 through 1992, he was Vice
President, Assistant General Counsel of Allstate Insurance Company.
MARLA G. FRIEDMAN, 42, President, Chief Operating Officer and Director (1995)*
She is also Vice President and Director of Allstate Life Insurance Company;
President, Chief Operating Officer and Director Glenbrook Life Insurance Com-
pany, and Glenbrook Life and Annuity Company; and a Director of Allstate Life
Financial Services, Inc.
PETER H. HECKMAN, 50, Vice President and Director (1989)*
He is also Vice President and Director of Allstate Life Insurance Company;
Vice President of Allstate Life Insurance Company of New York, Glenbrook Life
and Annuity Company, Glenbrook Life Insurance Company; and Director of Surety
Life Insurance Company and Lincoln Benefit Life Company.
JOHN R. HUNTER, 40, First Vice President, Assistant Vice President and
Director (1995)*
He is also Assistant Vice President of Allstate Life Insurance Company.
Prior to 1995, he was Assistant Vice President and Director of Northbrook Life
Insurance Company and Assistant Vice President of Allstate Life Insurance Com-
pany.
LAWRENCE P. MOEWS, 44, Director (1995)*
He is also Director of Glenbrook Life Insurance Company. Prior to 1995 he
was Director and Vice President of Allstate Life Insurance Company.
BARRY S. PAUL, 40, Assistant Vice President and Controller (1991)*
He is also Assistant Vice President of Allstate Life Insurance Company;
Assistant Vice President and Corporate Controller of Allstate Life Insurance
Company of New York; and Assistant Vice President and Controller of Glenbrook
Life Insurance Company and Glenbrook Life and Annuity Company.
CASEY J. SYLLA, 52, Chief Investment Officer and Director (1995)*
He is also Director of Allstate Insurance Company, Allstate Indemnity Compa-
ny, Allstate Property and Casualty Insurance Company, Deerbrook Insurance Com-
pany, First Assurance Company, Northbrook Indemnity Company, Northbrook Na-
tional Insurance Company, Northbrook Property and Casualty Insurance Company
and Allstate Life Insurance Company. He is also Chief Investment Officer of
Glenbrook Life and Annuity Company, Allstate Settlement Corporation, The
Northbrook Corporation, Allstate Insurance Company, Allstate Indemnity Compa-
ny, Allstate Property and Casualty, Deerbrook Insurance Company, First Assur-
ance Company, Northbrook Indemnity Company, Northbrook National Insurance Com-
pany, Northbrook Property and Casualty Insurance Company and Allstate Life In-
surance Company. Prior to 1995, he was Senior Vice President and Executive Of-
ficer Investments for Northwestern Mutual Life Insurance Company.
JAMES P. ZILS, 44, Treasurer (1995)*
He is also Treasurer of Allstate Life Financial Services, Inc., Allstate
Settlement Corporation, Allstate Life Insurance Company, Allstate Life Insur-
ance Company of New York, Glenbrook Life and Annuity Company, Glenbrook Life
Insurance Company, The Northbrook Corporation. He is Treasurer and Vice Presi-
dent of AEI Group, Inc., Allstate International Inc., Allstate Motor Club,
Inc., Direct Marketing Center, Inc., Enterprises Services Corporation, The
Allstate Foundation, Forestview Mort
24
<PAGE>
EXECUTIVE COMPENSATION
gage Insurance Company, Allstate Indemnity Company, Allstate Property and Ca-
sualty, Deerbrook Insurance Company, First Assurance Company, Northbrook In-
demnity Company, Northbrook National Insurance Company, Northbrook Property
and Casualty Insurance Company. Prior to 1995 he was Vice President of
Allstate Life Insurance Company. Prior to 1993 he held various management po-
sitions.
* Date elected to current office.
Executive officers of the Company also serve as officers of Allstate Life
and receive no compensation directly from the Company. Some of the officers
also serve as officers of other companies affiliated with the Company. Alloca-
tions have been made as to each individual's time devoted to his or her duties
as an executive officer of the Company. The allocated cash compensation of all
officers of the Company as a group for services rendered in all capacities to
the Company during 1995 totalled $392,156.41. Directors of the Company receive
no compensation in addition to their compensation as employees of the Company.
Shares of the Company and Allstate Life are not directly owned by any direc-
tor or officer of the Company. The percentage of shares of The Allstate Corpo-
ration beneficially owned by any director, and by all directors and officers
of the Company as a group, does not exceed one percent of the class outstand-
ing.
SUMMARY COMPENSATION TABLE
(ALLSTATE LIFE INSURANCE COMPANY)
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ --------------------- --------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) AWARD(S) SARS(#) ($) ($)
------------------ ---- -------- -------- ------------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louis G. Lower, II...... 1995 $416,000 $266,175 $17,044 $199,890 N/A $411,122 $5,250(1)
Chief Executive Officer 1994 $389,050 $ 43,973 $26,990 $170,660 N/A 0 $1,890(1)
and Chairman of the 1993 $374,200 $294,683 $52,443 $318,625 N/A $ 13,451 $6,296(1)
Board of Directors
John R. Hunter.......... 1995 $144,600 $ 35,037 0 N/A N/A 0 0
First Vice President,
Assistant Vice Presi-
dent and Director (2)
</TABLE>
- -------
(1) Amount received by Mr. Lower which represents the value allocated to his
account from employer contributions under the Profit Sharing Fund and its
predecessor, The Savings and Profit Sharing Fund of Sears employees.
(2) This amount represents the portion of Mr. Hunter's total compensation
allocated to Northbook Life. Prior to 1995, no Northbrook Life Officer's
compensation exceeded $100,000.
25
<PAGE>
LEGAL PROCEEDINGS
EXPERTS
LEGAL MATTERS
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary damages are asserted. Man-
agement, after consultation with legal counsel, does not anticipate the ulti-
mate liability arising from such pending or threatened litigation to have a ma-
terial effect on the financial condition of the Company.
The financial statements, the financial statement schedule and the financial
statements from which the Selected Financial Data included in this prospectus
have been derived, have been audited by Deloitte & Touche LLP, Two Prudential
Plaza, 180 N. Stetson Avenue, Chicago IL 60601-6449 independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in account-
ing and auditing.
Certain legal matters relating to the federal securities laws applicable to
the issue and sale of the Contracts have been passed upon by Routier, Mackey
and Johnson, P.C., of Washington, D.C. All matters of Illinois law pertaining
to the Contracts, including the validity of the Contracts and the Company's
right to issue such Contracts under Illinois insurance law, have been passed
upon by Michael J. Velotta, General Counsel of the Company.
26
<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 as of December 31, 1995 and 1994, and the
related Statements of Operations, Shareholder's Equity and Cash Flows for each
of the three years in the period ended December 31, 1995. 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 Northbrook Life Insurance Company as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 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.
As discussed in Note 3 to the financial statements, in 1993 the Company
changed its method of accounting for investment in fixed income securities.
Deloitte & Touche LLP
Chicago, Illinois
March 1, 1996
F-1
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments
Fixed income securities
Available for sale, at fair value (amortized cost
$59,142 and $61,581)............................. $ 63,229 $ 59,191
Short-term.......................................... 8,049 3,374
---------- ----------
Total investments............................... 71,278 62,565
Reinsurance recoverable from Allstate Life Insurance
Company.............................................. 2,636,981 3,085,781
Cash.................................................. 87 59
Deferred income taxes................................. 77
Net receivable from Allstate Life Insurance Company... 6,183 8,895
Other assets.......................................... 2,164 2,233
Separate Accounts..................................... 3,354,910 2,604,623
---------- ----------
Total assets.................................... $6,071,603 $5,764,233
========== ==========
LIABILITIES
Reserve for life insurance policy benefits............ $ 139,509 $ 134,942
Contractholder funds.................................. 2,497,278 2,950,532
Income taxes payable.................................. 233 4,634
Deferred income taxes................................. 2,798
Separate Accounts..................................... 3,354,910 2,604,623
---------- ----------
Total liabilities............................... 5,994,728 5,694,731
---------- ----------
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
Unrealized net capital gains (losses)................. 2,657 (1,553)
Retained income....................................... 15,118 11,955
---------- ----------
Total shareholder's equity...................... 76,875 69,502
---------- ----------
Total liabilities and shareholder's equity...... $6,071,603 $5,764,233
========== ==========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1994 1993
------ ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Net investment income.................................. $4,782 $2,881 $2,934
Realized capital gains and losses...................... 67 (193) 323
------ ------ ------
Income before income taxes............................... 4,849 2,688 3,257
Income tax expense....................................... 1,686 955 750
------ ------ ------
Net income............................................... $3,163 $1,733 $2,507
====== ====== ======
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
UNREALIZED
NET
ADDITIONAL CAPITAL
COMMON CAPITAL GAINS RETAINED
STOCK PAID-IN (LOSSES) INCOME TOTAL
------ ---------- ---------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992...... $2,500 $31,600 $ 7,715 $41,815
Net income.................... 2,507 2,507
Change in unrealized net
capital gains and losses..... $ 747 747
------ ------- ------- ------- -------
Balance, December 31, 1993...... 2,500 31,600 747 10,222 45,069
Net income.................... 1,733 1,733
Change in unrealized net
capital gains and losses..... (2,300) (2,300)
Capital contribution.......... 25,000 25,000
------ ------- ------- ------- -------
Balance, December 31, 1994...... 2,500 56,600 (1,553) 11,955 69,502
Net income.................... 3,163 3,163
Change in unrealized net
capital gains and losses..... 4,210 4,210
------ ------- ------- ------- -------
Balance, December 31, 1995...... $2,500 $56,600 $ 2,657 $15,118 $76,875
====== ======= ======= ======= =======
</TABLE>
See notes to financial statements.
F-4
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income....................................... $ 3,163 $ 1,733 $ 2,507
Adjustments to reconcile net income to net cash
from operating activities
Realized capital (gains) losses................ (67) 193 (323)
Amortization and other non-cash items.......... 903 640 415
Net change in reserve for policy benefits and
contractholder funds.......................... 113 (58) 18,338
Change in deferred income taxes................ 608 (114) 1,227
Changes in other operating assets and liabili-
ties.......................................... (2,705) (3,835) (19,325)
------- ------- --------
Net cash from operating activities........... 2,015 (1,441) 2,839
------- ------- --------
Cash flows from investing activities
Fixed income securities
Proceeds from sales............................ 5,423 1,256 14,279
Investment collections......................... 7,108 7,626 10,375
Investment purchases........................... (9,843) (36,071) (29,778)
Change in short-term investments, net............ (4,675) 3,475 2,369
------- ------- --------
Net cash from investing activities........... (1,987) (23,714) (2,755)
------- ------- --------
Cash flows from financing activities
Capital contribution............................. 25,000
------- ------- --------
Net cash from financing activities........... 25,000
------- ------- --------
Net increase (decrease) in cash.................... 28 (155) 84
Cash at beginning of year.......................... 59 214 130
------- ------- --------
Cash at end of year................................ $ 87 $ 59 $ 214
======= ======= ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION AND NATURE OF OPERATIONS
Northbrook Life Insurance Company (the "Company") is wholly owned by Allstate
Life Insurance Company ("Allstate Life"), which is wholly owned by Allstate
Insurance Company ("Allstate"), a wholly-owned subsidiary of The Allstate
Corporation (the "Corporation"). On June 30, 1995, Sears, Roebuck and Co.
("Sears") distributed its 80.3% ownership in the Corporation to Sears common
shareholders through a tax-free dividend (the "Distribution").
The Company develops and markets single and flexible premium annuities and
flexible premium deferred and variable annuity contracts to individuals in the
United States through Dean Witter Reynolds ("Dean Witter")(Note 4). Other
products include universal life and single premium life insurance.
Annuity contracts issued by the Company are subject to discretionary
withdrawal or surrender by the contractholder, subject to applicable surrender
charges. These contracts are reinsured with Allstate Life (Note 4) which
selects assets to meet the anticipated cash flow requirements of the assumed
liabilities. Allstate Life utilizes various modeling techniques in managing the
relationship between assets and liabilities and employs strategies to maintain
investments which are sufficiently liquid to meet obligations to
contractholders in various interest rate scenarios.
The Company monitors economic and regulatory developments which have the
potential to impact its business. Currently there is proposed federal
legislation which would permit banks greater participation in securities
businesses, which could eventually present an increased level of competition
for sales of the Company's annuity contracts. Furthermore, the federal
government may enact changes which could possibly eliminate the tax-advantaged
nature of annuities or eliminate consumers' need for tax deferral, thereby
reducing the incentive for customers to purchase the Company's products. While
it is not possible to predict the outcome of such issues with certainty,
management evaluates the likelihood of various outcomes and develops
strategies, as appropriate, to respond to such challenges.
Certain reclassifications have been made to the prior year financial
statements to conform to the presentation for the current year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIFE INSURANCE ACCOUNTING
The Company writes long-duration insurance contracts with terms that are not
fixed and guaranteed and single premium life insurance contracts, which are
considered universal life-type contracts. The Company also sells long-duration
contracts that do not involve significant risk of policyholder mortality or
morbidity
F-6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
(principally single and flexible premium annuities, structured settlement
annuities and supplemental contracts when sold without life contingencies)
which are considered investment contracts. Limited payment contracts (policies
with premiums paid over a period shorter than the contract period), primarily
consist of structured settlement annuities and supplemental contracts when sold
with life contingencies.
TRADITIONAL LIFE
The reserve for life insurance policy benefits, which relates to
structured settlement annuities and supplementary contracts when sold with
life contingencies, is computed on the basis of assumptions as to future
investment yields, mortality, morbidity, terminations and expenses. These
assumptions, which for traditional life are applied using the net level
premium method, include provisions for adverse deviation and generally vary
by such characteristics as plan, year of issue and policy duration. Reserve
interest rates ranged from 7.3% to 9.5% during 1995.
UNIVERSAL LIFE-TYPE CONTRACTS
Reserves for universal life-type contracts are established using the
retrospective deposit method. Under this method, liabilities are equal to
the account balance that accrues to the benefit of the policyholder.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual contracts that
include an investment component, including annuities and universal life-
type contracts. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and
interest accrued to the benefit of the contractholder less withdrawals,
mortality charges and administrative expenses. During 1995, credited
interest rates on contractholder funds ranged from 3.0% to 8.0% for those
contracts with fixed interest rates and from 3.0% to 8.7% for those with
flexible rates.
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuity contracts, the
assets and liabilities of which are legally segregated and reflected in the
accompanying statements of financial position as assets and liabilities of the
Separate Accounts. Assets and liabilities of the Separate Accounts represent
funds of Northbrook Variable Annuity Account and Northbrook Variable Annuity
Account II ("Separate Accounts"), unit investment trusts registered with the
Securities and Exchange Commission. The assets of the Separate Accounts are
carried at fair value. Investment income and realized gains and losses of the
Separate Accounts accrue directly to the contractholders and, therefore, are
not included in the accompanying statements of operations. Revenues to the
Company from the Separate Accounts consist of contract maintenance fees,
administrative fees and mortality and expense risk charges, which are entirely
ceded to Allstate Life.
F-7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
REINSURANCE
Premiums, contract charges, credited interest, and policy benefits are ceded
and reflected net of such cessions in the statements of operations. Reinsurance
recoverable and the related reserves for policy benefits and contractholder
funds are reported separately in the statements of financial position.
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. Fixed
income securities are carried at fair value. The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are made to write down the value of fixed
income securities for declines in value that are other than temporary. Such
writedowns are included in realized capital gains and losses.
Short-term investments are carried at cost which approximates fair value.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method, based on the estimated principal repayments.
Realized capital gains and losses are determined on a specific identification
basis.
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities and the enacted tax
rates. Deferred income taxes also arise from unrealized capital gains or losses
on fixed income securities carried at fair value.
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. ACCOUNTING CHANGE
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires that investments classified
as available for sale be carried at fair value. Previously, fixed income
securities classified as available for sale were carried at the lower of
amortized cost or fair value, determined in the aggregate. Unrealized holding
gains and losses are reflected as a separate component of shareholder's equity,
net of deferred income taxes. The net effect of adoption of this statement
increased shareholder's equity at December 31, 1993 by $747, with no impact on
net income.
F-8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
4. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company reinsures substantially all business with Allstate Life. Premiums
and contract charges ceded to Allstate Life were $2,284 and $52,348 in 1995,
$1,886 and $38,306 in 1994, and $2,688 and $22,446 in 1993. Credited interest,
policy benefits and other expenses ceded to Allstate Life amounted to $229,525,
$243,326, and $525,467 in 1995, 1994, and 1993, respectively. Investment income
earned on the assets which support contractholder funds was excluded from the
Company's financial statements as those assets were transferred to Allstate
Life under the terms of reinsurance treaties. Reinsurance ceded arrangements do
not discharge the Company as the primary insurer.
BUSINESS OPERATIONS
The Company utilizes services and business facilities owned or leased, and
operated by Allstate in conducting its business activities. The Company
reimburses Allstate for the operating expenses incurred by Allstate. The cost
to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the
Company were $5,341, $5,483 and $5,301 in 1995, 1994 and 1993, respectively.
Investment-related expenses are retained by the Company. All other costs are
assumed by Allstate Life under reinsurance agreements.
DEAN WITTER
The Company and Allstate Life have formed a strategic alliance with Dean
Witter to develop, market and distribute proprietary annuity and life insurance
products through Dean Witter account executives. Dean Witter provides a portion
of the funding for these products through loans to an affiliate of the Company.
Under the terms of the strategic alliance, which is cancelable by either
party, the Company has agreed to use Dean Witter as an exclusive distribution
channel for the Company's products. Dean Witter is also the investment manager
for the Dean Witter Variable Investment Series, the fund in which the assets of
the Separate Accounts are invested.
5. INCOME TAXES
Allstate Life and its life insurance subsidiaries, including the Company,
will file a consolidated federal income tax return. Tax liabilities and
benefits realized by the consolidated group are allocated as generated by the
respective subsidiaries, whether or not such benefits generated by the
subsidiaries would be available on a separate return basis. The Corporation and
its domestic subsidiaries, including the Company (the "Allstate Group"), will
be eligible to file a consolidated tax return beginning in the year 2000.
Prior to the Distribution, the Allstate Group joined with Sears and its
domestic business units (the "Sears Group") in the filing of a consolidated
federal income tax return (the "Sears Tax Group") and were parties to a federal
income tax allocation agreement (the "Tax Sharing Agreement"). As a member of
the Sears Tax
F-9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Group, the Corporation was jointly and severally liable for the consolidated
income tax liability of the Sears Tax Group. Under the Tax Sharing Agreement,
the Company, through the Corporation, paid to or received from the Sears Group
the amount, if any, by which the Sears Tax Group's federal income tax liability
was affected by virtue of inclusion of the Allstate Group in the consolidated
federal income tax return. Effectively, this resulted in the Company's annual
income tax provision being computed as if the Company filed a separate return,
except that items such as net operating losses, capital losses, foreign tax
credits, investment tax credits or similar items which might not be immediately
recognizable in a separate return, were allocated according to the Tax Sharing
Agreement and reflected in the Company's provision to the extent that such
items reduced the Sears Tax Group's federal tax liability.
The Allstate Group and Sears Group have entered into an agreement which
governs their respective rights and obligations with respect to federal income
taxes for all periods prior to the Distribution ("Consolidated Tax Years"). The
agreement provides that all Consolidated Tax Years will continue to be governed
by the Tax Sharing Agreement with respect to the Company's federal income tax
liability and taxes payable to or recoverable from the Sears Group.
The components of the deferred income tax assets and liabilities at December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------- -----
<S> <C> <C>
Deferred assets
Unrealized net capital losses on fixed income securities...... $ $837
------- -----
Total deferred assets....................................... 837
------- -----
Deferred liabilities
Difference in tax bases of investments........................ (1,368) (760)
Unrealized net capital gains on fixed income securities....... (1,430)
------- -----
Total deferred liabilities.................................. (2,798) (760)
------- -----
Net deferred (liability) asset.................................. $(2,798) $ 77
======= =====
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994 1993
------ ------ ----
<S> <C> <C> <C>
Current..................................................... $1,078 $1,069 $641
Deferred.................................................... 608 (114) 109
------ ------ ----
Income tax expense.......................................... $1,686 $ 955 $750
====== ====== ====
</TABLE>
F-10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The Company paid income taxes of $4,206, $4,219 and $1,175 in 1995, 1994 and
1993, respectively under the Tax Sharing Agreement. Included in these amounts
are $2,651, $2,826 and $1,111 reimbursed to the Company by Allstate Life under
the terms of reinsurance agreements for 1995, 1994 and 1993, respectively.
The Company had income taxes payable to Allstate Life of $233 and $4,634 at
December 31, 1995 and 1994, respectively.
A reconciliation of the statutory federal income tax rate to the effective
federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate............................ 35.0% 35.0% 35.0%
Dividends received deduction................................. (10.6)
Tax-exempt income............................................ (1.7)
Other........................................................ (0.3) 0.5 0.3
---- ---- -----
Effective federal income tax rate.......................... 34.7% 35.5% 23.0%
==== ==== =====
</TABLE>
6. INVESTMENTS
FAIR VALUES
The amortized cost, fair value and gross unrealized gains and losses for
fixed income securities are as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
AMORTIZED ------------- FAIR
AT DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- -------------------- --------- ------ ------ -------
<S> <C> <C> <C> <C>
U.S. government and agencies................... $ 8,619 $ 880 $ $ 9,499
Municipal...................................... 1,583 83 1,666
Corporate...................................... 4,967 349 5,316
Mortgage-backed securities..................... 43,973 3,003 228 46,748
------- ------ ------ -------
Totals..................................... $59,142 $4,315 $ 228 $63,229
======= ====== ====== =======
<CAPTION>
GROSS
UNREALIZED
AMORTIZED ------------- FAIR
AT DECEMBER 31, 1994 COST GAINS LOSSES VALUE
- -------------------- --------- ------ ------ -------
<S> <C> <C> <C> <C>
U.S. government and agencies................... $ 9,619 $ 49 $ 825 $ 8,843
Municipal...................................... 1,642 77 3 1,716
Corporate...................................... 3,172 63 3,109
Mortgage-backed securities..................... 47,148 75 1,700 45,523
------- ------ ------ -------
Totals..................................... $61,581 $ 201 $2,591 $59,191
======= ====== ====== =======
</TABLE>
F-11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- ----------
<S> <C> <C>
Due in one year or less......................... $ 270 $ 272
Due after one year through five years........... 3,021 3,182
Due after five years through ten years.......... 4,647 5,124
Due after ten years............................. 7,231 7,903
------- -------
15,169 16,481
Mortgage-backed securities...................... 43,973 46,748
------- -------
Total....................................... $59,142 $63,229
======= =======
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments
by the issuers.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses on fixed income securities included
in shareholder's equity at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
UNREALIZED NET
AMORTIZED COST FAIR VALUE GAINS/(LOSSES)
-------------- ---------- --------------
<S> <C> <C> <C>
Fixed income securities......... $59,142 $63,229 $ 4,087
======= =======
Deferred income taxes........... (1,430)
-------
Total....................... $ 2,657
=======
</TABLE>
The change in unrealized net capital gains and losses for fixed income
securities is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
------- --------
<S> <C> <C>
Fixed income securities................................ $ 6,477 $ (3,539)
Deferred income taxes.................................. (2,267) 1,239
------- --------
Change in unrealized net capital gains and
losses............................................ $ 4,210 $ (2,300)
======= ========
</TABLE>
F-12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
COMPONENTS OF INVESTMENT INCOME
Investment income by type of investment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Investment income:
Fixed income securities........................... $4,633 $2,735 $2,793
Short-term........................................ 215 192 172
------ ------ ------
Investment income, before expense................... 4,848 2,927 2,965
Investment expense.................................. 66 46 31
------ ------ ------
Net investment income........................... $4,782 $2,881 $2,934
====== ====== ======
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on investments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994 1993
---- ----- -----
<S> <C> <C> <C>
Fixed income securities................................ $ 67 $(193) $ 323
Income tax (expense) benefit........................... (23) 68 (113)
---- ----- -----
Net realized gains (losses)............................ $ 44 $(125) $ 210
==== ===== =====
</TABLE>
PROCEEDS FROM SALES OF FIXED INCOME SECURITIES
The proceeds from sales of investments in fixed income securities, excluding
calls, and related gross realized gains and losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Proceeds.......................................... $5,423 $1,256 $14,279
====== ====== =======
Gross realized gains.............................. $ 67 $ 318
Gross realized losses............................. $ (179) (34)
------ ------ -------
Net realized gains (losses)....................... $ 67 $ (179) $ 284
====== ====== =======
</TABLE>
SECURITIES ON DEPOSIT
At December 31, 1995, fixed income securities with a carrying value of $8,041
were on deposit with regulatory authorities as required by law.
F-13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
7. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The assets and liabilities of
the Separate Accounts are carried at the fair value of the funds in which the
assets are invested. The fair value of all financial assets other than fixed
income securities and all liabilities other than contractholder funds
approximates their carrying value as they are short-term in nature.
Fair values for fixed income securities are based on quoted market prices.
The December 31, 1995 and 1994 fair values and carrying values of fixed income
securities are discussed in Note 6.
The fair value of contractholder funds related to 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 fund balance less surrender charge. The
fair value of immediate annuities and annuities without life contingencies with
fixed terms are estimated using discounted cash flow calculations based on
interest rates currently offered for contracts with similar terms and duration.
Contractholder funds on investment contracts had a carrying value of $2,294,536
at December 31, 1995 and a fair value of $2,274,053. The carrying value and
fair value at December 31, 1994 were $2,738,823 and $2,685,448, respectively.
8. STATUTORY FINANCIAL INFORMATION
The following tables reconcile net income and shareholder's equity as
reported herein in conformity with generally accepted accounting principles
with statutory net income and capital and surplus, determined in accordance
with statutory accounting practices prescribed or permitted by insurance
regulatory authorities:
<TABLE>
<CAPTION>
NET INCOME
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Balance per generally accepted accounting
principles..................................... $3,163 $1,733 $2,507
Income taxes.................................. (88) (114) 825
Non-admitted assets and statutory reserves.... (775) (27) (91)
------ ------ ------
Balance per statutory accounting principles..... $2,300 $1,592 $3,241
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER'S
EQUITY DECEMBER
31,
----------------
1995 1994
------- -------
<S> <C> <C>
Balance per generally accepted accounting principles... $76,875 $69,502
Income taxes......................................... (1,614) (77)
Unrealized net capital gains (losses)................ (4,087) 2,390
Non-admitted assets and statutory reserves........... 1,891 (1,086)
------- -------
Balance per statutory accounting principles............ $73,065 $70,729
======= =======
</TABLE>
F-14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the insurance
department of the State of Illinois. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners, 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 material effect on statutory surplus
or risk-based capital.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant
factors. The payment of shareholder dividends by insurance companies without
the prior approval of the state insurance regulator is limited to formula
amounts based on net income and capital and surplus, determined in accordance
with statutory accounting practices, as well as the timing and amount of
dividends paid in the preceding twelve months. The maximum amount of dividends
that the Company can distribute during 1996 without prior approval of both the
Illinois and California Departments of Insurance is $7,057.
F-15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
GROSS NET
AMOUNT CEDED AMOUNT
-------- -------- --------
<S> <C> <C> <C>
Life insurance in force............................. $610,478 $610,478 $
======== ======== ========
Premiums and contract charges:
Life and annuities................................ $ 54,632 $ 54,632 $
======== ======== ========
YEAR ENDED DECEMBER 31, 1994
<CAPTION>
GROSS NET
AMOUNT CEDED AMOUNT
-------- -------- --------
<S> <C> <C> <C>
Life insurance in force............................. $661,356 $661,356 $
======== ======== ========
Premiums and contract charges:
Life and annuities................................ $ 40,192 $ 40,192 $
======== ======== ========
YEAR ENDED DECEMBER 31, 1993
<CAPTION>
GROSS NET
AMOUNT CEDED AMOUNT
-------- -------- --------
<S> <C> <C> <C>
Life insurance in force............................. $702,975 $702,975 $
======== ======== ========
Premiums and contract charges:
Life and annuities................................ $ 25,134 $ 25,134 $
======== ======== ========
</TABLE>
F-16
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is based on the following:
I= the effective annual Interest Crediting Rate for that Sub-Account
N= the number of complete days from the withdrawal to the end of the Sub-
Account's Guarantee Period; and
J= the current interest rate credited for contracts, on the date the
withdrawal request is received, for a Guarantee Period of duration N.
If a Guarantee Period of duration N is not currently being offered, J
will be determined by a linear interpolation (weighted average). If N
is less than or equal to 365 days, J will be the rate for a Guarantee
Period of duration 365.
The Market Value Adjustment factor is determined from the following formula:
[.9 X (I-J) X (N/365)].
The amount withdrawn less any applicable Free Withdrawal Amount will be
multiplied by the Market Value Adjustment factor to determine the Market Value
Adjustment.
ILLUSTRATION
EXAMPLE OF MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment:................................................. $10,000
Guarantee Period:................................................. 5 years
Interest Rate:.................................................... 5.40%
Full Surrender:.................................... End of Contract Year 3
</TABLE>
NOTE: This illustration assumes that premium taxes were not applicable.
EXAMPLE 1: (Assumes declining interest rates)
Step 1: Calculate Account Value at End of Contract Year 3:
= 10,000.00 X (1.054)/3/ = $11,709.06
Step 2: Calculate The Amount Withdrawn in Excess of the Free Withdrawal Amount:
.41Amount Withdrawn: 11,709.06
Free Withdrawal Amount: .10 X 10,000.00 = 1,000.00
Amount Withdrawn in Excess of the Free Withdrawal Amount:
= 11,709.06 - 1,000.00 = $10,709.06
Step 3: Calculate the Withdrawal Charge:
= .027 X 10,709.06 = $289.14
A-1
<PAGE>
Step 4: Calculate the Market Value Adjustment:
I= 5.40%
J= 5.10%
N = 730 days
Market Value Adjustment Factor: .9 X (I-J) X (N/365)
= .9 X (.0540 - .0510) X (730/365) = .0054
Market Value Adjustment = Factor X Amount in Excess of Free Withdrawal Amount:
= .0054 X 10,709.06 = $57.83
Step 5: Calculate The Net Surrender Value at End of Contract Year 3:
= 11,709.06 - 289.14 + 57.83 = $11,477.75
EXAMPLE 2: (Assumes rising interest rates)
Step 1: Calculate Account Value at End of Contract Year 3:
= 10,000.00 X (1.054)/3/ = $11,709.06
Step 2: Calculate The Amount Withdrawn in Excess of the Free Withdrawal Amount:
Amount Withdrawn: 11,709.06
Free Withdrawal Amount: .10 X 10,000.00 = 1,000.00
Amount Withdrawn in Excess of the Free Withdrawal Amount:
= 11,709.06 - 1,000.00 = $10,709.06
Step 3: Calculate the Withdrawal Charge:
= .027 X 10,709.06 = $289.14
Step 4: Calculate the Market Value Adjustment:
I= 5.40%
J= 5.70%
N = 730 days
Market Value Adjustment Factor: .9 X (I-J) X (N/365)
= .9 X (.054 - .057) X (730/365) = -.0054
Market Value Adjustment = Factor X Amount in Excess of Free Withdrawal Amount:
= -.0054 X 10,709.06 = -$57.83
Step 5: Calculate The Net Surrender Value at End of Contract Year 3:
= 11,709.06 - 289.14 - 57.83 = $11,362.09
A-2
<PAGE>
PART II
-------
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
Pursuant to Item 511 of Regulation S-K, the Registrant hereby
represents that the following expenses totaling approximately $202,914
will be incurred or are anticipated to be incurred in connection with
the issuance and distribution of the securities to be registered:
registration fees - $172,414, cost of printing and engraving -
$25,000, legal fees - $5,000; and accounting fees - $500. All amounts
are estimated.
ITEM 14. Indemnification of Directors and Officers.
The By-Laws of Northbrook Life Insurance Company ("Registrant") which
are incorporated herein by reference as Exhibit (3), provide that
Registrant will indemnify its officers and directors for certain
damages and expenses that may be incurred in the performance of their
duty to Registrant. No indemnification is provided, however, when such
person is adjudged to be liable for negligence or misconduct in the
performance of his or her duty, unless indemnification is deemed
appropriate by the court upon application.
ITEM 15. Recent Sales of Unregistered Securities.
Not applicable.
ITEM 16. Exhibits and Financial Statement Schedules.
Exhibit No. Description
----------- -----------
(1) Underwriting Agreement*
(2) Not Applicable
(3) (i) Articles of Incorporation*
(ii) By-Laws*
(4) Form of Northbrook Life Insurance Company Flexible Premium
Deferred Annuity Contract and Application***
(5) Opinion of General Counsel re: Legality****
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10) Reinsurance Agreement between Northbrook Life Insurance Company
and Allstate Life Insurance Company**
(11) Not Applicable
(12) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(21) Not Applicable
(23)(a) Consent of Independent Public Accountants
(23)(b) Consent of Attorneys****
(24) Powers of Attorney***, *****
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
(99) Resolution of Board of Directors**
* Previously filed in Form N-4 Registration Statement No. 33-35412 dated
June 14, 1990 and incorporated by reference.
** Previously filed in Form S-1 Registration Statement No. 33-39268 dated
March 6, 1991.
*** Previously filed in Form S-1 Registration Statement No. 33-50884 dated
March 30, 1993.
<PAGE>
**** Previously filed in Form S-1 Registration Statement No. 33-84480 dated
September 28, 1994.
***** Filed herewith powers of attorney for Louis G. Lower, II, Marla G.
Friedman, Lawrence P. Moews, Casey J. Sylla, and James P. Zils.
ITEM 17. Undertakings.
-------------
The undersigned registrant, Northbrook Life Insurance Company, hereby
undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant, Northbrook Life Insurance Company pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of Northfield State of
Illinois on April 4, 1996.
NORTHBROOK LIFE INSURANCE COMPANY
(Registrant)
By: /s/MICHAEL J. VELOTTA
----------------------------
Michael J. Velotta
Vice President, Secretary,
General Counsel and Director
(SEAL)
Attest: /s/ BRENDA D. SNEED
-----------------------
Brenda D. Sneed
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
*/ LOUIS G. LOWER, II Chairman of the Board April 4, 1996
- --- ------------------ And Chief Executive Officer
Louis G. Lower, II
/s/ MICHAEL J. VELOTTA Vice President, Secretary, April 4, 1996
- --- ------------------ General Counsel and Director
Michael J. Velotta
*/ MARLA G. FRIEDMAN President, Chief Operating April 4, 1996
- --- ----------------- Officer and Director
Marla G. Friedman
**/ PETER H. HECKMAN Vice President and Director April 4, 1996
- --- ----------------
Peter H. Heckman
*/ LAWRENCE P. MOEWS Director April 4, 1996
- --- -----------------
Lawrence P. Moews
**/ JOHN R. HUNTER First Vice President April 4, 1996
- --- -------------- Assistant Vice President
John R. Hunter and Director
*/ CASEY J. SYLLA Director and Chief April 4, 1996
- --- -------------- Investment Officer
Casey J. Sylla
*/ JAMES P. ZILS Treasurer April 4, 1996
- --- -------------
James P. Zils
**/ BARRY S. PAUL Assistant Vice President April 4, 1996
- --- ------------- and Controller
Barry S. Paul
*/ By Michael J. Velotta, pursuant to Power of Attorney, filed herewith.
**/ By Michael J. Velotta, pursuant to Power of Attorney, previously filed.
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed herewith:
(1) Underwriting Agreement*
(2) Not Applicable
(3) (i) Articles of Incorporation*
(ii) By-Laws*
(4) Form of Northbrook Life Insurance Company Flexible Premium Deferred
Annuity Contract and Application***
(5) Opinion of General Counsel re: Legality****
(6) Not Applicable
(7) Not Applicable
(8) Not Applicable
(9) Not Applicable
(10) Reinsurance Agreement between Northbrook Life Insurance Company and
Allstate Life Insurance Company**
(11) Not Applicable
(12) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(21) Not Applicable
(23)(a) Consent of Independent Public Accountants
(23)(b) Consent of Attorneys****
(24) Powers of Attorney***, *****
(25) Not Applicable
(26) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
(99) Resolution of Board of Directors**
* Previously filed in Form N-4 Registration Statement No. 33-35412 dated
June 14, 1990 and incorporated by reference.
** Previously filed in Form S-1 Registration Statement No. 33-39268 dated
March 6, 1991.
*** Previously filed in Form S-1 Registration Statement No. 33-50884 dated
March 30, 1993.
**** Previously filed in Form S-1 Registration Statement No. 33-84480 dated
September 28, 1994.
***** Filed herewith powers of attorney for Louis G. Lower, II, Marla G.
Friedman, Lawrence P. Moews, Casey J. Sylla, and James P. Zils.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 33-84480 of Northbrook Life Insurance Company of our report dated
March 1, 1996, appearing in the Prospectus, which is part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
April 8, 1996
<PAGE>
EXHIBIT NO. (24)
POWERS OF ATTORNEY
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
CUSTOM ANNUITY PLUS CONTRACT
Know all men by these presents that Louis G. Lower, II, whose signature
appears below, constitutes and appoints Michael J. Velotta, his attorney-in-
fact, with power of substitution, and his in any and all capacities, to sign any
registration statements and amendments thereto for the Northbrook Life Insurance
Company Custom Annuity Plus Contract and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
2/9/96
----------
Date
/s/LOUIS G. LOWER, II
---------------------
Louis G. Lower, II
Chairman of the Board of Directors
& Chief Executive Officer
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
CUSTOM ANNUITY PLUS CONTRACT
Know all men by these presents that Marla G. Friedman whose signature
appears below, constitutes and appoints Michael J. Velotta and Louis G. Lower,
II, her attorneys-in-fact, with power of substitution, and her in any and all
capacities, to sign any registration statements and amendments thereto for the
Northbrook Life Insurance Company Custom Annuity Plus Contract and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
2/9/96
---------
Date
/s/MARLA G. FRIEDMAN
--------------------
Marla G. Friedman
President, Chief Operating Officer
and Director
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
CUSTOM ANNUITY PLUS CONTRACT
Know all men by these presents that Lawrence P. Moews, whose signature
appears below, constitutes and appoints Michael J. Velotta and Louis G. Lower,
II, his attorneys-in-fact, with power of substitution, and his in any and all
capacities, to sign any registration statements and amendments thereto for the
Northbrook Life Insurance Company Custom Annuity Plus Contract and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
2/9/96
---------
Date
/s/LAWRENCE P. MOEWS
--------------------
Lawrence P. Moews
Director
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
CUSTOM ANNUITY PLUS CONTRACT
Know all men by these presents that Casey J. Sylla, whose signature appears
below, constitutes and appoints Michael J. Velotta and Louis G. Lower, II, his
attorneys-in-fact, with power of substitution, and his in any and all
capacities, to sign any registration statements and amendments thereto for the
Northbrook Life Insurance Company Custom Annuity Plus Contract and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
2/9/96
---------
Date
/s/CASEY J. SYLLA
-----------------
Casey J. Sylla
Chief Investment Officer
and Director
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
CUSTOM ANNUITY PLUS CONTRACT
Know all men by these presents that James P. Zils, whose signature appears
below, constitutes and appoints Michael J. Velotta and Louis G. Lower, II, his
attorneys-in-fact, with power of substitution, and his in any and all
capacities, to sign any registration statements and amendments thereto for the
Northbrook Life Insurance Company Custom Annuity Plus Contract and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
2/9/96
---------
Date
/s/JAMES P. ZILS
----------------
James P. Zils
Treasurer
<TABLE> <S> <C>
<PAGE>
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