UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
For fiscal year ended December 31, 1997 Commission file numbers: 33-50884
----------------- ----------
33-84480
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33-90272
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Northbrook Life Insurance Company
---------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-300152
--------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 Sanders Road
Northbrook, Illinois 60062
(Address of Principal executive offices)(Zip Code)
847/402-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 31, 1997, there were 25,000 shares of common capital stock
outstanding, par value $100 per share all of which shares are held by Allstate
Life Insurance Company.
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
(A wholly owned subsidiary of Allstate Life Insurance Company)
Annual Report for 1997 On Form 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business**............................................ 3
ITEM 2. Properties**.......................................... 4
ITEM 3. Legal Proceedings..................................... 4
ITEM 4. Submission of Matters to a Vote of Security Holders*..N/A
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................... 5
ITEM 6. Selected Financial Data...............................N/A
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 6
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk...........................................10
ITEM 8. Financial Statements and Supplementary Data...........10
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................N/A
PART III
ITEM 10. Directors and Executive Officers of the Registrant*...N/A
ITEM 11. Executive Compensation................................N/A
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management*...........................................N/A
ITEM 13. Certain Relationships and Related Transactions*.......N/A
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................................F-16
Index to Financial Statement Schedules..............................10
Signatures..........................................................11
* Omitted pursuant to General Instruction I(2) of Form 10-K.
** Item prepared in accordance with General Instruction I(2) of Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Northbrook Life Insurance Company (hereinafter "Northbrook Life" or the
"Company"), incorporated in 1978 as a stock life insurance company under the
laws of the State of Illinois, has done business continuously since that time as
"Northbrook Life Insurance Company."
Northbrook Life is a wholly owned subsidiary of Allstate Life Insurance
Company ("ALIC"), a stock life insurance company incorporated under the laws of
Illinois. ALIC is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), 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"). 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.
Northbrook Life's operations consist of one business segment which is
the sale of life insurance and annuity products.
Northbrook Life and ALIC entered into reinsurance agreements, effective
December 31, 1987, under which Northbrook Life reinsures substantially all of
its business with ALIC. Under the agreements, purchase payments under all
general account contracts are transferred to ALIC and become invested with the
assets of ALIC, and ALIC accepts 100% of the liability under such contracts.
However, the obligations of ALIC under the reinsurance agreement are to the
Company. In addition, assets of the Company that relate to insurance in-force
excluding separate account assets are transferred to ALIC. Therefore, the funds
necessary to support the operations of the Company are provided by ALIC and the
Company is not required to obtain additional capital to support in-force or
future business.
Under the Company's reinsurance agreements with ALIC, the Company
reinsures all reserve liabilities with ALIC except for variable contracts. The
Company's variable contract assets and liabilities are held in legally-
segregated, unitized separate accounts and are retained by the Company. However,
the transactions related to such variable and market value adjusted contracts
such as premiums, expenses and benefits are transferred to ALIC.
3
<PAGE>
Northbrook Life's and ALIC's general account assets must be invested in
accordance with applicable state laws. These laws govern the nature and quality
of investments that may be made by life insurance companies and the percentage
of their assets that may be committed to any particular type of investment. Of
ALIC's consolidated invested assets of $29,759 million on December 31, 1997,
84.4% was invested in fixed income securities, 2.9% in equities, 9.8% in
mortgage loans, and 2.9% in real estate, short-term and other investments.
Northbrook Life is engaged in a business that is highly competitive
because of the large number of stock and mutual life insurance companies and
other entities competing in the sale of insurance and annuities. There are
approximately 1,700 stock, mutual and other types of insurers in business in the
United States. Several independent rating agencies regularly evaluate life
insurer's claims paying ability, quality of investments and overall stability.
A.M. Best Company assigns A+(Superior) to ALIC which automatically reinsures all
net business of Northbrook Life. A.M. Best Company also assigns Northbrook Life
the rating of A+(r) because Northbrook Life 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 Investors Service
assigns an Aa2 (excellent) financial strength rating to the Company. Northbrook
Life shares the same ratings of its parent, ALIC.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed measures which may significantly
affect the Company's insurance business relate to the taxation of insurance
companies, the tax treatment of insurance products and the removal of barriers
preventing banks from engaging in the insurance business.
Northbrook Life is regulated by the Securities and Exchange Commission
("SEC") as an issuer of registered products. The SEC also regulates certain
Northbrook Life Separate Accounts which issue variable life contracts or,
together with the Company, issue variable annuity contracts.
ITEM 2. PROPERTIES
Northbrook Life occupies office space provided by AIC in Northbrook,
Illinois. Expenses associated with these offices are allocated on a direct and
indirect basis to Northbrook Life.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal
proceedings pending to which the Company is a party or which would materially
affect the Company. The Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not anticipate
the ultimate liability arising from such pending or threatened litigation to
have a material effect on the financial condition of the Company.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by its parent.
ALIC's outstanding shares are owned by AIC. With the exception of director's
qualifying shares, all of the outstanding capital stock of AIC is owned by The
Corporation. On June 30, 1995, Sears distributed its 80.3% ownership in the
Corporation to Sears common shareholders through a tax-free dividend.
5
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Northbrook Life Insurance Company
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Northbrook Life
Insurance Company (the "Company"). It should be read in conjunction with the
financial statements and related notes.
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly
owned subsidiary of The Allstate Corporation, markets life insurance and annuity
products through Dean Witter Reynolds Inc., a wholly owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co.
The Company issues flexible premium deferred variable annuity contracts
and variable life policies, the assets and liabilities of which are legally
segregated and reflected as Separate Account assets and liabilities. Separate
Account assets and liabilities are carried at fair value in the statements of
financial position. Investment income and realized gains and losses of the
Separate Accounts accrue directly to the contractholders (net of fees) and,
therefore, are not included in the Company's statements of operations.
<TABLE>
<CAPTION>
Results of Operations
($ in thousands)
1997 1996 1995
------------- -------------- ------------
<S> <C> <C> <C>
Net investment income $ 5,146 $ 4,888 $ 4,782
============= ============= =============
Realized capital gains and losses, after-tax $ (44) $ (13) $ 44
============= ============= =============
Net income $ 3,322 $ 3,202 $ 3,163
============= ============= =============
Investments $ 79,433 $ 74,069 $ 71,278
============= ============= =============
</TABLE>
The Company and ALIC have reinsurance agreements under which all contract
and policy related transactions are transferred to ALIC. The Company's results
of operations include only investment income and realized capital gains and
losses earned on the assets of the Company that are not transferred to ALIC
under the reinsurance agreements.
Net income for 1997 and 1996 increased $120 thousand and $39 thousand,
respectively, due to increased net investment income partially offset by
realized capital losses.
Pretax net investment income increased by $258 thousand, or 5.3% in 1997
and $106 thousand, or 2.2% in 1996. Additional investment income was earned on
higher investment balances arising from positive cash flows from operating
activities, partially offset by increased investment expenses.
Realized capital losses were $44 thousand and $13 thousand after tax in
1997 and 1996, respectively, and arose principally from the sale of fixed income
securities, the proceeds of which were used to acquire higher yielding
investments. Realized capital gains in 1995 of $44 thousand after tax were the
result of the sale of fixed income securities sold in response to changes in
market conditions.
6
<PAGE>
Financial Position
($ in thousands)
1997 1996
-------------- --------------
Fixed income securities (1) $ 76,402 $ 67,479
Short-term investments 3,031 6,590
-------------- --------------
Total investments $ 79,433 $ 74,069
============== ==============
Reinsurance recoverable from ALIC $ 2,293,094 $ 2,480,034
============== ==============
Separate Account assets and liabilities $ 5,719,203 $ 4,354,783
============== ==============
Contractholder funds $ 2,148,555 $ 2,336,296
============== ==============
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $72,491 and $65,500 at December 31, 1997 and 1996,
respectively.
The Company's fixed income securities portfolio consists of
mortgage-backed securities, publicly traded corporate bonds, U.S. government
bonds and tax-exempt municipal bonds. The Company generally holds its fixed
income securities for the long term, but has classified all of these securities
as available for sale to allow maximum flexibility in portfolio management.
Investments grew $5.4 million, or 7.2%, during 1997 primarily due to
amounts invested from positive cash flows generated from operations and
increased unrealized capital gains of $1.9 million on fixed income securities.
At December 31, 1997, unrealized net capital gains on the fixed income
securities portfolio were $3.9 million compared to $2.0 million as of December
31, 1996. The increase in the unrealized gain position is primarily attributable
to lower interest rates.
At the end of 1997, all of the Company's fixed income securities portfolio
is rated investment grade, with a National Association of Insurance
Commissioners ("NAIC") rating of 1 or a Moody's rating of Aaa, Aa or A.
At December 31, 1997 and 1996, $39.0 million and $40.7 million,
respectively, of the fixed income securities portfolio were invested in
mortgage-backed securities ("MBS"). At December 31, 1997, all of the MBS had
underlying collateral that is guaranteed by U.S. government entities, thus
credit risk was minimal.
MBS, however, are subject to interest rate risk as the duration and
ultimate realized yield are affected by the rate of repayment of the underlying
mortgages. The Company attempts to limit interest rate risk by purchasing MBS
whose cost does not significantly exceed par value, and with repayment
protection to provide a more certain cash flow to the Company. At December 31,
1997, the amortized cost of the MBS portfolio was below par value by $1.5
million and over 10% of the MBS portfolio was invested in planned amortization
class bonds. This type of MBS is purchased to provide additional protection
against rising interest rates.
The Company closely monitors its fixed income securities portfolio for
declines in value that are other than temporary. Securities are placed on
non-accrual status when they are in default or when the receipt of interest
payments is in doubt.
The Company's short-term investment portfolio was $3.0 million and $6.6
million at December 31, 1997 and 1996, respectively. The Company invests
available cash balances primarily in taxable short-term securities having a
final maturity date or redemption date of one year or less.
During 1997, contractholder funds decreased by $187.7 million and
reinsurance recoverable from ALIC under reinsurance agreements decreased by
$186.9 million. Interest credited to contractholders and sales of fixed annuity
contracts were more than offset by fixed annuity surrenders, withdrawals,
policyholder transfers from fixed annuity contracts to flexible premium deferred
variable annuity contracts, and benefits paid. Reinsurance recoverable from ALIC
relates to contract benefit obligations ceded to ALIC.
Separate Account assets and liabilities increased by $1.36 billion,
primarily attributable to sales of flexible premium deferred variable annuity
contracts, the favorable investment performance of the Separate Account
investment portfolios and transfers from fixed annuity contracts, partially
offset by variable annuity surrenders and withdrawals.
7
<PAGE>
Market Risk
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. The Company's primary market risk exposure
is to changes in interest rates. Interest rate risk is the risk that the Company
will incur economic losses due to adverse changes in interest rates, as the
Company invests substantial funds in interest-sensitive assets.
One way to quantify this exposure is duration. Duration measures the
sensitivity of the fair value of assets to changes in interest rates. For
example, if interest rates increase 1%, the fair value of an asset with a
duration of 5 years is expected to decrease in value by approximately 5%. At
December 31, 1997, the Company's asset duration was approximately 4.7 years.
To calculate duration, the Company projects asset cash flows, and
discounts them to a net present value basis using a risk-free market rate
adjusted for credit quality, sector attributes, liquidity and other specific
risks. Duration is calculated by revaluing these cash flows at an alternative
level of interest rates, and determining the percentage change in fair value
from the base case. The projections include assumptions (based upon historical
market and Company specific experience) reflecting the impact of changing
interest rates on the prepayment and/or option features of instruments, where
applicable. Such assumptions relate primarily to mortgage-backed securities,
collateralized mortgage obligations, and municipal and corporate obligations.
Based upon the information and assumptions the Company uses in its
duration calculation and in effect at December 31, 1997, management estimates
that a 100 basis point immediate, parallel increase in interest rates ("rate
shock") would decrease the net fair value of its total investments by
approximately $3.6 million. The selection of a 100 basis point immediate rate
shock should not be construed as a prediction by the Company's management of
future market events; but rather, to illustrate the potential impact of such an
event.
To the extent that actual results differ from the assumptions utilized,
the Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes that the current relationship
between short-term and long-term interest rates (the term structure of interest
rates) will remain constant over time. As a result, these calculations may not
fully capture the impact of non-parallel changes in the term structure of
interest rates and/or large changes in interest rates.
In formulating and implementing policies for investing new and existing
funds, AIC, as parent company of ALIC, administers and oversees investment risk
management processes primarily through three oversight bodies: the Boards of
Directors and Investment Committees of its operating subsidiaries, and the
Credit and Risk Management Committee ("CRMC"). The Boards of Directors and
Investment Committees provide executive oversight of investment activities. The
CRMC is a senior management committee consisting of the Chief Investment
Officer, the Investment Risk Manager, and other investment officers who are
responsible for the day-to-day management of market risk. The CRMC meets at
least monthly to provide detailed oversight of investment risk, including market
risk.
AIC has investment guidelines that define the overall framework for
managing market and other investment risks, including the accountabilities and
controls over these activities. In addition, AIC has specific investment
policies for each of its affiliates, including the Company, that delineate the
investment limits and strategies that are appropriate for the Company's
liquidity, surplus, product and regulatory requirements.
Liquidity and Capital Resources
Under the terms of reinsurance agreements, premiums and deposits on
universal life policies and investment contracts, excluding those relating to
Separate Accounts, are transferred to ALIC, which maintains the investment
portfolios supporting the Company's products. The Company continues to have
primary liability as a direct insurer for risks reinsured.
The NAIC has a standard for assessing the solvency of insurance companies,
which is referred to as risk-based capital ("RBC"). The requirement consists of
a formula for determining each insurer's RBC and a model law specifying
regulatory actions if an insurer's RBC falls below specified levels. The RBC
formula for life insurance companies establishes capital requirements relating
to insurance, business, asset and interest rate risks. At December 31, 1997, RBC
for the Company was significantly above a level that would require regulatory
action.
8
<PAGE>
Year 2000
The Company is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, and policy and contract
administration. Since many of the Company's older computer software programs
recognize only the last two digits of the year in any date, some software may
fail to operate properly in or after the year 1999, if the software is not
reprogrammed or replaced, ("Year 2000 Issue"). The Company believes that many of
its counterparties and suppliers also have Year 2000 Issues which could affect
the Company. In 1995, AIC commenced a plan intended to mitigate and/or prevent
the adverse effects of Year 2000 Issues. These strategies include normal
development and enhancement of new and existing systems, upgrades to operating
systems already covered by maintenance agreements and modifications to existing
systems to make them Year 2000 compliant. The plan also includes the Company
actively working with its major external counterparties and suppliers to assess
their compliance efforts and the Company's exposure to them. The Company
presently believes that it will resolve the Year 2000 Issue in a timely manner,
and the financial impact will not materially affect its results of operations,
liquidity or financial position. Year 2000 costs are and will be expensed as
incurred.
Pending Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 130 requires the presentation of comprehensive income in
the financial statements. Comprehensive income is a measurement of all changes
in equity that result from transactions and other economic events other than
transactions with stockholders. The requirements of this statement will be
adopted effective January 1, 1998.
SFAS No. 131 redefines how segments are determined and requires additional
segment disclosures for both annual and quarterly reporting. Under this
statement, segments are determined using the "management approach" for financial
statement reporting. The management approach is based on the way an enterprise
makes operating decisions and assesses performance of its businesses. The
Company is currently reviewing the requirements of this SFAS and has yet to
determine its impact on its current reporting segments. The requirements of this
statement will be adopted effective December 31, 1998.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP provides guidance concerning when to
recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related assessments
should be recognized as liabilities when all of the following criteria have been
met: a) an assessment has been imposed or it is probable that an assessment will
be imposed, b) the event obligating an entity to pay an assessment has occurred
and c) the amount of the assessment can be reasonably estimated. The
requirements of this standard will be adopted in 1999 and are not expected to
have a material impact on the results of operations, cash flows or financial
position of the Company. The SOP is expected to be adopted in 1999.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Specifically,
certain external, payroll and payroll related costs should be capitalized during
the application development state of a project and depreciated over the computer
software's useful life. The Company currently expenses these costs as incurred
and is evaluating the effects of this SOP on its accounting for internally
developed software. The SOP is expected to be adopted in 1998.
Forward-Looking Statements
The statements contained in this Management's Discussion and Analysis that
are not historical information are forward-looking statements that are based on
management's estimates, assumptions and projections. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor under The Securities Act of
1933 and The Securities Exchange Act of 1934 for forward-looking statements.
9
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The pertinent provisions of Management's Discussion and Analysis of Financial
Condition and Results of Operations are herein incorporated by reference.
ITEM 8. Financial Statements and Supplementary Data
Financial Statements
Index
-----
Page
----
Independent Auditors' Report............................................... F-1
Financial Statements:
Statements of Financial Position
December 31, 1997 and 1996........................................... F-2
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-3
Statements of Shareholder's Equity for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-4
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-5
Notes to Financial Statements......................................... F-6
Schedule IV - Reinsurance for the Years Ended
December 31, 1997, 1996 and 1995..................................... F-16
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statements of Financial Position of Northbrook
Life Insurance Company (the "Company") as of December 31, 1997 and 1996, and the
related Statements of Operations, Shareholder's Equity and Cash Flows for each
of the three years in the period ended December 31, 1997. Our audits also
included Schedule IV - Reinsurance. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
F-1
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value (amortized
cost $72,491 and $65,500) $ 76,402 $ 67,479
Short-term 3,031 6,590
------------------ ------------------
Total investments 79,433 74,069
Reinsurance recoverable from Allstate Life
Insurance Company 2,293,094 2,480,034
Net receivable from Allstate Life Insurance Company 1,467 4,246
Other assets 5,033 2,639
Separate Accounts 5,719,203 4,354,783
------------------ ------------------
Total assets $ 8,098,230 $ 6,915,771
================== ==================
LIABILITIES
Reserve for life-contingent contract benefits $ 144,352 $ 143,346
Contractholder funds 2,148,555 2,336,296
Income taxes payable 162 555
Deferred income taxes 2,674 2,085
Separate Accounts 5,719,203 4,354,783
------------------ ------------------
Total liabilities 8,014,946 6,837,065
------------------ ------------------
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 2,542 1,286
Retained income 21,642 18,320
------------------ ------------------
Total shareholder's equity 83,284 78,706
------------------ ------------------
Total liabilities and shareholder's equity $ 8,098,230 $ 6,915,771
================== ==================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------ ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Net investment income $ 5,146 $ 4,888 $ 4,782
Realized capital gains and losses (68) (20) 67
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX EXPENSE 5,078 4,868 4,849
INCOME TAX EXPENSE 1,756 1,666 1,686
--------------- --------------- ---------------
NET INCOME $ 3,322 $ 3,202 $ 3,163
=============== =============== ===============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
--------------- --------------- ---------------
ADDITIONAL CAPITAL PAID-IN 56,600 56,600 56,600
--------------- --------------- ---------------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 1,286 2,657 (1,553)
Net change 1,256 (1,371) 4,210
--------------- --------------- ---------------
Balance, end of year 2,542 1,286 2,657
--------------- --------------- ---------------
RETAINED INCOME
Balance, beginning of year 18,320 15,118 11,955
Net income 3,322 3,202 3,163
--------------- --------------- ---------------
Balance, end of year 21,642 18,320 15,118
--------------- --------------- ---------------
Total shareholder's equity $ 83,284 $ 78,706 $ 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,
------------------------
1997 1996 1995
------- ------ -------
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,322 $ 3,202 $ 3,163
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and other non-cash items 516 782 903
Realized capital losses (gains) 68 20 (67)
Increase (decrease) in life-contingent contract
benefits and contractholder funds 205 (198) 113
Change in deferred income taxes (87) 24 608
Changes in other operating assets and liabilities (657) 864 (2,705)
------------ ------------ -------------
Net cash provided by operating activities 3,367 4,694 2,015
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,606 3,522 5,423
Investment collections 10,036 5,770 7,108
Investment purchases (18,568) (15,532) (9,843)
Change in short-term investments, net 3,559 1,459 (4,675)
------------- ------------- -------------
Net cash used in investing activities (3,367) (4,781) (1,987)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH - (87) 28
CASH AT BEGINNING OF YEAR - 87 59
------------- ------------- -------------
CASH AT END OF YEAR $ - $ - $ 87
============= ============= =============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. General
Basis of presentation
The accompanying financial statements include the accounts of Northbrook Life
Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"). 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"). These financial statements have been
prepared in conformity with generally accepted accounting principles.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
Nature of operations
The Company markets life insurance and annuity products in the United States
through Dean Witter Reynolds Inc. ("Dean Witter") (see Note 4), a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. Life insurance
contracts sold by the Company include universal life and other
interest-sensitive life and variable life products. Annuities include both
deferred annuities, such as variable annuities and fixed rate single and
flexible premium annuities, and immediate annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary withdrawal or surrender by customers, subject to applicable
surrender charges. These policies and contracts are reinsured with ALIC (see
Note 3), which invests premiums and deposits to provide cash flows that will be
used to fund future benefits and expenses. In order to support competitive
crediting rates and limit interest rate risk, ALIC, as the Company's reinsurer,
adheres to a basic philosophy of matching assets with related liabilities while
maintaining adequate liquidity and a prudent and diversified level of credit
risk.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be new and proposed federal
and state regulation and legislation that would allow banks greater
participation in the securities and insurance businesses, which will present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and interest-sensitive
life insurance is enhanced by the tax incentives available under current law.
Any legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; (2) increasing competition in capital
markets; and (3) reopening stock/mutual company disagreements related to such
issues as taxation disparity between mutual and stock insurance companies.
The Company is authorized to sell life and annuity products in all states except
New York, as well as in the District of Columbia and Puerto Rico. The top
geographic locations for statutory premiums and deposits earned by the Company
are California, Florida and Texas for the year ended December 31, 1997. No other
jurisdiction accounted for more than 5% of statutory premiums and deposits. All
premiums and contract charges are ceded to ALIC under reinsurance agreements.
F-6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are recognized for declines in the value of
fixed income securities that are other than temporary. Such writedowns are
included in realized capital gains and losses. Short-term investments are
carried at cost 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. Accrual
of income is suspended for fixed income securities that are in default or when
the receipt of interest payments is in doubt. Realized capital gains and losses
are determined on a specific identification basis.
Reinsurance
The Company has reinsurance agreements whereby all premiums, contract charges,
credited interest, policy benefits and certain expenses are ceded to ALIC and
reflected net of such cessions in the statements of operations. The amounts
shown in the Company's statements of operations relate to the investment of
those assets of the Company that are not transferred to ALIC under reinsurance
agreements. Reinsurance recoverable and the related reserve for life-contingent
contract benefits and contractholder funds are reported separately in the
statements of financial position. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Recognition of premium revenues and contract charges
Revenues on interest-sensitive life insurance policies are comprised of contract
charges and fees, and are recognized when assessed against the policyholder
account balance. Revenues on most annuities, which are considered investment
contracts, include contract charges and fees for contract administration and
surrenders. These revenues are recognized when levied against the contract
balance.
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 at the enacted tax
rates, and reflect the impact of reinsurance agreements. Deferred income taxes
arise primarily from unrealized capital gains and losses on fixed income
securities carried at fair value.
Separate Accounts
The Company issues flexible premium deferred variable annuity contracts and
single premium variable life policies, the assets and liabilities of which are
legally segregated and reflected in the accompanying statements of financial
position as assets and liabilities of the Separate Accounts (Northbrook Variable
Annuity Account, Northbrook Variable Annuity Account II and Northbrook Life
Variable Life Separate Account A, unit investment trusts registered with the
Securities and Exchange Commission).
Assets of the Separate Accounts are carried at fair value. Investment income and
realized capital gains and losses of the Separate Accounts accrue directly to
the policy- and contractholders and, therefore, are not included in the
Company's statements of operations. Revenues to the Company from the Separate
Accounts consist of contract maintenance fees, administration fees, mortality
and expense risk charges, cost of insurance charges and tax expense charges, all
of which are ceded to ALIC.
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits, which relates to structured
settlement annuities and supplemental contracts with life contingencies, is
computed on the basis of assumptions as to future investment yields, mortality
and expenses. These assumptions include provisions for adverse deviation and
generally vary by such characteristics as type of coverage, year of issue and
policy duration. Reserve interest rates ranged from 4.00% to 11.00% during 1997.
F-7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Contractholder funds
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most annuities and
universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. During 1997, credited interest rates on
contractholder funds ranged from 3.30% to 9.51% for those contracts with fixed
interest rates and from 3.25% to 7.39% for those with flexible rates.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Related Party Transactions
Reinsurance
Premiums and contract charges ceded to ALIC were $1,979 and $83,559 in 1997,
$3,775 and $60,744 in 1996, and $2,284 and $52,348 in 1995, respectively.
Credited interest, policy benefits and expenses ceded to ALIC amounted to
$201,526, $218,088 and $229,525 in 1997, 1996 and 1995, respectively. Investment
income earned on the assets which support contractholder funds is not included
in the Company's financial statements as those assets are owned and managed by
ALIC under the terms of reinsurance agreements.
Business operations
The Company utilizes services and business facilities owned or leased, and
operated by AIC in conducting its business activities. The Company reimburses
AIC for the operating expenses incurred by AIC on behalf of the Company. The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $7,842, $8,074 and $5,341 in 1997, 1996 and 1995, respectively. Of these
costs, the Company retains investment related expenses. All other costs are
ceded to ALIC under reinsurance agreements.
4. Exclusive Distribution Agreement
The Company and ALIC have a strategic alliance with Dean Witter to develop,
market and distribute proprietary annuity and life insurance products through
Dean Witter account executives. Dean Witter provides a portion of the funding
for these products through loans to an affiliate of the Company. An affiliate of
Dean Witter, Dean Witter InterCapital Inc., is the investment manager for the
Dean Witter Variable Investment Series, the funds in which the assets of the
Separate Accounts are invested.
Under the terms of the strategic alliance, the Company has agreed to use Dean
Witter as an exclusive distribution channel for the Company's products. Although
the strategic alliance is cancelable by either party, termination of the
alliance would not impact existing policies and contracts.
F-8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
5. INVESTMENTS
Fair values
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- --------- -------
<S> <C> <C> <C> <C>
At December 31, 1997
U.S. government and agencies $ 8,638 $ 823 $ - $ 9,461
Municipal 1,143 28 - 1,171
Corporate 25,913 897 (12) 26,798
Mortgage-backed securities 36,797 2,315 (140) 38,972
-------- ------- ------ -------
Total fixed income securities $ 72,491 $4,063 $(152) $76,402
======== ======= ====== =======
At December 31, 1996
U.S. government and agencies $ 8,629 $ 193 $ (54) $ 8,768
Municipal 873 48 - 921
Corporate 16,902 260 (69) 17,093
Mortgage-backed securities 39,096 1,883 (282) 40,697
-------- ------ ------ -------
Total fixed income securities $ 65,500 $2,384 $(405) $67,479
======== ======= ====== ========
</TABLE>
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ----------
<S> <C> <C>
Due in one year or less $ 2,133 $ 2,155
Due after one year through five years 5,343 5,472
Due after five years through ten years 19,410 20,217
Due after ten years 8,808 9,586
------------ ----------
35,694 37,430
Mortgage-backed securities 36,797 38,972
------------ ----------
Total $ 72,491 $ 76,402
============ ==========
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
F-9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Net Investment Income
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed income securities $ 5,364 $ 4,675 $ 4,633
Short-term investments 84 390 215
----------- ----------- -----------
Investment income, before expense 5,448 5,065 4,848
Investment expense 302 177 66
----------- ----------- -----------
Net investment income $ 5,146 $ 4,888 $ 4,782
=========== =========== ===========
Realized capital gains and losses
Year Ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
Fixed income securities $ (70) $ (22) $ 67
Short-term investments 2 2 -
------------- ------------- -------------
Realized capital gains and losses (68) (20) 67
Income tax benefit (expense) 24 7 (23)
------------- ------------- -------------
Realized capital losses and gains, after tax $ (44) $ (13) $ 44
============= ============= =============
</TABLE>
Excluding calls and prepayments, gross losses of $70 and $32 and gross gains of
$67 were realized on sales of fixed income securities during 1997, 1996 and
1995, respectively.
Unrealized net capital gains
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Cost/ Fair Unrealized
Amortized Cost Value Net Gains
-------------- ----- -------------
<S> <C> <C> <C>
Fixed income securities $ 72,491 $ 76,402 $ 3,911
============== ============== (1,369)
Deferred income taxes -------------
Unrealized net capital gains $ 2,542
=============
</TABLE>
F-10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Change in unrealized net capital gains
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ------- ------- -------
<S> <C> <C> <C>
Fixed income securities $ 1,932 $(2,108) $ 6,477
Deferred income taxes (676) 737 (2,267)
------- ------- -------
Increase (decrease) in unrealized net
capital gains $ 1,256 $(1,371) $ 4,210
======= ======= =======
</TABLE>
Securities on deposit
At December 31, 1997, fixed income securities with a carrying value of $8,039
were on deposit with regulatory authorities as required by law.
6. Financial Instruments
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including deferred income
taxes and reserve for life-contingent contract benefits) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income,
are generally of a short-term nature. It is assumed that their carrying value
approximates fair value.
Financial assets
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed income securities $ 76,402 $ 76,402 $ 67,479 $ 67,479
Short-term investments 3,031 3,031 6,590 6,590
Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
</TABLE>
Fair values for fixed income securities are based on quoted market prices.
Short-term investments are highly liquid investments with maturities of less
than one year whose carrying value approximates fair value. Separate Accounts
assets are carried in the statements of financial position at fair value.
F-11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Financial liabilities
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $ 1,977,479 $ 1,951,214 $ 2,143,482 $ 2,118,583
Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
7. Income Taxes
The Company joins the Corporation and its other eligible domestic subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
and is party to a federal income tax allocation agreement (the "Tax Sharing
Agreement"). Under the Tax Sharing Agreement, the Company paid to or received
from the Corporation the amount, if any, by which the Allstate Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this results in the
Company's annual income tax provision being computed, with adjustments, as if
the Company filed a separate return.
Prior to the Distribution, the Corporation and all of its eligible domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax
Sharing Agreement, the Company, through the Corporation, paid to or received
from the Sears Group the amount, if any, by which the Sears Tax Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Allstate Group
filed a separate consolidated return, except that items such as net operating
losses, capital losses or similar items, which might not be recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.
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
Sears Tax Sharing Agreement with respect to the Allstate Group's federal income
tax liability.
F-12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The components of the deferred income tax assets and liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred assets
Separate Accounts $ 149 $ -
------- -------
Deferred liabilities
Difference in tax bases of investments (1,454) (1,392)
Unrealized net capital gains (1,369) (693)
------- -------
Total deferred liabilities (2,823) (2,085)
-------- --------
Net deferred liability $(2,674) $(2,085)
======== ========
</TABLE>
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 1,843 $ 1,642 $ 1,078
Deferred (87) 24 608
----------- ----------- -----------
Total income tax expense $ 1,756 $ 1,666 $ 1,686
=========== =========== ===========
</TABLE>
The Company paid income taxes of $2,236, $2,308 and $4,980 in 1997, 1996 and
1995, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.4) (0.6) -
Other - (0.2) (0.3)
---- ----- -----
Effective federal income tax rate 34.6% 34.2% 34.7%
==== ==== ====
</TABLE>
F-13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1997, approximately $16,
will result in federal income taxes payable of $6 if distributed by the Company.
No provision for taxes has been made as the Company has no plan to distribute
amounts from this account. No further additions to the account have been
permitted since the Tax Reform Act of 1984.
8. Statutory Financial Information
The following tables reconcile net income for the year ended December 31, and
shareholder's equity at December 31, 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
----------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance per generally accepted accounting principles $ 3,322 $ 3,202 $ 3,163
Deferred income taxes (87) 24 608
Statutory investment reserves 79 30 (28)
Other (405) (691) (1,443)
----------- ------------ ------------
Balance per statutory accounting practices $ 2,909 $ 2,565 $ 2,300
=========== ============ ============
</TABLE>
F-14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDER'S
EQUITY
----------------
1997 1996
------- -------
<S> <C> <C>
Balance per generally accepted accounting principles $ 83,284 $ 78,706
Deferred income taxes 2,674 2,085
Unrealized gain/loss on fixed income securities (3,911) (1,979)
Non-admitted assets and statutory investment
reserves (4,431) (3,317)
Other (1,939) (397)
---------- ------------
Balance per statutory accounting practices $ 75,677 $ 75,098
========== ============
</TABLE>
Permitted statutory accounting practices
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Illinois
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company follows a permitted statutory accounting practice
whereby it includes amounts receivable from an affiliated insurance company in
statutory admitted assets at a level which exceeds the threshold prescribed by
the Illinois Department of Insurance by $7,737.
Final approval of the NAIC's proposed "Comprehensive Guide" on statutory
accounting principles is expected in early 1998. Implementation could be as
early as January 1, 1999. The requirements of the Comprehensive Guide are not
expected to have a material impact on statutory surplus of the Company.
Under the NAIC's proposed accounting practices, the Company's practice related
to its receivable from affiliate will be prescribed rather than permitted.
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 1998 without prior approval of the Illinois Department of Insurance is
$7,318.
F-15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Gross Net
Year ended December 31, 1997 amount Ceded amount
- ---------------------------- -------- -------- ------
<S> <C> <C> <C>
Life insurance in force $ 515,890 $ 515,890 $ -
=========== =========== =========
Premiums and contract charges:
Life and annuities $ 85,538 $ 85,538 $ -
=========== =========== =========
Gross Net
Year ended December 31, 1996 amount Ceded amount
- ---------------------------- ------- ------ ------
Life insurance in force $ 556,242 $ 556,242 $ -
=========== ========== =========
Premiums and contract charges:
Life and annuities $ 64,519 $ 64,519 $ -
=========== ========== =========
Gross Net
Year ended December 31, 1995 amount Ceded amount
- ---------------------------- ------ ----- ------
Life insurance in force $ 610,478 $ 610,478 $ -
=========== ========== =========
Premiums and contract charges:
Life and annuities $ 54,632 $ 54,632 $ -
=========== ========== =========
</TABLE>
F-16
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Report. The page
number, if any, listed opposite a document indicates the page number in the
sequential numbering system in the manually signed original of this Report where
such document can be found.
(1) The financial statements filed as part of this Report are
listed in Item 8.
(2) Financial Statement Schedules
Schedule IV - Reinsurance page F-16
(3) Exhibits
Financial Data Schedule
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHBROOK LIFE INSURANCE COMPANY
By /s/ LOUIS G. LOWER, II
----------------------
Louis G. Lower, II
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date March 30, 1998
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ LOUIS G. LOWER, II
----------------------
Louis G. Lower, II
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date March 30, 1998
------------------
By */s/ PETER H. HECKMAN
----------------------
Peter H. Heckman
President and Chief Operating Officer
Date March 25, 1998
-------------------
By /s/ MICHAEL J. VELOTTA
----------------------
Michael J. Velotta
Vice President, Secretary and
General Counsel
Date March 30, 1998
-------------------
By */s/ KEVIN R. SLAWIN
--------------------
Kevin R. Slawin
Vice President and Director
Date March 26, 1998
-------------------
By */s/ KEITH A. HAUSCHILDT
------------------------
Keith A. Hauschildt
Assistant Vice President and Controller
(Chief Accounting Officer)
Date March 25, 1998
-------------------
*/Pursuant to Power of Attorney filed herewith.
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
AND THE FORM 10-K
Know all men by these presents that Peter H. Heckman whose signature appears
below, constitutes and appoints Louis G. Lower, II, and Michael J. Velotta, and
each of them, his attorneys-in-fact, with power of substitution, and him in any
and all capacities, to sign any reports and amendments thereto for the Form 10-K
for Northbrook Life Insurance Company 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.
March 25, 1998
- -------------------------------
Date
/s/ PETER H. HECKMAN
- -------------------------------
Peter H. Heckman
President and Chief Operating Officer
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
AND THE FORM 10-K
Know all men by these presents that Kevin R. Slawin whose signature appears
below, constitutes and appoints Louis G. Lower, II, and Michael J. Velotta, and
each of them, his attorneys-in-fact, with power of substitution, and him in any
and all capacities, to sign any reports and amendments thereto for the Form 10-K
for Northbrook Life Insurance Company 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.
March 26, 1998
- -------------------------------
Date
/s/ KEVIN R. SLAWIN
- -------------------------------
Kevin R. Slawin
Vice President and Director
<PAGE>
POWER OF ATTORNEY
WITH RESPECT TO THE NORTHBROOK LIFE INSURANCE COMPANY
AND THE FORM 10-K
Know all men by these presents that Keith A. Hauschildt whose signature appears
below, constitutes and appoints Louis G. Lower, II, and Michael J. Velotta, and
each of them, his attorneys-in-fact, with power of substitution, and him in any
and all capacities, to sign any reports and amendments thereto for the Form 10-K
for Northbrook Life Insurance Company 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.
March 25, 1998
- -------------------------------
Date
/s/ KEITH A. HAUSCHILDT
- -------------------------------
Keith A. Hauschildt
Assistant Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
STATEMENTS OF FINANCIAL POSITION AT DECEMBER 31, 1997; STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE
YEAR ENDED DECEMBER 31, 1997; AND STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000716791
<NAME> NORTHBROOK LIFE INSURANCE COMPANY
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<S> <C>
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0
0
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0
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</TABLE>
