FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 33-90272
33-84480
33-50884
NORTHBROOK LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
ARIZONA 36-3001527
(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)
847/402-2400
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares of each of the issuer's classes of common
stock, as of September 30, 1999; there were 25,000 shares of common capital
stock outstanding, par value $100 per share all of which shares are held by
Allstate Life Insurance Company.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Statements of Financial Position As Of
September 30, 1999 (Unaudited) and December 31, 1998 3
Statements of Operations
Three Months Ended September 30, 1999
and September 30, 1998 (Unaudited)
Nine Months Ended September 30, 1999
and September 30, 1998 (Unaudited) 4
Statements of Cash Flows
Nine Months Ended September 30, 1999
and September 30, 1998(Unaudited) 5
Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk* N/A
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and use of Proceeds* N/A
Item 3. Defaults Upon Senior Securities* N/A
Item 4. Submission of Matters to a Vote of Security Holders* N/A
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page
*Omitted pursuant to General Instruction H(2) of Form 10-Q
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
($ in thousands, except par value data) (UNAUDITED)
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $87,390 and $81,156) .......... $ 86,523 $ 86,336
Short-term ....................................... 4,047 5,083
----------- -----------
Total investments .......................... 90,570 91,419
Reinsurance recoverable from
Allstate Life Insurance Company .................. 2,020,444 2,148,091
Other assets ........................................ 6,525 6,705
Separate Accounts ................................... 7,313,227 7,031,083
----------- -----------
TOTAL ASSETS ............................... $ 9,430,766 $ 9,277,298
=========== ===========
LIABILITIES
Reserve for life-contingent contract benefits ....... $ 146,183 $ 145,055
Contractholder funds ................................ 1,874,367 2,003,122
Current income taxes payable ........................ 1,828 1,830
Deferred income taxes ............................... 1,119 3,316
Payable to affiliates, net .......................... 6,766 5,085
Separate Accounts ................................... 7,313,227 7,031,083
----------- -----------
TOTAL LIABILITIES .......................... 9,343,490 9,189,491
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding ............ 2,500 2,500
Additional capital paid-in .......................... 56,600 56,600
Retained income ..................................... 28,739 25,340
Accumulated other comprehensive income:
Unrealized net capital gains and losses ......... (563) 3,367
----------- -----------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME (563) 3,367
----------- -----------
TOTAL SHAREHOLDER'S EQUITY ................. 87,276 87,807
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY . $ 9,430,766 $ 9,277,298
=========== ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
($ in thousands) 1999 1998 1999 1998
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
REVENUES
Net investment income ........... $ 1,684 $ 1,457 $ 4,668 $ 4,267
Realized capital gains and losses (8) 12 557 12
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,676 1,469 5,225 4,279
Income tax expense .............. 586 524 1,826 1,500
------- ------- ------- -------
NET INCOME ...................... $ 1,090 $ 945 $ 3,399 $ 2,779
======= ======= ======= =======
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
($ in thousands) 1999 1998
-------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................ $ 3,399 $ 2,779
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other
non-cash items ................................. 192 397
Realized capital gains and losses .................. (557) (12)
Changes in:
Reserve for life-contingent contract benefits
and contractholder funds ................... 20 271
Income taxes payable ........................... (82) 922
Other operating assets and payable to affiliates 1,074 3,804
-------- --------
Net cash provided by operating activities .. 4,046 8,161
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales ................................ 16,059 --
Investment collections ............................. 6,007 7,681
Investment purchases ............................... (27,244) (15,782)
Change in short-term investments, net ..................... 1,132 (36)
-------- --------
Net cash used in investing activities ...... (4,046) (8,137)
-------- --------
NET INCREASE IN CASH ...................................... -- 24
CASH AT THE BEGINNING OF PERIOD ........................... -- --
-------- --------
CASH AT END OF PERIOD ..................................... $ -- $ 24
======== ========
</TABLE>
See notes to financial statements.
5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Northbrook
Life Insurance Company (the "Company"), a wholly owned subsidiary of
Allstate Life Insurance Company ("ALIC"), which is wholly owned by
Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The
Allstate Corporation (the "Corporation"). These financial statements have
been prepared in conformity with generally accepted accounting principles.
The financial statements and notes as of September 30, 1999 and for the
three month and nine month periods ended September 30, 1999 and 1998 are
unaudited. The interim financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods.
The financial statements and notes should be read in conjunction with the
financial statements and notes thereto included in the Northbrook Life
Insurance Company Annual Report on Form 10-K for 1998. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
Effective January 1, 1999, the Company adopted Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance concerning when
to recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related
assessments should be recognized as liabilities when all of the following
criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an
entity to pay an assessment has occurred and 3) the amount of the
assessment can be reasonably estimated. The adoption of this statement had
an immaterial impact on the Company's results of operations and financial
position.
To conform with the 1999 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
2. REINSURANCE
The Company has reinsurance agreements whereby substantially all premiums,
contract charges, credited interest, policy benefits and certain expenses
are ceded to ALIC, and reflected net of such reinsurance in the statements
of operations. The amounts shown in the Company's statements of operations
relate to the investment of those assets of the Company that are not
transferred under reinsurance agreements. Reinsurance recoverable and the
related reserve for life-contingent contract benefits and contractholder
funds are reported separately in the statements of financial position. The
Company continues to have primary liability as the direct insurer for
risks reinsured.
6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Investment income earned on the assets which support contractholder funds
and the reserve for life-contingent contract benefits is not included in
the Company's financial statements as those assets are owned and managed
by the assuming company under the terms of reinsurance agreements. The
following amounts were ceded to ALIC under reinsurance agreements.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
($ in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
Premiums $ 175 $ 883 $ 2,117 $ 1,893
Contract charges 29,919 25,684 87,499 76,317
Credited interest, policy
benefits, and certain
expenses 57,864 56,435 171,725 162,165
3. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
($ in thousands) 1999 1998
------------------------------------ --------------------------------
AFTER- AFTER-
PRETAX TAX TAX PRETAX TAX TAX
------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C>
Unrealized capital gains and losses:
Unrealized holding
(losses) gains arising
during the period $ (1,213) $425 $ (788) $2,235 $(783) $ 1,452
Less: reclassification
adjustment for realized
net capital
(losses)gains included in (8) 3 (5) 12 (4) 8
net income -------- -------- -------- -------- ------- --------
Unrealized net capital
(losses) gains (1,205) 422 (783) 2,223 (779) 1,444
-------- -------- -------- -------- ------- --------
Other comprehensive
(loss) income $ (1,205) $ 422 (783) $ 2,223 $ (779) 1,444
======== ======== ======== =======
Net income 1,090 945
-------- --------
Comprehensive
income $ 307 $2,389
======== ========
</TABLE>
7
<PAGE>
<TABLE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
($ in thousands) 1999 1998
------------------------------------ --------------------------------
AFTER- AFTER-
PRETAX TAX TAX PRETAX TAX TAX
------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C>
Unrealized capital gains and losses:
Unrealized holding
(losses) gains arising
during the period $ (5,490) $1,922 $ (3,568) $2,653 $(929) $ 1,724
Less: reclassification
adjustment for realized
net capital
gains included in 557 (195) 362 12 (4) 8
net income -------- -------- -------- -------- ------- --------
Unrealized net capital
(losses) gains (6,047) 2,117 (3,930) 2,641 (925) 1,716
-------- -------- -------- -------- ------- --------
Other comprehensive
(loss) income $ (6,047) $2,117 (3,930) $ 2,641 $ (925) 1,716
======== ====== ======== =======
Net income 3,399 2,779
-------- --------
Comprehensive
(loss) income $ (531) $4,495
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATION AND LEGAL PROCEEDINGS
The Company is subject to the effects of a changing social, economic and
regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing
banks from engaging in the securities and insurance business, tax law
changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of
various personal investment vehicles, and proposed legislation to prohibit
the use of gender in determining insurance rates and benefits. The
ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. In
the opinion of management, the ultimate liability, if any, in one or more
of these actions in excess of amounts currently reserved is not expected
to have a material effect on the results of operations, liquidity or
financial position of the Company.
8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
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 thereto found under items 7 and
8 of Part II of the Northbrook Life Insurance Company Annual Report on
Form 10-K for the year ended December 31, 1998.
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"),
currently markets savings products and variable life insurance products
through Dean Witter Reynolds Inc. ("Dean Witter"), a wholly owned
subsidiary of Morgan Stanley Dean Witter. Savings products consist of
fixed annuity products, including indexed and market value adjusted
annuities, as well as variable annuities. The financial statements also
include the impacts of structured settlement annuities, universal life and
single premium life policies, which the Company no longer actively sells.
The Company re-domesticated its operations from Illinois to Arizona in
1998. The Company has identified itself as a single segment entity.
The assets and liabilities related to variable annuity contracts and
variable life policies are legally segregated and reflected as Separate
Account assets and liabilities and 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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
($ in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net investment income $ 1,684 $ 1,457 $ 4,668 $ 4,267
======= ======= ======= =======
Realized capital gains
and losses, after tax $ (5) $ 8 $ 362 $ 8
======= ====== ====== ======
Net income $ 1,090 $ 945 $ 3,399 $ 2,779
======= ====== ======= =======
Total investments $90,570 $90,392 $90,570 $90,392
======= ======= ======= =======
</TABLE>
The Company has reinsurance agreements under which substantially all
contract and policy related transactions are transferred to ALIC. The
Company's results of operations include only net investment income and
realized capital gains and losses earned on the assets of the Company that
are not transferred under the reinsurance agreements.
9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
Net income for the third quarter of 1999 was $1.1 million compared with
$945 thousand for the same period in 1998, primarily due to higher net
investment income. For the first nine months of 1999, net income increased
22.3% to $3.4 million compared to the same period last year. The increase
was driven by realized capital gains from the sale of mortgage-backed
securities and higher net investment income.
Pretax net investment income increased 15.6% in the third quarter of 1999
and 9.4% for the nine month period ended September 30, 1999 compared with
the same periods last year. For the third quarter of 1999, the increase in
net investment income was driven by larger investment balances and higher
investment yields. Increases in net investment income for the nine month
period ended September 30, 1999 was due to higher investment balances
partially offset by increased investment expenses. Investments at
September 30, 1999, excluding Separate Accounts and unrealized gains on
fixed income securities, grew 9.1% from the same period last year.
FINANCIAL POSITION
($ in thousands) SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
Fixed income securities (1) $ 86,523 $ 86,336
Short-term investments 4,047 5,083
----------- -----------
Total investments $ 90,570 $ 91,419
=========== =========
Reinsurance recoverable from ALIC $ 2,020,444 $ 2,148,091
=========== ===========
Separate Account assets and liabilities $ 7,313,227 $ 7,031,083
=========== ===========
Reserve for life-contingent contract benefits $ 146,183 $ 145,055
=========== ==========
Contracholder funds $ 1,874,367 $ 2,003,122
=========== ===========
(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $87,390 and $81,156 at September 30, 1999 and
December 31, 1998, respectively.
Total investments were $90.6 million at September 30, 1999 compared to
$91.4 million at December 31, 1998. The investment of positive cash flows
generated from operations were more than offset by a decrease in
unrealized net capital gains on fixed income securities. At September 30,
1999, unrealized net capital losses on fixed income securities were $867
thousand compared to unrealized net capital gains of $5.2 million at
December 31, 1998. The significant change in the unrealized gain/loss
position is primarily attributable to rising interest rates.
10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
At September 30, 1999, all of the Company's fixed income securities
portfolio is rated investment grade, which is defined by the Company as a
security having a National Association of Insurance Commissioners rating
of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating.
During the nine months ended September 30, 1999, contractholder funds and
reinsurance recoverable for ALIC decreased by $128.8 million and $127.6
million, respectively. Deposits and interest credited to contractholders
were more than offset by fixed annuity surrenders and withdrawals and
transfers to the Separate Accounts. Reinsurance recoverable from ALIC
relates to contract benefit obligations ceded to ALIC.
Separate Account assets and liabilities increased $282.1 million to $7.31
billion at September 30, 1999. The increase was primarily attributable to
sales of variable annuity contracts and favorable investment performance
of the Separate Account investment portfolios, partially offset by
surrenders and withdrawals.
LIQUIDITY AND CAPITAL RESOURCES
Under the terms of reinsurance agreements, substantially all premiums and
deposits, excluding those relating to Separate Accounts, are transferred
to ALIC, which maintains the investment portfolios supporting the
Company's products. Substantially all payments of policyholder claims,
benefits, contract maturities, contract surrenders and withdrawals and
certain operating costs are also reimbursed by ALIC under the terms of the
reinsurance agreements. The Company continues to have primary liability as
a direct insurer for risks reinsured. The Company's ability to meet
liquidity demands is dependent on ALIC's ability to meet those demands.
ALIC's financial strength was rated Aa2, AA+ and A+ by Moody's, Standard &
Poor's and A.M. Best, respectively, at September 30, 1999.
The primary source for the remainder of the Company's funds is the
collection of principal and interest from the investment portfolio. The
Company may also receive capital contributions from ALIC. The primary uses
for the remainder of the Company's funds are to purchase investments and
pay costs associated with the maintenance of the Company's investment
portfolio.
11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
YEAR 2000
The Company is dependent upon certain services provided for it by the
Corporation including computer-related systems, and systems and equipment
not typically thought of as computer-related (referred to as "non-IT").
For this reason, the Company is reliant upon the Corporation for the
establishment and maintenance of its computer-related systems and non-IT.
The Corporation is heavily dependent upon complex computer systems and
equipment for all phases of its operations, including product
distribution, customer service, insurance processing, underwriting, loss
reserving, investments and other enterprise systems. Since many 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, remediated, or replaced
("Year 2000"). Also, non-IT contain embedded hardware or software that may
have a Year 2000 sensitive component. The Corporation believes that many
of its counterparties and suppliers also have Year 2000 issues and non-IT
issues which could affect the Corporation.
In 1995, the Corporation commenced a plan consisting of four phases which
are intended to mitigate and/or prevent the adverse effects of Year 2000
issues on its systems and equipment: 1) inventory and assessment of
affected systems and equipment, 2) remediation and compliance of systems
and equipment through strategies that include the replacement or
enhancement of existing systems, upgrades to operating systems already
covered by maintenance agreements and modifications to existing systems to
make them Year 2000 compliant, 3) testing of systems and equipment using
clock-forward testing for both current and future dates and for dates
which trigger specific processing, and 4) contingency planning to address
possible adverse scenarios and the potential financial impact to the
Corporation's results of operations, liquidity or financial position.
The Corporation believes that the first three phases of this plan,
assessment, remediation and testing, including clock-forward testing which
was performed on the Corporation's systems and equipment and non-IT, are
complete. It is expected that the implementation and rollout of the
remediated personal computer environment will be completed by December
1999. In addition, some systems and equipment and non-IT related to
discontinued or non-critical functions of the Corporation are planned to
be abandoned by the end of 1999.
The fourth phase of this plan, contingency planning, is currently in
process. Detailed plans have been created in the event that the systems
and equipment or major external counterparties and suppliers supporting
critical processes are not Year 2000 compliant in or after the year 1999.
These plans, created by each corporate function and business unit of the
Corporation, identify and document the risks associated with the Year 2000
on their business processes. Appropriate plans have been developed to
mitigate those risks. A common inclusion in many of the plans is a
description of manual processes and personnel needed in the event of a
temporary Year 2000 failure. Contingency plans will be tested
appropriately by the corporate function or business unit for their
effective operation and for achieving their desired results. This testing
will be complete by December 1999. In addition, the Corporation's
management is reviewing all corporate function and business units' plans
for accuracy and comprehensiveness. This review will also be complete by
December 1999. Monitoring of these plans will continue throughout the end
of 1999 and beyond, as needed.
12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
The final step of the contingency planning phase includes the
establishment of a Year 2000 Command Center and wellness checks for the
Corporation's systems and equipment. The Command Center will be in
operation 24 hours a day for several days before and after January 1, 2000
and other critical Year 2000 dates, to serve as a center of expertise in
the event a Year 2000 problem is encountered at the Corporation. Wellness
checks will be performed by designated personnel throughout the
Corporation on specified systems and non-IT to determine that they are
functioning properly on or after January 1, 2000. The results of the
wellness checks will be reported to the Command Center.
The Corporation has considered numerous risk scenarios during the
contingency planning phase. Through this planning, management believes
that the scenario which could be considered the worst case, includes a
widespread, prolonged failure of public utility systems which would not
only cause power outages for the Corporation, but also cause
telecommunications, banking or external counterparty and supplier service
outages. While the Corporation has assessed and will continue to assess
data on the utility, telecommunication, and banking industries, it
acknowledges the possibility that a prolonged widespread outage in any or
all of these industries could lead to a worse case scenario. However, the
Corporation does not consider such prolonged widespread outages to be
reasonably likely. Therefore, the Corporation has focused its most
reasonably likely worse case scenario contingency planning on limited
scale outages in order to ensure the ability to deal with risks of likely
scenarios. Because the Corporation is prepared for outages on a localized
basis as part of normal business operations, the Corporation considers the
impacts of this most reasonably likely scenario to be immaterial to the
Corporation's results of operations, liquidity or financial position.
The Company markets its products exclusively through Dean Witter.
Management believes that its interactions and interfaces with Dean Witter
are Year 2000 compliant. Therefore, the impacts of Year 2000 to the
Company's results of operations, liquidity and financial position are
expected to be immaterial.
In addition, the Corporation is actively working with its major external
counterparties and suppliers, including public utility companies and bank
and brokers involved in its distribution channel, to assess their
compliance efforts and the Corporation's exposure to both their Year 2000
issues and non-IT issues. This assessment has included soliciting external
counterparties and suppliers, evaluating responses received and testing
third party interfaces and interactions to determine compliance. Currently
the Corporation has solicited, and has received responses from, the
majority of its counterparties and suppliers. These responses generally
state that they believe they will be Year 2000 compliant and that no
transactions will be affected. However, certain vendors are also in
ongoing assessment and testing of their products whereby they are
currently unable to identify all potential problems in certain products
which are used by the Corporation. The Corporation believes that these
vendors will make no statements regarding their Year 2000 readiness other
than to publish declarations addressing specific compliance issues
identified with their products. The Corporation is working with these key
vendors and has procedures in place to stay aware of any compliance issues
encountered by these vendors. The Corporation has also decided to test
certain interfaces and interactions to gain additional assurance on third
party compliance. Currently, the Corporation does not have sufficient
information to determine whether all of its external counterparties and
suppliers will be Year 2000 compliant. If they are not Year 2000
compliant, the Corporation is not able to determine the impact of any
consequent losses on its results of operations, liquidity or financial
position.
13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1999 AND 1998
The Corporation may be exposed to the risk that the issuers of investments
in its portfolios will be adversely impacted by Year 2000 issues. The
Corporation assesses the impact which Year 2000 issues have on the
Corporation's investments as part of due diligence for proposed new
investments and in its ongoing review of all current portfolio holdings.
Any recommended actions with respect to individual investments are
determined by taking into account the potential impact of Year 2000 on the
issuer. Based on its current review, the Corporation believes that
although Year 2000 issues may temporarily affect the market or individual
issuers, the potential impact of Year 2000 on its investment portfolio
will not be material.
The Corporation presently believes that it will resolve the Year 2000
issue in a timely manner. Year 2000 costs are expensed as incurred. The
majority of the expenses related to this project have been incurred as of
September 30, 1999. The Corporation estimates that approximately $125
million in costs will be incurred between the years of 1995 and 2000.
These amounts include costs directly related to fixing Year 2000 issues,
such as modifying software and hiring Year 2000 solution providers, as
well as costs to replace certain non-compliant systems which would not
have been otherwise replaced. A portion of these costs will be incurred by
the Company on a pro rata basis of usage of the computer-related systems
and non-IT, as compared to the usage of all entities which share these
services with the Corporation. These amounts are not expected to be
material to the results of operations of the Company.
PENDING ACCOUNTING STANDARDS
In July 1999, the Financial Accounting Standards Board delayed the
effective date of Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
replaces existing pronouncements and practices with a single, integrated
accounting framework for derivatives and hedging activities. The delay was
effected through the issuance of SFAS No. 137, which extends the effective
date of SFAS No. 133 requirements to fiscal years beginning after June 15,
2000. As such, the Company expects to adopt the provisions of SFAS No. 133
as of January 1, 2001. Based on existing interpretations of the
requirements of SFAS No. 133, the impact of adoption is not expected to be
material to the operations or financial position of the Company.
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. In order to comply with the terms of the safe
harbor, the Company notes the following important factor that could cause
the Company's actual results and experience with respect to
forward-looking statements to differ materially from the anticipated
results or other expectations expressed in the Company's forward-looking
statement:
The Corporation presently believes that it will resolve the Year 2000
issues affecting its computer operations in a timely manner, and that
the costs incurred between the years of 1995 and 2000 in resolving
those issues will be approximately $125 million. However, the extent
to which the computer operations of the Corporation's external
counterparties and suppliers are adversely affected could, in turn,
affect the Corporation's ability to communicate with such
counterparties and suppliers, could increase the cost of resolving
the Year 2000 issues, and could materially affect the Corporation's
results of operations, liquidity and financial condition in any
period or periods.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
(2) None
(3)(i) Amended and Restated Articles of Incorporation and Articles of
Redomestication of Northbrook Life Insurance Company (Incorporated herein
by reference to the Company's Form 10-K Annual Report for the year ended
December 31, 1998)
(3)(ii) Amended and Restated By-laws of Northbrook Life Insurance Company
(Incorporated herein by reference to the Company's Form 10-K Annual Report
for the year ended December 31, 1998)
(4) None
(10)(a) Reinsurance Agreement between Northbrook Life Insurance Company and
Allstate Life Insurance Company (Incorporated herein by reference to the
Company's Form S-1 Registration Statement (File No. 033-84480) dated April
1, 1997)
(10)(b) Amendment No. 1 to the Reinsurance Agreement between Northbrook Life
Insurance Company and Allstate Life Insurance Company, dated June 6, 1991.
(Incorporated herein by reference to the Company's Form 10-Q dated May 14,
1999).
(10)(c) Amendment No. 2 to the Reinsurance Agreement between Northbrook Life
Insurance Company and Allstate Life Insurance Company, dated September 28,
1993. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(d) Amendment No. 3 to the Reinsurance Agreement between Northbrook Life
Insurance Company and allstate Life Insurance Company, dated February 23,
1995. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(e) Amendment No. 4 to the Reinsurance Agreement between Northbrook Life
Insurance Company and Alstate Life Insurance Company, dated June 12, 1995.
(Incorporated herein by reference to the Company's Form 10-Q dated May 14,
1999).
(10)(f) Amendment No. 5 to the Reinsurance Agreement between Northbrook Life
Insurance Company and Allstate Life Insurance Company, dated January 26,
1996. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(g) Amendment No. 6 to the Reinsurance Agreement between Northbrook Life
Insurance Company and Allstate Life Insurance Company, dated January 15,
1997. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(h) Amendment No. 7 to the Reinsurance Agreement between Northbrook Life
Insurance Company and Allstate Life Insurance Company, dated October 22,
1998. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(i) Modified Coinsurance Agreement between Northbrook Life Insurance Company
and Allstate Life Insurance Company, dated October 20, 1987. (Incorporated
herein by reference to the Company's Form 10-Q dated May 14, 1999).
15
<PAGE>
(10)(j) Amendment No. 1 to the Modified Coinsurance Agreement between Northbrook
Life Insurance Company and Allstate Life Insurance Company, dated June 6,
1991. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(k) Amendment No. 2 to the Modified Coinsurance Agreement between Northbrook
Life Insurance Company and Allstate Life Insurance Company, dated June 8,
1995. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(l) Amendment No. 3 to the Modified Coinsurance Agreement between Northbrook
Life Insurance Company and Allstate Life Insurance Company, dated February
23, 1995. (Incorporated herein by reference to the Company's Form 10-Q
dated May 14, 1999).
(10)(m) Amendment No. 4 to the Modified Coinsurance Agreement between Northbrook
Life Insurance Company and Allstate Life Insurance Company, January 26,
1996. (Incorporated herein by reference to the Company's Form 10-Q dated
May 14, 1999).
(10)(n) Amendment No. 5 to the Modified Coinsurance Agreement between Northbrook
Life Insurance Company and Allstate Life Insurance Company, dated January
15, 1997. (Incorporated herein by reference to the Company's Form 10-Q
dated May 14, 1999).
(10)(o) Amendment No. 6 to the Modified Coinsurance Agreement between Northbrook
Life Insurance Company and Allstate Life Insurance Company, dated October
22, 1998. (Incorporated herein by reference to the Company's Form 10-Q
dated May 14, 1999).
(11) Not Required
(15) None
(18) None
(19) None
(22) None
(23) Not required
(24) Power of Attorney - Samuel H. Pilch
(27) Financial Data Schedule
(b) Reports on 8-K
No reports on Form 8-K were filed during the third quarter of 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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, on the 12th day of November, 1999.
NORTHBROOK LIFE INSURANCE COMPANY
---------------------------------
(Registrant)
/s/ LOUIS G. LOWER, II CHAIRMAN OF THE BOARD OF DIRECTORS
- ------------------------ AND CHIEF EXECUTIVE OFFICER
LOUIS G. LOWER, II (Principal Executive Officer)
/s/ SAMUEL H. PILCH CONTROLLER
- ------------------------ (Chief Accounting Officer)
SAMUEL H. PILCH
17
<PAGE>
Exhibit Index
Exhibit No. Exhibit
(27) Financial Data Scehdule
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
STATEMENTS OF FINANCIAL POSITION AT SEPTEMBER 30, 1998; STATEMENTS OF
OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 AND
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998; AND STATEMENTS
OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1999.
</LEGEND>
<CIK> 0000716791
<NAME> NORTHBROOK LIFE INSURANCE COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 86,523
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 90,570
<CASH> 0
<RECOVER-REINSURE> 2,020,444
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 9,430,766
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 146,183
<POLICY-HOLDER-FUNDS> 1,874,367
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,500
<OTHER-SE> 84,776
<TOTAL-LIABILITY-AND-EQUITY> 9,430,766
0
<INVESTMENT-INCOME> 4,668
<INVESTMENT-GAINS> 557
<OTHER-INCOME> 0
<BENEFITS> 0
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<INCOME-PRETAX> 5,225
<INCOME-TAX> 1,826
<INCOME-CONTINUING> 3,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,399
<EPS-BASIC> 0
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