<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
OF
NORTHBROOK LIFE INSURANCE COMPANY
P.O. BOX 94040, PALATINE, ILLINOIS 60094-4040
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACTS
DISTRIBUTED BY
DEAN WITTER REYNOLDS INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
-------------------
This Prospectus describes the group and individual Flexible Premium Deferred
Variable Annuity Contract ("Contract") offered by Northbrook Life Insurance
Company ("Company"), a wholly owned subsidiary of Allstate Life Insurance
Company. Dean Witter Reynolds Inc. ("Dean Witter") is the principal underwriter
and distributor of the Contracts. In certain states the Contract is only
available as a group Contract. In these states a Certificate (hereinafter
referred to as "Contract") is issued to customers of Dean Witter which
summarizes the provisions of the Master Group Policy issued to Dean Witter.
The Contract has the flexibility to allow you to shape an annuity to fit
your particular needs. It is primarily designed to aid you in long-term
financial planning and can be used for retirement planning regardless of whether
the plan qualifies for special federal income tax treatment.
This Prospectus is a concise statement of the relevant information about the
Northbrook Variable Annuity Account II ("Variable Account") which you should
know before making a decision to purchase the Contract. This Prospectus
generally describes only the variable portion of the Contract. For a brief
summary of the fixed portion of the Contract, see "The Fixed Account" on page
23.
The Variable Account invests exclusively in shares of the Dean Witter
Variable Investment Series (the "Fund"), a mutual fund managed by Dean Witter
InterCapital Inc., a wholly owned subsidiary of Dean Witter, Discover & Co.
The Company has prepared and filed a Statement of Additional Information
dated May 1, 1996, with the U.S. Securities and Exchange Commission. If you wish
to receive the Statement of Additional Information, you may obtain a free copy
by calling or writing the Company at the address below. For your convenience, an
order form for the Statement of Additional Information may be found on page 31
of this Prospectus. Before ordering, you may wish to review the Table of
Contents of the Statement of Additional Information on page 29 of this
Prospectus. The Statement of Additional Information has been incorporated by
reference into this Prospectus.
NORTHBROOK LIFE INSURANCE COMPANY
P.O. BOX 94040
PALATINE, ILLINOIS 60094-4040
(800) 654-2397
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED
OR PRECEDED BY A CURRENT PROSPECTUS FOR THE
DEAN WITTER VARIABLE INVESTMENT SERIES
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
THE CONTRACTS ARE AVAILABLE IN ALL STATES (EXCEPT NEW YORK), PUERTO RICO AND THE
DISTRICT OF COLUMBIA.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GLOSSARY.......................................... 3
INTRODUCTION...................................... 5
SUMMARY OF SEPARATE ACCOUNT EXPENSES.............. 7
CONDENSED FINANCIAL INFORMATION................... 9
PERFORMANCE DATA.................................. 12
FINANCIAL STATEMENTS.............................. 12
NORTHBROOK LIFE INSURANCE COMPANY AND THE VARIABLE
ACCOUNT.......................................... 12
Northbrook Life Insurance Company............. 12
Dean Witter Reynolds Inc...................... 12
The Variable Account.......................... 13
Dean Witter Variable Investment Series........ 13
THE CONTRACTS..................................... 15
Purchase of the Contracts..................... 15
Crediting of Initial Purchase Payments........ 15
Allocation of Purchase Payments............... 15
Value of Variable Account Accumulation
Units........................................ 16
Transfers..................................... 16
Surrender and Withdrawals..................... 17
Default....................................... 18
CHARGES AND OTHER DEDUCTIONS...................... 18
Deductions from Purchase Payments............. 18
Early Withdrawal Charge....................... 18
Contract Maintenance Charge................... 19
Administrative Expense Charge................. 19
Mortality and Expense Risk Charge............. 19
Taxes......................................... 20
Dean Witter Variable Investment Series
("Fund") Expenses............................ 20
BENEFITS UNDER THE CONTRACT....................... 20
Death Benefits Prior to the Payout Start
Date......................................... 20
Death Benefits After the Payout Start Date.... 21
<CAPTION>
PAGE
-----
<S> <C>
INCOME PAYMENTS................................... 22
Payout Start Date............................. 22
Amount of Variable Annuity Income Payments.... 22
Income Plans.................................. 22
THE FIXED ACCOUNT................................. 23
General Description........................... 23
Transfers, Surrenders, and Withdrawals........ 24
GENERAL MATTERS................................... 25
Owner......................................... 25
Beneficiary................................... 25
Delay of Payments............................. 25
Assignments................................... 25
Modification.................................. 25
Customer Inquiries............................ 25
FEDERAL TAX MATTERS............................... 26
Introduction.................................. 26
Taxation of Annuities in General.............. 26
Tax Deferral................................ 26
Non-Natural Owners.......................... 26
Diversification Requirements................ 26
Investor Control............................ 26
Taxation of Partial and Full Withdrawals.... 26
Taxation of Annuity Payments................ 27
Taxation of Annuity Death Benefits.......... 27
Penalty Tax on Premature Distributions...... 27
Aggregation of Annuity Contracts............ 27
Tax Qualified Contracts....................... 27
Restrictions Under Section 403(b) Plans..... 27
Income Tax Withholding........................ 28
VOTING RIGHTS..................................... 28
SALES COMMISSION.................................. 28
STATEMENT OF ADDITIONAL INFORMATION: TABLE OF
CONTENTS......................................... 29
ORDER FORM........................................ 31
</TABLE>
2
<PAGE>
GLOSSARY
ACCUMULATION UNIT--An accounting unit used to calculate the Cash Value in
the Variable Account prior to the Payout Start Date. Each Sub-Account of the
Variable Account has its own distinct Accumulation Unit value.
AGE--Age on last birthday.
ANNUITANT--Includes Annuitant and any Joint Annuitant. A natural person(s)
whose life determines the duration of annuity payments involving life
contingencies.
ANNUITY UNIT--An accounting unit used to calculate Variable Annuity
payments. Each Sub-Account has a distinct Annuity Unit value.
AUTOMATIC ADDITIONS--Additional Purchase Payments of $25 or more which are
made automatically from the Owner's bank account or Dean Witter Active
Assets-TM- Account.
BENEFICIARY--The person(s) designated in the Contract who, after the death
of any Owner or last surviving annuitant, may elect to receive the Death Benefit
or continue the Contract as described in "Benefits Under the Contract" on page
20.
COMPANY--The issuer of the Contract, Northbrook Life Insurance Company,
which is a wholly owned subsidiary of Allstate Life Insurance Company.
CONTRACT/CERTIFICATE--The Flexible Premium Deferred Variable Annuity
Contract known as the "Northbrook Variable Annuity II" that is described in this
prospectus.
CONTRACT ANNIVERSARY--An anniversary of the date that the Contract was
issued to the Owner.
CASH VALUE--The sum of the value of all Accumulation Units for the Variable
Account plus the value in the Fixed Account.
CONTRACT YEAR--The year commencing on either the Issue Date or a Contract
Anniversary.
DATE OF DEATH--The Date that an Owner and/or Annuitant dies causing a Death
Benefit to be due.
DEATH BENEFIT--Prior to the Payout Start Date, the amount payable on the
death of the Owner or Annuitant.
DEATH BENEFIT ANNIVERSARY--Every sixth Contract Anniversary. For example,
the 6th, 12th and 18th Contract Anniversaries are the first three Death Benefit
Anniversaries.
DOLLAR COST AVERAGING--A method to transfer $100 or more of the Cash Value
in the Money Market Sub-Account automatically to the other Sub-Accounts on a
monthly basis or other frequencies that may be offered by the Company.
DUE PROOF OF DEATH--One of the following:
(a) A copy of a certified death certificate.
(b) A copy of a certified decree of a court of competent jurisdiction as
to the finding of death.
(c) Any other proof satisfactory to the Company.
EARLY WITHDRAWAL CHARGE--The charge that may be assessed by the Company on
full or partial withdrawals of the Purchase Payments in excess of the Free
Withdrawal Amount.
ENHANCED DEATH BENEFIT--An additional Death Benefit option which can be
selected at the time the Contract is Purchased.
FIXED ACCOUNT--All of the assets of the Company that are not in separate
accounts. Contributions made to the Fixed Account are invested in the general
account of the Company.
FIXED ANNUITY--An annuity with payments having a guaranteed amount.
FREE WITHDRAWAL AMOUNT--A portion of the Cash Value which may be annually
withdrawn during the course of the Contract Year without incurring an Early
Withdrawal Charge, i.e., 15% of all Purchase Payments.
3
<PAGE>
GUARANTEE PERIOD--The period of time for which a credited rate on an
allocation or transfer to the Fixed Account is guaranteed.
INCOME PAYMENTS--A series of periodic annuity payments made by the Company
to the Owner or Beneficiary.
INVESTMENT ALTERNATIVE--The Fixed Account and the eleven Sub-Accounts of the
Variable Account constitute the twelve Investment Alternatives.
JOINT ANNUITANT--The person, along with the Annuitant, whose life determines
the duration of annuity payments under a joint and last survivor annuity.
NET INVESTMENT FACTOR--The factor for a particular Sub-Account used to
determine the value of an Accumulation Unit and Annuity Unit in any Valuation
Period.
NON-QUALIFIED CONTRACTS--Contracts that do not qualify for special federal
income tax treatment.
OWNER--With respect to individual Contracts, the person or person(s)
designated as the Owner(s) in the Contract. With respect to group Contracts, an
individual participant(s) under the Contract.
PAYOUT START DATE--The date Income Payments are to begin under the Contract.
PORTFOLIOS--The mutual fund portfolios of The Dean Witter Variable
Investment Series. The Dean Witter Variable Investment Series has eleven
separate Portfolios: the Money Market Portfolio, the Quality Income Plus
Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Dividend
Growth Portfolio, the Capital Growth Portfolio, the Global Dividend Growth
Portfolio, the European Growth Portfolio, the Pacific Growth Portfolio, the
Equity Portfolio and the Strategist Portfolio.
PURCHASE PAYMENTS--The premiums paid by the Owner to the Company.
QUALIFIED CONTRACTS--Contracts issued under plans that qualify for special
federal income tax treatment.
REQUIRED MINIMUM DISTRIBUTION--For Qualified Contracts, partial withdrawals
equal to the IRS Required Minimum Distribution may be taken from the Cash Value
and sent to the Owner or deposited in the Owner's bank account or Dean Witter
Active Assets-TM- Account.
SETTLEMENT VALUE--The Cash Value less any applicable Early Withdrawal
Charges and premium tax. The Settlement Value will be calculated at the end of
the valuation period coinciding with a request for payment.
SUB-ACCOUNT--A sub-division of the Variable Account. Each Sub-Account
invests exclusively in shares of a specified Portfolio.
SYSTEMATIC WITHDRAWALS--Partial withdrawals of $100 or more may be taken
from the Cash Value and deposited in the Owner's bank account or Dean Witter
Active Assets-TM- Account or sent directly to the Owner.
VALUATION DATE--Each day that the New York Stock Exchange is open for
business, except for days in which there is an insufficient degree of trading in
the Variable Account's portfolio securities that the value of Accumulation or
Annuity Units might not be materially affected by changes in the value of the
portfolio securities. The Valuation Date does not include such Federal and
non-Federal holidays as are observed by the New York Stock Exchange.
VALUATION PERIOD--The period between successive Valuation Dates, commencing
on the close of business of each Valuation Date and ending at the close of
business of the next succeeding Valuation Date.
VARIABLE ACCOUNT--Northbrook Variable Annuity Account II, a separate
investment account established by the Company to receive and invest the Purchase
Payments paid under the Contracts.
VARIABLE ANNUITY--An annuity with payments that have no predetermined or
guaranteed dollar amounts. The payments will vary in amounts depending upon the
investment experience of one or more of the Portfolios.
4
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
1. WHAT IS THE PURPOSE OF THE CONTRACT?
The Contracts described in this Prospectus seek to allow you to accumulate
funds and to receive annuity payments ("Income Payments"), when desired, at
rates which depend upon the return achieved from the types of investments
chosen. THERE IS NO ASSURANCE THAT THIS GOAL WILL BE ACHIEVED. In attempting to
achieve this goal, the Owner can allocate Purchase Payments to one or more of
the Variable Account Portfolios. (Certain limitations may apply during the
free-look period of your Contract. See "Allocation of Purchase Payments," page
15.)
Because Income Payments and Cash Values invested in the Variable Account
depend on the investment experience of the selected Portfolios, the Owner bears
the entire investment risk for amounts allocated to the Variable Account. See
"Value of Variable Account Accumulation Units", page 16 and "Income Payments",
page 22.
2. HOW DO I PURCHASE A CONTRACT?
You may purchase the Contract from Dean Witter, the Company's authorized
sales representative. The first Purchase Payment must be at least $4,000 (for
Qualified Contracts, $1,000). Presently, the Company will accept an initial
Purchase Payment of at least $1,000, but reserves the right to increase the
minimum initial Purchase Payment amount to $4,000. See "Purchase of the
Contracts", page 15.
At the time of purchase, you will allocate your Purchase Payment among the
Investment Alternatives, subject to certain limitations described in the
"Allocation of Purchase Payments" section on page 15. All allocations must be in
whole percents from 0% to 100% and must total 100%. Allocations of amounts of no
less than $100 may also be made. Allocations may be changed by notifying the
Company in writing. See "Allocation of Purchase Payments", page 15.
3. WHAT TYPES OF INVESTMENTS UNDERLIE THE VARIABLE ACCOUNT?
The Variable Account invests exclusively in shares of the Dean Witter
Variable Investment Series (the "Fund"), a mutual fund managed by Dean Witter
InterCapital, Inc., a wholly owned subsidiary of Dean Witter, Discover & Co. The
Fund has eleven Portfolios: the Money Market Portfolio, the Quality Income Plus
Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Dividend
Growth Portfolio, the Capital Growth Portfolio, the Global Dividend Growth
Portfolio, the European Growth Portfolio, the Pacific Growth Portfolio, the
Equity Portfolio and the Strategist Portfolio. The assets of each Portfolio are
held separately from the other Portfolios and each has distinct investment
objectives and policies which are described in the accompanying Prospectus for
the Fund. In addition to the Variable Account, Owners can also allocate all or
part of their Purchase Payments to the Fixed Account. See "The Fixed Account" on
page 23.
4. CAN I TRANSFER AMOUNTS AMONG THE INVESTMENT ALTERNATIVES?
Transfers must be at least $100 or the entire amount in the Investment
Alternative, whichever is less. Transfers to any Guarantee Period of the Fixed
Account must be at least $500. Dollar Cost Averaging automatically moves funds
on a monthly basis (or other frequencies that may be offered by the Company)
from the Money Market Sub-Account to other Sub-Accounts of your choice. Certain
transfers may be restricted. See "Transfers", page 16.
5. CAN I GET MY MONEY IF I NEED IT?
All or part of the Settlement Value can be withdrawn before the earliest of
the Payout Start Date, the death of an Owner or the death of the last surviving
Annuitant. No Early Withdrawal Charges will be deducted on amounts up to the
annual Free With-
5
<PAGE>
drawal Amount, i.e., 15% of Purchase Payments made. Amounts withdrawn in excess
of the Free Withdrawal Amount may be subject to an Early Withdrawal Charge of 0%
to 6% depending on how long the withdrawn Purchase Payments have been invested
in the Contract. THE COMPANY GUARANTEES THAT THE AGGREGATE SURRENDER CHARGES
WILL NEVER EXCEED 6% OF THE PURCHASE PAYMENTS. Withdrawals and surrenders may be
subject to income tax and a 10% tax penalty. In addition, federal and state
income tax may be withheld from withdrawal and surrender amounts. Additional
restrictions may apply to Qualified Contracts. See "Surrender and Withdrawals",
page 17, and "Taxation of Annuities in General", page 26.
6. WHAT ARE THE CHARGES AND DEDUCTIONS UNDER THE CONTRACT?
To meet its Death Benefit obligations and to pay expenses not covered by the
Contract Maintenance Charge, the Company deducts a Mortality and Expense Risk
Charge of 1.25% and an Administrative Expense Charge of .10%. For Contracts with
the optional Enhanced Death Benefit provision, an additional Mortality and
Expense Risk Charge of .13% is assessed bringing the total charges for Contracts
with the Enhanced Death Benefit provision to a Mortality and Expense Risk Charge
of 1.38% and an Administrative Expense Risk Charge of .10%. See "Mortality and
Expense Risk Charge", page 19 and "Administrative Expense Charge", page 19.
Annually, the Company deducts $30 for maintaining the Contract. See "Contract
Maintenance Charge", page 19. Additional deductions may be made for certain
taxes. See "Taxes", page 20.
7. DOES THE CONTRACT PAY ANY GUARANTEED DEATH BENEFITS?
The Contracts provide that if any Owner or the last surviving Annuitant dies
prior to the Payout Start Date, a Death Benefit may be paid to the new Owner or
Beneficiary. If the Annuitant, not also an Owner dies, then the Death Benefit
may be paid to the Owner in a lump sum. If requested to be paid in a lump sum
within 180 days from the Date of Death, the Death Benefit will be the greatest
of (1) the sum of all Purchase Payments less any amounts deducted in connection
with partial withdrawals including any Early Withdrawal Charges and premium tax;
or (2) the Cash Value on the date we receive Due Proof of Death; or (3) the Cash
Value on the most recent Death Benefit Anniversary less any amounts deducted in
connection with partial withdrawals, including any Early Withdrawal Charges and
premium tax deducted from the Cash Value since that anniversary. For Contracts
with the optional Enhanced Death Benefit provision, the Death Benefit will be
the greatest of (1) through (3) above, or (4) the Enhanced Death Benefit. If the
Enhanced Death Benefit option is selected, it applies only at the death of the
Owner. It does not apply to the death of the Annuitant if different from the
Owner unless the Owner is a non-natural person. See "Death Benefits Prior to the
Payout Start Date," page 20, for a full description of Death Benefit options.
Prior to the Payout Start Date the Beneficiary has 180 days from the Date of
Death of the Owner(s) or Annuitant(s) to either elect an income plan or to take
a lump sum payment. Death Benefits after the Payout Start Date, if any, will
depend on the income plan chosen. See "Benefits Under the Contract", page 20.
8. IS THERE A FREE-LOOK PROVISION?
The Owner(s) may cancel the Contract anytime within 20 days after receipt of
the Contract, or longer if required by State law, and receive a full refund of
Purchase Payments allocated to the Fixed Account. Unless a refund of Purchase
Payments is required by State or Federal law, Purchase Payments allocated to the
Variable Account will be returned after an adjustment to reflect investment gain
or loss, less any applicable Contract expenses that occurred from the date of
allocation through the date of cancellation.
6
<PAGE>
SUMMARY OF SEPARATE ACCOUNT EXPENSES
- --------------------------------------------------------------------------------
The following fee table illustrates all expenses and fees that the Owner
will incur. The expenses and fees set forth in the table are based on charges
under the contracts and on the expenses of the separate account and the
underlying Fund for the fiscal year ended December 31, 1995.
OWNER TRANSACTION EXPENSES (ALL SUB-ACCOUNTS)
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of Purchase Payments)................. None
Early withdrawal charge (as a percentage of Purchase Payments)......................... *
</TABLE>
<TABLE>
<CAPTION>
APPLICABLE
SALES
NUMBER OF COMPLETE CONTRACT YEARS SINCE CHARGE
PURCHASE PAYMENT BEING WITHDRAWN WAS MADE PERCENTAGE
----------
<S> <C>
0 years.......................................................................................................... 6%
1 year........................................................................................................... 5%
2 years.......................................................................................................... 4%
3 years.......................................................................................................... 3%
4 years.......................................................................................................... 2%
5 years.......................................................................................................... 1%
6 years or more.................................................................................................. 0%
</TABLE>
<TABLE>
<S> <C>
Exchange Fee....................................................................... None
Annual Contract Fee................................................................ $30
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge.................................................. 1.38%**
Administrative Expense Charge...................................................... .10%
Total Separate Account Annual Expenses............................................. 1.48%**
<FN>
*There are no Contingent Deferred Sales Charges on amounts up to the Free
Withdrawal Amount.
**For Contracts without an Enhanced Death Benefit provision, the Mortality and
Expense Risk Charge is 1.25% resulting in total Separate Account Annual
Expenses of 1.35%.
</TABLE>
DEAN WITTER VARIABLE INVESTMENT SERIES ("FUND") EXPENSES
(AS A PERCENTAGE OF FUND AVERAGE ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER ANNUAL
PORTFOLIO FEES EXPENSES EXPENSES
- ---------------------------------------- ---------- -------- --------------
<S> <C> <C> <C>
Money Market............................ .50 % .03% .53%
Quality Income Plus..................... .50 %(1) .04% .54%
High Yield.............................. .50 % .04% .54%
Utilities............................... .65 %(2) .03% .68%
Dividend Growth......................... .59 %(3) .02% .61%
Capital Growth.......................... .65 % .09% .74%
Global Dividend Growth.................. .75 % .13% .88%
European Growth......................... 1.00 % .17% 1.17%
Pacific Growth.......................... 1.00 % .44% 1.44%
Equity.................................. .50 %(4) .04% .54%
Strategist.............................. .50 % .02% .52%
</TABLE>
(1) This percentage is applicable to Portfolio net assets of up to $500 million.
For net assets which exceed $500 million, the management fee will be 0.45%.
(2) This percentage is applicable to Portfolio net assets of up to $500 million.
For net assets which exceed $500 million, the management fee will be 0.55%.
(3) The management fee will be 0.625% for net assets of up to $500 million. For
net assets which exceed $500 million, but do not exceed $1 billion, the
management fee will be 0.50% and for net assets that exceed $1 billion, the
management fee will be 0.475%.
(4) This percentage is applicable to Portfolio net assets of up to $1 billion.
For net assets which exceed $1 billion, the management fee will be 0.475%.
7
<PAGE>
EXAMPLE
You (the Owner) would pay the following expenses on a $1,000 investment,
assuming a 5% annual return under the following circumstances:
If you surrender your Conract at the end of the applicable time period (or
if you annuitize for a specified period of less than 120 months):
<TABLE>
<CAPTION>
(WITH ENHANCED DEATH BENEFIT PROVISION**) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account.......................... $64 $91 $121 $241
Quality Income Plus Sub-Account................... $64 $91 $121 $242
High Yield Sub-Account............................ $64 $91 $121 $242
Utilities Sub-Account............................. $65 $96 $129 $257
Dividend Growth Sub-Account....................... $65 $93 $125 $250
Capital Growth Sub-Account........................ $66 $97 $132 $263
European Growth Sub-Account....................... $70 $111 $154 $307
Equity Sub-Account................................ $64 $91 $121 $242
Strategist Sub-Account............................ $64 $91 $120 $240
Pacific Growth Sub-Account........................ $73 $119 $167 $333
Global Dividend Growth Sub-Account................ $67 $102 $139 $278
<CAPTION>
(WITHOUT ENHANCED DEATH BENEFIT PROVISION***) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account.......................... $62 $87 $114 $227
Quality Income Plus Sub-Account................... $63 $87 $115 $228
High Yield Sub-Account............................ $63 $87 $115 $228
Utilities Sub-Account............................. $64 $92 $122 $243
Dividend Growth Sub-Account....................... $63 $89 $118 $236
Capital Growth Sub-Account........................ $65 $93 $125 $250
European Growth Sub-Account....................... $69 $107 $147 $294
Equity Sub-Account................................ $63 $87 $115 $228
Strategist Sub-Account............................ $62 $87 $113 $226
Pacific Growth Sub-Account........................ $72 $115 $161 $321
Global Dividend Growth Sub-Account................ $66 $98 $132 $264
</TABLE>
If you do not surrender your contract or if you annuitize* for a specified
period of 120 months or more, at the end of the applicable time period:
<TABLE>
<CAPTION>
(WITH ENHANCED DEATH BENEFIT PROVISION**) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account.......................... $21 $66 $112 $241
Quality income Plus Sub-Account................... $21 $66 $113 $242
High Yield Sub-Account............................ $21 $66 $113 $242
Utilities Sub-Account............................. $23 $70 $120 $257
Dividend Growth Sub-Account....................... $22 $72 $123 $263
Capital Growth Sub-Account........................ $23 $72 $123 $263
European Growth Sub-Account....................... $28 $85 $145 $307
Equity Sub-Account................................ $21 $66 $113 $242
Strategist Sub-Account............................ $21 $65 $112 $240
Pacific Growth Sub-Account........................ $31 $93 $159 $333
Global Dividend Growth Sub-Account................ $25 $76 $130 $278
<CAPTION>
(WITHOUT ENHANCED DEATH BENEFIT PROVISION***) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account.......................... $20 $61 $105 $227
Quality Income Plus Sub-Account................... $20 $62 $106 $228
High Yield Sub-Account............................ $20 $62 $106 $228
Utilities Sub-Account............................. $21 $66 $113 $243
Dividend Growth Sub-Account....................... $21 $64 $110 $236
Capital Growth Sub-Account........................ $22 $68 $116 $250
European Growth Sub-Account....................... $26 $81 $139 $294
Equity Sub-Account................................ $20 $62 $106 $228
Strategist Sub-Account............................ $20 $61 $105 $226
Pacific Growth Sub-Account........................ $29 $89 $152 $321
Global Dividend Growth Sub-Account................ $23 $72 $124 $264
</TABLE>
The above example should not be considered a representation of past or
future expense. Actual expenses may be greater or lesser than those shown. The
purpose of the example is to assist you in understanding the various costs and
expenses that you will bear directly or indirectly. Premium taxes are not
reflected in the example but may be applicable.
*Early Withdrawal Charges may be deducted from the Cash Value before it is
applied to an income plan with a specified period of less than 120 months.
**Total Separate Account Annual Expenses of 1.48%
***Total Separate Account Annual Expenses of 1.35%
8
<PAGE>
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES AND NUMBER
OF ACCUMULATION UNITS OUTSTANDING FOR
EACH SUB-ACCOUNT SINCE INCEPTION*
<TABLE>
<CAPTION>
FOR THE YEARS
BEGINNING JANUARY 1 AND
ENDING DECEMBER 31,
------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995
--------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
MONEY MARKET SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $10.111 $10.549 $10.765 $10.913 $11.178
Accumulation Unit Value, End of Period.... $10.111 $10.549 $10.765 $10.913 $11.178 $11.653
Number of Units Outstanding, End of
Period................................... 345,667 1,864,548 3,481,984 7,643,579 19,047,342 17,483,665
QUALITY INCOME PLUS SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $10.403 $12.163 $12.993 $14.487 $13.344
Accumulation Unit Value, End of Period.... $10.403 $12.163 $12.993 $14.487 $13.344 $16.373
Number of Units Outstanding, End of
Period................................... 175,839 1,221,348 6,701,534 26,314,453 25,348,646 26,735,500
HIGH YIELD SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $8.932 $13.982 $16.336 $20.022 $19.264
Accumulation Unit Value, End of Period.... $8.932 $13.982 $16.336 $20.022 $19.264 $21.859
Number of Units Outstanding, End of
Period................................... 1,574 64,097 377,434 2,451,231 4,082,485 5,536,230
UTILITIES SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $10.471 $12.454 $13.840 $15.798 $14.180
Accumulation Unit Value, End of Period.... $10.471 $12.454 $13.840 $15.798 $14.180 $17.999
Number of Units Outstanding, End of
Period................................... 130,114 1,615,460 6,626,508 25,354,331 22,552,568 22,626,178
DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $11.037 $13.911 $14.844 $16.746 $15.981
Accumulation Unit Value, End of Period.... $11.037 $13.911 $14.844 $16.746 $15.981 $21.505
Number of Units Outstanding, End of
Period................................... 159,555 2,004,718 7,123,073 21,941,369 28,980,558 33,515,201
EQUITY SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $10.706 $16.799 $16.599 $19.604 $18.392
Accumulation Unit Value, End of Period.... $10.706 $16.799 $16.599 $19.604 $18.392 $25.864
Number of Units Outstanding, End of
Period................................... 15,701 369,133 1,417,732 5,917,819 8,914,107 10,835,413
STRATEGIST SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... $10.000 $10.483 $13.266 $14.035 $15.286 $15.675
Accumulation Unit Value, End of Period.... $10.483 $13.266 $14.035 $15.286 $15.675 $16.919
Number of Units Outstanding, End of
Period................................... 5,854 778,440 3,385,842 11,837,077 18,218,900 17,717,645
CAPITAL GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... -- $10.000 $12.697 $12.731 $11.682 $11.379
Accumulation Unit Value, End of Period.... -- $12.697 $12.731 $11.682 $11.379 $14.923
Number of Units Outstanding, End of
Period................................... -- 901,617 2,655,336 3,556,779 3,411,788 3,917,752
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EUROPEAN GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... -- $10.000 $10.020 $10.280 $14.290 $15.278
Accumulation Unit Value, End of Period.... -- $10.020 $10.280 $14.290 $15.278 $18.976
Number of Units Outstanding, End of
Period................................... -- 248,922 719,495 4,448,126 8,491,681 8,587,679
GLOBAL DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... -- -- -- -- $10.000 $9.912
Accumulation Unit Value, End of Period.... -- -- -- -- $9.912 $11.935
Number of Units Outstanding, End of
Period................................... -- -- -- -- 12,306,690 15,325,898
PACIFIC GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of
Period................................... -- -- -- -- $10.000 $9.221
Accumulation Unit Value, End of Period.... -- -- -- -- $9.221 $9.619
Number of Units Outstanding, End of
Period................................... -- -- -- -- 7,080,863 8,865,898
</TABLE>
*The Money Market, Quality Income Plus, High Yield, Utilities, Dividend Growth,
Equity and Strategist Sub-Accounts commenced operations on October 25, 1990.
The Capital Growth and European Growth Sub-Accounts commenced operations on
March 1, 1991. The Global Dividend Growth and Pacific Growth Sub-Accounts
commenced operations on February 23, 1994. The Accumulation Unit Value for each
of these Sub-Accounts was initially set at $10.000. The Accumulation Unit
Values in this table reflect a Mortality and Expense Risk Charge of 1.25% and
an Administrative Expense charge of .10%.
10
<PAGE>
ACCUMULATION UNIT VALUES AND NUMBER
OF ACCUMULATION UNITS OUTSTANDING FOR
EACH SUB-ACCOUNT SINCE INCEPTION
FOR CONTRACTS WITH THE ENHANCED DEATH BENEFIT PROVISION*
<TABLE>
<CAPTION>
1995
---------
<S> <C>
MONEY MARKET SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 11.579
Accumulation Unit Value, End of Period................................................................... $ 11.651
Number of Units Outstanding, End of Period............................................................... 511,096
QUALITY INCOME PLUS SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 15.746
Accumulation Unit Value, End of Period................................................................... $ 16.370
Number of Units Outstanding, End of Period............................................................... 142,004
HIGH YIELD SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 21.462
Accumulation Unit Value, End of Period................................................................... $ 21.855
Number of Units Outstanding, End of Period............................................................... 66,987
UTILITIES SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 16.972
Accumulation Unit Value, End of Period................................................................... $ 17.995
Number of Units Outstanding, End of Period............................................................... 165,046
DIVIDEND GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 20.068
Accumulation Unit Value, End of Period................................................................... $ 21.500
Number of Units Outstanding, End of Period............................................................... 366,928
EQUITY SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 24.677
Accumulation Unit Value, End of Period................................................................... $ 25.858
Number of Units Outstanding, End of Period............................................................... 215,961
STRATEGIST SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 16.490
Accumulation Unit Value, End of Period................................................................... $ 16.915
Number of Units Outstanding, End of Period............................................................... 91,983
CAPITAL GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 13.895
Accumulation Unit Value, End of Period................................................................... $ 14.920
Number of Units Outstanding, End of Period............................................................... 36,005
EUROPEAN GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 18.486
Accumulation Unit Value, End of Period................................................................... $ 18.972
Number of Units Outstanding, End of Period............................................................... 62,011
GLOBAL DIVIDEND SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 11.250
Accumulation Unit Value, End of Period................................................................... $ 11.932
Number of Units Outstanding, End of Period............................................................... 155,023
PACIFIC GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................................................. $ 9.352
Accumulation Unit Value, End of Period................................................................... $ 9.617
Number of Units Outstanding, End of Period............................................................... 97,952
</TABLE>
*All of the above sub-accounts commenced operation on October 30, 1995. The
accumulation unit values in this table reflect a Mortality and Expense Risk
Charge of 1.38% and an Administrative Expense Charge of .10%. The additional
.13% Mortality and Expense Risk Charge is applicable to Contract Owners who
selected the Enhanced Death Benefit provision.
11
<PAGE>
PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Variable Account may publish advertisements containing
performance data relating to its Sub-Accounts. The performance data for the
Sub-Accounts (other than for the Money Market Sub-Account) will always be
accompanied by total return quotations for the most recent one, five and ten
year periods, or for a period from inception to date if the Sub-Account has not
been available for one of the prescribed periods. The total return quotations
for each period will be the average annual rates of return required for an
initial Purchase Payment of $1,000 to equal the amount Owners would receive on a
withdrawal of the Purchase Payment, after reflection of all recurring and
nonrecurring charges.
In addition, the Variable Account may advertise the total return over
different periods of time by means of aggregate, average, year-by-year or other
types of total return figures. Such calculations may or may not reflect the
deduction of some or all of the charges which may be imposed on the Contracts by
the Variable Account which, if reflected, would reduce the performance quoted.
The Variable Account from time to time may also advertise the performance of the
Sub-Accounts relative to certain performance rankings and indexes compiled by
independent organizations.
Performance figures used by the Variable Account are based on actual
historical performance of its Sub-Accounts for specified periods, and the
figures are not intended to indicate future performance. More detailed
information on the computation is set forth in the Statement of Additional
Information.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Northbrook Variable Annuity Account II and
Northbrook Life Insurance Company may be found in the Statement of Additional
Information, which is incorporated by reference into this Prospectus and which
is available upon request. (See Order Form on page 31.)
NORTHBROOK LIFE INSURANCE COMPANY AND THE VARIABLE ACCOUNT
- --------------------------------------------------------------------------------
NORTHBROOK LIFE INSURANCE COMPANY
The Company is the issuer of the Contract. Incorporated in 1978 as a stock
life insurance company under the laws of Illinois, the Company sells annuities
and individual life insurance. The Company is currently licensed to operate in
the District of Columbia, all states (except New York) and Puerto Rico. The
Company's home office is located at 3100 Sanders Road, Northbrook, Illinois,
60062.
The Company is a wholly-owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), which is a stock life insurance company incorporated under
the laws of Illinois. Allstate Life is a wholly-owned subsidiary of Allstate
Insurance Company ("Allstate"), which is a stock property-liability insurance
company incorporated under the laws of Illinois. All of the outstanding capital
stock of Allstate is owned by The Allstate Corporation ("Corporation"). In June
1995, Sears, Roebuck and Co. ("Sears") distributed in a tax-free dividend to its
stockholders its remaining 80.3% ownership in the Corporation. As a result of
the distribution, Sears no longer has an ownership interest in the Corporation.
DEAN WITTER REYNOLDS INC.
Dean Witter Reynolds Inc. ("Dean Witter") is the principal underwriter of
the Contract. Dean Witter is a wholly owned subsidiary of Dean Witter, Discover
& Co. ("Dean Witter Discover"). Dean Witter is located at Two World Trade
Center, New York, New York. Dean Witter is a member of the New York Stock
Exchange and the National Association of Securities Dealers, Inc.
12
<PAGE>
Dean Witter Discover's wholly owned subsidiary, Dean Witter InterCapital,
Inc. ("InterCapital"), is the investment manager of the Dean Witter Variable
Investment Series. InterCapital is registered with the Securities and Exchange
Commission as an investment adviser. As compensation for investment management,
the Fund pays InterCapital a monthly advisory fee. These expenses are more fully
described in the Fund's Prospectus attached to this Prospectus.
In October, 1993, Allstate, through Allstate Life and the Company, announced
a strategic alliance to develop, market and distribute proprietary annuity and
life insurance products through Dean Witter account executives.
THE VARIABLE ACCOUNT
Established on May 18, 1990, the Variable Account is a unit investment trust
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, but such registration does not signify that the Commission
supervises the management or investment practices or policies of the Variable
Account. The investment performance of the Variable Account is entirely
independent of both the investment performance of the Company's general account
and the performance of any other separate account.
The assets of the Variable Account are held separately from the other assets
of the Company. They are not chargeable with liabilities incurred in the
Company's other business operations. Accordingly, the income, capital gains and
capital losses, realized or unrealized, incurred on the assets of the Variable
Account are credited to or charged against the assets of the Variable Account,
without regard to the income, capital gains or capital losses arising out of any
other business the Company may conduct.
The Variable Account has been divided into eleven Sub-Accounts, each of
which invests solely in its corresponding Portfolio of the Dean Witter Variable
Investment Series. Additional Sub-Accounts may be added at the discretion of the
Company.
DEAN WITTER VARIABLE INVESTMENT SERIES
The Variable Account will invest exclusively in the Dean Witter Variable
Investment Series (the "Fund"). Shares of the Fund are also offered to separate
accounts of the Company which fund other variable annuity and variable life
contracts. Shares of the Fund are also offered to separate accounts of a life
insurance company affiliated with the Company which fund variable annuity and
variable life contracts. Shares of the Fund are also offered to separate
accounts of certain non-affiliated life insurance companies which fund variable
life insurance contracts. It is conceivable that in the future it may become
disadvantageous for both variable life and variable annuity contract separate
accounts to invest in the same underlying Fund. Although neither the Company nor
the Fund currently foresees any such disadvantage, the Fund's Board of Trustees
intends to monitor events in order to identify any material irreconcilable
conflict between the interests of variable annuity contract owners and variable
life contract owners and to determine what action, if any, should be taken in
response thereto.
Investors in the High Yield Portfolio should carefully consider the relative
risks of investing in high yield securities, which are commonly known as junk
bonds. Bonds of this type are considered to be speculative with regard to the
payment of interest and return of principal. Investors in the High Yield
Portfolio should also be cognizant of the fact that such securities are not
generally meant for short-term investing and should assess the risks associated
with an investment in the High Yield Portfolio.
Shares of the Portfolios of the Fund are not deposits, or obligations of, or
guaranteed or endorsed by any bank and the shares are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency.
The Fund has eleven portfolios: the Money Market Portfolio, the Quality
Income Plus Portfolio, the High Yield Portfolio, the Utilities Portfolio, the
Dividend Growth Portfolio, the Capital Growth Portfolio, the Global Dividend
Growth Portfolio, the European Growth Portfolio, the Pacific Growth Portfolio,
the Equity Portfolio and the Strategist Portfolio. Each
Port-
13
<PAGE>
folio has different investment objectives and policies and operates as a
separate investment fund.
The Money Market Portfolio seeks high current income, preservation of
capital, and liquidity by investing in certain money market instruments,
principally U.S. government securities, bank obligations, and high grade
commercial paper.
The Quality Income Plus Portfolio seeks, as its primary objective, to earn a
high level of current income and, as a secondary objective, capital
appreciation, but only when consistent with its primary objective, by investing
primarily in debt securities issued by the U.S. Government, its agencies and
instrumentalities, including zero coupon securities and in fixed-income
securities rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("Standard & Poor's") or non-rated securities of
comparable quality, and by writing covered call and put options against such
securities.
The High Yield Portfolio seeks, as its primary objective, to earn a high
level of current income by investing in a professionally managed diversified
portfolio consisting principally of fixed-income securities rated Baa or lower
by Moody's or BBB or lower by Standard & Poor's or non-rated securities of
comparable quality, which are commonly known as junk bonds, and, as a secondary
objective, capital appreciation when consistent with its primary objective.
The Utilities Portfolio seeks to provide current income and long-term growth
of income and capital by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry.
The Dividend Growth Portfolio seeks to provide reasonable current income and
long-term growth of income and capital by investing primarily in common stock of
companies with a record of paying dividends and the potential for increasing
dividends.
The Capital Growth Portfolio seeks to provide long-term capital growth by
investing principally in common stocks.
The Global Dividend Growth Portfolio seeks to provide reasonable current
income and long-term growth of income and capital by investing primarily in
common stock of companies, issued by issuers worldwide, with a record of paying
dividends and the potential for increasing dividends.
The European Growth Portfolio seeks to maximize the capital appreciation on
its investments by investing primarily in securities issued by issuers located
in Europe.
The Pacific Growth Portfolio seeks to maximize the capital appreciation of
its investments by investing primarily in securities issued by issuers located
in Asia, Australia and New Zealand.
The Equity Portfolio seeks, as its primary objective, growth of capital
through investments in common stock of companies believed by the Investment
Manager to have potential for superior growth and, as a secondary objective,
income when consistent with its primary objective.
The Strategist Portfolio seeks a high total investment return through a
fully managed investment policy utilizing equity securities, fixed-income
securities rated Baa or higher by Moody's or BBB or higher by Standard & Poor's
(or non-rated securities of comparable quality), and money market securities,
and the writing of covered options on such securities and the collateralized
sale of stock index options.
All dividends and capital gains distributions from the Portfolios are
automatically reinvested in shares of the distributing Portfolio at their net
asset value.
14
<PAGE>
THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ATTAIN THEIR
RESPECTIVE STATED OBJECTIVES. Additional information concerning the investment
objectives and policies of the Portfolios can be found in the current prospectus
for the Fund accompanying this Prospectus.
THE PROSPECTUS OF THE FUND SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS
MADE CONCERNING THE ALLOCATION OF PURCHASE PAYMENTS TO A PARTICULAR PORTFOLIO.
THE CONTRACTS
- --------------------------------------------------------------------------------
PURCHASE OF THE CONTRACTS
The Contracts may be purchased through sales representatives of Dean Witter.
The first Purchase Payment must be at least $4,000 unless the Contract is a
Qualified Contract, in which case the first Purchase Payment must be at least
$1,000. Presently, the Company will accept an initial Purchase Payment of at
least $1,000, but reserves the right to increase the minimum initial Purchase
Payment amount to $4,000. All subsequent Purchase Payments must be $25 or more
and may be made at any time prior to the Payout Start Date. Additional Purchase
Payments may also be made from your bank account or your Dean Witter Active
Assets-TM- Account through Automatic Additions. Please consult with your Dean
Witter Account Executive for detailed information about Automatic Additions.
The Company reserves the right to limit the amount of Purchase Payments it
will accept.
CREDITING OF INITIAL PURCHASE PAYMENTS
A Purchase Payment accompanied by completed information will be credited to
the Contract within two business days of receipt by the Company at its home
office. If the information is not complete, the Company will credit the Purchase
Payments to the Contract within five business days or return it at that time
unless the applicant specifically consents to the Company holding the Purchase
Payment until the information is complete. The Company reserves the right to
reject any proposed purchase of the Contract. Subsequent Purchase Payments will
be credited to the Contract at the close of the Valuation Period in which the
Purchase Payment is received.
ALLOCATION OF PURCHASE PAYMENTS
At the time of purchase the Owner instructs the Company how to allocate the
Purchase Payment among the twelve Investment Alternatives. Purchase Payments may
be allocated in whole percents, from 0% to 100%, to any Investment Alternative
so long as the total allocation equals 100%. Purchase Payments may be allocated
in amounts of no less than $100. Unless the Owner notifies the Company
otherwise, subsequent Purchase Payments are allocated according to the original
instructions.
In those states where the Company is required to return the Purchase Payment
upon a free-look of the Contract and where it has been approved by the state,
the Company reserves the right to allocate all Purchase Payments made prior to
the expiration of the free-look provision to the Money Market Sub-Account of the
Variable Account. Thereafter, Purchase Payments may be made at any time during
the accumulation phase into any of the Investment Alternatives. After the
expiration of the free-look provision the Owner may instruct the Company how to
allocate the Purchase Payment(s) among the twelve Investment Alternatives.
Purchase Payments may be allocated in whole percents, from 0% to 100%, to any
Investment Alternative so long as the total allocation equals 100%. Purchase
Payments may be allocated in amounts of no less than $100. If, after the
free-look period, the Owner does not affirmatively request a transfer to other
Sub-Accounts, the Purchase Payments will remain in the Money Market Sub-Account
indefinitely. Please consult with your Account Executive for applicability of
this provision.
15
<PAGE>
Each Purchase Payment will be credited to the Contract as Variable Account
Accumulation Units equal to the amount of the Purchase Payment allocated to each
Sub-Account divided by the Accumulation Unit value for that Sub-Account next
computed after the Purchase Payment is credited to the Contract. For example, if
a $10,000 Purchase Payment is credited to the Contract when the Accumulation
Unit value equals $10, then 1,000 Accumulation Units would be credited to the
Contract. The Variable Account, in turn, purchases shares of the corresponding
Portfolio (see "Value of Variable Account Accumulation Units," page 16).
For a brief summary of how Purchase Payments allocated to the Fixed Account
are credited to the Contract, see "The Fixed Account" on page 23.
VALUE OF VARIABLE ACCOUNT ACCUMULATION UNITS
The Accumulation Units in each Sub-Account of the Variable Account are
valued separately. The value of Accumulation Units may change each Valuation
Period according to the investment performance of the shares purchased by each
Sub-Account and the deduction of certain expenses and charges.
A Valuation Period is the period between successive Valuation Dates. It
begins at the close of business of each Valuation Date and ends at the close of
business of the next succeeding Valuation Date. A Valuation Date is each day
that the New York Stock Exchange is open for business except for any day in
which there is an insufficient degree of trading in the Variable Account's
portfolio securities that the value of Accumulation or Annuity Units might not
be materially affected by changes in the value of the portfolio securities.
Valuation Dates do not include such Federal and non-Federal holidays as are
observed by the New York Stock Exchange. The New York Stock Exchange currently
observes the following holidays: New Year's Day (January 1); President's Day
(the third Monday in February); Good Friday (the Friday before Easter); Memorial
Day (the last Monday in May); Independence Day (July 4); Labor Day (the first
Monday in September); Thanksgiving Day (the fourth Thursday in November); and
Christmas Day (December 25).
The value of an Accumulation Unit in a Sub-Account for any Valuation Period
equals the value of the Accumulation Unit as of the immediately preceding
Valuation Period, multiplied by the Net Investment Factor for that Sub-Account
for the current Valuation Period. The Net Investment Factor is a number
representing the change on successive Valuation Dates in value of Sub-Account
assets due to investment income, realized or unrealized capital gains or loss,
deductions for taxes, if any, and deductions for the Mortality and Expense Risk
Charge and Administrative Expense Charge.
TRANSFERS
Transfers must be at least $100 or the total amount in the Investment
Alternative whichever is less. Transfers to any Guarantee Period of the Fixed
Account must be at least $500. Currently there is no charge for transfers among
the twelve Investment Alternatives. The Company, however, reserves the right to
assess a $25.00 charge on all transfers in excess of twelve per Contract Year.
If you are required to allocate Purchase Payments to the Money Market
Sub-Account of the Variable Account during the free-look period of your
Contract, the first transfer made following the end of the free-look period will
not be counted as a transfer for purposes of assessing this charge. The Company
will notify Owners at least 30 days prior to imposing the transfer charge.
If, under the terms of the free-look provision, your Purchase Payments have
been allocated to the Money Market Sub-Account of the Variable Account, you may
not transfer amounts out of the Money Market Sub-Account, until the free-look
provision has expired. After the free-look provision has expired and prior to
the payout start date, you may make transfers among all Investment Alternatives.
Transfers out of any Sub-Account before the Payout Start Date may be made at
any time.
After the Payout Start Date, transfers among Sub-Accounts of the Variable
Account, or from the Variable Account to the Fixed Account may be made only once
every six months and may not be made
16
<PAGE>
during the first six months following the Payout Start Date.
Transfers may be made pursuant to telephone instructions if the Owner
authorizes telephone transfers at the time of purchase, or subsequently on a
form provided by the Company. Telephone transfer requests will be accepted by
the Company if received at 800/654-2397 by 3:00 p.m. Central Time. Telephone
transfer requests received at any other telephone number or after 3:00 p.m.
Central Time will not be accepted by the Company. Telephone transfer requests
received before 3:00 p.m. Central Time are effected at the next computed value.
Otherwise, transfer requests must be in writing, on a form provided by the
Company.
Transfers may also be made automatically through Dollar Cost Averaging prior
to the Payout Start Date. Dollar Cost Averaging permits the Owner to transfer a
specified amount every month (or other frequencies that may be offered by the
Company) from the Money Market Sub-Account to any other Sub-Account. Transfers
made through Dollar Cost Averaging must be $100 or more. Dollar Cost Averaging
cannot be used to transfer amounts to the Fixed Account. Please consult with
your Dean Witter Account Executive for detailed information about Dollar Cost
Averaging.
Transfers from Sub-Accounts of the Variable Account will be made based on
the Accumulation Unit values next computed after the Company receives the
transfer request at its home office.
For transfers involving the Fixed Account, see page 24.
SURRENDER AND WITHDRAWALS
The Owner may withdraw all or part of the Cash Value at anytime prior to the
earlier of the death of the last surviving Annuitant, death of any Owner or the
Payout Start Date. The amount available for withdrawal is the Cash Value next
computed after the Company receives the request for a withdrawal at its home
office, less any Early Withdrawal Charges, Contract Maintenance Charges or any
remaining charge for premium taxes. Withdrawals from the Variable Account will
be paid within seven days of receipt of the request, subject to postponement in
certain circumstances. See "Delay of Payments", page 25. For withdrawals from
the Fixed Account, see page 24.
The minimum partial withdrawal is $100. If the Cash Value after a partial
withdrawal would be less than $500, then the Company will treat the request as
one for a total surrender of the Contract and the entire Cash Value, less any
charges and premium taxes, will be paid out.
Partial withdrawals may also be taken automatically through monthly
Systematic Withdrawals. Systematic Withdrawals of $100 or more may be requested
at any time prior to the Payout Start Date. Please consult with your Dean Witter
Account Executive for detailed information about Systematic Withdrawals.
For Qualified Contracts, the Company will at the request of the Owner,
automatically calculate and withdraw the IRS Required Minimum Distribution.
Withdrawals taken to satisfy IRS required minimum distribution rules will have
any applicable withdrawal charges waived. This waiver is permitted only for
withdrawals which satisfy distributions resulting from this Contract. Please
consult with your Dean Witter Account Executive for detailed information about
the Required Minimum Distribution program.
Withdrawals and surrenders may be subject to income tax and a 10% tax
penalty. This tax and penalty is explained in "Federal Tax Matters" on page 26.
The full Contract Maintenance Charge will be deducted at the time of total
surrender. The total amount paid at surrender may be more or less than the total
Purchase Payments due to prior withdrawals, any deductions, and investment
performance.
To complete the partial withdrawals, the Company will cancel Accumulation
Units in an amount equal to the withdrawal and any applicable Early Withdrawal
Charge and premium taxes. The Owner must name the Investment Alternative from
which the withdrawal is to be made. If none is named, then
17
<PAGE>
the withdrawal request is incomplete and cannot be honored.
DEFAULT
So long as the Cash Value is not reduced to zero or a withdrawal does not
reduce it to less than $500, the Contract will stay in force until the Payout
Start Date even if no Purchase Payments are made after the first Purchase
Payment.
CHARGES AND OTHER DEDUCTIONS
- --------------------------------------------------------------------------------
DEDUCTIONS FROM PURCHASE PAYMENTS
No deductions are currently made from Purchase Payments. Therefore the full
amount of every Purchase Payment is invested in the Investment Alternative(s) to
increase the potential for investment gain.
EARLY WITHDRAWAL CHARGE (CONTINGENT DEFERRED SALES CHARGE)
The Owner may withdraw the Cash Value at any time before the earliest of the
Payout Start Date, the death of any Owner or the last surviving Annuitant's
death.
There are no Early Withdrawal Charges on amounts up to the Free Withdrawal
Amount. A Free Withdrawal Amount will be available in each Contract Year. The
Free Withdrawal Amount may not be available in the first Contract Year if not
approved in your state of residence. The annual Free Withdrawal Amount is 15% of
the amount of Purchase Payments. Amounts withdrawn in excess of the Free
Withdrawal Amount may be subject to an Early Withdrawal Charge. Free Withdrawal
Amounts not withdrawn in a Contract Year do not increase the Free Withdrawal
Amount in later Contract Years. Early Withdrawal Charges, if applicable, will be
deducted from the amount paid.
In certain cases, distributions required by federal tax law (see the
Statement of Additional Information for "IRS Required Distribution at Death
Rules") may be subject to an Early Withdrawal Charge. Early Withdrawal Charges
may be deducted from the Cash Value before it is applied to an income plan with
a specified period of less than 120 months.
Free Withdrawals and other partial withdrawals will be allocated on a first
in, first out basis to Purchase Payments. For purposes of calculating the amount
of the Early Withdrawal Charge, withdrawals are assumed to come from Purchase
Payments first, beginning with the oldest payment. Unless the Company is
instructed otherwise, for partial withdrawals, the Early Withdrawal Charge will
be deducted from the amount paid, rather than from the remaining Cash Value.
Once all Purchase Payments have been withdrawn, additional withdrawals will not
be assessed an Early Withdrawal Charge.
Early Withdrawal Charges will be applied to amounts withdrawn in excess of a
Free Withdrawal Amount as set forth below:
<TABLE>
<CAPTION>
APPLICABLE
COMPLETE CONTRACT YEARS SINCE WITHDRAWAL
PURCHASE PAYMENT BEING CHARGE
WITHDRAWN WAS MADE PERCENTAGE
- -------------------------------------------------------------------- ----------
<S> <C>
0 years............................................................. 6%
1 year.............................................................. 5%
2 years............................................................. 4%
3 years............................................................. 3%
4 years............................................................. 2%
5 years............................................................. 1%
6 years or more..................................................... 0%
</TABLE>
THE CUMULATIVE TOTAL OF ALL EARLY WITHDRAWAL CHARGES IS GUARANTEED NEVER TO
EXCEED 6% OF AN OWNER'S PURCHASE PAYMENTS.
Early Withdrawal Charges will be used to pay sales commissions and other
promotional or distribution expenses associated with the marketing of the
Contracts. The Company does not anticipate that the Early Withdrawal Charges
will cover all distribution expenses in connection with the Contract.
18
<PAGE>
In addition, federal and state income tax may be withheld from withdrawal
and surrender amounts. Certain surrenders may also be subject to a federal tax
penalty. See "Federal Tax Matters," page 26.
CONTRACT MAINTENANCE CHARGE
A Contract Maintenance Charge is deducted annually from the Cash Value to
reimburse the Company for its actual costs in maintaining each Contract and the
Variable Account. THE COMPANY GUARANTEES THAT THE AMOUNT OF THIS CHARGE WILL NOT
EXCEED $30 PER CONTRACT YEAR OVER THE LIFE OF THE CONTRACT. Maintenance costs
include but are not limited to expenses incurred in billing and collecting
Purchase Payments; keeping records; processing death claims and cash surrenders;
policy changes and proxy statements; calculating Accumulation Unit and Annuity
Unit values; and issuing reports to Owners and regulatory agencies. The Company
does not expect to realize a profit from this charge.
On each Contract Anniversary, the Contract Maintenance Charge will be
deducted from the Investment Alternatives in the same proportion that the
Owner's interest in each bears to the total Cash Value. After the Payout Start
Date, a pro rata share of the annual Contract Maintenance Charge will be
deducted from each Income Payment. For example, 1/12 of the $30 or $2.50 will be
deducted if there are twelve Income Payments during the Contract Year. The
Contract Maintenance Charge will be deducted from the amount paid on a total
surrender.
Prior to October 3, 1993 Vantage Computer Systems, Inc. was under contract
with the Company to provide contract recordkeeping services. As of October 4,
1993, the Company provides all contract recordkeeping services.
ADMINISTRATIVE EXPENSE CHARGE
The Company will deduct an Administrative Expense Charge which is equal, on
an annual basis to .10% of the daily net assets in the Variable Account. This
charge is designed to cover actual administrative expenses which exceed the
revenues from the Contract Maintenance Charge. The Company does not intend to
profit from this charge. The Company believes that the Administrative Expense
Charge and Contract Maintenance Charge have been set at a level that will
recover no more than the actual costs associated with administering the
Contract. There is no necessary relationship between the amount of
administrative charge imposed on a given Contract and the amount of expenses
that may be attributable to that Contract.
MORTALITY AND EXPENSE RISK CHARGE
A Mortality and Expense Risk Charge will be deducted daily at a rate equal
on an annual basis to 1.25% of the daily net assets in the Variable Account. The
Company estimates that .85% is attributed to the assumption of mortality risks
and .40% is attributed to the assumption of expense risks. For Contracts with
the Enhanced Death Benefit provision, the Mortality and Expense Risk Charge will
be deducted daily, at a rate equal on an annual basis, to 1.38% of the daily net
assets in the Variable Account. The assessment of the additional .13% for the
Enhanced Death Benefit is attributed to the assumption of additional mortality
risks. (see pages 20-21, for a full description of Death Benefit options) THE
COMPANY GUARANTEES THAT THE AMOUNT OF THIS CHARGE WILL NOT INCREASE OVER THE
LIFE OF THE CONTRACT.
If the Mortality and Expense Risk Charge is insufficient to cover the
Company's mortality costs and excess expenses, the Company will bear the loss.
If the Charge is more than sufficient, the Company will retain the balance as
profit. The Company currently expects a profit from this charge. Any such
profit, as well as any other profit realized by the Company and held in its
general account, (which supports insurance and annuity obligations), would be
available for any proper corporate purpose, including, but not limited to,
payment of distribution expenses.
The mortality risk arises from the Company's guarantee to cover all death
benefits and to make Income Payments in accordance with the Income
19
<PAGE>
Payment Tables, thus, relieving the Annuitants of the risk of outliving funds
accumulated for retirement.
The expense risk arises from the possibility that the Contract Maintenance
and Early Withdrawal Charges, both of which are guaranteed not to increase, will
be insufficient to cover actual administrative expenses.
TAXES
The Company will deduct any state premium taxes incurred or other taxes
incurred relative to the Contract (collectively referred to as "premium taxes")
either at the Payout Start Date, or when a total withdrawal occurs. Current
premium tax rates range from 0 to 3.5%. The Company reserves the right to deduct
any incurred premium taxes from the Purchase Payments.
At the Payout Start Date, any charge for premium taxes will be deducted from
each Investment Alternative in the proportion that the Owner's interest in the
Investment Alternative bears to the total Cash Value.
DEAN WITTER VARIABLE INVESTMENT SERIES ("FUND") EXPENSES
A complete description of the expenses and deductions from the Portfolios
are found in the Fund's prospectus which is attached to this prospectus.
BENEFITS UNDER THE CONTRACT
- --------------------------------------------------------------------------------
DEATH BENEFITS PRIOR TO THE PAYOUT START DATE
If any Owner or the last surviving Annuitant dies prior to the Payout Start
Date, and a Death Benefit is elected, it will be paid to the new Owner or
Beneficiary. If requested to be paid in a lump sum within 180 days from the Date
of Death, the Death Benefit will be the greatest of: (a) the sum of all Purchase
Payments less any amounts deducted in connection with partial withdrawals
including any applicable Early Withdrawal Charges or premium taxes; or (b) the
Cash Value on the date we receive Due Proof of Death, or (c) the Cash Value on
the most recent Death Benefit Anniversary less any amounts deducted in
connection with partial withdrawals, including any applicable Early Withdrawal
Charges and premium taxes deducted from the Cash Value, since that anniversary.
The Death Benefit Anniversary is every sixth Contract Anniversary. For example,
the 6th, 12th and 18th Contract Anniversaries are the first three Death Benefit
Anniversaries.
If the Enhanced Death Benefit option is selected, it applies only at the
death of the Owner. It does not apply to the death of the Annuitant if different
from the Owner unless the Owner is a non-natural Owner. For Contracts with the
optional Enhanced Death Benefit provision, the Death Benefit will be the greater
of (a) through (c) above, or (d) the Enhanced Death Benefit. The Enhanced Death
Benefit on the date of issue is equal to the initial purchase payment. On each
Contract Anniversary, but not beyond the Contract Anniversary preceding all
owner(s)' 75th birthday(s), the Enhanced Death Benefit will be recalculated as
follows:
The Enhanced Death Benefit as of the prior Contract Anniversary multiplied
by 1.05 which results in an increase of 5% annually.
Further, for all ages, the Enhanced Death Benefit will be adjusted on each
Contract Anniversary, or upon receipt of a death claim, as follows:
The Enhanced Death Benefit will be reduced by the percentage of any Cash
Value withdrawn since the prior Contract Anniversary.
Any additional purchase payments since the prior Contract Anniversary will
be added.
The Enhanced Death Benefit will never be greater than the maximum death benefit
allowed by any non-forfeiture laws which govern the Contract.
The Company will not settle any death claim until it receives Due Proof of
Death. If an Owner dies prior to the Payout Start Date, the new Owner will be
the surviving Owner, if any, otherwise the new Owner
20
<PAGE>
will be the Beneficiary. Generally, this new Owner has the following options:
1. The new Owner may elect, within 180 days of the date of receipt by the
Company of Due Proof of Death, to receive the Death Benefit in a lump sum;
2. The new Owner may elect, within 180 days of the date of receipt by the
Company of Due Proof of Death, to receive the Settlement Value (the
Settlement Value is the Cash Value less any applicable Early Withdrawal
Charges and premium tax on the date payment is requested) payable within
five years of the date of death.
3. The new Owner may elect to apply an amount equal to the Death Benefit
to one of the income plans. Payments must begin within one year of the date
of death and must be over the life of the new Owner, or a period not to
exceed the life expectancy of the new Owner.
4. If the new Owner is the spouse of the deceased Owner, the new Owner
may elect one of the above options or may continue the Contract.
If the new Owner who is not the spouse of the deceased Owner does not make
one of these elections, the Settlement Value will be paid in a lump sum to the
new Owner five years after the date of death.
If the new Owner is a non-natural person, then the new Owner must receive
the Death Benefit in a lump sum, and the options listed above are not available.
If any Annuitant dies who is not also an Owner, the Owner must elect an
applicable option listed below. If the option selected is 1(a) or 1(b)(ii)
below, the new Annuitant will be the youngest Owner, unless the Owner names a
different Annuitant.
1. If the Owner is a natural person:
a. The Owner may choose to continue the Contract as if the death had
not occurred; or
b. If the Company receives due proof of death within 180 days of the
date of the Annuitant's death, then the Owner may alternatively choose
to:
i. Receive the Death Benefit in a lump sum; or
ii. Apply the Death Benefit to an income plan which must begin
within one year of the date of death and must be for a period equal
to or less than the life expectancy of the Owner.
2. If the Owner is a non-natural person: The Owner must receive the Death
Benefit in a lump sum.
The value of the Death Benefit will be determined at the end of the
Valuation Period during which the Company receives a complete request for
payment of the Death Benefit, which includes Due Proof of Death.
DEATH BENEFITS AFTER THE PAYOUT START DATE
If the Annuitant and Joint Annuitant, if applicable, dies after the Payout
Start Date, the Company will pay the Death Benefit, if any, contained in the
particular income plan.
If the Owner, who is not the Annuitant, dies after the Payout Start Date,
payments will continue to be made under the particular income plan. The
Beneficiary will be the recipient of any such payment.
21
<PAGE>
INCOME PAYMENTS
- --------------------------------------------------------------------------------
PAYOUT START DATE
The Payout Start Date is the day that Income Payments will start under the
Contract. The Owner may change the Payout Start Date at any time by notifying
the Company in writing of the change at least 30 days before the current Payout
Start Date. The Payout Start Date must be (a) at least a month after the issue
date; (b) the first day of a calendar month; and (c) no later than the first day
of the calendar month after the Annuitant reaches age 85, or the 10th
anniversary date, if later.
Unless the Owner notifies the Company in writing otherwise, the Payout Start
Date will be the later of the first day of the calendar month after the
Annuitant reaches age 85 or the 10th anniversary date.
AMOUNT OF VARIABLE ANNUITY INCOME PAYMENTS
The amount of Variable Annuity Income Payments depends upon the investment
experience of the Portfolios selected by the Owner, any premium taxes, the age
and sex of the Annuitant(s), and the income plan chosen. The Company guarantees
that the Income Payments will not be affected by (1) actual mortality experience
and (2) the amount of the Company's administration expenses.
The Contracts offered by this Prospectus (except in states which require
unisex annuity tables) contain life annuity tables that provide for different
benefit payments to men and women of the same age. Nevertheless, in accordance
with the U.S. Supreme Court's decision in ARIZONA GOVERNING COMMITTEE V. NORRIS,
in certain employment-related situations, annuity tables that do not vary on the
basis of sex may be used. Accordingly, if the Contract is to be used in
connection with an employment-related retirement or benefit plan, consideration
should be given, in consultation with legal counsel, to the impact of NORRIS on
any such plan before making any contributions under these Contracts. For
qualified plans where it is appropriate, a unisex endorsement is available.
The sum of Income Payments made may be more or less than the total Purchase
Payments made because (a) Variable Annuity Income Payments vary with the
investment results of the underlying Portfolios; (b) the Owner bears the
investment risk with respect to all amounts allocated to the Variable Account,
and (c) Annuitants may die before the actuarially expected Date of Death. As
such, the total amount of Income Payments cannot be predicted.
The duration of the income plan may affect the dollar amounts of each Income
Payment. For example, if an income plan guaranteed for life is chosen, the
Income Payments may be greater or less than Income Payments under an income plan
for a specified period depending on the life expectancy of the Annuitant.
If the actual net investment experience is less than the assumed investment
rate, then the dollar amount of the Income Payments will decrease. The dollar
amount of the Income Payments will stay level if the net investment experience
equals the assumed investment rate and the dollar amount of the Income Payments
will increase if the net investment experience exceeds the assumed investment
rate. For purposes of the Variable Annuity Income Payments, the assumed
investment rate is found in the Contract.
If the Cash Value to be applied to an income plan is less than $2,000, or if
the monthly payments determined under the Income Plan are less than $20, the
Company may pay the Cash Value in a lump sum or change the payment frequency to
an interval which results in Income Payments of at least $20.
INCOME PLANS
The Owner may elect a completely Fixed Annuity, a completely Variable
Annuity or a combination Fixed and Variable Annuity. Up to 30 days before the
Payout Start Date, the Owner may change the income plan or request any other
form of Income
22
<PAGE>
Plan agreeable to both the Company and the Owner. Subsequent changes will not be
permitted. If an income plan is chosen which depends on the Annuitant or Joint
Annuitant's life, proof of age will be required before Income Payments begin.
Premium taxes may be assessed. The income plans include:
INCOME PLAN 1--LIFE WITH PAYMENTS GUARANTEED FOR 120 MONTHS
Monthly payments will be made for as long as the Annuitant lives. If the
Annuitant dies before 120 monthly payments have been made, the remainder of the
120 guaranteed monthly payments will be paid to the Owner, or if deceased, to
the surviving Beneficiary.
INCOME PLAN 2--JOINT AND LAST SURVIVOR
Monthly payments beginning on the Payout Start Date will be made for as long
as either the Annuitant or Joint Annuitant is living. It is possible under this
option that only one monthly payment will be made if the Annuitant and Joint
Annuitant both die before the second payment is made, or only two monthly
payments will be made if they both die before the third payment, and so forth.
INCOME PLAN 3--PAYMENTS FOR A SPECIFIED PERIOD
Monthly payments beginning on the Payout Start Date will be made for a
specified period. An Early Withdrawal Charge may apply if the specified period
is less than 120 months. Payments under this option do not depend on the
continuation of the Annuitant's life. If the Owner dies before the end of the
specified period, the remaining payments will be paid to the surviving
beneficiary. The Mortality and Expense Risk Charge is deducted from payments
even though the Company does not bear any mortality risk. If Income Plan 3 is
chosen and the proceeds are derived from the Variable Account, the Owner or
Beneficiary may surrender the Contract at any time by notifying the Company in
writing.
In the event that an income plan is not selected, the Company will make
Income Payments in accordance with Income Plan 1. At the Company's discretion,
other income plans may be available upon request. The Company currently uses
sex-distinct annuity tables. However, if legislation is passed by Congress or
the states, the Company reserves the right to use Income Payment tables which do
not distinguish on the basis of sex.
THE FIXED ACCOUNT
- --------------------------------------------------------------------------------
CONTRIBUTIONS UNDER THE FIXED PORTION OF THE ANNUITY CONTRACT AND TRANSFERS
TO THE FIXED PORTION BECOME PART OF THE GENERAL ACCOUNT OF THE COMPANY, WHICH
SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF EXEMPTIVE AND
EXCLUSIONARY PROVISIONS, INTERESTS IN THE GENERAL ACCOUNT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), NOR IS THE GENERAL
ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE GENERAL ACCOUNT NOR ANY INTERESTS
THEREIN ARE GENERALLY SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND THE
COMPANY HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO
THE FIXED PORTION. DISCLOSURES REGARDING THE FIXED PORTION OF THE ANNUITY
CONTRACT AND THE GENERAL ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY
APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY
AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES.
GENERAL DESCRIPTION
Contributions made to the Fixed Account are invested in the general account
of the Company. The general account is made up of all of the general assets of
the Company, other than those in the Variable Account and any other segregated
asset account. Instead of the Owner bearing the investment risk as is the case
for amounts in the Variable
23
<PAGE>
Account, the Company bears the full investment risk for all amounts contributed
to the general account. The Company has sole discretion to invest the assets of
the general account, subject to applicable law. The Company guarantees that the
amounts allocated to the Fixed Account will be credited interest at a net
effective interest rate of at least the minimum guaranteed rate found in the
Contract. (This interest rate is net of separate account asset based charges of
1.35% or 1.48% if the Enhanced Death Benefit has been selected). Currently the
amount of interest credited in excess of the guaranteed rate will vary
periodically in the sole discretion of the Company. Any interest held in the
general account does not entitle an Owner to share in the investment experience
of the general account.
Money deposited in the Fixed Account earns interest at the current rate in
effect at the time of allocation or transfer for the Guarantee Period. After the
Guarantee Period, a renewal rate will be declared. Subsequent renewal dates will
be on anniversaries of the first renewal date. On or about each renewal date,
the Company will notify the Owner of the interest rate(s). The interest rate
will be guaranteed by the Company for a full year and will not be less than the
guaranteed rate found in the Contract. The Company may declare more than one
interest rate for different monies based upon the date of allocation or transfer
to the Fixed Account and based upon the Guarantee Period.
The Company will offer a one year Guarantee Period. Additional Guarantee
Periods are offered at the sole discretion of the Company. The Company currently
offers a 6 year Guarantee Period.
ANY INTEREST CREDITED TO AMOUNTS ALLOCATED TO THE FIXED ACCOUNT IN EXCESS OF
THE GUARANTEED RATE FOUND IN THE CONTRACT WILL BE DETERMINED IN THE SOLE
DISCRETION OF THE COMPANY.
TRANSFERS, SURRENDERS, AND WITHDRAWALS
Amounts may be transferred from the Sub-Accounts of the Variable Account to
the Fixed Account, and prior to the Payout Start Date amounts may also be
transferred from the Fixed Account to Sub-Accounts of the Variable Account.
The maximum amount in any Contract Year which may be transferred from the
Fixed Account to the Variable Account or between Guarantee Periods of the Fixed
Account is limited to the greater of (1) 25% of the value in the Fixed Account
as of the most recent Contract Anniversary; if 25% of the value as of the most
recent Contract Anniversary is greater than zero but less than $1,000, then up
to $1,000 may be transferred; or (2) 25% of the sum of all Purchase Payments and
transfers to the Fixed Account as of the most recent Contract Anniversary.
If the first renewal interest rate is less than the current rate that was in
effect at the time money was allocated or transferred to the Fixed Account, the
transfer restriction for that money and the accumulated interest thereon will be
waived during the 60-day period following the first renewal date.
After the Payout Start Date no transfers may be made from the Fixed Account.
Transfers from the Variable Account to the Fixed Account may not be made for six
months after the Payout Start Date and may be made thereafter only once every
six months.
Surrenders and withdrawals from the Fixed Account may be delayed for up to
six months. After the Payout Start Date no surrenders or withdrawals may be made
from the Fixed Account.
24
<PAGE>
GENERAL MATTERS
- --------------------------------------------------------------------------------
OWNER
The Owner has the sole right to exercise all rights and privileges under the
Contract, except as otherwise provided in the Contract. These rights include the
right to name and change the Owner, Beneficiary and Annuitant. The Annuitant can
be changed only if the Owner is a natural person.
Generally, an Owner who is not a natural person is required to include in
income each year any increase in the Cash Value to the extent the increase is
attributable to contributions to the Contract made after February 28, 1986.
BENEFICIARY
Subject to the terms of any irrevocable Beneficiary, the Owner may change
the Beneficiary while the Annuitant is living by notifying the Company in
writing. Any change will be effective at the time it is signed by the Owner,
whether or not the Annuitant is living when the change is received by the
Company. The Company will not, however, be liable as to any payment or
settlement made prior to receiving the written notice.
Unless otherwise provided in the Beneficiary designation, the rights of any
Beneficiary predeceasing the Annuitant will revert to the Owner or the Owner's
estate. Multiple Beneficiaries may be named. Unless otherwise provided in the
Beneficiary designation, if more than one Beneficiary survives the Annuitant,
the surviving Beneficiaries will share equally in any amounts due.
DELAY OF PAYMENTS
Payment of any amounts due from the Variable Account under the Contract will
occur within seven days, unless:
1. The New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the Exchange is otherwise restricted;
2. An emergency exists as defined by the Securities and Exchange
Commission; or
3. The Securities and Exchange Commission permits delay for the
protection of the Owners.
For payment or transfers from the Fixed Account, see page 24.
ASSIGNMENTS
The Owner may not assign an interest in a Contract as collateral or security
for a loan. Otherwise, the Owner may assign benefits under the Contract prior to
the Payout Start Date. No Beneficiary may assign benefits under the Contract
until they are due. No assignment will bind the Company unless it is signed by
the Owner and filed with the Company. The Company is not responsible for the
validity of an assignment.
MODIFICATION
The Company may not modify the Contract without the consent of the Owner
except to make the Contract meet the requirements of the Investment Company Act
of 1940, or to make the Contract comply with any changes in the Internal Revenue
Code or required by the Code or by any other applicable law.
CUSTOMER INQUIRIES
The Owners or any persons interested in the Contract may make inquiries
regarding the Contract by calling or writing their Dean Witter Account
Executive.
25
<PAGE>
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax
consequences of ownership or receipt of distributions under an annuity contract
depend on the individual circumstances of each person. If you are concerned
about any tax consequences with regard to your individual circumstances, you
should consult a competent tax adviser.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL
Generally, an annuity contract owner is not taxed on increases in the
Contract Value until a distribution occurs. This rule applies only where (1) the
Owner is a natural person, (2) the investments of the Variable Account are
"adequately diversified" in accordance with Treasury Department ("Treasury")
regulations and (3) the Company, instead of the annuity Owner, is considered the
Owner of the Variable Account assets for federal income tax purposes.
NON-NATURAL OWNERS
As a general rule, annuity contracts owned by nonnatural persons are not
treated as annuity contracts for federal income tax purposes and the income on
such Contracts is taxed as ordinary income received or accrued by the Owner
during the taxable year. There are several exceptions to the general rule for
Contracts owned by non-natural persons which are discussed in the Statement of
Additional Information.
DIVERSIFICATION REQUIREMENTS
For a Contract to be treated as an annuity for federal income tax purposes,
the investments in the Variable Account must be "adequately diversified" in
accordance with the standards provided in the Treasury regulations. If the
investments in the Variable Account are not adequately diversified, then the
Contract will not be treated as an annuity contract for federal income tax
purposes and the Contract Owner will be taxed on the excess of the Contract
Value over the investment in the Contract. Although the Company does not have
control over the Fund or its investments, the Company expects the Fund to meet
the diversification requirements.
INVESTOR CONTROL
In connection with the issuance of the regulations on the adequate
diversification standards, Treasury announced that the regulations do not
provide guidance concerning the extent to which Contract Owners may direct their
investments among Sub-Accounts of a Variable Account. The Internal Revenue
Service has previously stated in published rulings that a variable Contract
Owner will be considered the Owner of separate account assets if the Owner
possesses incidents of ownership in those assets such as the ability to exercise
investment control over the assets. At the time the diversification regulations
were issued, Treasury announced that guidance would be issued in the future
regarding the extent that Owners could direct their investments among
Sub-Accounts without being treated as Owners of the underlying assets of the
Variable Account. It is possible that Treasury's position, when announced, may
adversely affect the tax treatment of existing Contracts. The Company,
therefore, reserves the right to modify the Contract as necessary to attempt to
prevent the Contract Owner from being considered the federal tax owner of the
assets of the Variable Account.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal under a Non-Qualified Contract, amounts
received are taxable to the extent the Contract value before the withdrawal
exceeds the investment in the Contract. In the case of a partial withdrawal
under a Qualified Contract, the portion of the payment that bears the same ratio
to the total payment that the investment in the Contract bears to the Contract
value, can be excluded
26
<PAGE>
from income. In the case of a full withdrawal under a Non-Qualified Contract or
a Qualified Contract, the amount received will be taxable only to the extent it
exceeds the investment in the Contract. If an individual transfers an annuity
contract without full and adequate consideration to a person other than the
individual's spouse (or to a former spouse incident to a divorce), the Owner
will be taxed on the difference between the Contract Value and the investment in
the Contract at the time of transfer. Other than in the case of certain
Qualified Contracts, any amount received as a loan under a Contract, and any
assignment or pledge (or agreement to assign or pledge) of the Contract Value is
treated as a withdrawal of such amount or portion.
TAXATION OF ANNUITY PAYMENTS
Generally, the rule for income taxation of payments received from an annuity
contract provides for the return of the Owner's investment in the Contract in
equal tax-free amounts over the payment period. The balance of each payment
received is taxable. In the case of Variable Annuity payments, the amount
excluded from taxable income is determined by dividing the investment in the
Contract by the total number of expected payments. In the case of fixed annuity
payments, the amount excluded from income is determined by multiplying the
payment by the ratio of the investment in the Contract (adjusted for any refund
feature or period certain) to the total expected value of annuity payments for
the term of the Contract.
TAXATION OF ANNUITY DEATH BENEFITS
Amounts may be distributed from an annuity contract because of the death of
an Owner or Annuitant. Generally, such amounts are includible in income as
follows: (1) if distributed in a lump sum, the amounts are taxed in the same
manner as a full withdrawal or (2) if distributed under an annuity option, the
amounts are taxed in the same manner as an annuity payment.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any premature
distribution from a non-qualified annuity contract. The penalty tax generally
applies to any distribution made prior to the owner attaining age 59 1/2.
However, there should be no penalty tax on distributions to Owners (1) made on
or after the Owner attains age 59 1/2; (2) made as a result of the Owner's death
or disability; (3) made in substantially equal periodic payments over life or
life expectancy; or (4) made under an immediate annuity. Similar rules apply for
distributions under certain Qualified Contracts. Please see the Statement of
Additional Information for a discussion of other situations in which the penalty
tax may not apply.
AGGREGATION OF ANNUITY CONTRACTS
All Non-Qualified Contracts issued by the Company (or its affiliates) to the
same Owner during any calendar year will be aggregated and treated as one
annuity Contract for purposes of determining the taxable amount of a
distribution.
TAX QUALIFIED CONTRACTS
Annuity contracts may be used as investments with certain tax qualified
plans such as: (1) Individual Retirement Annuities under Section 408(b) of the
Code; (2) Simplified Employee Pension Plans under Section 408(k) of the Code;
(3) Tax Sheltered Annuities under Section 403(b) of the Code; (4) Corporate and
Self Employed Pension and Profit Sharing Plans; and (5) State and Local
Government and Tax-Exempt Organization Deferred Compensation Plans. In the case
of certain tax qualified plans, the terms of the plans may govern the right to
benefits, regardless of the terms of the Contract.
RESTRICTIONS UNDER SECTION 403(b) PLANS
Section 403(b) of the Code provides for tax-deferred retirement savings
plans for employees of certain non-profit and educational organizations. In
accordance with the requirements of Section 403(b), any annuity contract used
for a 403(b) plan must provide that distributions attributable to salary
reduction contributions made after 12/31/88, and all earnings on salary
reduction contributions, may be made only after the employee attains age 59 1/2,
separates from service, dies, becomes disabled or on the account of hardship
(earnings on salary
reduc-
27
<PAGE>
tion contributions may not be distributed on the account of hardship).
INCOME TAX WITHHOLDING
The Company is required to withhold federal income tax at a rate of 20% on
all "eligible rollover distributions" unless an individual elects to make a
"direct rollover" of such amounts to another qualified plan or Individual
Retirement Account or Annuity ("IRA"). Eligible rollover distributions generally
include all distributions from Qualified Contracts, excluding IRAs, with the
exception of (1) required minimum distributions, or (2) a series of
substantially equal periodic payments made over a period of at least 10 years,
or the life (joint lives) of the participant (and beneficiary). For any
distributions from non-qualified annuity contracts, or distributions from
Qualified Contracts which are not considered eligible rollover distributions,
the Company may be required to withhold federal and state income taxes unless
the recipient elects not to have taxes withheld and properly notifies the
Company of such election.
VOTING RIGHTS
- --------------------------------------------------------------------------------
The Owner or anyone with a voting interest in the Sub-Account of the
Variable Account may instruct the Company on how to vote at shareholder meetings
of the Fund. The Company will solicit and cast each vote according to the
procedures set up by the Fund and to the extent required by law. The Company
reserves the right to vote the eligible shares in its own right, if subsequently
permitted by the Investment Company Act of 1940, its regulations or
interpretations thereof.
Before the Payout Start Date, the Owner holds the voting interest in the
Sub-Account. (The number of votes for the Owner will be determined by dividing
the Cash Value attributable to a Sub-Account by the net asset value per share of
the applicable eligible Portfolio.)
After the Payout Start Date, the person receiving Income Payments has the
voting interest. After the Payout Start Date, the votes decrease as Income
Payments are made and as the reserves for the Contract decrease. That person's
number of votes will be determined by dividing the reserve for such Contract
allocated to the applicable Sub-Account by the net asset value per share of the
corresponding eligible Portfolio.
SALES COMMISSION
- --------------------------------------------------------------------------------
From its profits the Company may pay a maximum sales commission of 6.0% of
Purchase Payments and an annual sales administration expense allowance of up to
0.125% of the average net assets of the Fixed Account to Dean Witter Reynolds
Inc., the principal underwriter of the Contracts. Dean Witter will pay annually
to its Registered Representatives from its profits, an amount equal to .10% of
the net assets of the Variable Account attributable to Contracts.
28
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Contract....................................................................... 3
Purchase of Contracts.......................................................... 3
Value of Variable Account Accumulation Units................................... 3
Performance Data............................................................... 3
Transfers...................................................................... 4
Tax-free Exchanges (1035 Exchanges, Rollovers, Transfers)...................... 4
General Matters.................................................................... 5
Recordkeeping Services......................................................... 5
Additions, Deletions or Substitution of Investments............................ 5
Reinvestment................................................................... 5
Incontestability............................................................... 5
Settlements.................................................................... 5
Safekeeping of the Variable Account's Assets................................... 6
Experts........................................................................ 6
Legal Matters.................................................................. 6
Federal Tax Matters................................................................ 6
Introduction................................................................... 6
Taxation of Northbrook Life Insurance Company.................................. 6
Exceptions to the Non-Natural Owner Rule....................................... 7
Penalty Tax on Premature Distributions......................................... 7
IRS Required Distribution at Death Rules....................................... 7
Qualified Plans................................................................ 7
Types of Qualified Plans....................................................... 8
Individual Retirement Annuities.............................................. 8
Simplified Employee Pension Plans............................................ 8
Tax Sheltered Annuities...................................................... 8
Corporate and Self-Employed Pension and Profit Sharing Plans................. 8
State and Local Government and Tax-Exempt Organization Deferred Compensation
Plans....................................................................... 8
Voting Rights...................................................................... 8
Sales Commissions.................................................................. 9
Financial Statements............................................................... F-1
</TABLE>
29
<PAGE>
(This page intentionally left blank)
30
<PAGE>
ORDER FORM
/ / Please send me a copy of the most recent Statement of Additional Information
for the Northbrook Variable Annuity II.
- ------------------------
(Date)
- ---------------------------------------------
(Name)
- ---------------------------------------------
(Street Address)
- ---------------------------------------------
(City) (State) (Zip Code)
Send to: Northbrook Life Insurance Company
Post Office Box 94040
Palatine, Illinois 60094-4040
Attention: Annuity Services
31
<PAGE>
Northbrook Life
Insurance Company
3100 Sanders Road -- M4A
Northbrook, IL 60062
DWR 40139
<PAGE>
THE NORTHBROOK
VARIABLE ANNUITY II
PROSPECTUS
DATED MAY 1, 1996
Issued by:
Northbrook Life Insurance
Company
Distributed by:
[LOGO]
Two World Trade Center
New York, NY 10048
<PAGE>
Northbrook Life
Insurance Company
3100 Sanders Road -- M4A
Northbrook, IL 60062
DWR 40137
<PAGE>
THE DEAN WITTER
VARIABLE ANNUITY II
PROSPECTUS
DATED MAY 1, 1996
Issued by:
Northbrook Life Insurance
Company
Distributed by:
[LOGO]
Two World Trade Center
New York, NY 10048
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
OF
NORTHBROOK LIFE INSURANCE COMPANY
P.O. BOX 94040
PALATINE, IL 60094-4040
GROUP AND INDIVIDUAL VARIABLE ANNUITY CONTRACTS
DISTRIBUTED BY
DEAN WITTER REYNOLDS INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
-------------------
This Statement of Additional Information supplements the information in the
Prospectus for the group or individual Flexible Premium Deferred Variable
Annuity Contract (as used herein "Contract" includes "Certificates" and
"Contracts") offered by Northbrook Life Insurance Company ("Company"), a wholly
owned subsidiary of Allstate Life Insurance Company. The group and individual
Contract is primarily designed to aid individuals in long-term financial
planning and it can be used for retirement planning regardless of whether the
plan qualifies for special federal income tax treatment.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
You may obtain a copy of the Prospectus from Dean Witter Reynolds Inc.
("Dean Witter"), the principal underwriter and distributor of the Contract, by
calling or writing Dean Witter at the address listed above.
The Prospectus, dated May 1, 1996, has been filed with the United States
Securities and Exchange Commission.
DATED MAY 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE CONTRACT...................................... 3
Purchase of Contracts........................... 3
Value of Variable Account Accumulation Units.... 3
Performance Data................................ 3
Transfers....................................... 6
Tax-free Exchanges (1035 Exchanges, Rollovers
and Transfers)................................. 6
GENERAL MATTERS................................... 7
Recordkeeping Services.......................... 7
Additions, Deletions or Substitutions of
Investments.................................... 7
Reinvestment.................................... 7
Incontestability................................ 7
Settlements..................................... 7
Safekeeping of the Variable Account's Assets.... 7
Experts......................................... 8
Legal Matters................................... 8
FEDERAL TAX MATTERS............................... 8
<CAPTION>
PAGE
-----
<S> <C>
Introduction.................................... 8
Taxation of Northbrook Life Insurance Company... 8
Exceptions to the Non-Natural Owner Rule........ 8
Penalty Tax on Premature Distributions.......... 9
IRS Required Distribution at Death Rules........ 9
Qualified Plans................................. 9
Types of Qualified Plans........................ 9
Individual Retirement Annuities............... 9
Simplified Employee Pension Plans............. 10
Tax Sheltered Annuities....................... 10
Corporate and Self-Employed Pension and Profit
Sharing Plans................................ 10
State and Local Government and Tax-Exempt
Organization Deferred Compensation Plans..... 10
VOTING RIGHTS..................................... 10
SALES COMMISSIONS................................. 11
FINANCIAL STATEMENTS.............................. F-1
</TABLE>
2
<PAGE>
THE CONTRACT
- --------------------------------------------------------------------------------
PURCHASE OF CONTRACTS
The Contracts are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Contracts
is continuous and the Company does not anticipate discontinuing the offering of
the Contracts. However, the Company reserves the right to discontinue the
offering of the Contracts.
VALUE OF VARIABLE ACCOUNT ACCUMULATION UNITS
The value of Variable Account Accumulation Units will vary in accordance
with investment experience of the Portfolio in which the Sub-Account invests.
The number of such Accumulation Units credited to a Contract will not, however,
change as a result of any fluctuations in the Accumulation Unit value.
The Accumulation Units in each Sub-Account of the Variable Account are
valued separately. The value of Accumulation Units in any Valuation Period will
depend upon the investment performance of the shares purchased by each
Sub-Account in a particular Portfolio. The value of an Accumulation Unit in a
Sub-Account for any Valuation Period equals the value of such a unit as of the
immediately preceding Valuation Period, multiplied by the "Net Investment
Factor" for that Sub-Account for the current Valuation Period. The Net
Investment Factor for each Sub-Account for any Valuation Period is determined by
dividing (A) by (B) and subtracting (C), where:
(A) is the sum of:
(1) the net asset value per share of the Portfolio(s) underlying the
Sub-Account determined at the end of the current valuation period; plus,
(2) the per share amount of any dividend or capital gain distributions
made by the Portfolio(s) underlying the Sub-Account during the current
Valuation Period.
(B) is the net asset value per share of the Portfolio(s) underlying the
Sub-Account determined as of the end of the immediately preceding valuation
period.
(C) is the annualized Mortality and Expense Risk and Administrative Expense
Charges divided by 365 and then multiplied by the number of calendar days in the
current valuation period.
PERFORMANCE DATA
From time to time the Variable Account May publish advertisements containing
performance data relating to its Sub-Accounts. The performance data for the
Sub-Accounts (other than for the Money Market Sub-Account) will always be
accompanied by total return quotations.
A Sub-Account's "average annual total return" represents an annualization of
the Sub-Account's total return over a particular period and is computed by
finding the annual percentage rate which will result in the ending redeemable
value of a hypothetical $1,000 Purchase Payment made at the beginning of a one,
five or ten year period, or for a period from the date of commencement of the
Sub-Account's operations, if shorter than any of the foregoing. The formula for
computing the average annual total return involves a percentage obtained by
dividing the ending redeemable value, including deductions for any Early
Withdrawal Charges or Contract Maintenance Charges imposed on the Contracts by
the Variable Account, by the initial hypothetical $1,000 Purchase Payment,
taking the "n"th root of the quotient (where "n" is the number of years in the
period) and subtracting 1 from the result.
The Early Withdrawal Charges assessed upon redemption are computed as
follows: The Free Withdrawal Amount is not assessed an Early Withdrawal Charge.
Early Withdrawal Charges are charged on the amount of redemption equal to the
Purchase
3
<PAGE>
Payment, reduced by the Free Withdrawal Amount, if any. The remaining amount of
the redemption, if any, is not assessed an Early Withdrawal Charge. The Early
Withdrawal Charge Schedule specifies rates based on the Contract Year in which
the Purchase Payment was made. One rate is specified for Purchase Payments made
in the current Contract Year, another rate for Purchase Payments made in the
prior Contract Year, another rate for Purchase Payments made in the second prior
Contract Year, and so on until a rate for Purchase Payments made in the sixth
prior Contract Year or prior to it is reached. For a one year total return
calculation the second rate, (i.e., the rate for Purchase Payments made in the
prior Contract Year), is assessed. The Contract Maintenance Charge ($30 per
contract) used in the total return calculation is normally prorated using the
following method: The total amount of annual Contract fees collected during the
year is divided by the total average net assets of all the Sub-Accounts. The
resulting percentage is then multiplied by the ending Cash Value.
STANDARDIZED TOTAL RETURN
- --------------------------------------------------------------------------------
The standardized average annual returns for the Sub-Accounts for the
one-year, five-year and since inception periods ending December 31, 1995 are
presented below:
(WITHOUT ENHANCED DEATH BENEFIT)
<TABLE>
<CAPTION>
SUB-ACCOUNT ONE-YEAR FIVE-YEARS SINCE INCEPTION*
- ------------------------------------- --------- --------------------
<S> <C> <C> <C>
Capital Growth.............. 26.83% N/A 8.33%
Dividend Growth............. 30.25% 14.12% 15.80%
Equity...................... 36.31% 19.17% 20.02%
European Growth............. 19.89% N/A 13.91%
Global Dividend Growth...... 16.09% N/A 7.83%
High Yield.................. 9.16% 19.48% 16.17%
Money Market................ N/A N/A N/A
Pacific Growth.............. 0.01% N/A (4.52)%
Quality Income Plus......... 18.38% 9.32% 9.82%
Strategist.................. 3.62% 9.88% 10.53%
Utilities................... 22.62% 11.28% 11.86%
(WITH ENHANCED DEATH BENEFIT) (NOT ANNUALIZED)
<CAPTION>
SUB-ACCOUNT SINCE INCEPTION**
- ---------------------------- --------------------
<S> <C> <C> <C>
Capital Growth.............. 2.21%
Dividend Growth............. 1.97%
Equity...................... (0.38)%
European Growth............. (2.54)%
Global Dividend Growth...... 0.90%
High Yield.................. (3.33)%
Money Market................ N/A
Pacific Growth.............. (2.33)%
Quality Income Plus......... (1.21)%
Strategist.................. (2.58)%
Utilities................... 0.86%
</TABLE>
- --------------------------
* The Money Market, Quality Income Plus, High Yield, Utilities, Dividend
Growth, Equity and Strategist Sub-Accounts commenced operation on October 25,
1990. The Capital Growth and European Growth Sub-Accounts commenced operation
on March 1, 1991. The Global Dividend Growth and Pacific Growth Sub-Accounts
commenced operation on February 23, 1994.
** The Sub-Accounts commenced operation on October 30, 1995.
From time to time, sales literature or advertisements may also quote average
annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Sub-Accounts will be
calculated based on the performance of the Portfolios and the assumption that
the Sub-accounts were in existence for the same periods as those indicated for
the Portfolios, with the level of Contract charges currently in effect.
4
<PAGE>
Such average annual total return information for the Sub-Accounts (including
deduction of the Surrender Charge) is as follows:
(WITHOUT ENHANCED DEATH BENEFIT)
<TABLE>
<CAPTION>
SUB-ACCOUNT AND DATE 10-YEARS OR
OF INCEPTION OF SINCE INCEPTION (IF
CORRESPONDING PORTFOLIO 1 YEAR 5-YEARS LESS)
- ---------------------------------- --------- --------------------
<S> <C> <C> <C>
Capital Growth****....... 26.83% N/A 8.33%
Dividend Growth***....... 30.25% 14.12% 10.22%
Equity*.................. 36.31% 19.17% 11.96%
European Growth****...... 19.89% N/A 13.91%
Global Dividend
Growth*****............. 16.09% N/A 7.83%
High Yield*.............. 9.16% 19.48% 6.35%
Money Market*............ N/A N/A N/A
Pacific Growth*****...... 0.01% N/A (4.52)%
Quality Income Plus**.... 18.38% 9.32% 8.05%
Strategist**............. 3.62% 9.88% 7.92%
Utilities***............. 22.62% 11.28% 10.22%
</TABLE>
- --------------------------
*Portfolio inception date of March 9, 1984
**Portfolio inception date of March 1, 1987
***Portfolio inception date of March 1, 1990
****Portfolio inception date of March 1, 1991
*****Portfolio inception date of February 23, 1994
(WITH ENHANCED DEATH BENEFIT)
<TABLE>
<CAPTION>
SUB-ACCOUNT AND DATE
OF INCEPTION OF 10-YEARS OR SINCE
CORRESPONDING PORTFOLIO 1 YEAR 5-YEARS INCEPTION (IF LESS)
- ---------------------------------- --------- --------------------
<S> <C> <C> <C>
Capital Growth****....... 26.66% N/A 8.18%
Dividend Growth***....... 30.07% 13.97% 10.07%
Equity*.................. 36.13% 19.01% 11.82%
European Growth****...... 19.73% N/A 13.76%
Global Dividend
Growth*****............. 15.94% N/A 7.69%
High Yield*.............. 9.01% 19.31% 6.21%
Money Market*............ N/A N/A N/A
Pacific Growth*****...... (0.13)% N/A (4.65)%
Quality Income Plus**.... 18.22% 9.18% 7.90%
Strategist**............. 3.48% 9.74% 7.77%
Utilities***............. 22.45% 11.14% 10.07%
</TABLE>
- --------------------------
*Portfolio inception date of March 9, 1984
**Portfolio inception date of March 1, 1987
***Portfolio inception date of March 1, 1990
****Portfolio inception date of March 1, 1991
*****Portfolio inception date of February 23, 1994
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the Surrender Charge. These are
calculated in exactly the same way as the average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered. Sales literature or
advertisements may also quote such average annual total returns for periods
prior to the date the Variable Account commenced operations, calculated based on
the performance of the Portfolios and the assumption that the Sub-Accounts were
in existence for the same periods as those indicated for the Portfolios, with
the level of Contract charges currently in effect except for the Surrender
Charge.
Such average annual total return information for the Sub-Accounts (not
including deduction of the Surrender Charge) is as follows:
(WITHOUT ENHANCED DEATH BENEFIT)
<TABLE>
<CAPTION>
SUB-ACCOUNT AND DATE 10-YEARS OR
OF INCEPTION OF SINCE INCEPTION
CORRESPONDING PORTFOLIO 1 YEAR 5-YEARS (IF LESS)
- -------------------------- ----------- ----------- -----------------
<S> <C> <C> <C>
Capital Growth****........ 31.14% N/A 8.64%
Dividend Growth***........ 34.56% 14.27% 10.35%
Equity*................... 40.63% 19.29% 12.01%
European Growth****....... 24.21% N/A 14.17%
Global Dividend
Growth*****.............. 20.41% N/A 10.04%
High Yield*............... 13.47% 19.60% 6.41%
Money Market*............. N/A N/A N/A
Pacific Growth*****....... 4.32 % N/A (2.08 )%
Quality Income Plus**..... 22.70 % 9.49 % 8.09 %
Strategist**.............. 7.93 % 10.05 % 7.96 %
Utilities***.............. 26.93 % 11.44 % 10.35 %
</TABLE>
- --------------------------
*Portfolio inception date of March 9, 1984
**Portfolio inception date of March 1, 1987
***Portfolio inception date of March 1, 1990
****Portfolio inception date of March 1, 1991
*****Portfolio inception date of February 23, 1994
5
<PAGE>
(WITH ENHANCED DEATH BENEFIT)
<TABLE>
<CAPTION>
SUB-ACCOUNT AND DATE 10-YEARS OR
OF INCEPTION OF SINCE INCEPTION
CORRESPONDING PORTFOLIO 1-YEAR 5-YEARS (IF LESS)
- ------------------------- ----------- ----------- -----------------
<S> <C> <C> <C>
Capital Growth****....... 30.97% N/A 8.49%
Dividend Growth***....... 34.39% 14.12% 10.21%
Equity*.................. 40.45% 19.14% 11.86%
European Growth****...... 24.05% N/A 14.02%
Global Dividend
Growth*****............. 20.25% N/A 9.89%
High Yield*.............. 13.33% 19.44% 6.27%
Money Market*............ N/A N/A N/A
Pacific Growth*****...... 4.19% N/A (2.21)%
Quality Income Plus**.... 22.54% 9.35% 7.95%
Strategist**............. 7.79% 9.90% 7.82%
Utilities***............. 26.77% 11.30% 10.21%
</TABLE>
- --------------------------
*Portfolio inception date of March 9, 1984
**Portfolio inception date of March 1, 1987
***Portfolio inception date of March 1, 1990
****Portfolio inception date of March 1, 1991
*****Portfolio inception date of February 23, 1994
The Variable Account may also advertise the performance of the Sub-Accounts
relative to certain performance rankings and indexes compiled by independent
organizations, such as: (a) Lipper Analytical Services, Inc.; (b) the Standard &
Poor's 500 Composite Stock Price Index ("S & P 500"); and, (c) A.M. Best
Company.
TRANSFERS
The Owner may transfer amounts from one investment alternative to another
prior to the Payout Start Date. Transfers are subject to the following
restrictions:
1. The minimum amount that may be transferred from an investment
alternative is $100; if the total amount in an investment alternative is
less than $100, the entire amount may be transferred.
2. The minimum transfer to any Guarantee Period of the Fixed Account is
$500.
3. The maximum amount in any Contract Year which may be transferred
from the Fixed Account to the Variable Account or between Guarantee Periods
of the Fixed Account is limited to the greater of (1) 25% of the value in
the Fixed Account as of the most recent Contract Anniversary; if 25% of the
value as of the most recent Contract Anniversary is greater than zero but
less than $1,000, then up to $1,000 May be transferred; or (2) 25% of the
sum of all Purchase Payments and transfers to the Fixed Account as of the
most recent Contract Anniversary.
4. If the first renewal interest rate is less than the current rate
that was in effect at the time money was allocated or transferred to the
Fixed Account, the 25% transfer restriction for that money and the
accumulated interest thereon will be waived during the 60 day period
following the first renewal date.
The Company reserves the right to assess transfer fees.
TAX-FREE EXCHANGES (1035 EXCHANGES,
ROLLOVERS AND TRANSFERS)
The Company accepts Purchase Payments which are the proceeds of a Contract
in a transaction qualifying for a tax-free exchange under Section 1035 of the
Internal Revenue Code. Except as required by federal law in calculating the
basis of the Contract, the Company does not differentiate between Section 1035
Purchase Payments and non-Section 1035 Purchase Payments.
The Company also accepts "rollovers" and transfers from Contracts qualifying
as tax-sheltered annuities (TSAs), individual retirement annuities or accounts,
(IRAs), or any other Qualified Contract which is eligible to "rollover" into an
IRA. The Company differentiates between Non-Qualified Contracts, TSAs, IRAs and
other Qualified Contracts to the extent necessary to comply with federal tax
laws. For example, the Company restricts the assignment, transfer or pledge of
TSAs and IRAs so the Contracts will continue to qualify for special tax
treatment. An Owner contemplating any such exchange, rollover or transfer of a
Contract should contact a competent tax adviser with respect to the potential
effects of such a transaction.
6
<PAGE>
GENERAL MATTERS
- --------------------------------------------------------------------------------
RECORDKEEPING SERVICES
In 1993, the Company paid $336,207.59 to Vantage for its services from
January 1, 1993 through October 3, 1993. The basis for the fee was an annual fee
of $16 per policy, plus out-of-pocket expenses for fees for enhancements.
As of October 4, 1993, the Company performs all Contract recordkeeping
services.
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
The Company retains the right, subject to any applicable law, to make
additions to, deletions from or substitutions for the Portfolio shares held by
any Sub-Account of the Variable Account. The Company reserves the right to
eliminate the shares of any of the Portfolios and to substitute shares of
another Portfolio of the Fund, or of another open-end, registered investment
company, if the shares of the Portfolio are no longer available for investment,
or if, in the Company's judgment, investment in any Portfolio would become
inappropriate in view of the purposes of the Variable Account. Substitutions of
shares attributable to an Owner's interest in a Sub-Account will not be made
until the Owner has been notified of the change, and until the Securities and
Exchange Commission has approved the change, to the extent such notification and
approval is required by the Investment Company Act of 1940. Nothing contained in
this Statement of Additional Information shall prevent the Variable Account from
purchasing other securities for other series or classes of contracts, or from
effecting a conversion between series or classes of contracts on the basis of
requests made by Owners.
The Company may also establish additional Sub-Accounts of the Variable
Account. Each additional Sub-Account would purchase shares in a new Portfolio of
the Fund or in another mutual fund. New Sub-Accounts may be established when, in
the sole discretion of the Company, marketing needs or investment conditions
warrant. Any new Sub-Accounts will be made available to existing Owners on a
basis to be determined by the Company. The Company may also eliminate one or
more Sub-Accounts if, in its sole discretion, marketing, tax or investment
conditions so warrant.
In the event of any such substitution or change, the Company may, by
appropriate endorsement, make such changes in the Contract as may be necessary
or appropriate to reflect such substitution or change. If deemed to be in the
best interests of persons having voting rights under the policies, the Variable
Account may be operated as a management company under the Investment Company Act
of 1940 or it may be deregistered under such Act in the event such registration
is no longer required.
REINVESTMENT
All dividends and capital gains distributions from the Portfolios are
automatically reinvested in shares of the distributing Portfolio at their net
asset value.
INCONTESTABILITY
The Contract will not be contested after it is issued.
SETTLEMENTS
The Contract must be returned to the Company prior to any settlement. Due
proof of the Owner(s) or the Annuitant's (and any Joint Annuitant's) death must
be received prior to settlement of a death claim.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
The Company holds title to the assets of the Variable Account. The assets
are kept physically segregated and held separate and apart from the Company's
general corporate assets. Records are maintained of all purchases and
redemptions of the Portfolio shares held by each of the Sub-Accounts.
7
<PAGE>
The Dean Witter Variable Investment Series ("Fund") does not issue
certificates and, therefore, the Company holds the Account's assets in open
account in lieu of stock certificates. See the Fund's Prospectus for a more
complete description of the Fund's custodian.
EXPERTS
The financial statements of the Variable Account and the financial
statements and financial statement schedule of the Company appearing in this
Statement of Additional Information (which is incorporated by reference in the
prospectus of Northbrook Variable Annuity Account II of Northbrook Life
Insurance Company) have been audited by Deloitte & Touche LLP, Two Prudential
Plaza, 180 N. Stetson Avenue, Chicago, Illinois, independent auditors, as stated
in their reports appearing herein and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
Legal advice regarding certain matters relating to the federal securities
laws applicable to the issue and sale of the Contracts has been provided by
Routier and Johnson, P.C., of Washington, D.C.. All matters of Illinois law
pertaining to the Contracts, including the validity of the Contracts and the
Company's right to issue such Contracts under Illinois insurance law, have been
passed upon by Michael J. Velotta, General Counsel of Northbrook Life Insurance
Company.
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax
consequences of ownership or receipt of distributions under an annuity contract
depend on the individual circumstances of each person. If you are concerned
about any tax consequences with regard to your individual circumstances, you
should consult a competent tax adviser.
TAXATION OF NORTHBROOK LIFE INSURANCE
COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter
L of the Internal Revenue Code. The following discussion assumes that the
Company is taxed as a life insurance company under Part I of Subchapter L. Since
the Variable Account is not an entity separate from the Company, and its
operations form a part of the Company, it will not be taxed separately as a
"regulated Investment Company" under Subchapter M of the Code. Investment income
and realized capital gains are automatically applied to increase reserves under
the contract. Under existing federal income tax law, the Company believes that
the Variable Account investment income and realized net capital gains will not
be taxed to the extent that such income and gains are applied to increase the
reserves under the contract.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Variable Account, and therefore the
Company does not intend to make provisions for any such taxes. However, if
changes in the federal tax laws or interpretations thereof result in the Company
being taxed on income or gains attributable to the Variable Account, then the
Company may impose a charge against the Variable Account (with respect to some
or all contracts) in order to set aside provisions to pay such taxes.
EXCEPTIONS TO THE NON-NATURAL OWNER RULE
There are several exceptions to the general rule that contracts held by a
non-natural owner are not
8
<PAGE>
treated as annuity contracts for federal income tax purposes. Contracts will
generally be treated as held by a natural person if the nominal owner is a trust
or other entity which holds the contract as agent for a natural person. However,
this special exception will not apply in the case of an employer who is the
nominal owner of an annuity contract under a non-qualified deferred compensation
arrangement for its employees. Other exceptions to the non-natural owner rule
are: (1) contracts acquired by an estate of a decedent by reason of the death of
the decedent; (2) certain qualified contracts; (3) contracts purchased by
employers upon the termination of certain qualified plans; (4) certain contracts
used in connection with structured settlement agreements, and (5) contracts
purchased with a single premium when the annuity starting date is no later than
a year from purchase of the annuity and substantially equal periodic payments
are made, not less frequently than annually, during the annuity period.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment received
from a non-qualified annuity contract unless: (1) made after the owner reaches
59 1/2; (2) attributable to the owner's disability; (3) attributable to
investment before August 14, 1982, including earnings on pre-August 14, 1982
investment; (4) made from certain qualified contracts; (5) made after the death
of the owner; (6) made under an immediate annuity contract; (7) made from an
annuity purchased and held by an employer upon the termination of a qualified
retirement plan; (8) made under a qualified funding asset; (9) made as part of a
series of substantially equal periodic payments (not less frequently than
annually) for the life of or life expectancy of the owner or the joint lives of
joint life expectancies of the owner and designated beneficiary. Similar rules
apply in the case of qualified contracts.
IRS REQUIRED DISTRIBUTION AT DEATH RULES
In order to be considered an annuity contract for federal income tax
purposes, an annuity contract must provide: (1) if any owner dies on or after
the annuity start date but before the entire interest in the contract has been
distributed, the remaining portion of such interest must be distributed at least
as rapidly as under the method of distribution being used as of the date of the
owner's death; (2) if any owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which is payable to (or for the benefit of) a designated
beneficiary is distributed over the life of such beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary) and the
distributions begin within one year of the owner's death. If the owner's
designated beneficiary is the surviving spouse of the owner, the contract may be
continued with the surviving spouse as the new owner. If the owner of the
contract is a non-natural person, then the annuitant will be treated as the
owner for purposes of applying the distribution at death rules. In addition, a
change in the annuitant on a contract owned by a non-natural person will be
treated as the death of the owner.
QUALIFIED PLANS
This annuity contract may be used with several types of qualified plans. The
tax rules applicable to participants in such qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Adverse tax
consequences may result from excess contributions, premature distributions,
distributions that do not conform to specified commencement and minimum
distribution rules, excess distributions and in other circumstances. Owners and
participants under the plan and annuitants and beneficiaries under the contract
may be subject to the terms and conditions of the plan regardless of the terms
of the contract.
TYPES OF QUALIFIED PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity.
9
<PAGE>
Individual Retirement Annuities are subject to limitations on the amount that
can be contributed and on the time when distributions may commence. Certain
distributions from other types of qualified plans may be "rolled over" on a
tax-deferred basis into an Individual Retirement Annuity.
SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' individual retirement
annuities if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to their individual retirement annuities.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase annuity contracts for them, and subject
to certain limitations, to exclude the purchase payments from the employees'
gross income. An annuity contract used for a Section 403(b) plan must provide
that distributions attributable to salary reduction contributions made after
12/31/88, and all earnings on salary reduction contributions, may be made only
after the employee attains age 59 1/2, separates from service, dies, becomes
disabled or in the case of hardship (earnings on salary reduction contributions
may not be distributed for hardship).
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to
establish various types of tax favored retirement plans for employees. The
Self-Employed Individuals Retirement Act of 1962, as amended, (commonly referred
to as "H.R. 10" or "Keogh") permits self-employed individuals to establish tax
favored retirement plans for themselves and their employees. Such retirement
plans may permit the purchase of annuity contracts in order to provide benefits
under the plans.
STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION DEFERRED COMPENSATION
PLANS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Generally, under the non-natural owner rules, such contracts
are not treated as annuity contracts for federal income tax purposes.
VOTING RIGHTS
- --------------------------------------------------------------------------------
The number of votes which a person has the right to instruct will be
calculated separately for each Sub-Account. That number will be determined by
applying his/her percentage interest, if any, in a particular Sub-Account to the
total number of votes attributable to the Sub-Account.
The number of votes of the Portfolio which an Owner has a right to instruct
will be determined as of the date coincident with the date established by that
Portfolio for determining shareholders eligible to vote at the meeting of the
Fund. Voting instructions will be solicited by written communication prior to
such meeting in accordance with procedures established by the Fund.
Fund shares as to which no timely instructions are received will be voted in
proportion to the voting instructions which are received with respect to all
Contracts participating in that Sub-Account. Voting instructions to abstain on
any item to be voted upon will be applied on a pro rata basis to reduce the
votes eligible to be cast.
Each person having a voting interest in a Sub-Account will receive proxy
material, reports and other materials relating to the appropriate Portfolio.
10
<PAGE>
SALES COMMISSIONS
- --------------------------------------------------------------------------------
The Company pays Dean Witter for its underwriting and general agent's
services a sales commission of up to 6.0% of the Purchase Payments and sales
administration expense allowance of up to 0.125% of the average net assets of
the Fixed Account. These commissions are intended to cover Dean Witter's
expenses in distributing and selling the Contracts. In addition, sale of the
Contract may count toward incentive program awards for the Registered
Representative.
In accordance with the Underwriting and General Agent's Agreements between
Dean Witter and the Company, Dean Witter offers for sale and sells the
Contracts, prepares sales or promotional literature and prints and distributes
the Prospectuses to prospective purchasers. The Company paid Dean Witter sales
commission in the amount of $32,937,708 in 1995, $42,196,817 in 1994 and
$65,164,096 in 1993 for its services under these agreements. These fees are
based on sales commissions.
Under the Underwriting Agreement and Managing General Agent's Agreement
between Dean Witter and the Company, Dean Witter is responsible for paying costs
and expenses associated with licensing its agents, paying agent's commissions,
printing, mailing and distributing the Prospectus to prospective purchasers; and
preparing, printing and distributing sales literature. In the event the
commissions fail to adequately compensate Dean Witter for these expenses, Dean
Witter will pay these expenses from its own funds.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statements of Financial Position of Northbrook
Life Insurance Company as of December 31, 1995 and 1994, and the related
Statements of Operations, Shareholder's Equity and Cash Flows for each of the
three years in the period ended December 31, 1995. Our audits also included
Schedule IV -- Reinsurance. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Northbrook Life Insurance Company as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, Schedule IV
- -- Reinsurance, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 3 to the financial statements, in 1993 the Company changed
its method of accounting for investment in fixed income securities.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 1, 1996
F-1
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
Assets
Investments
Fixed income securities
Available for sale, at fair value (amortized cost $59,142 and $61,581)............... $ 63,229 $ 59,191
Short-term............................................................................. 8,049 3,374
------------ ------------
Total investments.................................................................. 71,278 62,565
Reinsurance recoverable from Allstate Life Insurance Company............................. 2,636,981 3,085,781
Cash..................................................................................... 87 59
Deferred income taxes.................................................................... 77
Net receivable from Allstate Life Insurance Company...................................... 6,183 8,895
Other assets............................................................................. 2,164 2,233
Separate Accounts........................................................................ 3,354,910 2,604,623
------------ ------------
Total assets....................................................................... $ 6,071,603 $ 5,764,233
------------ ------------
------------ ------------
Liabilities
Reserve for life insurance policy benefits............................................... $ 139,509 $ 134,942
Contractholder funds..................................................................... 2,497,278 2,950,532
Income taxes payable..................................................................... 233 4,634
Deferred income taxes.................................................................... 2,798
Separate Accounts........................................................................ 3,354,910 2,604,623
------------ ------------
Total liabilities.................................................................. 5,994,728 5,694,731
------------ ------------
Shareholder's equity
Common stock ($100 par value, 25,000 shares authorized, issued and outstanding).......... 2,500 2,500
Additional capital paid-in............................................................... 56,600 56,600
Unrealized net capital gains (losses).................................................... 2,657 (1,553)
Retained income.......................................................................... 15,118 11,955
------------ ------------
Total shareholder's equity......................................................... 76,875 69,502
------------ ------------
Total liabilities and shareholder's equity......................................... $ 6,071,603 $ 5,764,233
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Net investment income................................................................... $ 4,782 $ 2,881 $ 2,934
Realized capital gains and losses....................................................... 67 (193) 323
--------- --------- ---------
Income before income taxes................................................................ 4,849 2,688 3,257
Income tax expense........................................................................ 1,686 955 750
--------- --------- ---------
Net income................................................................................ $ 3,163 $ 1,733 $ 2,507
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL NET CAPITAL
COMMON CAPITAL GAINS RETAINED
STOCK PAID-IN (LOSSES) INCOME TOTAL
----------- ----------- ----------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992.................................. $ 2,500 $ 31,600 $ 7,715 $ 41,815
Net income................................................ 2,507 2,507
Change in unrealized net capital gains and losses......... $ 747 747
----------- ----------- ----------- --------- ---------
Balance, December 31, 1993.................................. 2,500 31,600 747 10,222 45,069
Net income................................................ 1,733 1,733
Change in unrealized net capital gains and losses......... (2,300) (2,300)
Capital contribution...................................... 25,000 25,000
----------- ----------- ----------- --------- ---------
Balance, December 31, 1994.................................. 2,500 56,600 (1,553) 11,955 69,502
Net income................................................ 3,163 3,163
Change in unrealized net capital gains and losses......... 4,210 4,210
----------- ----------- ----------- --------- ---------
Balance, December 31, 1995.................................. $ 2,500 $ 56,600 $ 2,657 $ 15,118 $ 76,875
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income....................................................................... $ 3,163 $ 1,733 $ 2,507
Adjustments to reconcile net income to net cash from operating activities
Realized capital (gains) losses................................................ (67) 193 (323)
Amortization and other non-cash items.......................................... 903 640 415
Net change in reserve for policy benefits and contractholder funds............. 113 (58) 18,338
Change in deferred income taxes................................................ 608 (114) 1,227
Changes in other operating assets and liabilities.............................. (2,705) (3,835) (19,325)
---------- ---------- ----------
Net cash from operating activities........................................... 2,015 (1,441) 2,839
---------- ---------- ----------
Cash flows from investing activities
Fixed income securities
Proceeds from sales............................................................ 5,423 1,256 14,279
Investment collections......................................................... 7,108 7,626 10,375
Investment purchases........................................................... (9,843) (36,071) (29,778)
Change in short-term investments, net............................................ (4,675) 3,475 2,369
---------- ---------- ----------
Net cash from investing activities........................................... (1,987) (23,714) (2,755)
---------- ---------- ----------
Cash flows from financing activities
Capital contribution............................................................. 25,000
---------- ---------- ----------
Net cash from financing activities........................................... 25,000
---------- ---------- ----------
Net increase (decrease) in cash.................................................... 28 (155) 84
Cash at beginning of year.......................................................... 59 214 130
---------- ---------- ----------
Cash at end of year................................................................ $ 87 $ 59 $ 214
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION AND NATURE OF OPERATIONS
Northbrook Life Insurance Company (the "Company") is wholly owned by
Allstate Life Insurance Company ("Allstate Life"), which is wholly owned by
Allstate Insurance Company ("Allstate"), a wholly-owned subsidiary of The
Allstate Corporation (the "Corporation"). On June 30, 1995, Sears, Roebuck and
Co. ("Sears") distributed its 80.3% ownership in the Corporation to Sears common
shareholders through a tax-free dividend (the "Distribution").
The Company develops and markets single and flexible premium annuities and
flexible premium deferred and variable annuity contracts to individuals in the
United States through Dean Witter Reynolds ("Dean Witter")(Note 4). Other
products include universal life and single premium life insurance.
Annuity contracts issued by the Company are subject to discretionary
withdrawal or surrender by the contractholder, subject to applicable surrender
charges. These contracts are reinsured with Allstate Life (Note 4) which selects
assets to meet the anticipated cash flow requirements of the assumed
liabilities. Allstate Life utilizes various modeling techniques in managing the
relationship between assets and liabilities and employs strategies to maintain
investments which are sufficiently liquid to meet obligations to contractholders
in various interest rate scenarios.
The Company monitors economic and regulatory developments which have the
potential to impact its business. Currently there is proposed federal
legislation which would permit banks greater participation in securities
businesses, which could eventually present an increased level of competition for
sales of the Company's annuity contracts. Furthermore, the federal government
may enact changes which could possibly eliminate the tax-advantaged nature of
annuities or eliminate consumers' need for tax deferral, thereby reducing the
incentive for customers to purchase the Company's products. While it is not
possible to predict the outcome of such issues with certainty, management
evaluates the likelihood of various outcomes and develops strategies, as
appropriate, to respond to such challenges.
Certain reclassifications have been made to the prior year financial
statements to conform to the presentation for the current year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIFE INSURANCE ACCOUNTING
The Company writes long-duration insurance contracts with terms that are not
fixed and guaranteed and single premium life insurance contracts, which are
considered universal life-type contracts. The Company also sells long-duration
contracts that do not involve significant risk of policyholder mortality or
morbidity (principally single and flexible premium annuities, structured
settlement annuities and supplemental contracts when sold without life
contingencies) which are considered investment contracts. Limited payment
contracts (policies with premiums paid over a period shorter than the contract
period), primarily consist of structured settlement annuities and supplemental
contracts when sold with life contingencies.
F-6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRADITIONAL LIFE
The reserve for life insurance policy benefits, which relates to structured
settlement annuities and supplementary contracts when sold with life
contingencies, is computed on the basis of assumptions as to future investment
yields, mortality, morbidity, terminations and expenses. These assumptions,
which for traditional life are applied using the net level premium method,
include provisions for adverse deviation and generally vary by such
characteristics as plan, year of issue and policy duration. Reserve interest
rates ranged from 7.3% to 9.5% during 1995.
UNIVERSAL LIFE-TYPE CONTRACTS
Reserves for universal life-type contracts are established using the
retrospective deposit method. Under this method, liabilities are equal to the
account balance that accrues to the benefit of the policyholder.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual contracts that
include an investment component, including universal life-type contracts.
Payments received are recorded as interest-bearing liabilities. Contractholder
funds are equal to deposits received and interest accrued to the benefit of the
contractholder less withdrawals, mortality charges and administrative expenses.
During 1995, credited interest rates on contractholder funds ranged from 3.0% to
8.0% for those contracts with fixed interest rates and from 3.0% to 8.7% for
those with flexible rates.
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuity contracts, the
assets and liabilities of which are legally segregated and reflected in the
accompanying statements of financial position as assets and liabilities of the
Separate Accounts. Assets and liabilities of the Separate Accounts represent
funds of Northbrook Variable Annuity Account and Northbrook Variable Annuity
Account II ("Separate Accounts"), unit investment trusts registered with the
Securities and Exchange Commission. The assets of the Separate Accounts are
carried at fair value. Investment income and realized gains and losses of the
Separate Accounts accrue directly to the contractholders and, therefore, are not
included in the accompanying statements of operations. Revenues to the Company
from the Separate Accounts consist of contract maintenance fees, administrative
fees and mortality and expense risk charges, which are entirely ceded to
Allstate Life.
REINSURANCE
Premiums, contract charges, credited interest, and policy benefits are ceded
and reflected net of such cessions in the statements of operations. Reinsurance
recoverable and the related reserves for policy benefits and contractholder
funds are reported separately in the statements of financial position.
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. Fixed
income securities are carried at fair value. The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a
F-7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
component of shareholder's equity. Provisions are made to write down the value
of fixed income securities for declines in value that are other than temporary.
Such writedowns are included in realized capital gains and losses.
Short-term investments are carried at cost which approximates fair value.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method, based on the estimated principal repayments.
Realized capital gains and losses are determined on a specific identification
basis.
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities and the enacted tax
rates. Deferred income taxes also arise from unrealized capital gains or losses
on fixed income securities carried at fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. ACCOUNTING CHANGE
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires that investments classified
as available for sale be carried at fair value. Previously, fixed income
securities classified as available for sale were carried at the lower of
amortized cost or fair value, determined in the aggregate. Unrealized holding
gains and losses are reflected as a separate component of shareholder's equity,
net of deferred income taxes. The net effect of adoption of this statement
increased shareholder's equity at December 31, 1993 by $747, with no impact on
net income.
4. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company reinsures substantially all business with Allstate Life.
Premiums and contract charges ceded to Allstate Life were $2,284 and $52,348 in
1995, $1,886 and $38,306 in 1994, and $2,688 and $22,446 in 1993. Credited
interest, policy benefits and other expenses ceded to Allstate Life amounted to
$229,525, $243,326, and $525,467 in 1995, 1994, and 1993, respectively.
Investment income earned on the assets which support contractholder funds was
excluded from the Company's financial statements as those assets were
transferred to Allstate Life under the terms of reinsurance treaties.
Reinsurance ceded arrangements do not discharge the Company as the primary
insurer.
F-8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
BUSINESS OPERATIONS
The Company utilizes services and business facilities owned or leased, and
operated by Allstate in conducting its business activities. The Company
reimburses Allstate for the operating expenses incurred by Allstate. The cost to
the Company is determined by various allocation methods and is primarily related
to the level of services provided. Operating expenses, including compensation
and retirement and other benefit programs, allocated to the Company were $5,341,
$5,483 and $5,301 in 1995, 1994 and 1993, respectively. Investment-related
expenses are retained by the Company. All other costs are assumed by Allstate
Life under reinsurance agreements.
DEAN WITTER
The Company and Allstate Life have formed a strategic alliance with Dean
Witter to develop, market and distribute proprietary annuity and life insurance
products through Dean Witter account executives. Dean Witter provides a portion
of the funding for these products through loans to an affiliate of the Company.
Under the terms of the strategic alliance, which is cancelable by either
party, the Company has agreed to use Dean Witter as an exclusive distribution
channel for the Company's products. Dean Witter is also the investment manager
for the Dean Witter Variable Investment Series, the fund in which the assets of
the Separate Accounts are invested.
5. INCOME TAXES
Allstate Life and its life insurance subsidiaries, including the Company,
will file a consolidated federal income tax return. Tax liabilities and benefits
realized by the consolidated group are allocated as generated by the respective
subsidiaries, whether or not such benefits generated by the subsidiaries would
be available on a separate return basis. The Corporation and its domestic
subsidiaries, including the Company (the "Allstate Group"), will be eligible to
file a consolidated tax return beginning in the year 2000.
Prior to the Distribution, the Allstate Group joined with Sears and its
domestic business units (the "Sears Group") in the filing of a consolidated
federal income tax return (the "Sears Tax Group") and were parties to a federal
income tax allocation agreement (the "Tax Sharing Agreement"). As a member of
the Sears Tax Group, the Corporation was jointly and severally liable for the
consolidated income tax liability of the Sears Tax Group. Under the Tax Sharing
Agreement, the Company, through the Corporation, paid to or received from the
Sears Group the amount, if any, by which the Sears Tax Group's federal income
tax liability was affected by virtue of inclusion of the Allstate Group in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Company filed a
separate return, except that items such as net operating losses, capital losses,
foreign tax credits, or similar items which might not be immediately
recognizable in a separate return, were allocated according to the Tax Sharing
Agreement and reflected in the Company's provision to the extent that such items
reduced the Sears Tax Group's federal tax liability.
The Allstate Group and Sears Group have entered into an agreement which
governs their respective rights and obligations with respect to federal income
taxes for all periods prior to the Distribution ("Consolidated Tax Years"). The
agreement provides that all Consolidated Tax Years will continue to be governed
by the Tax Sharing
F-9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
5. INCOME TAXES (CONTINUED)
Agreement with respect to the Company's federal income tax liability and taxes
payable to or recoverable from the Sears Group.
The components of the deferred income tax assets and liabilities at December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred assets
Unrealized net capital losses on fixed income securities.................... $ $ 837
--------- ---------
Total deferred assets..................................................... 837
--------- ---------
Deferred liabilities
Difference in tax bases of investments...................................... (1,368) (760)
Unrealized net capital gains on fixed income securities..................... (1,430)
--------- ---------
Total deferred liabilities................................................ (2,798) (760)
--------- ---------
Net deferred (liability) asset................................................ $ (2,798) $ 77
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
5. INCOME TAXES (CONTINUED)
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................. $ 1,078 $ 1,069 $ 641
Deferred................................................................ 608 (114) 109
--------- --------- ---------
Income tax expense...................................................... $ 1,686 $ 955 $ 750
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company paid income taxes of $4,206, $4,219 and $1,175 in 1995, 1994 and
1993, respectively under the Tax Sharing Agreement. Included in these amounts
are $2,651, $2,826 and $1,111 reimbursed to the Company by Allstate Life under
the terms of reinsurance agreements for 1995, 1994 and 1993, respectively.
The Company had income taxes payable to Allstate Life of $233 and $4,634 at
December 31, 1995 and 1994, respectively.
A reconciliation of the statutory federal income tax rate to the effective
federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate..................................... 35.0% 35.0% 35.0%
Dividends received deduction.......................................... (10.6)
Tax-exempt income..................................................... (1.7)
Other................................................................. (0.3) 0.5 0.3
--- ----- -----
Effective federal income tax rate..................................... 34.7% 35.5% 23.0%
--- ----- -----
--- ----- -----
</TABLE>
F-11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
6. INVESTMENTS
FAIR VALUES
The amortized cost, fair value and gross unrealized gains and losses for
fixed income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1995
U.S. government and agencies...................................... $ 8,619 $ 880 $ $ 9,499
Municipal......................................................... 1,583 83 1,666
Corporate......................................................... 4,967 349 5,316
Mortgage-backed securities........................................ 43,973 3,003 228 46,748
----------- --------- --------- ---------
Totals........................................................ $ 59,142 $ 4,315 $ 228 $ 63,229
----------- --------- --------- ---------
----------- --------- --------- ---------
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------- FAIR
COST GAINS LOSSES VALUE
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1994
U.S. government and agencies...................................... $ 9,619 $ 49 $ 825 $ 8,843
Municipal......................................................... 1,642 77 3 1,716
Corporate......................................................... 3,172 63 3,109
Mortgage-backed securities........................................ 47,148 75 1,700 45,523
----------- --------- --------- ---------
Totals........................................................ $ 61,581 $ 201 $ 2,591 $ 59,191
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
--------------- -----------
<S> <C> <C>
Due in one year or less......................................................... $ 270 $ 272
Due after one year through five years........................................... 3,021 3,182
Due after five years through ten years.......................................... 4,647 5,124
Due after ten years............................................................. 7,231 7,903
------- -----------
15,169 16,481
Mortgage-backed securities...................................................... 43,973 46,748
------- -----------
Total....................................................................... $ 59,142 $ 63,229
------- -----------
------- -----------
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments
by the issuers.
F-12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
6. INVESTMENTS (CONTINUED)
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses on fixed income securities included
in shareholder's equity at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
UNREALIZED NET
AMORTIZED COST FAIR VALUE GAINS/(LOSSES)
--------------- ----------- ---------------
<S> <C> <C> <C>
Fixed income securities........................................ $ 59,142 $ 63,229 $ 4,087
------- -----------
------- -----------
Deferred income taxes.......................................... (1,430)
-------
Total...................................................... $ 2,657
-------
-------
</TABLE>
The change in unrealized net capital gains and losses for fixed income
securities is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Fixed income securities................................................................. $ 6,477 $ (3,539)
Deferred income taxes................................................................... (2,267) 1,239
--------- ---------
Change in unrealized net capital gains and losses................................... $ 4,210 $ (2,300)
--------- ---------
--------- ---------
</TABLE>
COMPONENTS OF INVESTMENT INCOME
Investment income by type of investment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Investment income:
Fixed income securities....................................................... $ 4,633 $ 2,735 $ 2,793
Short-term.................................................................... 215 192 172
--------- --------- ---------
Investment income, before expense............................................... 4,848 2,927 2,965
Investment expense.............................................................. 66 46 31
--------- --------- ---------
Net investment income....................................................... $ 4,782 $ 2,881 $ 2,934
--------- --------- ---------
--------- --------- ---------
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains and losses on investments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Fixed income securities............................................................. $ 67 $ (193) $ 323
Income tax (expense) benefit........................................................ (23) 68 (113)
--- --------- ---------
Net realized gains (losses)......................................................... $ 44 $ (125) $ 210
--- --------- ---------
--- --------- ---------
</TABLE>
F-13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
6. INVESTMENTS (CONTINUED)
PROCEEDS FROM SALES OF FIXED INCOME SECURITIES
The proceeds from sales of investments in fixed income securities, excluding
calls, and related gross realized gains and losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Proceeds...................................................................... $ 5,423 $ 1,256 $ 14,279
--------- --------- ---------
--------- --------- ---------
Gross realized gains.......................................................... $ 67 $ 318
Gross realized losses......................................................... $ (179) (34)
--------- --------- ---------
Net realized gains (losses)................................................... $ 67 $ (179) $ 284
--------- --------- ---------
--------- --------- ---------
</TABLE>
SECURITIES ON DEPOSIT
At December 31, 1995, fixed income securities with a carrying value of
$8,041 were on deposit with regulatory authorities as required by law.
7. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The assets and liabilities of
the Separate Accounts are carried at the fair value of the funds in which the
assets are invested. The fair value of all financial assets other than fixed
income securities and all liabilities other than contractholder funds
approximates their carrying value as they are short-term in nature.
Fair values for fixed income securities are based on quoted market prices.
The December 31, 1995 and 1994 fair values and carrying values of fixed income
securities are discussed in Note 6.
The fair value of contractholder funds related to investment contracts is
based on the terms of the underlying contracts. Reserves on investment contracts
with no stated maturities (single premium and flexible premium deferred
annuities) are valued at the fund balance less surrender charge. The fair value
of immediate annuities and annuities without life contingencies with fixed terms
are estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and duration. Contractholder
funds on investment contracts had a carrying value of $2,294,536 at December 31,
1995 and a fair value of $2,274,053. The carrying value and fair value at
December 31, 1994 were $2,738,823 and $2,685,448, respectively.
F-14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
8. STATUTORY FINANCIAL INFORMATION
The following tables reconcile net income and shareholder's equity as
reported herein in conformity with generally accepted accounting principles with
statutory net income and capital and surplus, determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities:
<TABLE>
<CAPTION>
NET INCOME
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance per generally accepted accounting principles............................ $ 3,163 $ 1,733 $ 2,507
Income taxes.................................................................. (88) (114) 825
Non-admitted assets and statutory reserves.................................... (775) (27) (91)
--------- --------- ---------
Balance per statutory accounting principles..................................... $ 2,300 $ 1,592 $ 3,241
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER'S EQUITY
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Balance per generally accepted accounting principles................................... $ 76,875 $ 69,502
Income taxes......................................................................... (1,614) (77)
Unrealized net capital gains (losses)................................................ (4,087) 2,390
Non-admitted assets and statutory reserves........................................... 1,891 (1,086)
--------- ---------
Balance per statutory accounting principles............................................ $ 73,065 $ 70,729
--------- ---------
--------- ---------
</TABLE>
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the insurance
department of the State of Illinois. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners, as well as state laws, regulations and general administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The Company does not follow any permitted statutory
accounting practices that have a material effect on statutory surplus or
risk-based capital.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The payment of shareholder dividends by insurance companies without the prior
approval of the state insurance regulator is limited to formula amounts based on
net income and capital and surplus, determined in accordance with statutory
accounting practices, as well as the timing and amount of dividends paid in the
preceding twelve months. The maximum amount of dividends that the Company can
distribute during 1996 without prior approval of both the Illinois and
California Departments of Insurance is $7,057.
F-15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995
GROSS NET
AMOUNT CEDED AMOUNT
-------- -------- ------
Life insurance in force...................... $610,478 $610,478 $
-------- -------- ------
-------- -------- ------
Premiums and contract charges:
Life and annuities......................... $ 54,632 $ 54,632 $
-------- -------- ------
-------- -------- ------
YEAR ENDED DECEMBER 31, 1994
GROSS NET
AMOUNT CEDED AMOUNT
-------- -------- ------
Life insurance in force...................... $661,356 $661,356 $
-------- -------- ------
-------- -------- ------
Premiums and contract charges:
Life and annuities......................... $ 40,192 $ 40,192 $
-------- -------- ------
-------- -------- ------
YEAR ENDED DECEMBER 31, 1993
GROSS NET
AMOUNT CEDED AMOUNT
-------- -------- ------
Life insurance in force...................... $702,975 $702,975 $
-------- -------- ------
-------- -------- ------
Premiums and contract charges:
Life and annuities......................... $ 25,134 $ 25,134 $
-------- -------- ------
-------- -------- ------
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statement of Net Assets of Northbrook
Variable Annuity Account II (the "Account") as of December 31, 1995, and the
related Statements of Operations for the year then ended and Changes in Net
Assets for each of the two years in the period ended December 31, 1995 of the
Money Market, High Yield, Equity, Quality Income Plus, Strategist, Dividend
Growth, Utilities, European Growth, Capital Growth, Global Dividend Growth and
Pacific Growth portfolios that comprise the Account. These financial statements
are the responsibility of the Account's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1995. 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 Account as of December 31, 1995, and the
results of its operations for the year then ended and the changes in its net
assets for each of the two years in the period ended December 31, 1995 of each
of the portfolios comprising the Account, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 1, 1996
F-17
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF NET ASSETS
DECEMBER 31,1995
($ and shares in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in the Dean Witter Variable Investment Series:
Money Market Portfolio
209,700 shares (cost $209,700)................................................. $ 209,700
High Yield Portfolio
19,555 shares (cost $130,706).................................................. 122,505
Equity Portfolio
10,535 shares (cost $228,556).................................................. 285,869
Quality Income Plus Portfolio
40,167 shares (cost $428,048).................................................. 440,092
Strategist Portfolio
24,214 shares (cost $300,626).................................................. 301,342
Dividend Growth Portfolio
46,736 shares (cost $579,345).................................................. 728,687
Utilities Portfolio
27,937 shares (cost $362,476).................................................. 410,249
European Growth Portfolio
9,364 shares (cost $129,564)................................................... 164,151
Capital Growth Portfolio
3,876 shares (cost $46,593).................................................... 59,013
Global Dividend Growth Portfolio
15,811 shares (cost $161,238).................................................. 184,781
Pacific Growth Portfolio
8,890 shares (cost $85,307).................................................... 86,235
----------
Total assets................................................................. 2,992,624
LIABILITIES
Payable to Northbrook Life Insurance Company --
accrued contract maintenance charges............................................. 932
----------
Net assets................................................................... $2,991,692
----------
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
QUALITY
MONEY HIGH INCOME DIVIDEND
MARKET YIELD EQUITY PLUS STRATEGIST GROWTH
($ in thousands) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................................... $ 11,158 $ 12,774 $ 2,326 $ 27,080 $ 26,439 $ 27,541
Less charges from Northbrook Life:
Mortality and expense risk................... (2,528) (1,266) (2,649) (4,813) (3,669) (7,298)
Administrative expense....................... (202) (101) (212) (385) (294) (584)
--------- --------- --------- --------- ----------- ----------
Net investment income (loss)................... 8,428 11,407 (535) 21,882 22,476 19,659
--------- --------- --------- --------- ----------- ----------
REALIZED AND UNREALIZED GAINS AND LOSSES ON
INVESTMENTS:
Realized gains and losses from sales of
investments:
Proceeds from sales.......................... 75,444 3,552 8,558 13,626 30,784 10,369
Cost of investments sold..................... (75,444) (3,831) (8,272) (14,382) (31,294) (9,437)
--------- --------- --------- --------- ----------- ----------
Net realized gains and losses.................... -- (279) 286 (756) (510) 932
--------- --------- --------- --------- ----------- ----------
Change in unrealized gains and losses............ -- 1,677 71,559 57,216 467 149,094
--------- --------- --------- --------- ----------- ----------
Net gains and losses on investments.............. -- 1,398 71,845 56,460 (43) 150,026
--------- --------- --------- --------- ----------- ----------
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS... $ 8,428 $ 12,805 $ 71,310 $ 78,342 $ 22,433 $ 169,685
--------- --------- --------- --------- ----------- ----------
--------- --------- --------- --------- ----------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-19
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
EUROPEAN CAPITAL DIVIDEND PACIFIC
UTILITIES GROWTH GROWTH GROWTH GROWTH
($ in thousands) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO TOTAL
--------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................................. $ 15,698 $ 6,356 $ 267 $ 3,802 $ 644 $ 134,085
Less charges from Northbrook Life:
Mortality and expense risk............... (4,461) (1,812) (597) (1,858) (900) (31,851)
Administrative expense................... (357) (145) (48) (149) (72) (2,549)
--------- ---------- --------- ---------- ---------- ------------
Net investment income (loss)............... 10,880 4,399 (378) 1,795 (328) 99,685
--------- ---------- --------- ---------- ---------- ------------
REALIZED AND UNREALIZED GAINS AND LOSSES ON
INVESTMENTS:
Realized gains and losses from sales of
investments:
Proceeds from sales...................... 18,110 12,465 5,003 2,508 10,733 191,152
Cost of investments sold................. (18,108) (10,836) (4,406) (2,422) (11,117) (189,549)
--------- ---------- --------- ---------- ---------- ------------
Net realized gains and losses................ 2 1,629 597 86 (384) 1,603
--------- ---------- --------- ---------- ---------- ------------
Change in unrealized gains and losses........ 75,255 24,572 12,700 25,883 3,987 422,410
--------- ---------- --------- ---------- ---------- ------------
Net gains and losses on investments.......... 75,257 26,201 13,297 25,969 3,603 424,013
--------- ---------- --------- ---------- ---------- ------------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS.................................. $ 86,137 $ 30,600 $ 12,919 $ 27,764 $ 3,275 $ 523,698
--------- ---------- --------- ---------- ---------- ------------
--------- ---------- --------- ---------- ---------- ------------
</TABLE>
F-20
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
QUALITY
MONEY INCOME DIVIDEND
($ and units in thousands, MARKET HIGH YIELD EQUITY PLUS STRATEGIST GROWTH
except value per unit) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss)............. $ 8,428 $ 11,407 $ (535) $ 21,882 $ 22,476 $ 19,659
Net realized gains and losses............ (279) 286 (756) (510) 932
Net change in unrealized gains and
losses.................................. 1,677 71,559 57,216 467 149,094
---------- ---------- ---------- ---------- ---------- ----------
8,428 12,805 71,310 78,342 22,433 169,685
---------- ---------- ---------- ---------- ---------- ----------
FROM CAPITAL TRANSACTIONS:
Deposits................................. 90,983 30,088 48,365 42,505 31,559 106,405
Benefit payments......................... (3,903) (1,357) (1,786) (5,370) (4,215) (6,901)
Payments on termination.................. (25,297) (6,748) (13,887) (20,886) (16,319) (34,408)
Contract maintenance charges............. (83) (67) (161) (241) (170) (449)
Transfers among the portfolios and with
the Fixed Account, net.................. (73,404) 9,102 17,994 7,342 (17,627) 30,986
---------- ---------- ---------- ---------- ---------- ----------
(11,704) 31,018 50,525 23,350 (6,772) 95,633
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net assets.......... (3,276) 43,823 121,835 101,692 15,661 265,318
Net assets, beginning of period............ 212,911 78,644 163,945 338,263 285,587 463,142
---------- ---------- ---------- ---------- ---------- ----------
Net assets, end of period.................. $ 209,635 $ 122,467 $ 285,780 $ 439,955 $ 301,248 $ 728,460
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE PER UNIT, END OF PERIOD.... $ 11.65 $ 21.86 $ 25.86 $ 16.37 $ 16.92 $ 21.51
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
ENHANCED DEATH BENEFIT:
NET ASSET VALUE PER UNIT, END OF
PERIOD.................................. $ 11.54 $ 21.66 $ 25.62 $ 15.60 $ 16.13 $ 21.03
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
UNITS OUTSTANDING, END OF PERIOD........... 17,484 5,536 10,835 26,736 17,718 33,515
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
ENHANCED DEATH BENEFIT:
UNITS OUTSTANDING, END OF PERIOD........... 511 67 216 142 92 367
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-21
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
EUROPEAN CAPITAL DIVIDEND PACIFIC
($ and units in thousands, UTILITIES GROWTH GROWTH GROWTH GROWTH
except value per unit) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO TOTAL
---------- ---------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss)............. $ 10,880 $ 4,399 $ (378) $ 1,795 $ (328) $ 99,685
Net realized gains and losses............ 2 1,629 597 86 (384) 1,603
Net change in unrealized gains and
losses.................................. 75,255 24,572 12,700 25,883 3,987 422,410
---------- ---------- --------- ---------- --------- ------------
86,137 30,600 12,919 27,764 3,275 523,698
---------- ---------- --------- ---------- --------- ------------
FROM CAPITAL TRANSACTIONS:
Deposits................................. 31,144 18,112 7,568 34,383 16,415 457,527
Benefit payments......................... (5,388) (1,480) (443) (1,695) (682) (33,220)
Payments on termination.................. (19,877) (9,858) (3,391) (8,436) (3,661) (162,768)
Contract maintenance charges............. (264) (98) (36) (108) (50) (1,727)
Transfers among the portfolios and with
the Fixed Account, net.................. (1,427) (2,908) 3,555 10,831 5,621 (9,935)
---------- ---------- --------- ---------- --------- ------------
4,188 3,768 7,253 34,975 17,643 249,877
---------- ---------- --------- ---------- --------- ------------
Increase (decrease) in net assets.......... 90,325 34,368 20,172 62,739 20,918 773,575
Net assets, beginning of period............ 319,796 129,732 38,823 121,984 65,290 2,218,117
---------- ---------- --------- ---------- --------- ------------
Net assets, end of period.................. $ 410,121 $ 164,100 $ 58,995 $ 184,723 $ 86,208 $ 2,991,692
---------- ---------- --------- ---------- --------- ------------
---------- ---------- --------- ---------- --------- ------------
NET ASSET VALUE PER UNIT, END OF PERIOD.... $ 18.00 $ 18.98 $ 14.92 $ 11.93 $ 9.62
---------- ---------- --------- ---------- ---------
---------- ---------- --------- ---------- ---------
ENHANCED DEATH BENEFIT:
NET ASSET VALUE PER UNIT, END OF
PERIOD.................................. $ 17.40 $ 18.38 $ 14.72 $ 11.67 $ 9.46
---------- ---------- --------- ---------- ---------
---------- ---------- --------- ---------- ---------
UNITS OUTSTANDING, END OF PERIOD........... 22,626 8,588 3,918 15,326 8,866
---------- ---------- --------- ---------- ---------
---------- ---------- --------- ---------- ---------
ENHANCED DEATH BENEFIT:
UNITS OUTSTANDING, END OF PERIOD........... 165 62 36 155 98
---------- ---------- --------- ---------- ---------
---------- ---------- --------- ---------- ---------
</TABLE>
F-22
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
QUALITY
MONEY INCOME DIVIDEND
($ and units in thousands, MARKET HIGH YIELD EQUITY PLUS STRATEGIST GROWTH
except value per unit) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss)............. $ 3,937 $ 7,907 $ 11,131 $ 27,457 $ 10,297 $ 7,411
Net realized gains and losses............ (708) (601) (6,255) 36 196
Net change in unrealized gains and
losses.................................. (11,093) (20,729) (53,902) (4,450) (27,664)
---------- ---------- ---------- ---------- ---------- ----------
3,937 (3,894) (10,199) (32,700) 5,883 (20,057)
---------- ---------- ---------- ---------- ---------- ----------
FROM CAPITAL TRANSACTIONS:
Deposits................................. 175,691 36,052 63,695 81,803 77,194 134,871
Benefit payments......................... (3,032) (1,268) (1,658) (5,881) (2,785) (5,288)
Payments on termination.................. (12,993) (3,479) (4,745) (16,192) (7,609) (15,924)
Deduction for contract maintenance
charges................................. (104) (50) (106) (218) (182) (332)
Transfers among the portfolios and with
the Fixed Account, net.................. (34,004) 2,209 982 (69,831) 32,119 2,297
---------- ---------- ---------- ---------- ---------- ----------
125,558 33,464 58,168 (10,319) 98,737 115,624
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net assets.......... 129,495 29,570 47,969 (43,019) 104,620 95,567
---------- ---------- ---------- ---------- ---------- ----------
Net assets, beginning of period............ 83,416 49,074 115,976 381,282 180,967 367,575
---------- ---------- ---------- ---------- ---------- ----------
Net assets, end of period.................. $ 212,911 $ 78,644 $ 163,945 $ 338,263 $ 285,587 $ 463,142
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE PER UNIT, END OF PERIOD.... $ 11.18 $ 19.26 $ 18.39 $ 13.34 $ 15.68 $ 15.98
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-23
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
EUROPEAN CAPITAL DIVIDEND PACIFIC
($ and units in thousands, UTILITIES GROWTH GROWTH GROWTH GROWTH
except value per unit) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO TOTAL
---------- ---------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss)............. $ 12,221 $ 2,951 $ (59) $ 484 $ (278) $ 83,459
Net realized gains and losses............ (3,189) 465 (41) 15 (23) (10,105)
Net change in unrealized gains and
losses.................................. (49,925) 2,060 (987) (2,340) (3,059) (172,089)
---------- ---------- --------- ---------- --------- ------------
(40,893) 5,476 (1,087) (1,841) (3,360) (98,735)
---------- ---------- --------- ---------- --------- ------------
FROM CAPITAL TRANSACTIONS:
Deposits................................. 65,745 45,006 7,644 61,362 35,008 784,071
Benefit payments......................... (5,377) (1,406) (302) (608) (476) (28,081)
Payments on termination.................. (14,947) (2,758) (1,657) (1,421) (960) (82,685)
Deduction for contract maintenance
charges................................. (243) (85) (30) (67) (36) (1,453)
Transfers among the portfolios and with
the Fixed Account, net.................. (85,168) 19,937 (7,285) 64,559 35,114 (39,071)
---------- ---------- --------- ---------- --------- ------------
(39,990) 60,694 (1,630) 123,825 68,650 632,781
---------- ---------- --------- ---------- --------- ------------
Increase (decrease) in net assets.......... (80,883) 66,170 (2,717) 121,984 65,290 534,046
Net assets, beginning of period............ 400,679 63,562 41,540 1,684,071
---------- ---------- --------- ---------- --------- ------------
Net assets, end of period.................. 319,796 129,732 38,823 121,984 65,290 2,218,117
---------- ---------- --------- ---------- --------- ------------
---------- ---------- --------- ---------- --------- ------------
NET ASSET VALUE PER UNIT, END OF PERIOD.... $ 14.18 $ 15.28 $ 11.38 $ 9.91 $ 9.22
---------- ---------- --------- ---------- ---------
---------- ---------- --------- ---------- ---------
</TABLE>
F-24
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 1995
1. ORGANIZATION
Northbrook Variable Annuity Account II (the "Account"), a unit investment
trust registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, is a separate account of Northbrook Life
Insurance Company ("Northbrook Life"), which is wholly owned by Allstate Life
Insurance Company ("Allstate Life"), a wholly-owned subsidiary of Allstate
Insurance Company ("Allstate"), which is wholly owned by The Allstate
Corporation (the "Corporation').
Northbrook Life writes certain annuity contracts, the proceeds of which are
invested at the discretion of the contractholder. Contractholders primarily
invest in units of the portfolios comprising the Account but may also invest in
the general account of Northbrook Life ("Fixed Account"). The Account, in turn,
invests solely in shares of the portfolios of the Dean Witter Variable
Investment Series ("Fund"). Northbrook Life provides administrative and
insurance services to the Account for a fee.
Dean Witter Reynolds, Inc. ("Dean Witter") is the sole distributor of
Northbrook Life's flexible premium deferred variable annuity contracts and
certain single and flexible premium annuities and is the investment manager for
the Fund. In October, 1993, Allstate Life and Northbrook Life announced a
strategic alliance to develop, market and distribute proprietary annuity and
life insurance products through Dean Witter account executives. Dean Witter
receives investment management fees from the Fund.
Effective September 1, 1995, the name of the Managed Assets Portfolio of the
Fund changed to the Strategist Portfolio. While certain of the investment
policies of the portfolio have changed, the overall investment strategy has
remained the same.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
Investments consist of shares in the portfolios of the Fund, and are stated
at fair value based on quoted market prices.
INVESTMENT INCOME
Investment income consists of dividends declared by the portfolios of the
Fund, and is recognized on the date of record.
REALIZED GAINS AND LOSSES
Realized gains and losses on the sale of shares by the Account are computed
on a weighted average ("cost") basis.
FEDERAL INCOME TAXES
Net investment income and realized gains and losses on investments of the
Account are reported to contractholders generally upon distribution.
Accordingly, no provision for income taxes has been recorded.
F-25
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TWO YEARS ENDED DECEMBER 31, 1995
3. MORTALITY AND EXPENSE CHARGES
Northbrook Life assumes mortality and expense risks related to the
operations of the Account and deducts charges daily at a rate , on an annual
basis, equal to 1.25% of the daily net assets of the Account. Northbrook Life
guarantees that the amount of this charge will not increase over the life of the
contract.
Beginning in October 1995, Northbrook Life offers contractholders an
enhanced death benefit, which guarantees that the death benefit will provide a
cumulative return greater than or equal to a specified level ("Enhanced Death
Benefit"). Northbrook Life deducts daily an additional charge equal to .13%, on
an annual basis, of the daily net assets of the Account which are attributable
to contractholders who have elected the enhanced death benefit.
4. ADMINISTRATIVE EXPENSE CHARGE AND CONTRACT MAINTENANCE CHARGES
Northbrook Life deducts administrative expense charges daily at a rate, on
an annual basis, equal to .10% of the daily net assets of the Account. This
charge is designed to cover additional administrative expense.
For each year or portion of a year a contract is in effect, Northbrook Life
deducts a fixed annual contract maintenance charge of $30 as reimbursement for
expenses related to the maintenance of each contract and the Account. The amount
of this charge is guaranteed not to increase over the life of the contract.
F-26
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TWO YEARS ENDED DECEMBER 31, 1995
5. UNITS ISSUED AND REDEEMED
Units issued and redeemed by the Account during 1995 for contracts with and
without the Enhanced Death Benefit were as follows:
CONTRACTS WITHOUT THE ENHANCED DEATH BENEFIT:
<TABLE>
<CAPTION>
QUALITY
MONEY HIGH INCOME
MARKET YIELD EQUITY PLUS STRATEGIST
(units in thousands) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
UNITS OUTSTANDING, DECEMBER
31, 1994..................... 19,047 4,083 8,914 25,350 18,219
Unit activity during 1995:
Issued...................... 9,777 2,082 3,103 3,809 2,549
Redeemed.................... (11,340) (629) (1,182) (2,423) (3,050)
--------- --------- --------- --------- ----------
UNITS OUTSTANDING, DECEMBER
31, 1995..................... 17,484 5,536 10,835 26,736 17,718
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
CONTRACTS WITH THE ENHANCED DEATH BENEFIT:
<TABLE>
<CAPTION>
QUALITY
MONEY HIGH INCOME
MARKET YIELD EQUITY PLUS STRATEGIST
(units in thousands) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
UNITS OUTSTANDING, DECEMBER
31, 1994..................... -- -- -- -- --
Unit activity during 1995:
Issued...................... 719 78 227 146 94
Redeemed.................... (208) (11) (11) (4) (2)
--- --- --- --- ---
UNITS OUTSTANDING, DECEMBER
31, 1995..................... 511 67 216 142 92
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
UNITS REDEEMED INCLUDES UNITS DEDUCTED FOR ACCRUED CONTRACT MAINTENANCE CHARGES.
F-27
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TWO YEARS ENDED DECEMBER 31, 1995
5. UNITS ISSUED AND REDEEMED (CONTINUED)
CONTRACTS WITHOUT THE ENHANCED DEATH BENEFIT:
<TABLE>
<CAPTION>
GLOBAL
DIVIDEND EUROPEAN CAPITAL DIVIDEND PACIFIC
GROWTH UTILITIES GROWTH GROWTH GROWTH GROWTH
(units in thousands) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
UNITS OUTSTANDING, DECEMBER 31, 1994......................... 28,981 22,553 8,490 3,411 12,307 7,080
Unit activity during 1995:
Issued..................................................... 7,341 2,498 1,397 1,117 4,309 3,564
Redeemed................................................... (2,807) (2,425) (1,299) (610) (1,290) (1,778)
-------- --------- -------- --------- -------- ---------
UNITS OUTSTANDING, DECEMBER 31, 1995......................... 33,515 22,626 8,588 3,918 15,326 8,866
-------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- ---------
</TABLE>
CONTRACTS WITH THE ENHANCED DEATH BENEFIT:
<TABLE>
<CAPTION>
GLOBAL
DIVIDEND EUROPEAN CAPITAL DIVIDEND PACIFIC
GROWTH UTILITIES GROWTH GROWTH GROWTH GROWTH
(units in thousands) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
UNITS OUTSTANDING, DECEMBER 31, 1994......................... -- -- -- -- -- --
Unit activity during 1995:
Issued..................................................... 383 171 75 48 170 116
Redeemed................................................... (16) (6) (13) (12) (15) (18)
--- --- --- --- --- ---
UNITS OUTSTANDING, DECEMBER 31, 1995......................... 367 165 62 36 155 98
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>
UNITS REDEEMED INCLUDES UNITS DEDUCTED FOR ACCRUED CONTRACT MAINTENANCE CHARGES.
F-28
