NORTHBROOK VARIABLE ANNUITY ACCOUNT II
of
NORTHBROOK LIFE INSURANCE COMPANY
PO 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
22.
The Variable Account invests in shares of one or more management investment
companies ("Funds"). All of the Funds which are described in this Prospectus may
not be available in your state. Presently, the Variable Account invests in
shares of the following Funds:
Morgan Stanley Dean Witter Variable Investment Series
Morgan Stanley Universal Funds, Inc.
Van Kampen American Capital Life Investment Trust
The Company has prepared and filed a Statement of Additional Information dated
July 10, 1998, 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 29
of this Prospectus. Before ordering, you may wish to review the Table of
Contents of the Statement of Additional Information on page 27 of this
Prospectus. The Statement of Additional Information has been incorporated by
reference into this Prospectus.
Northbrook Life Insurance Company
PO Box 94040
Palatine, Illinois 60094-4040
(800) 654-2397
This Prospectus is valid only when accompanied or preceded by a current
Prospectus for the Morgan Stanley Dean Witter Variable Investment Series, the
Morgan Stanley Universal Funds, Inc. and the Van Kampen American Capital Life
Investment Trust.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR 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 July 10, 1998.
The Contract is not available in all states.
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
Glossary.................................................................. 3
Introduction.............................................................. 5
Summary of Separate Account Expenses...................................... 7
Condensed Financial Information...........................................11
Performance Data..........................................................11
Financial Statements......................................................11
Northbrook Life Insurance Company and the Variable Account................11
Northbrook Life Insurance Company......................................11
Dean Witter Reynolds Inc...............................................12
The Variable Account...................................................12
The Funds..............................................................12
The Contracts.............................................................14
Purchase of the Contracts..............................................14
Crediting of Initial Purchase Payments.................................14
Allocation of Purchase Payments........................................14
Value of Variable Account Accumulation Units...........................15
Transfers..............................................................15
Surrender and Withdrawals..............................................16
Default................................................................16
Charges and Other Deductions..............................................17
Deductions from Purchase Payments......................................17
Early Withdrawal Charge................................................17
Contract Maintenance Charge............................................17
Administrative Expense Charge..........................................18
Mortality and Expense Risk Charge......................................18
Taxes..................................................................18
Fund Expenses..........................................................18
Benefits Under the Contract...............................................18
Death Benefits Prior to the Payout Start Date..........................18
Death Benefits After the Payout Start Date.............................20
Income Payments...........................................................20
Payout Start Date......................................................20
Amount of Variable Annuity Income Payments.............................20
Performance Income Benefit.............................................21
Income Plans...........................................................21
The Fixed Account.........................................................22
General Description....................................................22
Dollar Cost Averaging Fixed Account....................................22
Transfers, Surrenders, and Withdrawals.................................22
General Matters...........................................................22
Owner..................................................................22
Beneficiary............................................................23
Delay of Payments......................................................23
Assignments............................................................23
Modification...........................................................23
Customer Inquiries.....................................................23
Federal Tax Matters.......................................................23
Introduction...........................................................23
Taxation of Annuities in General.......................................23
Tax Qualified Contracts................................................25
Income Tax Withholding................................................25
Voting Rights.............................................................25
Distribution of Contracts.................................................26
Year 2000.................................................................26
Statement of Additional Information: Table of Contents....................27
Order Form................................................................29
<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 $500 or more which are
made automatically from the Owner's bank account or Morgan Stanley Dean Witter
Active Assets(sm) Account.
Automatic Portfolio Rebalancing--All of the money allocated to Sub-Accounts
of the Variable Account will be automatically rebalanced to the desired
allocation on a quarterly basis (or other frequencies that may be offered by the
Company).
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
18.
Cash Value--The sum of the value of all Accumulation Units for the Variable
Account plus the value in the Fixed Account (may also be known as Accumulation
Value).
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 "Variable Annuity II AssetManager" that is described in
this Prospectus.
Contract Anniversary--An anniversary of the date that the Contract was
issued to the Owner.
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 and/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 Fixed Account--A one year Guarantee Period Fixed
Account that may be used for the Dollar Cost Averaging Program.
Dollar Cost Averaging Program--A method to transfer $100 or more of the
Cash Value in any Sub-Accounts of the Variable Account or the Dollar Cost
Averaging Fixed Account automatically to any 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--One of two Death Benefit options which can be
selected.
Fixed Account--All of the assets of the Company that are not in separate
accounts. At present, the Dollar Cost Averaging Fixed Account is the only
available Fixed Account option. 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.
Funds--The Morgan Stanley Dean Witter Variable Investment Series, the
Morgan Stanley Universal Funds, Inc. and/or the Van Kampen American Capital Life
Investment Trust.
Guarantee Period--The period of time for which a credited rate on an
allocation 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 twenty Sub-Accounts of
the Variable Account constitute the twenty-one 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.
Performance Death Benefit--One of two Death Benefit options which can be
selected.
Performance Income Benefit--An income benefit option which can be selected.
Portfolios--The mutual fund portfolios of the Funds.
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 Morgan Stanley
Dean Witter Active Assets(sm) 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 Morgan Stanley
Dean Witter Active Assets(sm) Account or sent directly to the Owner.
Valuation Date--Each day that the New York Stock Exchange ("NYSE") 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 NYSE.
Valuation Period--The period between successive Valuation Dates, commencing
at the close of regular trading on the NYSE (which is currently 3:00 p.m.
Central Time) and ending as of the close of regular trading on the NYSE on 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.
<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 14.)
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 15 and "Income Payments," page 20.
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 $20,000. The Company
reserves the right to increase or decrease the minimum initial Purchase Payment
amount. See "Purchase of the Contracts," page 14.
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 14. 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 14.
3. What types of investments underlie the Variable Account?
The Variable Account invests in shares of the Morgan Stanley Dean Witter
Variable Investment Series, a mutual fund managed by Morgan Stanley Dean Witter
Advisors Inc., a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The
Fund has fifteen Portfolios: the Money Market Portfolio, the Quality Income Plus
Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Income Builder
Portfolio, the Dividend Growth Portfolio, the Capital Growth Portfolio, the
Global Dividend Growth Portfolio, the European Growth Portfolio, the Pacific
Growth Portfolio, the Capital Appreciation Portfolio, the Equity Portfolio, the
S&P 500 Index Portfolio, the Competitive Edge "Best Ideas" Portfolio, and the
Strategist Portfolio. The Variable Account invests in shares of four Portfolios
of Morgan Stanley Universal Funds, Inc., a mutual fund managed by Morgan Stanley
Asset Management Inc., a wholly owned subsidiary of Morgan Stanley Dean Witter &
Co. The Fund Portfolios include: the Equity Growth Portfolio, the U.S. Real
Estate Portfolio, the International Magnum Portfolio, and the Emerging Markets
Equity Portfolio. The Variable Account also invests in shares of one Portfolio
of Van Kampen American Capital Life Investment Trust, a mutual fund managed by
Van Kampen American Capital Asset Management, Inc., a wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The Fund Portfolio includes: the Emerging
Growth 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," page 22.
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 the Dollar Cost Averaging Fixed
Account are not permitted. The Dollar Cost Averaging Program automatically moves
funds on a monthly basis (or other frequencies that may be offered by the
Company) from any Sub-Accounts of the Variable Account or from the Dollar Cost
Averaging Fixed Account to any Sub-Accounts of your choice. Certain transfers
may be restricted. See "Transfers," page 15.
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 Withdrawal 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 1%. IF THE WITHDRAWN PURCHASE PAYMENTS HAVE BEEN INVESTED
IN THE CONTRACT FOR LESS THAN ONE YEAR THE COMPANY GUARANTEES THAT THE AGGREGATE
SURRENDER CHARGES WILL NEVER EXCEED 1% 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 16, and "Taxation of Annuities in General,"
page 23.
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 1.49% and an Administrative Expense Charge of .10%. For Contracts with
either one of the optional Death Benefit provisions or the optional Performance
Income Benefit, an additional Mortality and Expense Risk Charge of .13% is
assessed bringing the total charges for Contracts with an optional Death Benefit
provision or the optional Performance Income Benefit to a Mortality and Expense
Risk Charge of 1.62% and an Administrative Expense Charge of .10%. When both the
Performance Income Benefit and the Performance Death Benefit are selected an
additional Mortality and Expense Risk Charge of .24% is assessed bringing the
total charges for Contracts with both the Performance Income Benefit and the
Performance Death Benefit to a Mortality and Expense Risk Charge of 1.73% and an
Administrative Expense Charge of .10%. See "Mortality and Expense Risk Charge,"
page 18 and "Administrative Expense Charge," page 18. Annually, the Company
deducts $35 for maintaining the Contract (this fee is waived if total purchase
payments are $50,000 or more). See "Contract Maintenance Charge," page 17.
Additional deductions may be made for certain taxes. See "Taxes," page 18.
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. The Company is
currently waiving the 180 day limit. The Company reserves the right to enforce
the limitation in the future. For Contracts with either optional Death Benefit
provision, the Death Benefit will be the greatest of (1) through (3) above, or
(4) the optional Death Benefit selected. If an optional Death Benefit 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
nonnatural person. See "Death Benefits Prior to the Payout Start Date," page 18,
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. The Company is currently waiving the 180 day limit. The
Company reserves the right to enforce the limitation in the future. Death
Benefits after the Payout Start Date, if any, will depend on the income plan
chosen. See "Benefits Under the Contract," page 18.
8. Is there a free-look provision?
The Owner(s) may cancel the Contract any time 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.
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 each underlying
Fund.
Owner Transaction Expenses (all Sub-Accounts)
Sales Load Imposed on Purchases (as a percentage of Purchase Payments).....None
Early withdrawal charge (as a percentage of Purchase Payments)............. 1%*
Exchange Fee..............................................................None
Annual Contract Fee........................................................$35**
Separate Account Annual Expenses (as a percentage of account value)
<TABLE>
<CAPTION>
Without an Optional With an Optional With Both the Optional
Death Benefit Provision Death Benefit Provision Performance Death Benefit and
or the Optional Performance or the Optional Performance the Optional Performance
Income Benefit Income Benefit Income Benefit
<S> <C> <C> <C>
Mortality and Expense Risk Charge***....... 1.49% 1.62% 1.73%
Administrative Expense Charge.............. .10% .10% .10%
Total Separate Account Annual Expenses..... 1.59% 1.72% 1.83%
- ------------------------------------
* There are no Early Withdrawal Charges on amounts up to the Free Withdrawal
Amount. The Early Withdrawal Charge is applied to payments withdrawn in the one
year period following a purchase payment.
** This fee is waived if total purchase payments are $50,000 or more.
*** For amounts allocated to the Variable Account the Mortality and Expense
Risk is assessed during both the accumulation and the payout phases of the
Contract.
</TABLE>
Morgan Stanley Dean Witter Variable Investment Series ("Fund") Expenses (as a
percentage of Fund average assets)
<TABLE>
<CAPTION>
Total Fund
Annual Expenses
(after any expense
Management Other reimbursement
Portfolio Fees Expenses or waiver)
- --------- ---- -------- ---------------
<S> <C> <C> <C>
Money Market......................................... .50% .02% .52%
Quality Income Plus.................................. .50% (1) .03% .53%
High Yield........................................... .50% (2) .03% .53%
Utilities............................................ .65% (3) .02% .67%
Income Builder(5).................................... .75% .24% .99%
Dividend Growth...................................... .625% (4) .01% .635%
Capital Growth....................................... .65% .06% .71%
Global Dividend Growth............................... .75% .09% .84%
European Growth...................................... 1.00% (6) .12% 1.12%
Pacific Growth....................................... 1.00% .44% 1.44%
Capital Appreciation(5).............................. .75% .22% .97%
Equity............................................... .50% (7) .02% .52%
S&P 500 Index(8) .................................... 0% 0% 0%
Competitive Edge "Best Ideas"(8)..................... 0% 0% 0%
Strategist........................................... .50% .02% .52%
</TABLE>
(1) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be .45%.
(2) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be .425%.
(3) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be .55%.
(4) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be .50%, assets that exceed $1 billion, the fee
will be .475%. and for assets that exceed $2 billion, the fee will be .45%.
(5) Morgan Stanley Dean Witter Advisors Inc. has undertaken to assume all
expenses until the pertinent portfolio has $50 million in assets or until
July 31, 1998, whichever occurs first. Income Builder obtained $50 million
on December 3, 1997 resulting in fees being applied on that date and
thereafter. As of the date of this prospectus, Capital Appreciation had not
attained $50 million in assets.
(6) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be .95%. (7) Applicable to net assets of up to
$1 billion. For net assets which exceed $1 billion, the fee will be .475%.
(8) The Investment Manager has undertaken to assume all expenses of each of
these Portfolios (except for brokerage fees) and to waive the compensation
provided for each of these Portfolios in its Management Agreement with the
Fund until such time as the pertinent Portfolio has $50 million of net
assets or until six months from the date of the Portfolio's commencement of
operations, whichever occurs first. Thereafter, the Investment Manager has
agreed to assume all expenses of the S&P 500 Index Portfolio (except for
brokerage fees) and to waive the compensation provided in its Management
Agreement with the Fund to the extent that such expenses and compensation
on an annualized basis exceed .50% of the daily net assets of the S&P 500
Index Portfolio. The fees being waived would be as follows:
<TABLE>
<CAPTION>
Management Other Total Fund
Portfolio Fees Expenses Annual Expenses
- --------- ---- -------- ---------------
<S> <C> <C> <C>
S&P 500 Index .40% .05% .45%
Competitive Edge "Best Ideas" .65% .06% .71%
Morgan Stanley Universal Funds, Inc. ("Fund") Expenses (as a percentage of Fund average assets)
Total Fund
Annual Expenses
(after any expense
Management Other reimbursement
Portfolio Fees(1) Expenses or waiver)
- --------- ---- -------- ---------------
Equity Growth 0% .85% .85%
U.S. Real Estate 0% 1.10% 1.10%
International Magnum 0% 1.15% 1.15%
Emerging Markets Equity 0% 1.75% 1.75%
(1) Morgan Stanley Asset Management Inc. has voluntarily agreed to a reduction
in its management fees and to reimburse the Portfolios for which it acts as
investment adviser if such fees would cause "Total Fund Annual Expenses" to
exceed the amount set forth in the table above. Absent such reductions the
expenses would have been as follows:
Management Other Total Fund
Portfolio Fees Expenses Annual Expenses
- --------- ---- -------- ---------------
Equity Growth .55% 1.50% 2.05%
U.S. Real Estate .80% 1.52% 2.32%
International Magnum .80% 1.98% 2.78%
Emerging Markets Equity 1.25% 2.87% 4.12%
Van Kampen American Capital Life Investment Trust ("Fund") Expenses (as a percentage of Fund average assets)
Total Fund
Annual Expenses
(After any expense
Management Other reimbursement
Portfolio Fees(1) Expenses or waiver)
- --------- ---- -------- ---------------
Emerging Growth 0% .85% .85%
(1) Van Kampen American Capital has voluntarily agreed to a reduction in its
management fees and to reimburse the Portfolio for which it acts as
investment adviser if such fees would cause "Total Fund Annual Expenses" to
exceed the amount set forth in the table above. Absent of such reductions
the expenses would have been as follows:
Management Other Total Fund
Portfolio Fees Expenses Annual Expenses
- --------- ---- -------- ---------------
Emerging Growth .70% 1.80% 2.50%
</TABLE>
Example
You (the Owner) would pay the following expenses on a $1,000 investment,
assuming a 5% annual return, if you continued the Contract, surrendered or
annuitized at the end of the applicable time period:
(With Both the Optional Performance Income Benefit and the Optional Performance
Death Benefit*)
<TABLE>
<CAPTION>
1 Year 3 Year 5 Year 10 Year
------ ------ ------ -------
<S> <C> <C> <C> <C>
Money Market Sub-Account.................................... $24 $75 $128 $273
Quality Income Plus Sub-Account............................. $24 $75 $128 $274
High Yield Sub-Account...................................... $24 $75 $128 $274
Utilities Sub-Account....................................... $26 $79 $136 $288
Income Builder Sub-Account.................................. $29 $89 $152 $320
Dividend Growth Sub-Account................................. $25 $75 $129 $275
Capital Growth Sub-Account.................................. $26 $81 $138 $292
Global Dividend Growth Sub-Account.......................... $28 $85 $144 $305
European Growth Sub-Account................................. $30 $93 $158 $333
Pacific Growth Sub-Account.................................. $34 $103 $174 $363
Capital Appreciation Sub-Account............................ $29 $89 $151 $318
Equity Sub-Account.......................................... $24 $75 $128 $273
S&P 500 Index Sub-Account................................... $19 $59 $101 $218
Competitive Edge "Best Ideas" Sub-Account................... $19 $59 $101 $218
Strategist Sub-Account...................................... $24 $75 $128 $273
Equity Growth Sub-Account................................... $28 $85 $145 $306
U.S. Real Estate Sub-Account................................ $30 $93 $157 $331
International Magnum Sub-Account............................ $31 $94 $160 $336
Emerging Markets Equity Sub-Account......................... $37 $112 $189 $392
Emerging Growth Sub-Account................................. $28 $85 $145 $306
(With an Optional Death Benefit Provision or the Optional Performance Income Benefit**)
</TABLE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account.................................... $23 $71 $122 $262
Quality Income Plus Sub-Account............................. $23 $72 $123 $263
High Yield Sub-Account...................................... $23 $72 $123 $263
Utilities Sub-Account....................................... $25 $76 $130 $277
Income Builder Sub-Account.................................. $28 $86 $146 $309
Dividend Growth Sub-Account................................. $23 $72 $123 $264
Capital Growth Sub-Account.................................. $25 $77 $132 $281
Global Dividend Growth Sub-Account.......................... $26 $81 $139 $294
European Growth Sub-Account................................. $29 $90 $153 $322
Pacific Growth Sub-Account.................................. $33 $100 $169 $353
Capital Appreciation Sub-Account............................ $28 $85 $145 $307
Equity Sub-Account.......................................... $23 $71 $122 $262
S&P 500 Index Sub-Account................................... $18 $55 $95 $206
Competitive Edge "Best Ideas" Sub-Account................... $18 $55 $95 $206
Strategist Sub-Account...................................... $23 $71 $122 $262
Equity Growth Sub-Account................................... $27 $82 $139 $295
U.S. Real Estate Sub-Account................................ $29 $89 $152 $320
International Magnum Sub-Account............................ $30 $91 $154 $325
Emerging Markets Equity Sub-Account......................... $36 $109 $184 $382
Emerging Growth Sub-Account................................. $27 $82 $139 $295
(Without an Optional Death Benefit Provision or the Optional Performance Income Benefit***)
</TABLE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account.................................... $22 $67 $116 $248
Quality Income Plus Sub-Account............................. $22 $68 $116 $249
High Yield Sub-Account...................................... $22 $68 $116 $249
Utilities Sub-Account....................................... $23 $72 $123 $264
Income Builder Sub-Account.................................. $27 $82 $140 $296
Dividend Growth Sub-Account................................. $22 $68 $117 $250
Capital Growth Sub-Account.................................. $24 $73 $125 $268
Global Dividend Growth Sub-Account.......................... $25 $77 $132 $281
European Growth Sub-Account................................. $28 $86 $146 $309
Pacific Growth Sub-Account.................................. $31 $96 $162 $340
Capital Appreciation Sub-Account............................ $26 $81 $139 $294
Equity Sub-Account.......................................... $22 $67 $116 $248
S&P 500 Index Sub-Account................................... $17 $51 $88 $192
Competitive Edge "Best Ideas" Sub-Account................... $17 $51 $88 $192
Strategist Sub-Account...................................... $22 $67 $116 $248
Equity Growth Sub-Account................................... $25 $78 $133 $282
U.S. Real Estate Sub-Account................................ $28 $85 $145 $307
International Magnum Sub-Account............................ $28 $87 $148 $312
Emerging Markets Equity Sub-Account......................... $34 $105 $178 $370
Emerging Growth Sub-Account................................. $25 $78 $133 $282
</TABLE>
The above examples should not be considered a representation of past or future
expense or performance. Actual expenses of a Sub-Account may be greater or
lesser than those shown. The purpose of this summary is to assist the Owner in
understanding the various costs and expenses that Owners will bear directly or
indirectly. Premium taxes are not reflected in the example but may be
applicable.
*Total Separate Account Annual Expenses of 1.83%
**Total Separate Account Annual Expenses of 1.72%
***Total Separate Account Annual Expenses of 1.59%
CONDENSED FINANCIAL INFORMATION
The offering of the Contracts commenced as of the date of this Prospectus.
Accordingly, there are no accumulation unit values to report for the Contracts.
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 or the Funds 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 .)
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"). 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.
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 Morgan Stanley Dean Witter
& Co. ("Morgan Stanley Dean Witter"). Dean Witter is located at Two World Trade
Center, New York, New York, 10048. Dean Witter is a member of the New York Stock
Exchange and the National Association of Securities Dealers, Inc.
Morgan Stanley Dean Witter's wholly owned subsidiary, Morgan Stanley Dean Witter
Advisors Inc. ("MSDW Advisors"), is the investment manager of the Morgan Stanley
Dean Witter Variable Investment Series. MSDW Advisors is registered with the
Securities and Exchange Commission as an investment adviser. As compensation for
investment management, the Fund pays MSDW Advisors a monthly advisory fee. These
expenses are more fully described in the Fund's Prospectus accompanying this
Prospectus.
Morgan Stanley Dean Witter's wholly owned subsidiary, Morgan Stanley Asset
Management Inc. ("MSAM"), is the investment manager of Morgan Stanley Universal
Funds, Inc. MSAM is registered with the Securities and Exchange Commission as an
investment adviser. As compensation for investment management, the Fund pays
MSAM a monthly advisory fee. These expenses are more fully described in the
Fund's Prospectus.
Morgan Stanley Dean Witter's wholly owned subsidiary, Van Kampen American
Capital Asset Management, Inc. ("VKACAM"), is the investment manager of Van
Kampen American Capital Life Investment Trust. VKACAM is registered with the
Securities and Exchange Commission as an investment adviser. As compensation for
investment management, the Fund pays VKACAM a monthly advisory fee. These
expenses are more fully described in the Fund's 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 Morgan Stanley Dean Witter Financial Advisors.
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 twenty Sub-Accounts, each of which
invests solely in its corresponding Portfolio of the Morgan Stanley Dean Witter
Variable Investment Series, the Morgan Stanley Universal Funds, Inc. and the Van
Kampen American Capital Life Investment Trust. Additional Sub-Accounts may be
added at the discretion of the Company.
THE FUNDS
The Variable Account will invest in the Morgan Stanley Dean Witter Variable
Investment Series, the Morgan Stanley Universal Funds, Inc. and the Van Kampen
American Capital Life Investment Trust (collectively "Funds"). Shares of the
Funds are also offered to separate accounts of the Company which fund other
variable annuity and variable life contracts. Shares of the Funds 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
Funds 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 Funds currently foresee
any such disadvantage, the Funds' Boards of Directors or Trustees intend 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 Funds 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.
Morgan Stanley Dean Witter Variable Investment Series
The Fund has fifteen portfolios: the Money Market Portfolio, the Quality Income
Plus Portfolio, the High Yield Portfolio, the Utilities Portfolio, the Income
Builder Portfolio, the Dividend Growth Portfolio, the Capital Growth Portfolio,
the Global Dividend Growth Portfolio, the European Growth Portfolio, the Pacific
Growth Portfolio, the Capital Appreciation Portfolio, the Equity Portfolio, the
S&P 500 Index Portfolio, the Competitive Edge "Best Ideas" Portfolio and the
Strategist Portfolio. Each Portfolio 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 Income Builder Portfolio seeks, as its primary objective, reasonable income
by investing primarily in common stock of large-cap companies which have a
record of paying dividends and the potential for maintaining dividends, in
preferred stock and in securities convertible into common stocks of small and
mid-cap companies and, as its secondary objective, growth of capital.
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 Capital Appreciation Portfolio seeks long-term capital appreciation by
investing primarily in common stocks of U.S. companies that offer the potential
for either superior earnings growth and/or appear to be undervalued.
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 S&P 500 Index Portfolio seeks to provide investment results that, before
expenses, correspond to the total return (i.e., the combination of capital
changes and income) of the Standard and Poor's 500 Composite Stock Price
Index (the "S&P 500 Index") by investing, under normal circumstances, at least
80% of the value of its total assets in common stocks included in the S&P 500
Index in approximately the same weightings as the Index.
The Competitive Edge "Best Ideas" Portfolio seeks long-term capital growth by
investing, under normal circumstances, at least 80% of its net assets in the
common stock of U.S. and non-U.S. companies included in the "Best Ideas"
subgroup of "Global Investing: The Competitive Edge," a research compilation
assembled and maintained by Morgan Stanley Dean Witter Equity Research.
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.
Morgan Stanley Universal Funds, Inc.
The Fund Portfolios available under the Contracts include: the Equity Growth
Portfolio, the U.S. Real Estate Portfolio, the International Magnum Portfolio,
and the Emerging Markets Equity Portfolio. Each Portfolio has different
investment objectives and policies and operates as a separate investment fund.
The Equity Growth Portfolio seeks long-term capital appreciation by investing
primarily in equity securities of medium and large capitalization companies
that, in the investment adviser's judgment, provide above-average potential for
capital growth.
The U.S. Real Estate Portfolio seeks above-average current income and long-term
capital appreciation by investing primarily in equity securities of U.S. and
non-U.S. companies principally engaged in the U.S. real estate industry,
including real estate investment trusts.
The International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of non-US issuers domiciled in EAFE
counties (defined as countries that include Australia, Japan, New Zealand, most
nations in Western Europe and certain developed countries in Asia such as Hong
Kong and Singapore, see the Fund's Prospectus for greater detail).
The Emerging Markets Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of emerging market country issuers with
a focus on those in which the investment manager believes the economies are
developing strongly and in which the markets are becoming more sophisticated.
Van Kampen American Capital Life Investment Trust
The Fund Portfolio available under the Contracts includes the Emerging Growth
Portfolio. The Emerging Growth Portfolio seeks capital appreciation by investing
in a portfolio of securities consisting of common stocks of small and medium
sized companies considered by the investment manager to be emerging growth
companies.
All dividends and capital gains distributions from the Portfolios are
automatically reinvested in shares of the distributing Portfolio at their net
asset value.
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 Prospectuses for the
Funds accompanying this Prospectus.
THE PROSPECTUSES OF THE FUNDS 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 Morgan Stanley
Dean Witter. The first Purchase Payment must be at least $20,000. The Company
reserves the right to increase or decrease the minimum initial Purchase Payment
amount. All subsequent Purchase Payments must be $500 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 Morgan Stanley Dean Witter Active
Assets(sm) Account through Automatic Additions. Please consult with your Morgan
Stanley 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 twenty-one 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 twenty-one 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.
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 $20,000 Purchase Payment is credited to the Contract when the Accumulation
Unit value equals $10, then 2,000 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 15).
For a brief summary of how Purchase Payments allocated to the Fixed Account are
credited to the Contract, see "The Fixed Account" on page 22.
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 ("NYSE") 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 NYSE. The NYSE currently observes the following holidays:
New Year's Day (January 1); Martin Luther King Day (the third Monday in
January); 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 into the Dollar Cost Averaging Fixed
Account are not permitted. Currently there is no charge for transfers among the
twenty-one Investment Alternatives. The Company, however, reserves the right to
assess a $25 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 during the first six months following the
Payout Start Date.
Transfers may be made pursuant to telephone instructions. 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 or after the close of trading on the NYSE
will not be accepted by the Company. Telephone transfer requests received before
3:00 p.m. Central Time are effected at the Sub-Account Accumulation Unit values
next computed after receipt of the request. Otherwise, transfer requests must be
in writing, on a form provided by the Company. In the event that the NYSE closes
early, i.e., before 3:00 p.m. Central Time, or in the event that the NYSE closes
early for a period of time but then reopens for trading on the same day,
telephone transfer requests will be processed by the Company as of the close of
the NYSE on that particular day.
Transfers may also be made automatically through the Dollar Cost Averaging
Program prior to the Payout Start Date. The Dollar Cost Averaging Program
permits the Owner to transfer a specified amount every month (or other
frequencies that may be offered by the Company) from any Sub-Accounts of the
Variable Account or from the Dollar Cost Averaging Fixed Account to any
Sub-Account. Transfers made through Dollar Cost Averaging must be $100 or more.
The Dollar Cost Averaging Program cannot be used to transfer amounts to the
Fixed Account. Please consult with your Morgan Stanley Dean Witter Financial
Advisor for detailed information about the Dollar Cost Averaging Program.
Transfers may also be made automatically through Automatic Portfolio Rebalancing
prior to the Payout Start Date. By electing Automatic Portfolio Rebalancing, all
of the money allocated to Sub-Accounts of the Variable Account will be
rebalanced to the desired allocation on a quarterly basis (or other frequencies
that may be offered by the Company), determined from the first date that you
decide to rebalance. Upon rebalancing, your money will be transferred among
Sub-Accounts of the Variable Account to achieve the desired allocation.
The desired allocation will be the allocation initially selected, unless
subsequently changed. You may change the allocation at any time by giving us
written notice. The new allocation will be effective with the first rebalancing
that occurs after we receive the written request.
Transfers made through Automatic Portfolio Rebalancing are not assessed a $25
charge and are not counted towards the twelve free transfers per Contract Year.
Any money allocated to the Fixed Account will not be included in the
rebalancing.
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 22.
SURRENDER AND WITHDRAWALS
The Owner may withdraw all or part of the Cash Value at any time 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 23. For withdrawals from
the Fixed Account, see page 22.
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 Morgan Stanley Dean
Witter Financial Advisor 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 Morgan Stanley Dean Witter Financial Advisor 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 23.
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 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.
Currently, the Company does not assess applicable Early Withdrawal Charges upon
annuitization. The Company, however, reserves the right to assess such a charge
in the future.
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:
Applicable
Complete Contract Years since Withdrawal
Purchase Payment Being Charge
Withdrawn Was Made Percentage
Less than 1 year.................................... 1%
1 year or more...................................... 0%
THE CUMULATIVE TOTAL OF ALL EARLY WITHDRAWAL CHARGES IS GUARANTEED NEVER TO
EXCEED 1% 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.
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 23.
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. This charge is waived if total purchase payments are $50,000
or more. THE COMPANY GUARANTEES THAT THE AMOUNT OF THIS CHARGE WILL NOT EXCEED
$35 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 $35 or $2.92 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.
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 1.49% of the daily net assets in the Variable Account. For
Contracts with an optional Death Benefit provision or the optional Performance
Income Benefit, the Mortality and Expense Risk Charge will be deducted daily, at
a rate equal on an annual basis, to 1.62% of the daily net assets in the
Variable Account. The assessment of the additional .13% for either of the two
optional Death Benefits is attributed to the assumption of additional mortality
risks. The assessment of the additional .13% for the optional Performance Income
Benefit is attributed to the assumption of additional survivorship risks. When
both the Performance Income Benefit and the Performance Death Benefit are
selected an additional .24% is assessed for a total of 1.73%. For amounts
allocated to the Variable Account, the Mortality and Expense Risk Charge is
assessed during both the accumulation and the payout phases of the Contract. 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 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.
FUND EXPENSES
A complete description of the expenses and deductions from the Portfolios are
found in each Fund's Prospectus which accompanies 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 Company is currently waiving the 180 day limit. The Company reserves the
right to enforce the limitation in the future. 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.
The Enhanced Death Benefit or the Performance Death Benefit is an optional
benefit that you may elect. If the Enhanced Death Benefit option or the
Performance 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 nonnatural Owner. For Contracts with either optional
Death Benefit provision, the Death Benefit will be the greater of (a) through
(c) above, or (d) the optional Death Benefit selected. If the Performance Income
Benefit is selected then the Performance Death Benefit is the only optional
Death Benefit provision available. Either of the optional Death Benefit
provisions may not be available in all states.
When the Enhanced Death Benefit is selected on the date of issue, it is equal to
the initial Purchase Payment. On each Contract Anniversary, but not beyond the
Contract Anniversary preceding all Owners' 75th birthdays, 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.
When the Performance Death Benefit is selected on the date of issue, it is equal
to the initial Purchase Payment. On each Contract Anniversary, we will
recalculate your Performance Death Benefit to equal the greater of your Cash
Value on that date or the most recently calculated Performance Death Benefit. We
will also recalculate your Performance Death Benefit whenever you make an
additional Purchase Payment or a partial withdrawal. Additional Purchase
Payments will increase the Performance Death Benefit dollar-for-dollar.
Withdrawals will reduce the Performance Death Benefit by an amount equal to: (i)
the Performance Death Benefit immediately just before the withdrawal, multiplied
by (ii) the ratio of the withdrawal amount to the Cash Value just before the
withdrawal. In the absence of any withdrawals or Purchase Payments, the
Performance Death Benefit will be the greatest of all Contract Anniversary Cash
Values on or before the date the Company calculates the death benefit.
The Performance Death Benefit will be recalculated until the oldest Owner or the
Annuitant, if the Owner is a nonnatural Owner, attains age 85. After age 85, we
will recalculate the Performance Death Benefit only to reflect additional
Purchase Payments and withdrawals.
Neither the Enhanced Death Benefit nor the Performance Death Benefit will ever
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 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 contract is
continued prior to the Payout Start Date, the surviving spouse may make a single
withdrawal of any amount within one year of the date of death without incurring
an Early Withdrawal Charge.
The Company is currently waiving the 180 day limit. The Company reserves the
right to enforce the limitation in the future.
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 nonnatural 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 nonnatural person: The Owner must receive the Death
Benefit in a lump sum.
The Company is currently waiving the 180 day limit. The Company reserves the
right to enforce the limitation in the future.
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, die 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.
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 90, or the 10th
anniversary date, if later.
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 lesser 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.
PERFORMANCE INCOME BENEFIT
The Performance Income Benefit is an optional benefit that you may elect. When
the Performance Income Benefit is selected on the date of issue, it is equal to
the initial Purchase Payment. On each Contract Anniversary, we will recalculate
your Performance Income Benefit to equal the greater of your Cash Value on that
date or the most recently calculated Performance Income Benefit. We will also
recalculate your Performance Income Benefit whenever you make an additional
Purchase Payment or a partial withdrawal. Additional Purchase Payments will
increase the Performance Income Benefit dollar-for-dollar. Withdrawals will
reduce the Performance Income Benefit by an amount equal to: (i) the Performance
Income Benefit just before the withdrawal, multiplied by (ii) the ratio of the
withdrawal amount to the Cash Value just before the withdrawal.
In the absence of any withdrawals or Purchase Payments, the Performance Income
Benefit will be the greatest of all Contract Anniversary Cash Values on or prior
to the Payout Start Date.
We will recalculate the Performance Income Benefit until the oldest Owner or
Annuitant (if the Owner is a nonnatural Owner) attains age 85. After age 85, we
will only recalculate the Performance Income Benefit to reflect additional
Purchase Payments and withdrawals.
To exercise your Performance Income Benefit, you must apply it to an income
plan. The Payout Start Date you select must begin on or after your tenth
Contract Anniversary, after electing the benefit, and within 30 days after a
Contract Anniversary. In addition, you must apply your Performance Income
Benefit to an income plan that provides guaranteed payments for either a single
or joint life for at least:
1. 10 years, if the Annuitant's age (or youngest Annuitant's age, in the case
of joint Annuitants) is 80 or less on the date you apply the Benefit, or
2. 5 years, if the Annuitant's age (or youngest Annuitant's age, in the case
of joint Annuitants) is greater than 80 on the date you apply the Benefit.
If your current Cash Value is higher than the Performance Income Benefit, you
can apply the Cash Value to any income plan. The Performance Income Benefit may
not be available in all states.
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
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 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 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 1.59%, 1.72% if an optional Death Benefit or the
optional Performance Income Benefit has been selected, or 1.83% if both the
optional Performance Income Benefit and the optional Performance 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.
The Company is currently only offering a Dollar Cost Averaging Fixed Account,
described below. The Company reserves the right to offer additional Fixed
Account options.
THE DOLLAR COST AVERAGING FIXED ACCOUNT
Purchase Payments may also be allocated to the Dollar Cost Averaging Fixed
Account. Transfers are not allowed into the Dollar Cost Averaging Fixed Account.
Once Purchase Payments have been allocated to the Dollar Cost Averaging Fixed
Account, interest is earned for a one year period at a current rate in effect at
the time of allocation. After the one year period, a renewal rate will be
declared. Subsequent renewal dates will be every twelve months for each Purchase
Payment. The renewal rate will be guaranteed by the Company for a full year and
will not be less than the minimum guaranteed rate found in the Contract.
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 not be transferred from the Sub-Accounts of the Variable Account to
the Dollar Cost Averaging Fixed Account.
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.
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 NYSE 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 payments transfers from the Fixed Account, see page 22.
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 Morgan Stanley Dean Witter
Financial Advisor.
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.
Nonnatural 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 nonnatural 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.
Ownership Treatment. In connection with the issuance of the regulations on the
adequate diversification standards, the Department of the 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, the Treasury Department 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.
The ownership rights under this contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the owner of this contract has the choice of more investment options to
which to allocate premiums and contract values, and may be able to transfer
among investment options more frequently than in such rulings. These differences
could result in the contract owner being treated as the owner of the Variable
Account. In those circumstances, income and gain from the Variable Account
assets would be includible in the Contract Owner's gross income. In addition,
the Company does not know what standards will be set forth in the regulations or
rulings which the Treasury Department has stated it expects to issue. It is
possible that Treasury Department'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. However, the Company makes no guarantee that such modification to the
contract will be successful.
Delayed Maturity Date. If the contract's scheduled maturity date is at a time
when the annuitant has reached an advanced age, it is possible that the contract
would not be treated as an annuity. In that event, the income and gains under
the contract would be currently includible in the owner's income.
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, without regard to surrender charges, exceeds the investment in
the Contract. The investment in the contract is the gross premium or other
consideration paid for the contract reduced by any amounts previously received
from the contract to the extent such amounts were properly excluded from the
owner's gross income. 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 (i.e., nondeductible IRA
contributions, after tax contributions to qualified plans) bears to the Contract
value, can be excluded 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. Once the total
amount of the investment in the contract is excluded using these ratios, the
annuity payments will be fully taxable. If annuity payments cease because of the
death of the annuitant before the total amount of the investment in the contract
is recovered, the unrecovered amount will be allowed as a deduction to the
annuitant for his last taxable year.
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 date the owner attains age 59-1/2. However, there should be no penalty tax
on distributions to Owners (1) made on or after the date 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 from Qualified
Contracts. Consult a competent tax advisor for other possible exceptions to the
penalty tax.
Aggregation of Annuity Contracts. All Non-Qualified deferred annuity 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) Roth Individual Retirement Annuities under Section 408A of the Code; (3)
Simplified Employee Pension Plans under Section 408(k) of the Code; (4) Savings
Incentive Match Plans for Employees (SIMPLE) Plans under Section 408(p) of the
Code; (5) Tax Sheltered Annuities under Section 403(b) of the Code; (6)
Corporate and Self Employed Pension and Profit Sharing Plans; and (7) 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
on or after the date the employee attains age 59-1/2, separates from service,
dies, becomes disabled or on the account of hardship (earnings on salary
reduction contributions may not be distributed on the account of hardship).
Roth Individual Retirement Annuities. Section 408A of the Code permits eligible
individuals to make nondeductible contributions to an individual retirement
program known as a Roth Individual Retirement Annuity. Roth Individual
Retirement Annuities are subject to limitations on the amount that can be
contributed and on the time when distributions may commence. "Qualified
distributions" from Roth Individual Retirement Annuities are not includible in
gross income. "Qualified distributions" are any distributions made more than
five taxable years after the taxable year of the first contribution to the Roth
Individual Retirement Annuity, and which are made on or after the date the
individual attains age 59-1/2, made to a beneficiary after the owner's death,
attributable to the owner being disabled or for a first time home purchase
(first time home purchases are subject to a lifetime limit of $10,000).
"Nonqualified distributions" are treated as made from contributions first and
are includible in gross income to the extent such distributions exceed the
contributions made to the Roth Individual Retirement Annuity. The taxable
portion of a "nonqualified distribution" may be subject to the 10% penalty tax
on premature distributions. Subject to certain limitations, a traditional
Individual Retirement Account or Annuity may be converted or "rolled over" to a
Roth Individual Retirement Annuity. The taxable portion of a conversion or
rollover distribution is includible in gross income, but is exempted from the
10% penalty tax on premature distributions.
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
Funds. The Company will solicit and cast each vote according to the procedures
set up by the Funds and to the extent required by law. 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. The
Company reserves the right to vote the eligible shares in its own right, to the
extent 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 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
Portfolio.
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 established by that Portfolio for determining
shareholders eligible to vote at the meeting of the Funds. Voting instructions
will be solicited by written communication prior to such meeting in accordance
with procedures established by the Funds.
DISTRIBUTION OF THE CONTRACTS
From its profits the Company may pay a maximum sales commission of 2.0% of
Purchase Payments and an annual sales administration expense allowance of up to
1.5% of the average net assets of the Contract to Dean Witter Reynolds Inc., the
principal underwriter of the Contracts. In addition, Dean Witter may pay
annually to its Financial Advisors from its profits, a persistency bonus which
will take into account, among other things, the length of time purchase payments
have been held under a Contract, and Contract Values.
YEAR 2000
The Company is heavily dependent upon complex computer systems for all phases of
its operations, including customer service, and policy and contract
administration. Since many of the Company's older computer software programs
recognize only the last two digits of the year in any date, some software may
fail to operate properly in or after the year 1999, if the software is not
reprogrammed, remediated or replaced, ("Year 2000 Issue"). The Company believes
that many of its counterparties and suppliers also have Year 2000 Issues which
could affect the Company. In 1995, Allstate commenced a plan intended to
mitigate and/or prevent the adverse effects of Year 2000 Issues. These
strategies include normal development and enhancement of new and existing
systems, upgrades to operating systems already covered by maintenance agreements
and modifications to existing systems to make them Year 2000 compliant. The plan
also includes the Company actively working with its major external
counterparties and suppliers to assess their compliance efforts and the
Company's exposure to them. The Company presently believes that it will resolve
the Year 2000 Issue in a timely manner, and the financial impact will not
materially affect its results of operations, liquidity or financial position.
Year 2000 costs are and will continue to be expensed as incurred.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
The Contract
Purchase of Contracts
Value of Variable Account Accumulation Units
Performance Data
Standardized Total Return
Other Total Returns
Tax-Free Exchanges (1035 Exchanges, Rollovers, Transfers)
Income Payments
General Matters
Additions, Deletions or Substitution of Investments
Reinvestment
Incontestability
Settlements
Safekeeping of the Variable Account's Assets
Experts
Legal Matters
Federal Tax Matters
Introduction
Taxation of Northbrook Life Insurance Company
Exceptions to the Nonnatural Owner Rule
IRS Required Distribution at Death Rules
Qualified Plans
Types of Qualified Plans
Sales Commissions
Financial Statements
<PAGE>
ORDER FORM
/ / Please send me a copy of the most recent Statement of Additional Information
for the Northbrook Variable Annuity Account II.
- ---------------------- --------------------------------
(Date) (Name)
--------------------------------
(Street Address)
--------------------------------
(City) (State) (Zip Code)
Send to: Northbrook Life Insurance Company
PO Box 94040
Palatine, IL 60094-4040
Attn: Annuity Services
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
OF
NORTHBROOK LIFE INSURANCE COMPANY
PO 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 July 10, 1998, has been filed with the U.S. Securities and
Exchange Commission.
DATED JULY 10, 1998
<PAGE>
TABLE OF CONTENTS
Page
THE CONTRACT...........................................................
Purchase of Contracts...............................................
Value of Variable Account Accumulation Units........................
PERFORMANCE DATA.......................................................
Standardized Total Return..........................................
Other Total Returns.................................................
TAX-FREE EXCHANGES (1035 Exchanges, Rollovers and Transfers)...........
INCOME PAYMENTS........................................................
GENERAL MATTERS........................................................
Additions, Deletions or Substitutions of Investments................
Reinvestment........................................................
Incontestability....................................................
Settlements.........................................................
Safekeeping of the Variable Account's Assets........................
Experts.............................................................
Legal Matters.......................................................
FEDERAL TAX MATTERS....................................................
Introduction........................................................
Taxation of Northbrook Life Insurance Company.......................
Exceptions to the Nonnatural Owner Rule.............................
IRS Required Distribution at Death Rules............................
Qualified Plans.....................................................
Types of Qualified Plans...........................................
SALES COMMISSIONS......................................................
FINANCIAL STATEMENTS................................................... F-1
<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. 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.
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
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. For example, in the Variable Annuity II Contract
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 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.
The performance data that may be presented are not estimates or guarantees of
future investment performance and do not necessarily represent the actual
experience of amounts invested by a particular Contract owner.
Set out in the tables below are standardized, adjusted historical and other
total return performance data for the periods shown.
VARIABLE ANNUITY II CONTRACTS
- -----------------------------
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, 1997 are presented
below:
<TABLE>
<CAPTION>
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION)
SUB-ACCOUNT ONE-YEAR FIVE-YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Money Market....................... N/A N/A N/A
Quality Income Plus................ (4.13)% 5.97% 8.27%
High Yield......................... 6.15% 11.39% 15.27%
Utilities.......................... 2.90% 8.98% 11.16%
Income Builder..................... N/A N/A 16.74%
Dividend Growth.................... 17.98% 13.42% 16.87%
Capital Growth..................... 5.73% 5.07% 8.71%
Global Dividend Growth............. 11.69% N/A 11.03%
European Growth.................... 23.92% 19.28% 16.33%
Pacific Growth..................... (1.83)% N/A (1.79)%
Capital Appreciation............... N/A N/A 7.05%
Equity............................. 6.53% 11.11% 18.52%
Strategist......................... 9.16% 7.49% 11.07%
</TABLE>
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR THE OPTIONAL PERFORMANCE INCOME
BENEFIT PROVISION)
<TABLE>
<CAPTION>
SUB-ACCOUNT ONE-YEAR FIVE-YEARS SINCE INCEPTION*, **
<S> <C> <C> <C>
Money Market....................... N/A N/A N/A
Quality Income Plus................ (4.26)% 5.83% (0.31)%
High Yield......................... 6.01% 11.23% 6.76%
Utilities.......................... 2.76% 8.83% 7.75%
Income Builder..................... N/A N/A 16.58%
Dividend Growth.................... 17.82% 13.27% 22.18%
Capital Growth..................... 5.58% 4.93% 11.51%
Global Dividend Growth............. 11.53% N/A 15.58%
European Growth.................... 23.76% 19.13% 22.67%
Pacific Growth..................... (1.96)% N/A 0.74%
Capital Appreciation............... N/A N/A 6.90%
Equity............................. 6.39% 10.97% 9.83%
Strategist......................... 9.01% 7.35% 10.04%
</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 Income Builder and Capital Appreciation
Sub-Accounts commenced operation on January 21, 1997.
** Contracts with the optional Death Benefit provision first became available
for all Sub-Accounts, except the Income Builder and Capital Appreciation
Sub-Accounts, on October 30, 1995 and for the Income Builder and Capital
Appreciation Sub-Accounts on January 21, 1997. The performance information for
these Contracts for periods prior to their availability has been restated to
reflect the changes under the Contracts that would have applied had the
Contracts been available during those periods.
ADJUSTED HISTORICAL RETURN
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.
Such adjusted historical returns for the Sub-Accounts (including deduction of
the Surrender Charge) for the one-year, five-year, and ten-year or since
inception periods ended December 31, 1997 are presented below:
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION)
<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>
Money Market*.................. N/A N/A N/A
Quality Income Plus**.......... (4.13)% 5.97% 7.20%
High Yield*.................... 6.15% 11.39% 5.77%
Utilities***................... 2.90% 8.98% 9.83%
Income Builder******........... N/A N/A 16.74%
Dividend Growth***............. 17.98% 13.42% 11.96%
Capital Growth****............. 5.73% 5.07% 8.71%
Global Dividend Growth*****.... 11.69% N/A 11.04%
European Growth****............ 23.92% 19.28% 16.33%
Pacific Growth*****............ (1.83)% N/A (1.79)%
Capital Appreciation******..... N/A N/A 7.05%
Equity*........................ 6.53% 11.11% 11.52%
Strategist**................... 9.16% 7.49% 8.45%
</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
******Portfolio inception date of January 21, 1997
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR THE PERFORMANCE INCOME BENEFIT
PROVISION)
<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>
Money Market*.................. N/A N/A N/A
Quality Income Plus**.......... (4.26)% 5.83% 7.06%
High Yield*.................... 6.01% 11.23% 5.63%
Utilities***................... 2.76% 8.83% 9.69%
Income Builder******........... N/A N/A 16.58%
Dividend Growth***............. 17.82% 13.27% 11.81%
Capital Growth****............. 5.58% 4.93% 8.57%
Global Dividend Growth*****.... 11.53% N/A 10.89%
European Growth****............ 23.76% 19.13% 16.18%
Pacific Growth*****............ (1.96)% N/A (1.92)%
Capital Appreciation******..... N/A N/A 6.90%
Equity*........................ 6.39% 10.97% 11.37%
Strategist**................... 9.01% 7.35% 8.31%
</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
******Portfolio inception date of January 21, 1997
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 adjusted historical returns described
immediately 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 other total returns for the Sub-Accounts (not including deduction of the
Surrender Charge) for the one-year, five-year, and ten-year or since inception
periods ended December 31, 1997 are presented below:
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION)
<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>
Money Market*................... N/A N/A N/A
Quality Income Plus**........... 0.19% 6.16% 7.25%
High Yield*..................... 0.47% 11.55% 5.84%
Utilities***.................... 7.22% 9.15% 9.88%
Income Builder******............ N/A N/A 22.24%
Dividend Growth***.............. 2.29% 13.58% 12.01%
Capital Growth****.............. 10.04% 5.28% 8.86%
Global Dividend Growth*****..... 16.00% N/A 12.07%
European Growth****............. 28.24% 19.42% 16.45%
Pacific Growth*****............. 2.49% N/A (0.50)%
Capital Appreciation******...... N/A N/A 12.53%
Equity*......................... 10.85% 11.28% 11.57%
Strategist**.................... 13.47% 7.67% 8.50%
</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
******Portfolio inception date of January 21, 1997
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR PERFORMANCE INCOME BENEFIT
PROVISION)
<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>
Money Market*.................. N/A N/A N/A
Quality Income Plus**.......... 0.06% 6.03% 7.11%
High Yield*.................... 10.33% 11.39% 5.70%
Utilities***................... 7.08% 9.01% 9.73%
Income Builder******........... N/A N/A 22.08%
Dividend Growth***............. 22.13% 13.44% 11.86%
Capital Growth****............. 9.90% 5.14% 8.72%
Global Dividend Growth*****.... 15.85% N/A 11.92%
European Growth****............ 28.07% 19.26% 16.29%
Pacific Growth*****............ 2.35% N/A (0.63)%
Capital Appreciation******..... N/A N/A 12.39%
Equity*........................ 10.70% 11.14% 11.43%
Strategist**................... 13.33% 7.53% 8.36%
</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
******Portfolio inception date of January 21, 1997
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.
VARIABLE ANNUITY II ASSET MANAGER CONTRACT
- ------------------------------------------
The offering of the Variable Annuity II AssetManager Contracts commenced as of
the date of this Prospectus. Accordingly, the figures shown below are based on
the actual historical performance of the Sub-Accounts, or the corresponding
Portfolio, as the case may be, restated to reflect the charges under the
Contracts that would have applied had the Contracts been available during the
periods shown.
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, 1997 are presented
below:
<TABLE>
<CAPTION>
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION)
SUB-ACCOUNT ONE-YEAR FIVE-YEARS SINCE INCEPTION*
- ----------- -------- ---------- ----------------
<S> <C> <C> <C>
Money Market 3.55% 2.84% 2.94%
Quality Income Plus 9.34% 6.44% 8.23%
High Yield 10.08% 9.99% 14.32%
Utilities 25.13% 11.54% 12.81%
Income Builder NA NA 21.03%
Dividend Growth 23.60% 16.73% 17.58%
Capital Growth 22.55% 9.36% 10.53%
Global Dividend Growth 10.25% NA 11.38%
European Growth 14.23% 21.77% 15.88%
Pacific Growth -38.71% NA -12.42%
Capital Appreciation NA NA 11.34%
Equity 35.24% 18.25% 20.50%
Strategist 11.90% 8.66% 10.99%
S&P 500 Index NA NA NA
Competitive Edge "Best Ideas" NA NA NA
Equity Growth NA NA NA
U.S. Real Estate NA NA NA
International Magnum NA NA NA
Emerging Markets Equity NA NA NA
Emerging Growth NA NA NA
</TABLE>
<PAGE>
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR PERFORMANCE INCOME BENEFIT
PROVISION)
<TABLE>
<CAPTION>
SUB-ACCOUNT ONE-YEAR FIVE-YEARS SINCE INCEPTION*
- ----------- -------- ---------- ----------------
<S> <C> <C> <C>
Money Market 3.42% 2.71% 2.80%
Quality Income Plus 9.20% 6.30% 8.09%
High Yield 9.94% 9.85% 14.18%
Utilities 24.96% 11.40% 12.66%
Income Builder NA NA 20.87%
Dividend Growth 23.44% 16.58% 17.42%
Capital Growth 22.40% 9.22% 10.39%
Global Dividend Growth 10.11% NA 11.24%
European Growth 14.08% 21.61% 15.73%
Pacific Growth -38.79% NA -12.54%
Capital Appreciation NA NA 11.19%
Equity 35.07% 18.10% 20.34%
Strategist 11.76% 8.52% 10.84%
S&P 500 Index NA NA NA
Competitive Edge "Best Ideas" NA NA NA
Equity Growth NA NA NA
U.S. Real Estate NA NA NA
International Magnum NA NA NA
Emerging Markets Equity NA NA NA
Emerging Growth NA NA NA
</TABLE>
(WITH OPTIONAL DEATH BENEFIT PROVISION AND PERFORMANCE INCOME BENEFIT PROVISION)
<TABLE>
<CAPTION>
SUB-ACCOUNT ONE-YEAR FIVE-YEARS SINCE INCEPTION*
- ----------- -------- ---------- ----------------
<S> <C> <C> <C>
Money Market 3.30% 2.59% 2.69%
Quality Income Plus 9.08% 6.18% 7.97%
High Yield 9.82% 9.73% 14.05%
Utilities 24.83% 11.28% 12.54%
Income Builder NA NA 20.74%
Dividend Growth 23.31% 16.45% 17.29%
Capital Growth 22.26% 9.10% 10.26%
Global Dividend Growth 9.99% NA 11.11%
European Growth 13.96% 21.47% 15.60%
Pacific Growth -38.85% NA -12.63%
Capital Appreciation NA NA 11.07%
Equity 34.92% 17.97% 20.21%
Strategist 11.63% 8.40% 10.72%
S&P 500 Index NA NA NA
Competitive Edge "Best Ideas" NA NA NA
Equity Growth NA NA NA
U.S. Real Estate NA NA NA
International Magnum NA NA NA
Emerging Markets Equity NA NA NA
Emerging Growth NA NA NA
</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 Income Builder and Capital Appreciation
Sub-Accounts commenced operation on January 21, 1997. The Equity Growth, ,
International Magnum, Emerging Markets Equity, and Emerging Growth Sub-Accounts
commenced operation on March 16, 1998. The S&P 500 Index, Competitive Edge "Best
Ideas", and U.S. Real Estate Sub-Accounts commenced operations of May 18, 1998.
ADJUSTED HISTORICAL RETURNS
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.
Such average annual total return information for the Sub-Accounts (including
deduction of the Surrender Charge) for the one-year, five-year, and ten-year or
since inception periods ended December 31, 1997 are presented below:
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION)
<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>
Money Market* 3.55% 2.84% 3.90%
Quality Income Plus** 9.34% 6.44% 7.68%
High Yield* 10.08% 9.99% 7.08%
Utilities*** 25.13% 11.54% 11.47%
Income Builder****** NA NA 21.03%
Dividend Growth*** 23.60% 16.73% 13.18%
Capital Growth**** 22.55% 9.36% 10.53%
Global Dividend Growth***** 10.25% NA 11.38%
European Growth**** 14.23% 21.77% 15.88%
Pacific Growth***** -38.71% NA -12.42%
Capital Appreciation****** NA NA 11.34%
Equity* 35.24% 18.25% 15.63%
Strategist** 11.90% 8.66% 9.32%
S&P 500 Index******** NA NA NA
Competitive Edge "Best Ideas"******** NA NA NA
Equity Growth******* NA NA 30.31%
U.S. Real Estate******** NA NA 19.13%
International Magnum******* NA NA 4.79%
Emerging Markets Equity******* -1.30% NA -3.11%
Emerging Growth******* 18.50% NA 20.11%
</TABLE>
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR PERFORMANCE INCOME BENEFIT
PROVISION)
<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>
Money Market* 3.42% 2.71% 3.76%
Quality Income Plus** 9.20% 6.30% 7.54%
High Yield* 9.94% 9.85% 6.94%
Utilities*** 24.96% 11.40% 11.33%
Income Builder****** NA NA 20.87%
Dividend Growth*** 23.44% 16.58% 13.03%
Capital Growth**** 22.40% 9.22% 10.39%
Global Dividend Growth***** 10.11% NA 11.24%
European Growth**** 14.08% 21.61% 15.73%
Pacific Growth***** -38.79% NA -12.54%
Capital Appreciation****** NA NA 11.19%
Equity* 35.07% 18.10% 15.48%
Strategist** 11.76% 8.52% 9.18%
S&P 500 Index******** NA NA NA
Competitive Edge "Best Ideas"******** NA NA NA
Equity Growth******* NA NA 30.14%
U.S. Real Estate******** NA NA 18.97%
International Magnum******* NA NA 4.65%
Emerging Markets Equity******* -1.43% NA -3.24%
Emerging Growth******* 18.35% NA 19.96%
</TABLE>
(WITH OPTIONAL DEATH BENEFIT PROVISION AND PERFORMANCE INCOME BENEFIT PROVISION)
<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>
Money Market* 3.30% 2.59% 3.65%
Quality Income Plus** 9.08% 6.18% 7.42%
High Yield* 9.82% 9.73% 6.83%
Utilities*** 24.83% 11.28% 11.21%
Income Builder****** NA NA 20.74%
Dividend Growth*** 23.31% 16.45% 12.91%
Capital Growth**** 22.26% 9.10% 10.26%
Global Dividend Growth***** 9.99% NA 11.11%
European Growth**** 13.96% 21.47% 15.60%
Pacific Growth***** -38.85% NA -12.63%
Capital Appreciation****** NA NA 11.07%
Equity* 34.92% 17.97% 15.35%
Strategist** 11.63% 8.40% 9.06%
S&P 500 Index******** NA NA NA
Competitive Edge "Best Ideas"******** NA NA NA
Equity Growth******* NA NA 29.99%
U.S. Real Estate*********** NA NA 18.84%
International Magnum******* NA NA 4.53%
Emerging Markets Equity********* -1.53% NA -3.34%
Emerging Growth********** 18.22% NA 19.83%
</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 ******
Portfolio inception date of January 21, 1997 ******* Portfolio inception date of
January 2, 1997 ******** Portfolio inception date of May 18, 1998 *********
Portfolio inception date of October 1, 1996 ********** Portfolio inception date
of July 3, 1995 *********** Portfolio inception date of March 4, 1997
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 adjusted historical returns described
immediately 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 other total returns for the Sub-Accounts (not including deduction of the
Surrender Charge) for the one-year, five-year, and ten-year or since inception
periods ended December 31, 1997 are presented below:
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION OR PERFORMANCE INCOME BENEFIT
PROVISION)
<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>
Money Market* 3.57% 2.86% 3.92%
Quality Income Plus** 9.36% 6.46% 7.70%
High Yield* 10.10% 10.01% 7.10%
Utilities*** 25.15% 11.56% 11.48%
Income Builder****** NA NA 21.95%
Dividend Growth*** 23.63% 16.75% 13.16%
Capital Growth**** 22.58% 9.38% 10.54%
Global Dividend Growth***** 10.27% NA 11.39%
European Growth**** 14.25% 21.78% 15.89%
Pacific Growth***** -38.68% NA -12.39%
Capital Appreciation****** NA NA 12.26%
Equity* 35.27% 18.27% 15.64%
Strategist** 11.93% 8.68% 9.34%
S&P 500 Index******** NA NA NA
Competitive Edge "Best Ideas"******** NA NA NA
Equity Growth******* NA NA 31.16%
U.S. Real Estate*********** NA NA 20.20%
International Magnum******* NA NA 5.66%
Emerging Markets Equity********* -1.27% NA -3.08%
Emerging Growth********** 18.53% NA 20.12%
</TABLE>
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR PERFORMANCE INCOME BENEFIT
PROVISION)
<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>
Money Market* 3.44% 6.32% 3.78%
Quality Income Plus** 9.22% 6.44% 7.56%
High Yield* 9.96% 9.87% 6.96%
Utilities*** 24.99% 11.42% 11.34%
Income Builder****** NA NA 21.79%
Dividend Growth*** 23.47% 16.60% 13.04%
Capital Growth**** 22.42% 9.24% 10.40%
Global Dividend Growth***** 14.10% NA 11.25%
European Growth**** 17.02% 21.62% 15.74%
Pacific Growth***** -38.76% NA -12.50%
Capital Appreciation****** NA NA 12.12%
Equity* 35.09% 18.12% 15.49%
Strategist** 11.78% 8.54% 9.20%
S&P 500 Index******** NA NA NA
Competitive Edge "Best Ideas"******** NA NA NA
Equity Growth******* NA NA 30.99%
U.S. Real Estate*********** NA NA 20.05%
International Magnum******* NA NA 5.52%
Emerging Markets Equity********* -1.40% NA -3.20%
Emerging Growth********** 18.37% NA 19.96%
</TABLE>
(WITH OPTIONAL DEATH BENEFIT PROVISION AND PERFORMANCE INCOME BENEFIT PROVISION)
<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>
Money Market* 3.33% 2.61% 3.67%
Quality Income Plus** 9.10% 6.20% 7.44%
High Yield* 9.84% 9.75% 6.85%
Utilities*** 24.85% 11.30% 11.22%
Income Builder****** NA NA 21.66%
Dividend Growth*** 23.33% 16.47% 12.92%
Capital Growth**** 22.28% 9.12% 10.28%
Global Dividend Growth***** 10.01% NA 11.13%
European Growth**** 13.98% 21.49% 15.61%
Pacific Growth***** -38.83% NA -12.60%
Capital Appreciation****** NA NA 11.99%
Equity* 34.94% 17.99% 15.36%
Strategist** 11.66% 8.42% 9.09%
S&P 500 Index******** NA NA NA
Competitive Edge "Best Ideas"******** NA NA NA
Equity Growth******* NA NA 30.85%
U.S. Real Estate*********** NA NA 19.91%
International Magnum******* NA NA 5.41%
Emerging Markets Equity********* -1.51% NA -3.31%
Emerging Growth********** 18.24% NA 19.83%
</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 ******
Portfolio inception date of January 21, 1997 ******* Portfolio inception date of
January 2, 1997 ******** Portfolio inception date of May 18, 1998 *********
Portfolio inception date of October 1, 1996 ********** Portfolio inception date
of July 3, 1995 *********** Portfolio inception date of March 4, 1997
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.
INCOME PAYMENTS
Amount of Variable Annuity Income Payments
The amount of the first Income Payment is calculated by applying the
Contract Value allocated to each Sub-Account less any applicable premium tax
charge deducted at this time, to the income payment tables in the Contract. The
first Variable Annuity Income Payment is divided by the Sub-Account's then
current Annuity Unit Value to determine the number of Annuity Units upon which
later Income Payments will be based. Variable Annuity Income Payments after the
first will be equal to the sum of the number of Annuity Units determined in this
manner for each Sub-Account times the then current Annuity Unit Value for each
respective Sub-Account.
The value of an Annuity Unit in each Sub-Account of the Variable Account is
set at $10. Annuity Units in each Sub-Account are valued separately and Annuity
Unit Values will depend upon the investment experience of the particular
Portfolios in which the Sub-Account invests. The value of the Annuity Unit for
each Sub-Account at the end of any Valuation Period is calculated by: (a)
multiplying the prior value by the Sub-Account's Net Investment Factor during
the period; and then (b) dividing the product by the sum of 1.0 plus the assumed
investment rate for the period. The assumed investment rate adjusts for the
interest rate assumed in the annuity tables used to determine the dollar amount
of the first Variable Annuity Income Payment, and is an effective annual rate of
4.0%.
Currently, the amount of the first Income Payment paid under an Annuity
Option is determined using 4% interest and the 1971 Individual Annuity Mortality
Table with the following age adjustment (The revised Contract is based on the
1983A Individual Annuity Mortality Table.) An annuitant's age at his or her last
birthday on or prior to the Income Starting Date will be set back one year each
six full years between January 1, 1971 and the Income Starting Date (except in
the case of Contracts based on the 1983A Table). Due to judicial or legislative
developments regarding the use of tables which do not differentiate on the basis
of sex, in some cases different annuity tables may be used.
GENERAL MATTERS
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.
The Funds do not issue certificates and, therefore, the Company holds the
Account's assets in open account in lieu of stock certificates. See the Funds'
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
Freeman, Levy, Kroll & Simonds, Washington, D.C., has advised the Company on
certain federal securities laws matters. 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 NONNATURAL OWNER RULE
There are several exceptions to the general rule that contracts held by a
nonnatural owner are not treated as annuity contracts for federal income tax
purposes. Contracts will generally be treated as held by a natural person if the
nominal owner is a trust or other entity which holds the contract as agent for a
natural person. However, this special exception will not apply in the case of an
employer who is the nominal owner of an annuity contract under a non-qualified
deferred compensation arrangement for its employees. Other exceptions to the
nonnatural owner rule are: (1) contracts acquired by an estate of a decedent by
reason of the death of the decedent; (2) certain qualified contracts; (3)
contracts purchased by employers upon the termination of certain qualified
plans; (4) certain contracts used in connection with structured settlement
agreements, and (5) contracts purchased with a single premium when the annuity
starting date is no later than a year from purchase of the annuity and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
IRS REQUIRED DISTRIBUTION AT DEATH RULES
In order to be considered an annuity contract for federal income tax purposes,
an annuity contract must provide: (1) if any owner dies on or after the annuity
start date but before the entire interest in the contract has been distributed,
the remaining portion of such interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of the owner's
death; (2) if any owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which is payable to (or for the benefit of) a designated
beneficiary is distributed over the life of such beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary) and the
distributions begin within one year of the owner's death. If the owner's
designated beneficiary is the surviving spouse of the owner, the contract may be
continued with the surviving spouse as the new owner. If the owner of the
contract is a nonnatural 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 nonnatural 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.
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.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth Individual
Retirement Annuity. Roth Individual Retirement Annuities are subject to
limitations on the amount that can be contributed and on the time when
distribution may commence. "Qualified distributions" from Roth Individual
Retirement Annuities are not includible in gross income. "Qualified
distributions" are any distributions made more than five taxable years after the
taxable year of the first contribution to the Roth Individual Retirement
Annuity, and which are made on or after the date the individual attains age 59
1/2, made to a beneficiary after the owner's death, attributable to the owner
being disabled or for a first time home purchase (first time home purchases are
subject to lifetime limit of $10,000). "Nonqualified distributions" are treated
as made from contributions first and are includible in gross income to the
extent such distributions exceed the contributions made to the Roth Individual
Retirement Annuity. The taxable portion of a "nonqualified distribution" may be
subject to the 10% penalty tax on premature distributions. Subject to certain
limitations, a traditional Individual Retirement Account or Annuity may be
converted or "rolled over" to a Roth Individual Retirement Annuity. The taxable
portion of a conversion or rollover distribution is includible in gross income,
but is exempted from the 10% penalty tax on premature distributions.
SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' individual retirement
annuities if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to their individual retirement annuities.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS)
Sections 408(p) and 401(k) of the Code allow employers with 100 or fewer
employees to establish SIMPLE retirement plans for their employees. SIMPLE plans
may be structured as a SIMPLE retirement account using an employee's IRA to hold
the assets or as a Section 401(k) qualified cash or deferred arrangement. In
general, a SIMPLE plan consists of a salary deferral program for eligible
employees and matching or nonelective contributions made by employers. Employers
intending to use the contract in conjunction with SIMPLE plans should seek
competent tax and legal advice.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase annuity contracts for them, and subject
to certain limitations, to exclude the purchase payments from the employees'
gross income. An annuity contract used for a Section 403(b) plan must provide
that distributions attributable to salary reduction contributions made after
12/31/88, and all earnings on salary reduction contributions, may be made only
on or after the date the employee attains age 59-1/2, separates from service,
dies, becomes disabled or in the case of hardship (earnings on salary reduction
contributions may not be distributed for hardship). These limitations do not
apply to withdrawals where the Company is directed to transfer some or all of
the contract value to another 403(b) plan.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax favored retirement plans for employees. The Self-Employed
Individuals Retirement Act of 1962, as amended, (commonly referred to as "H.R.
10" or "Keogh") permits self-employed individuals to establish tax favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of annuity contracts in order to provide benefits under the
plans.
STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION DEFERRED COMPENSATION
PLANS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as owner of the contract has the sole right to the proceeds of the
contract. Generally, under the nonnatural owner rules, such contracts are not
treated as annuity contracts for federal income tax purposes. Under these plans,
contributions made for the benefit of the employees will not be includible in
the employees' gross income until distributed from the plan. However, under a
457 plan all the compensation deferred under the plan must remain solely the
property of the employer, subject only to the claims of the employer's general
creditors, until such time as made available to the employee or a beneficiary.
SALES COMMISSIONS
Dean Witter Variable Annuity II Contract - 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. Dean Witter Variable Annuity II
AssetManager - The Company pays Dean Witter for its underwriting and general
agent's services a sales commission of up to 2.0% of the Purchase Payments and
sales administration expense allowance of up to 1.5% of the average net assets
of the Contract. These commissions are intended to cover Dean Witter's expenses
in distributing and selling the Contracts.
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 $81,393,283 in 1997, $53,617,941 in 1996, and
$32,937,708 in 1995 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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statements of Financial Position of Northbrook
Life Insurance Company (the "Company") as of December 31, 1997 and 1996, and the
related Statements of Operations, Shareholder's Equity and Cash Flows for each
of the three years in the period ended December 31, 1997. Our audits also
included Schedule IV - Reinsurance. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
F-1
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value (amortized
cost $72,491 and $65,500) $ 76,402 $ 67,479
Short-term 3,031 6,590
------------------ ------------------
Total investments 79,433 74,069
Reinsurance recoverable from Allstate Life
Insurance Company 2,293,094 2,480,034
Net receivable from Allstate Life Insurance Company 1,467 4,246
Other assets 5,033 2,639
Separate Accounts 5,719,203 4,354,783
------------------ ------------------
Total assets $ 8,098,230 $ 6,915,771
================== ==================
LIABILITIES
Reserve for life-contingent contract benefits $ 144,352 $ 143,346
Contractholder funds 2,148,555 2,336,296
Income taxes payable 162 555
Deferred income taxes 2,674 2,085
Separate Accounts 5,719,203 4,354,783
------------------ ------------------
Total liabilities 8,014,946 6,837,065
------------------ ------------------
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 56,600 56,600
Unrealized net capital gains 2,542 1,286
Retained income 21,642 18,320
------------------ ------------------
Total shareholder's equity 83,284 78,706
------------------ ------------------
Total liabilities and shareholder's equity $ 8,098,230 $ 6,915,771
================== ==================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------ ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Net investment income $ 5,146 $ 4,888 $ 4,782
Realized capital gains and losses (68) (20) 67
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX EXPENSE 5,078 4,868 4,849
INCOME TAX EXPENSE 1,756 1,666 1,686
--------------- --------------- ---------------
NET INCOME $ 3,322 $ 3,202 $ 3,163
=============== =============== ===============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
--------------- --------------- ---------------
ADDITIONAL CAPITAL PAID-IN 56,600 56,600 56,600
--------------- --------------- ---------------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 1,286 2,657 (1,553)
Net change 1,256 (1,371) 4,210
--------------- --------------- ---------------
Balance, end of year 2,542 1,286 2,657
--------------- --------------- ---------------
RETAINED INCOME
Balance, beginning of year 18,320 15,118 11,955
Net income 3,322 3,202 3,163
--------------- --------------- ---------------
Balance, end of year 21,642 18,320 15,118
--------------- --------------- ---------------
Total shareholder's equity $ 83,284 $ 78,706 $ 76,875
=============== =============== ===============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------ -------
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,322 $ 3,202 $ 3,163
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and other non-cash items 516 782 903
Realized capital losses (gains) 68 20 (67)
Increase (decrease) in life-contingent contract
benefits and contractholder funds 205 (198) 113
Change in deferred income taxes (87) 24 608
Changes in other operating assets and liabilities (657) 864 (2,705)
------------ ------------ -------------
Net cash provided by operating activities 3,367 4,694 2,015
----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,606 3,522 5,423
Investment collections 10,036 5,770 7,108
Investment purchases (18,568) (15,532) (9,843)
Change in short-term investments, net 3,559 1,459 (4,675)
------------- ------------- -------------
Net cash used in investing activities (3,367) (4,781) (1,987)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH - (87) 28
CASH AT BEGINNING OF YEAR - 87 59
------------- ------------- -------------
CASH AT END OF YEAR $ - $ - $ 87
============= ============= =============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. General
Basis of presentation
The accompanying financial statements include the accounts of Northbrook Life
Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"). On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed
its 80.3% ownership in the Corporation to Sears common shareholders through a
tax-free dividend (the "Distribution"). These financial statements have been
prepared in conformity with generally accepted accounting principles.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
Nature of operations
The Company markets life insurance and annuity products in the United States
through Dean Witter Reynolds Inc. ("Dean Witter") (see Note 4), a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. Life insurance
contracts sold by the Company include universal life and other
interest-sensitive life and variable life products. Annuities include both
deferred annuities, such as variable annuities and fixed rate single and
flexible premium annuities, and immediate annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary withdrawal or surrender by customers, subject to applicable
surrender charges. These policies and contracts are reinsured with ALIC (see
Note 3), which invests premiums and deposits to provide cash flows that will be
used to fund future benefits and expenses. In order to support competitive
crediting rates and limit interest rate risk, ALIC, as the Company's reinsurer,
adheres to a basic philosophy of matching assets with related liabilities while
maintaining adequate liquidity and a prudent and diversified level of credit
risk.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be new and proposed federal
and state regulation and legislation that would allow banks greater
participation in the securities and insurance businesses, which will present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and interest-sensitive
life insurance is enhanced by the tax incentives available under current law.
Any legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; (2) increasing competition in capital
markets; and (3) reopening stock/mutual company disagreements related to such
issues as taxation disparity between mutual and stock insurance companies.
The Company is authorized to sell life and annuity products in all states except
New York, as well as in the District of Columbia and Puerto Rico. The top
geographic locations for statutory premiums and deposits earned by the Company
are California, Florida and Texas for the year ended December 31, 1997. No other
jurisdiction accounted for more than 5% of statutory premiums and deposits. All
premiums and contract charges are ceded to ALIC under reinsurance agreements.
F-6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are recognized for declines in the value of
fixed income securities that are other than temporary. Such writedowns are
included in realized capital gains and losses. Short-term investments are
carried at cost which approximates fair value.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method, based on the estimated principal repayments. Accrual
of income is suspended for fixed income securities that are in default or when
the receipt of interest payments is in doubt. Realized capital gains and losses
are determined on a specific identification basis.
Reinsurance
The Company has reinsurance agreements whereby all premiums, contract charges,
credited interest, policy benefits and certain expenses are ceded to ALIC and
reflected net of such cessions in the statements of operations. The amounts
shown in the Company's statements of operations relate to the investment of
those assets of the Company that are not transferred to ALIC under reinsurance
agreements. Reinsurance recoverable and the related reserve for life-contingent
contract benefits and contractholder funds are reported separately in the
statements of financial position. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Recognition of premium revenues and contract charges
Revenues on interest-sensitive life insurance policies are comprised of contract
charges and fees, and are recognized when assessed against the policyholder
account balance. Revenues on most annuities, which are considered investment
contracts, include contract charges and fees for contract administration and
surrenders. These revenues are recognized when levied against the contract
balance.
Income taxes
The income tax provision is calculated under the liability method. Deferred tax
assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates, and reflect the impact of reinsurance agreements. Deferred income taxes
arise primarily from unrealized capital gains and losses on fixed income
securities carried at fair value.
Separate Accounts
The Company issues flexible premium deferred variable annuity contracts and
single premium variable life policies, the assets and liabilities of which are
legally segregated and reflected in the accompanying statements of financial
position as assets and liabilities of the Separate Accounts (Northbrook Variable
Annuity Account, Northbrook Variable Annuity Account II and Northbrook Life
Variable Life Separate Account A, unit investment trusts registered with the
Securities and Exchange Commission).
Assets of the Separate Accounts are carried at fair value. Investment income and
realized capital gains and losses of the Separate Accounts accrue directly to
the policy- and contractholders and, therefore, are not included in the
Company's statements of operations. Revenues to the Company from the Separate
Accounts consist of contract maintenance fees, administration fees, mortality
and expense risk charges, cost of insurance charges and tax expense charges, all
of which are ceded to ALIC.
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits, which relates to structured
settlement annuities and supplemental contracts with life contingencies, is
computed on the basis of assumptions as to future investment yields, mortality
and expenses. These assumptions include provisions for adverse deviation and
generally vary by such characteristics as type of coverage, year of issue and
policy duration. Reserve interest rates ranged from 4.00% to 11.00% during 1997.
F-7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Contractholder funds Contractholder funds arise from the issuance of individual
or group policies and contracts that include an investment component, including
most annuities and universal life policies. Payments received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received and interest credited to the benefit of the contractholder less
withdrawals, mortality charges and administrative expenses. During 1997,
credited interest rates on contractholder funds ranged from 3.30% to 9.51% for
those contracts with fixed interest rates and from 3.25% to 7.39% for those with
flexible rates.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Related Party Transactions
Reinsurance
Premiums and contract charges ceded to ALIC were $1,979 and $83,559 in 1997,
$3,775 and $60,744 in 1996, and $2,284 and $52,348 in 1995, respectively.
Credited interest, policy benefits and expenses ceded to ALIC amounted to
$201,526, $218,088 and $229,525 in 1997, 1996 and 1995, respectively. Investment
income earned on the assets which support contractholder funds is not included
in the Company's financial statements as those assets are owned and managed by
ALIC under the terms of reinsurance agreements.
Business operations
The Company utilizes services and business facilities owned or leased, and
operated by AIC in conducting its business activities. The Company reimburses
AIC for the operating expenses incurred by AIC on behalf of the Company. The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $7,842, $8,074 and $5,341 in 1997, 1996 and 1995, respectively. Of these
costs, the Company retains investment related expenses. All other costs are
ceded to ALIC under reinsurance agreements.
4. Exclusive Distribution Agreement
The Company and ALIC have a strategic alliance with Dean Witter to develop,
market and distribute proprietary annuity and life insurance products through
Dean Witter account executives. Dean Witter provides a portion of the funding
for these products through loans to an affiliate of the Company. An affiliate of
Dean Witter, Dean Witter InterCapital Inc., is the investment manager for the
Dean Witter Variable Investment Series, the funds in which the assets of the
Separate Accounts are invested.
Under the terms of the strategic alliance, the Company has agreed to use Dean
Witter as an exclusive distribution channel for the Company's products. Although
the strategic alliance is cancelable by either party, termination of the
alliance would not impact existing policies and contracts.
F-8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
5. INVESTMENTS
Fair values
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- --------- -------
<S> <C> <C> <C> <C>
At December 31, 1997
U.S. government and agencies $ 8,638 $ 823 $ - $ 9,461
Municipal 1,143 28 - 1,171
Corporate 25,913 897 (12) 26,798
Mortgage-backed securities 36,797 2,315 (140) 38,972
-------- ------- ------ -------
Total fixed income securities $ 72,491 $4,063 $(152) $76,402
======== ======= ====== =======
At December 31, 1996
U.S. government and agencies $ 8,629 $ 193 $ (54) $ 8,768
Municipal 873 48 - 921
Corporate 16,902 260 (69) 17,093
Mortgage-backed securities 39,096 1,883 (282) 40,697
-------- ------ ------ -------
Total fixed income securities $ 65,500 $2,384 $(405) $67,479
======== ======= ====== =======
</TABLE>
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ----------
<S> <C> <C>
Due in one year or less $ 2,133 $ 2,155
Due after one year through five years 5,343 5,472
Due after five years through ten years 19,410 20,217
Due after ten years 8,808 9,586
------------ ----------
35,694 37,430
Mortgage-backed securities 36,797 38,972
------------ ----------
Total $ 72,491 $ 76,402
============ ==========
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
F-9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Net Investment Income
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed income securities $ 5,364 $ 4,675 $ 4,633
Short-term investments 84 390 215
----------- ----------- -----------
Investment income, before expense 5,448 5,065 4,848
Investment expense 302 177 66
----------- ----------- -----------
Net investment income $ 5,146 $ 4,888 $ 4,782
=========== =========== ===========
Realized capital gains and losses
Year Ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
Fixed income securities $ (70) $ (22) $ 67
Short-term investments 2 2 -
------------- ------------- -------------
Realized capital gains and losses (68) (20) 67
Income tax benefit (expense) 24 7 (23)
------------- ------------- -------------
Realized capital losses and gains, after tax $ (44) $ (13) $ 44
============= ============= =============
</TABLE>
Excluding calls and prepayments, gross losses of $70 and $32 and gross gains of
$67 were realized on sales of fixed income securities during 1997, 1996 and
1995, respectively.
Unrealized net capital gains
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Cost/ Fair Unrealized
Amortized Cost Value Net Gains
-------------- ----- -------------
<S> <C> <C> <C>
Fixed income securities $ 72,491 $ 76,402 $ 3,911
============== ==============
Deferred income taxes (1,369)
-------------
Unrealized net capital gains $ 2,542
=============
</TABLE>
F-10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Change in unrealized net capital gains
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ------- ------- -------
<S> <C> <C> <C>
Fixed income securities $ 1,932 $(2,108) $ 6,477
Deferred income taxes (676) 737 (2,267)
------- ------- -------
Increase (decrease) in unrealized net
capital gains $ 1,256 $(1,371) $ 4,210
======= ======= =======
</TABLE>
Securities on deposit
At December 31, 1997, fixed income securities with a carrying value of $8,039
were on deposit with regulatory authorities as required by law.
6. Financial Instruments
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including deferred income
taxes and reserve for life-contingent contract benefits) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income,
are generally of a short-term nature. It is assumed that their carrying value
approximates fair value.
Financial assets
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed income securities $ 76,402 $ 76,402 $ 67,479 $ 67,479
Short-term investments 3,031 3,031 6,590 6,590
Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
</TABLE>
Fair values for fixed income securities are based on quoted market prices.
Short-term investments are highly liquid investments with maturities of less
than one year whose carrying value approximates fair value. Separate Accounts
assets are carried in the statements of financial position at fair value.
F-11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Financial liabilities
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $ 1,977,479 $ 1,951,214 $ 2,143,482 $ 2,118,583
Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
7. Income Taxes
The Company joins the Corporation and its other eligible domestic subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
and is party to a federal income tax allocation agreement (the "Tax Sharing
Agreement"). Under the Tax Sharing Agreement, the Company paid to or received
from the Corporation the amount, if any, by which the Allstate Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this results in the
Company's annual income tax provision being computed, with adjustments, as if
the Company filed a separate return.
Prior to the Distribution, the Corporation and all of its eligible domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax
Sharing Agreement, the Company, through the Corporation, paid to or received
from the Sears Group the amount, if any, by which the Sears Tax Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Allstate Group
filed a separate consolidated return, except that items such as net operating
losses, capital losses or similar items, which might not be recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.
The Allstate Group and Sears Group have entered into an agreement which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution ("Consolidated Tax Years"). The agreement
provides that all Consolidated Tax Years will continue to be governed by the
Sears Tax Sharing Agreement with respect to the Allstate Group's federal income
tax liability.
F-12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The components of the deferred income tax assets and liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred assets
Separate Accounts $ 149 $ -
------- -------
Deferred liabilities
Difference in tax bases of investments (1,454) (1,392)
Unrealized net capital gains (1,369) (693)
------- -------
Total deferred liabilities (2,823) (2,085)
-------- --------
Net deferred liability $(2,674) $(2,085)
======== ========
</TABLE>
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 1,843 $ 1,642 $ 1,078
Deferred (87) 24 608
----------- ----------- -----------
Total income tax expense $ 1,756 $ 1,666 $ 1,686
=========== =========== ===========
</TABLE>
The Company paid income taxes of $2,236, $2,308 and $4,980 in 1997, 1996 and
1995, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.4) (0.6) -
Other - (0.2) (0.3)
---- ----- -----
Effective federal income tax rate 34.6% 34.2% 34.7%
==== ==== ====
</TABLE>
F-13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1997, approximately $16,
will result in federal income taxes payable of $6 if distributed by the Company.
No provision for taxes has been made as the Company has no plan to distribute
amounts from this account. No further additions to the account have been
permitted since the Tax Reform Act of 1984.
8. Statutory Financial Information
The following tables reconcile net income for the year ended December 31, and
shareholder's equity at December 31, as reported herein in conformity with
generally accepted accounting principles with statutory net income and capital
and surplus, determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities:
<TABLE>
<CAPTION>
Net Income
----------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance per generally accepted accounting principles $ 3,322 $ 3,202 $ 3,163
Deferred income taxes (87) 24 608
Statutory investment reserves 79 30 (28)
Other (405) (691) (1,443)
----------- ------------ ------------
Balance per statutory accounting practices $ 2,909 $ 2,565 $ 2,300
=========== ============ ============
</TABLE>
F-14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDER'S
EQUITY
----------------
1997 1996
------- -------
<S> <C> <C>
Balance per generally accepted accounting principles $ 83,284 $ 78,706
Deferred income taxes 2,674 2,085
Unrealized gain/loss on fixed income securities (3,911) (1,979)
Non-admitted assets and statutory investment
reserves (4,431) (3,317)
Other (1,939) (397)
---------- ------------
Balance per statutory accounting practices $ 75,677 $ 75,098
========== ============
</TABLE>
Permitted statutory accounting practices
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Illinois
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company follows a permitted statutory accounting practice
whereby it includes amounts receivable from an affiliated insurance company in
statutory admitted assets at a level which exceeds the threshold prescribed by
the Illinois Department of Insurance by $7,737.
Final approval of the NAIC's proposed "Comprehensive Guide" on statutory
accounting principles is expected in early 1998. Implementation could be as
early as January 1, 1999. The requirements of the Comprehensive Guide are not
expected to have a material impact on statutory surplus of the Company.
Under the NAIC's proposed accounting practices, the Company's practice related
to its receivable from affiliate will be prescribed rather than permitted.
Dividends
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by insurance companies without the prior approval of
the state insurance regulator is limited to formula amounts based on net income
and capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 1998 without prior approval of the Illinois Department of Insurance is
$7,318.
F-15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Gross Net
Year ended December 31, 1997 amount Ceded amount
- ---------------------------- -------- -------- ------
<S> <C> <C> <C>
Life insurance in force $ 515,890 $ 515,890 $ -
=========== =========== =========
Premiums and contract charges:
Life and annuities $ 85,538 $ 85,538 $ -
=========== =========== =========
Gross Net
Year ended December 31, 1996 amount Ceded amount
- ---------------------------- ------- ------ ------
Life insurance in force $ 556,242 $ 556,242 $ -
=========== ========== =========
Premiums and contract charges:
Life and annuities $ 64,519 $ 64,519 $ -
=========== ========== =========
Gross Net
Year ended December 31, 1995 amount Ceded amount
- ---------------------------- ------ ----- ------
Life insurance in force $ 610,478 $ 610,478 $ -
=========== ========== =========
Premiums and contract charges:
Life and annuities $ 54,632 $ 54,632 $ -
=========== ========== =========
</TABLE>
F-16
<PAGE>
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, 1997, and the related
statement of operations for the year then ended and the statement of changes in
net assets for the year ended December 31, 1997 of the Money Market, High Yield,
Equity, Quality Income Plus, Strategist, Dividend Growth, Utilities, European
Growth, Capital Growth, Global Dividend Growth, Pacific Growth, Capital
Appreciation, and Income Builder portfolios that comprise the Account and for
the year ended December 31, 1996 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, 1997. 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, 1997, the
results of its operations for the year then ended, and the changes in net assets
for each of the two years in the period then ended, of each of the portfolios
comprising the Account, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 20, 1998
F-17
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
($ and shares in thousands)
ASSETS
Investments in the Dean Witter Variable Investment Series Portfolios:
<S> <C>
Money Market, 301,306 shares (cost $301,306) ............................ $ 301,306
High Yield, 55,003 shares (cost $348,823) ............................... 336,619
Equity, 21,938 shares (cost $560,962) ................................... 736,690
Quality Income Plus, 39,291 shares (cost $416,727) ...................... 423,168
Strategist, 28,631 shares (cost $371,672) ............................... 423,738
Dividend Growth, 80,882 shares (cost $1,254,591) ........................ 1,747,060
Utilities, 22,035 shares (cost $297,406) ................................ 409,636
European Growth, 15,212 shares (cost $264,905) .......................... 358,090
Capital Growth, 6,433 shares (cost $96,620) ............................. 117,662
Global Dividend Growth, 32,426 shares (cost $386,272) ................... 450,391
Pacific Growth, 10,189 shares (cost $96,689) ............................ 62,357
Capital Appreciation, 2,721 shares (cost $29,661) ....................... 30,805
Income Builder, 4,508 shares (cost $49,413) ............................. 53,011
----------
Total assets ................................................... 5,450,533
LIABILITIES
Payable to Northbrook Life Insurance Company:
Accrued contract maintenance charges ..................................... 1,303
----------
Net assets ..................................................... $5,449,230
==========
</TABLE>
See notes to financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Dean Witter Variable Investment Series Portfolios
------------------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends .............................. $ 16,353 $ 34,268 $ 41,702 $ 27,402 $ 20,644 $ 99,490 $ 17,681
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk ......... (4,022) (3,549) (7,450) (5,127) (5,001) (18,630) (4,653)
Administrative expense ............. (316) (278) (583) (407) (396) (1,463) (370)
--------- --------- --------- --------- -------- --------- ---------
Net investment income (loss) ..... 12,015 30,441 33,669 21,868 15,247 79,397 12,658
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of
investments:
Proceeds from sales ................ 196,264 23,906 67,364 72,313 44,632 80,976 92,601
Cost of investments sold ........... (196,264) (24,070) (53,203) (73,318) (38,107) (53,624) (76,667)
--------- --------- --------- --------- -------- --------- ---------
Net realized gains (losses) ...... -- (164) 14,161 (1,005) 6,525 27,352 15,934
--------- --------- --------- --------- -------- --------- ---------
Change in unrealized and gains (losses). -- (2,116) 125,556 16,518 21,328 191,096 56,029
--------- --------- --------- --------- -------- --------- ---------
Net gains (losses) on investments. -- (2,280) 139,717 15,513 27,853 218,448 71,963
--------- --------- --------- --------- -------- --------- ---------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS ...................... $ 12,015 $ 28,161 $ 173,386 $ 37,381 $ 43,100 $ 297,845 $ 84,621
========= ========= ========= ========= ======== ========= =========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------------
Global
European Capital Dividend Pacific Capital Income
Growth Growth Growth Growth Appreciation Builder Total
---------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends .............................. $ 20,132 $ 11,049 $ 23,088 $ 1,707 $ -- $ 1,239 $ 314,755
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk ......... (4,142) (1,254) (5,018) (1,368) (199) (283) (60,696)
Administrative expense ............. (326) (99) (394) (108) (15) (22) (4,777)
--------- --------- --------- --------- -------- --------- ---------
Net investment income (loss) ..... 15,664 9,696 17,676 231 (214) 934 249,282
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of
investments:
Proceeds from sales ................ 43,054 13,791 21,637 56,309 2,358 642 715,847
Cost of investments sold ........... (30,764) (10,602) (17,642) (64,678) (2,200) (608) (641,747)
--------- --------- --------- --------- -------- --------- ---------
Net realized gains (losses) ...... 12,290 3,189 3,995 (8,369) 158 34 74,100
--------- --------- --------- --------- -------- --------- ---------
Change in unrealized and gains (losses). 15,432 4,657 12,263 (35,707) 1,144 3,598 409,798
--------- --------- --------- --------- -------- --------- ---------
Net gains (losses) on investments 27,722 7,846 16,258 (44,076) 1,302 3,632 483,898
--------- --------- --------- --------- -------- --------- ---------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS ...................... $ 43,386 $ 17,542 $ 33,934 $ (43,845) $ 1,088 $ 4,566 $ 733,180
========= ========= ========= ========= ======== ========= =========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
($ and units in thousands, except value per unit)
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ........ $ 12,015 $ 30,441 $ 33,669 $ 21,868 $ 15,247 $ 79,397 $ 12,658
Net realized gains (losses) ......... -- (164) 14,161 (1,005) 6,525 27,352 15,934
Change in unrealized gains (losses) . -- (2,116) 125,556 16,518 21,328 191,096 56,029
--------- --------- --------- --------- --------- ----------- -----------
Change in net assets resulting
from operations .................. 12,015 28,161 173,386 37,381 43,100 297,845 84,621
FROM CAPITAL TRANSACTIONS
Deposits ............................ 149,402 104,526 162,502 50,521 85,569 446,039 30,744
Benefit payments .................... (9,812) (3,029) (4,642) (7,406) (4,738) (13,976) (6,217)
Payments on termination ............. (82,460) (34,243) (76,080) (55,141) (53,102) (185,959) (53,999)
Contract maintenance charges ........ (101) (123) (296) (182) (184) (748) (192)
Transfers among the portfolios and
with the Fixed Account - net ...... (68,644) 13,062 30,461 (17,577) 6,753 59,898 (32,932)
--------- --------- --------- --------- --------- ----------- -----------
Change in net assets resulting
from capital transactions ....... (11,615) 80,193 111,945 (29,785) 34,298 305,254 (62,596)
--------- --------- --------- --------- --------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS ... 400 108,354 285,331 7,596 77,398 603,099 22,025
NET ASSETS AT BEGINNING OF PERIOD ... 300,834 228,184 451,183 415,471 346,239 1,143,544 387,513
--------- --------- --------- --------- --------- ----------- -----------
NET ASSETS AT END OF PERIOD ......... $ 301,234 $ 336,538 $ 736,514 $ 423,067 $ 423,637 $ 1,746,643 $ 409,538
========= ========= ========= ========= ========= =========== ===========
CONTRACTS WITHOUT THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period ......................... $ 12.55 $ 26.65 $ 38.87 $ 17.98 $ 21.54 $ 32.59 $ 24.21
========= ========= ========= ========= ========= =========== ===========
Units outstanding at end of period .. 18,622 8,795 13,509 20,834 16,149 39,665 15,170
========= ========= ========= ========= ========= =========== ===========
CONTRACTS WITH THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period ......................... $ 12.51 $ 26.57 $ 38.76 $ 17.93 $ 21.48 $ 32.50 $ 24.14
========= ========= ========= ========= ========= =========== ===========
Units outstanding at end of period .. 5,407 3,844 5,455 2,701 3,529 13,970 1,754
========= ========= ========= ========= ========= =========== ===========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
($ and units in thousands, except value per unit)
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------------------
Global
European Capital Dividend Pacific Capital Income
Growth Growth Growth Growth Appreciation Builder Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ........ $ 15,664 $ 9,696 $ 17,676 $ 231 $ (214) $ 934 $ 249,282
Net realized gains (losses) ......... 12,290 3,189 3,995 8,369) 158 34 74,100
Change in unrealized gains (losses) . 15,432 4,657 12,263 (35,707) 1,144 3,598 409,798
--------- --------- --------- --------- --------- ----------- -----------
Change in net assets resulting
from operations .................. 43,386 17,542 33,934 (43,845) 1,088 4,566 733,180
FROM CAPITAL TRANSACTIONS
Deposits ............................ 87,645 24,982 128,566 15,672 18,352 31,208 1,335,728
Benefit payments .................... (2,725) (910) (3,466) (1,262) (109) (165) (58,457)
Payments on termination ............. (37,732) (11,218) (41,571) (11,743) (944) (1,458) (645,650)
Contract maintenance charges ........ (148) (49) (199) (37) (12) (15) (2,286)
Transfers among the portfolios and
with the Fixed Account - net ...... (3,726) 8,692 25,556 (26,769) 12,422 18,862 26,058
--------- --------- --------- --------- --------- ----------- -----------
Change in net assets resulting
from capital transactions ....... 43,314 21,497 108,886 (24,139) 29,709 48,432 655,393
--------- --------- --------- --------- --------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS ... 86,700 39,039 142,820 (67,984) 30,797 52,998 1,388,573
NET ASSETS AT BEGINNING OF PERIOD ... 271,305 78,594 307,464 130,326 -- -- 4,060,657
--------- --------- --------- --------- --------- ----------- -----------
NET ASSETS AT END OF PERIOD ......... $ 358,005 $ 117,633 $ 450,284 $ 62,342 $ 30,797 $ 52,998 $ 5,449,230
========= ========= ========= ========= ========= =========== ===========
CONTRACTS WITHOUT THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period ......................... $ 27.87 $ 20.18 $ 15.30 $ 6.06 $ 11.18 $ 12.08
========= ========= ========= ========= ========= ===========
Units outstanding at end of period .. 9,762 4,469 21,656 8,190 1,609 2,363
========= ========= ========= ========= ========= ===========
CONTRACTS WITH THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period ......................... $ 27.79 $ 20.12 $ 15.26 $ 6.04 $ 11.16 $ 12.07
========= ========= ========= ========= ========= ===========
Units outstanding at end of period .. 3,091 1,365 7,789 2,105 1,148 2,025
========= ========= ========= ========= ========= ===========
</TABLE>
See notes to the financial statements
F-22
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
($ and units in thousands, except value per unit)
Dean Witter Variable Investment Series Portfolios
-----------------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ......... $ 9,192 $ 19,006 $ 42,957 $ 23,023 $ 8,903 $ 31,688
Net realized gains (losses) .......... -- (360) 1,623 (1,632) 1,212 3,058
Change in unrealized gains (losses) .. -- (1,795) (7,081) (21,855) 30,151 152,104
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from operations ............... 9,192 16,851 37,499 (464) 40,266 186,850
FROM CAPITAL TRANSACTIONS
Deposits ............................. 167,498 83,674 131,579 52,568 42,708 266,005
Benefit payments ..................... (8,807) (2,069) (3,092) (7,512) (4,219) (9,022)
Payments on termination .............. (37,294) (11,121) (23,766) (31,874) (23,127) (66,865)
Contract maintenance charges ......... (109) (94) (207) (195) (172) (565)
Transfers among the portfolios and
with the Fixed Account - net ....... (39,281) 18,476 23,390 (37,007) (10,465) 38,681
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting from
capital transactions .......... 82,007 88,866 127,904 (24,020) 4,725 228,234
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS .... 91,199 105,717 165,403 (24,484) 44,991 415,084
NET ASSETS AT BEGINNING OF PERIOD .... 209,635 122,467 285,780 439,955 301,248 728,460
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS AT END OF PERIOD .......... $ 300,834 $ 228,184 $ 451,183 $ 415,471 $ 346,239 $ 1,143,544
=========== =========== =========== =========== =========== ===========
CONTRACTS WITHOUT THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period .......................... $ 12.08 $ 24.15 $ 28.67 $ 16.40 $ 19.20 $ 26.30
=========== =========== =========== =========== =========== ===========
Units outstanding at end of
period ............................. 21,477 7,989 13,438 24,233 17,132 38,903
=========== =========== =========== =========== =========== ===========
CONTRACTS WITH THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period ........................... $ 12.07 $ 24.11 $ 28.63 $ 16.38 $ 19.17 $ 26.26
=========== =========== =========== =========== =========== ===========
Units outstanding at end of
period ............................. 3,424 1,463 2,303 1,096 904 4,587
=========== =========== =========== =========== =========== ===========
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
($ and units in thousands, except value per unit)
Dean Witter Variable Investment Series Portfolios
----------------------------------------------------------------------------------------
Global
European Capital Dividend Pacific
Utilities Growth Growth Growth Growth Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) ......... $ 10,360 $ 7,751 $ 431 $ 7,678 $ (422) $ 160,567
Net realized gains (losses) .......... 8,482 1,911 1,890 407 180 16,771
Change in unrealized gains (losses) .. 8,559 43,165 3,981 28,418 449 236,096
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from operations ............... 27,401 52,827 6,302 36,503 207 413,434
FROM CAPITAL TRANSACTIONS
Deposits ............................. 37,371 54,928 18,649 76,120 37,469 968,569
Benefit payments ..................... (5,738) (1,847) (736) (2,137) (1,002) (46,181)
Payments on termination .............. (32,116) (15,391) (5,821) (14,070) (7,379) (268,824)
Contract maintenance charges ......... (217) (127) (39) (151) (74) (1,950)
Transfers among the portfolios and
with the Fixed Account - net ....... (49,309) 16,815 1,244 26,476 14,897 3,917
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting from
capital transactions .......... (50,009) 54,378 13,297 86,238 43,911 655,531
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS .... (22,608) 107,205 19,599 122,741 44,118 1,068,965
NET ASSETS AT BEGINNING OF PERIOD .... 410,121 164,100 58,995 184,723 86,208 2,991,692
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS AT END OF PERIOD .......... $ 387,513 $ 271,305 $ 78,594 $ 307,464 $ 130,326 $ 4,060,657
=========== =========== =========== =========== =========== ===========
CONTRACTS WITHOUT THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period .......................... $ 19.30 $ 24.33 $ 16.42 $ 13.84 $ 9.86
=========== =========== =========== =========== ===========
Units outstanding at end of
period ............................. 19,259 10,007 4,278 19,847 11,811
=========== =========== =========== =========== ===========
CONTRACTS WITH THE
DEATH BENEFIT OPTIONS
Net asset value per unit at end
of period ........................... $ 19.27 $ 24.30 $ 16.40 $ 13.82 $ 9.84
=========== =========== =========== =========== ===========
Units outstanding at end of
period ............................. 823 1,144 509 2,364 1,412
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-24
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
TWO YEARS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
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"). The assets of the Account are
legally segregated from those of Northbrook Life. Northbrook Life is wholly
owned by Allstate Life Insurance Company ("Allstate Life"), a wholly owned
subsidiary of Allstate Insurance Company, which is wholly owned by The
Allstate Corporation.
Northbrook Life writes certain annuity contracts, the proceeds of which are
invested at the direction of the contractholder. Contractholders primarily
invest in units of the portfolios comprising the Account, for which they
bear all of the investment risk, but may also invest in the general account
of Northbrook Life. 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"), a wholly owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co., is the sole distributor of
Northbrook Life's flexible premium deferred variable annuity contracts and
certain single and flexible premium annuities. Dean Witter InterCapital,
Inc. ("InterCapital"), a wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., 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. InterCapital receives
investment management fees from the Fund.
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.
Recognition of 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 represent the
difference between the proceeds from sales of shares by the Account and the
cost of such shares, which is determined on a weighted average basis.
Contractholder Account Activity - Account activity is reflected in
individual contractholder accounts on a daily basis.
Federal Income Taxes - The Account is intended to qualify as a segregated
asset account as defined in the Internal Revenue Code ("Code"). As such,
the operations of the Account are included with and taxed as a part of
Northbrook Life. Northbrook Life is taxed as a life insurance company under
the Code. Under current law, no federal income taxes are payable by the
Account.
Account Value - Certain calculations that could be made in the financial
statements may differ from published amounts due to truncation of actual
Account values.
F-25
<PAGE>
3. CONTRACT MAINTENANCE, MORTALITY AND EXPENSE RISK, ADMINISTRATIVE EXPENSE,
AND ENHANCED DEATH BENEFIT CHARGES
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.
Northbrook Life assumes mortality and expense risks related to the
operations of the Account and deducts charges daily at a rate equal to
1.25% per annum 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.
Northbrook Life deducts administrative expense charges daily at a rate
equal to .10% per annum of the daily net assets of the Account. This charge
is designed to cover administrative expenses.
Northbrook Life offers contractholders the choice of two death benefit
options. The Enhanced Death Benefit option guarantees that the death
benefit will provide a cumulative return greater than or equal to a
specified level, while the Performance Death Benefit option guarantees that
the death benefit will not be less than the contract's highest value on any
anniversary (collectively, "Death Benefit Options"). For either death
benefit, Northbrook Life deducts daily an additional charge equal to .13%
per annum of the daily net assets of the Account which are attributable to
contractholders who have elected the optional death benefit.
4. FINANCIAL INSTRUMENTS
The investments of the Separate Accounts are carried at fair value, based
upon quoted market prices. Accrued contract maintenance charges are of a
short-term nature. It is assumed that their carrying value approximates
fair value.
F-26
<PAGE>
5. UNITS ISSUED AND REDEEMED
Units issued and redeemed by the Account during 1997 for contracts with and
without the Death Benefit Options were as follows:
<TABLE>
<CAPTION>
Dean Witter Variable Investment Series Portfolios
--------------------------------------------------------------------------
(Units in thousands) Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTRACTS WITHOUT THE
DEATH BENEFIT OPTIONS
Units outstanding at
beginning of period .... 21,477 7,989 13,438 24,233 17,132 38,903 19,259
Unit activity during 1997:
Issued ................. 13,675 2,640 3,203 1,824 2,408 7,783 759
Redeemed ............... (16,530) (1,834) (3,132) (5,223) (3,391) (7,021) (4,848)
------- ------ ------ ------ ------ ------ ------
Units outstanding at
end of period .......... 18,622 8,795 13,509 20,834 16,149 39,665 15,170
------- ------ ------ ------ ------ ------ ------
CONTRACTS WITH THE
DEATH BENEFIT OPTIONS
Units outstanding at
beginning of period .... 3,424 1,463 2,303 1,096 904 4,587 823
Unit activity during 1997:
Issued ................. 9,358 2,883 3,851 2,005 2,953 10,318 1,131
Redeemed ............... (7,375) (502) (699) (400) (328) (935) (200)
------- ------ ------ ------ ------ ------ ------
Units outstanding at
end of period .......... 5,407 3,844 5,455 2,701 3,529 13,970 1,754
------- ------ ------ ------ ------ ------ ------
<CAPTION>
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------
(Units in thousands) Global
European Capital Dividend Pacific Capital Income
Growth Growth Growth Growth Appreciation Builder
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTRACTS WITHOUT THE
DEATH BENEFIT OPTIONS
Units outstanding at
beginning of period .... 10,007 4,278 19,847 11,811 -- --
Unit activity during 1997:
Issued ................. 2,051 1,203 5,450 2,237 1,908 2,541
Redeemed ............... (2,296) (1,012) (3,641) (5,858) (299) (178)
------- ------ ------ ------ ------ ------
Units outstanding at
end of period .......... 9,762 4,469 21,656 8,190 1,609 2,363
------- ------ ------ ------ ------ ------
CONTRACTS WITH THE
DEATH BENEFIT OPTIONS
Units outstanding at
beginning of period .... 1,144 509 2,364 1,412 -- --
Unit activity during 1997:
Issued ................. 2,332 1,051 5,991 2,560 1,266 2,086
Redeemed ............... (385) (195) (566) (1,867) (118) (61)
------- ------ ------ ------ ------ ------
Units outstanding at
end of period .......... 3,091 1,365 7,789 2,105 1,148 2,025
======= ====== ====== ====== ====== ======
</TABLE>
Units relating to accrued contract maintenance charges are included in
units redeemed.
******
F-27
