MORGAN STANLEY DEAN WITTER
VARIABLE ANNUITY II
Northbrook Life Insurance Company Prospectus dated May 2, 1999
P.O. Box 94040
Palatine, IL 60094
Telephone Number: 1-800-654-2397
Northbrook Life Insurance Company ("Northbrook") is offering the Morgan Stanley
Dean Witter Variable Annuity II, an individual and group flexible premium
deferred variable annuity contract ("Contract"). This prospectus contains
information about the Contract that you should know before investing. Please
keep it for future reference.
The Contract offers 25 investment alternatives ("investment alternatives"). The
investment alternatives include 4 fixed account options ("Fixed Account
Options") and 21 variable sub-accounts ("Variable Sub-Accounts") of the
Northbrook Variable Annuity Account II ("Variable Account"). Each Variable
Sub-Account invests exclusively in shares of portfolios ("Portfolios") of the
following mutual funds ("Funds"):
o Morgan Stanley Dean Witter Variable Investment Series
o Morgan Stanley Dean Witter Universal Funds, Inc.
o Van Kampen Life Investment Trust
We (Northbrook) have filed a Statement of Additional Information, dated May 2,
1999, with the Securities and Exchange Commission ("SEC"). It contains more
information about the Contract and is incorporated herein by reference, which
means that it is legally a part of this prospectus. Its table of contents
appears on page B-1 of this prospectus. For a free copy, please write or call us
at the address or telephone number above, or go to the SEC's Web site (Error!
Bookmark not defined.. You can find other information and documents about us,
including documents that are legally a part of this prospectus, at the SEC's Web
site.
The Securities and Exchange Commission has not approved
or disapproved the securities described in this
prospectus, nor has it passed on the accuracy or the
adequacy of this prospectus. Any one who tells you
otherwise is committing a federal crime.
IMPORTANT
NOTICE Investment in the Contracts involves investment risks,
including possible loss of principal.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
Important Terms....................................... 3
Overview The Contract At A Glance.............................. 4
How the Contract Works................................ 6
Expense Table......................................... 7
Financial Information................................. 11
Experts............................................... 11
The Contract.......................................... 12
Contract Features Purchases............................................. 13
Contract Value........................................ 14
Investment Alternatives
The Variable Sub-Accounts.................... 15
The Fixed Account Options.................... 16
Transfers.................................... 17
Expenses.............................................. 18
Access To Your Money.................................. 20
Income Payments....................................... 21
Death Benefits........................................ 23
More Information:..................................... 25
Northbrook................................... 25
The Variable Account......................... 25
The Portfolios............................... 26
Other Information The Contract................................. 26
Qualified Plans.............................. 27
Legal Matters................................ 27
Year 2000.................................... 27
Taxes................................................. 27
Performance Information............................... 30
Appendix A--Accumulation Unit Values..................A-1
Statement of Additional Information Table of Contents.B-1
</TABLE>
<PAGE>
IMPORTANT TERMS
- -------------------------------------------------------------------------------
This prospectus uses a number of important terms that you may not be familiar
with. The index below identifies the page that describes each term. The first
use of each term in this prospectus appears in highlights.
Page
Accumulation Phase............................................. 6
Accumulation Unit ............................................. 11
Accumulation Unit Value ....................................... 11
Annuitant...................................................... 12
Automatic Portfolio Rebalancing Program........................ 18
Automatic Additions Program.................................... 13
Beneficiary.................................................... 12
Cancellation Period............................................ 4
*Contract ..................................................... 1
Contract Anniversary........................................... 5
Contract Owner ("You")......................................... 12
Contract Value................................................. 14
Contract Year................................................. 5
Death Benefit Anniversary ..................................... 23
Death Benefit Combination Option............................... 24
Dollar Cost Averaging Program.................................. 18
Dollar Cost Averaging Fixed Account Options.................... 16
Due Proof of Death............................................. 23
Enhanced Death Benefit Option.................................. 23
Fixed Account Options.......................................... 16
Free Withdrawal Amount......................................... 19
Funds.......................................................... 1
Guarantee Periods.............................................. 16
Income Plan ................................................... 21
Investment Alternatives ....................................... 1
Issue Date .................................................... 6
Northbrook ("We").............................................. 25
Payout Phase................................................... 6
Payout Start Date.............................................. 6
Performance Benefit Combination Option......................... 24
Performance Death Benefit Option............................... 24
Performance Income Benefit Option.............................. 22
Portfolios..................................................... 1
Qualified Contracts............................................ 12
Right to Cancel................................................ 4
SEC............................................................ 1
Settlement Value ............................................. 24
Systematic Withdrawal Program.................................. 20
Valuation Date................................................. 13
Variable Account .............................................. 1
Variable Sub-Account .......................................... 1
* In certain states the Contract is available only as a group Contract.
In these states, we will issue you a certificate that represents your
ownership and that summarizes the provisions of the group Contract.
References to "Contract" in this prospectus include certificates,
unless the context requires otherwise.
<PAGE>
THE CONTRACT AT A GLANCE
- ------------------------------------------------------------------------------
The following is a snapshot of the Contract. Please read the remainder of this
prospectus for more information.
- ---------------------------------- -----------------------------------------
Flexible Payments You can purchase a Contract with
an initial purchase payment as little as
$1,000 (we may increase this minimum to
$4,000). You can add to your Contract as
often and as much as you like. Each payment
must be at least $25. You must maintain a
minimum account size of $500.
- ---------------------------------- ------------------------------------------
Right to Cancel You may cancel your Contract
within 20 days of receipt or any longer
period as your state may require
("Cancellation Period"). Upon cancellation,
we will return your purchase payments
adjusted, to the extent state law permits,
to reflect the investment experience of any
amounts allocated to the Variable Account.
- ---------------------------------- -------------------------------------------
Expenses You will bear the following expenses:
o Total Variable Account annual fees
equal to 1.35% of average daily
net assets (1.48% if you select
the Enhanced Death Benefit Option,
the Performance Death Benefit
Option, or the Performance Income
Benefit Option, and 1.59% if you
select the Performance Benefit
Combination Option, or the Death
Benefit Combination
Option)
o Annual contract maintenance charge
of $30
o Withdrawal charges ranging from 0%
to 6% of purchase payment(s)
withdrawn (with certain exceptions)
o Transfer fee of $25 after 12th
transfer in any Contract Year (fee
currently waived)
o State premium tax (if your state
imposes one)
In addition, each Portfolio pays expenses
that you will bear indirectly if you invest
in a Variable Sub-Account.
- ---------------------------------- -------------------------------------------
Investment The Contract offers 25 investment
Alternatives alternatives including:
o 4 Fixed Account Options (which credit
interest at rates we guarantee)
o 21 Variable Sub-Accounts investing in
Portfolios offering professional money
management by these investment
advisers:
o Morgan Stanley Dean Witter Advisors,
Inc.
o Morgan Stanley Dean Witter Asset
Management, Inc.
o Van Kampen Asset Management, Inc.
To find out current rates being paid on the Fixed Account
Options, or to find out how the Variable Sub-Accounts have
performed, call us at 1-800-654-2397.
- ----------------------------------- ------------------------------------------
Special Services For your convenience, we offer these
special services:
o Automatic Additions Program
o Automatic Portfolio Rebalancing Program
o Dollar Cost Averaging Program
o Systematic Withdrawal Program
- ----------------------------------- ------------------------------------------
Income Payments You can choose fixed income
payments, variable income payments, or a
combination of the two. You can receive
your income payments in one of the
following ways:
o life income with payments guaranteed
for 10 years
o joint and survivor life income
o guaranteed payments for a specified
period
- ----------------------------------- ------------------------------------------
Death Benefits If you or the Annuitant dies
before the Payout Start Date, we will pay
the death benefit described in the
Contract. We also offer 3 Death Benefit
Options.
- ----------------------------------- ------------------------------------------
Transfers Before the Payout Start Date, you may
transfer your Contract value ("Contract
Value") among the investment alternatives,
with certain restrictions. Transfers must
be at least $100 or the entire amount in
the investment alternative, whichever is
less. Transfers to the Guarantee Periods
must be at least $500.
We do not currently impose a fee upon
transfers. However, we reserve the right
to charge $25 per transfer after the 12th
transfer in each "Contract Year," which we
measure from the date we issue your
contract or a Contract anniversary
("Contract Anniversary").
- ----------------------------------- ------------------------------------------
Withdrawals You may withdraw some or all of your
Contract Value at anytime during the
Accumulation Phase. In general, you must
withdraw at least $100 at a time or the
total amount in the investment
alternative, if less. A 10% federal tax
penalty may apply if you withdraw before
you are 59 1/2 years old. A withdrawal
charge also may apply.
- ----------------------------------- ------------------------------------------
<PAGE>
HOW THE CONTRACT WORKS
- ------------------------------------------------------------------------------
The Contract basically works in two ways.
First, the Contract can help you (we assume you are the "Contract owner")
save for retirement because you can invest in up to 25 investment alternatives
and pay no federal income taxes on any earnings until you withdraw them. You do
this during what we call the "Accumulation Phase" of the Contract. The
Accumulation Phase begins on the date we issue your Contract (we call that date
the "Issue Date") and continues until the Payout Start Date, which is the date
we apply your money to provide income payments. During the Accumulation Phase,
you may allocate your purchase payments to any combination of the Variable
Sub-Accounts and/or the Fixed Account Options. If you invest in the Fixed
Account Options, you will earn a fixed rate of interest that we declare
periodically. If you invest in any of the Variable Sub-Accounts, your investment
return will vary up or down depending on the performance of the corresponding
Portfolios.
Second, the Contract can help you plan for retirement because you can use
it to receive retirement income for life and/or for a pre-set number of years,
by selecting one of the income payment options (we call these "Income Plans")
described on page 21. You receive income payments during what we call the
"Payout Phase" of the Contract, which begins on the Payout Start Date and
continues until we make the last payment required by the Income Plan you select.
During the Payout Phase, if you select a fixed income payment option, we
guarantee the amount of your payments, which will remain fixed. If you select a
variable income payment option, based on one or more of the Variable
Sub-Accounts, the amount of your payments will vary up or down depending on the
performance of the corresponding Portfolios. The amount of money you accumulate
under your Contract during the Accumulation Phase and apply to an Income Plan
will determine the amount of your income payments during the Payout Phase.
The timeline below illustrates how you might use your Contract.
<TABLE>
<CAPTION>
Issue Payout Start
Date Accumulation Phase Date Payout Phase
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
| You save for retirement | | ?
You buy You elect to receive income You can receive Or you can receive
a Contract payments or receive a lump sum income payments income payments
payment for a set period for life
</TABLE>
As the Contract owner, you exercise all of the rights and privileges
provided by the Contract. If you die, any surviving Contract owner or, if there
is none, the Beneficiary will exercise the rights and privileges provided by the
Contract. See "The Contract." In addition, if you die before the Payout Start
Date, we will pay a death benefit to any surviving Contract owner, or if there
is none, to your Beneficiary. See "Death Benefits."
Please call us at 1-800-654-2397 if you have any question about how the
Contract works.
<PAGE>
EXPENSE TABLE
- ------------------------------------------------------------------------------
The table below lists the expenses that you will bear directly or indirectly
when you buy a Contract. The table and the examples that follow do not reflect
premium taxes that may be imposed by the state where you reside. For more
information about Variable Account expenses, see "Expenses," below. For more
information about Portfolio expenses, please refer to the accompanying
prospectuses for the Funds.
---------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
Withdrawal Charge (as a percentage of purchase payments withdrawn)*
Number of Complete Years
Since We Received the Purchase
Payment Being Withdrawn: 0 1 2 3 4 5 6+
Applicable Charge: 6% 5% 4% 3% 2% 1% 0%
Annual Contract Maintenance Charge............................$30.00
Transfer Fee..................................................$25.00**
-------------------
* During each Contract Year after the first, you may withdraw up to
15% of the aggregate amount of your purchase payments as of the
beginning of the Contract Year without incurring a withdrawal charge.
**Applies solely to the thirteenth and subsequent transfers within a
Contract Year excluding transfers due to dollar cost averaging and
automatic portfolio rebalancing. We are currently waiving the transfer
fee.
---------------------------------------------------------------------
<PAGE>
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VARIABLE ACCOUNT ANNUAL EXPENSES
(as a percentage of average daily net asset value deducted from each
Variable Sub-Account)
Mortality and Expense Risk Charge............................1.25%*
Administrative Expense Charge................................0.10%
Total Variable Account Annual Expenses.............1.35%
--------------
* If you select the Enhanced Death Benefit Option, the Performance
Death Benefit Option, or the Performance Income Benefit Option, the
mortality and expense risk charge is 1.38%. If you select the
Performance Benefit Combination Option, or the Death Benefit
Combination Option, the mortality and expense risk charge is 1.49%.
PORTFOLIOANNUAL EXPENSES (After Voluntary Reductions and
Reimbursements) (as a percentage of Portfolio average daily net
assets)
<TABLE>
<CAPTION>
Total
Management Other Portfolio
Portfolio Fees Expenses Annual Expenses
- --------- ---------- -------- -----------
Morgan Stanley Dean Witter Variable Investment
Series
<S> <C> <C> <C>
Money Market 0.50% 0.02% 0.52%
Quality Income Plus 0.50% 0.02% 0.52%
Short-Term Bond 0.45% 0.00% 0.45%
High Yield 0.50% 0.03% 0.53%
Utilities 0.65% 0.02% 0.67%
Income Builder 0.75% 0.06% 0.81%
Dividend Growth 0.52% 0.01% 0.53%
Aggressive Equity 0.75% 0.00% 0.75%
Capital Growth 0.65% 0.05% 0.70%
Global Dividend Growth 0.75% 0.09% 0.84%
European Growth 0.99% 0.12% 1.11%
Pacific Growth 0.99% 0.52% 1.51%
Equity(1) 0.50% 0.02% 0.52%
S&P 500 Index(2) 0.00% 0.00% 0.00%
Competitive Edge "Best Ideas"(2) 0.00% 0.00% 0.00%
Strategist 0.50% 0.02% 0.52%
Morgan Stanley Dean Witter Universal Funds,
Inc.(3)
Equity Growth 0.09% 0.76% 0.85%
U.S. Real Estate 0.17% 0.93% 1.10%
International Magnum 0.15% 1.00% 1.15%
Emerging Markets Equity 0.00% 1.95% 1.95%
Van Kampen Life Investment Trust(4)
Emerging Growth 0.70% 0.53% 1.23%
</TABLE>
(1) At the close of business on March 19, 1999, the Capital Appreciation
Portfolio merged with and into the Equity Portfolio.
(2) Morgan Stanley Dean Witter Advisors, Inc. has undertaken to assume all
expenses of the S&P 500 Index and Competitive Edge "Best Ideas" 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. Absent such reductions, the management fees, other expenses, and
total annual Portfolio expenses would have been as follows:
S&P 500 Index 0.40% 0.19% 0.59%
Competitive Edge "Best Ideas" 0.65% 0.27% 0.82%
(3) 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 Portfolio Annual
Expenses" to exceed the amount set forth in the table above. Absent such
reductions, the management fees, other expenses, and total annual Portfolio
expenses would have been as follows:
Equity Growth 0.55% 0.76% 1.31%
U.S. Real Estate 0.80% 0.93% 1.73%
International Magnum 0.80% 1.00% 1.80%
Emerging Markets Equity 1.25% 2.20% 3.45%
(4) Van Kampen Asset Management, Inc. has voluntarily agreed to a reduction in
its management fees and to reimburse the Emerging Growth Portfolio for
which it acts as investment adviser if such fees would cause "Total
Portfolio Annual Expenses" to exceed the amount set forth in the table
above. Absent such reductions, the management fees, other expenses, and
total annual Portfolio expenses would have been 0.70%, 0.53% and 1.23%,
respectively.
EXAMPLE 1
The example below shows the dollar amount of expenses that you would bear
directly or indirectly if you:
o invested $1,000 in a Variable Sub-Account,
o earned a 5% annual return on your investment,
o surrendered your Contract or you began receiving income payments
for a specified period of less than 120 months, at the end of each
time period, and
o elected the Performance Benefit Combination Option or the Death Benefit
Combination Option.
The example does not include any taxes or tax penalties you may be required to
pay if you surrender your Contract.
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account............................... $65 $94 $126 $251
Quality Income Plus Sub-Account........................ $65 $94 $126 $251
Short-Term Bond Sub-Account............................. $64 $92 $122 $244
High Yield Sub-Account.................................. $65 $94 $126 $252
Utilities Sub-Account................................... $66 $98 $133 $267
Income Builder Sub-Account.............................. $68 $103 $140 $281
Dividend Growth Sub-Account............................. $65 $94 $126 $252
Capital Growth Sub-Account.............................. $67 $99 $135 $270
Global Dividend Growth Sub-Account...................... $68 $104 $142 $284
European Growth Sub-Account............................. $71 $112 $156 $311
Pacific Growth Sub-Account.............................. $75 $124 $176 $350
Equity Sub-Account...................................... $65 $94 $126 $251
S&P 500 Index Sub-Account............................... $59 $78 $98 $195
Competitive Edge "Best Ideas" Sub-Account............... $59 $78 $98 $195
Strategist Sub-Account.................................. $65 $94 $126 $251
Equity Growth Sub-Account............................... $68 $104 $143 $285
Aggressive Equity Sub-Account........................... $67 $101 $137 $275
U.S. Real Estate Sub-Account............................ $71 $112 $155 $310
International Magnum Sub-Account........................ $71 $113 $158 $315
Emerging Markets Equity Sub-Account..................... $79 $137 $197 $391
Emerging Growth Sub-Account............................. $68 $104 $143 $285
</TABLE>
EXAMPLE 2
Same assumptions as Example 1 above, except that you decided not to surrender
your Contract, or you began receiving income payments (for at least 120 months
if under an Income Plan with a specified period), at the end of each period.
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Sub-Account............................... $22 $68 $117 $251
Quality Income Plus Sub-Account........................ $22 $68 $117 $251
Short-Term Bond Sub-Account............................. $21 $66 $113 $244
High Yield Sub-Account.................................. $22 $69 $118 $252
Utilities Sub-Account................................... $24 $73 $125 $267
Income Builder Sub-Account.............................. $25 $77 $132 $281
Dividend Growth Sub-Account............................. $22 $69 $118 $252
Capital Growth Sub-Account.............................. $24 $74 $126 $270
Global Dividend Growth Sub-Account...................... $25 $78 $133 $284
European Growth Sub-Account............................. $28 $86 $147 $311
Pacific Growth Sub-Account.............................. $32 $99 $167 $350
Equity Sub-Account...................................... $22 $68 $117 $251
S&P 500 Index Sub-Account............................... $17 $52 $90 $195
Competitive Edge "Best Ideas" Sub-Account............... $17 $52 $90 $195
Strategist Sub-Account.................................. $22 $68 $117 $251
Equity Growth Sub-Account............................... $26 $78 $134 $285
Aggressive Equity Sub-Account........................... $25 $75 $129 $275
U.S. Real Estate Sub-Account............................ $28 $86 $147 $310
International Magnum Sub-Account........................ $29 $88 $149 $315
Emerging Markets Equity Sub-Account..................... $37 $112 $189 $391
Emerging Growth Sub-Account............................. $26 $78 $134 $285
</TABLE>
Please remember that you are looking at examples and not a representation of
past or future expenses. Your actual expenses may be lower or greater than those
shown above. Similarly, your rate of return may be lower or greater than 5%,
which is not guaranteed. The above examples assume the election of the
Performance Benefit Combination Option, or the Death Benefit Combination Option,
with a mortality and expense risk charge of 1.49%. If those options were not
elected, the expense figures shown above would be slightly lower. To reflect the
contract maintenance charge in the examples, we estimated an equivalent
percentage charge, based on an assumed average Contract size of $54,945.
<PAGE>
FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
To measure the value of your investment in the Variable Sub-Accounts during the
Accumulation Phase, we use a unit of measure we call the "Accumulation Unit."
Each Variable Sub-Account has a separate value for its Accumulation Units we
call "Accumulation Unit Value." Accumulation Unit Value is analogous to, but not
the same as, the share price of a mutual fund.
Attached as Appendix A to this prospectus are tables showing the Accumulation
Unit Values of each Variable Sub-Account since its inception. No Accumulation
Unit Values are shown for the Short-Term Bond and Aggressive Equity
Sub-Accounts, which just became available as of the date of this prospectus. To
obtain additional detail on each Variable Sub-Account's finances, please refer
to the Variable Account's financial statements contained in the Statement of
Additional Information. The financial statements of Northbrook also appear in
the Statement of Additional Information.
EXPERTS
- ------------------------------------------------------------------------------
The financial statements of the Variable Account and Northbrook have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports thereon. We have included such financial statements and reports in the
Statement of additional Information, which is legally a part of this prospectus,
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
<PAGE>
THE CONTRACT
- -----------------------------------------------------------------------------
CONTRACT OWNER
The Variable Annuity II is a contract between you, the Contract owner, and
Northbrook, a life insurance company. As the Contract owner, you may exercise
all of the rights and privileges provided to you by the Contract. That means it
is up to you to select or change (to the extent permitted):
o the investment alternatives during the Accumulation and Payout Phases,
o the amount and timing of your purchase payments and withdrawals,
o the programs you want to use to invest or withdraw money,
o the income payment plan you want to use to receive retirement income,
o the Annuitant (either yourself or someone else) on whose life the income
payments will be based,
o the Beneficiary or Beneficiaries who will receive the benefits that the
Contract provides when you die, and
o any other rights that the Contract provides.
If you die, any surviving Contract owner, or, if none, the Beneficiary will
exercise the rights and privileges provided to them by the Contract. The
Contract cannot be jointly owned by both a non-natural person and a natural
person.
You can use the Contract with or without a qualified plan. A "qualified plan" is
a personal retirement savings plan, such as an IRA or tax-sheltered annuity,
that meets the requirements of the Internal Revenue Code. Qualified plans may
limit or modify your rights and privileges under the Contract. We use the term
"Qualified Contract" to refer to a Contract used with a qualified plan. See
"Qualified Plans" on page 27.
ANNUITANT
The Annuitant is the individual whose life span we use to determine income
payments as well as the latest Payout Start Date. You initially designate an
Annuitant in your application. If the Contract owner is a natual person, you may
change the Annuitant before the Payout Start Date. Before the Payout Start Date,
you may also designate a joint Annuitant, who is a second person on whose life
income payments depend.
BENEFICIARY
The Beneficiary is the person who may elect to receive the death benefit or
become the new Contract owner if the sole surviving Contract owner dies before
the Payout Start Date. If the sole surviving Contract owner dies after the
Payout Start Date, the Beneficiary will receive any guaranteed income payments
scheduled to continue.
You may name one or more Beneficiaries when you apply for a Contract. You may
change or add Beneficiaries at any time while the Annuitant is living by writing
to us, unless you have designated an irrevocable Beneficiary. We will provide a
change of Beneficiary form to be signed and filed with us. Any change will be
effective at the time you sign the written notice, whether or not the Annuitant
is living when we receive the notice. Until we receive your written notice to
change a Beneficiary, we are entitled to rely on the most recent Beneficiary
information in our files. We will not be liable as to any payment or settlement
made prior to receiving the written notice. Accordingly, if you wish to change
your Beneficiary, you should deliver your written notice to us promptly.
If you did not name a Beneficiary or, if the named Beneficiary is no longer
living and there are no other surviving Beneficiaries, the new Beneficiary will
be:
o your spouse, if he or she is still alive, otherwise
o your surviving children equally, or if you have no surviving children,
o your estate.
If more than one Beneficiary survives you, (or the Annuitant, if the Contract
owner is not a natural person) we will divide the death benefit among your
Beneficiaries according to your most recent written instructions. If you have
not given us written instructions, we will pay the death benefit in equal
amounts to the surviving Beneficiaries.
MODIFICATION OF THE CONTRACT
Only a Northbrook officer may approve a change in or waive any provision of the
Contract. Any change or waiver must be in writing. None of our agents has the
authority to change or waive the provisions of the Contract. We may not change
the terms of the Contract without your consent, except to conform the Contract
to applicable law or changes in the law. If a provision of the Contract is
inconsistent with state law, we will follow state law.
ASSIGNMENT
We will not honor an assignment of an interest in a Contract as collateral or
security for a loan. However, you may assign periodic income payments under the
Contract prior to the Payout Start Date. No Beneficiary may assign benefits
under the Contract until they are payable to the Beneficiary. We will not be
bound by any assignment until you sign it and file it with us. We are not
responsible for the validity of any assignment. Federal law prohibits or
restricts the assignment of benefits under many types of retirement plans and
the terms of such plans may themselves contain restrictions on assignments. An
assignment may also result in taxes or tax penalties. You should consult with an
attorney before trying to assign your Contract.
<PAGE>
PURCHASES
- ------------------------------------------------------------------------------
MINIMUM PURCHASE PAYMENTS
Your initial purchase payment must be at least $1,000. However, we reserve the
right to raise that minimum to $4,000. All subsequent purchase payments must be
$25 or more. You may make purchase payments at any time prior to the Payout
Start Date. We reserve the right to limit the maximum amount of purchase
payments we will accept. We also reserve the right to reject any application.
AUTOMATIC ADDITIONS PROGRAM
You may make subsequent purchase payments of at least $25 by automatically
transferring amounts from your bank account or your Morgan Stanley Dean Witter
Active AssetsTM Account. Please consult your Morgan Stanley Dean Witter
Financial Advisor for details.
ALLOCATION OF PURCHASE PAYMENTS
At the time you apply for a Contract, you must decide how to allocate your
purchase payments among the investment alternatives. The allocation you specify
on your application will be effective immediately. All allocations must be in
whole percentages that total 100% or in whole dollars. The minimum you may
allocate to any investment alternative is $100. The minimum amount that you may
allocate to the Guarantee Periods is $500. You can change your allocations by
notifying us in writing.
We will allocate your purchase payments to the investment alternatives according
to your most recent instructions on file with us. Unless you notify us in
writing otherwise, we will allocate subsequent purchase payments according to
the allocation for the previous purchase payment. We will effect any change in
allocation instructions at the time we receive written notice of the change in
good order.
We will credit the initial purchase payment that accompanies your completed
application to your Contract within 2 business days after we receive the payment
at our headquarters. If your application is incomplete, we will ask you to
complete your application within 5 business days. If you do so, we will credit
your initial purchase payment to your Contract within that 5 business day
period. If you do not, we will return your purchase payment at the end of the 5
business day period unless you expressly allow us to hold it until you complete
the application. We will credit subsequent purchase payments to the Contract on
the business day that we receive the purchase payment at our headquarters.
We use the term "business day" to refer to each day Monday through Friday that
the New York Stock Exchange is open for business. We also refer to these days as
"Valuation Dates." If we receive your purchase payment after 3 p.m. Central Time
on any Valuation Date, we will credit your purchase payment using the
Accumulation Unit Values computed on the next Valuation Date.
RIGHT TO CANCEL
You may cancel the Contract within the Cancellation Period, which is the 20-day
period after you receive the Contract or such longer period as your state may
require. If you exercise this Right to Cancel, the Contract terminates and we
will pay you the full amount of your purchase payments allocated to the Fixed
Account Options. We also will return your purchase payments allocated to the
Variable Account after an adjustment, to the extent state law permits, to
reflect investment gain or loss that occurred from the date of allocation
through the date of cancellation. Some states may require us to return a greater
amount to you.
<PAGE>
CONTRACT VALUE
- ------------------------------------------------------------------------------
Your Contract Value at any time during the Accumulation Phase is equal to the
sum of the value of your Accumulation Units in the Variable Sub-Accounts you
have selected, plus the value of your investment in the Fixed Account Options.
ACCUMULATION UNITS
To determine the number of Accumulation Units of each Variable Sub-Account to
allocate to your Contract, we divide (i) the amount of the purchase payment you
have allocated to a Variable Sub-Account by (ii) the Accumulation Unit Value of
that Variable Sub-Account next computed after we receive your payment. For
example, if we receive a $10,000 purchase payment allocated to a Variable
Sub-Account when the Accumulation Unit Value for the Sub-Account is $10, we
would credit 1,000 Accumulation Units of that Variable Sub-Account to your
Contract.
ACCUMULATION UNIT VALUE
As a general matter, the Accumulation Unit Value for each Variable Sub-Account
will rise or fall to reflect:
o changes in the share price of the Portfolio in which the Variable
Sub-Account invests, and
o the deduction of amounts reflecting the mortality and expense risk charge,
administrative expense charge, and any provision for taxes that have
accrued since we last calculated the Accumulation Unit Value.
We determine contract maintenance charges, withdrawal charges, and transfer fees
(currently waived) separately for each Contract. They do not affect Accumulation
Unit Value. Instead, we obtain payment of those charges and fees by redeeming
Accumulation Units. For details on how we calculate Accumulation Unit Value,
please refer to the Statement of Additional Information.
We determine a separate Accumulation Unit Value for each Variable Sub-Account on
each Valuation Date. We also determine a separate set of Accumulation Unit
Values that reflect the cost of the Enhanced Death Benefit Option, the
Performance Death Benefit Option, or the Performance Income Benefit Option, and
a third set of Accumulation Unit Values that reflect the cost of the Performance
Benefit Combination Option and the Death Benefit Combination Option.
You should refer to the prospectuses for the Funds that accompany this
prospectus for a description of how the assets of each Portfolio are valued,
since that determination directly bears on the Accumulation Unit Value of the
corresponding Variable Sub-Account and, therefore, your Contract Value.
<PAGE>
INVESTMENT ALTERNATIVES: The Variable Sub-Accounts
- ------------------------------------------------------------------------------
You may allocate your purchase payments to up to 21 Variable Sub-Accounts. Each
Variable Sub-Account invests in the shares of a corresponding Portfolio. Each
Portfolio has its own investment objective(s) and policies. We briefly describe
the Portfolios below.
For more complete information about each Portfolio, including expenses and risks
associated with the Portfolio, please refer to the accompanying prospectuses for
the Funds. You should carefully review the Fund prospectuses before allocating
amounts to the Variable Sub-Accounts.
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------------------------------------------ ----------------------
Investment
Portfolio: Each Portfolio Seeks: Adviser:
- --------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series
- --------------------------------------------------------------------------------------------------------------------------
- -------------------------------------- ------------------------------------------------------------ ----------------------
<S> <C> <C>
Money Market Portfolio High current income, preservation of capital, and liquidity
Morgan Stanley Dean
Witter Advisors, Inc.
- -------------------------------------- ------------------------------------------------------------ ----------------------
Quality Income Plus Portfolio High current income and, as a secondary
objective, capital appreciation when
consistent with its primary objective
- -------------------------------------- ------------------------------------------------------------ ----------------------
Short-Term Bond Portfolio High current income consistent with preservation of capital
- -------------------------------------- ------------------------------------------------------------ ----------------------
High Yield Portfolio High current income and, as a secondary
objective, capital appreciation when
consistent with its primary objective
- -------------------------------------- ------------------------------------------------------------ ----------------------
Utilities Portfolio Current income and long-term growth of income and capital
- -------------------------------------- ------------------------------------------------------------ ----------------------
Income Builder Portfolio Reasonable income and, as a secondary objective, growth of
capital
- -------------------------------------- ------------------------------------------------------------ ----------------------
Dividend Growth Portfolio Reasonable current income and long-term growth of income
and capital
- -------------------------------------- ------------------------------------------------------------ ----------------------
Capital Growth Portfolio Long-term capital growth
- -------------------------------------- ------------------------------------------------------------ ----------------------
Global Dividend Growth Portfolio Reasonable current income and long-term growth of income
and capital
- -------------------------------------- ------------------------------------------------------------ ----------------------
European Growth Portfolio To maximize the capital appreciation on its investments
- -------------------------------------- ------------------------------------------------------------ ----------------------
Pacific Growth Portfolio To maximize the capital appreciation of its investments
- -------------------------------------- ------------------------------------------------------------ ----------------------
Aggressive Equity Portfolio Capital growth
- -------------------------------------- ------------------------------------------------------------ ----------------------
Equity Portfolio Growth of capital and, as a secondary objective,
income when consistent with its primary objective.
- -------------------------------------- ------------------------------------------------------------ ----------------------
S&P 500 Index Portfolio Investment results that, before expenses, correspond to
the total return of the Standard and Poor's 500 Composite
Stock Price Index
- -------------------------------------- ------------------------------------------------------------ ----------------------
Competitive Edge "Best Ideas" Long-term capital growth
Portfolio
- -------------------------------------- ------------------------------------------------------------ ----------------------
Strategist Portfolio High total investment return
- -------------------------------------- ------------------------------------------------------------ ----------------------
- --------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Universal Funds, Inc.
- -------------------------------------- ------------------------------------------------------------ ----------------------
Equity Growth Portfolio Long-term capital appreciation Morgan Stanley Dean Witter
Investment Management, Inc.
- -------------------------------------- ------------------------------------------------------------ ----------------------
U.S. Real Estate Portfolio Above-average current income and long-term capital
appreciation
- -------------------------------------- ------------------------------------------------------------ ----------------------
International Magnum Portfolio Long-term capital appreciation
- -------------------------------------- ------------------------------------------------------------ ----------------------
Emerging Markets Equity Long-term capital appreciation
Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Van Kampen Life Investment Trust
- --------------------------------------------------------------------------------------------------------------------------
Emerging Growth Portfolio Capital appreciation Van Kampen Asset
Management, Inc.
- -------------------------------------- ------------------------------------------------------------ ----------------------
</TABLE>
Amounts you allocate to Variable Sub-Accounts may grow in value, decline in
value, or grow less than you expect, depending on the investment performance of
the Portfolios in which those Variable Sub-Accounts invest. You bear the
investment risk that the Portfolios might not meet their investment objectives.
Shares of the Portfolios are not deposits, or obligations of, or guaranteed or
endorsed by any bank and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other agency.
<PAGE>
INVESTMENT ALTERNATIVES : The Fixed Account Options
- ------------------------------------------------------------------------------
You may allocate all or a portion of your purchase payments to the Fixed Account
Options. You may choose from among 4 Fixed Account Options including 3 dollar
cost averaging options ("Dollar Cost Averaging Fixed Account Options") and the
option to invest in one or more Guarantee Periods. The Fixed Account Options may
not be available in all states. Northbrook may also limit the availability of
the 6 and 12 Month Dollar Cost Averaging Options. Please consult with your
Morgan Stanley Dean Witter Financial Advisor for current information. The Fixed
Account supports our insurance and annuity obligations. The Fixed Account
consists of our general assets other than those in segregated asset accounts. We
have sole discretion to invest the assets of the Fixed Account, subject to
applicable law. Any money you allocate to a Fixed Account Option does not
entitle you to share in the investment experience of the Fixed Account.
DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS
Basic Dollar Cost Averaging Option. You may establish a Dollar Cost Averaging
Program, as described on page 18, by allocating purchase payments to the Basic
Dollar Cost Averaging Option. Purchase payments that you allocate to the Basic
Dollar Cost Averaging Option will earn interest for a 1 year period at the
current rate in effect at the time of allocation. We will credit interest daily
at a rate that will compound over the year to the annual interest rate we
guaranteed at the time of allocation. Rates may be different than those
available for the Guarantee Periods described below. After the one year period,
we will declare a renewal rate which we guarantee for a full year. Subsequent
renewal dates will be every twelve months for each purchase payment. Renewal
rates will not be less than the minimum guaranteed rate found in the Contract.
You may not transfer funds from other investment alternatives to the Basic
Dollar Cost Averaging Option.
6 and 12 Month Dollar Cost Averaging Options. You also may establish a Dollar
Cost Averaging Program by allocating purchase payments to the Fixed Account
either for 6 months (the "6 Month Dollar Cost Averaging Option") or for 12
months (the "12 Month Dollar Cost Averaging Option"). Your purchase payments
will earn interest for the period you select at the current rates in effect at
the time of allocation. Rates may differ from those available for the Guarantee
Periods described below. However, the crediting rates for the 6 and 12 Month
Dollar Cost Averaging Options will never be less than 3% annually.
You must transfer all of your money out of the 6 or 12 Month Dollar Cost
Averaging Options to the Variable Sub-Accounts in equal monthly installments. If
you discontinue a 6 or 12 Month Dollar Cost Averaging Option prior to last
scheduled transfer, we will transfer any remaining money immediately to the
Money Market Variable Sub-Account, unless you request a different Variable
Sub-Account.
You may not transfer funds from other investment alternatives to the 6 or 12
Month Dollar Cost Averaging Options.
Transfers out of the Dollar Cost Averaging Fixed Account Options do not count
towards the 12 transfers you can make without paying a transfer fee.
We may declare more than one interest rate for different monies based upon the
date of allocation to the Dollar Cost Averaging Fixed Account Options. For
current interest rate information, please contact your sales representative or
our customer support unit at 1-800-654-2397.
GUARANTEE PERIODS
You may allocate purchase payments or transfers to one or more Guarantee Periods
of the Fixed Account ("Guarantee Periods"). Each payment or transfer allocated
to a Guarantee Period earns interest at a specified rate that we guarantee for a
period of years. We will offer a 1 year Guarantee Period. We offer additional
Guarantee Periods at our sole discretion. We currently offer a 1 year and a 6
year Guarantee Period.
Interest Rates. We will tell you what interest rates and Guarantee Periods we
are offering at a particular time. We will not change the interest rate that we
credit to a particular allocation until the end of the relevant Guarantee
Period. We may declare different interest rates for Guarantee Periods of the
same length that begin at different times.
We have no specific formula for determining the rate of interest that we will
declare initially or in the future. We will set those interest rates based on
investment returns available at the time of the determination. In addition, we
may consider various other factors in determining interest rates including
regulatory and tax requirements, our sales commission and administrative
expenses, general economic trends, and competitive factors. We determine the
interest rates to be declared in our sole discretion. We can neither predict nor
guarantee what those rates will be in the future. For current interest rate
information, please contact your sales representative or Northbrook at
1-800-654-2397. The interest rate will never be less than the minimum guaranteed
rate stated in the Contract.
After the Guarantee Period, we will declare a renewal rate. Subsequent renewal
dates will be on anniversaries of the first renewal date. On or about each
renewal date, the Company will notify the owner of the interest rate(s) for the
Contract Year then starting.
<PAGE>
INVESTMENT ALTERNATIVES: Transfers
- ------------------------------------------------------------------------------
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase, you may transfer Contract Value among the
investment alternatives. Transfers to any Guarantee Period must be at least
$500. You may not, however, transfer Contract Value into any of the Dollar Cost
Averaging Fixed Account Options. You may request transfers in writing on a form
that we provide or by telephone according to the procedure described below. The
minimum amount that you may transfer is $100 or the total amount in the
investment alternative, whichever is less. We currently do not assess, but
reserve the right to assess, a $25 charge on each transfer in excess of 12 per
Contract Year. We will notify you at least 30 days before we begin imposing the
transfer charge. We treat transfers to or from more than one Portfolio on the
same day as one transfer.
We limit the amount you may transfer from the Guarantee Periods to the Variable
Account in any Contract Year to the greater of:
1) 25% of the aggregate value in the Guarantee Periods as of the most recent
Contract Anniversary (if this amount is less than $1,000, then up to $1,000
may be transferred); or
2) 25% of the sum of all purchase payments and transfers to the Guarantee
Periods as of the most recent Contract Anniversary. These restrictions do
not apply to transfers pursuant to dollar cost averaging. If the first
renewal interest rate is less than the current rate that was in effect at
the time money was allocated or transferred to a Guarantee Period, we will
waive the transfer restriction for that money and the accumulated interest
thereon during the 60-day period following the first renewal date.
We will process transfer requests that we receive before 3:00 p.m. Central Time
on any Valuation Date using the Accumulation Unit Values for that Date. We will
process requests completed after 3:00 p.m. on any Valuation Date using the
Accumulation Unit Values for the next Valuation Date. The Contract permits us to
defer transfers from the Fixed Account Options for up to six months from the
date we receive your request. If we decide to postpone transfers for 30 days or
more, we will pay interest as required by applicable law. Any interest would be
payable from the date we receive the transfer request to the date we make the
transfer.
For Contracts issued after May 2, 1999, we reserve the right to limit transfers
among the Variable Sub-Accounts if we determine, in our sole discretion, that
transfers by one or more Contract owners would be to the disadvantage of other
Contract owners. We may limit transfers by taking such steps as:
o imposing a minimum time period between each transfer,
o refusing to accept transfer requests of an agent acting under a power of
attorney on behalf of more than one Contract owner, or
o limiting the dollar amount that a Contract owner may transfer between the
Variable Sub-Accounts and the Fixed Account Options at any one time.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract owners.
We reserve the right to waive any transfer restrictions.
TRANSFERS DURING THE PAYOUT PHASE
During the Payout Phase, you may make transfers among the Variable Sub-Accounts
so as to change the relative weighting of the Variable Sub-Accounts on which
your variable income payments will be based. In addition, you will have a
limited ability to make transfers from the Variable Sub-Accounts to increase the
proportion of your income payments consisting of fixed income payments. You may
not, however, convert any portion of your right to receive fixed income payments
into variable income payments.
You may not make any transfers for the first 6 months after the Payout Start
Date. Thereafter, you may make transfers among the Variable Sub-Accounts or make
transfers from the Variable Sub-Accounts to increase the proportion of your
income payments consisting of fixed income payments. Your transfers must be at
least 6 months apart.
TELEPHONE TRANSFERS
You may make transfers by telephone by calling 1-800-654-2397 if you have on
file a completed authorization form. The cut off time for telephone transfer
requests is 3:00 p.m. Central time. In the event that the New York Stock
Exchange closes early, i.e., before 3:00 p.m. Central Time, or in the event that
the Exchange closes early for a period of time but then reopens for trading on
the same day, we will process telephone transfer requests as of the close of the
Exchange on that particular day. We will not accept telephone requests received
at any telephone number other than the number that appears in this paragraph or
received after the close of trading on the Exchange.
We may suspend, modify or terminate the telephone transfer privilege at any time
without notice.
We use procedures that we believe provide reasonable assurance that the
telephone transfers are genuine. For example, we tape telephone conversations
with persons purporting to authorize transfers and request identifying
information. Accordingly, we disclaim any liability for losses resulting from
allegedly unauthorized telephone transfers. However, if we do not take
reasonable steps to help ensure that a telephone authorization is valid, we may
be liable for such losses.
DOLLAR COST AVERAGING PROGRAM
Through our Dollar Cost Averaging Program, you may automatically transfer a set
amount every month (or other intervals we may offer) during the Accumulation
Phase from any Variable Sub-Account or the Dollar Cost Averaging Fixed Account
Option(s) to any Variable Sub-Account. Transfers made through dollar cost
averaging must be $100 or more.
The theory of dollar cost averaging is that if purchases of equal dollar amounts
are made at fluctuating prices, the aggregate average cost per unit will be less
than the average of the unit prices on the same purchase dates. However,
participation in this Program does not assure you of a greater profit from your
purchases under the Program nor will it prevent or necessarily reduce losses in
a declining market. Call or write us for information on how to enroll.
AUTOMATIC PORTFOLIO REBALANCING PROGRAM
Once you have allocated your money among the Variable Sub-Accounts, the
performance of each Sub-Account may cause a shift in the percentage you
allocated to each Sub-Account. If you select our Automatic Portfolio Rebalancing
Program, we will automatically rebalance the Contract Value in each Variable
Sub-Account and return it to the desired percentage allocations. We will not
include money you allocate to the Fixed Account Options in the Automatic
Portfolio Rebalancing Program.
We will rebalance your account each quarter (or other intervals that we may
offer) according to your instructions. We will transfer amounts among the
Variable Sub-Accounts to achieve the percentage allocations you specify. You can
change your allocations at any time by contacting us in writing or by telephone.
The new allocation will be effective with the first rebalancing that occurs
after we receive your request. We are not responsible for rebalancing that
occurs prior to receipt of your request.
Example:
Assume that you want your initial purchase payment split among 2
Variable Sub-Accounts. You want 40% to be in the High Yield Variable
Sub-Account and 60% to be in the Equity Growth Variable Sub-Account.
Over the next 2 months the bond market does very well while the stock
market performs poorly. At the end of the first quarter, the High Yield
Variable Sub-Account now represents 50% of your holdings because of its
increase in value. If you choose to have your holdings rebalanced
quarterly, on the first day of the next quarter, we would sell some of
your units in the High Yield Variable Sub-Account and use the money to
buy more units in the Equity Growth Variable Sub-Account so that the
percentage allocations would again be 40% and 60% respectively.
The Automatic Portfolio Rebalancing Program is available only during the
Accumulation Phase. The transfers made under the Program do not count towards
the 12 transfers you can make without paying a transfer fee, and are not subject
to a transfer fee.
Portfolio rebalancing is consistent with maintaining your allocation of
investments among market segments, although it is accomplished by reducing your
Contract Value allocated to the better performing segments.
<PAGE>
EXPENSES
- ------------------------------------------------------------------------------
As a Contract owner, you will bear, directly or indirectly, the charges and
expenses described below.
CONTRACT MAINTENANCE CHARGE
During the Accumulation Phase, on each Contract Anniversary, we will deduct a
$30 contract maintenance charge from your Contract Value invested in each
Variable Sub-Account in proportion to the amount invested. We also will deduct a
full contract maintenance charge if you withdraw your entire Contract Value.
During the Payout Phase, we will deduct the charge proportionately from each
income payment.
The charge is to compensate us for the cost of administering the Contracts and
the Variable Account. Maintenance costs include expenses we incur in billing and
collecting purchase payments; keeping records; processing death claims, cash
withdrawals, and policy changes; proxy statements; calculating Accumulation Unit
Values and income payments; and issuing reports to Contract owners and
regulatory agencies.
We cannot increase the charge.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge daily at an annual rate of 1.25%
of the average daily net assets you have invested in the Variable Sub-Accounts
(1.38% if you select either the Enhanced Death Benefit Option, the Performance
Death Benefit Option, or the Performance Income Benefit Option, and 1.49% if you
select the Performance Benefit Combination Option or the Death Benefit
Combination Option). The mortality and expense risk charge is for all the
insurance benefits available with your Contract (including our guarantee of
annuity rates and the death benefits), for certain expenses of the Contract, and
for assuming the risk (expense risk) that the current charges will not be
sufficient in the future to cover the cost of administering the Contract. If the
charges under the Contract are not sufficient, then we will bear the loss. We
charge an additional amount for the Death Benefit Options and the Performance
Income Benefit Option to compensate us for the additional risk that we accept by
providing these Options.
We guarantee the mortality and expense risk charge and we cannot increase it. We
assess the mortality and expense risk charge during both the Accumulation Phase
and the Payout Phase.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge daily at an annual rate of 0.10% of
the average daily net assets you have invested in the Variable Sub-Accounts. We
intend this charge to cover actual administrative expenses that exceed the
revenues from the contract maintenance charge. There is no necessary
relationship between the amount of administrative charge imposed on a given
Contract and the amount of expenses that may be attributed to that Contract. We
assess this charge each day during the Accumulation Phase and the Payout Phase.
TRANSFER FEE
We do not currently impose a fee upon transfers among the investment
alternatives. However, we reserve the right to charge $25 per transfer after the
12th transfer in each Contract Year. We will not charge a transfer fee on
transfers that are part of a Dollar Cost Averaging or Automatic Portfolio
Rebalancing Program.
WITHDRAWAL CHARGE
We may assess a withdrawal charge of up to 6% of the purchase payment(s) you
withdraw. This charge declines to 0% after the expiration of 6 years from the
day we receive the purchase payment being withdrawn. A schedule showing how the
withdrawal charge declines over the 6-year period is shown on page 7. During
each Contract Year after the first, you can withdraw up to 15% of the aggregate
amount of your purchase payments (excluding those made in the current Contract
Year) without paying the charge. Unused portions of this Free Withdrawal Amount
are not carried forward to future Contract Years.
We will deduct withdrawal charges, if applicable, from the amount paid, unless
you instruct otherwise. For purposes of the withdrawal charge, we will treat
withdrawals as coming from the oldest purchase payments first. However, for
federal income tax purposes, please note that withdrawals are considered to have
come first from earnings, which means you pay taxes on the earnings portion of
your withdrawal.
We do not apply a withdrawal charge in the following situations:
o on the Payout Start Date (a withdrawal charge may apply if you elect to
receive income payments for a specified period of less than 120 months);
and
o withdrawals taken to satisfy IRS minimum distribution rules for the
Contract.
We use the amounts obtained from the withdrawal charge to pay sales commissions
and other promotional or distribution expenses associated with marketing the
Contracts. To the extent that the withdrawal charge does not cover all sales
commissions and other promotional or distribution expenses, we may use any of
our corporate assets, including potential profit which may arise from the
mortality and expense risk charge or any other charges or fee described above,
to make up any difference.
Withdrawals also may be subject to tax penalties or income tax. You should
consult your own tax counsel or other tax advisers regarding any withdrawals.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for paying these taxes and
will deduct them from your Contract Value. Some of these taxes are due when the
Contract is issued, others are due when income payments begin or upon surrender.
Our current practice is not to charge anyone for these taxes until income
payments begin or when a total withdrawal occurs including payment upon death.
At our discretion, we may discontinue this practice and deduct premium taxes
from the purchase payments. Premium taxes generally range from 0% to 4%,
depending on the state.
At the Payout Start Date, if applicable, we deduct the charge for premium taxes
from each investment alternative in the proportion that the Contract owner's
value in the investment alternative bears to the total Contract Value.
DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES
We are not currently maintaining a provision for taxes. In the future, however,
we may establish a provision for taxes if we determine, in our sole discretion,
that we will incur a tax as a result of the operation of the Variable Account.
We will deduct for any taxes we incur as a result of the operation of the
Variable Account, whether or not we previously made a provision for taxes and
whether or not it was sufficient. Our status under the Internal Revenue Code is
briefly described in the Statement of Additional Information.
OTHER EXPENSES
Each Portfolio deducts advisory fees and other expenses from its assets. You
indirectly bear the charges and expenses of the Portfolios whose shares are held
by the Variable Sub-Accounts. These fees and expenses are described in the
accompanying prospectuses for the Funds. For a summary of current estimates of
those charges and expenses, see pages 7-10 above. We may receive compensation
from the investment advisers or administrators of the Portfolios for
administrative services we provide to the Portfolios.
<PAGE>
ACCESS TO YOUR MONEY
- ------------------------------------------------------------------------------
You can withdraw some or all of your Contract Value at any time during the
Accumulation Phase. Withdrawals also are available under limited circumstances
on or after the Payout Start Date. See "Income Plans" on page __.
You can withdraw money from the Variable Account and/or the Fixed Account
Options. The amount payable upon withdrawal is the Contract Value (or portion
thereof) next computed after we receive the request for a withdrawal at our
headquarters, less any withdrawal charges, contract maintenance charges, income
tax withholding, penalty tax, and any premium taxes. To complete a partial
withdrawal from the Variable Account, we will cancel Accumulation Units in an
amount equal to the withdrawal and any applicable charges and taxes. We will pay
withdrawals from the Variable Account within 7 days of receipt of the request,
subject to postponement in certain circumstances.
You must name the investment alternative from which you are taking the
withdrawal. If none is named, then the withdrawal request is incomplete and
cannot be honored. In general, you must withdraw at least $100 at a time. You
also may withdraw a lesser amount if you are withdrawing your entire interest in
a Variable Sub-Account.
Withdrawals also may be subject to income tax and a 10% penalty tax, as
described below.
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.
POSTPONEMENT OF PAYMENTS
We may postpone the payment of any amounts due from the Variable Account under
the Contract if:
1) The New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the Exchange is otherwise restricted;
2) An emergency exists as defined by the SEC; or
3) The SEC permits delay for your protection.
In addition, we may delay payments or transfers from the Fixed Account Options
for up to 6 months or shorter period if required by law. If we delay payment or
transfer for 30 days or more, we will pay interest as required by law. Any
interest would be payable from the date we receive the withdrawal request to the
date we make the payment or transfer.
SYSTEMATIC WITHDRAWAL PROGRAM
You may choose to receive systematic withdrawal payments on a monthly basis at
any time prior to the Payout Start Date. The minimum amount of each systematic
withdrawal is $100. We will deposit systematic withdrawal payments into the
Contract owner's bank account or Morgan Stanley Dean Witter Active Assets(TM)
Account. Please consult with your Morgan Stanley Dean Witter Financial Advisor
for details.
Depending on fluctuations in the value of the Variable Sub-Accounts and the
value of the Fixed Account Options, systematic withdrawals may reduce or even
exhaust the Contract Value. Income taxes may apply to systematic withdrawals.
Please consult your tax advisor before taking any withdrawal.
We may modify or suspend the Systematic Withdrawal Program and charge a
processing fee for the service. If we modify or suspend the Systematic
Withdrawal Program, existing systematic withdrawal payments will not be
affected.
MINIMUM CONTRACT VALUE
If your request for a partial withdrawal would reduce your Contract Value to
less than $500, we may treat it as a request to withdraw your entire Contract
Value. Your Contract will terminate if you withdraw all of your Contract Value.
We will, however, ask you to confirm your withdrawal request before terminating
your Contract. If we terminate your Contract, we will distribute to you its
Contract Value, less withdrawal and other applicable charges, and applicable
taxes.
<PAGE>
INCOME PAYMENTS
- ------------------------------------------------------------------------------
PAYOUT START DATE
The Payout Start Date is the day that money is applied to an Income Plan. The
Payout Start Date must be:
o at least 30 days after the Issue Date;
o the first day of a calendar month; and
o no later than the first day of the calendar month after the Annuitant's
90th birthday, or the 10th Contract Anniversary, if later.
You may change the Payout Start Date at any time by notifying us in writing of
the change at least 30 days before the scheduled Payout Start Date. Absent a
change, we will use the Payout Start Date stated in your Contract.
INCOME PLANS
An "Income Plan" is a series of payments on a scheduled basis to you or to
another person designated by you. You may choose and change your choice of
Income Plan until 30 days before the Payout Start Date. If you do not select an
Income Plan, we will make income payments in accordance with Income Plan 1.
After the Payout Start Date, you may not make withdrawals or change your choice
of Income Plan.
Three Income Plans are available under the Contract. Each is available to
provide:
o fixed income payments;
o variable income payments; or
o a combination of the two.
The three Income Plans are:
Income Plan 1 -- Life Income with Payments Guaranteed for 10 Years.
Under this plan, we make periodic income payments for at least as long
as the Annuitant lives. If the Annuitant dies before we have made all
of the guaranteed income payments, we will continue to pay the
remainder of the guaranteed income payments as required by the
Contract.
Income Plan 2 -- Joint and Survivor Life Income. Under this plan, we
make periodic income payments for as long as either the Annuitant or
the joint Annuitant is alive.
Income Plan 3 -- Guaranteed Payments for a Specified Period. Under
this plan, we make periodic income payments for the period you have
chosen. These payments do not depend on the Annuitant's life. A
withdrawal charge may apply if the specified period is less than 10
years. We will deduct the mortality and expense risk charge from the
assets of the Variable Account supporting this Income Plan even though
we may not bear any mortality risk.
The length of any guaranteed payment period under your selected Income Plan
generally will affect the dollar amounts of each income payment. As a general
rule, longer guarantee periods result in lower income payments, all other things
being equal. For example, if you choose an Income Plan with payments that depend
on the life of the Annuitant but with no minimum specified period for guaranteed
payments, the variable income payments generally will be greater than the income
payments made under the same Income Plan with a minimum specified period for
guaranteed payments.
We may make other Income Plans available including ones that you and we agree
upon. You may obtain information about them by writing or calling us.
If you choose Income Plan 1 or 2, or, if available, another Income Plan with
payments that continue for the life of the Annuitant or joint Annuitant, we may
require proof of age and sex of the Annuitant or joint Annuitant before starting
income payments, and proof that the Annuitant or joint Annuitant is still alive
before we make each payment. Please note that under such Income Plans, if you
elect to take no minimum guaranteed payments, it is possible that the payee
could receive only 1 income payment if the Annuitant and any joint Annuitant
both die before the second income payment, or only 2 income payments if they die
before the third income payment, and so on.
Generally, you may not make withdrawals after the Payout Start Date. One
exception to this rule applies if you are receiving variable income payments
that do not depend on the life of the Annuitant (such as under Income Plan 3).
In that case you may terminate the Variable Account portion of the income
payments at any time and receive a lump sum equal to the present value of the
remaining variable payments due. A withdrawal charge may apply. We also assess
applicable premium taxes against all income payments.
You may apply your Contract Value to an Income Plan. If you elected the
Performance Income Benefit Option, you may be able to apply an amount greater
than your Contract Value to an Income Plan. You must apply at least the Contract
Value in the Fixed Account Options on the Payout Start Date to fixed income
payments. If you wish to apply any portion of your Fixed Account Option balance
to provide variable income payments, you should plan ahead and transfer that
amount to the Variable Sub-Accounts prior to the Payout Start Date. If you do
not tell us how to allocate your Contract Value among fixed and variable income
payments, we will apply your Contract Value in the Variable Account to variable
income payments and your Contract Value in the Fixed Account Options to fixed
income payments.
We will apply your Contract Value, less applicable taxes, to your Income Plan on
the Payout Start Date. If the amount available to apply under an Income Plan is
less than $2,000, or not enough to provide an initial payment of at least $20,
and state law permits, we may:
o pay you the Contract Value, less any applicable taxes, in a lump sum
instead of the periodic payments you have chosen, or
o we may reduce the frequency of your payments so that each payment will be
at least $20.
VARIABLE INCOME PAYMENTS
The amount of your variable income payments depends upon the investment results
of the Variable Sub-Accounts you select, the premium taxes you pay, the age and
sex of the Annuitant, and the Income Plan you choose. We guarantee that the
payments will not be affected by (a) actual mortality experience and (b) the
amount of our administration expenses.
We cannot predict the total amount of your variable income payments. Your
variable income payments may be more or less than your total purchase payments
because (a) variable income payments vary with the investment results of the
underlying Portfolios, and (b) the Annuitant could live longer or shorter than
we expect based on the tables we use.
In calculating the amount of the periodic payments in the annuity tables in the
Contract, we assumed an annual investment rate of 3%. If the actual net
investment return of the Variable Sub-Accounts you choose is less than this
assumed investment rate, then the dollar amount of your variable income payments
will decrease. The dollar amount of your variable income payments will increase,
however, if the actual net investment return exceeds the assumed investment
rate. The dollar amount of the variable income payments stays level if the net
investment return equals the assumed investment rate. Please refer to the
Statement of Additional Information for more detailed information as to how we
determine variable income payments.
FIXED INCOME PAYMENTS
We guarantee income payment amounts derived from any Fixed Account Option for
the duration of the Income Plan. We calculate the fixed income payments by:
1) deducting any applicable premium tax; and
2) applying the resulting amount to the greater of (a) the appropriate
value from the income payment table in your Contract or (b) such other
value as we are offering at that time.
We may defer making fixed income payments for a period of up to 6 months or such
shorter time state law may require. If we defer payments for 30 days or more, we
will pay interest as required by law from the date we receive the withdrawal
request to the date we make payment.
PERFORMANCE INCOME BENEFIT
The Performance Income Benefit is an optional benefit that you may elect. On the
date we issue the rider for this benefit ("Rider Date"), the Performance Income
Benefit is equal to the Contract Value. On each Contract Anniversary, we will
recalculate your Performance Income Benefit to equal the greater of your
Contract 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 Contract Value just before the
withdrawal.
In the absence of any withdrawals or purchase payments, the Performance Income
Benefit will be the greatest of the Contract Value on the Rider Date and all
Contract Anniversary Contract Values on or prior to the Payout Start Date.
We will recalculate the Performance Income Benefit as described above until the
oldest Contract owner or Annuitant (if the Contract owner is not a natural
person) 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 youngest Annuitant's age is 80 or less on the date you
apply the Benefit, or
2) 5 years, if the youngest Annuitant's age is greater than 80 on the date you
apply the Benefit.
If your current Contract Value is higher than the Performance Income Benefit,
you can apply the Contract Value to any Income Plan. The Performance Income
Benefit may not be available in all states.
At present, we do not permit you to simultaneously elect the Performance Income
Benefit and the Death Benefit Combination Option. We do, however, reserve the
right to do so in the future.
CERTAIN EMPLOYEE BENEFIT PLANS
The Contracts offered by this prospectus contain income payment tables that
provide for different payments to men and women of the same age, except in
states that require unisex tables. We reserve the right to use income payment
tables that do not distinguish on the basis of sex to the extent permitted by
law. In certain employment-related situations, employers are required by law to
use the same income payment tables for men and women. Accordingly, if the
Contract is to be used in connection with an employment-related retirement or
benefit plan and we do not offer unisex annuity tables in your state, you should
consult with legal counsel as to whether the purchase of a Contract is
appropriate.
<PAGE>
DEATH BENEFITS
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We will pay a death benefit if, prior to the Payout Start Date:
1) any Contract owner dies, or
2) the Annuitant dies.
We will pay the death benefit to the new Contract owner as determined
immediately after the death. The new Contract owner would be a surviving
Contract owner or, if none, the Beneficiary. In the case of the death of an
Annuitant, we will pay the death benefit to the current Contract owner.
A request for payment of the death benefit must include "Due Proof of Death." We
will accept the following documentation as Due Proof of Death:
o a certified copy of a death certificate,
o a certified copy of a decree of a court of competent jurisdiction as to the
finding of death, or
o any other proof acceptable to us.
Death Benefit Amount
Prior to the Payout Start Date, the death benefit is equal to the greatest of:
1) the Contract Value as of the date we determine the death benefit, or
2) the sum of all purchase payments made less any amounts deducted in
connection with partial withdrawals (including any applicable withdrawal
charges or premium taxes), or
3) the Contract Value on the most recent Death Benefit Anniversary prior to
the date we determine the death benefit, plus any purchase payments and
less any amounts deducted in connection with any partial withdrawals since
that Death Benefit Anniversary.
A "Death Benefit Anniversary" is every 6th Contract Anniversary beginning with
the 6th Contract Anniversary. For example, the 6th, 12th and 18th Contract
Anniversaries are the first three Death Benefit Anniversaries.
We will determine the value of the death benefit as of the end of the Valuation
Date on which we receive a complete request for payment of the death benefit. If
we receive a request after 3 p.m. Central Time on a Valuation Date, we will
process the request as of the end of the following Valuation Date.
Death Benefit Options
The Enhanced Death Benefit, the Performance Death Benefit, the Performance
Benefit Combination, and the Death Benefit Combination Options are optional
benefits that you may elect. If the Contract owner is a natural person, these
Options apply only on the death of the Contract owner. If the Contract owner is
not a natural person, these Options apply only on the death of the Annuitant.
For Contracts with a death benefit option, the death benefit will be the greater
of (1) through (3) above, or (4) the death benefit option you selected. The
death benefit options may not be available in all states.
Enhanced Death Benefit Option. The Enhanced Death Benefit on the date we issue
the rider for this option ("Rider Date") is equal to the Contract Value. On the
first Contract anniversary after the Rider Date, the Enhanced Death Benefit is
equal to the Contract Value on the Rider Date plus interest at an annual rate of
5% per year for the portion of a year since the Rider Date. On each subsequent
Contract Anniversary, but not beyond the Contract Anniversary preceding the
oldest Contract owners' 75th birthdays, we will recalculate the Enhanced Death
Benefit as follows:
First, we multiply the Enhanced Death Benefit as of the prior Contract
Anniversary by 1.05. This results in an increase of 5% annually. Further, for
all ages, we will adjust the Enhanced Death Benefit on each Contract
Anniversary, or upon receipt of a death claim, as follows:
o We will reduce the Enhanced Death Benefit by the percentage of any Contract
Value withdrawn since the prior Contract Anniversary; and
o We will increase the Enhanced Death Benefit by any additional purchase
payments since the prior Contract Anniversary.
Performance Death Benefit Option. The Performance Death Benefit on the date we
issue the rider for this option ("Rider Date") is equal to the Contract Value.
On each Contract Anniversary, we will recalculate your Performance Death Benefit
to equal the greater of your Contract Value on that date, or the most recently
calculated Performance Death Benefit. We also will 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 before the
withdrawal, multiplied by (ii) the ratio of the withdrawal amount to the
Contract Value just before the withdrawal. In the absence of any withdrawals or
purchase payments, the Performance Death Benefit will be the greatest of the
Contract Value on the Rider Date and all Contract Anniversary Contract Values on
or before the date we calculate the death benefit.
We will recalculate the Performance Death Benefit as described above until the
oldest Contract owner (the Annuitant, if the owner is not a natural person),
attains age 85. After age 85, we will recalculate the Performance Death Benefit
only to reflect additional purchase payments and withdrawals.
Death Benefit Combination Option. If you select the Death Benefit Combination
Option, the death benefit payable will be the greater of the death benefits
provided by the Enhanced Death Benefit or the Performance Death Benefit (both
calculated until the oldest Contract owner, or Annuitant if the Contract owner
is a non-natural person, attains age 85). After age 85, the death benefit
payable will be adjusted to reflect purchase payments and withdrawals to the
extent described under "Enhanced Death Benefit Option" and "Performance Death
Benefit Option" above. We sometimes refer to the Death Benefit Combination
Option as the "Best of the Best" death benefit option.
Performance Benefit Combination Option. You may elect the Performance Death
Benefit in combination with the Performance Income Benefit. We call this the
"Performance Benefit Combination Option."
None of the Enhanced Death Benefit, the Performance Death Benefit, the
Performance Benefit Combination, or the Death Benefit Combination will ever be
greater than the maximum death benefit allowed by any nonforfeiture laws which
govern the Contract.
Death Benefit Payments
If the new Contract owner is a natural person, the new Contract owner may elect
to:
1) receive the death benefit in a lump sum, or
2) apply the death benefit to an Income Plan. Payments from the Income Plan
must begin within 1 year of the date of death and must be payable
throughout:
o the life of the new Contract owner; or
o for a guaranteed number of payments from 5 to 30 years, but not to
exceed the life expectancy of the Contract owner.
Options 1 and 2 above are only available if the new Contract owner elects one of
these options within 180 days of the date of death. Otherwise, the new Contract
owner will receive the Settlement Value. The "Settlement Value" is the Contract
Value, less any applicable withdrawal charge and premium tax. The Settlement
Value paid will be the Settlement Value next computed on or after the requested
distribution date for payment, or on the mandatory distribution date of 5 years
after the date of your death, whichever is earlier. We are currently waiving the
180 day limit, but we reserve the right to enforce the limitation in the future.
In any event, the entire value of the Contract must be distributed within 5
years after the date of death unless an Income Plan is elected or a surviving
spouse continues the Contract in accordance with the provisions described below.
If the new Contract owner is your spouse, then he or she may elect one of the
options listed above or may continue the Contract in the Accumulation Phase as
if the death had not occurred. The Contract may only be continued once. If the
surviving spouse continues the Contract in the Accumulation Phase, the surviving
spouse may make a single withdrawal of any amount within 1 year of the date of
death without incurring a withdrawal charge. If the surviving spouse is under
age 59 1/2, a 10% penalty tax may apply to the withdrawal.
If the new Contract owner is corporation, trust, or other non-natural person,
then the new Contract owner may elect, within 180 days of your death, to receive
the death benefit in lump sum or may elect to receive the Settlement Value in a
lump sum within 5 years of death. We are currently waiving the 180 day limit,
but we reserve the right to enforce the limitation in the future.
Death of Annuitant. If any Annuitant who is not also the Contract owner dies
prior to the Payout Start Date, the Contract owner must elect one of the
applicable options described below.
If the Contract owner is a natural person, the Contract owner may elect to
continue the Contract as if the death had not occurred, or, if we receive Due
Proof of Death within 180 days of the date of the Annuitant's death, the
Contract owner may choose to:
1) receive the death benefit in a lump sum; or
2) apply the death benefit to an Income Plan that must begin within 1
year of the date of death and must be for a guaranteed number of
payments for a period from 5 to 30 years but not to exceed the life
expectancy of the Contract owner.
If the Contract owner elects to continue the Contract or to apply the death
benefit to an Income Plan, the new Annuitant will be the youngest Contract
owner, unless the Contract owner names a different Annuitant.
If the Contract owner is a non-natural person, the non-natural Contract owner
may elect, within 180 days of the Annuitant's date of death, to receive the
death benefit in a lump sum or may elect to receive the Settlement Value payable
in a lump sum within 5 years of the Annuitant's date of death. If the
non-natural Contract owner does not make one of the above described elections,
the Settlement Value must be withdrawn by the non-natural Contract owner on or
before the mandatory distribution date 5 years after the Annuitant's death.
We are currently waiving the 180 day limit, but we reserve the right to enforce
the limitation in the future.
<PAGE>
MORE INFORMATION
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NORTHBROOK
Northbrook is the issuer of the Contract. Northbrook is an Arizona stock life
insurance company organized in 1978. Northbrook is currently licensed to operate
in all states (except New York), the District of Columbia, and Puerto Rico. We
intend to offer the Contract in those jurisdictions in which we are licensed.
Our headquarters are located at 3100 Sanders Road, Northbrook, Illinois, 60062.
Northbrook is a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), an Illinois stock life insurance company. Allstate Life is a
wholly owned subsidiary of Allstate Insurance Company, an Illinois stock
property-liability insurance company. All of the outstanding capital stock of
Allstate Insurance Company is owned by The Allstate Corporation.
Northbrook and Allstate Life entered into a reinsurance agreement effective
December 31, 1987. Under the reinsurance agreement, Allstate Life reinsures all
of Northbrook's liabilities under the Contracts. The reinsurance agreement
provides us with financial backing from Allstate Life. However, it does not
create a direct contractual relationship between Allstate Life and you. In other
words, the obligations of Allstate Life under the reinsurance agreement are to
Northbrook; Northbrook remains the sole obligor under the Contract to you.
Several independent rating agencies regularly evaluate life insurers'
claims-paying ability, quality of investments, and overall stability. A.M. Best
Company assigns A+ (Superior) to Allstate Life which automatically reinsures all
net business of Northbrook. A.M. Best Company also assigns Northbrook the rating
of A+(r) because Northbrook automatically reinsures all net business with
Allstate Life. Standard & Poor's Insurance Rating Services assigns an AA+ (Very
Strong) financial strength rating and Moody's assigns an Aa2 (Excellent)
financial strength rating to Northbrook. Northbrook shares the same ratings of
its parent, Allstate Life. These ratings do not reflect the investment
performance of the Variable Account. We may from time to time advertise these
ratings in our sales literature.
THE VARIABLE ACCOUNT
Northbrook established the Northbrook Variable Annuity Account II on May 8,
1990. We have registered the Variable Account with the SEC as a unit investment
trust. The SEC does not supervise the management of the Variable Account or
Northbrook.
We own the assets of the Variable Account. The Variable Account is a segregated
asset account under Arizona insurance law. That means we account for the
Variable Account's income, gains, and losses separately from the results of our
other operations. It also means that only the assets of the Variable Account
that are in excess of the reserves and other Contract liabilities with respect
to the Variable Account are subject to liabilities relating to our other
operations. Our obligations arising under the Contracts are general corporate
obligations of Northbrook.
The Variable Account consists of 21 Variable Sub-Accounts, each of which invests
in a corresponding Portfolio. We may add new Variable Sub-Accounts or eliminate
one or more of them, if we believe marketing, tax, or investment conditions so
warrant. We do not guarantee the investment performance of the Variable Account,
its Sub-Accounts or the Portfolios. We may use the Variable Account to fund our
other annuity contracts. We will account separately for each type of annuity
contract funded by the Variable Account.
THE PORTFOLIOS
Dividends and Capital Gain Distributions. We automatically reinvest all
dividends and capital gains distributions from the Portfolios in shares of the
distributing Portfolio at their net asset value.
Voting Privileges. As a general matter, you do not have a direct right to vote
the shares of the Portfolios held by the Variable Sub-Accounts to which you have
allocated your Contract Value. Under current law, however, you are entitled to
give us instructions on how to vote those shares on certain matters. Based on
our present view of the law, we will vote the shares of the Portfolios that we
hold directly or indirectly through the Variable Account in accordance with
instructions that we receive from Contract owners entitled to give such
instructions.
As a general rule, before the Payout Start Date, the Contract owner or anyone
with a voting interest is the person entitled to give voting instructions. The
number of shares that a person has a right to instruct will be determined by
dividing the Contract Value allocated to the applicable Variable Sub-Account by
the net asset value per share of the corresponding Portfolio as of the record
date of the meeting. After the Payout Start Date the person receiving income
payments has the voting interest. The payee's number of votes will be determined
by dividing the reserves for such Contract allocated to the applicable Variable
Sub-Account by the net asset value per share of the corresponding Portfolio as
of the record date of the meeting. The votes decrease as income payments are
made and as the reserves for the Contract decrease.
We will vote shares attributable to Contracts for which we have not received
instructions, as well as shares attributable to us, in the same proportion as we
vote shares for which we have received instructions, unless we determine that we
may vote such shares in our own discretion. We will apply voting instructions to
abstain on any item to be voted upon on a pro rata basis to reduce the votes
eligible to be cast.
We reserve the right to vote Portfolio shares as we see fit without regard to
voting instructions to the extent permitted by law. If we disregard voting
instructions, we will include a summary of that action and our reasons for that
action in the next semi-annual financial report we send to you.
Changes in Portfolios. We reserve the right, subject to any applicable law, to
make additions to, deletions from or substitutions for the Portfolio shares held
by any Variable Sub-Account. If the shares of any of the Portfolios are no
longer available for investment by the Variable Account or if, in our judgment,
further investment in such shares is no longer desirable in view of the purposes
of the Contract, we may eliminate that Portfolio and substitute shares of
another eligible investment fund. Any substitution of securities will comply
with the requirements of the Investment Company Act of 1940. We also may add new
Variable Sub-Accounts that invest in additional mutual funds. We will notify you
in advance of any change.
Conflicts of Interest. Certain of the Portfolios sell their shares to separate
accounts underlying both variable life insurance and variable annuity contracts.
It is conceivable that in the future it may be unfavorable for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the same Portfolio. The boards of directors or trustees of these Portfolios
monitor for possible conflicts among separate accounts buying shares of the
Portfolios. Conflicts could develop for a variety of reasons. For example,
differences in treatment under tax and other laws or the failure by a separate
account to comply with such laws could cause a conflict. To eliminate a
conflict, a Portfolio's board of directors or trustees may require a separate
account to withdraw its participation in a Portfolio. A Portfolio's net asset
value could decrease if it had to sell investment securities to pay redemption
proceeds to a separate account withdrawing because of a conflict.
THE CONTRACT
The Contracts are distributed exclusively by their principal underwriter, Dean
Witter Reynolds Inc. ("Dean Witter"). Dean Witter, a wholly owned subsidiary of
Morgan Stanley Dean Witter & Co., 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.
We may pay up to a maximum sales commission of 6.0% of purchase payments and an
annual sales administration expense of up to 0.125% of the average net assets of
the Fixed Account to Dean Witter. In addition, Dean Witter may pay annually to
its representatives, from its profits, a persistency bonus that will take into
account, among other things, the length of time purchase payments have been held
under the Contract and Contract Values.
Administration. We have primary responsibility for all administration of the
Contracts and the Variable Account. We provide the following administrative
services, among others:
o issuance of the Contracts;
o maintenance of Contract owner records;
o Contract owner services;
o calculation of unit values;
o maintenance of the Variable Account; and
o preparation of Contract owner reports.
We will send you Contract statements at least annually prior to the Payout Start
Date. You should notify us promptly in writing of any address change. You should
read your statements and confirmations carefully and verify their accuracy. You
should contact us promptly if you have a question about a periodic statement. We
will investigate all complaints and make any necessary adjustments
retroactively, but you must notify us of a potential error within a reasonable
time after the date of the questioned statement. If you wait too long, we will
make the adjustment as of the date that we receive notice of the potential
error.
We also will provide you with additional periodic and other reports, information
and prospectuses as may be required by federal securities laws.
QUALIFIED PLANS
If you use the Contract with a qualified plan, the plan may impose different or
additional conditions or limitations on withdrawals, waivers of withdrawal
charges, death benefits, Payout Start Dates, income payments, and other Contract
features. In addition, adverse tax consequences may result if qualified plan
limits on distributions and other conditions are not met. Please consult your
qualified plan administrator for more information.
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds, Washington, D.C., has advised Northbrook on
certain federal securities law matters. All matters of state law pertaining to
the Contracts, including the validity of the Contracts and Northbrook's right to
issue such Contracts under state insurance law, have been passed upon by Michael
J. Velotta, General Counsel of Northbrook.
YEAR 2000
Northbrook is heavily dependent upon complex computer systems for all phases of
its operations, including customer service, and policy and contract
administration. Since many of Northbrook's older computer software programs
recognize only the last two digits of the year in any date, some software may
fail to operate properly in or after the year 1999, if the software is not
reprogrammed or replaced ("Year 2000 Issue"). Northbrook believes that many of
its counterparties and suppliers also have Year 2000 Issues which could affect
Northbrook. In 1995, Allstate Insurance Company 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 Northbrook actively working with its major external counterparties
and suppliers to assess their compliance efforts and Northbrook's exposure to
them. Northbrook presently believes that it will resolve the Year 2000 Issue in
a timely manner, and the financial impact will not materially affect its results
of operations, liquidity or financial position. Year 2000 costs are and will be
expensed as incurred.
<PAGE>
TAXES
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The following discussion is general and is not intended as tax advice.
Northbrook 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 your individual circumstances.
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, you are not taxed on increases in the Contract Value
until a distribution occurs. This rule applies only where:
1) the Contract owner is a natural person,
2) the investments of the Variable Account are "adequately diversified"
according to Treasury Department regulations, and
3) Northbrook is considered the owner of the Variable Account assets for
federal income tax purposes.
Non-natural Owners. As a general rule, annuity contracts owned by non-natural
persons such as corporations, trusts, or other entities are not treated as
annuity contracts for federal income tax purposes. The income on such contracts
is taxed as ordinary income received or accrued by the owner during the taxable
year. Please see the Statement of Additional Information for a discussion of
several exceptions to the general rule for Contracts owned by non-natural
persons.
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" consistent with standards under Treasury Department
regulations. If the investments in the Variable Account are not adequately
diversified, the Contract will not be treated as an annuity contract for federal
income tax purposes. As a result, the income on the Contract will be taxed as
ordinary income received or accrued by the Contract owner during the taxable
year. Although Northbrook does not have control over the Portfolios or their
investments, we expect the Portfolios to meet the diversification requirements.
Ownership Treatment. The IRS has stated that you will be considered the owner of
Variable Account assets if you possess 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 the regulations do not provide guidance concerning circumstances in which
investor control of separate account investments may cause an investor to be
treated as the owner of the separate account. The Treasury Department also
stated that future guidance would be issued regarding the extent that owners
could direct sub-account investments without being treated as owners of the
underlying assets of the separate account.
Your rights under the Contract are different than those described by the IRS in
rulings in which it found that contract owners were not owners of separate
account assets. For example, you have the choice to allocate premiums and
Contract Values among more investment alternatives. Also, you may be able to
transfer among investment alternatives more frequently than in such rulings.
These differences could result in you being treated as the owner of the Variable
Account. If this occurs, income and gain from the Variable Account assets would
be includible in your gross income. Northbrook does not know what standards will
be set forth in any regulations or rulings which the Treasury Department may
issue. It is possible that future standards announced by the Treasury Department
could adversely affect the tax treatment of your Contract. We reserve the right
to modify the Contract as necessary to attempt to prevent you from being
considered the federal tax owner of the assets of the Variable Account. However,
we make no guarantee that such modification to the Contract will be successful.
Taxation of Partial and Full Withdrawals. If you make 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 paid for the
Contract minus any amounts previously received from the Contract if such amounts
were properly excluded from your gross income. If you make 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, is excluded from your income. If you make 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.
"Nonqualified distributions" from Roth IRAs are treated as made from
contributions first and are included in gross income only to the extent that
distributions exceed contributions. "Qualified distributions" from Roth IRAs are
not included in gross income. "Qualified distributions" are any distributions
made more than 5 taxable years after the taxable year of the first contribution
to any Roth IRA and which are:
o made on or after the date the individual attains age 59 1/2,
o made to a Beneficiary after the Contract owner's death,
o attributable to the Contract owner being disabled, or
o for a first time home purchase (first time home purchases are subject
to a lifetime limit of $10,000).
If you transfer a non-Qualified Contract without full and adequate consideration
to a person other than your spouse (or to a former spouse incident to a
divorce), you will be taxed on the difference between the Contract Value and the
investment in the Contract at the time of transfer. Except for certain Qualified
Contracts, any amount you receive 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 annuity
payments received from a non-Qualified Contract provides for the return of your
investment in the Contract in equal tax-free amounts over the payment period.
The balance of each payment received is taxable. For 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. If you elect 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. The annuity payments will be fully taxable
after the total amount of the investment in the Contract is excluded using these
ratios. If you die, and annuity payments cease before the total amount of the
investment in the Contract is recovered, the unrecovered amount will be allowed
as a deduction for your last taxable year.
Taxation of Annuity Death Benefits. Death of a Contract owner, or death of the
Annuitant if the Contract is owned by a non-natural person, will cause a
distribution of death benefits from a Contract. Generally, such amounts are
included 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. Please see the Statement of
Additional Information for more detail on distribution at death
requirements.
Penalty Tax on Premature Distributions. A 10% penalty tax applies to the taxable
amount of any premature distribution from a non-Qualified Contract. The penalty
tax generally applies to any distribution made prior to the date you attain age
59 1/2.
However, no penalty tax is incurred on distributions:
1) made on or after the date the Contract owner attains age 59 1/2;
2) made as a result of the Contract owner's death or disability;
3) made in substantially equal periodic payments over the Contract
owner's life or life expectancy,
4) made under an immediate annuity, or
5) attributable to investment in the Contract before August 14, 1982.
You should consult a competent tax advisor to determine if any other exceptions
to the penalty apply to your situation. Similar exceptions may apply to
distributions from Qualified Contracts.
Aggregation of Annuity Contracts. All non-qualified deferred annuity contracts
issued by Northbrook (or its affiliates) to the same Contract 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
Contracts may be used as investments with certain qualified plans such as:
o Individual Retirement Annuities or Accounts (IRAs) under Section 408 of the
Internal Revenue Code ("Code");
o Roth IRAs under Section 408A of the Code;
o Simplified Employee Pension Plans under Section 408(k) of the Code;
o Savings Incentive Match Plans for Employees (SIMPLE) Plans under Section
408(p) of the Code;
o Tax Sheltered Annuities under Section 403(b) of the Code;
o Corporate and Self Employed Pension and Profit Sharing Plans; and
o State and Local Government and Tax-Exempt Organization Deferred
Compensation Plans.
In the case of certain 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
tax-deferred retirement savings plans for employees of certain non-profit and
educational organizations. Under Section 403(b), any 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:
1) on or after the date of employee
o attains age 59 1/2,
o separates from service,
o dies,
o becomes disabled, or
2) on account of hardship (earnings on salary reduction contributions may
not be distributed on the account of hardship).
These limitations do not apply to withdrawals where Northbrook is directed to
transfer some or all of the Contract Value to another 403(b) plan.
Income Tax Withholding
Northbrook is required to withhold federal income tax at a rate of 20% on all
"eligible rollover distributions" unless you elect to make a "direct rollover"
of such amounts to an IRA or eligible retirement plan. 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,
3) over the life (joint lives) of the participant (and beneficiary).
Northbrook may be required to withhold federal and state income taxes on any
distributions from non-Qualified Contracts or Qualified Contracts that are not
eligible rollover distributions, unless you notify us of your election to not
have taxes withheld.
<PAGE>
PERFORMANCE INFORMATION
- ------------------------------------------------------------------------------
We may advertise the performance of the Variable Sub-Accounts, including yield
and total return information. Yield refers to the income generated by an
investment in a Variable Sub-Account over a specified period. Total return
represents the change, over a specified period of time, in the value of an
investment in a Variable Sub-Account after reinvesting all income distributions.
All performance advertisements will include, as applicable, standardized yield
and total return figures that reflect the deduction of insurance charges, the
contract maintenance charge, and withdrawal charge. Performance advertisements
also may include total return figures that reflect the deduction of insurance
charges, but not the contract maintenance or withdrawal charges. The deduction
of such charges would reduce the performance shown. In addition, performance
advertisements may include aggregate, average, year-by-year, or other types of
total return figures.
Performance information for periods prior to the inception date of the Variable
Sub-Accounts will be based on the historical performance of the corresponding
Portfolios for the periods beginning with the inception dates of the Portfolios
and adjusted to reflect current Contract expenses. You should not interpret
these figures to reflect actual historical performance of the Variable Account.
We may include in advertising and sales materials tax deferred compounding
charts and other hypothetical illustrations that compare currently taxable and
tax deferred investment programs based on selected tax brackets. Our
advertisements also may compare the performance of our Variable Sub-Accounts
with: (a) certain unmanaged market indices, including but not limited to the Dow
Jones Industrial Average, the Standard & Poor's 500, and the Shearson Lehman
Bond Index; and/or (b) other management investment companies with investment
objectives similar to the underlying funds being compared. In addition, our
advertisements may include the performance ranking assigned by various
publications, including the Wall Street Journal, Forbes, Fortune, Money,
Barron's, Business Week, USA Today, and statistical services, including Lipper
Analytical Services Mutual Fund Survey, Lipper Annuity and Closed End Survey,
the Variable Annuity Research Data Survey, and SEI.
<PAGE>
APPENDIX A
Accumulation Unit Values and Number of Accumulation Units Outstanding
for Each Variable Sub-Account Since Inception
<TABLE>
<CAPTION>
for the Years Beginning January 1* and Ending December 31,
VARIABLE SUB-ACCOUNT 1990 1991 1992 1993 1994 1995
- -------------------- ---- ---- ---- ---- ---- ----
MONEY MARKET
<S> <C> <C> <C> <C> <C> <C>
Accumulation Unit Value, Beginning of $10.000 $10.111 $10.549 $10.765 $10.913 $11.178
Period
Accumulation Unit Value, End of Period $10.111 $10.549 $10.765 $10.913 $11.178 $11.653
Number of Units Outstanding, End of 345,667 1,864,548 3,481,984 7,643,579 19,047,342 17,483,665
Period
QUALITY INCOME PLUS
Accumulation Unit Value, Beginning of $10.000 $10.403 $12.163 $12.993 $14.487 $13.344
Period
Accumulation Unit Value, End of Period $10.403 $12.163 $12.993 $14.487 $13.344 $16.373
Number of Units Outstanding, End of 175,839 1,221,348 6,701,534 26,314,453 25,348,646 26,735,500
Period
HIGH YIELD
Accumulation Unit Value, Beginning of $10.000 $8.932 $13.982 $16.336 $20.022 $19.264
Period
Accumulation Unit Value, End of Period $8.932 $13.982 $16.336 $20.022 $19.264 $21.859
Number of Units Outstanding, End of 1,574 64,097 377,434 2,451,231 4,082,485 5,536,230
Period
UTILITIES
Accumulation Unit Value, Beginning of $10.000 $10.471 $12.454 $13.840 $15.798 $14.180
Period
Accumulation Unit Value, End of Period $10.471 $12.454 $13.840 $15.798 $14.180 $17.999
Number of Units Outstanding, End of 130,114 1,615,460 6,626,508 25,354,331 22,552,568 22,626,178
Period
INCOME BUILDER
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
DIVIDEND GROWTH
Accumulation Unit Value, Beginning of $10.000 $11.037 $13.911 $14.844 $16.746 $15.981
Period
Accumulation Unit Value, End of Period $11.037 $13.911 $14.844 $16.746 $15.981 $21.505
Number of Units Outstanding, End of 159,555 2,004,718 7,123,073 21,941,369 28,980,558 33,515,201
Period
CAPITAL GROWTH
Accumulation Unit Value, Beginning of -- $10.000 $12.697 $12.731 $11.682 $11.379
Period
Accumulation Unit Value, End of Period -- $12.697 $12.731 $11.682 $11.379 $14.923
Number of Units Outstanding, End of -- 901,617 2,655,336 3,556,779 3,411,788 3,917,752
Period
GLOBAL DIVIDEND GROWTH
Accumulation Unit Value, Beginning of -- -- -- -- $10.000 $9.912
Period
Accumulation Unit Value, End of Period -- -- -- -- $9.912 $11.935
Number of Units Outstanding, End of -- -- -- -- 12,306,690 15,325,898
Period
EUROPEAN GROWTH
Accumulation Unit Value, Beginning of -- $10.000 $10.020 $10.280 $14.290 $15.278
Period
Accumulation Unit Value, End of Period -- $10.020 $10.280 $14.290 $15.278 $18.976
Number of Units Outstanding, End of -- 248,922 719,495 4,448,126 8,491,681 8,587,679
Period
PACIFIC GROWTH
Accumulation Unit Value, Beginning of -- -- -- -- $10.000 $9.221
Period
Accumulation Unit Value, End of Period -- -- -- -- $9.221 $9.619
Number of Units Outstanding, End of -- -- -- -- 7,080,863 8,865,898
Period
EQUITY
Accumulation Unit Value, Beginning of $10.000 $10.706 $16.799 $16.599 $19.604 $18.392
Period
Accumulation Unit Value, End of Period $10.706 $16.799 $16.599 $19.604 $18.392 $25.864
Number of Units Outstanding, End of 15,701 369,133 1,417,732 5,917,819 8,914,107 10,835,413
Period
S&P 500 INDEX
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
COMPETITIVE EDGE "BEST IDEAS"
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
STRATEGIST
Accumulation Unit Value, Beginning of $10.000 $10.483 $13.266 $14.035 $15.286 $15.675
Period
Accumulation Unit Value, End of Period $10.483 $13.266 $14.035 $15.286 $15.675 $16.919
Number of Units Outstanding, End of 5,854 778,440 3,385,842 11,837,077 18,218,900 17,717,645
Period
EQUITY GROWTH
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
U.S. REAL ESTATE
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
INTERNATIONAL MAGNUM
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
EMERGING MARKETS EQUITY
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
EMERGING GROWTH
Accumulation Unit Value, Beginning of -- -- -- -- -- --
Period
Accumulation Unit Value, End of Period -- -- -- -- -- --
Number of Units Outstanding, End of -- -- -- -- -- --
Period
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
MONEY MARKET
<S> <C> <C> <C>
Accumulation Unit Value, Beginning of $11.653 $12.084 $12.546
Period
Accumulation Unit Value, End of Period $12.084 $12.546 12.979
Number of Units Outstanding, End of 21,476,904 18,625,330 21,159,031
Period
QUALITY INCOME PLUS
Accumulation Unit Value, Beginning of $16.373 $16.404 $17.983
Period
Accumulation Unit Value, End of Period $16.404 $17.983 $19.265
Number of Units Outstanding, End of 24,233,104 20,839,536 20,312,197
Period
HIGH YIELD
Accumulation Unit Value, Beginning of $21.859 $24.148 $26.652
Period
Accumulation Unit Value, End of Period $24.148 $26.652 $24.658
Number of Units Outstanding, End of 7,988,916 8,797,892 8,199,142
Period
UTILITIES
Accumulation Unit Value, Beginning of $17.999 $19.298 $24.208
Period
Accumulation Unit Value, End of Period $19.298 $24.208 $29.461
Number of Units Outstanding, End of 19,259,329 15,172,387 13,541,542
Period
INCOME BUILDER
Accumulation Unit Value, Beginning of -- $10.000 $12.084
Period
Accumulation Unit Value, End of Period -- $12.084 $12.297
Number of Units Outstanding, End of -- 2,364,583 2,979,980
Period
DIVIDEND GROWTH
Accumulation Unit Value, Beginning of $21.505 $26.298 $32.590
Period
Accumulation Unit Value, End of Period $26.298 $32.590 $36.725
Number of Units Outstanding, End of 38,902,776 39,673,542 36,334,173
Period
CAPITAL GROWTH
Accumulation Unit Value, Beginning of $14.923 $16.421 $20.177
Period
Accumulation Unit Value, End of Period $16.421 $20.177 $23.806
Number of Units Outstanding, End of 4,277,823 4,469,790 3,662,958
Period
GLOBAL DIVIDEND GROWTH
Accumulation Unit Value, Beginning of $11.935 $13.845 $15.304
Period
Accumulation Unit Value, End of Period $13.845 $15.304 $16.991
Number of Units Outstanding, End of 19,847,332 21,662,482 17,634,472
Period
EUROPEAN GROWTH
Accumulation Unit Value, Beginning of $18.976 $24.335 $27.870
Period
Accumulation Unit Value, End of Period $24.335 $27.870 $34.083
Number of Units Outstanding, End of 10,006,937 9,765,284 8,967,887
Period
PACIFIC GROWTH
Accumulation Unit Value, Beginning of $9.619 $9.858 $6.059
Period
Accumulation Unit Value, End of Period $9.858 $6.059 $5.356
Number of Units Outstanding, End of 11,810,540 8,191,656 6,325,967
Period
EQUITY
Accumulation Unit Value, Beginning of $25.864 $28.669 $38.873
Period
Accumulation Unit Value, End of Period $28.669 $38.873 $50.025
Number of Units Outstanding, End of 13,438,192 13,511,972 12,608,741
Period
S&P 500 INDEX
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $11.126
Number of Units Outstanding, End of -- -- 1,722,709
Period
COMPETITIVE EDGE "BEST IDEAS"
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $9.728
Number of Units Outstanding, End of -- -- 1,432,745
Period
STRATEGIST
Accumulation Unit Value, Beginning of $16.919 $19.199 $21.540
Period
Accumulation Unit Value, End of Period $19.199 $21.540 $26.875
Number of Units Outstanding, End of 17,132,441 16,153,105 14,574,012
Period
EQUITY GROWTH
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $10.104
Number of Units Outstanding, End of -- -- 822,038
Period
U.S. REAL ESTATE
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $9.062
Number of Units Outstanding, End of -- -- 79,729
Period
INTERNATIONAL MAGNUM
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $9.790
Number of Units Outstanding, End of -- -- 136,628
Period
EMERGING MARKETS EQUITY
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $7.102
Number of Units Outstanding, End of -- -- 82,002
Period
EMERGING GROWTH
Accumulation Unit Value, Beginning of -- -- $10.000
Period
Accumulation Unit Value, End of Period -- -- $11.997
Number of Units Outstanding, End of -- -- 254,704
Period
</TABLE>
- -----------
* The Money Market, Quality Income Plus, High Yield, Utilities, Dividend Growth,
Equity and Strategist Sub-Accounts commenced operations on October 25, 1990. The
Capital Growth and European Growth Sub-Accounts commenced operations on March 1,
1991. The Global Dividend Growth and Pacific Growth Sub-Accounts commenced
operations on February 23, 1994. The Income Builder and the former Capital
Appreciation Sub-Accounts commenced operations on January 21, 1997. As of the
close of business on March 19, 1999, the former Capital Appreciation Sub-Account
merged with and into the Equity Sub-Account. The Equity Growth, International
Magnum, Emerging Markets, and Emerging Growth Sub-Accounts commenced operations
on March 16, 1998. The U.S. Real Estate, S&P 500 Index, and Competitive Edge
"Best Ideas' Sub-Accounts commenced operations on May 18, 1998. The Accumulation
Unit Value for each of these Sub-Accounts was initially set at $10.000. The
Accumulation Unit Values in this table reflect a mortality and expense risk
charge of 1.25% and an administrative expense charge of 0.10%.
<PAGE>
<TABLE>
<CAPTION>
Accumulation Unit Values and Number of Accumulation Units Outstanding for Each Sub-Account
Since Inception
for Contracts with the Enhanced Death Benefit Option, the Performance Death Benefit Option
or the Performance Income Benefit Option
For the Years Beginning January 1* and Ending December
31,
1995 1996 1997 1998
---- ---- ---- ----
VARIABLE SUB-ACCOUNT
<S> <C> <C> <C> <C>
MONEY MARKET
- ---------------------------------------------------
- ---------------------------------------------------
Accumulation Unit Value, Beginning of Period $11.579 $11.651 $12.065 $12.511
- --------------------------------------------------
Accumulation Unit Value, End of Period $11.651 $12.065 $12.511 $12.963
- --------------------------------------------------
Number of Units Outstanding, End of Period 511,096 3,424,292 5,406,175 8,938,860
- ---------------------------------------------------
QUALITY INCOME PLUS
- ---------------------------------------------------
Accumulation Unit Value, Beginning of Period $15.746 $16.370 $16.379 $17.932
- --------------------------------------------------
Accumulation Unit Value, End of Period $16.370 $16.379 $17.932 $19.200
- --------------------------------------------------
Number of Units Outstanding, End of Period 142,004 1,095,796 3,843,253 5,109,593
- ---------------------------------------------------
HIGH YIELD
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $21.462 $21.855 $24.112 $26.577
- --------------------------------------------------
Accumulation Unit Value, End of Period $21.855 $24.112 $26.577 $24.563
- --------------------------------------------------
Number of Units Outstanding, End of Period 66,987 1,462,866 8,797,892 5,304,510
- --------------------------------------------------
UTILITIES
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $16.972 $17.995 $19.268 $24.140
- --------------------------------------------------
Accumulation Unit Value, End of Period $17.995 $19.268 $24.140 $29.438
- --------------------------------------------------
Number of Units Outstanding, End of Period 165,046 822,723 1,753,743 3,510,503
- --------------------------------------------------
INCOME BUILDER
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- $10.000 $12.069
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- $12.069 $12.274
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- 2,024,851 3,652,211
- --------------------------------------------------
DIVIDEND GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $20.068 $21.500 $26.259 $32.498
- --------------------------------------------------
Accumulation Unit Value, End of Period $21.500 $26.259 $32.498 $36.593
- --------------------------------------------------
Number of Units Outstanding, End of Period 366,928 4,586,699 13,973,141 19,936,437
- --------------------------------------------------
CAPITAL GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $13.895 $14.920 $16.397 $20.121
- --------------------------------------------------
Accumulation Unit Value, End of Period $14.920 $16.397 $20.121 $23.717
- --------------------------------------------------
Number of Units Outstanding, End of Period 36,005 509,094 1,365,427 1,687,847
- --------------------------------------------------
GLOBAL DIVIDEND GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $11.250 $11.932 $13.824 $15.260
- --------------------------------------------------
Accumulation Unit Value, End of Period $11.932 $13.824 $15.260 $16.921
- --------------------------------------------------
Number of Units Outstanding, End of Period 155,023 2,364,163 7,789,952 8,929,904
- --------------------------------------------------
EUROPEAN GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $18.486 $18.972 $24.298 $27.792
- --------------------------------------------------
Accumulation Unit Value, End of Period $18.972 $24.298 $27.792 $33.944
- --------------------------------------------------
Number of Units Outstanding, End of Period 62,011 1,143,635 3,091,981 4,668,539
- --------------------------------------------------
PACIFIC GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $9.352 $9.617 $9.843 $6.042
- --------------------------------------------------
Accumulation Unit Value, End of Period $9.617 $9.843 $6.042 $5.334
- --------------------------------------------------
Number of Units Outstanding, End of Period 97,952 1,411,508 2,105,514 2,456,851
- --------------------------------------------------
EQUITY
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $24.677 $25.858 $28.626 $38.764
- --------------------------------------------------
Accumulation Unit Value, End of Period $25.858 $28.626 $38.764 $49.825
- --------------------------------------------------
Number of Units Outstanding, End of Period 215,961 2,302,720 5,454,409 7,931,260
- --------------------------------------------------
S&P 500 INDEX
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10.000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $11.117
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 2,003,301
- --------------------------------------------------
COMPETITIVE EDGE "BEST IDEAS"
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10.000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $9.720
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 1,965,368
- --------------------------------------------------
STRATEGIST
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period $16.490 $16.915 $19.170 $21.479
- --------------------------------------------------
Accumulation Unit Value, End of Period $16.915 $19.170 $21.479 $26.783
- --------------------------------------------------
Number of Units Outstanding, End of Period 91,983 903,817 3,529,096 5,639,152
- --------------------------------------------------
EQUITY GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10.000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $10.094
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 1,530,819
- --------------------------------------------------
U.S. REAL ESTATE
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10.000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $9.054
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 80,782
- --------------------------------------------------
INTERNATIONAL MAGNUM
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10.000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $9.780
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 170,897
- --------------------------------------------------
EMERGING MARKETS EQUITY
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10,000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $7.095
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 94,600
- --------------------------------------------------
EMERGING GROWTH
- --------------------------------------------------
Accumulation Unit Value, Beginning of Period -- -- -- $10.000
- --------------------------------------------------
Accumulation Unit Value, End of Period -- -- -- $11.985
- --------------------------------------------------
Number of Units Outstanding, End of Period -- -- -- 402,082
- ---------------------------------------------------
</TABLE>
- -----------
* Contracts with the Enhanced Death Benefit Option, the Performance Death
Benefit Option, or the Performance Income Benefit Option were first made
available for all of the above Variable Sub-Accounts on October 30, 1995, except
that they became available for the Income Builder Variable Sub-Account on
January 21, 1997, and for the Equity Growth, International Magnum, Emerging
Markets, Emerging Growth, U.S. Real Estate, S&P 500 Index, and Competitive Edge
"Best Ideas' Variable Sub-Accounts on the day those Variable Sub-Accounts
commenced operations. The Accumulation Unit Value for each of these Variable
Sub-Accounts was initially set at $10.000. The Accumulation Unit Values in this
table reflect a mortality and expense risk charge of 1.38% and an administrative
expense charge of .10%. The additional .13% mortality and expense risk charge is
applicable to Contract owners who selected the Enhanced Death Benefit Option,
the Performance Death Benefit Option or the Performance Income Benefit Option.
<PAGE>
<TABLE>
<CAPTION>
Accumulation Unit Values and Number of Accumulation Units Outstanding for Each
Sub-Account since Inception
for Contracts with the Performance Benefit Combination Option*
For the Period Beginning January 20 and Ending December 31
VARIABLE SUB-ACCOUNT 1998
- -------------------- -----
<S> <C>
MONEY MARKET
Accumulation Unit Value, Beginning of Period $12.355
Accumulation Unit Value, End of Period $12.766
Number of Units Outstanding, End of Period 673,034
QUALITY INCOME PLUS
Accumulation Unit Value, Beginning of Period $17.841
Accumulation Unit Value, End of Period $18.906
Number of Units Outstanding, End of Period 169,761
HIGH YIELD
Accumulation Unit Value, Beginning of Period $26.463
Accumulation Unit Value, End of Period $24.176
Number of Units Outstanding, End of Period 137,884
UTILITIES
Accumulation Unit Value, Beginning of Period $23.622
Accumulation Unit Value, End of Period $28.985
Number of Units Outstanding, End of Period 159,860
INCOME BUILDER
Accumulation Unit Value, Beginning of Period $12.036
Accumulation Unit Value, End of Period $12.248
Number of Units Outstanding, End of Period 164,457
DIVIDEND GROWTH
Accumulation Unit Value, Beginning of Period $32.096
Accumulation Unit Value, End of Period $36.031
Number of Units Outstanding, End of Period 528,141
CAPITAL GROWTH
Accumulation Unit Value, Beginning of Period $19.356
Accumulation Unit Value, End of Period $23.373
Number of Units Outstanding, End of Period 41,885
GLOBAL DIVIDEND GROWTH
Accumulation Unit Value, Beginning of Period $15.193
Accumulation Unit Value, End of Period $16.794
Number of Units Outstanding, End of Period 156,429
EUROPEAN GROWTH
Accumulation Unit Value, Beginning of Period $27.627
Accumulation Unit Value, End of Period $33.452
Number of Units Outstanding, End of Period 175,357
PACIFIC GROWTH
Accumulation Unit Value, Beginning of Period $5.587
Accumulation Unit Value, End of Period $5.294
Number of Units Outstanding, End of Period 52,484
EQUITY
Accumulation Unit Value, Beginning of Period $38.177
Accumulation Unit Value, End of Period $49.060
Number of Units Outstanding, End of Period 221,631
S&P 500 INDEX
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $11.110
Number of Units Outstanding, End of Period 283,511
COMPETITIVE EDGE "BEST IDEAS"
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $9.714
Number of Units Outstanding, End of Period 178,762
STRATEGIST
Accumulation Unit Value, Beginning of Period $21.497
Accumulation Unit Value, End of Period $26.371
Number of Units Outstanding, End of Period 472,816
EQUITY GROWTH
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $10.370
Number of Units Outstanding, End of Period 154,201
U.S. REAL ESTATE
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $9.048
Number of Units Outstanding, End of Period 37,193
INTERNATIONAL MAGNUM
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $9.771
Number of Units Outstanding, End of Period 31,933
EMERGING MARKETS EQUITY
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $7.089
Number of Units Outstanding, End of Period 19,500
EMERGING GROWTH
Accumulation Unit Value, Beginning of Period $10.000
Accumulation Unit Value, End of Period $12.590
Number of Units Outstanding, End of Period 82,427
</TABLE>
* Contracts with the Performance Benefit Combination Option were first made
available for all of the above Variable Sub-Accounts on December 7, 1998, except
that they first became available for the Short-Term Bond and Aggressive Equity
Variable Sub-Accounts on May 2, 1999, and for the Equity Growth, International
Magnum, Emerging Markets, Emerging Growth, U.S. Real Estate, S&P 500 Index, and
Competitive Edge "Best Ideas' Variable Sub-Accounts on the day those Variable
Sub-Accounts commenced operations. Contracts with the Death Benefit Combination
Option were first made available for all of the above Variable Sub-Accounts on
May 2, 1999. The Accumulation Unit Values in this table reflect a mortality and
expense risk charge of 1.49% and an administrative expense Charge of .10%. The
additional .24% mortality and expense risk charge is applicable to Contract
owners who selected either the Performance Benefit Combination Option or the
Death Benefit Combination Option.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Description Page
Additions, Deletions or Substitutions of Investments..................... 2
The Contract............................................................. 3
Purchases....................................................... 3
Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers).... 3
Performance Information.................................................. 4
Calculation of Accumulation Unit Values.................................. 17
Calculation of Variable Income Payments.................................. 18
General Matters.......................................................... 19
Incontestability................................................ 19
Settlements..................................................... 19
Safekeeping of the Variable Account's Assets.................... 19
Premium Taxes................................................... 19
Tax Reserves.................................................... 19
Federal Tax Matters...................................................... 20
Qualified Plans.......................................................... 21
Experts.................................................................. 22
Financial Statements..................................................... 23
-----------------------------------------------
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. We do not authorize anyone to provide
any information or representations regarding the offering described in this
prospectus other than as contained in this prospectus.
[back cover]
<PAGE>
THE MORGAN STANLEY DEAN WITTER VARIABLE ANNUITY II
THE MORGAN STANLEY DEAN WITTER VARIABLE ANNUITY II ASSETMANAGER
Northbrook Life and Annuity Company Statement of Additional Information
Northbrook Variable Annuity Account II dated May 2, 1999
Post Office Box 94040
Palatine, IL 60094-4040
1 (800) 654 - 2397
This Statement of Additional Information supplements the information in the
prospectus for each of the two forms of the Morgan Stanley Dean Witter Variable
Annuity II Contracts that we offer. This Statement of Additional Information is
not a prospectus. You should read it with the prospectus, dated May 2, 1999, for
each form of Contract. You may obtain a prospectus by calling or writing us at
the address or telephone number listed above, or by calling or writing your
Morgan Stanley Dean Witter Financial Advisor.
Except as otherwise noted, this Statement of Additional Information uses the
same defined terms as the prospectus for each of the two forms of the Morgan
Stanley Dean Witter Variable Annuity II Contracts that we offer. For
convenience, we refer to the second form of Contract as the Morgan Stanley Dean
Witter Variable Annuity II AssetManager Contract ("AssetManager Contracts").
TABLE OF CONTENTS
Description Page
Additions, Deletions or Substitutions of Investments 2
The Contract 3
Purchases 3
Tax-free Exchanges (1035 Exchanges, Rollovers and
Transfers) 3
Performance Information 4
Calculation of Accumulation Unit Values 17
Calculation of Variable Income Payments 18
General Matters 19
Incontestability 19
Settlements 19
Safekeeping of the Variable Account's Assets 19
Premium Taxes 19
Tax Reserves 19
Federal Tax Matters 20
Qualified Plans 21
Experts 22
Financial Statements 23
<PAGE>
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
- --------------------------------------------------------------------------------
We may add, delete, or substitute the Portfolio shares held by any Variable
Sub-Account to the extent the law permits. We may substitute shares of any
Portfolio with those of another Portfolio of the same or different mutual
Portfolio if the shares of the Portfolio are no longer available for investment,
or if we believe investment in any Portfolio would become inappropriate in view
of the purposes of the Variable Account.
We will not substitute shares attributable to a Contract owner's interest in a
Variable Sub-Account until we have notified the Contract owner of the change,
and until the Securities and Exchange Commission has approved the change, to the
extent such notification and approval are required by law. 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 Contract owners.
We also may establish additional Variable Sub-Accounts or series of Variable
Sub-Accounts. Each additional Variable Sub-Account would purchase shares in a
new Portfolio of the same or different mutual fund. We may establish new
Variable Sub-Accounts when we believe marketing needs or investment conditions
warrant. We determine the basis on which we will offer any new Variable
Sub-Accounts in conjunction with the Contract to existing Contract owners. We
may eliminate one or more Variable Sub-Accounts if, in our sole discretion,
marketing, tax or investment conditions so warrant.
We may, by appropriate endorsement, change the Contract as we believe necessary
or appropriate to reflect any substitution or change in the Portfolios. If we
believe the best interests of persons having voting rights under the Contracts
would be served, we may operate the Variable Account as a management company
under the Investment Company Act of 1940 or we may withdraw its registration
under such Act if such registration is no longer required.
<PAGE>
THE CONTRACT
- --------------------------------------------------------------------------------
The Contract is primarily designed to aid individuals in long-term financial
planning. You can use it for retirement planning regardless of whether the
retirement plan qualifies for special federal income tax treatment.
PURCHASE OF CONTRACTS
Dean Witter Reynolds, Inc., is the principal underwriter and distributor of the
Contracts. The offering of the Contracts is continuous. We do not anticipate
discontinuing the offering of the Contracts, but we reserve the right to do so
at any time.
TAX-FREE EXCHANGES (1035 EXCHANGES, ROLLOVERS AND TRANSFERS)
We accept purchase payments that are the proceeds of a Contract in a transaction
qualifying for a tax-free exchange under Section 1035 of the Internal Revenue
Code ("Code"). Except as required by federal law in calculating the basis of the
Contract, we do not differentiate between Section 1035 purchase payments and
non-Section 1035 purchase payments.
We also accept "rollovers" and transfers from Contracts qualifying as
tax-sheltered annuities ("TSAs"), individual retirement annuities or accounts
("IRAs"), or any other Qualified Contract that is eligible to "rollover" into an
IRA. We differentiate among non-Qualified Contracts, TSAs, IRAs and other
Qualified Contracts to the extent necessary to comply with federal tax laws. For
example, we restrict the assignment, transfer, or pledge of TSAs and IRAs so the
Contracts will continue to qualify for special tax treatment. A Contract 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.
<PAGE>
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time we may advertise the "standardized," "non-standardized," and
"adjusted historical" total returns of the Variable Sub-Accounts, as described
below. Please remember that past performance is not an estimate or guarantee of
future performance and does not necessarily represent the actual experience of
amounts invested by a particular Contract owner.
STANDARDIZED TOTAL RETURNS
A Variable Sub-Account's standardized total return represents the average annual
total return of that Sub-Account over a particular period. We compute
standardized total return by finding the annual percentage rate that, when
compounded annually, will accumulate a hypothetical $1,000 purchase payment to
the redeemable value at the end of the one, five or ten year period, or for a
period from the date of commencement of the Variable Sub-Account's operations,
if shorter than any of the foregoing. We use the following formula prescribed by
the SEC for computing standardized total return:
1000(1 + T)n = ERV
where:
T = average annual total return
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of 1, 5, or 10 year periods or
shorter period
n = number of years in the period
1000 = hypothetical $1,000 investment
When factoring in the withdrawal charge assessed upon redemption, we exclude the
Free Withdrawal Amount, which is the amount you can withdraw from the Contract
without paying a withdrawal charge. We also use the withdrawal charge that would
apply upon redemption at the end of each period. Thus, for example, when
factoring in the withdrawal charge for a one year standardized total return
calculation, we would use the withdrawal charge that applies to a withdrawal of
a purchase payment made one year prior.
When factoring in the contract maintenance charge, we pro rate the charge by
dividing (i) the contract maintenance charge by (ii) the average contract size
of $54,945. We then multiply the resulting percentage by a hypothetical $1,000
investment.
The standardized total returns for the Variable Sub-Accounts available under
each form of Contract for the periods ended December 31, 1998 are set out below.
No standardized total returns are shown for Money Market Variable Sub-Account.
In addition, no standardized total returns are shown of the Short-Term Bond and
Aggressive Equity Variable Sub-Accounts, which commenced operations as of the
date of this Statement of Additional Information.
The AssetManager Contracts were first offered to the public on July 20, 1998.
Accordingly, performance figures for certain Variable Sub-Accounts prior to
those dates reflect the historical performance of the Variable Sub-Accounts,
adjusted to reflect the current level of charges that apply to the Variable
Sub-Accounts under the AssetManager Contracts, as well as the withdrawal and
contract maintenance charges described above. In addition, performance figures
for periods prior to the availability of an optional death benefit, the
Performance Income Benefit Option, the Performance Benefit Combination Option,
or the Death Benefit Combination Option have been adjusted to reflect the
current charge for such features as if they had been available throughout the
periods shown.
Variable Sub-Account Inception Dates: The Money Market, Quality Income Plus,
High Yield, Utilities, Dividend Growth, Equity and Strategist Variable
Sub-Accounts commenced operations on October 25, 1990. The Capital Growth and
European Growth Variable Sub-Accounts commenced operations on March 1, 1991. The
Global Dividend Growth and Pacific Growth Variable Sub-Accounts commenced
operations on February 23, 1994. The Income Builder Variable Sub-Account
commenced operation on January 21, 1997. The Equity Growth, , International
Magnum, Emerging Markets Equity, and Emerging Growth Variable Sub-Accounts
commenced operation on March 16, 1998. The S&P 500 Index, Competitive Edge
("Best Ideas") and U.S. Real Estate Variable Sub-Accounts commenced operations
of May 18, 1998.
VARIABLE ANNUITY II CONTRACTS
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION OR
PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------
High Yield -11.75% 4.07% 11.64%
Equity 24.41% 20.49% 21.72%
Quality Income Plus 2.92% 5.71% 8.32%
Strategist 20.56% 11.81% 12.82%
Dividend Growth 8.45% 16.89% 17.21%
Utilities 17.81% 13.21% 14.13%
European Growth 18.01% 18.87% 16.91%
Capital Growth 13.74% 15.18% 11.68%
Pacific Growth -15.90% N/A -12.71%
Global Dividend Growth 6.73% N/A 11.27%
Income Builder -2.46% N/A 9.24%
Equity Growth N/A N/A -5.14%
International Magnum N/A N/A -9.04%
Emerging Markets Equity N/A N/A -40.89%
Emerging Growth N/A N/A 19.02%
U.S. Real Estate N/A N/A -22.32%
Competitive Edge ("Best N/A N/A -12.35%
Ideas")
S&P 500 Index N/A N/A 10.03%
<PAGE>
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR
THE PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception
----------------------------------------------
High Yield -11.87% 3.94% 11.48%
Equity 24.24% 20.33% 21.56%
Quality Income Plus 2.78% 5.57% 8.18%
Strategist 20.40% 11.67% 12.67%
Dividend Growth 8.30% 16.74% 17.06%
Utilities 17.65% 13.06% 13.98%
European Growth 17.85% 18.72% 16.76%
Capital Growth 13.58% 15.03% 11.53%
Pacific Growth -16.01% N/A -12.82%
Global Dividend Growth 6.59% N/A 11.12%
Income Builder -2.60% N/A 9.09%
Equity Growth N/A N/A -5.27%
International Magnum N/A N/A -9.16%
Emerging Markets Equity N/A N/A -40.97%
Emerging Growth N/A N/A 18.86%
U.S. Real Estate N/A N/A -22.43%
Competitive Edge ("Best N/A N/A -12.47%
Ideas")
S&P 500 Index N/A N/A 9.88%
<PAGE>
(WITH PERFORMANCE BENEFIT COMBINATION OPTION OR
DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -11.97% 3.82% 11.36%
Equity 24.10% 20.20% 21.43%
Quality Income Plus 2.66% 5.45% 8.06%
Strategist 20.26% 11.54% 12.55%
Dividend Growth 8.18% 16.61% 16.93%
Utilities 17.51% 12.93% 13.85%
European Growth 17.72% 18.58% 16.63%
Capital Growth 13.45% 14.90% 11.41%
Pacific Growth -16.11% N/A -12.92%
Global Dividend 6.46% N/A 11.00%
Growth
Income Builder -2.71% N/A 8.97%
Equity Growth N/A N/A -5.38%
International Magnum N/A N/A -9.27%
Emerging Markets N/A N/A -41.04%
Equity
Emerging Growth N/A N/A 18.73%
U.S. Real Estate N/A N/A -22.52%
Competitive Edge N/A N/A -12.57%
("Best Ideas")
S&P 500 Index N/A N/A 9.75%
<PAGE>
ASSETMANAGER CONTRACTS
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION OR
PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception*
---------------------------------------------
High Yield -7.73% 3.96% 11.36%
Equity 28.34% 20.27% 21.42%
Quality Income Plus 6.90% 5.58% 8.05%
Strategist 24.50% 11.65% 12.54%
Dividend Growth 12.42% 16.69% 16.92%
Utilities 21.76% 13.03% 13.85%
European Growth 21.96% 18.66% 16.62%
Capital Growth 17.69% 14.99% 11.40%
Pacific Growth -11.87% N/A -12.35%
Global Dividend Growth 10.70% N/A 11.22%
Income Builder 1.53% N/A 10.96%
Equity Growth N/A N/A -0.07%
International Magnum N/A N/A -4.00%
Emerging Markets Equity N/A N/A -36.21%
Emerging Growth N/A N/A 24.28%
U.S. Real Estate N/A N/A -16.23%
Competitive Edge ("Best N/A N/A -6.00%
Ideas")
S&P 500 Index N/A N/A 16.90%
(WITH AN OPTIONAL DEATH BENEFIT OR
THE PERFORMANCE INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
--------------------------------------------
High Yield -7.85% 3.82% 11.21%
Equity 28.17% 20.12% 21.26%
Quality Income Plus 6.76% 5.44% 7.91%
Strategist 24.34% 11.50% 12.39%
Dividend Growth 12.27% 16.54% 16.77%
Utilities 21.60% 12.88% 13.70%
European Growth 21.80% 18.51% 16.47%
Capital Growth 17.54% 14.84% 11.26%
Pacific Growth -11.98% N/A -12.46%
Global Dividend Growth 10.56% N/A 11.08%
Income Builder 1.40% N/A 10.81%
Equity Growth N/A N/A -0.20%
International Magnum N/A N/A -4.13%
Emerging Markets Equity N/A N/A -36.29%
Emerging Growth N/A N/A 24.12%
U.S. Real Estate N/A N/A -16.34%
Competitive Edge ("Best N/A N/A -6.12%
Ideas")
S&P 500 Index N/A N/A 16.75%
(WITH PERFORMANCE BENEFIT COMBINATION OPTION OR
DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
High Yield -7.96% 3.71% 11.09%
Equity 28.03% 19.99% 21.13%
Quality Income Plus 6.65% 5.32% 7.79%
Strategist 24.20% 11.38% 12.27%
Dividend Growth 12.15% 16.41% 16.64%
Utilities 21.46% 12.76% 13.57%
European Growth 21.66% 18.38% 16.34%
Capital Growth 17.41% 14.71% 11.13%
Pacific Growth -12.08% N/A -12.56%
Global Dividend Growth 10.44% N/A 10.96%
Income Builder 1.29% N/A 10.69%
Equity Growth N/A N/A -0.31%
International Magnum N/A N/A -4.24%
Emerging Markets Equity N/A N/A -36.37%
Emerging Growth N/A N/A 23.98%
U.S. Real Estate N/A N/A -16.44%
Competitive Edge ("Best N/A N/A -6.23%
Ideas")
S&P 500 Index N/A N/A 16.61%
<PAGE>
NON-STANDARDIZED TOTAL RETURNS
From time to time, we also may quote average annual total returns that do not
reflect the withdrawal charge. We calculate these "non-standardized total
returns" in exactly the same way as the standardized total returns described
above, except that we replace the ending redeemable value of the hypothetical
account for the period with an ending redeemable value for the period that does
not take into account any charges on amounts surrendered.
In addition, we 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 would not reflect deductions for withdrawal charges
which may be imposed on the Contracts which, if reflected, would reduce the
performance quoted. The formula for computing such total return quotations
involves a per unit change calculation. This calculation is based on the
Accumulation Unit Value at the end of the defined period divided by the
Accumulation Unit Value at the beginning of such period, minus 1. The periods
included in such advertisements are "year-to- date" (prior calendar year end to
the day of the advertisement); "year to most recent quarter" (prior calendar
year end to the end of the most recent quarter); "the prior calendar year"; "
'n' most recent Calendar Years"; and "Inception (commencement of the Variable
Sub-Account's operation) to date" (day of the advertisement).
The non-standardized total returns for the Variable Sub-Accounts for the periods
ended December 31, 1998 are set out below. Non-standardized total returns are
not shown for the Money Market Variable Sub-Account. In addition,
non-standardized total returns are not shown of the Short-Term Bond and
Aggressive Equity Variable Sub-Accounts, which commenced operations as of the
date of this Statement of Additional Information. Performance figures for
periods prior to the availability of an optional death benefit, the Performance
Income Benefit Option, the Performance Benefit Combination Option, or the Death
Benefit Combination Option have been adjusted to reflect the current charge for
such features as if they had been available throughout the periods shown.
The inception date of each Variable Sub-Account appears under "Standardized
Total Returns," above.
VARIABLE ANNUITY II CONTRACTS
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION
OR THE PERFORMANCE INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.46% 4.26% 11.65%
Equity 28.70% 20.61% 21.73%
Quality Income Plus 7.21% 5.88% 8.35%
Strategist 24.85% 11.96% 12.84%
Dividend Growth 12.75% 17.02% 17.22%
Utilities 22.10% 13.35% 14.15%
European Growth 22.30% 18.99% 16.93%
Capital Growth 18.03% 15.31% 11.70%
Pacific Growth -11.60% N/A -12.06%
Global Dividend Growth 11.02% N/A 11.53%
Income Builder 1.83% N/A 11.27%
Equity Growth N/A N/A 1.32%
International Magnum N/A N/A -2.64%
Emerging Markets Equity N/A N/A -34.99%
Emerging Growth N/A N/A 25.76%
U.S. Real Estate N/A N/A -14.65%
Competitive Edge N/A N/A -4.34%
("Best Ideas")
S&P 500 Index N/A N/A 18.72%
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR
THE PERFORMANCE INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.58% 4.12% 11.50%
Equity 28.53% 20.45% 21.57%
Quality Income Plus 7.07% 5.75% 8.21%
Strategist 24.69% 11.82% 12.69%
Dividend Growth 12.60% 16.87% 17.07%
Utilities 21.94% 13.20% 14.00%
European Growth 22.14% 18.84% 16.78%
Capital Growth 17.88% 15.16% 11.56%
Pacific Growth -11.72% N/A -12.17%
Global Dividend Growth 10.88% N/A 11.39%
Income Builder 1.70% N/A 11.12%
Equity Growth N/A N/A 1.19%
International Magnum N/A N/A -2.76%
Emerging Markets Equity N/A N/A -35.08%
Emerging Growth N/A N/A 25.60%
U.S. Real Estate N/A N/A -14.76%
Competitive Edge N/A N/A -12.47%
("Best Ideas")
S&P 500 Index N/A N/A 18.57%
(WITH PERFORMANCE BENEFIT COMBINATION OPTION OR
DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.68% 4.01% 11.38%
Equity 28.39% 20.32% 21.44%
Quality Income Plus 6.96% 5.63% 8.09%
Strategist 24.55% 11.69% 12.57%
Dividend Growth 12.48% 16.74% 16.94%
Utilities 21.81% 13.08% 13.88%
European Growth 22.01% 18.70% 16.65%
Capital Growth 17.75% 15.03% 11.44%
Pacific Growth -11.81% N/A -12.92%
Global Dividend Growth 10.76% N/A 11.26%
Income Builder 1.59% N/A 11.00%
Equity Growth N/A N/A 1.07%
International Magnum N/A N/A -2.87%
Emerging Markets Equity N/A N/A -35.15%
Emerging Growth N/A N/A 25.46%
U.S. Real Estate N/A N/A -14.86%
Competitive Edge N/A N/A -4.57%
("Best Ideas")
S&P 500 Index N/A N/A 18.44%
ASSETMANAGER CONTRACTS
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION OR
PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.68% 4.01% 11.38%
Equity 28.39% 20.32% 21.44%
Quality Income Plus 6.96% 5.63% 8.09%
Strategist 24.55% 11.69% 12.57%
Dividend Growth 12.48% 16.74% 16.94%
Utilities 21.81% 13.08% 13.88%
European Growth 22.01% 18.70% 16.65%
Capital Growth 17.75% 15.03% 11.44%
Pacific Growth -11.81% N/A -12.27%
Global Dividend Growth 10.76% N/A 11.26%
Income Builder 1.59% N/A 11.00%
Equity Growth N/A N/A 1.07%
International Magnum N/A N/A -2.87%
Emerging Markets Equity N/A N/A -36.21%
Emerging Growth N/A N/A 25.46%
U.S. Real Estate N/A N/A -14.86%
Competitive Edge N/A N/A -4.57%
("Best Ideas")
S&P 500 Index N/A N/A 18.44%
<PAGE>
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR
THE PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.80% 3.87% 11.24%
Equity 28.23% 20.16% 21.28%
Quality Income Plus 6.82% 5.49% 7.95%
Strategist 24.39% 11.55% 12.42%
Dividend Growth 12.33% 16.59% 16.79%
Utilities 21.65% 12.93% 13.73%
European Growth 21.85% 18.55% 16.50%
Capital Growth 17.59% 14.88% 11.29%
Pacific Growth -11.93% N/A -12.39%
Global Dividend Growth 10.61% N/A 11.12%
Income Builder 1.45% N/A 10.86%
Equity Growth N/A N/A 0.94%
International Magnum N/A N/A -3.00%
Emerging Markets Equity N/A N/A -35.23%
Emerging Growth N/A N/A 25.29%
U.S. Real Estate N/A N/A -14.97%
Competitive Edge N/A N/A -4.69%
("Best Ideas")
S&P 500 Index N/A N/A 18.28%
(WITH PERFORMANCE BENEFIT COMBINATION OPTION OR
DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.90% 3.76% 11.12%
Equity 28.09% 20.03% 21.15%
Quality Income Plus 6.70% 5.38% 7.83%
Strategist 24.26% 11.43% 12.30%
Dividend Growth 12.21% 16.46% 16.66%
Utilities 21.52% 12.81% 13.61%
European Growth 21.72% 18.42% 16.37%
Capital Growth 17.47% 14.76% 11.17%
Pacific Growth -12.02% N/A -12.48%
Global Dividend Growth 10.49% N/A 11.00%
Income Builder 1.34% N/A 10.74%
Equity Growth N/A N/A 0.83%
International Magnum N/A N/A -3.11%
Emerging Markets Equity N/A N/A -35.31%
Emerging Growth N/A N/A 25.15%
U.S. Real Estate N/A N/A -15.07%
Competitive Edge N/A N/A -4.80%
("Best Ideas")
S&P 500 Index N/A N/A 18.14%
ADJUSTED HISTORICAL TOTAL RETURNS
We may advertise the total return for periods prior to the date that the
Variable Sub-Accounts commenced operations. We will calculate such "adjusted
historical total returns" using the historical performance of the underlying
Portfolios and adjusting such performance to reflect the current level of
charges that apply to the Variable Sub-Accounts under the Contract as well as
the contract maintenance charge and the withdrawal charge.
The adjusted historical total returns for the Variable Sub-Accounts for the
periods ended December 31, 1998 are set out below. No adjusted historical total
returns are shown for the Money Market Variable Sub-Account. In addition, no
adjusted historical total returns are shown for the portfolios corresponding to
the Short-Term Bond and Aggressive Equity Variable Sub-Accounts, as each
portfolio commenced operations as of the date of this Statement of Additional
Information. Where the returns included in the following tables give effect to
one or more of the optional death benefit provisions, the Performance Income
Benefit Option, the Performance Benefit Combination Option, or the Death Benefit
Combination Option, the performance figures have been adjusted to reflect the
current charge for the feature as if that feature had been available throughout
the periods shown.
The following list provides the inception date for the Portfolio corresponding
to each of the Variable Sub-Accounts included in the tables.
Inception Date of
Corresponding
Variable Sub-Account Portfolio
- -------------------- -----------------
High Yield March 9, 1984
Equity March 9, 1984
Quality Income Plus March 1, 1987
Strategist March 1, 1987
Dividend Growth March 1, 1990
Utilities March 1, 1990
European Growth March 1, 1991
Capital Growth March 1, 1991
Pacific Growth February 24, 1994
Global Dividend Growth February 24, 1994
Income Builder January 21, 1997
Equity Growth January 2, 1997
International Magnum January 2, 1997
Emerging Markets Equity October 1,1996
Emerging Growth July 3, 1995
U.S. Real Estate March 4, 1997
Competitive Edge May 18, 1998
("Best Ideas")
S&P 500 Index May 18, 1998
VARIABLE ANNUITY II CONTRACTS
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION OR
PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -11.75% 4.07% 5.53%
Equity 24.41% 20.49% 17.92%
Quality Income Plus 2.92% 5.71% 8.05%
Strategist 20.56% 11.81% 10.84%
Dividend Growth 8.45% 16.89% 17.21%
Utilities 17.81% 13.21% 14.13%
European Growth 18.01% 18.87% 16.91%
Capital Growth 13.74% 15.18% 11.68%
Pacific Growth -15.90% N/A -12.71%
Global Dividend Growth 6.73 N/A 11.27%
Income Builder -2.46% N/A 9.24%
Equity Growth 13.40% N/A 22.62%
International Magnum 3.21% N/A 4.65%
Emerging Markets Equity -29.49% N/A -15.42%
Emerging Growth 31.42% N/A 24.15%
U.S. Real Estate -16.35% N/A -0.95%
Competitive Edge N/A N/A -12.35%
("Best Ideas")
S&P 500 Index N/A N/A 10.03%
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR
THE PERFORMANCE INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -11.87% 3.94% 5.46%
Equity 24.24% 20.33% 17.85%
Quality Income Plus 2.78% 5.57% 7.98%
Strategist 20.40% 11.67% 10.77%
Dividend Growth 8.30% 16.74% 17.06%
Utilities 17.65% 13.06% 13.98%
European Growth 17.85% 18.72% 16.76%
Capital Growth 13.58% 15.03% 11.53%
Pacific Growth -16.01% N/A -12.82%
Global Dividend Growth 6.59% N/A 11.12%
Income Builder -2.60% N/A 9.09%
Equity Growth 13.24% N/A 22.46%
International Magnum 3.07% N/A 4.51%
Emerging Markets Equity -29.59% N/A -15.53%
Emerging Growth 31.24% N/A 23.99%
U.S. Real Estate -16.47% N/A -1.08%
Competitive Edge N/A N/A -12.47%
("Best Ideas")
S&P 500 Index N/A N/A 9.88%
(WITH PERFORMANCE BENEFIT COMBINATION OPTION OR
DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -11.97% 3.82% 5.27%
Equity 24.10% 20.20% 17.64%
Quality Income Plus 2.66% 5.45% 7.79%
Strategist 20.26% 11.54% 10.57%
Dividend Growth 8.18% 16.61% 16.93%
Utilities 17.51% 12.93% 13.85%
European Growth 17.72% 18.58% 16.63%
Capital Growth 13.45% 14.90% 11.41%
Pacific Growth -16.11% N/A -12.92%
Global Dividend Growth 6.46% N/A 11.00%
Income Builder -2.71% N/A 8.97%
Equity Growth 13.12% N/A 22.32%
International Magnum 2.95% N/A 4.39%
Emerging Markets Equity -29.67% N/A -15.63%
Emerging Growth 1.89% N/A 15.43%
U.S. Real Estate 31.10% N/A 23.85%
Competitive Edge N/A N/A -12.57%
("Best Ideas")
S&P 500 Index N/A N/A 9.75%
<PAGE>
ASSETMANAGER CONTRACTS
(WITHOUT AN OPTIONAL DEATH BENEFIT PROVISION OR
PERFORMANCE INCOME BENEFIT OPTION )
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.73% 3.96% 5.26%
Equity 28.34% 20.27% 17.63%
Quality Income Plus 6.90% 5.58% 7.78%
Strategist 24.50% 11.65% 10.57%
Dividend Growth 12.42% 16.69% 16.92%
Utilities 21.76% 13.03% 13.85%
European Growth 21.96% 18.66% 16.62%
Capital Growth 17.69% 14.99% 11.40%
Pacific Growth -11.87% N/A -12.35%
Global Dividend Growth 10.70% N/A 11.22%
Income Builder 1.53% N/A 10.96%
Equity Growth 17.36% N/A 24.05%
International Magnum 7.19% N/A 6.41%
Emerging Markets Equity -25.43% N/A -13.80%
Emerging Growth 35.34% N/A 24.27%
U.S. Real Estate -12.32% N/A 1.12%
Competitive Edge N/A N/A -6.00%
("Best Ideas")
S&P 500 Index N/A N/A 16.90%
(WITH AN OPTIONAL DEATH BENEFIT PROVISION OR
THE PERFORMANCE INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
-------------------------------------------------
High Yield -7.85% 3.82% 5.13%
Equity 28.17% 20.12% 17.48%
Quality Income Plus 6.76% 5.44% 7.64%
Strategist 24.34% 11.50% 10.42%
Dividend Growth 12.27% 16.54% 16.77%
Utilities 21.60% 12.88% 13.70%
European Growth 21.80% 18.51% 16.47%
Capital Growth 17.54% 14.84% 11.26%
Pacific Growth -11.98% N/A -12.46%
Global Dividend Growth 10.56% N/A 11.08%
Income Builder 1.40% N/A 10.81%
Equity Growth 17.20% N/A 23.89%
International Magnum 7.05% N/A 6.27%
Emerging Markets Equity -25.53% N/A -13.91%
Emerging Growth 35.16% N/A 24.11%
U.S. Real Estate -12.44% N/A 0.99%
Competitive Edge N/A N/A -6.12%
("Best Ideas")
S&P 500 Index N/A N/A 16.75%
(WITH PERFORMANCE BENEFIT COMBINATION OPTION OR
DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since
Inception
------------------------------------------------
High Yield -7.96% 3.71% 5.01%
Equity 28.03% 19.99% 17.35%
Quality Income Plus 6.65% 5.32% 7.52%
Strategist 24.20% 11.38% 10.30%
Dividend Growth 12.15% 16.41% 16.64%
Utilities 21.46% 12.76% 13.57%
European Growth 21.66% 18.38% 16.34%
Capital Growth 17.41% 14.71% 11.13%
Pacific Growth -12.08% N/A -12.56%
Global Dividend Growth 10.44% N/A 10.96%
Income Builder 1.29% N/A 10.69%
Equity Growth 17.07% N/A 23.75%
International Magnum 6.93% N/A 6.15%
Emerging Markets Equity -25.61% N/A -14.01%
Emerging Growth 35.01% N/A 23.97%
U.S. Real Estate -12.54% N/A 0.87%
Competitive Edge N/A N/A -6.23%
("Best Ideas")
S&P 500 Index N/A N/A 16.61%
<PAGE>
Calculation of Accumulation Unit Values
- --------------------------------------------------------------------------------
The value of Accumulation Units will change each Valuation Period according to
the investment performance of the Portfolio shares purchased by each Variable
Sub-Account and the deduction of certain expenses and charges. A "Valuation
Period" is the period from the end of one Valuation Date and continues to the
end of the next Valuation Date. A Valuation Date ends at the close of regular
trading on the New York Stock Exchange (currently 3:00 p.m. Central Time).
The Accumulation Unit Value of a Variable Sub-Account for any Valuation Period
equals the Accumulation Unit Value as of the immediately preceding Valuation
Period, multiplied by the Net Investment Factor (described below) for that
Variable Sub-Account for the current Valuation Period.
NET INVESTMENT FACTOR
The Net Investment Factor for a Valuation Period is a number representing the
change, since the last Valuation Period, in the value of Variable Sub-Account
assets per Accumulation Unit due to investment income, realized or unrealized
capital gain or loss, deductions for taxes, if any, and deductions for the
mortality and expense risk charge and administrative expense charge. We
determine the Net Investment Factor for each Variable Sub-Account for any
Valuation Period by dividing (A) by (B) and subtracting (C) from the result,
where:
(A) is the sum of:
(1) the net asset value per share of the Portfolio underlying the
Variable 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 underlying the Variable
Sub-Account during the current Valuation Period;
(B) is the net asset value per share of the Portfolio underlying the
Variable Sub-Account determined as of the end of the immediately preceding
Valuation Period; and
(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.
<PAGE>
CALCULATION OF VARIABLE INCOME PAYMENTS
- --------------------------------------------------------------------------------
We calculate the amount of the first variable income payment under an Income
Plan by applying the Contract Value allocated to each Variable Sub-Account less
any applicable premium tax charge deducted at the time, to the income payment
tables in the Contract. We divide the amount of the first variable annuity
income payment by the Variable Sub-Account's then current Annuity Unit value to
determine the number of annuity units ("Annuity Units") upon which later income
payments will be based. To determine income payments after the first, we simply
multiply the number of Annuity Units determined in this manner for each Variable
Sub-Account by the then current Annuity Unit value ("Annuity Unit Value") for
that Variable Sub-Account.
CALCULATION OF ANNUITY UNIT VALUES
Annuity Units in each Variable Sub-Account are valued separately and Annuity
Unit Values will depend upon the investment experience of the particular
Portfolio in which the Variable Sub-Account invests. We calculate the Annuity
Unit Value for each Variable Sub-Account at the end of any Valuation Period by:
o multiplying the Annuity Unit Value at the end of the immediately
preceding Valuation Period by the Variable Sub-Account's Net
Investment Factor (described in the preceding section) for the Period;
and then
o dividing the product by the sum of 1.0 plus the assumed investment
rate for the Valuation Period.
The assumed investment rate adjusts for the interest rate assumed in the
income payment tables used to determine the dollar amount of the first variable
income payment, and is at an effective annual rate which is disclosed in the
Contract.
We determine the amount of the first variable income payment paid under an
Income Plan using the income payment tables set out in the Contracts. The
Contracts include tables that differentiate on the basis of sex, except in
states that require the use of unisex tables.
<PAGE>
GENERAL MATTERS
- --------------------------------------------------------------------------------
INCONTESTABILITY
We will not contest the Contract after we issue it.
SETTLEMENTS
The Contract must be returned to us prior to any settlement. We must receive due
proof of the Contract owner(s) death (or Annuitant's death if there is a
non-natural Contract owner) before we will settle a death claim.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
We hold title to the assets of the Variable Account. We keep the assets
physically segregated and separate and apart from our general corporate assets.
We maintain records of all purchases and redemptions of the Portfolio shares
held by each of the Variable Sub-Accounts.
The Portfolios do not issue stock certificates. Therefore, we hold the Variable
Account's assets in open account in lieu of stock certificates. See the
Portfolios' prospectuses for a more complete description of the custodian of the
Portfolios.
PREMIUM TAXES
Applicable premium tax rates depend on the Contract owner's state of residency
and the insurance laws and our status in those states where premium taxes are
incurred. Premium tax rates may be changed by legislation, administrative
interpretations, or judicial acts.
TAX RESERVES
We do not establish capital gains tax reserves for any Variable Sub-Account nor
do we deduct charges for tax reserves because we believe that capital gains
attributable to the Variable Account will not be taxable. However, we reserve
the right to deduct charges to establish tax reserves for potential taxes on
realized or unrealized capital gains.
<PAGE>
FEDERAL TAX MATTERS
- --------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. WE MAKE
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
Northbrook is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code. Since the Variable Account is not an entity separate
from Northbrook, and its operations form a part of Northbrook, it will not be
taxed separately as a "Regulated Investment Company" under Subchapter M of the
Code. Investment income and realized capital gains of the Variable Account are
automatically applied to increase reserves under the contract. Under existing
federal income tax law, Northbrook believes that the Variable Account investment
income and capital gains will not be taxed to the extent that such income and
gains are applied to increase the reserves under the contract. Accordingly,
Northbrook does not anticipate that it will incur any federal income tax
liability attributable to the Variable Account, and therefore Northbrook does
not intend to make provisions for any such taxes. If Northbrook is taxed on
investment income or capital gains of the Variable Account, then Northbrook may
impose a charge against the Variable Account in order to make provision for such
taxes.
EXCEPTIONS TO THE NON-NATURAL OWNER RULE
There are several exceptions to the general rule that annuity contracts held by
a non-natural 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
non-natural owner rule are: (1) contracts acquired by an estate of a decedent by
reason of the death of the decedent; (2) certain qualified contracts; (3)
contracts purchased by employers upon the termination of certain qualified
plans; (4) certain contracts used in connection with structured settlement
agreements, and (5) contracts purchased with a single premium when the annuity
starting date is no later than a year from purchase of the annuity and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
IRS REQUIRED DISTRIBUTION AT DEATH RULES
In order to be considered an annuity contract for federal income tax purposes,
an annuity contract must provide: (1) if any owner dies on or after the annuity
start date but before the entire interest in the contract has been distributed,
the remaining portion of such interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of the owner's
death; (2) if any owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which is payable to (or for the benefit of) a designated
beneficiary is distributed over the life of such beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary) and the
distributions begin within one year of the owner's death. If the owner's
designated beneficiary is the surviving spouse of the owner, the contract may be
continued with the surviving spouse as the new owner. If the owner of the
contract is a non-natural person, then the annuitant will be treated as the
owner for purposes of applying the distribution at death rules. In addition, a
change in the annuitant on a contract owned by a non-natural person will be
treated as the death of the owner.
<PAGE>
QUALIFIED PLANS
- --------------------------------------------------------------------------------
The 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. Contract 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.
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity (IRA).
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. An IRA generally may
not provide life insurance, but it may provide a death benefit that equals the
greater of the premiums paid and the Contract's Cash Value. The Contract
provides a death benefit that in certain circumstances may exceed the greater of
the payments and the Contract Value. It is possible that the death benefit could
be viewed as violating the prohibition on investment in life insurance contracts
with the result that the Contract would not be viewed as satisfying the
requirements of an IRA.
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.
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. Employers intending to use
the Contract in connection with such plans should seek competent advice. In
particular, employers should consider that an IRA generally may not provide life
insurance, but it may provide a death benefit that equals the greater of the
premiums paid and the contract's cash value. The Contract provides a death
benefit that in certain circumstances may exceed the greater of the payments and
the Contract Value.
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 on the account of hardship (earnings on salary
reduction contributions may not be distributed for hardship). These limitations
do not apply to withdrawals where Northbrook 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 non-natural 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
Section 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.
<PAGE>
EXPERTS
- --------------------------------------------------------------------------------
The financial statements and the related financial statement schedule included
in this statement of additional information have been audited by Deloitte &
Touche LLP, 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.
<PAGE>
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements of the Variable Account and Northbrook and the
accompanying Reports of Independent Auditors appear on the pages that follow.
The financial statements of Northbrook included herein should be considered only
as bearing upon the ability of Northbrook to meet its obligations under the
Contracts.
<PAGE>
Financial Statements
Index
-----
Page
----
Independent Auditors' Report............................................... F-1
Financial Statements:
Statements of Financial Position
December 31, 1998 and 1997........................................... F-2
Statements of Operations and Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996..................................... F-3
Statements of Shareholder's Equity for the Years Ended
December 31, 1998, 1997 and 1996..................................... F-4
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996..................................... F-5
Notes to Financial Statements......................................... F-6
Schedule IV - Reinsurance for the Years Ended
December 31, 1998, 1997 and 1996..................................... F-17
<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", an affiliate of The Allstate Corporation)
as of December 31, 1998 and 1997, and the related Statements of Operations and
Comprehensive Income, Shareholder's Equity and Cash Flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 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 19, 1999
F-1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
December 31,
------------
($ in thousands) 1998 1997
---- ----
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $81,156 and $72,491) $ 86,336 $ 76,402
Short-term 5,083 3,031
---------- ----------
Total investments 91,419 79,433
Reinsurance recoverable from Allstate Life
Insurance Company 2,148,091 2,293,094
Receivable from affiliates, net -- 1,467
Other assets 8,206 5,033
Separate Accounts 7,031,083 5,719,203
---------- ----------
TOTAL ASSETS $9,278,799 $8,098,230
========== ==========
LIABILITIES
Reserve for life-contingent contract benefits $ 145,055 $ 144,352
Contractholder funds 2,003,122 2,148,555
Current income taxes payable 1,830 162
Deferred income taxes 3,316 2,674
Payable to affiliates, net 6,586 --
Separate Accounts 7,031,083 5,719,203
---------- ----------
TOTAL LIABILITIES 9,190,992 8,014,946
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 56,600 56,600
Retained income 25,340 21,642
Accumulated other comprehensive income:
Unrealized net capital gains 3,367 2,542
---------- ----------
Total accumulated other comprehensive income 3,367 2,542
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 87,807 83,284
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $9,278,799 $8,098,230
========== ==========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net investment income $ 5,691 $ 5,146 $ 4,888
Realized capital gains and losses 2 (68) (20)
------- ------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 5,693 5,078 4,868
Income tax expense 1,995 1,756 1,666
------- ------- -------
NET INCOME 3,698 3,322 3,202
------- ------- -------
OTHER COMPREHENSIVE INCOME, AFTER-TAX
Change in unrealized net capital gains and losses 825 1,256 (1,371)
------- ------- -------
COMPREHENSIVE INCOME $ 4,523 $ 4,578 $ 1,831
======= ======= =======
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
December 31,
------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL CAPITAL PAID-IN 56,600 56,600 56,600
-------- -------- --------
RETAINED INCOME
Balance, beginning of year 21,642 18,320 15,118
Net income 3,698 3,322 3,202
-------- -------- --------
Balance, end of year 25,340 21,642 18,320
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year 2,542 1,286 2,657
Change in unrealized net capital gains and losses 825 1,256 (1,371)
-------- -------- --------
Balance, end of year 3,367 2,542 1,286
-------- -------- --------
Total shareholder's equity $ 87,807 $ 83,284 $ 78,706
======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,698 $ 3,322 $ 3,202
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, amortization and
other non-cash items 518 516 782
Realized capital gains and losses (2) 68 20
Changes in:
Life-contingent contract benefits and
contractholder funds 273 205 (198)
Income taxes payable 1,866 (480) 346
Other operating assets and liabilities 4,126 (264) 542
-------- -------- --------
Net cash provided by operating activities 10,479 3,367 4,694
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,922 1,606 3,522
Investment collections 10,253 10,036 5,770
Investment purchases (20,690) (18,568) (15,532)
Change in short-term investments, net (1,964) 3,559 1,459
-------- -------- --------
Net cash used in investing activities (10,479) (3,367) (4,781)
-------- -------- --------
NET DECREASE IN CASH -- -- (87)
CASH AT THE BEGINNING OF YEAR -- -- 87
-------- -------- --------
CASH AT END OF YEAR $ -- $ -- $ --
======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
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"). These financial statements have been prepared in conformity with
generally accepted accounting principles.
To conform with the 1998 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets savings products and life insurance exclusively through Dean
Witter Reynolds Inc. ("Dean Witter") (see Note 4), a wholly owned subsidiary of
Morgan Stanley Dean Witter. Savings products include deferred annuities, such as
variable annuities and fixed rate single and flexible premium annuities, and
immediate annuities. Life insurance includes universal life and variable life
products. In 1998, substantially all of the Company's statutory premiums and
deposits were from annuities. The Company re-domesticated its operations from
Illinois to Arizona in 1998.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary surrenders or withdrawal by customers, subject to applicable
surrender charges. These policies and contracts are reinsured primarily with
ALIC (see Note 3), which invests premiums and deposits to provide cash flows
that will be used to fund future benefits and expenses.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be proposed federal and
state regulation and legislation that, if passed, would allow banks greater
participation in securities and insurance businesses. Such events would present
an increased level of competition for sales of the Company's 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.
Additionally, traditional demutualizations of mutual insurance companies and
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; and (2) increasing competition in the
capital markets.
The Company is authorized to sell life and savings 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 for the Company are
California, Florida and Texas for the year ended December 31, 1998. No other
jurisdiction accounted for more than 5% of statutory premiums and deposits.
Substantially all premiums and deposits are ceded to ALIC under reinsurance
agreements.
F-6
<PAGE>
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 or amortized cost, which approximates fair value.
Investment income consists primarily of interest and dividends on short-term
investments. Interest is recognized on an accrual basis and dividends are
recorded at the ex-dividend date. 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 substantially all premiums,
contract charges, credited interest, policy benefits and certain expenses are
ceded to ALIC. Such amounts are reflected net of such reinsurance in the
statements of operations and comprehensive income. The amounts shown in the
Company's statements of operations and comprehensive income relate to the
investment of those assets of the Company that are not transferred under
reinsurance agreements. Reinsurance recoverable and the related reserve for
life-contingent contract benefits and contractholder funds are reported
separately in the statements of financial position. The Company continues to
have primary liability as the direct insurer for risks reinsured.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES
Revenues on universal life-type contracts are comprised of contract charges and
fees, and are recognized when assessed against the policyholder account balance.
Revenues on investment contracts include contract charges and fees for contract
administration and surrenders. These revenues are recognized when levied against
the contract balance. All premium revenues and contract charges are primarily
reinsured with ALIC.
INCOME TAXES
The income tax provision is calculated under the liability method and presented
net of reinsurance. 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. Deferred income taxes arise from
unrealized capital gains and losses on fixed income securities carried at fair
value and differences in the tax bases of investments.
F-7
<PAGE>
SEPARATE ACCOUNTS
The Company issues flexible premium deferred variable annuity and 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. The Company's Separate Accounts consist
of: Northbrook Variable Annuity Account, Northbrook Variable Annuity Account II
and Northbrook Life Variable Life Separate Account A. Each of the Separate
Accounts are unit investment trusts registered with the Securities and Exchange
Commission.
The assets of the Separate Accounts are carried at fair value. Investment income
and realized capital gains and losses of the Separate Accounts accrue directly
to the contractholders and, therefore, are not included in the Company's
statements of operations and comprehensive income. Revenues to the Company from
the Separate Accounts consist of contract maintenance fees, administration fees,
mortality and expense risk charges and cost of insurance charges, all of which
are reinsured with ALIC.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to structured
settlement annuities with life contingencies, is computed on the basis of
assumptions as to future investment yields, mortality, morbidity, terminations
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 1998.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most fixed 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 1998, credited interest rates on
contractholder funds ranged from 3.46% to 11.00% for those contracts with fixed
interest rates and from 3.25% to 6.50% 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.
NEW ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive income is a
measurement of certain changes in shareholder's equity that result from
transactions and other economic events other than transactions with
shareholders. For the Company, these consist of changes in unrealized gains and
losses on the investment portfolio (See Note 9).
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 redefines how segments are
determined and requires additional segment disclosures for both annual and
interim financial reporting. The Company has identified itself as a single
operating segment.
F-8
<PAGE>
PENDING ACCOUNTING STANDARDS
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP is required to be adopted in 1999. The
SOP provides guidance concerning when to recognize a liability for
insurance-related assessments and how those liabilities should be measured.
Specifically, insurance-related assessments should be recognized as liabilities
when all of the following criteria have been met: 1) an assessment has been
imposed or it is probable that an assessment will be imposed, 2) the event
obligating an entity to pay an assessment has occurred and 3) the amount of the
assessment can be reasonably estimated. The Company is currently evaluating the
effects of this SOP on its accounting for insurance-related assessments. Certain
information required for compliance is not currently available and therefore the
Company is studying alternatives for estimating the accrual. In addition,
industry groups are working to improve the information available. Adoption of
this standard is not expected to be material to the results of operations or
financial position of the Company.
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements whereby substantially all premiums,
contract charges, credited interest, policy benefits and certain expenses are
ceded to ALIC and reflected net of such reinsurance in the statements of
operations and comprehensive income. The amounts shown in the Company's
statements of operations and comprehensive income relate to the investment of
those assets of the Company that are not transferred under reinsurance
agreements. Reinsurance recoverable and the related reserve for life-contingent
contract benefits and contracholder funds are reported separately in the
statements of financial position. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Investment income earned on the assets which support contractholder funds and
the reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed under the
terms of reinsurance agreements. The following amounts were ceded to ALIC under
reinsurance agreements.
YEAR ENDED DECEMBER 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
Premiums $ 2,528 $ 1,979 $ 3,775
Contract charges 102,218 83,559 60,744
Credited interest, policy benefits,
and certain expenses 217,428 201,526 218,088
BUSINESS OPERATIONS
The Company utilizes services provided by AIC and ALIC and business facilities
owned or leased, and operated by AIC in conducting its business activities. The
Company reimburses AIC and ALIC for the operating expenses incurred 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 $26,230, $23,978 and $26,583 in 1998, 1997 and 1996,
respectively. Of these costs, the Company retains investment related expenses.
All other costs are ceded to ALIC under reinsurance agreements.
F-9
<PAGE>
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
Morgan Stanley Dean Witter Financial Advisors. Affiliates of Dean Witter are the
investment managers for the Morgan Stanley Dean Witter Variable Investment
Series, Morgan Stanley Universal Funds, Inc. and the Van Kampen American Capital
Life Investment Trust, 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. In
addition to the Company's products, Dean Witter markets other products which
compete with those of the Company. The strategic alliance is cancelable by
either party, however, the Company believes the benefits derived by Dean Witter
will preserve the alliance. If Dean Witter would choose to cancel the alliance,
existing contracts and policies would not be affected.
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, 1998
U.S. government and agencies $ 8,648 $ 1,469 $ -- $10,117
Municipal 590 11 -- 601
Corporate 33,958 1,634 (16) 35,576
Mortgage-backed securities 37,960 2,250 (168) 40,042
------- ------- ------- -------
Total fixed income securities $81,156 $ 5,364 $ (184) $86,336
======= ======= ======= =======
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
======= ======= ======= =======
</TABLE>
F-10
<PAGE>
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1998:
AMORTIZED FAIR
COST VALUE
Due in one year or less $ 1,443 $ 1,452
Due after one year through five years 7,546 7,950
Due after five years through ten years 26,008 27,429
Due after ten years 8,199 9,463
------- -------
43,196 46,294
Mortgage-backed securities 37,960 40,042
------- -------
Total $81,156 $86,336
======= =======
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
Fixed income securities $ 5,616 $ 5,364 $ 4,675
Short-term investments 190 84 390
------- ------- -------
Investment income, before expense 5,806 5,448 5,065
Investment expense 115 302 177
------- ------- -------
Net investment income $ 5,691 $ 5,146 $ 4,888
======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
Fixed income securities $ 2 $ (70) $ (22)
Short-term investments -- 2 2
------- ------- -------
Realized capital gains and losses 2 (68) (20)
Income tax (1) 24 7
------- ------- -------
Realized capital gains and losses, after tax $ 1 $ (44) $ (13)
======= ======= =======
Excluding calls and prepayments, gross losses of $9, $70 and $32 were realized
on sales of fixed income securities during 1998, 1997 and 1996, respectively.
F-11
<PAGE>
UNREALIZED NET CAPITAL GAINS
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
COST/
AMORTIZED FAIR GROSS UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES NET GAINS
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 81,156 $ 86,336 $ 5,364 $ (184) $ 5,180
======== ======== ======== ========
Deferred income taxes (1,813)
--------
Unrealized net capital gains $ 3,367
========
</TABLE>
CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
Fixed income securities $ 1,269 $ 1,932 $(2,108)
Deferred income taxes (444) (676) 737
------- ------- -------
Increase (decrease) in unrealized net
capital gains $ 825 $ 1,256 $(1,371)
======= ======= =======
SECURITIES ON DEPOSIT
At December 31, 1998, fixed income securities with a carrying value of $9,188
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 universal
life-type insurance reserves and deferred income taxes) 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. Their carrying values are assumed to
approximate fair value.
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Fixed income securities $ 86,336 $ 86,336 $ 76,402 $ 76,402
Short-term investments 5,083 5,083 3,031 3,031
Separate Accounts 7,031,083 7,031,083 5,719,203 5,719,203
F-12
<PAGE>
Fair values for fixed income securities are based on quoted market prices where
available. Non-quoted securities are valued based on discounted cash flows using
current interest rates for similar securities. 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 based on quoted market prices.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31, are
as follows:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Contractholder funds on
investment contracts $1,839,114 $1,814,684 $1,977,479 $1,951,214
Separate Accounts 7,031,083 7,031,083 5,719,203 5,719,203
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
(the "Allstate Group") in the filing of a consolidated federal income tax return
and is party to a federal income tax allocation agreement (the "Allstate Tax
Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the Company pays
to or receives from the Corporation the amount, if any, by which the Allstate
Group's federal income tax liability is 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 Sears, Roebuck and Co.'s ("Sears") distribution ("Sears distribution")
on June 30, 1995 of its 80.3% ownership in the Corporation to Sears
shareholders, the Allstate Group joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Tax Sharing Agreement"). Under the Tax Sharing
Agreement, the Company, through the Corporation, paid to or received from the
Sears Group the amount, if any, by which the Sears Tax Group's federal income
tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return.
F-13
<PAGE>
As a result of the Sears distribution, the Allstate Group was no longer included
in the Sears Tax Group, and the Tax Sharing Agreement was terminated.
Accordingly, the Allstate Group and Sears Group entered into a new tax sharing
agreement, which adopts many of the principles of the Tax Sharing Agreement and
governs their respective rights and obligations with respect to federal income
taxes for all periods prior to the Sears distribution, including the treatment
of audits of tax returns for such periods.
The Internal Revenue Service ("IRS") has completed its review of the Allstate
Group's federal income tax returns through the 1993 tax year. Any adjustment
that may result from IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or results of operations of
the Company.
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
1998 1997
---- ----
DEFERRED ASSETS
Separate Accounts $ -- $ 149
------- -------
DEFERRED LIABILITIES
Difference in tax bases of investments (1,503) (1,454)
Unrealized net capital gains (1,813) (1,369)
------- -------
Total deferred liabilities (3,316) (2,823)
------- -------
Net deferred liability $(3,316) $(2,674)
======= =======
The components of income tax expense for the year ended December 31, are as
follows:
1998 1997 1996
---- ---- ----
Current $ 1,797 $ 1,843 $ 1,642
Deferred 198 (87) 24
------- ------- -------
Total income tax expense $ 1,995 $ 1,756 $ 1,666
======= ======= =======
The Company paid income taxes of $129, $2,236 and $2,308 in 1998, 1997 and 1996,
respectively. The Company had a current income tax liability of $1,830 and $162
at December 31, 1998 and 1997, respectively.
F-14
<PAGE>
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:
1998 1997 1996
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.2) (0.4) (0.6)
Other 0.2 -- (0.2)
------ ------ ------
Effective income tax rate 35.0% 34.6% 34.2%
====== ====== ======
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, 1998, 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
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Arizona
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 does not follow any permitted statutory accounting
practices that have a significant impact on statutory surplus or statutory net
income.
The NAIC's codification initiative has produced a comprehensive guide of revised
statutory accounting principles. While the NAIC has approved a January 1, 2001
implementation date for the newly developed guidance, companies must adhere to
the implementation date adopted by their state of domicile. The Company's state
of domicile, Arizona, is continuing its comparison of codification and current
statutory accounting requirements to determine necessary revisions to existing
state laws and regulations. The requirements are not expected to have a material
impact on the statutory surplus of the Company.
F-15
<PAGE>
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 the Company 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 1999 without prior approval of the Arizona Department of Insurance is
$3,518.
9. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax basis for
the year ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ---------------------------- -----------------------------
After- After- After-
Pretax Tax tax Pretax Tax tax Pretax Tax tax
------ --- --- ------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized capital gains
and losses:
- ---------------------------------
Unrealized holding gains
(losses) arising during
the period $ 1,271 $ (445) $ 826 $ 1,862 $ (652) $ 1,210 $(2,130) $ 745 $(1,385)
Less: reclassification
adjustment for realized
net capital gains
included in net income 2 (1) 1 (70) 24 (46) (22) 8 (14)
------- ------- ------- ------- ------- ------- ------- ------- -------
Unrealized net capital
gains (losses) 1,269 (444) 825 1,932 (676) 1,256 (2,108) 737 (1,371)
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
income $ 1,269 $ (444) $ 825 $ 1,932 $ (676) $ 1,256 $(2,108) $ 737 $(1,371)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
10. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social, economic
and regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing banks
from engaging in the securities and insurance business, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and proposed legislation to prohibit the use of gender in
determining insurance rates and benefits. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. In the opinion of management, the ultimate liability, if any, arising
from such pending or threatened litigation is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
F-16
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 494,256 $ 494,256 $ --
========= ========= =========
Premiums and contract charges:
Life and annuities $ 104,746 $ 104,746 $ --
========= ========= =========
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
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, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- ------ ----- ------
Life insurance in force $ 556,242 $ 556,242 $ --
========= ========= ==========
Premiums and contract charges:
Life and annuities $ 64,519 $ 64,519 $ --
========= ========= ==========
F-17
<PAGE>
-------------------------------------------------------------------------------
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
Financial Statements as of December 31, 1998
and for the periods ended December 31, 1998
and December 31, 1997, and
Independent Auditors' Report
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Independent Auditors' Report 1
Statements of Net Assets as of December 31, 1998 for the following:
Investments in the Morgan Stanley Dean Witter Variable Investment
Series Portfolios: 2
Money Market
High Yield
Equity
Quality Income Plus
Strategist
Dividend Growth
Utilities
European Growth
Capital Growth
Global Dividend Growth
Pacific Growth
Capital Appreciation
Income Builder
Competitive Edge "Best Ideas"
S&P 500 Index
Investments in the Morgan Stanley Dean Witter Universal Funds, Inc.
Portfolios:
International Magnum
Emerging Markets Equity
Equity Growth
U.S. Real Estate
Investment in the Van Kampen Life Investment Trust Portfolio:
Emerging Growth
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Statements of Operations for the following:
For the Year Ended December 31, 1998
Investments in the Morgan Stanley Dean Witter Variable Investment
Series Portfolios: 3, 4
Money Market
High Yield
Equity
Quality Income Plus
Strategist
Dividend Growth
Utilities
European Growth
Capital Growth
Global Dividend Growth
Pacific Growth
Capital Appreciation
Income Builder 5
For the Period May 18, 1998 to December 31, 1998
Investments in the Morgan Stanley Dean Witter Variable Investment
Series Portfolios:
Competitive Edge "Best Ideas"
S&P 500 Index
For the Period March 16, 1998 to December 31, 1998
Investments in the Morgan Stanley Dean Witter Universal Funds,
Inc. Portfolios:
International Magnum
Emerging Markets Equity
Equity Growth
For the Period May 18, 1998 to December 31, 1998
Investments in the Morgan Stanley Dean Witter Universal Funds,
Inc. Portfolios:
U.S. Real Estate
For the Period March 16, 1998 to December 31, 1998
Investment in the Van Kampen Life Investment Trust Portfolio:
Emerging Growth
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Statements of Changes in Net Assets for the following:
For the Years Ended December 31, 1998, and 1997
Investments in the Morgan Stanley Dean Witter Variable Investment
Series Portfolios: 6,7,9,10
Money Market
High Yield
Equity
Quality Income Plus
Strategist
Dividend Growth
Utilities
European Growth
Capital Growth
Global Dividend Growth
Pacific Growth
For the Year Ended December 31, 1998, and for the Period
January 21, 1997 to December 31, 1997
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Capital Appreciation
Income Builder 8, 10
For the Period May 18, 1998 to December 31, 1998
Investments in the Morgan Stanley Dean Witter Variable Investment
Series Portfolios: 8
Competitive Edge "Best Ideas"
S&P 500 Index
For the Period March 16, 1998 to December 31, 1998
Investments in the Morgan Stanley Dean Witter Universal Funds,
Inc. Portfolios:
International Magnum
Emerging Markets Equity
Equity Growth
For the Period May 18, 1998 to December 31, 1998
Investment in the Morgan Stanley Dean Witter Universal Funds, Inc. Portfolio:
U.S. Real Estate
For the Period March 16, 1998 to December 31, 1998
Investment in the Van Kampen Life Investment Trust Portfolio:
Emerging Growth
Notes to Financial Statements 11-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Northbrook Life Insurance Company:
We have audited the accompanying statements of net assets of each of the
sub-accounts ("portfolios" for purposes of this report), listed in the table of
contents, that comprise Northbrook Variable Annuity Account II (the "Account"),
a Separate Account of Northbrook Life Insurance Company, an affiliate of The
Allstate Corporation, as of December 31, 1998, and the related statements of
operations and changes in net assets for the applicable periods indicated in the
table of contents. 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 audits 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, 1998. 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 each of the portfolios, listed in the table
of contents, that comprise the Account as of December 31, 1998, and the results
of their operations, and the changes in their net assets for each of the
periods, indicated in the table of contents, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 18, 1999
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF NET ASSETS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
($ and shares in thousands)
ASSETS
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Money Market, 401,023 shares (cost $401,023) $ 401,023
High Yield, 66,497 shares (cost $407,839) 337,140
Equity, 26,919 shares (cost $761,382) 1,038,517
Quality Income Plus, 45,087 shares (cost $481,586) 495,962
Strategist, 33,442 shares (cost $456,197) 556,471
Dividend Growth, 94,314 shares (cost $1,606,539) 2,087,163
Utilities, 23,911 shares (cost $353,913) 508,112
European Growth, 17,375 shares (cost $353,686) 472,241
Capital Growth, 6,310 shares (cost $100,444) 128,471
Global Dividend Growth, 32,832 shares (cost $405,572) 454,072
Pacific Growth, 9,197 shares (cost $66,760) 47,365
Capital Appreciation, 3,020 shares (cost $33,114) 31,290
Income Builder, 7,319 shares (cost $83,510) 83,874
Competitive Edge "Best Ideas", 3,599 shares (cost $34,032) 35,309
S&P 500 Index, 4,143 shares (cost $41,873) 46,487
Investments in the Morgan Stanley Dean Witter Universal Funds,
Inc. Portfolios:
International Magnum, 308 shares (cost $3,639) 3,463
Emerging Markets Equity, 205 shares (cost $1,636) 1,459
Equity Growth, 1,701 shares (cost $24,283) 25,683
U.S. Real Estate, 202 shares (cost $2,036) 1,980
Investments in the Van Kampen Life Investment Trust Portfolio:
Emerging Growth, 426 shares (cost $8,141) 9,640
------------
Total assets 6,765,722
LIABILITIES
Payable to Northbrook Life Insurance Company:
Accrued contract maintenance charges 1,499
------------
Net assets $ 6,764,223
============
See notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
--------------------------------------------------------------------------
For the Year Ended December 31, 1998
--------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 17,397 $ 43,535 $ 109,635 $ 28,193 $ 56,397 $ 209,394
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk (4,498) (4,678) (11,173) (5,781) (6,152) (25,103)
Administrative expense (350) (360) (862) (455) (480) (1,944)
--------- --------- --------- --------- --------- ---------
Net investment income (loss) 12,549 38,497 97,600 21,957 49,765 182,347
--------- --------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 239,277 154,402 95,654 59,783 60,552 184,605
Cost of investments sold 239,277 164,118 73,762 58,900 51,539 133,624
--------- --------- --------- --------- --------- ---------
Net realized gains (losses) -- (9,716) 21,892 883 9,013 50,981
--------- --------- --------- --------- --------- ---------
Change in unrealized gains (losses) -- (58,495) 101,407 7,935 48,208 (11,845)
--------- --------- --------- --------- --------- ---------
Net gains (losses) on investments - -- (68,211) 123,299 8,818 57,221 39,136
--------- --------- --------- --------- --------- ---------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $ 12,549 $ (29,714) $ 220,899 $ 30,775 $ 106,986 $ 221,483
========= ========= ========= ========= ========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
--------------------------------------------------------------------------
For the Year Ended December 31, 1998
--------------------------------------------------------------------------
Global Capital
European Capital Dividend Pacific Appreci-
Utilities Growth Growth Growth Growth ation
--------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 34,513 $ 32,912 $ 9,336 $ 56,581 $ 2,661 $ 200
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk (5,586) (5,623) (1,586) (5,960) (645) (420)
Administrative expense (439) (436) (123) (462) (50) (32)
--------- --------- --------- --------- --------- ---------
Net investment income (loss) 28,488 26,853 7,627 50,159 1,966 (252)
--------- --------- --------- --------- --------- ---------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 67,310 104,720 26,648 87,138 69,894 10,850
Cost of investments sold 47,924 80,227 22,224 77,300 93,611 10,897
--------- --------- --------- --------- --------- ---------
Net realized gains (loss) 19,386 24,493 4,424 9,838 (23,717) (47)
--------- --------- --------- --------- --------- ---------
Change in unrealized gains (losses) 41,969 25,370 6,985 (15,619) 14,937 (2,968)
--------- --------- --------- --------- --------- ---------
Net gains (losses) on investments 61,355 49,863 11,409 (5,781) (8,780) (3,015)
--------- --------- --------- --------- --------- ---------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $ 89,843 $ 76,716 $ 19,036 $ 44,378 $ (6,814) $ (3,267)
========= ========= ========= ========= ========= =========
See notes to financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Van Kampen
Life
Investment
Morgan Stanley Dean Witter Morgan Stanley Dean Witter Univeral Trust
Variable Investment Series Funds, Inc. Portfolios Portfolio
------------------------------ ----------------------------------------- ----------
For the For the
For the Period Period
Year May 18, March 16,
Ended For the Period 1998 to 1998 to
December May 18, 1998 to For the Period March 16, December December
31, 1998 December 31, 1998 1998 to December 31, 1998 31, 1998 31, 1998
-------- ------------------- ------------------------------ --------- ---------
Compet-
itive
Edge Inter- Emerging U.S.
Income "Best S&P 500 national Markets Equity Real Emerging
Builder Ideas" Index Magnum Equity Growth Estate Growth
-------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 4,591 $ -- $ -- $ 20 $ 7 $ 106 $ 54 $ --
Charges from Northbrook Life Insurance
Company:
Mortality and expense risk (1,007) (199) (159) (25) (9) (172) (10) (44)
Administrative expense (76) (15) (12) (2) (1) (13) (1) (3)
-------- -------- -------- -------- -------- -------- -------- --------
Net investment income (loss) 3,508 (214) (171) (7) (3) (79) 43 (47)
-------- -------- -------- -------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of
investments:
Proceeds from sales 9,687 9,230 1,921 1,007 603 2,815 298 1,422
Cost of investments sold 9,828 9,577 1,955 1,082 669 3,027 328 1,474
-------- -------- -------- -------- -------- -------- -------- --------
Net realized gains (losses) (141) (347) (34) (75) (66) (212) (30) (52)
-------- -------- -------- -------- -------- -------- -------- --------
Change in unrealized gains (losses) (3,234) 1,277 4,614 (176) (177) 1,400 (56) 1,499
-------- -------- -------- -------- -------- -------- -------- --------
Net gains (losses) on investments (3,375) 930 4,580 (251) (243) 1,188 (86) 1,447
-------- -------- -------- -------- -------- -------- -------- --------
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS $ 133 $ 716 $ 4,409 $ (258) $ (246) $ 1,109 $ (43) $ 1,400
======== ======== ======== ======== ======== ======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
--------------------------------------------------------------------------------------
For the Year Ended December 31, 1998
--------------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 12,549 $ 38,497 $ 97,600 $ 21,957 $ 49,765 $ 182,347
Net realized gains (losses) -- (9,716) 21,892 883 9,013 50,981
Change in unrealized gains (losses) -- (58,495) 101,407 7,935 48,208 (11,845)
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from operations 12,549 (29,714) 220,899 30,775 106,986 221,483
FROM CAPITAL TRANSACTIONS
Deposits 129,304 89,840 172,406 61,783 73,193 365,505
Benefit payments (10,995) (6,105) (8,144) (7,285) (6,681) (20,960)
Payments on termination (87,147) (37,591) (87,507) (51,273) (53,776) (208,790)
Contract maintenance charges (141) (129) (381) (199) (221) (878)
Transfers among the portfolios and
with the Fixed Account - net 56,130 (15,774) 4,500 38,984 13,210 (16,301)
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from capital transactions 87,151 30,241 80,874 42,010 25,725 118,576
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS 99,700 527 301,773 72,785 132,711 340,059
NET ASSETS AT BEGINNING OF YEAR 301,234 336,538 736,514 423,067 423,637 1,746,643
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS AT END OF YEAR $ 400,934 $ 337,065 $1,038,287 $ 495,852 $ 556,348 $ 2,086,702
=========== =========== =========== =========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
----------------------------------------------------------------------------
For the Year Ended December 31, 1998
----------------------------------------------------------------------------
Global
European Capital Dividend Pacific Capital
Utilities Growth Growth Growth Growth Appreciation
---------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 28,488 $ 26,853 $ 7,627 $ 50,159 $ 1,966 $ (252)
Net realized gains (losses) 19,386 24,493 4,424 9,838 (23,717) (47)
Change in unrealized gains (losses) 41,969 25,370 6,985 (15,619) 14,937 (2,968)
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from operations 89,843 76,716 19,036 44,378 (6,814) (3,267)
FROM CAPITAL TRANSACTIONS
Deposits 58,091 77,756 17,878 54,785 5,414 12,585
Benefit payments (7,223) (4,658) (965) (4,783) (481) (278)
Payments on termination (56,603) (44,010) (15,021) (45,080) (5,343) (2,047)
Contract maintenance charges (207) (197) (51) (209) (24) (13)
Transfers among the portfolios and with the
Fixed Account - net 14,560 8,524 (10,068) (45,404) (7,740) (6,494)
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting from
capital transactions 8,618 37,415 (8,227) (40,691) (8,174) 3,753
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS 98,461 114,131 10,809 3,687 (14,988) 486
NET ASSETS AT BEGINNING OF YEAR 409,538 358,005 117,633 450,284 62,342 30,797
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS AT END OF YEAR $ 507,999 $ 472,136 $ 128,442 $ 453,791 $ 47,354 $ 31,283
=========== =========== =========== =========== =========== ===========
<FN>
See notes to financial statements.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Van Kampen
Life
Morgan Stanley Dean Witter Investment
Variable Investment Series Morgan Stanley Dean Witter Trust
Portfolio Universal Funds, Inc. Portfolio Portfolio
---------------------------------- --------------------------------------------- ----------
For the For the
Period Period
For the May 18, March 16,
Year Ended For the Period For the Period 1998 to 1998 to
December May 18, 1998 to March 16, 1998 to December December
31, 1998 December 31, 1998 December 31, 1998 31, 1998 31, 1998
---------- --------------------- --------------------------------- --------- ---------
Competi-
tive Edge Inter- Emerging U.S.
Income "Best S&P 500 national Markets Equity Real Emerging
Builder Ideas" Index Magnum Equity Growth Estate Growth
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 3,508 $ (214) $ (171) $ (7) $ (3) $ (79) $ 43 $ (47)
Net realized gains (losses) (141) (347) (34) (75) (66) (212) (30) (52)
Change in unrealized gains (losses) (3,234) 1,277 4,614 (176) (177) 1,400 (56) 1,499
--------- --------- --------- --------- --------- --------- --------- ---------
Change in net assets resulting
from operations 133 716 4,409 (258) (246) 1,109 (43) 1,400
FROM CAPITAL TRANSACTIONS
Deposits 34,230 19,127 20,590 2,610 1,114 21,346 1,559 5,514
Benefit payments (920) (168) (60) (11) -- (354) -- --
Payments on termination (5,563) (423) (593) (168) (7) (594) (35) (272)
Contract maintenance charges (31) (10) (12) (1) -- (7) (1) (3)
Transfers among the portfolios and
with the Fixed Account - net 3,008 16,059 22,143 1,291 598 4,177 500 2,999
--------- --------- --------- --------- --------- --------- --------- ---------
Change in net assets resulting
from capital transactions 30,724 34,585 42,068 3,721 1,705 24,568 2,023 8,238
--------- --------- --------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN NET ASSETS 30,857 35,301 46,477 3,463 1,459 25,677 1,980 9,638
NET ASSETS AT BEGINNING OF PERIOD 52,998 -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
NET ASSETS AT END OF PERIOD $ 83,855 $ 35,301 $ 46,477 $ 3,463 $ 1,459 $ 25,677 $ 1,980 $ 9,638
========= ========= ========= ========= ========= ========= ========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
($ and units in thousands, except value per unit)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997
---------------------------------------------------------------------------------------------
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
=========== =========== =========== ========== =========== =========== ==========
<FN>
See notes to the financial statements.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------
($ and units in thousands, except value per unit)
Morgan Stanley Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------
For the Period January 21,
For the Year Ended December 31, 1997 to December 31, 1997
----------------------------------------------------- --------------------------
Global
European Capital Dividend Pacific Capital Income
Growth Growth Growth Growth Appreciation Builder
---------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 15,664 $ 9,696 $ 17,676 $ 231 $ (214) $ 934
Net realized gains (losses) 12,290 3,189 3,995 (8,369) 158 34
Change in unrealized gains (losses) 15,432 4,657 12,263 (35,707) 1,144 3,598
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from operations 43,386 17,542 33,934 (43,845) 1,088 4,566
FROM CAPITAL TRANSACTIONS
Deposits 87,645 24,982 128,566 15,672 18,352 31,208
Benefit payments (2,725) (910) (3,466) (1,262) (109) (165)
Payments on termination (37,732) (11,218) (41,571) (11,743) (944) (1,458)
Contract maintenance charges (148) (49) (199) (37) (12) (15)
Transfers among the portfolios and
with the Fixed Account - net (3,726) 8,692 25,556 (26,769) 12,422 18,862
----------- ----------- ----------- ----------- ----------- -----------
Change in net assets resulting
from capital transactions 43,314 21,497 108,886 (24,139) 29,709 48,432
----------- ----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN NET ASSETS 86,700 39,039 142,820 (67,984) 30,797 52,998
NET ASSETS AT BEGINNING OF PERIOD 271,305 78,594 307,464 130,326 -- --
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS AT END OF PERIOD $ 358,005 $ 117,633 $ 450,284 $ 62,342 $ 30,797 $ 52,998
=========== =========== =========== =========== =========== ===========
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
=========== =========== =========== =========== =========== ===========
<FN>
See notes to the financial statements.
</FN>
</TABLE>
10
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, a wholly owned subsidiary of
Allstate Insurance Company, which is wholly owned by The Allstate
Corporation.
Northbrook Life issues two variable annuity contracts, the Northbrook
Variable Annuity II and the Morgan Stanley Dean Witter Variable Annuity II
Asset Manager, the deposits of which are invested at the direction of the
contractholder in the sub-accounts ("portfolios" for the purposes of this
report) that comprise the Account. Contractholders bear all investment risk
for amounts allocated to the Account. The portfolios invest in the Morgan
Stanley Dean Witter Variable Investment Series, Morgan Stanley Dean Witter
Universal Funds, Inc., and Van Kampen Life Investment Trust (collectively,
the "Funds").
Northbrook Life provides insurance and administrative services to the
contractholders for a fee.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS - Investments consist of shares of the Funds and
are stated at fair value based on quoted market prices at December 31,
1998.
INVESTMENT INCOME - Investment income consists of dividends declared by the
Funds 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 portfolio shares by the
Account and the cost of such shares, which is determined on a weighted
average basis.
FEDERAL INCOME TAXES - The Account intends to qualify as a segregated asset
account as defined in the Internal Revenue Code ("Code"). As such, the
operations of the Account are included in the tax return of Northbrook
Life. Northbrook Life is taxed as a life insurance company under the Code.
No federal income taxes are payable by the Account in 1998 as the Account
did not generate taxable income.
11
<PAGE>
3. CONTRACT CHARGES
Northbrook Life charges each contractholder daily at a per annum rate as
follows:
Mortality and Administrative
expense risk expense
------------ -------
Northbrook Variable Annuity II 1.25% (a) .10%
Morgan Stanley Dean Witter Variable
Annuity II Asset Manager 1.49% (b) .10%
(a) Two optional death benefit provisions (enhanced death benefit and
performance death benefit) and an optional performance income benefit
are available at an additional charge of .13% for each, bringing the
mortality and expense risk charge to 1.38% when one of these options
has been selected. When both the performance income benefit and the
performance death benefit are selected, an additional charge of .24%
is assessed for a total mortality and expense risk charge of 1.49%.
(b) Two optional death benefit provisions (enhanced death benefit and
performance death benefit) and an optional performance income benefit
are available at an additional charge of .13% for each, bringing the
mortality and expense risk charge to 1.62% when one of these options
has been selected. When both the performance income benefit and the
performance death benefit are selected, an additional charge of .24%
is assessed for a total mortality and expense risk charge of 1.73%.
Northbrook Life charges an annual contract maintenance fee of $30 for each
Northbrook Variable Annuity II contract. If aggregate deposits are less
than $50,000 in the Morgan Stanley Dean Witter Variable Annuity II Asset
Manager contract, Northbrook Life will deduct an annual maintenance fee of
$35 on each contract anniversary.
4. FINANCIAL INSTRUMENTS
The investments of the Account are carried at fair value, based on quoted
market prices. Accrued contract maintenance charges are of a short-term
nature. It is assumed that their carrying value approximates fair value.
12
<PAGE>
<TABLE>
<CAPTION>
5. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
Northbrook Variable Annuity II
Unit activity during 1998:
--------------------------------------
Units Units Accumulation
Outstanding Outstanding Unit Value
December Units Units December December
31, 1997 Issued Redeemed 31, 1998 31, 1998
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Money Market 18,622,471 29,618,231 (27,081,671) 21,159,031 $ 12.98
High Yield 8,795,791 2,662,861 (3,259,510) 8,199,142 24.66
Equity 13,509,402 2,779,303 (3,679,964) 12,608,741 50.02
Quality Income Plus 20,834,557 4,548,681 (5,071,041) 20,312,197 19.27
Strategist 16,149,246 2,137,422 (3,712,656) 14,574,012 26.88
Dividend Growth 39,664,627 5,856,411 (9,186,865) 36,334,173 36.73
Utilities 15,169,533 2,081,739 (3,709,730) 13,541,542 29.46
European Growth 9,762,952 3,453,911 (4,248,976) 8,967,887 34.08
Capital Growth 4,468,723 591,637 (1,397,402) 3,662,958 23.81
Global Dividend Growth 21,656,308 2,154,837 (6,176,673) 17,634,472 16.99
Pacific Growth 8,189,699 5,896,210 (7,759,942) 6,325,967 5.36
Capital Appreciation 1,609,271 675,388 (843,723) 1,440,936 10.15
Income Builder 2,364,018 1,697,157 (1,081,195) 2,979,980 12.30
Competitive Edge "Best Ideas" -- 2,229,816 (797,071) 1,432,745 9.73
S&P 500 Index -- 2,077,746 (355,037) 1,722,709 11.13
Investments in the Morgan Stanley Dean Witter
Universal Funds, Inc. Portfolios:
International Magnum -- 200,313 (63,685) 136,628 9.79
Emerging Markets Equity -- 133,597 (51,595) 82,002 7.10
Equity Growth -- 986,727 (164,689) 822,038 10.10
U.S. Real Estate -- 104,232 (24,503) 79,729 9.06
Investments in the Van Kampen Life Investment
Trust Portfolios:
Emerging Growth -- 343,599 (88,895) 254,704 12.00
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
13
<PAGE>
<TABLE>
<CAPTION>
5. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
Northbrook Variable Annuity II with Death Benefit or
Peformance Income Benefit Option
Unit activity during 1998:
--------------------------------------
Units Units Accumulation
Outstanding Outstanding Unit Value
December Units Units December December
31, 1997 Issued Redeemed 31, 1998 31, 1998
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Money Market 5,406,811 21,513,035 (17,980,986) 8,938,860 $ 12.96
High Yield 3,843,598 3,574,266 (2,113,354) 5,304,510 24.56
Equity 5,455,102 4,060,420 (1,584,262) 7,931,260 49.82
Quality Income Plus 2,701,037 3,748,051 (1,339,495) 5,109,593 19.20
Strategist 3,529,251 2,975,852 (865,951) 5,639,152 26.78
Dividend Growth 13,969,794 9,295,313 (3,328,670) 19,936,437 36.59
Utilities 1,754,323 2,529,566 (773,386) 3,510,503 29.44
European Growth 3,091,241 3,420,945 (1,843,647) 4,668,539 33.94
Capital Growth 1,365,100 814,201 (491,454) 1,687,847 23.72
Global Dividend Growth 7,788,524 3,158,171 (2,016,791) 8,929,904 16.92
Pacific Growth 2,105,010 8,584,871 (8,233,030) 2,456,851 5.33
Capital Appreciation 1,147,553 1,051,403 (671,619) 1,527,337 10.12
Income Builder 2,025,367 2,373,888 (747,044) 3,652,211 12.27
Competitive Edge "Best Ideas" -- 2,682,216 (716,848) 1,965,368 9.72
S&P 500 Index -- 2,152,754 (149,453) 2,003,301 11.12
Investments in the Morgan Stanley Dean Witter
Universal Funds, Inc. Portfolios:
International Magnum -- 228,450 (57,553) 170,897 9.78
Emerging Markets Equity -- 147,831 (53,231) 94,600 7.09
Equity Growth -- 1,868,415 (337,596) 1,530,819 10.09
U.S. Real Estate -- 92,318 (11,536) 80,782 9.05
Investments in the Van Kampen Life Investment
Trust Portfolios:
Emerging Growth -- 502,151 (100,069) 402,082 11.98
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
14
<PAGE>
5. UNITS ISSUED AND REDEEMED (Continued)
(Units in whole amounts)
Northbrook Variable Annuity II with Performance Income Benefit and
Performance Death Benefit
<TABLE>
<CAPTION>
Unit activity during 1998
------------------------------------------------------------------------
Units Units Accumulation
Outstanding Units Units Outstanding Unit Value
December 31, 1997 Issued edeemed December 31, 1998 December 31, 1998
----------------- ---------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Investments in the Dean Witter
Variable Investment Series Portfolios:
Money Market - 1,510,549 837,515) 673,034 $ 12.77
High Yield - 179,714 (41,830) 137,884 24.18
Equity - 240,636 (19,005) 221,631 49.06
Quality Income Plus - 199,475 (29,714) 169,761 18.91
Strategist - 493,607 (20,791) 472,816 26.37
Dividend Growth - 573,909 (45,768) 528,141 36.03
Utilities - 175,090 (15,230) 159,860 28.99
European Growth - 207,634 (32,277) 175,357 33.45
Capital Growth - 49,812 (7,927) 41,885 23.37
Global Dividend Growth - 174,390 (17,961) 156,429 16.79
Pacific Growth - 81,292 (28,808) 52,484 5.29
Capital Appreciation - 90,771 (12,886) 77,885 10.10
Income Builder - 195,348 (30,891) 164,457 12.25
Competitive Edge "Best Ideas" - 218,369 (39,607) 178,762 9.71
S&P 500 Index - 325,073 (41,562) 283,511 11.11
Investments in the Morgan Stanley
Universal Funds, Inc. Portfolios:
International Magnum - 42,585 (10,652) 31,933 9.77
Emerging Markets Equity - 28,692 (9,192) 19,500 7.09
Equity Growth - 181,311 (27,110) 154,201 10.37
U.S. Real Estate - 42,621 (5,428) 37,193 9.05
Investments in the Van Kampen American
Capital Life Investment Trust Portfolios:
Emerging Growth - 104,423 (21,996) 82,427 12.59
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
<PAGE>
Morgan Stanley Dean Witter Variable Annuity II Asset Manager
<TABLE>
<CAPTION>
Unit activity during 1998
--------------------------------------------------------------------------
Accumulation
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1997 Issued Redeemed December 31, 1998 December 31, 1998
----------------- ------- ---------- ---------------- -----------------
Investments in the Dean Witter
Variable Investment Series Portfolios:
<S> <C> <C> <C> <C> <C>
Money Market - 134,017 (52,312) 81,705 $ 10.15
High Yield - 93,888 (288) 93,600 8.87
Equity - 38,121 (3,611) 34,510 10.27
Quality Income Plus - 191,794 (13,766) 178,028 10.36
Strategist - 70,485 (449) 70,036 10.34
Dividend Growth - 155,660 (8,346) 147,314 10.10
Utilities - 46,771 (422) 46,349 10.90
European Growth - 26,543 (4,490) 22,053 9.01
Capital Growth - 7,961 (1,769) 6,192 9.71
Global Dividend Growth - 15,248 (16) 15,232 9.89
Pacific Growth - 1,450 - 1,450 10.99
Capital Appreciation - 7,872 (279) 7,593 8.52
Income Builder - 18,610 (383) 18,227 9.68
Competitive Edge "Best Ideas" - 17,981 (411) 17,570 9.57
S&P 500 Index - 35,403 (9) 35,394 10.38
Investments in the Morgan Stanley
Universal Funds, Inc. Portfolios:
International Magnum - 6,590 (1) 6,589 8.76
Emerging Markets Equity - 463 (340) 123 8.12
Equity Growth - 14,361 (3) 14,358 9.88
U.S. Real Estate - 3,295 (1) 3,294 9.11
Investments in the Van Kampen American
Capital Life Investment Trust Portfolios:
Emerging Growth - 10,950 (3) 10,947 10.51
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
15
<PAGE>
<TABLE>
<CAPTION>
5. UNITS ISSUED AND REDEEMED (Continued)
(Units in whole amounts)
Morgan Stanley Dean Witter Variable Annuity II Asset Manager
with Death Benefit or Performance Income Benefit Option
Unit activity during 1998:
--------------------------------------
Units Units Accumulation
Outstanding Outstanding Unit Value
December Units Units December December
31, 1997 Issued Redeemed 31, 1998 31, 1998
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Money Market -- 589,224 (503,397) 85,827 $ 10.15
High Yield -- 401,477 (363,262) 38,215 8.86
Equity -- 85,082 (4,965) 80,117 10.27
Quality Income Plus -- 56,800 (4,022) 52,778 10.35
Strategist -- 38,941 (14,885) 24,056 10.34
Dividend Growth -- 173,319 (7,329) 165,990 10.10
Utilities -- 35,912 (2,623) 33,289 10.90
European Growth -- 497,082 (290,652) 206,430 9.01
Capital Growth -- 5,156 (3) 5,153 9.70
Global Dividend Growth -- 39,005 (694) 38,311 9.88
Pacific Growth -- 299,447 (297,824) 1,623 10.99
Capital Appreciation -- 30,193 (1,781) 28,412 8.52
Income Builder -- 17,665 (833) 16,832 9.68
Competitive Edge "Best Ideas" -- 25,339 (532) 24,807 9.56
S&P 500 Index -- 109,657 (4,705) 104,952 10.38
Investments in the Morgan Stanley Dean Witter
Universal Funds, Inc. Portfolios:
International Magnum -- 9,577 (2) 9,575 8.76
Emerging Markets Equity -- 5,918 (1,993) 3,925 8.11
Equity Growth -- 18,569 (644) 17,925 9.88
U.S. Real Estate -- 17,480 (17) 17,463 9.11
Investments in the Van Kampen Life Investment
Trust Portfolios:
Emerging Growth -- 31,848 (797) 31,051 10.50
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
16
<PAGE>
<TABLE>
<CAPTION>
5. UNITS ISSUED AND REDEEMED (Continued)
(Units in whole amounts)
Morgan Stanley Dean Witter Variable Annuity II Asset Manager
with Performance Income Benefit and Performance Death Benefit
Unit activity during 1998:
--------------------------------------
Units Units Accumulation
Outstanding Outstanding Unit Value
December Units Units December December
31, 1997 Issued Redeemed 31, 1998 31, 1998
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Portfolios:
Money Market -- 67,944 (52,888) 15,056 $ 10.14
High Yield -- 12,539 (1,140) 11,399 8.86
Equity -- 62,407 (31,801) 30,606 10.26
Quality Income Plus -- 81,104 (33) 81,071 10.35
Strategist -- 18,099 (10) 18,089 10.33
Dividend Growth -- 74,673 (15,719) 58,954 10.09
Utilities -- 19,656 (12) 19,644 10.89
European Growth -- 10,229 (8) 10,221 9.00
Capital Growth -- 12,471 (7) 12,464 9.70
Global Dividend Growth -- 14,658 (6) 14,652 9.88
Pacific Growth -- 4,550 -- 4,550 10.98
Capital Appreciation -- 11,988 (3) 11,985 8.51
Income Builder -- 3,159 (1) 3,158 9.67
Competitive Edge "Best Ideas" -- 12,372 (3) 12,369 9.56
S&P 500 Index -- 41,707 (10) 41,697 10.37
Investments in the Morgan Stanley Dean Witter
Universal Funds, Inc. Portfolios:
International Magnum -- -- -- -- --
Emerging Markets Equity -- 4,236 (1) 4,235 8.11
Equity Growth -- -- -- -- --
U.S. Real Estate -- -- -- -- --
Investments in the Van Kampen Life Investment
Trust Portfolios:
Emerging Growth -- 27,037 (7) 27,030 10.50
</TABLE>
Units relating to accrued contract maintenance charges are included in units
redeemed.
17
