Morgan Stanley Dean Witter
Variable Annuity 3 AssetManager
Northbrook Life Insurance Company Prospectus dated September 12, 2000
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 3 AssetManager, 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 34 investment alternatives ("investment
alternatives"). The investment alternatives include 3 fixed account options
("Fixed Account Options") and 31 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 (Class Y Shares)
o The Universal Institutional Funds, Inc.
o Van Kampen Life Investment Trust
o AIM Variable Insurance Funds
o Alliance Variable Products Series Fund (Class B Shares)
o Putnam Variable Trust (Class IB Shares)
We (Northbrook) have filed a Statement of Additional Information, dated
September 12, 2000, 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 A-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 (http://www.sec.gov). 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
IMPORTANT prospectus. Anyone who tells you otherwise is committing
NOTICES federal crime. Investment in the Contracts a involves
investment risks, including possible loss of principal.
<PAGE>
Page
Overview
Important Terms 3
The Contract at 4
a Glance
How the Contract 6
Works
Expense Table 7
Financial 12
Information
Contract Features
The Contract 13
Purchases 14
Contract Value 15
Investment
Alternatives
The Variable 16
Sub-Accounts
The Fixed 18
Account Options
Transfers 19
Expenses 20
Access To Your 22
Money
Income Payments 23
Death Benefits 26
Other Information
More Information: 28
Northbrook 28
The Variable 28
Account
The Portfolios 28
The Contract 29
Qualified 30
Plans
Legal Matters 30
Year 2000 30
Taxes 30
Performance 33
Information
Statement of B-1
Additional
Information
Table of
Contents
<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.
Accumulation Phase 6
Accumulation Unit 12
Accumulation Unit Value 12
Annuitant 13
Automatic Additions Program 14
Automatic Portfolio Rebalancing Program 20
Beneficiary 13
Cancellation Period 4
*Contract 29
Contract Anniversary 5
Contract Owner ("You") 6
Contract Value 15
Contract Year 5
Death Benefit Anniversary 26
Death Benefit Combination Option 26
Dollar Cost Averaging Fixed Account Options 18
Dollar Cost Averaging Program 19
Due Proof of Death 26
Fixed Account Options 18
Free Withdrawal Amount 21
Funds 1,16
Income and Death Benefit Combination Option 2 27
Income Benefit Combination Option 2 24
Income Plans 22
Investment Alternatives 1,16
Issue Date 6
Northbrook ("We") 28
Payout Phase 6
Payout Start Date 23
Performance Death Benefit Option 26
Portfolios 28
Qualified Contracts 32
Right to Cancel 14
SEC 1
Settlement Value 27
Systematic Withdrawal Program 22
Valuation Date 14
Variable Account 28
Variable Sub-Account 16
* In certain states the Contract is available only as a group Contract. If
you purchase a group Contract, 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.
<TABLE>
<CAPTION>
<S> <C>
Flexible Payments You can purchase a Contract
with an initial purchase payment of
$10,000 or more. You can add to your
Contract as often and as much as you
like, but each payment must be at
least $100. You must maintain a
minimum account size of $1000.
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 applicable 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 1.45% of average daily net
assets (1.58% if you select the
Performance Death Benefit Option,
1.69% if you select the Death Benefit
Combination, 1.75% if you select the
Income Benefit Combination Option 2
and 1.95% if you select the Income and
Death Benefit Combination Option 2.
o Annual contract maintenance charge
of $35(waived in certain cases)
o Withdrawal charges not to exceed 1%
of purchase payment(s) withdrawn (with
certain exceptions)
o Transfer fee of $10 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 Alternatives The Contract offers 34
investment alternatives including:
- 3 Fixed Account Options (which
credit interest at rates we guarantee)
- 31 Variable Sub-Accounts investing
in Portfolios offering professional
money management by these investment
advisers:
- AIM Advisors, Inc.
- Alliance Capital Management, L.P.
- Miller Anderson & Sherred, LLP
- Morgan Stanley Dean Witter Advisors, Inc.
- Morgan Stanley Asset Management
- Putnam Investment Management, Inc.
- 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:
- Automatic Additions Program
- Automatic Portfolio Rebalancing Program
- Dollar Cost Averaging Program
- 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: " life income with
payments guaranteed for 10 years "
joint and survivor life income with
guaranteed payments " 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 total amount in the
investment alternative, whichever is
less. We do not currently impose a fee
upon transfers. However, we reserve
the right to charge $10 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 and under limited
circumstances during the Payout 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 591/2
years old. A withdrawal charge also
may apply.
</TABLE>
<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 34 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 22. 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.
<TABLE>
<CAPTION>
The timeline below illustrates how you might use your Contract.
<S> <C> <C> <C> <C>
Issue Accumulation Phase Payout Start Payout Phase
Date Date
------------------------------------------------------------------------------------------------------------------------
You buy You save for retirement You elect to You can receive Or you can
a Contract receive income income payments receive income
payments or for a set period payments for life
receive a lump
sum payment
</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 management fees, 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
Applicable Charge: 1% 0%
Annual Contract Maintenance Charge $35.00**
Transfer Fee $10.00***
* Each Contract Year, 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.
** We will waive this charge in certain cases. See "Expenses."
*** 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.
Variable Account Annual Expenses (as a percentage of average daily net asset
value deducted from each Variable Sub-Account)
Without any Death or Income Benefit Option
Mortality and Expense Risk Charge 1.35%
Administrative Expense Charge 0.10%
Total Variable Account Annual Expenses 1.45%
With the Performance Death Benefit Option
Mortality and Expense Risk Charge 1.48%
Administrative Expense Charge 0.10%
Total Variable Account Annual Expenses 1.58%
With the Death Benefit Combination Option
Mortality and Expense Risk Charge 1.59%
Administrative Expense Charge 0.10%
Total Variable Account Annual Expenses 1.69%
With the Income Benefit Combination Option 2
Mortality and Expense Risk Charge 1.65%
Administrative Expense Charge 0.10%
Total Variable Account Annual Expenses 1.75%
With the Income and Death Benefit Combination Option 2
Mortality and Expense Risk Charge 1.85%
Administrative Expense Charge 0.10%
Total Variable Account Annual Expenses 1.95%
<PAGE>
<TABLE>
<CAPTION>
Portfolio Annual Expenses (After Voluntary Reductions and Reimbursements) (as a
percentage of Portfolio average daily net assets) (1)
Portfolio Management Rule 12b-1 Other Total Portfolio
Fees Fees Expenses Annual Expenses
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter Variable Investment Series
(Class Y Shares)(2)
Money Market 0.50% 0.25% 0.02% 0.77%
Quality Income Plus 0.50% 0.25% 0.02% 0.77%
Short-Term Bond 0.45% 0.25% 0.17% 0.87%
High Yield 0.50% 0.25% 0.03% 0.78%
Utilities 0.64% 0.25% 0.03% 0.92%
Income Builder 0.75% 0.25% 0.06% 1.06%
Dividend Growth 0.51% 0.25% 0.01% 0.77%
Aggressive Equity 0.42% 0.25% 0.10% 0.77%
Capital Growth 0.65% 0.25% 0.07% 0.97%
Global Dividend Growth 0.75% 0.25% 0.08% 1.08%
European Growth 0.95% 0.25% 0.09% 1.29%
Pacific Growth 0.95% 0.25% 0.47% 1.67%
Equity 0.49% 0.25% 0.02% 0.76%
S&P 500 Index(3) 0.39% 0.25% 0.09% 0.73%
Competitive Edge "Best Ideas" 0.44% 0.25% 0.12% 0.81%
Strategist 0.50% 0.25% 0.02% 0.77%
The Universal Institutional Funds, Inc.(4)
Emerging Markets Equity 0.42% " 1.37% 1.79%
Equity Growth 0.29% " 0.56% 0.85%
International Magnum 0.29% " 0.87% 1.16%
Mid-Cap Value 0.43% " 0.62% 1.05%
U.S. Real Estate 0.00% " 1.10% 1.10%
Van Kampen Life Investment Trust(5)
Emerging Growth 0.67% " 0.18% 0.85%
AIM Variable Insurance Funds
AIM V.I. Capital Appreciation Fund 0.62% " 0.11% 0.73%
AIM V.I. Growth Fund 0.63% " 0.10% 0.73%
AIM V.I. Value Fund 0.61% " 0.15% 0.76%
Alliance VARIABLE Products Series Fund (Class B Shares)(6)
Growth Portfolio 0.75% 0.25% 0.12% 1.12%
Growth and Income Portfolio 0.63% 0.25% 0.09% 0.97%
Premier Growth Portfolio 1.00% 0.25% 0.04% 1.29%
Putnam Variable Trust (Class IB Shares)(7)
Putnam VT Growth and Income Fund 0.46% 0.15% 0.04% 0.65%
Putnam VT International Growth Fund 0.80% 0.15% 0.22% 1.17%
Putnam VT Voyager Fund 0.53% 0.15% 0.04% 0.72%
(1) Figures shown in the Table are for the year ended December 31, 1999, unless
otherwise noted.
(2) Class Y of the Morgan Stanley Dean Witter Variable Investment Series has a
distribution plan or "Rule 12b-1" plan as described in that Fund's
prospectus. Because no Class Y shares were issued as of December 31, 1999,
figures (other than "12b-1 fees") are based on the expenses of the Fund's
Class X shares for the fiscal year ended December 31, 1999, plus Class Y's
maximum annual Rule 12b-1 fee of 0.25%.
(3) Morgan Stanley Dean Witter Advisors Inc. has permanently undertaken 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 .050% of the daily net assets of the S&P 500 Index
Portfolio.
(4) Morgan Stanley Asset Management 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:
Management Other Total Portfolio
Fees Expenses Annual Expenses
Emerging Markets Equity 1.25% 1.37% 2.62%
Equity Growth 0.55% 0.56% 1.11%
International Magnum 0.80% 0.87% 1.67%
Mid-Cap Value 0.75% 0.62% 1.37%
U.S. Real Estate 0.80% 1.10% 1.90%
</TABLE>
(5) 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%, 0.18%, and .88%,
respectively.
(6) Class B of the Alliance Variable Products Series Fund has a distribution
plan or "Rule 12b-1 plan" as described in that Fund's prospectus. The Class
B shares were first issued on July 14, 1999.
(7) Figures shown in the table include amounts paid through expense offset and
brokerage service arrangements.
<PAGE>
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 Income and Death Benefit Combination Option 2.
The example does not include any taxes or tax penalties You may be
required to pay if you surrender your Contract.
<TABLE>
<CAPTION>
Variable Sub-Account 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
AIM Variable Insurance Funds
AIM V.I. Capital Appreciation $37 $86 $147 $310
AIM V.I. Growth $37 $86 $147 $310
AIM V.I. Value $37 $87 $148 $313
Alliance Variable Products Series Funds
Alliance Growth $41 $98 $166 $348
Alliance Growth and Income $39 $93 $159 $333
Alliance Premier Growth $42 $103 $175 $364
Morgan Stanley Dean Witter V.I.S
Aggressive Equity $34 $80 $136 $289
Capital Growth $36 $86 $146 $309
Competitive Edge $35 $81 $138 $293
Dividend Growth $34 $80 $136 $289
Equity $34 $79 $135 $288
European Growth $40 $96 $162 $340
Global Dividend Growth $38 $89 $152 $320
High Yield $35 $80 $136 $290
Income Builder $37 $89 $151 $318
Money Market $34 $80 $136 $289
Pacific Growth $44 $107 $181 $376
Quality Income Plus $34 $80 $136 $289
S&P 500 Index $34 $78 $134 $285
Short-Term Bond $35 $83 $141 $299
Strategist $34 $80 $136 $289
Utilities $36 $84 $144 $304
The Universal Institutional Funds, Inc.
Emerging Markets Equity $47 $118 $199 $409
Equity Growth $38 $90 $153 $322
International Magnum $41 $99 $168 $351
Mid-cap Value $40 $96 $163 $341
U.S. Real Estate $40 $97 $165 $346
Putnam Variable Trust
Putnam VT Growth and Income $36 $84 $143 $302
Putnam VT International Growth $41 $100 $169 $352
Putnam VT Voyager $36 $86 $146 $309
Van Kampen Life Investment Trust
Emerging Growth $38 $90 $153 $322
<PAGE>
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.
Variable Sub-Account 1 Year 3 Years 5 Years 10 Years
AIM Variable Insurance Funds
AIM V.I. Capital Appreciation $28 $86 $147 $310
AIM V.I. Growth $28 $86 $147 $310
AIM V.I. Value $28 $87 $148 $313
Alliance Variable Products Series Funds
Alliance Growth $32 $98 $166 $348
Alliance Growth and Income $31 $93 $159 $333
Alliance Premier Growth $34 $103 $175 $364
Morgan Stanley Dean Witter V.I.S
Aggressive Equity $26 $80 $136 $289
Capital Growth $28 $86 $146 $309
Competitive Edge $26 $81 $138 $293
Dividend Growth $26 $80 $136 $289
Equity $26 $79 $135 $288
European Growth $31 $96 $162 $340
Global Dividend Growth $29 $89 $152 $320
High Yield $26 $80 $136 $290
Income Builder $29 $89 $151 $318
Money Market $26 $80 $136 $289
Pacific Growth $35 $107 $181 $376
Quality Income Plus $26 $80 $136 $289
S&P 500 Index $26 $78 $134 $285
Short-Term Bond $27 $83 $141 $299
Strategist $26 $80 $136 $289
Utilities $27 $84 $144 $304
The Universal Institutional Funds, Inc.
Emerging Markets Equity $39 $118 $199 $409
Equity Growth $29 $90 $153 $322
International Magnum $33 $99 $168 $351
Mid-cap Value $31 $96 $163 $341
U.S. Real Estate $32 $97 $165 $346
Putnam Variable Trust
Putnam VT Growth and Income $27 $84 $143 $302
Putnam VT International Growth $33 $100 $169 $352
Putnam VT Voyager $28 $86 $146 $309
Van Kampen Life Investment Trust
Emerging Growth $29 $90 $153 $322
</TABLE>
Please remember that you are looking at examples and not a
representation of past or future expenses. The examples assume that any
portfolio expense waivers or reimbursement arrangements described in the
footnotes on page are in effect for the time periods presented above. 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 Income and Death Benefit Combination
Option 2, with a mortality and expense risk charge of 1.85%. If that option 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 the "Accumulation Unit Value." Accumulation Unit
Value is similar to, but not the same as, the share price of a mutual fund.
No historical Accumulation Unit Values are shown for the Contracts that
were first offered as of the date of this prospectus. The financial statements
of the Variable Account and Northbrook also appear in the Statement of
Additional Information.
<PAGE>
The Contract
CONTRACT OWNER
The Variable Annuity 3 AssetManager 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 the last surviving Contract owner dies, 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. The maximum issue age for the Contract without any rider is age 90.
You can use the Contract with or without a qualified plan. A "qualified
plan" is a 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 32.
ANNUITANT
The Annuitant is the individual whose life determines the amount and duration of
income payments (other than under Income Plans with guaranteed payments for a
specified period). The Annuitant must be a natural person.
You initially designate an Annuitant in your application. If the
Contract owner is a natural person, you may change the Annuitant at any time
prior to the Payout Start Date. Once we receive your change request, any change
will be effective at the time you sign the written notice. We are not liable for
any payment we make or other action we take before receiving any written request
from you. Before the Payout Start Date, you may designate a joint Annuitant, who
is a second person on whose life income payments depend. If the Annuitant dies
prior to the Payout Start Date, the new Annuitant will be the youngest Contract
owner, otherwise, the youngest Beneficiary, unless the Contract owner names a
different Annuitant.
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 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 the assignor signs it and files 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 $10,000. We may increase or
decrease this minimum in the future. You may make additional purchase payments
of at least $100 at any time prior to the Payout Start Date. We reserve the
right to reduce the minimum or 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 $100 by automatically
transferring amounts from your bank account or your Morgan Stanley Dean Witter
Active Assets 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. 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 applicable 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. If your contract is qualified under Section 408 of the Internal
Revenue Code, we will refund the greater of any purchase payments or the
Contract Value.
<PAGE>
Contract Value
On the Issue Date, the Contract Value is equal to the initial purchase
payment. Thereafter, 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 or
transfer 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 or transfer. 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. Withdrawals and transfers from a Variable
Sub-Account would, of course, reduce the number of Accumulation Units of that
Sub-Account allocated 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 second set of
Accumulation Unit Values that reflect the cost of the Performance Death Benefit
Option, a third set of Accumulation Unit Values that reflect the cost of the
Death Benefit Combination Option, a fourth set of Accumulation Unit Values that
reflect the cost of the Income Benefit Combination Option 2, and a fifth set of
Accumulation Unit Values that reflect the cost of the Income and Death Benefit
Combination Option 2.
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 31 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>
Portfolio: Each Portfolio Seeks: Investment Adviser:
<S> <C> <C>
AIM Variable Insurance Funds*
AIM V.I. Capital Appreciation Fund Growth of capital
AIM V.I. Growth Fund Growth of capital
AIM V.I. Value Fund Long-term growth of capital
A I M Advisors, Inc.
Alliance Variable Products Series Fund
Growth Portfolio Long-term growth of capital.
Current income is incidental to
the Portfolio's objective
Growth and Income Portfolio Reasonable current income and
reasonable opportunity for
appreciation
Premier Growth Portfolio Growth of capital by pursuing
aggressive investment policies
Alliance Capital Management,
L.P.
Morgan Stanley Dean Witter Variable Investment Series
Money Market Portfolio High current income,
preservation of capital, and
liquidity
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" Portfolio Long-term capital growth
Strategist Portfolio High total investment return
Morgan Stanley Dean Witter
<PAGE>
Portfolio: Each Portfolio Seeks: Investment Adviser:
The Universal Institutional Funds, Inc.
Equity Growth Portfolio Long-term capital appreciation
U.S. Real Estate Portfolio Above-average current income and
long-term capital appreciation
International Magnum Portfolio Long-term capital appreciation
Emerging Markets Equity Portfolio Long-term capital appreciation
Morgan Stanley Asset Management
Mid-Cap Value Above-average total return over Miller Anderson & Sherrerd, LLP
a market cycle of three to five
years
Putnam Variable Trust
Putnam VT Growth and Income Fund Capital growth and income
Putnam VT International Growth Fund Capital appreciation
Putnam VT Voyager Fund Capital appreciation
Putnam Investment
Management, Inc.
Van Kampen Life Investment Trust
Emerging Growth Portfolio Capital appreciation Van Kampen Asset Management
Inc.
</TABLE>
* A Portfolio's investment objective may be changed by the Fund's Board
of Trustees without shareholder approval.
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
You may allocate all or a portion of your purchase payments to the Fixed
Account Options. We offer 3 dollar cost averaging options ("Dollar Cost
Averaging Fixed Account Options"). The Fixed Account Options may not be
available in all states. Northbrook is currently limiting 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 19, 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. 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. 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 Morgan Stanley Dean
Witter Financial Advisor or our customer support unit at 1-800-654-2397.
<PAGE>
Investment Alternatives: Transfers
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase, you may transfer the Contract Value among the
investment alternatives. You may not 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 $10 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. Transfers from the Dollar Cost
Averaging Fixed Account Options do not count towards the 12 free transfers each
Contract Year.
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 6 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.
We reserve the right to waive any transfers fees and restrictions.
EXCESSIVE TRADING LIMITS
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
Options to any Variable Sub-Account. Transfers made through dollar cost
averaging must be $100 or more.
We will not charge a transfer fee for transfers made under this
Program, nor will such transfers count against the 12 transfers you can make
each Contract Year without paying a transfer fee.
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
$35 contract maintenance charge from your Contract Value. This charge will be
deducted on a pro-rata basis from each Variable Sub-Account in the proportion
that your investment in each bears to your Contract Value. 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. We will waive
this charge if:
o total purchase payments equal $50,000 or more, or
o all of your money is allocated to the Fixed Account Options as of the
Contract Anniversary.
o After the Payout Start Date, we will waive this charge if:
o the Contract Value is $50,000 or more as of the Payout Start Date, or
o all income payments are fixed amount income payments.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge daily at an annual rate of 1.35%
of the average daily net assets you have invested in the Variable Sub-Accounts
(1.48% if you select the Performance Death Benefit Option, 1.59% if you select
the Death Benefit Combination Option, 1.65% if you select the Income Benefit
Combination Option 2 and 1.85% if you select the Income and Death Benefit
Combination Option 2). 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 Income Benefit
Options to compensate us for the additional risk that we accept by providing
these Options.
We will not increase the mortality and expense risk charge for the life
of the Contract. 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.
We will not increase the administrative expense charge for the life of the
Contract.
TRANSFER FEE
We do not currently impose a fee upon transfers among the investment
alternatives. However, we reserve the right to charge $10 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 Program or Automatic
Portfolio Rebalancing Program.
WITHDRAWAL CHARGE
We may assess a withdrawal charge of 1% of the purchase payment(s) you withdraw
if the amount being withdrawn has been invested in the Contract for less than 1
year. However, during each Contract Year, you can withdraw up to 15% of the
aggregate amount of your purchase payments as of the beginning of the 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);
o the death of the Contract owner or Annuitant (unless the Settlement
Value is used); and
o withdrawals taken to satisfy IRS minimum distribution rules for the
Contract. This waiver does not apply to Contracts owned by an
Individual Retirement Account.
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 making a provision for taxes. In the future, however, we
may make 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 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 22.
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
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 $1000, 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 your Contract Value less applicable taxes
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 with
payments guaranteed for 10 years. After the Payout Start Date, you may not make
withdrawals (except as described below) 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 Guaranteed Payments. 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 with Guaranteed Payments. Under
this plan, we make periodic income payments for as long as either the Annuitant
or the joint Annuitant is alive. If both the Annuitant and the Joint Annuitant
die before we have made all of the guaranteed income payments, we will continue
to pay the remainder of the guaranteed payments as required by the Contract.
Income Plan 3. " Guaranteed Payments for a Specified Period (5 to 30 years).
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 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 all or part of 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 associated with the amount withdrawn.
To determine the present value of any remaining variable income payments being
withdrawn, we use a discount rate equal to the assumed annual investment rate
that we use to compute such variable income payments. The minimum amount you may
withdraw under this feature is $1,000. A withdrawal charge may apply.
You may apply your Contract Value to an Income Plan. If you elected the
Income Benefit Combination Option 2 or the Income and Death Benefit Combination
Option 2, 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 Options 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 deduct applicable premium taxes from the Contract Value at the Payout Start
Date.
We will apply your Contract Value, less applicable taxes, to your
Income Plan on the Payout Start Date. If the Cash Value 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. We reserve the right to make
other annual investment rates available under the Contract.
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.
INCOME BENEFIT COMBINATION OPTION 2
You have the option to add Income Benefit Combination Option 2 to your Contract.
This Option guarantees that the amount you apply to an Income Plan will not be
less than the income base ("Income Base") (which is the greater of Income Base A
or Income Base B), described below.
Eligibility. If you select the Income Benefit Combination Option 2, the maximum
age of any owner on the date we issue the Contract Rider is 75. To qualify for
this benefit, you must meet the following conditions as of the Payout Start
Date:
o You must elect a payout Start Date that is on or after the 10th
anniversary of the date we issued the rider for this Option (the
"Rider Date");
o The Payout Start Date must occur during the 30 day period following a
Contract Anniversary.
o You must apply the Income Base to fixed income payments or variable
income payments as we may permit from time to time. Currently, you may
apply the Income Base only to provide fixed income payments;
o The Income Plan you have selected must provide for payments guaranteed
for either a single life or joint lives with a specified period of at
least:
1. 10 years, if the youngest Annuitant's age is 80 or less on the date the
amount is applied; or
2. 5 years, if the youngest Annuitant's age is greater than 80 on the date the
amount is applied.
If your current Contract Value is higher than the value calculated
under Income Benefit Combination Option 2, you can apply the Contract Value to
any Income Plan. The Income Benefit Combination Option 2 may not be available in
all states.
INCOME BASE
The Income Base is the greater of Income Base A or Income Base B.
The Income Base is used solely for the purpose of calculating the
guaranteed income benefit under this Option ("guaranteed income benefit") and
does not provide a Contract Value or guarantee performance of any investment
option.
Income Base A
On the Rider Date, Income Base A is equal to the Contract Value. After the Rider
Date, we recalculate Income Base A as follows on the Contract Anniversary and
when a purchase payment or withdrawal is made. For purchase payments, Income
Base A is equal to the most recently calculated Income Base A plus the purchase
payment. For withdrawals, Income Base A is equal to the most recently calculated
Income Base A reduced by a withdrawal adjustment (described below). On each
Contract Anniversary, Income Base A is equal to the greater of the Contract
Value or the most recently calculated Income Base A.
In the absence of any withdrawals or purchase payments, Income Base A
will be the greatest of the Contract Value on the Rider Date and all Contract
Anniversary Contract Values between the Rider Date and the Payout Start Date.
We will recalculate Income Base A as described above until the first
Contract Anniversary after the 85th birthday of the oldest Contract owner or
Annuitant (if the Contract owner is not a natural person). After age 85, we will
only recalculate Income Base A to reflect additional purchase payments and
withdrawals.
Income Base B
On the Rider Date, Income Base B is equal to the Contract Value. After the Rider
Date, Income Base B plus any subsequent purchase payments and less a withdrawal
adjustment (described below) for any subsequent withdrawals will accumulate
daily at a rate equivalent to 5% per year until the first Contract Anniversary
after the 85th birthday of the oldest Contract owner or Annuitant (if the
Contract owner is not a natural person).
Withdrawal Adjustment
The withdrawal adjustment is equal to (1) divided by (2), with the result
multiplied by (3) where:
(1) = the withdrawal amount
(2) = the Contract Value immediately prior to the withdrawal, and
(3) = the most recently calculated Income Base
The guaranteed income benefit amount is determined by applying the
Income Base less any applicable taxes to the guaranteed rates for the Income
Plan you elect. The Income Plan you elect must satisfy the conditions described
above.
As described above, you may currently apply the Income Base only to
receive period certain fixed income payments. If, however, you apply the
Contract Value and not the Income Base to an Income Plan, then you may select
fixed and/or variable income payments under any Income Plan we offer at that
time. If you expect to apply your Contract Value to variable and/or fixed income
payment options, or you expect to apply your Contract Value to current annuity
payment rates then in effect, electing the Income Benefit Combination Option 2
may not be appropriate.
You may also elect the Income and Death Benefit Combination Option 2
which combines the features of the Income Benefit Combination Option 2 with the
features of the Death Benefit Combination Option (described below).
Please keep in mind, once you have selected an optional income or death
benefit (each an "Option"), you ability to select a different Option may be
limited. Please consult with your representative concerning any such limitations
before selecting any Option. Further, if you select another Option, the benefits
under the new Option on the date we issue the new Option will equal the Contract
Value. You will not retain or transfer the benefits from the earlier Option.
Please consult with your representative concerning the effect of selecting a
different Option before doing so.
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
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 the surviving
Contract owner(s) or, if none, the Beneficiary(ies). 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 3:00 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 Performance Death Benefit Option, Death Benefit Combination Option and
Income and Death Benefit Combination Option 2 are optional benefits that you may
elect. If the Contract owner is a natural person, these death benefit 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.
Please keep in mind, once you have selected an optional income or death
benefit (each an "Option"), your ability to select a different Option may be
limited. Please consult with your representative concerning any such limitations
before selecting any Option. Further, if you select another Option, the benefits
under the new Option on the date we issue the new Option will equal the Contract
Value. You will not retain or transfer the benefits from the earlier Option.
Please consult with your representative concerning the effect of selecting a
different Option before doing so.
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.
If you select the Performance Death Benefit Option, the maximum age of
any owner on the Rider Date is age 80.
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 Death Benefit A or Death
Benefit B. Death Benefit B is the Performance Death Benefit Option described
above. DEATH BENEFIT A IS ONLY AVAILABLE THROUGH THE DEATH BENEFIT COMBINATION
OPTION. We sometimes refer to the Death Benefit Combination Option as the "Best
of the Best" death benefit option.
Death Benefit A. Death Benefit A 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, Death Benefit A is equal to the Contract Value on the
Rider Date plus interest at an annual rate of 5% per year for the portion of the
year since the Rider Date. On each subsequent Contract Anniversary, we will
multiply Death Benefit A as of the prior Contract Anniversary by 1.05. This
results in an increase of 5% annually.
We will recalculate Death Benefit A as described above, but not beyond
the Contract Anniversary preceding the oldest Contract owner's (the Annuitant,
if the owner is not a natural person), 85th birthday. For all ages, we will
recalculate Death Benefit A on each Contract Anniversary, or upon receipt of a
death claim, as follows:
o We will reduce the Death Benefit A by a withdrawal adjustment (as
described above under Performance Death Benefit Option) for any
withdrawals since the prior Contract Anniversary; and
o We will increase Death Benefit A by any additional purchase payments
since the prior Contract Anniversary.
If you select the Death Benefit Combination Option, the maximum age of
any owner on the Contract Rider date is age 80.
INCOME AND DEATH BENEFIT COMBINATION OPTION 2
You may also elect the Income and Death Benefit Combination Option 2 which
combines the features of the Income Benefit Combination (described on page 24)
with the features of the Death Benefit Combination Option.
If you select the Income and Death Benefit Combination Option 2, the
maximum age of any owner on the date we issue the Contract Rider for the option
is age 75.
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, contract maintenance
charge and applicable taxes. 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. On the date the Contract is continued,
the Contract Value will equal the amount of the death benefit as determined as
of the Valuation Date on which we receive Due Proof of Death (the next Valuation
Date if we receive Due Proof of Death after 3:00 pm Central Time). 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 591/2, 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
NORTHBROOK
Northbrook is the issuer of the Contract. Northbrook is a stock life insurance
company organized under the laws of the State of Arizona in 1998. Previously,
from 1978 to 1998, Northbrook was organized under the laws of the State of
Illinois. 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 31 Variable Sub-Accounts, 31 of which
are available under the Contract. 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, Inc.
We may pay up to a maximum sales commission of 2.0% of purchase
payments and an annual sales administration expense of up to 1.5% of the average
net assets of the Contracts 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. Contract statements are currently being sent on a quarterly
basis. 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 also 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
recognized only the last two digits of the year in any date, some software may
have failed to operate properly after the year 1999 if the software had not been
reprogrammed or replaced ("Year 2000 Issue"). Northbrook believes that many of
its counterparties and suppliers also had potential Year 2000 Issues which could
have affected Northbrook. In 1995, Allstate Insurance Company commenced a four
phase plan intended to mitigate and/or prevent the adverse effects of Year 2000
Issues. These strategies included normal development and enhancement of new and
existing systems, to make them Year 2000 compliant. The plan also included
Northbrook actively working with its major external counterparties and suppliers
to assess their compliance efforts and Northbrook's exposure to them. As of the
date of this prospectus, Northbrook believes that the Year 2000 Issue was
successfully resolved and that such resolution will not materially affect its
results of operations, liquidity or financial position.
<PAGE>
Taxes
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.
The income on qualified plan and IRA investments is tax deferred and
variable annuities held by such plans do not receive any additional tax
deferral. You should review the annuity features, including all benefits and
expenses, prior to purchasing a variable annuity in a qualified plan or IRA.
Northbrook reserves the right to limit the availability of the Contract for use
with any of the Qualified Plans listed above.
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 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 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, 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>
TABLE OF CONTENTS
Description Page
Additions, Deletions or Substitutions of Investments 3
The Contract 4
Purchase of Contracts 4
Tax-free Exchanges (1035 Exchanges, Rollovers and 4
Transfers)
Performance Information 5
Calculation of Accumulation Unit Values 16
Net Investment Factor 16
Calculation of Variable Amount Income Payments 16
Calculation of Annuity Unit Values 16
General Matters 16
Incontestability 16
Settlements 16
Safekeeping of the Variable Account's Assets 17
Premium Taxes 17
Tax Reserves 17
Federal Tax Matters 17
Qualified Plans 18
Experts 19
Financial Statements 19
-----------
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.
<PAGE>
MORGAN STANLEY DEAN WITTER VARIABLE ANNUITY 3 AssetManager
Northbrook Life Insurance Company Statement of Additional Information
Northbrook Variable Annuity Account II Dated September 12, 2000
Post Office Box 94040
Palatine, IL 60094-4040
1 (800) 654 - 2397
This Statement of Additional Information supplements the information in the
prospectus for the Morgan Stanley Dean Witter Variable Annuity 3 AssetManager
Contract that we offer. This Statement of Additional Information is not a
prospectus. You should read it with the prospectus, dated September 12, 2000,
for the 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 the Morgan Stanley Dean Witter Variable
Annuity 3 AssetManager Contract.
<PAGE>
TABLE OF CONTENTS
Description Page
Additions, Deletions or Substitutions of Investments 3
The Contract 4
Purchase of Contracts 4
Tax-free Exchanges (1035 Exchanges, Rollovers and 4
Transfers)
Performance Information 5
Calculation of Accumulation Unit Values 16
Net Investment Factor 16
Calculation of Variable Amount Income Payments 16
Calculation of Annuity Unit Values 16
General Matters 16
Incontestability 16
Settlements 16
Safekeeping of the Variable Account's Assets 17
Premium Taxes 17
Tax Reserves 17
Federal Tax Matters 17
Qualified Plans 18
Experts 19
Financial Statements 19
<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 fund
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. Also, please note that the
performance figures shown do not reflect any applicable taxes.
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 the contract maintenance charge, we pro rate the charge by
dividing (a) the contract maintenance charge by (b) an assumed annual contract
size of $54,945. We then multiply the resulting percentage by a hypothetical
$1,000 investment.
The standardized average annual total returns for the Variable Sub-Accounts
available under the Contract for the periods ended December 31, 1999 are set out
below. No standardized total returns are shown for the Money Market Variable
Sub-Account. No standardized total returns are shown for the Variable
Sub-Accounts marked with an asterisk (*) below which commenced operations on
January 31, 2000 or May 1, 2000 as indicated below.
The Morgan Stanley Dean Witter Variable Annuity 3 AssetManager Contracts were
first offered to the public as of the date of this Statement of Additional
Information. Accordingly, performance figures for 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 Morgan Stanley Dean Witter Variable Annuity 3
AssetManager Contracts as well as the withdrawal and contract maintenance
charges described above.
Variable Sub-Account Inception Dates:
Morgan Stanley Dean Witter Variable Investment Series:
Variable Sub-Account Date
Quality Income Plus* May 1, 2000
High Yield* May 1, 2000
Utilities* May 1, 2000
Dividend Growth* May 1, 2000
Equity* May 1, 2000
Strategist* May 1, 2000
Capital Growth* May 1, 2000
European Growth* May 1, 2000
Global Dividend Growth* May 1, 2000
Pacific Growth* May 1, 2000
Income Builder* May 1, 2000
Short-Term Bond* May 1, 2000
Aggressive Equity* May 1, 2000
S&P 500 Index* May 1, 2000
Competitive Edge ("Best Ideas")* May 1, 2000
The Universal Institutional Fund, Inc.:
Variable Sub-Account Date
Equity Growth March 16, 1998
International Magnum March 16, 1998
Emerging Markets Equity March 16, 1998
U.S. Real Estate May 18, 1998
Mid-Cap Value* January 31, 2000
Van Kampen Life Investment Trust:
Variable Sub-Account Date
Emerging Growth March 16, 1998
AIM Variable Insurance Funds:
Variable Sub-Account Date
Capital Appreciation* January 31, 2000
Growth* January 31, 2000
Value* January 31, 2000
Alliance Variable Products Series Fund:
Variable Sub-Account Date
Growth* January 31, 2000
Growth and Income* January 31, 2000
Premier Growth* January 31, 2000
Putnam Variable Trust:
Variable Sub-Account Date
Growth and Income* January 31, 2000
International Growth* January 31, 2000
Voyager* January 31, 2000
<TABLE>
<CAPTION>
(WITHOUT ANY DEATH OR INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
<S> <C> <C> <C>
Emerging Markets Equity 90.99% N/A 16.28%
Equity Growth 36.53% N/A 17.91%
International Magnum 22.48% N/A 8.56%
U.S. Real Estate -3.80% N/A -11.84%
Van Kampen Emerging Growth 100.53% N/A 61.82%
(WITH THE PERFORMANCE DEATH BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 90.53% N/A 15.99%
Equity Growth 36.20% N/A 17.62%
International Magnum 22.18% N/A 8.29%
U.S. Real Estate -4.04% N/A -12.07%
Van Kampen Emerging Growth 100.05% N/A 61.42%
(WITH THE DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 90.04% N/A 15.68%
Equity Growth 35.85% N/A 17.30%
International Magnum 21.86% N/A 8.00%
U.S. Real Estate -4.29% N/A -12.31%
Van Kampen Emerging Growth 99.53% N/A 61.00%
(WITH THE INCOME BENEFIT COMBINATION 2 OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 90.42% N/A 15.92%
Equity Growth 36.12% N/A 17.55%
International Magnum 22.11% N/A 8.23%
U.S. Real Estate -4.09% N/A -12.12%
Van Kampen Emerging Growth 99.93% N/A 61.33%
(WITH THE INCOME AND DEATH BENEFIT COMBINATION 2 OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 90.74% N/A 16.12%
Equity Growth 36.35% N/A 17.75%
International Magnum 22.32% N/A 8.42%
U.S. Real Estate -3.93% N/A -11.96%
Van Kampen Emerging Growth 100.27% N/A 61.61%
</TABLE>
<PAGE>
NON-STANDARDIZED TOTAL RETURNS
From time to time, we also may quote rates of return that reflect changes in the
values of each Variable Sub-Account's accumulation units. We may quote these
"non-standardized total returns" on an annualized, cumulative, year-by-year, or
other basis. These rates of return take into account asset-based charges, such
as the mortality and expense risk charge and administration charge as well as
the contract maintenance charge. However, these rates of return do not reflect,
withdrawal charges or any taxes. Such charges, if reflected, would reduce the
performance shown.
Annualized returns reflect the rate of return that, when compounded annually,
would equal the cumulative rate of return for the period shown. We compute
annualized returns according to the following formula:
Annualized Return = (1+r)1/n-1
where:
r = cumulative rate of return for the period shown, and
n = number of years in the period.
The method of computing annualized rates of return is similar to that for
computing standardized performance, described above, except that rather than
using a hypothetical $1,000 investment and the ending redeemable value thereof,
we use the changes in value of an accumulation unit.
Cumulative rates of return reflect the cumulative change in value of an
accumulation unit over the period shown. Year-by-year rates of return reflect
the change in value of accumulation unit during the course of each year shown.
We compute these returns by dividing the accumulation unit value at the end of
each period shown, by accumulation unit value at the beginning of that period,
and subtracting one. We compute other total returns on a similar basis.
We may quote non-standardized total returns for 1,3,5, and 10 year periods, or
period since inception of the Variable Sub-Account's operations, as well as
other periods, such as "year-to-date" (prior calendar year end to the day stated
in the advertisement); "year to most recent quarter" (prior calendar year end to
the end of the most recent quarter); the prior calendar year; and the "n" most
recent calendar years.
The non-standardized average annual total returns for the Variable Sub-Accounts
for the periods ended December 31, 1999 are set out below. No non-standardized
total returns are shown for the Money Market Variable Sub-Account. In addition,
no non-standardized total returns are shown for the Variable Sub-Accounts which
commenced operations on January 31, 2000 or May 1, 2000 respectively.
The Morgan Stanley Dean Witter Variable Annuity 3 AssetManager Contracts were
first offered to the public as of the date of this Statement of Additional
Information. Accordingly, performance figures for 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 Morgan Stanley Dean Witter Variable Annuity 3
AssetManager Contracts, excluding the withdrawal charge but including the
contract maintenance charges.
The inception dates of each Variable Sub-Account appears under "Standardized
Total Returns" above.
<TABLE>
<CAPTION>
(WITHOUT ANY DEATH OR INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
<S> <C> <C> <C>
Emerging Markets Equity 91.90% N/A 18.44%
Equity Growth 37.44% N/A 20.03%
International Magnum 23.39% N/A 10.83%
U.S. Real Estate -2.89% N/A -8.95%
Van Kampen Emerging Growth 101.44% N/A 63.44%
(WITH THE PERFORMANCE DEATH BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 91.44% N/A 18.16%
Equity Growth 37.11% N/A 19.74%
International Magnum 23.10% N/A 10.57%
U.S. Real Estate -3.12% N/A -9.17%
Van Kampen Emerging Growth 100.96% N/A 63.05%
(WITH THE DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 90.95% N/A 17.85%
Equity Growth 36.76% N/A 19.43%
International Magnum 22.78% N/A 10.28%
U.S. Real Estate -3.37% N/A -9.41%
Van Kampen Emerging Growth 100.44% N/A 62.63%
(WITH THE INCOME BENEFIT COMBINATION 2 OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 91.33% N/A 18.08%
Equity Growth 37.03% N/A 19.67%
International Magnum 23.02% N/A 10.50%
U.S. Real Estate -3.18% N/A -9.22%
Van Kampen Emerging Growth 100.84% N/A 62.95%
(WITH THE INCOME AND DEATH BENEFIT COMBINATION 2 OPTION)
10 Years or
Variable Sub-Account One Year Five Years Since Inception
Emerging Markets Equity 91.65% N/A 18.29%
Equity Growth 37.27% N/A 19.88%
International Magnum 23.23% N/A 10.69%
U.S. Real Estate -3.02% N/A -9.07%
Van Kampen Emerging Growth 101.18% N/A 63.23%
</TABLE>
<PAGE>
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.
The adjusted historical total returns for the Variable Sub-Accounts for the
periods ended December 31, 1999 are set out below. No adjusted historical total
returns are shown for the Money Market Variable Sub-Account.
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
Variable Sub-Account Corresponding 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 22, 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
Mid-Cap Value January 2, 1997
U.S. Real Estate March 4, 1997
Competitive Edge ("Best Ideas")* May 18, 1998
S&P 500 Index* May 18, 1998
Short-Term Bond* May 2, 1999
Aggressive Equity* May 1, 1999
Van Kampen Emerging Growth July 3, 1995
AIM V.I. Capital Appreciation May 5, 1993
AIM V.I. Growth May 5, 1993
AIM V.I. Value May 5, 1993
Alliance Growth** September 15, 1994
Alliance Growth and Income** January 14, 1991
Alliance Premier Growth** July 14, 1999
Putnam VT Growth and Income*** February 1, 1988
Putnam VT International Growth*** January 2, 1997
Putnam VT Voyager*** February 1, 1988
* The Portfolios' Class Y shares ("12b-1 class") corresponding to these
Variable Sub-Accounts were first offered on May 1, 2000. For periods prior to
May 1, 2000, the performance shown is based on the historical performance of
the Portfolios' Class X shares ("non-12b-1 class"), adjusted to reflect the
current expenses of the Portfolios' 12b-1 class. The inception dates for the
Portfolios are shown above.
** The Portfolios' Class B shares (12b-1 class") corresponding to the Alliance
Growth and Alliance Growth and Income Variable Sub-Accounts were first offered
on June 1, 1999. For periods prior to these dates, the performance shown is
based on the historical performance of the Portfolios' Class A shares
("non-12b-1 class"), adjusted to reflect the current expenses of the Portfolios'
12b-1 class. The inception dates for the Portfolios' are as shown above.
*** The Portfolios' Class IB shares ("12b-1 Class") corresponding to the Putnam
VT Growth and Income, International Growth, and Voyager Variable Sub-Accounts
were first offered on April 6, 1998, April 6, 1998, and April 30, 1998
respectively. For periods prior to these dates, the performance shown is based
on the historical performance of the Portfolios' Class 1A shares ("non 12b-1
class"), adjusted to reflect the current expenses of the Portfolios' 12b-1
class. The inception dates for the Portfolios are as shown above.
<PAGE>
<TABLE>
<CAPTION>
(WITHOUT ANY DEATH OR INCOME BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Year Since Inception
-------------------- ---------- --------- ----------------
<S> <C> <C> <C>
AIM Capital Appreciation 41.62% 23.01% 20.00%
AIM Growth 32.38% 25.96% 19.85%
AIM Value 27.12% 24.12% 20.36%
Alliance Growth* 31.48% 29.15% 28.35%
Alliance Growth and Income* 8.74% 21.83% 13.51%
Alliance Premier Growth* N/A N/A 7.18%**
MSDW Aggressive Equity* N/A N/A 39.28%**
MSDW Capital Growth* 30.14% 22.09% 13.35%
MSDW Competitive Edge* 23.06% N/A 9.56%
MSDW Dividend Growth* -4.95% 16.65% 11.09%
MSDW Equity* 55.01% 33.39% 20.94%
MSDW European Growth* 26.03% 22.73% 17.63%
MSDW Global Dividend Growth* 11.81% 13.75% 11.20%
MSDW High Yield* -3.91% 4.03% 6.43%
MSDW Income Builder* 4.35% N/A 7.65%
MSDW Mid Cap 17.95% N/A 21.52%
MSDW Pacific Growth* 62.39% -1.21% -2.96%
MSDW Quality Income* -6.84% 6.03% 5.89%
MSDW Short Term Bond* N/A N/A -4.75%**
MSDW S & P 500 Index* 16.77% N/A 15.48%
MSDW Strategist* 14.46% 14.24% 11.09%
MSDW Utilities* 9.90% 17.83% 12.28%
Emerging Markets 90.99% N/A 9.35%
Equity Growth 36.53% N/A 27.61%
International Magnum 22.48% N/A 10.60%
U.S. Real Estate -3.80% N/A -2.64%
Putnam Growth and Income* -0.91% 17.36% 12.01%
Putnam International Growth* 56.82% N/A 27.23%
Putnam Voyager* 54.83% 29.41% 20.19%
Van Kampen Emerging Growth 100.53% N/A 38.33%
+Please refer to the table at the beginning of this section for the inception
dates of the Portfolios.
*The performance shown for the Portfolios' 12b-1 class is based on the
performance of the non 12b-1 class, as described in the table at the beginning
of this section.
** Performance shown is not annualized.
<PAGE>
(WITH THE PERFORMANCE DEATH BENEFIT OPTION)
10 Years or
Variable Sub-Account One Year Five Year Since Inception
-------------------- ---------- --------- ----------------
AIM Capital Appreciation 41.28% 22.72% 19.72%
AIM Growth 32.06% 25.66% 19.56%
AIM Value 26.81% 23.82% 20.07%
Alliance Growth* 31.17% 28.84% 28.04%
Alliance Growth and Income* 8.48% 21.54% 13.24%
Alliance Premier Growth* N/A N/A 7.05%**
MSDW Aggressive Equity* N/A N/A 39.05%**
MSDW Capital Growth* 29.82% 21.80% 13.08%
MSDW Competitive Edge* 22.76% N/A 9.29%
MSDW Dividend Growth* -5.18% 16.37% 10.82%
MSDW Equity* 54.64% 33.07% 20.65%
MSDW European Growth* 25.72% 22.43% 17.34%
MSDW Global Dividend Growth* 11.54% 13.48% 10.94%
MSDW High Yield* -4.14% 3.78% 6.18%
MSDW Income Builder* 4.09% N/A 7.38%
MSDW Mid Cap 17.66% N/A 21.22%
MSDW Pacific Growth* 62.00% -1.45% -3.20%
MSDW Quality Income* -7.07% 5.78% 5.64%
MSDW Short Term Bond* N/A N/A -4.91%**
MSDW S & P 500 Index* 16.49% N/A 15.19%
MSDW Strategist* 14.18% 13.97% 10.82%
MSDW Utilities* 9.64% 17.55% 12.01%
Emerging Markets 90.53% N/A 9.08%
Equity Growth 36.20% N/A 27.30%
International Magnum 22.18% N/A 10.33%
U.S. Real Estate -4.04% N/A -2.89%
Putnam Growth and Income* -1.15% 17.08% 11.74%
Putnam International Growth* 56.45% N/A 26.92%
Putnam Voyager* 54.46% 29.10% 19.90%
Van Kampen Emerging Growth 100.05% N/A 38.00%
+Please refer to the table at the beginning of this section for the inception
dates of the Portfolios.
*The performance shown for the Portfolios' 12b-1 class is based on the
performance of the non 12b-1 class, as described in the table at the beginning
of this section.
** Performance shown is not annualized.
<PAGE>
(WITH THE DEATH BENEFIT COMBINATION OPTION)
10 Years or
Variable Sub-Account One Year Five Year Since Inception
-------------------- ---------- --------- ----------------
AIM Capital Appreciation 40.91% 22.40% 19.41%
AIM Growth 31.71% 25.33% 19.25%
AIM Value 26.48% 23.50% 19.76%
Alliance Growth* 30.82% 28.51% 27.71%
Alliance Growth and Income* 8.19% 21.22% 12.95%
Alliance Premier Growth* N/A N/A 6.92%**
MSDW Aggressive Equity* N/A N/A 38.80%**
MSDW Capital Growth* 29.49% 21.48% 12.78%
MSDW Competitive Edge* 22.44% N/A 8.99%
MSDW Dividend Growth* -5.43% 16.07% 10.53%
MSDW Equity* 54.23% 32.72% 20.33%
MSDW European Growth* 25.39% 22.11% 17.04%
MSDW Global Dividend Growth* 11.25% 13.18% 10.64%
MSDW High Yield* -4.39% 3.51% 5.90%
MSDW Income Builder* 3.82% N/A 7.09%
MSDW Mid Cap 17.35% N/A 20.89%
MSDW Pacific Growth* 61.57% -1.70% -3.46%
MSDW Quality Income* -7.31% 5.50% 5.36%
MSDW Short Term Bond* N/A N/A -5.08%**
MSDW S & P 500 Index* 16.18% N/A 14.88%
MSDW Strategist* 13.89% 13.67% 10.53%
MSDW Utilities* 9.35% 17.25% 11.72%
Emerging Markets 90.04% N/A 8.79%
Equity Growth 35.85% N/A 26.96%
International Magnum 21.86% N/A 10.03%
U.S. Real Estate -4.29% N/A -3.15%
Putnam Growth and Income* -1.41% 16.77% 5.19%
Putnam International Growth* 55.65% N/A 26.34%
Putnam Voyager* 54.06% 28.76% 19.59%
Van Kampen Emerging Growth 99.53% N/A 37.64%
+Please refer to the table at the beginning of this section for the inception
dates of the Portfolios.
*The performance shown for the Portfolios' 12b-1 class is based on the
performance of the non 12b-1 class, as described in the table at the beginning
of this section.
** Performance shown is not annualized.
<PAGE>
(WITH THE INCOME BENEFIT COMBINATION 2 OPTION)
10 Years or
Variable Sub-Account One Year Five Year Since Inception
-------------------- ---------- --------- ----------------
AIM Capital Appreciation 41.19% 22.65% 19.64%
AIM Growth 31.98% 25.58% 19.49%
AIM Value 26.73% 23.75% 20.00%
Alliance Growth* 31.09% 28.76% 27.96%
Alliance Growth and Income* 8.41% 21.46% 13.17%
Alliance Premier Growth* N/A N/A 7.02%**
MSDW Aggressive Equity* N/A N/A 38.99%**
MSDW Capital Growth* 29.75% 21.73% 13.01%
MSDW Competitive Edge* 22.69% N/A 9.22%
MSDW Dividend Growth* -5.24% 16.30% 10.76%
MSDW Equity* 54.54% 32.99% 20.57%
MSDW European Growth* 25.65% 22.36% 17.27%
MSDW Global Dividend Growth* 11.47% 13.41% 10.87%
MSDW High Yield* -4.20% 3.71% 6.11%
MSDW Income Builder* 4.03% N/A 7.31%
MSDW Mid Cap 17.59% N/A 21.14%
MSDW Pacific Growth* 61.90% -1.51% -3.26%
MSDW Quality Income* -7.12% 5.71% 5.58%
MSDW Short Term Bond* N/A N/A -4.95%**
MSDW S & P 500 Index* 16.42% N/A 15.12%
MSDW Strategist* 14.11% 13.90% 10.75%
MSDW Utilities* 9.57% 17.48% 11.94%
Emerging Markets 90.42% N/A 9.01%
Equity Growth 36.12% N/A 27.22%
International Magnum 22.11% N/A 10.26%
U.S. Real Estate -4.09% N/A -2.95%
Putnam Growth and Income* -1.21% 17.01% 11.68%
Putnam International Growth* 56.35% N/A 26.84%
Putnam Voyager* 54.37% 29.02% 19.83%
Van Kampen Emerging Growth 99.93% N/A 37.92%
+Please refer to the table at the beginning of this section for the inception
dates of the Portfolios.
*The performance shown for the Portfolios' 12b-1 class is based on the
performance of the non 12b-1 class, as described in the table at the beginning
of this section.
** Performance shown is not annualized.
<PAGE>
(WITH THE INCOME AND DEATH BENEFIT COMBINATION 2 OPTION)
10 Years or
Variable Sub-Account One Year Five Year Since Inception
-------------------- ---------- --------- ----------------
AIM Capital Appreciation 41.44% 22.85% 19.85%
AIM Growth 32.20% 25.80% 19.70%
AIM Value 26.95% 23.96% 20.21%
Alliance Growth* 31.31% 28.98% 28.18%
Alliance Growth and Income* 8.60% 21.67% 13.37%
Alliance Premier Growth* N/A N/A 7.11%**
MSDW Aggressive Equity* N/A N/A 39.15%**
MSDW Capital Growth* 29.97% 21.93% 13.20%
MSDW Competitive Edge* 22.90% N/A 9.41%
MSDW Dividend Growth* -5.07% 16.50% 10.94%
MSDW Equity* 54.81% 33.21% 20.78%
MSDW European Growth* 25.86% 22.57% 17.47%
MSDW Global Dividend Growth* 11.66% 13.60% 11.06%
MSDW High Yield* -4.03% 3.89% 6.29%
MSDW Income Builder* 4.21% N/A 7.50%
MSDW Mid Cap 17.79% N/A 21.35%
MSDW Pacific Growth* 62.17% -1.34% -3.09%
MSDW Quality Income* -6.97% 5.89% 5.76%
MSDW Short Term Bond* N/A N/A -4.83%**
MSDW S & P 500 Index* 16.61% N/A 15.32%
MSDW Strategist* 14.31% 14.09% 10.94%
MSDW Utilities* 9.76% 17.68% 12.13%
Emerging Markets 90.74% N/A 9.20%
Equity Growth 36.35% N/A 27.44%
International Magnum 22.32% N/A 10.45%
U.S. Real Estate -3.93% N/A -2.78%
Putnam Growth and Income* -1.04% 17.21% 11.87%
Putnam International Growth* 56.62% N/A 27.06%
Putnam Voyager* 54.63% 29.24% 20.03%
Van Kampen Emerging Growth 100.27% N/A 38.15%
</TABLE>
+Please refer to the table at the beginning of this section for the inception
dates of the Portfolios.
*The performance shown for the Portfolios' 12b-1 class is based on the
performance of the non 12b-1 class, as described in the table at the beginning
of this section.
** Performance shown is not annualized.
<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 the number of days in the current calendar year and then
multiplied by the number of calendar days in the current Valuation Period.
CALCULATION OF VARIABLE AMOUNT 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.
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.
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.
QUALIFIED PLANS
The Contract may be used with several types of qualified plans. Northbrook
reserves the right to limit the availability of the contract for use with any of
the qualified plans listed below. 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.
IRAs
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an IRA. IRAs 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 IRA. 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 IRAs
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth IRA. Roth IRAs
are subject to limitations on the amount that can be contributed and on the time
when distributions may commence. "Qualified distributions" from Roth IRAs 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 IRA, 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 IRA. 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 IRA. 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' IRAs 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.
EXPERTS
------------------------------------------------------------------------------
The financial statements of Northbrook as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 and the related
financial statement schedule that appear in this Statement of Additional
Information have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of the Variable Account as of December 31, 1999 and for
each of the periods in the two years then ended that appear in this Statement of
Additional Information have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
-----------------------------------------------------------------------------
FINANCIAL STATEMENTS
The financial statements of the Variable Account as of December 31, 1999 and for
each of the periods in the two years then ended, the financial statements of
Northbrook as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999 and related financial statement schedule and
the accompanying Independent Auditors' Reports appear in the pages that follow.
The financial statements and schedule of Northbrook included herein should be
considered only as bearing upon the ability of Northbrook to meet its
obligations under the Contracts.
<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, 1999 and 1998, 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, 1999. 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, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 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 25, 2000
<PAGE>
<TABLE>
<CAPTION>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
December 31,
-----------------------------
1999 1998
------------- ------------
($ in thousands, except par value data)
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $89,205 and $81,156) $ 86,998 $ 86,336
Short-term 3,170 5,083
------------ ------------
Total investments 90,168 91,419
Cash 21 --
Reinsurance recoverable from
Allstate Life Insurance Company 2,022,502 2,148,091
Other assets 5,997 6,705
Separate Accounts 8,211,996 7,031,083
------------ ------------
TOTAL ASSETS $ 10,330,684 $ 9,277,298
============ ============
LIABILITIES
Reserve for life-contingent contract benefits $ 150,587 $ 145,055
Contractholder funds 1,871,933 2,003,122
Current income taxes payable 2,171 1,830
Deferred income taxes 746 3,316
Payable to affiliates, net 5,990 5,085
Separate Accounts 8,211,996 7,031,083
------------ ------------
TOTAL LIABILITIES 10,243,423 9,189,491
============ ============
Commitments and Contingent Liabilities (Note 12)
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 29,596 25,340
Accumulated other comprehensive (loss) income:
Unrealized net capital (losses) gains (1,435) 3,367
------------ ------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (1,435) 3,367
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 87,261 87,807
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 10,330,684 $ 9,277,298
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
($ in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES
Net investment income $ 6,010 $ 5,691 $ 5,146
Realized capital gains and losses 510 2 (68)
------- ------- -------
Income from operations
before income tax expense 6,520 5,693 5,078
Income tax expense 2,264 1,995 1,756
------- ------- -------
NET INCOME 4,256 3,698 3,322
------- ------- -------
Other comprehensive (loss) income, after-tax
Change in unrealized net capital gains and losses (4,802) 825 1,256
------- ------- -------
COMPREHENSIVE (LOSS) INCOME $ (546) $ 4,523 $ 4,578
======= ======= =======
</TABLE>
See notes to financial statements.
3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
($ in thousands)
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL CAPITAL PAID-IN $ 56,600 $ 56,600 $ 56,600
-------- -------- --------
RETAINED INCOME
Balance, beginning of year $ 25,340 $ 21,642 $ 18,320
Net income 4,256 3,698 3,322
-------- -------- --------
Balance, end of year 29,596 25,340 21,642
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance, beginning of year $ 3,367 $ 2,542 $ 1,286
Change in unrealized net capital gains
and losses (4,802) 825 1,256
-------- -------- --------
Balance, end of year (1,435) 3,367 2,542
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY $ 87,261 $ 87,807 $ 83,284
======== ======== ========
</TABLE>
See notes to financial statements.
4
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
($ in thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,256 $ 3,698 $ 3,322
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization and other non-cash items 559 518 516
Realized capital gains and losses (510) (2) 68
Changes in:
Life-contingent contract benefits and
contractholder funds (68) 273 205
Income taxes payable 355 1,866 (480)
Other operating assets and liabilities 924 4,126 (264)
-------- -------- --------
Net cash provided by operating activities 5,516 10,479 3,367
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 17,992 1,922 1,606
Investment collections 6,555 10,253 10,036
Investment purchases (32,050) (20,690) (18,568)
Change in short-term investments, net 2,008 (1,964) 3,559
-------- -------- --------
Net cash used in investing activities (5,495) (10,479) (3,367)
-------- -------- --------
NET INCREASE IN CASH 21 -- --
CASH AT THE BEGINNING OF YEAR -- -- --
-------- -------- --------
CASH AT END OF YEAR $ 21 $ -- $ --
======== ======== ========
</TABLE>
See notes to financial statements.
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 1999 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets savings and life insurance products exclusively through Dean
Witter Reynolds, Inc. ("Dean Witter") (see Note 4), a wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. Savings products include deferred annuities and
immediate annuities without life contingencies. Deferred annuities include fixed
rate, market value adjusted, and variable annuities. Life insurance consists of
interest-sensitive life, immediate annuities with life contingencies, and
variable life insurance. In 1999, substantially all of the Company's statutory
premiums and deposits were from annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary surrender 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. Recently enacted federal legislation will
allow for banks and other financial organizations to have greater participation
in the securities and insurance businesses. This legislation may 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 were
California, Florida, and Texas for the year ended December 31, 1999. 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.
6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are recognized for declines in the value of
fixed income securities that are other than temporary. Such writedowns are
included in realized capital gains and losses. Short-term investments are
carried at cost or amortized cost, which approximates fair value.
Investment income consists primarily of interest and short-term investment
dividends. 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 RECOVERABLE
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. 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 terms of 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 INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED
Interest-sensitive life contracts are insurance contracts whose terms are not
fixed and guaranteed. The terms that may be changed include premiums paid by the
contractholder, interest credited to the contractholder account balance and one
or more amounts assessed against the contractholder. Premiums from these
contracts are reported as deposits to contractholder funds. Contract charge
revenue consists of fees assessed against the contractholder account balance for
cost of insurance (mortality risk), contract administration and surrender
charges. Contract benefits include interest credited to contracts and claims
incurred in excess of the related contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed rate
annuities, market value adjusted annuities and immediate annuities without life
contingencies are considered investment contracts. Deposits received for such
contracts are reported as deposits to contractholder funds. Contract charge
revenue for investment contracts consists of charges assessed against the
contractholder account balance for contract
7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
administration and surrender charges. Contract benefits include interest
credited and claims incurred in excess of the related contractholder account
balance.
Crediting rates for fixed rate annuities and interest-sensitive life contracts
are adjusted periodically by the Company to reflect current market conditions.
Investment contracts also include variable annuity and variable life contracts
which are sold as Separate Accounts products. The assets supporting these
products are legally segregated and available only to settle Separate Accounts
contract obligations. Deposits received are reported as Separate Accounts
liabilities. The Company's contract charge revenue for these contracts consists
of charges assessed against the Separate Accounts fund balances for contract
maintenance, administration, mortality, expense and surrenders.
All premiums, contract charges, contract benefits and interest credited are
reinsured.
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 primarily from
unrealized capital gains and losses on fixed income securities carried at fair
value and differences in the tax bases of investments.
SEPARATE ACCOUNTS
The Company issues deferred variable annuity and variable life contracts, the
assets and liabilities of which are legally segregated and recorded as assets
and liabilities of the Separate Accounts. Absent any contract provisions wherein
the Company contractually guarantees either a minimum return or account value to
the beneficiaries of the contractholders in the form of a death benefit, the
contractholders bear the investment risk that the Separate Accounts' funds may
not meet their stated investment objectives.
The assets of the Separate Accounts are carried at fair value. Separate Accounts
liabilities represent the contractholders' claims to the related assets and are
carried at the fair value of the assets. In the event that the asset value of
certain contractholder accounts are projected to be below the value guaranteed
by the Company, a liability is established through a charge to earnings.
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 Separate Accounts consist of contract maintenance and
administration fees, and mortality, surrender and expense charges.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to immediate
annuities with life contingencies and certain variable annuity contract
guarantees, is computed on the basis of assumptions as to mortality, future
investment yields, terminations and expenses at the time the policy is issued.
These assumptions include provisions for adverse deviation and generally vary by
such characteristics as type of coverage, year
8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
of issue and policy duration. Detailed reserve assumptions and reserve interest
rates are outlined in Note 7.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of interest-sensitive life and
certain investment contracts. Deposits received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received, net of
commissions, and interest credited to the benefit of the contractholder less
withdrawals, mortality charges and administrative expenses. Detailed information
on crediting rates and surrender and withdrawal protection on contractholder
funds are outlined in Note 7.
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 1999, the Company adopted Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." The SOP
provides guidance concerning when to recognize a liability for insurance-related
assessments and how those liabilities should be measured. Specifically,
insurance-related assessments should be recognized as liabilities when all of
the following criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an entity
to pay an assessment has occurred and 3) the amount of the assessment can be
reasonably estimated. Adoption of this statement was not material to the
Company's results of operations or financial position.
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. 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 the reinsurance agreements. The following amounts were ceded to ALIC
under reinsurance agreements.
9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Premiums $ 2,966 $ 2,528 $ 1,979
Contract charges 118,290 102,218 83,559
Credited interest, policy benefits, and certain
expenses 222,513 217,428 201,526
</TABLE>
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 Company is charged for the cost of these operating expenses
based on the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $33,892, $26,230 and $23,978 in 1999, 1998 and 1997, respectively. Of these
costs, the Company retains investment related expenses. All other costs are
ceded to ALIC under reinsurance agreements.
4. EXCLUSIVE DISTRIBUTION AGREEMENT
The Company has a strategic alliance with Dean Witter to develop, market and
distribute proprietary savings and life insurance products through Morgan
Stanley Dean Witter Financial Advisors. Affiliates of Dean Witter are the
investment managers for the Morgan Stanley Dean Witter Variable Investment
Series, Morgan Stanley Universal Funds, Inc. and the Van Kampen American Capital
Life Investment Trust, the funds in which certain assets of the Separate
Accounts products are invested. Under the terms of the alliance, the Company has
agreed to use Dean Witter as an exclusive distribution channel for the Company's
products. In addition to the Company's products, Dean Witter markets other
products which compete with those of the Company.
Pursuant to the alliance agreement, Dean Witter provides approximately half of
the statutory capital necessary to maintain these products on the Company's
books through loans to a subsidiary of AIC. AIC unconditionally guarantees the
repayment of these loans. The Company shares approximately half the net profits
with Dean Witter on contracts written under the alliance.
The strategic alliance is cancelable for new business by either party by giving
30 days written notice, however, the Company believes the benefits derived by
Dean Witter will preserve the alliance.
10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
5. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED --------------------------- FAIR
COST GAINS LOSSES VALUE
--------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
U.S. government and agencies $ 8,660 $ 131 $ (57) $ 8,734
Municipal 1,155 6 (108) 1,053
Corporate 61,049 26 (2,541) 58,534
Mortgage-backed securities 18,341 822 (486) 18,677
------- ------- ------- -------
Total fixed income securities $89,205 $ 985 $(3,192) $86,998
======= ======= ======= =======
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
======= ======= ======= =======
</TABLE>
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1999:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Due in one year or less $ 50 $ 50
Due after one year through five years 16,690 16,538
Due after five years through ten years 46,933 44,542
Due after ten years 7,191 7,191
------- ------
70,864 68,321
Mortgage-backed securities 18,341 18,677
------- -------
Total $89,205 $86,998
======= =======
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
<TABLE>
<CAPTION>
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed income securities $ 5,881 $ 5,616 $ 5,364
Short-term investments 261 190 84
------- ------- -------
Investment income, before expense 6,142 5,806 5,448
Investment expense 132 115 302
------- ------- -------
Net investment income $ 6,010 $ 5,691 $ 5,146
======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1999 1998 1997
------- ------- -------
Fixed income securities $ 510 $ 2 $ (70)
Short-term investments -- -- 2
------- ------- -------
Realized capital gains and losses 510 2 (68)
Income taxes (178) (1) 24
------- ------- -------
Realized capital gains and losses, after tax $ 332 $ 1 $ (44)
======= ======= =======
</TABLE>
Excluding calls and prepayments, gross gains of $629 were realized on sales of
fixed income securities during 1999 and gross losses of $119, $9 and $70 were
realized on sales of fixed income securities during 1999, 1998 and 1997,
respectively. There were no gross gains realized on sales of fixed income
securities during 1998 and 1997.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
COST/ FAIR GROSS UNREALIZED UNREALIZED
AMORTIZED COST VALUE GAINS LOSSES NET LOSSES
-------------- ----- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Fixed income securities $ 89,205 $ 86,998 $ 985 $ (3,192) $ (2,207)
======== ======== ======== ========
Deferred income taxes 772
--------
Unrealized net capital losses $ (1,435)
========
CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31, 1999 1998 1997
-------- -------- --------
Fixed income securities $ (7,387) $ 1,269 $ 1,932
Deferred income taxes 2,585 (444) (676)
-------- -------- --------
(Decrease) increase in unrealized net
capital gains $ (4,802) $ 825 $ 1,256
======== ======== ========
</TABLE>
SECURITIES ON DEPOSIT
At December 31, 1999, fixed income securities with a carrying value of $7,856
were on deposit with regulatory authorities as required by law.
12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
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
interest-sensitive life 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 and cash 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed income securities $ 86,998 $ 86,998 $ 86,336 $ 86,336
Short-term investments 3,170 3,170 5,083 5,083
Separate Accounts 8,211,996 8,211,996 7,031,083 7,031,083
</TABLE>
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
are deemed to approximate 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $1,735,843 $1,675,910 $1,839,114 $1,814,684
Separate Accounts 8,211,996 8,211,996 7,031,083 7,031,083
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
7. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, the reserve for life-contingent contract benefits consists of
the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Immediate annuities:
Structured settlement annuities $109,907 $108,215
Other immediate annuities 40,680 36,840
-------- --------
Total life-contingent contract benefits $150,587 $145,055
======== ========
</TABLE>
The assumptions for mortality generally utilized in calculating reserves
include, the U.S. population with projected calendar year improvements and age
setbacks for impaired lives for structured settlement annuities; and the 1983
group annuity mortality table for other immediate annuities. Interest rate
assumptions vary from 3.5% to 10.0% for immediate annuities. Other estimation
methods used include the present value of contractually fixed future benefits
for structured settlement annuities and other immediate annuities.
Premium deficiency reserves are established, if necessary, for the structured
settlement annuity business, to the extent the unrealized gains on fixed income
securities would result in a premium deficiency had those gains actually been
realized. The Company did not have a premium deficiency reserve at December 31,
1999 and 1998.
At December 31, contractholder funds consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest-sensitive life $ 173,867 $ 178,589
Fixed annuities:
Immediate annuities 78,197 77,291
Deferred annuities 1,619,869 1,747,242
---------- ----------
Total contractholder funds $1,871,933 $2,003,122
========== ==========
</TABLE>
Contractholder funds are equal to deposits received net of commissions and
interest credited to the benefit of the contractholder less withdrawals,
mortality charges and administrative expenses. Interest rates credited range
from 4.0% to 7.2% for interest-sensitive life contracts; 3.5% to 10.2% for
immediate annuities and 3.4% to 8.0% for deferred annuities. Withdrawal and
surrender charge protection includes: i) for interest- sensitive life, either a
percentage of account balance or dollar amount grading off generally over 20
years; and, ii) for deferred annuities not subject to a market value adjustment,
either a declining or a level percentage charge generally over nine years or
less. Approximately 25% of deferred annuities are subject to a market value
adjustment.
14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
8. CORPORATION RESTRUCTURING
On November 10, 1999, the Corporation announced a series of strategic
initiatives to aggressively expand its selling and service capabilities. The
Corporation also announced that it is implementing a program to reduce expenses
by approximately $600 million. The reduction will result in the elimination of
approximately 4,000 current non-agent positions, across all employment grades
and categories by the end of 2000, or approximately 10% of the Corporation's
non-agent work force. The impact of the reduction in employee positions is not
expected to materially impact the results of operations of the Company.
These cost reductions are part of a larger initiative to redeploy the cost
savings to finance new initiatives including investments in direct access and
internet channels for new sales and service capabilities, new competitive
pricing and underwriting techniques, new agent and claim technology and enhanced
marketing and advertising. As a result of the cost reduction program, the
Corporation recorded restructuring and related charges of $81 million pretax
during the fourth quarter of 1999. The Corporation anticipates that additional
pretax restructuring related charges of approximately $100 million will be
expensed as incurred throughout 2000. The Company's allocable share of these
expenses were immaterial in 1999 and are expected to be immaterial in 2000.
9. INCOME TAXES
The Company joins the Corporation and its other eligible domestic subsidiaries
(the "Allstate Group") in the filing of a consolidated federal income tax return
and is party to a federal income tax allocation agreement (the "Allstate Tax
Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the Company pays
to or receives from the Corporation the amount, if any, by which the Allstate
Group's federal income tax liability is affected by virtue of inclusion of the
Company in the consolidated federal income tax return. Effectively, this results
in the Company's annual income tax provision being computed, with adjustments,
as if the Company filed a separate return.
Prior to June 30, 1995, the Corporation was a subsidiary of Sears Roebuck & Co.
("Sears") and, with its eligible domestic subsidiaries, was included in the
Sears consolidated federal income tax return and federal income tax allocation
agreement. Effective June 30, 1995, the Corporation and Sears entered into a new
tax sharing agreement, which governs their respective rights and obligations
with respect to federal income taxes for all periods during which the
Corporation was a subsidiary of Sears, including the treatment of audits of tax
returns for such periods.
The Internal Revenue Service ("IRS") has completed its review of the Allstate
Group's federal income tax returns through the 1993 tax year. Any adjustments
that may result from IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or results of operations of
the Company.
15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
DEFERRED ASSETS
Unrealized net capital losses $ 772 $ --
------- -------
Total deferred assets 772 --
DEFERRED LIABILITIES
Difference in tax bases of investments (1,518) (1,503)
Unrealized net capital gains -- (1,813)
------- -------
Total deferred liabilities (1,518) (3,316)
------- -------
Net deferred liability $ (746) $(3,316)
======= =======
</TABLE>
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current $ 2,249 $ 1,797 $ 1,843
Deferred 15 198 (87)
------- ------- -------
Total income tax expense $ 2,264 $ 1,995 $ 1,756
======= ======= =======
</TABLE>
The Company paid income taxes of $1,908, $129 and $2,236 in 1999, 1998 and 1997,
respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.1) (0.2) (0.4)
Other (0.2) 0.2 --
----- ----- -----
Effective income tax rate 34.7% 35.0% 34.6%
===== ===== =====
</TABLE>
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, 1999, 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.
10. STATUTORY FINANCIAL INFORMATION
The Company's statutory capital and surplus was $83,746 and $68,883 at December
31, 1999 and 1998, respectively. The Company's statutory net income was $4,840,
$3,518 and $2,908 for the years ended December 31, 1999, 1998 and 1997,
respectively.
16
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting 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
statutory accounting principles, which the Company will implement in January
2001. The Company's state of domicile, Arizona, has passed legislation revising
various statutory accounting requirements to conform to codification. These
requirements are not expected to have a material impact on the statutory surplus
of the Company.
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 2000 without prior approval of the Arizona Department of Insurance is
$4,840.
RISKED-BASED CAPITAL
The NAIC has a standard for assessing the solvency of insurance companies, which
is referred to as risk-based capital ("RBC"). The requirement consists of a
formula for determining each insurer's RBC and a model law specifying regulatory
actions if an insurer's RBC falls below specified levels. The RBC formula for
life insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. At December 31, 1999, RBC for the
Company was significantly above levels that would require regulatory action.
17
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
11. 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>
1999 1998 1997
-------------------------- ---------------------------- -----------------------------
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 (losses)
gains arising during
the period $(6,877) $ 2,407 $(4,470) $ 1,271 $ (445) $ 826 $ 1,862 $ (652) $ 1,210
Less: reclassification
adjustments 510 (178) 332 2 (1) 1 (70) 24 (46)
------- ------- ------- ------- ------- ------- ------- ------- -------
Unrealized net capital
(losses) gains (7,387) 2,585 (4,802) 1,269 (444) 825 1,932 (676) 1,256
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
(loss) income $(7,387) $ 2,585 $(4,802) $ 1,269 $ (444) $ 825 $ 1,932 $ (676) $ 1,256
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
12. 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.
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business in a state can
be assessed, up to prescribed limits, for certain obligations of insolvent
insurance companies to policyholders and claimants. The Company's expenses
related to these funds have been immaterial. These expenses are ceded to ALIC
under reinsurance agreements.
MARKETING AND COMPLIANCE ISSUES
Companies operating in the insurance and financial services markets have come
under the scrutiny of regulators with respect to market conduct and compliance
issues. Under certain circumstances, companies have been held responsible for
providing incomplete or misleading sales materials and for replacing existing
policies with policies that were less advantageous to the policyholder. The
Company monitors its sales materials and
18
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
enforces compliance procedures to mitigate any exposure to potential litigation.
The Company is a member of the Insurance Marketplace Standards Association, an
organization which advocates ethical market conduct.
19
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT CEDED AMOUNT
---------------------------- ------ ----- ------
<S> <C> <C> <C>
Life insurance in force $ 474,824 $ 474,824 $ -
========= ========= =======
Premiums and contract charges:
Life and annuities $ 121,351 $ 121,351 $ -
========= ========= =======
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, 1997 AMOUNT CEDED AMOUNT
---------------------------- ------ ----- ------
Life insurance in force $ 515,890 $515,890 $ -
========= ======== =======
Premiums and contract charges:
Life and annuities $ 85,538 $ 85,538 $ -
========= ======== =======
</TABLE>
20
<PAGE>
-------------------------------------------------
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND FOR THE PERIODS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998, AND INDEPENDENT AUDITORS'
REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Northbrook Life Insurance Company:
We have audited the accompanying statement of net assets of Northbrook Variable
Annuity Account II as of December 31, 1999 (including the assets of each of the
individual sub-accounts which comprise the Account as disclosed in Note 1), and
the related statements of operations for the period then ended and the
statements of changes in net assets for each of the periods in the two year
period then ended for each of the individual sub-accounts which comprise the
Account. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1999 by correspondence with the
account custodians. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Northbrook Variable Annuity Account II as of
December 31, 1999 (including the assets of each of the individual sub-accounts
which comprise the Account), and the results of operations for each of the
individual sub-accounts for the period then ended and the changes in their net
assets for each of the periods in the two year period then ended in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 27, 2000
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Allocation to Sub-Accounts investing in the Morgan Stanley Dean Witter Variable Investment Series:
Money Market, 399,687,085 shares (cost $399,687,085) $ 399,687,085
Quality Income Plus, 41,997,297 shares (cost $446,990,830) 414,093,354
Short-term Bond, 317,419 shares (cost $3,155,163) 3,136,095
High Yield, 59,754,185 shares (cost $345,269,007) 258,735,614
Utilities, 23,208,039 shares (cost $363,178,521) 531,464,073
Income Builder, 6,835,266 shares (cost $78,259,417) 78,195,436
Dividend Growth, 103,340,027 shares (cost $1,935,635,044) 1,893,189,362
Aggressive Equity, 2,583,544 shares (cost $31,052,866) 37,642,241
Capital Growth, 6,653,311 shares (cost $111,603,872) 157,855,670
Global Dividend Growth, 32,940,470 shares (cost $415,892,581) 475,660,390
European Growth, 17,029,397 shares (cost $373,802,190) 535,915,110
Pacific Growth, 12,523,323 shares (cost $90,737,991) 106,197,769
Equity, 35,605,525 shares (cost $1,143,964,322) 1,918,425,656
S&P 500 Index, 13,203,522 shares (cost $152,388,943) 177,323,303
Competitive Edge, "Best Ideas", 4,808,606 shares (cost $47,697,008) 59,482,451
Strategist, 34,150,688 shares (cost $483,599,787) 652,278,152
Allocation to Sub-Accounts investing in the Morgan Stanley Dean Witter Universal Funds, Inc.:
Equity Growth, 3,599,965 shares (cost $58,801,975) 73,115,278
U.S. Real Estate, 575,145 shares (cost $5,616,194) 5,239,570
International Magnum, 817,294 shares (cost $10,124,267) 11,352,212
Emerging Markets Equity, 1,571,876 shares (cost $16,495,581) 21,754,769
Allocation to Sub-Accounts investing in the Van Kampen Life Investment Trust:
Emerging Growth, 2,816,146 shares (cost $82,270,389) 130,190,408
------------------
Total Assets 7,940,933,998
LIABILITIES
Payable to Northbrook Life Insurance Company:
Accrued contract maintenance charges 1,585,863
------------------
Net Assets $7,939,348,135
==================
</TABLE>
See notes to financial statements.
2
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
------------------------------------------------------------------------------
For the Period Ended December 31, 1999
------------------------------------------------------------------------------
Quality
Money Income Short-term High
Market Plus Bond (a) Yield Utilities
------------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $18,792,485 $29,581,022 $ 57,480 $43,293,002 $23,117,286
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (5,174,278) (5,889,185) (16,208) (4,018,180) (6,616,560)
Administrative expense (397,391) (458,506) (1,199) (307,202) (514,744)
------------- -------------- ------------ -------------- -------------
Net investment income (loss) 13,220,816 23,233,331 40,073 38,967,620 15,985,982
------------- -------------- ------------ -------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 450,473,606 91,452,155 2,359,119 120,337,868 77,317,835
Cost of investments sold 450,473,606 93,902,304 2,359,900 151,639,171 53,406,420
------------- -------------- ------------ -------------- -------------
Net realized gains (losses) - (2,450,149) (781) (31,301,303) 23,911,415
------------- -------------- ------------ -------------- -------------
Change in unrealized gains (losses) - (47,274,110) (19,068) (15,834,237) 14,087,560
------------- -------------- ------------ -------------- -------------
Net gains (losses) on investments - (49,724,259) (19,849) (47,135,540) 37,998,975
------------- -------------- ------------ -------------- -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $13,220,816 $(26,490,928) $ 20,224 $ (8,167,920) $53,984,957
============= ============== ============ ============== =============
</TABLE>
(a) For the Period Beginning May 3, 1999 and Ending December 31, 1999
See notes to financial statements.
3
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
------------------------------------------------------------------------------
For the Period Ended December 31, 1999
------------------------------------------------------------------------------
Global
Income Dividend Aggressive Capital Dividend
Builder Growth Equity (a) Growth Growth
------------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $5,656,529 $ 344,715,375 $ 8,016 $16,465,625 $42,276,039
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (1,074,813) (27,635,413) (90,882) (1,704,240) (5,962,699)
Administrative expense (80,797) (2,120,551) (6,625) (131,437) (459,161)
------------- -------------- ------------ -------------- -------------
Net investment income (loss) 4,500,919 314,959,411 (89,491) 14,629,948 35,854,179
------------- -------------- ------------ -------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 22,078,410 271,852,893 9,380,824 25,783,061 67,497,277
Cost of investments sold 21,966,313 143,156,159 8,818,400 20,761,201 58,495,694
------------- -------------- ------------ -------------- -------------
Net realized gains (losses) 112,097 128,696,734 562,424 5,021,860 9,001,583
------------- -------------- ------------ -------------- -------------
Change in unrealized gains (losses) (428,270) (523,069,735) 6,589,375 18,225,024 11,267,752
------------- -------------- ------------ -------------- -------------
Net gains (losses) on investments (316,173) (394,373,001) 7,151,799 23,246,884 20,269,335
------------- -------------- ------------ -------------- -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $4,184,746 $ (79,413,590) $7,062,308 $37,876,832 $56,123,514
============= ============== ============ ============== =============
</TABLE>
(a) For the Period Beginning May 3, 1999 and Ended December 31, 1999
See notes to financial statements.
4
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
----------------------------------------------------------------------------
For the Period Ended December 31, 1999
----------------------------------------------------------------------------
Competitive
European Pacific S&P 500 Edge
Growth Growth Equity Index "Best Ideas"
-------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $ 46,726,748 $ 708,269 $ 162,022,502 $ 505,872 $ 256,310
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (6,021,308) (942,881) (17,504,413) (1,480,933) (571,765)
Administrative expense (462,358) (72,239) (1,335,632) (110,039) (42,508)
-------------- ------------- --------------- ------------- -------------
Net investment income (loss) 40,243,082 (306,851) 143,182,457 (1,085,100) (357,963)
-------------- ------------- --------------- ------------- -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 166,759,231 204,696,580 71,908,669 10,680,473 8,151,769
Cost of investments sold 134,216,170 199,030,079 51,120,136 9,714,922 7,482,882
-------------- ------------- --------------- ------------- -------------
Net realized gains (losses) 32,543,061 5,666,501 20,788,533 965,551 668,887
-------------- ------------- --------------- ------------- -------------
Change in unrealized gains (losses) 43,557,813 34,854,630 497,325,723 20,320,510 10,507,911
-------------- ------------- --------------- ------------- -------------
Net gains (losses) on investments 76,100,874 40,521,131 518,114,256 21,286,061 11,176,798
-------------- ------------- --------------- ------------- -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $116,343,956 $40,214,280 $ 661,296,713 $20,200,961 $10,818,835
============== ============= =============== ============= =============
</TABLE>
See notes to financial statements.
5
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter
Variable Investment Morgan Stanley Dean Witter
Series Sub-Accounts Universal Funds, Inc. Sub-Accounts
--------------------------- -------------------------------------------
For the Period Ended December 31, 1999
------------------------------------------------------------------------
Capital Equity U.S. Real International
Strategist Appreciation Growth Estate Magnum
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends $13,525,693 $ 431,345 $2,304,285 $ 268,634 $ 98,917
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (7,823,773) (93,215) (554,937) (55,126) (80,070)
Administrative expense (602,540) (7,030) (40,931) (4,034) (5,870)
------------- ------------ ------------- ------------ -------------
Net investment income (loss) 5,099,380 331,100 1,708,417 209,474 12,977
------------- ------------ ------------- ------------ -------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 65,492,020 36,005,812 5,611,630 3,634,072 9,573,057
Cost of investments sold 50,460,560 35,960,809 4,973,147 3,714,989 9,327,204
------------- ------------ ------------- ------------ -------------
Net realized gains (losses) 15,031,460 45,003 638,483 (80,917) 245,853
------------- ------------ ------------- ------------ -------------
Change in unrealized gains (losses) 68,404,657 1,824,853 12,913,775 (365,102) 1,391,382
------------- ------------ ------------- ------------ -------------
Net gains (losses) on investments 83,436,117 1,869,856 13,552,258 (446,019) 1,637,235
------------- ------------ ------------- ------------ -------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $88,535,497 $2,200,956 $15,260,675 $ (236,545) $ 1,650,212
============= ============ ============= ============ =============
</TABLE>
See notes to financial statements.
6
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------
Morgan Stanley Van Kampen
Dean Witter Life
Universal Funds Investment
Inc. Sub-Accounts Trust Sub-Account
------------------- -------------------
For the Period Ended December 31, 1999
------------------------------------------
Emerging
Markets Emerging
Equity Growth
------------------- -------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends $ 1,768 $ -
Charges from Northbrook Life Insurance Company:
Mortality and expense risk (116,835) (600,044)
Administrative expense (8,607) (43,889)
------------------- -------------------
Net investment income (loss) (123,674) (643,933)
------------------- -------------------
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales of investments:
Proceeds from sales 24,519,251 8,038,290
Cost of investments sold 22,217,514 6,791,472
------------------- -------------------
Net realized gains (losses) 2,301,737 1,246,818
------------------- -------------------
Change in unrealized gains (losses) 5,429,367 46,420,306
------------------- -------------------
Net gains (losses) on investments 7,731,104 47,667,124
------------------- -------------------
CHANGE IN NET ASSETS
RESULTING FROM OPERATIONS $ 7,607,430 $ 47,023,191
=================== ===================
</TABLE>
See notes to financial statements.
7
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
-----------------------------------------------------------------------------
Money Quality Income Short-term
Market Plus Bond
------------------------------ ------------------------------ ------------
1999 1998 1999 1998 1999 (a)
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 13,220,816 $ 12,548,671 $ 23,233,331 $ 21,956,967 $ 40,073
Net realized gains (losses) - - (2,450,149) 882,678 (781)
Change in unrealized gains (losses) - - (47,274,110) 7,935,179 (19,068)
-------------- -------------- -------------- -------------- ------------
Change in net assets resulting from operations 13,220,816 12,548,671 (26,490,928) 30,774,824 20,224
-------------- -------------- -------------- -------------- ------------
FROM CAPITAL TRANSACTIONS
Deposits 75,959,488 129,304,408 29,984,131 61,783,024 930,037
Benefit payments (12,372,372) (10,995,208) (7,891,742) (7,284,535) -
Payments on termination (112,272,629) (87,146,553) (52,572,327) (51,273,025) (114,564)
Contract maintenance charges (128,006) (141,332) (161,057) (198,787) (754)
Transfers among the sub-accounts
and with the Fixed Account - net 34,266,127 56,130,115 (24,709,758) 38,983,496 2,300,526
-------------- -------------- -------------- -------------- ------------
Change in net assets resulting
from capital transactions (14,547,392) 87,151,430 (55,350,753) 42,010,173 3,115,245
-------------- -------------- -------------- -------------- ------------
INCREASE (DECREASE) IN NET ASSETS (1,326,576) 99,700,101 (81,841,681) 72,784,997 3,135,469
NET ASSETS AT BEGINNING OF PERIOD 400,933,840 301,233,739 495,852,338 423,067,341 -
-------------- -------------- -------------- -------------- ------------
NET ASSETS AT END OF PERIOD $399,607,264 $400,933,840 $414,010,657 $495,852,338 $3,135,469
============== ============== ============== ============== ============
</TABLE>
(a) For the Period Beginning May 3, 1999 and Ended December 31, 1999
See notes to financial statements
8
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
--------------------------------------------------------------------------------------------
High Income
Yield Utilities Builder
------------------------------ ------------------------------ ----------------------------
1999 1998 1999 1998 1999 1998
-------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 38,967,620 $ 38,496,771 $ 15,985,982 $ 28,487,796 $ 4,500,919 $ 3,508,026
Net realized gains (losses) (31,301,303) (9,716,192) 23,911,415 19,386,662 112,097 (141,151)
Change in unrealized gains (losses) (15,834,237) (58,494,693) 14,087,560 41,968,561 (428,270) (3,233,777)
-------------- -------------- -------------- -------------- ------------- -------------
Change in net assets resulting from
operations (8,167,920) (29,714,114) 53,984,957 89,843,019 4,184,746 133,098
-------------- -------------- -------------- -------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 26,101,041 89,840,399 39,072,264 58,090,579 7,989,151 34,230,388
Benefit payments (4,009,045) (6,104,964) (8,484,832) (7,223,282) (1,104,145) (920,343)
Payments on termination (35,111,312) (37,590,732) (50,808,054) (56,602,582) (5,408,027) (5,562,637)
Contract maintenance charges (104,889) (129,431) (201,221) (207,332) (31,269) (31,038)
Transfers among the sub-accounts
and with the Fixed Account - net (57,088,792) (15,774,631) (10,204,178) 14,560,699 (11,305,739) 3,007,479
-------------- -------------- -------------- -------------- ------------- -------------
Change in net assets resulting
from capital transactions (70,212,997) 30,240,641 (30,626,021) 8,618,082 (9,860,029) 30,723,849
-------------- -------------- -------------- -------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS (78,380,917) 526,527 23,358,936 98,461,101 (5,675,283) 30,856,947
NET ASSETS AT BEGINNING OF PERIOD 337,064,860 336,538,333 507,998,999 409,537,898 83,855,103 52,998,156
-------------- -------------- -------------- -------------- ------------- -------------
NET ASSETS AT END OF PERIOD $258,683,943 $337,064,860 $531,357,935 $507,998,999 $78,179,820 $83,855,103
============== ============== ============== ============== ============= =============
</TABLE>
See notes to financial statements
9
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
---------------------------------------------------------------------------------
Dividend Aggressive Capital
Growth Equity Growth
---------------------------------- ------------- ------------------------------
1999 1998 1999 (a) 1999 1998
---------------- ---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 314,959,411 $ 182,347,531 $ (89,491) $ 14,629,948 $ 7,626,924
Net realized gains (losses) 128,696,734 50,981,189 562,424 5,021,860 4,423,808
Change in unrealized gains (losses) (523,069,735) (11,845,338) 6,589,375 18,225,024 6,984,723
---------------- ---------------- ------------- -------------- --------------
Change in net assets resulting from
operations (79,413,590) 221,483,382 7,062,308 37,876,832 19,035,455
---------------- ---------------- ------------- -------------- --------------
FROM CAPITAL TRANSACTIONS
Deposits 188,251,624 365,505,119 12,119,932 9,505,220 17,877,989
Benefit payments (22,608,692) (20,959,842) (8,280) (1,116,070) (964,822)
Payments on termination (178,336,682) (208,789,814) (180,619) (12,938,058) (15,020,571)
Contract maintenance charges (827,903) (877,968) (8,488) (54,380) (50,900)
Transfers among the sub-accounts
and with the Fixed Account - net (100,954,098) (16,303,049) 18,649,870 (3,891,813) (10,068,182)
---------------- ---------------- ------------- -------------- --------------
Change in net assets resulting
from capital transactions (114,475,751) 118,574,446 30,572,415 (8,495,101) (8,226,486)
---------------- ---------------- ------------- -------------- --------------
INCREASE (DECREASE) IN NET ASSETS (193,889,341) 340,057,828 37,634,723 29,381,731 10,808,969
NET ASSETS AT BEGINNING OF PERIOD 2,086,700,619 1,746,642,791 - 128,442,414 117,633,445
---------------- ---------------- ------------- -------------- --------------
NET ASSETS AT END OF PERIOD $1,892,811,278 $2,086,700,619 $37,634,723 $157,824,145 $128,442,414
================ ================ ============= ============== ==============
</TABLE>
(a) For the Period Beginning May 3, 1999 and Ended December 31, 1999
See notes to financial statements
10
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
-------------------------------------------------------------------------------------------------
Global Dividend European Pacific
Growth Growth Growth
------------------------------- -------------------------------- ------------------------------
1999 1998 1999 1998 1999 1998
-------------- --------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 35,854,179 $ 50,158,952 $ 40,243,082 $ 26,853,320 $ (306,851) $1,965,499
Net realized gains (losses) 9,001,583 9,838,298 32,543,061 24,492,627 5,666,501 (23,716,625)
Change in unrealized gains (losses) 11,267,752 (15,619,557) 43,557,813 25,369,951 34,854,630 14,937,413
-------------- --------------- --------------- --------------- --------------- -------------
Change in net assets resulting
from operations 56,123,514 44,377,693 116,343,956 76,715,898 40,214,280 (6,813,713)
-------------- --------------- --------------- --------------- --------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 24,612,447 54,785,412 33,605,981 77,755,711 12,935,903 5,413,539
Benefit payments (5,520,386) (4,782,958) (3,672,213) (4,657,657) (522,120) (480,704)
Payments on termination (36,599,848) (45,079,876) (44,372,248) (44,010,271) (5,927,181) (5,342,736)
Contract maintenance charges (198,686) (209,379) (186,281) (196,986) (41,208) (24,050)
Transfers among the sub-accounts
and with the Fixed Account - net (16,822,685) (45,403,643) (38,047,377) 8,524,933 12,162,641 (7,740,250)
-------------- --------------- --------------- --------------- --------------- -------------
Change in net assets resulting
from capital transactions (34,529,158) (40,690,444) (52,672,138) 37,415,730 18,608,035 (8,174,201)
-------------- --------------- --------------- --------------- --------------- -------------
INCREASE (DECREASE) IN NET ASSETS 21,594,356 3,687,249 63,671,818 114,131,628 58,822,315 (14,987,914)
NET ASSETS AT BEGINNING OF PERIOD 453,971,041 450,283,792 472,136,266 358,004,638 47,354,245 62,342,159
-------------- --------------- --------------- --------------- --------------- -------------
NET ASSETS AT END OF PERIOD $475,565,397 $ 453,971,041 $ 535,808,084 $ 472,136,266 $ 106,176,560 $47,354,245
============== =============== =============== =============== =============== =============
</TABLE>
See notes to financial statements
11
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Variable Investment Series Sub-Accounts
-----------------------------------------------------------------------------------------------
S&P 500 Competitive Edge
Equity Index "Best Ideas"
---------------------------------- ----------------------------- ----------------------------
1999 1998 1999 1998 (b) 1999 1998 (b)
---------------- ---------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 143,182,457 $ 97,599,586 $ (1,085,100) $ (170,910) $ (357,963) $ (214,440)
Net realized gains (losses) 20,788,533 21,891,916 965,551 (34,337) 668,887 (346,888)
Change in unrealized gains (losses) 497,325,723 101,407,443 20,320,510 4,613,850 10,507,911 1,277,534
---------------- ---------------- -------------- ------------- ------------- -------------
Change in net assets resulting from
operations 661,296,713 220,898,945 20,200,961 4,408,603 10,818,835 716,206
---------------- ---------------- -------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 167,149,976 172,405,792 62,363,357 20,590,308 14,308,748 19,126,765
Benefit payments (11,678,201) (8,143,648) (364,932) (59,990) (385,715) (167,624)
Payments on termination (109,621,629) (87,506,544) (6,958,805) (592,621) (3,208,126) (422,743)
Contract maintenance charges (626,104) (380,694) (52,042) (11,823) (20,818) (10,074)
Transfers among the sub-accounts
and with the Fixed Account - net 173,235,007 4,499,209 55,622,169 22,142,705 2,656,267 16,058,851
---------------- ---------------- -------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions 218,459,049 80,874,115 110,609,747 42,068,579 13,350,356 34,585,175
---------------- ---------------- -------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS 879,755,762 301,773,060 130,810,708 46,477,182 24,169,191 35,301,381
NET ASSETS AT BEGINNING OF PERIOD 1,038,286,770 736,513,710 46,477,182 - 35,301,381 -
---------------- ---------------- -------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $1,918,042,532 $1,038,286,770 $177,287,890 $46,477,182 $59,470,572 $35,301,381
================ ================ ============== ============= ============= =============
</TABLE>
(b) For the Period Beginning May 18, 1998 and Ended December 31, 1998
See notes to financial statements
12
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter
Morgan Stanley Dean Witter Variable Investment Universal Funds, Inc.
Series Sub-Accounts Sub-Accounts
------------------------------------------------------------ -----------------------------
Capital Equity
Strategist Appreciation Growth
------------------------------ ---------------------------- ----------------------------
1999 1998 1999 1998 1999 1998 (c)
-------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 5,099,380 $ 49,765,425 $ 331,100 $ (251,058) $ 1,708,417 $ (78,711)
Net realized gains (losses) 15,031,460 9,013,062 45,003 (47,279) 638,483 (211,792)
Change in unrealized gains (losses) 68,404,657 48,207,735 1,824,853 (2,968,573) 12,913,775 1,399,530
-------------- -------------- ------------- ------------- ------------- -------------
Change in net assets resulting from
operations 88,535,497 106,986,222 2,200,956 (3,266,910) 15,260,675 1,109,027
-------------- -------------- ------------- ------------- ------------- -------------
FROM CAPITAL TRANSACTIONS
Deposits 53,336,082 73,192,883 1,292,309 12,585,227 18,427,169 21,346,469
Benefit payments (7,657,772) (6,681,194) (57,970) (277,813) (284,465) (354,060)
Payments on termination (54,083,482) (53,776,482) (647,504) (2,046,795) (3,119,435) (593,813)
Contract maintenance charges (236,109) (220,828) 3,365 (12,735) (21,923) (6,896)
Transfers among the sub-accounts
and with the Fixed Account - net 15,905,456 13,210,961 (34,073,925) (6,495,400) 17,161,540 4,176,388
-------------- -------------- ------------- ------------- ------------- -------------
Change in net assets resulting
from capital transactions 7,264,175 25,725,340 (33,483,725) 3,752,484 32,162,886 24,568,088
-------------- -------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS 95,799,672 132,711,562 (31,282,769) 485,574 47,423,561 25,677,115
NET ASSETS AT BEGINNING OF PERIOD 556,348,215 423,636,653 31,282,769 30,797,195 25,677,115 -
-------------- -------------- ------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $652,147,887 $556,348,215 $ - $31,282,769 $73,100,676 $25,677,115
============== ============== ============= ============= ============= =============
</TABLE>
(c) For the Period Beginning March 16, 1998 and Ended December 31, 1998
See notes to financial statements
13
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Universal Funds, Inc. Sub-Accounts
------------------------------------------------------------------------------------
Emerging Markets
U.S. Real Estate International Magnum Equity
-------------------------- --------------------------- ---------------------------
1999 1998 (b) 1999 1998 (c) 1999 1998 (c)
------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 209,474 $ 43,330 $ 12,977 $ (6,800) $ (123,674) $ (2,522)
Net realized gains (losses) (80,917) (29,879) 245,853 (74,905) 2,301,737 (66,221)
Change in unrealized gains (losses) (365,102) (56,788) 1,391,382 (175,857) 5,429,367 (177,275)
------------ ------------ ------------- ------------ ------------- ------------
Change in net assets resulting from operations (236,545) (43,337) 1,650,212 (257,562) 7,607,430 (246,018)
------------ ------------ ------------- ------------ ------------- ------------
FROM CAPITAL TRANSACTIONS
Deposits 2,256,539 1,559,058 4,195,250 2,610,252 5,860,089 1,113,998
Benefit payments (18,349) - (11,957) (11,092) (4,713) -
Payments on termination (219,432) (35,109) (236,057) (167,597) (593,151) (6,515)
Contract maintenance charges (1,904) (537) (3,349) (1,018) (6,183) (407)
Transfers among the sub-accounts
and with the Fixed Account - net 1,478,675 499,465 2,293,294 1,289,569 7,427,993 597,902
------------ ------------ ------------- ------------ ------------- ------------
Change in net assets resulting
from capital transactions 3,495,529 2,022,877 6,237,181 3,720,114 12,684,035 1,704,978
------------ ------------ ------------- ------------ ------------- ------------
INCREASE (DECREASE) IN NET ASSETS 3,258,984 1,979,540 7,887,393 3,462,552 20,291,465 1,458,960
NET ASSETS AT BEGINNING OF PERIOD 1,979,540 - 3,462,552 - 1,458,960 -
------------ ------------ ------------- ------------ ------------- ------------
NET ASSETS AT END OF PERIOD $5,238,524 $1,979,540 $11,349,945 $3,462,552 $21,750,425 $1,458,960
============ ============ ============= ============ ============= ============
</TABLE>
(b) For the Period Beginning May 18, 1998 and Ended December 31, 1998
(c) For the Period Beginning March 16, 1998 and Ended December 31, 1998
See notes to financial statements
14
<PAGE>
NORTHBROOK VARIABLE ANNUITY ACCOUNT II
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
Van Kampen Life Investement
Trust Sub-Account
---------------------------------------------
Emerging Growth
---------------------------------------------
1999 1998 (a)
--------------------- ---------------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ (643,933) $ (47,552)
Net realized gains (losses) 1,246,818 (51,808)
Change in unrealized gains (losses) 46,420,306 1,499,714
--------------------- ---------------------
Change in net assets resulting from operations 47,023,191 1,400,354
--------------------- ---------------------
FROM CAPITAL TRANSACTIONS
Deposits 27,759,585 5,513,918
Benefit payments (201,304) -
Payments on termination (3,202,433) (271,704)
Contract maintenance charges (35,203) (2,526)
Transfers among the sub-accounts
and with the Fixed Account - net 49,182,955 2,997,575
--------------------- ---------------------
Change in net assets resulting
from capital transactions 73,503,600 8,237,263
--------------------- ---------------------
INCREASE (DECREASE) IN NET ASSETS 120,526,791 9,637,617
NET ASSETS AT BEGINNING OF PERIOD 9,637,617 -
--------------------- ---------------------
NET ASSETS AT END OF PERIOD $ 130,164,408 $ 9,637,617
===================== =====================
</TABLE>
(a) For the Period Beginning March 16, 1998 and Ended December 31, 1998
See notes to financial statements
15
<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 the Morgan Stanley Dean Witter Variable Annuity II
and the Morgan Stanley Dean Witter Variable Annuity II AssetManager, the
deposits of which are invested at the direction of the contractholders in
the sub-accounts that comprise the Account. Absent any contract provisions
wherein Northbrook Life contractually guarantees either a minimum return
or account value to the beneficiaries of the contractholders in the form
of a death benefit, the contractholders bear the investment risk that the
sub-accounts may not meet their stated objectives. The sub-accounts invest
in the following underlying mutual fund portfolios (collectively the
"Funds"):
MORGAN STANLEY DEAN WITTER VARIABLE INVESTMENT SERIES
Money Market Capital Growth
Quality Income Plus Global Dividend Growth
Short-term Bond European Growth
High Yield Pacific Growth
Utilities Equity
Income Builder S&P 500 Index
Dividend Growth Competitive Edge "Best Ideas"
Aggressive Equity Strategist
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Equity Growth International Magnum
U.S. Real Estate Emerging Markets Equity
VAN KAMPEN LIFE INVESTMENT TRUST
Emerging Growth
Northbrook Life provides insurance and administrative services to the
contractholders for a fee. Northbrook Life also maintains a fixed account
("Fixed Account"), to which contractholders may direct their deposits and
receive a fixed rate of return. Northbrook Life has sole discretion to
invest the assets of the Fixed Account, subject to applicable law.
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,
1999.
INVESTMENT INCOME - Investment income consists of dividends declared by the
Funds and is recognized on the ex-dividend date.
16
<PAGE>
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 allocable to the Account as the Account did not
generate taxable income.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. EXPENSES
ADMINISTRATIVE EXPENSE CHARGE - Northbrook Life deducts an administrative
expense charge daily at a rate equal to .10% per annum of the average daily
net assets of the Account for both Morgan Stanley Dean Witter Variable
Annuity II and Morgan Stanley Dean Witter Variable Annuity II AssetManager.
CONTRACT MAINTENANCE CHARGE - Northbrook Life deducts an annual contract
maintenance charge of $30 on each Morgan Stanley Dean Witter Variable
Annuity II and $35 on each Morgan Stanley Dean Witter Variable Annuity II
AssetManager contract anniversary and guarantees that this charge will not
increase over the life of the contract. If certain conditions are met, this
charge will be waived for Morgan Stanley Dean Witter Variable Annuity II
AssetManager.
MORTALITY AND EXPENSE RISK CHARGE - Northbrook Life assumes mortality and
expense risks related to the operations of the Account and deducts charges
daily based on the average daily net assets of the Account. The mortality
and expense risk charge covers insurance benefits available with the
contract and certain expenses of the contract. It also covers the risk that
the current charges will not be sufficient in the future to cover the cost
of administering the contract. Northbrook Life guarantees that the amount
of this charge will not increase over the life of the contract. At the
contractholder's discretion, additional options, primarily death benefits,
may be purchased for an additional charge.
17
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Annuity II
-----------------------------------------------------------------------------------------
Unit activity during 1999:
------------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
------------------- ------------ ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean
Witter Variable Investment Series Sub-Accounts:
Money Market 21,159,031 14,889,251 (18,506,888) 17,541,394 $ 13.46
Quality Income Plus 20,312,197 1,033,305 (4,473,358) 16,872,144 18.20
Short-term Bond - 347,635 (220,476) 127,159 10.07
High Yield 8,199,142 636,275 (2,648,721) 6,186,696 24.01
Utilities 13,541,542 727,904 (2,580,797) 11,688,649 32.87
Income Builder 2,979,980 562,566 (984,569) 2,557,977 13.00
Dividend Growth 36,334,173 1,704,445 (6,266,668) 31,771,950 35.38
Aggressive Equity - 1,736,286 (811,611) 924,675 14.48
Capital Growth 3,662,958 327,971 (739,762) 3,251,167 31.32
Global Dividend Growth 17,634,472 913,941 (3,171,090) 15,377,323 19.22
European Growth 8,967,887 1,483,799 (3,009,151) 7,442,535 43.42
Pacific Growth 6,325,967 8,987,636 (7,901,427) 7,412,176 8.78
Equity 12,608,741 2,288,532 (1,863,807) 13,033,466 78.28
S&P 500 Index 1,722,709 3,752,288 (745,579) 4,729,418 13.20
Competitive Edge, "Best Ideas" 1,432,745 764,913 (431,011) 1,766,647 12.18
Strategist 14,574,012 1,101,779 (2,402,382) 13,273,409 31.14
Captial Appreciation 1,440,936 89,955 (1,530,891) - -
Investments in the Morgan Stanley Dean
Witter Universal Funds, Inc. Sub-Accounts:
Equity Growth 822,038 1,142,895 (311,090) 1,653,843 13.90
U.S. Real Estate 79,729 487,659 (337,388) 230,000 8.81
International Magnum 136,628 972,988 (828,047) 281,569 12.09
Emerging Markets Equity 82,002 2,454,699 (1,927,128) 609,573 13.64
Investments in the Van Kampen Life Investment Trust Sub-Account:
Emerging Growth 254,704 1,931,376 (424,205) 1,761,875 24.19
Units relating to accrued contract maintenance charges are included in units redeemed.
</TABLE>
18
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Annuity II with
Enhanced Death Benefit Option, Performance
Death Benefit Option or Performance Income Benefit Option
-----------------------------------------------------------------------------------------
Unit activity during 1999:
------------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
------------------- ------------ ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean
Witter Variable Investment Series Sub-Accounts:
Money Market 8,938,860 19,548,212 (18,210,802) 10,276,270 $ 13.39
Quality Income Plus 5,109,593 1,234,183 (1,176,427) 5,167,349 18.10
Short-term Bond - 132,480 (10,931) 121,549 10.06
High Yield 5,304,510 1,595,314 (2,696,745) 4,203,079 23.88
Utilities 3,510,503 1,138,744 (632,588) 4,016,659 32.69
Income Builder 3,652,211 427,013 (965,993) 3,113,231 12.95
Dividend Growth 19,936,437 3,725,192 (3,607,794) 20,053,835 35.19
Aggressive Equity - 1,151,589 (29,577) 1,122,012 14.47
Capital Growth 1,687,847 394,284 (446,078) 1,636,053 31.15
Global Dividend Growth 8,929,904 1,233,435 (1,387,884) 8,775,455 19.12
European Growth 4,668,539 1,860,406 (2,084,797) 4,444,148 43.19
Pacific Growth 2,456,851 21,494,013 (19,892,379) 4,058,485 8.73
Equity 7,931,260 3,545,573 (1,102,040) 10,374,793 77.86
S&P 500 Index 2,003,301 4,944,770 (738,240) 6,209,831 13.17
Competitive Edge, "Best Ideas" 1,965,368 1,055,127 (539,084) 2,481,411 12.15
Strategist 5,639,152 1,686,811 (766,870) 6,559,093 30.97
Captial Appreciation 1,527,337 141,243 (1,668,580) - -
Investments in the Morgan Stanley Dean
Witter Universal Funds, Inc. Sub-Accounts:
Equity Growth 1,530,819 1,779,604 (357,775) 2,952,648 13.87
U.S. Real Estate 80,782 158,681 (44,499) 194,964 8.79
International Magnum 170,897 282,082 (36,161) 416,818 12.06
Emerging Markets Equity 94,600 1,011,314 (416,698) 689,216 13.61
Investments in the Van Kampen Life Investment Trust Sub-Account:
Emerging Growth 402,082 2,363,234 (242,627) 2,522,689 24.14
Units relating to accrued contract maintenance charges are included in units redeemed.
</TABLE>
19
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Annuity II with Performance Benefit Combination
Option or the Death Benefit Combination Option
-----------------------------------------------------------------------------------------
Unit activity during 1999:
------------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
------------------- ------------ ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean
Witter Variable Investment Series Sub-Accounts:
Money Market 673,034 1,866,416 (1,276,029) 1,263,421 $ 13.17
Quality Income Plus 169,761 243,839 (85,461) 328,139 17.80
Short-term Bond - 41,250 (6,308) 34,942 10.05
High Yield 137,884 200,592 (48,340) 290,136 23.48
Utilities 159,860 243,466 (62,582) 340,744 32.16
Income Builder 164,457 165,256 (58,942) 270,771 12.91
Dividend Growth 528,141 1,129,219 (222,883) 1,434,477 34.61
Aggressive Equity - 478,757 (20,270) 458,487 14.45
Capital Growth 41,885 109,033 (22,261) 128,657 30.66
Global Dividend Growth 156,429 370,289 (38,382) 488,336 18.95
European Growth 175,357 306,278 (89,585) 392,050 42.51
Pacific Growth 52,484 567,553 (229,429) 390,608 8.66
Equity 221,631 797,425 (68,763) 950,293 76.58
S&P 500 Index 283,511 1,682,096 (88,165) 1,877,442 13.15
Competitive Edge, "Best Ideas" 178,762 367,543 (56,648) 489,657 12.13
Strategist 472,816 660,323 (128,301) 1,004,838 30.46
Captial Appreciation 77,885 24,001 (101,886) -
Investments in the Morgan Stanley Dean
Witter Universal Funds, Inc. Sub-Accounts:
Equity Growth 154,201 385,914 (44,254) 495,861 13.84
U.S. Real Estate 37,193 78,203 (21,569) 93,827 8.77
International Magnum 31,933 168,374 (27,719) 172,588 12.04
Emerging Markets Equity 19,500 262,216 (71,124) 210,592 13.58
Investments in the Van Kampen Life Investment Trust Sub-Account:
Emerging Growth 82,427 795,728 (59,300) 818,855 24.09
Units relating to accrued contract maintenance charges are included in units redeemed.
</TABLE>
20
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Annuity II AssetManager
-----------------------------------------------------------------------------------------
Unit activity during 1999:
------------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
------------------- ------------ ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley
Dean Witter Variable Investment Series Sub-Accounts:
Money Market 81,705 547,117 (302,283) 326,539 $ 10.47
Quality Income Plus 178,028 261,748 (86,650) 353,126 9.76
Short-term Bond - 12,183 (1,013) 11,170 10.05
High Yield 93,600 198,142 (108,204) 183,538 8.61
Utilities 46,349 126,846 (35,756) 137,439 12.10
Income Builder 18,227 26,379 (6,560) 38,046 10.21
Dividend Growth 147,314 407,993 (113,515) 441,792 9.70
Aggressive Equity - 12,092 (637) 11,455 14.45
Capital Growth 6,192 25,144 (3,865) 27,471 12.74
Global Dividend Growth 15,232 73,526 (8,276) 80,482 11.16
European Growth 22,053 76,602 (13,809) 84,846 11.45
Pacific Growth 1,450 15,964 (565) 16,849 17.97
Equity 34,510 315,147 (72,422) 277,235 16.04
S&P 500 Index 35,394 164,599 (32,928) 167,065 12.29
Competitive Edge, "Best Ideas" 17,570 57,902 (16,105) 59,367 11.95
Strategist 70,036 157,240 (28,638) 198,638 11.95
Captial Appreciation 7,593 2,639 (10,232) - -
Investments in the Morgan Stanley
Dean Witter Universal Funds, Inc. Sub-Accounts:
Equity Growth 14,358 48,936 (14,653) 48,641 13.56
U.S. Real Estate 3,294 12,931 (2,881) 13,344 8.84
International Magnum 6,589 31,388 (12,768) 25,209 10.80
Emerging Markets Equity 123 14,262 (5,452) 8,933 15.56
Investments in the Van Kampen Life Investment Trust Sub-Account:
Emerging Growth 10,947 108,275 (29,083) 90,139 21.14
Units relating to accrued contract maintenance charges are included in units redeemed.
</TABLE>
21
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Annuity II AssetManager with Death Benefit Option,
Performance Death Benefit Option or Performance Income Benefit Option
-----------------------------------------------------------------------------------------
Unit activity during 1999:
------------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
------------------- ------------ ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley
Dean Witter Variable Investment Series Sub-Accounts:
Money Market 85,827 3,539,643 (3,188,969) 436,501 $ 10.45
Quality Income Plus 52,778 231,640 (34,594) 249,824 9.74
Short-term Bond - 11,499 (14) 11,485 10.04
High Yield 38,215 483,447 (398,427) 123,235 8.59
Utilities 33,289 144,058 (12,245) 165,102 12.07
Income Builder 16,832 39,978 (4,310) 52,500 10.19
Dividend Growth 165,990 572,766 (75,915) 662,841 9.69
Aggressive Equity 43,817 (3,302) 40,515 14.44
Capital Growth 5,153 27,978 (2,333) 30,798 12.71
Global Dividend Growth 38,311 96,752 (6,629) 128,434 11.14
European Growth 206,430 1,082,402 (1,093,929) 194,903 11.43
Pacific Growth 1,623 1,984,601 (1,947,775) 38,449 17.94
Equity 80,117 413,296 (22,082) 471,331 16.01
S&P 500 Index 104,952 278,154 (33,399) 349,707 12.26
Competitive Edge, "Best Ideas" 24,807 53,580 (5,567) 72,820 11.93
Strategist 24,056 159,660 (20,892) 162,824 11.92
Captial Appreciation 28,412 7,569 (35,981) - -
Investments in the Morgan Stanley
Dean Witter Universal Funds, Inc. Sub-Accounts:
Equity Growth 17,925 101,942 (15,608) 104,259 13.54
U.S. Real Estate 17,463 15,867 (288) 33,042 8.82
International Magnum 9,575 21,239 (7) 30,807 10.78
Emerging Markets Equity 3,925 19,204 (6,431) 16,698 15.53
Investments in the Van Kampen Life Investment Trust Sub-Account:
Emerging Growth 31,051 92,816 (15,183) 108,684 21.10
Units relating to accrued contract maintenance charges are included in units redeemed.
</TABLE>
22
<PAGE>
4. UNITS ISSUED AND REDEEMED
(Units in whole amounts)
<TABLE>
<CAPTION>
Morgan Stanley Dean Witter Variable Annuity II AssetManager with Performance Benefit
Combination Option or the Death Benefit Combination Option
-----------------------------------------------------------------------------------------
Unit activity during 1999:
------------------------------------------------
Accumulated
Units Outstanding Units Units Units Outstanding Unit Value
December 31, 1998 Issued Redeemed December 31, 1999 December 31,1999
------------------- ------------ ------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Investments in the Morgan Stanley Dean Witter Variable
Investment Series Sub-Accounts:
Money Market 15,056 187,536 (78,671) 123,921 $ 10.44
Quality Income Plus 81,071 114,629 (23,281) 172,419 9.72
Short-term Bond - 5,437 (1) 5,436 10.03
High Yield 11,399 31,391 (4,736) 38,054 8.58
Utilities 19,644 89,175 (8,355) 100,464 12.05
Income Builder 3,158 17,284 (219) 20,223 10.17
Dividend Growth 58,954 239,272 (41,852) 256,374 9.67
Aggressive Equity 45,639 (1,347) 44,292 14.43
Capital Growth 12,464 22,290 (7,271) 27,483 12.69
Global Dividend Growth 14,652 49,253 (940) 62,965 11.12
European Growth 10,221 74,577 (8,908) 75,890 11.41
Pacific Growth 4,550 83,644 (14,951) 73,243 17.91
Equity 30,606 315,914 (22,976) 323,544 15.98
S&P 500 Index 41,697 154,928 (28,522) 168,103 12.24
Competitive Edge, "Best Ideas" 12,369 19,922 (8,397) 23,894 11.91
Strategist 18,089 60,405 (9,525) 68,969 11.90
Captial Appreciation 11,985 454 (12,439) - -
Investments in the Morgan Stanley Dean Witter Universal
Funds, Inc. Sub-Accounts:
Equity Growth - 16,478 (4) 16,474 13.52
U.S. Real Estate - 30,217 (6) 30,211 8.81
International Magnum - 21,800 (4) 21,796 10.76
Emerging Markets Equity 4,235 52,543 (5,538) 51,240 15.50
Investments in the Van Kampen Life Investment Trust Sub-Account:
Emerging Growth 27,030 125,530 (22,931) 129,629 21.07
Units relating to accrued contract maintenance charges are included in units redeemed.
</TABLE>
23
