<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY VARIABLE ANNUITY ACCOUNT
OFFERED BY
GLENBROOK LIFE AND ANNUITY COMPANY
3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
1-800/453-6038
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACTS
---------------------
This prospectus describes the STI Classic Variable Annuity, an Individual
Flexible Premium Deferred Variable Annuity Contract ("Contract") designed to aid
you in long-term financial planning and which can be used for retirement
planning.
The Contracts are issued by Glenbrook Life and Annuity Company ("Company"), a
wholly owned subsidiary of Allstate Life Insurance Company. Purchase payments
for the Contracts will be allocated to a series of Variable Sub-accounts of the
Glenbrook Life and Annuity Company Variable Annuity Account ("Variable Account")
and/or to one or more of the Fixed Account Options funded through the Company's
general account.
The Variable Sub-accounts invest in shares of the STI Classic Variable Trust and
the Federated Prime Money Fund II (the "Funds"). The Funds have a total of five
portfolios available under the Contract. The STI Classic Variable Trust
portfolios include: (1) Investment Grade Bond; (2) Capital Growth; (3) Value
Income; and (4) Mid-Cap Equity (previously known as the Aggressive Growth
portfolio). The Federated Prime Money Fund II (previously known as the Prime
Money Fund) is a portfolio of Federated Insurance Series that invests
exclusively in money market instruments. The Fixed Account Options include a
Standard Fixed Account and a Guaranteed Maturity Amount Fixed Account.
This prospectus presents information you should know before making a decision to
invest in the Contract and the available Investment Alternatives.
THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS WHICH HAVE RELATIONSHIPS
WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS;
HOWEVER, THE CONTRACTS AND THE INVESTMENTS IN THE FUNDS ARE NOT DEPOSITS, OR
OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY
AGENCY. INVESTMENT IN THE CONTRACTS INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE CONTRACTS ARE NOT FDIC INSURED
The Company has prepared and filed a Statement of Additional Information dated
May 1, 1996 with the U.S. Securities and Exchange Commission. If you wish to
receive the Statement of Additional Information, you may obtain a free copy by
calling or writing the Company at the address above. For your convenience, an
order form for the Statement of Additional Information may be found on page B-2
of this prospectus. Before ordering, you may wish to review the Table of
Contents of the Statement of Additional Information on page B-1 of this
prospectus. The Statement of Additional Information has been incorporated by
reference into this prospectus.
This Prospectus is Valid Only When Accompanied or Preceded By A Current
Prospectus For the STI Classic Variable Trust and the Federated Prime Money Fund
II.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE
THE DATE OF THIS PROSPECTUS IS MAY 1, 1996.
<PAGE>
2
The Contract is not available in all states.
At least once each Contract year, the Company will send the Owner an annual
statement that contains certain information pertinent to the individual Owner's
Contract. The annual statement details values and specific Contract data that
applies to each particular Contract. The annual statement does not contain
financial statements of the Company. The Company, however, is subject to the
informational requirements of the Securities Exchange Act of 1934 and in
accordance therewith files reports and other information with the Securities and
Exchange Commission. Reports and other information filed by the Company can be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 at prescribed rates.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Glossary...................................... 4
Highlights.................................... 6
Summary of Variable Account Expenses.......... 8
Condensed Financial Information............... 10
Yield and Total Return Disclosure............. 10
Financial Statements.......................... 11
Glenbrook Life and Annuity Company and the
Variable Account............................. 11
Glenbrook Life and Annuity Company.......... 11
The Variable Account........................ 11
The Funds..................................... 12
The STI Classic Variable Trust.............. 12
The Federated Prime Money Fund II, a
Portfolio of Federated Insurance Series.... 12
Investment Advisors for the Portfolios...... 13
Fixed Account Options......................... 13
The Standard Fixed Account.................. 13
The Guaranteed Maturity Amount Fixed
Account.................................... 14
Example of Interest Crediting During the
Guarantee Period........................... 14
Withdrawals or Transfers.................... 16
Market Value Adjustment................... 17
Purchase of the Contracts..................... 17
Purchase Payment Limits..................... 17
Free-Look Period............................ 17
Crediting of Purchase Payments.............. 18
Allocation of Purchase Payments............. 18
Accumulation Units.......................... 18
Accumulation Unit Value..................... 18
Transfers Among Portfolios.................. 18
Dollar Cost Averaging....................... 19
<CAPTION>
PAGE
<S> <C>
Automatic Portfolio Rebalancing............. 19
Benefits Under the Contract................... 20
Withdrawals................................. 20
Payout Start Date for Income Payments....... 20
Amount of Variable Account Income
Payments................................... 20
Amount of Fixed Account Income Payments..... 21
Income Plans................................ 21
Death Benefit Payable....................... 22
Death Benefit Amount........................ 22
Death Benefit Payment Provisions............ 22
Charges and Other Deductions.................. 23
Deductions from Purchase Payments........... 23
Withdrawal Charge (Contingent Deferred Sales
Charge).................................... 23
Contract Maintenance Charge................. 24
Administrative Expense Charge............... 24
Mortality and Expense Risk Charge........... 24
Taxes....................................... 25
Transfer Charges............................ 25
Fund Expenses............................... 25
General Matters............................... 25
Beneficiary................................. 25
Assignments................................. 25
Delay of Payments........................... 25
Modification................................ 26
Customer Inquiries.......................... 26
Federal Tax Matters........................... 26
Introduction................................ 26
Taxation of Annuities in General............ 26
Tax Deferral.............................. 26
</TABLE>
<PAGE>
3
<TABLE>
<CAPTION>
PAGE
Non-Natural Owners........................ 26
<S> <C>
Diversification Requirements.............. 26
Investor Control.......................... 26
Taxation of Partial and Full
Withdrawals.............................. 27
Taxation of Annuity Payments.............. 27
Taxation of Annuity Death Benefits........ 27
Penalty Tax on Premature Distributions.... 27
Aggregation of Annuity Contracts.......... 27
Tax Qualified Contracts..................... 28
Restrictions Under Section 403(b) Plans... 28
Income Tax Withholding...................... 28
Distribution of the Contracts................. 28
Voting Rights................................. 28
Selected Financial Data....................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 30
<CAPTION>
PAGE
<S> <C>
General..................................... 30
Results of Operations....................... 30
Financial Position.......................... 30
Liquidity and Capital Resources............. 31
Competition................................... 31
Employees..................................... 31
Properties.................................... 31
State and Federal Regulation.................. 31
Executive Officers and Directors of the
Company...................................... 33
Executive Compensation........................ 35
Legal Proceedings............................. 35
Experts....................................... 35
Legal Matters................................. 35
Financial Statements.......................... F-1
Statement of Additional Information: Table of
Contents..................................... B-1
Order Form.................................... B-2
Appendix A.................................... A-1
</TABLE>
<PAGE>
4
GLOSSARY
ACCUMULATION UNIT -- A measure of your ownership interest in a Sub-account of
the Variable Account prior to the Payout Start Date. Analogous, though not
identical, to a share owned in a mutual fund.
ACCUMULATION UNIT VALUE -- The value of each Accumulation Unit which is
calculated each Valuation Date. Each Sub-account of the Variable Account has its
own distinct Accumulation Unit Value. Analogous, though not identical, to the
share price (net asset value) of a mutual fund.
ANNUITANT(S) -- The person or persons whose life determines the latest Payout
Start Date and the amount and duration of any income payments for Income Plan
options other than Guaranteed Payments for a Specified Period.
BENEFICIARY(IES) -- The person(s) to whom any benefits are due when a death
benefit is payable and there is no surviving Owner.
COMPANY("WE," "US") -- Glenbrook Life and Annuity Company.
CONTRACT -- The Glenbrook Life and Annuity Company Flexible Premium Deferred
Variable Annuity Contract, known as the "STI Classic Variable Annuity," that is
described in this prospectus.
CONTRACT ANNIVERSARY -- An anniversary of the date that the Contract was issued.
CONTRACT VALUE -- The value of all amounts accumulated under the Contract prior
to the Payout Start Date, equivalent to the Accumulation Units in each
Sub-account of the Variable Account multiplied by the respective Accumulation
Unit Value, plus the value in the Fixed Account Options.
CONTRACT YEAR -- A period of 12 months starting with the issue date or any
Contract Anniversary.
DEATH BENEFIT ANNIVERSARY -- Every seventh Contract Anniversary beginning on the
date that the Contract was issued. For example, the issue date, 7th and 14th
Contract Anniversaries are the first three Death Benefit Anniversaries.
FIXED ACCOUNT OPTIONS -- The Standard Fixed Account and the Guaranteed Maturity
Amount Fixed Account.
GUARANTEE PERIOD -- A period of years for which a specified effective annual
interest rate is guaranteed by the Company.
INCOME PLAN -- One of several ways in which a series of payments are made after
the Payout Start Date. Income payments are based on the Contract Value adjusted
by any applicable Market Value Adjustment and any applicable taxes on the Payout
Start Date. Under a Fixed Account option, the dollar amount of each income
payment does not change over time. Under a Variable Account option, the dollar
amount of each income payment may change over time, depending on the investment
experience of the Sub-account or Sub-accounts you choose.
INVESTMENT ALTERNATIVES -- The five Sub-accounts of the Variable Account and the
two Fixed Account Options constitute the seven Investment Alternatives.
GUARANTEED MATURITY AMOUNT FIXED SUB-ACCOUNTS -- These Sub-accounts are
distinguished by Guarantee Period(s) and the dates the period(s) begin. The
Guaranteed Maturity Amount Fixed Sub-accounts are established when purchase
payments are made and when previous Sub-accounts expire and a new Guarantee
Period is selected.
MARKET VALUE ADJUSTMENT -- The Market Value Adjustment is the adjustment made to
the money distributed from a Sub-account of the Guaranteed Maturity Amount Fixed
Account prior to the end of the Guarantee Period under the Contract to reflect
the impact of changes in interest rates between the time the Sub-account of the
Guaranteed Maturity Amount Fixed Account was established and the time of
distribution.
OWNER(S)("YOU") -- The person or persons designated as the Owner in the
Contract.
PAYOUT START DATE -- The date on which income payments begin.
<PAGE>
5
VALUATION DATE -- Each day that the New York Stock Exchange is open for
business. The Valuation Date does not include such Federal and non-Federal
holidays as are observed by the New York Stock Exchange.
VALUATION PERIOD -- The period between successive Valuation Dates, commencing at
the close of regular trading on the New York Stock Exchange (which is currently
4:00pm Eastern Time) and ending as of the close of regular trading on the New
York Stock Exchange on the next succeeding Valuation Date.
VARIABLE ACCOUNT -- Glenbrook Life and Annuity Company Variable Annuity Account,
a separate investment account established by the Company to receive and invest
purchase payments paid under the Contracts.
VARIABLE SUB-ACCOUNT -- A portion of the Variable Account invested in shares of
a Fund's portfolios. The investment performance of each Variable Sub-account is
linked directly to the investment performance of the portfolios.
<PAGE>
6
HIGHLIGHTS
THE CONTRACT
This Contract is designed for long-term financial planning and retirement
planning. Money can be allocated to any combination of the Funds' portfolios
and/or Fixed Account Options. You have access to your funds either through
withdrawals of Contract Value or through periodic income payments.
You bear the entire investment risk for Contract Values and income payments
based upon the Variable Account, because values will vary depending on the
investment performance of the portfolio(s) you select. See "Accumulation Unit
Value," page 18 and "Amount of Variable Account Income Payments," page 20.
You will also bear the investment risk of adverse changes in interest rates in
the event amounts are prematurely withdrawn or transferred from Sub-accounts of
the Guaranteed Maturity Amount Fixed Account. See "The Guaranteed Maturity
Amount Fixed Account," page 14.
FREE-LOOK
You may cancel the Contract any time within 20 days after receipt of the
Contract and receive a full refund of purchase payments allocated to the Fixed
Account Options. Unless a refund of purchase payments is required by state or
federal law, purchase payments allocated to the Variable Account will be
returned after an adjustment to reflect investment gain or loss that occurred
from the date of allocation through the date of cancellation. See "Free-Look
Period," page 17.
HOW TO INVEST
Your first purchase payment must be at least $3,000 (for qualified contracts,
$2,000). Subsequent purchase payments must be at least $50, See "Purchase
Payment Limits," page 17.
At the time of your application, you will allocate your purchase payment among
the Investment Alternatives. In certain states, all money allocated to
Sub-accounts of the Variable Account during the 30 day period following the
issue date will be invested in the Federated Prime Money Fund II during that 30
day period. On the 31st day, the Contract Value in the Federated Prime Money
Fund II will then be transferred to the Sub-account(s) you elected on the
application for the initial purchase payment and requested for any subsequent
purchase payment. In all other cases, the allocation you specify on the
application will be effective immediately. Please consult with your sales
representative for applicability of this requirement. All allocations must be in
whole percents from 0% to 100% (total allocation equals 100%) or in whole
dollars. Allocations may be changed by notifying the Company in writing. See
"Allocation of Purchase Payments," page 18.
INVESTMENT ALTERNATIVES
The Variable Account invests in shares of the STI Classic Variable Trust and the
Federated Prime Money Fund II (the "Funds"). The Funds have a total of five
portfolios available under the Contract. The STI Classic Variable Trust
portfolios include: the Investment Grade Bond portfolio, the Capital Growth
portfolio, the Value Income Stock portfolio and the Mid-Cap Equity portfolio.
The Federated Prime Money Fund II is a portfolio of Federated Insurance Series
that invests exclusively in money market instruments. The assets of each
portfolio are held separately from the other portfolios and each has distinct
investment objectives and policies which are described in the accompanying
prospectuses for the Funds. In addition to the Variable Account, Owners can also
allocate all or part of their purchase payments among two Fixed Account Options.
See "Fixed Account Options," on page 13.
TRANSFERS AMONG INVESTMENT ALTERNATIVES
Prior to the Payout Start Date, you may transfer amounts among the Investment
Alternatives. The Company reserves the right to assess a $10 charge on each
transfer in excess of 12 per Contract Year. The Company is presently waiving
this charge. Certain Fixed Account transfers may be restricted. See "Transfers
Among Portfolios," page 18.
<PAGE>
7
You may want to enroll in a Dollar Cost Averaging Program or an Automatic
Portfolio Rebalancing Program. See "Dollar Cost Averaging," page 19, and
"Automatic Portfolio Rebalancing," page 19.
CHARGES AND DEDUCTIONS
The costs of the Contract include: a contract maintenance charge ($30 annually),
a mortality and expense risk charge (deducted daily, equal on an annual basis to
1.25% of the Contract's daily net assets of the Variable Account), and an
administrative expense charge (deducted daily, equal on an annual basis to .10%
of the Contract's daily net assets of the Variable Account). The Company
reserves the right to assess a transfer charge ($10 on each transfer in excess
of 12 per Contract Year). Additional deductions may be made for certain taxes.
See "Contract Maintenance Charge," page 24, "Mortality and Expense Risk Charge,"
page 24, "Administrative Expense Charge," page 24, "Transfer Charges," page 25,
and "Taxes," page 25.
WITHDRAWALS
You may withdraw all or part of the Contract Value before the earliest of the
Payout Start Date, the death of any Owner or, if the Owner is not a natural
person, the death of the Annuitant. No withdrawal charges will be deducted on
amounts withdrawn up to 10% of the Contract Value on the date of the first
withdrawal in a Contract Year. Amounts withdrawn in excess of the 10% may be
subject to a withdrawal charge of 0% to 7% depending on how long the purchase
payments have been invested in the Contract. Amounts withdrawn from a
Sub-account of the Guaranteed Maturity Amount Fixed Account, except during the
30 day period after the Guarantee Period expires, will be subject to a Market
Value Adjustment. See "Withdrawals," page 20, "Withdrawals or Transfers," page
16, and "Taxation of Annuities in General," page 26.
DEATH BENEFIT
The Company will pay a death benefit prior to the Payout Start Date on the death
of any Owner or, if the Owner is not a natural person, the death of the
Annuitant. See "Death Benefit Amount," page 22.
INCOME PAYMENTS
You will receive periodic income payments beginning on the Payout Start Date.
You may choose among several Income Plans to fit your needs. Income payments may
be received for a specified period or for life (either single or joint life),
with or without a guaranteed number of payments. You can select income payments
that are fixed, variable or a combination of fixed and variable. See "Income
Plans," page 21.
<PAGE>
8
SUMMARY OF VARIABLE ACCOUNT EXPENSES
The following table illustrates all expenses and fees that you will incur. The
expenses and fees set forth in the table are based on charges under the
Contracts and on the expenses of the Variable Account and the underlying Funds.
OWNER TRANSACTION EXPENSES (ALL SUB-ACCOUNTS)
<TABLE>
<S> <C>
Sales Load Imposed on Purchases (as a percentage of purchase payments)..... None
Contingent Deferred Sales Charge (as a percentage of purchase payments).... *
<CAPTION>
APPLICABLE SALES
NUMBER OF COMPLETE YEARS SINCE PURCHASE CHARGE AS
PAYMENT BEING WITHDRAWN WAS MADE A PERCENTAGE
- --------------------------------------------------------------------------- -------------------
<S> <C>
0 years................................................................ 7%
1 year................................................................. 6%
2 years................................................................ 5%
3 years................................................................ 4%
4 years................................................................ 3%
5 years................................................................ 2%
6 years................................................................ 1%
7 years or more........................................................ 0%
Transfer Fee............................................................... **
Annual Contract Fee........................................................ $30***
VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF THE CONTRACT'S AVERAGE NET ASSETS IN THE
VARIABLE ACCOUNT)
Mortality and Expense Risk Charge.......................................... 1.25 %
Administrative Expense Charge.............................................. .10 %
Total Variable Account Annual Expenses..................................... 1.35 %
<FN>
- ------------
</TABLE>
* Each Contract Year up to 10% of the Contract Value on the date of the first
withdrawal may be withdrawn without a contingent deferred sales charge.
However, any applicable Market Value Adjustment determined as of the date of
withdrawal will apply.
** No charges will be imposed on the first 12 transfers in any Contract Year.
The Company reserves the right to assess a $10 charge for each transfer in
excess of 12 in any Contract Year, excluding transfers due to dollar cost
averaging and automatic portfolio rebalancing.
*** The annual Contract fee will be waived if total purchase payments as of a
Contract Anniversary or upon full withdrawal are $25,000 or more or if all
money is allocated to the Fixed Account Options.
FUND EXPENSES (NET OF VOLUNTARY REDUCTIONS AND REIMBURSEMENTS)(1)
(AS A PERCENTAGE OF FUND ASSETS)
<TABLE>
<CAPTION>
OTHER TOTAL FUND ANNUAL
PORTFOLIO ADVISORY FEES EXPENSES EXPENSES
- ------------------------------------------------------- ------------- ------------ -------------------
<S> <C> <C> <C>
Federated Prime Money Fund II.......................... .0% .80 % .80%
Investment Grade Bond.................................. .0% .75 % .75%
Capital Growth......................................... .0% 1.15 % 1.15%
Value Income Stock..................................... .0% .95 % .95%
Mid-Cap Equity......................................... .0% 1.15 % 1.15%
</TABLE>
- ------------
(1) Absent voluntary reductions and reimbursements, advisory fees, other
expenses and total operating expenses expressed as a percentage of average
net assets of each Fund would be: Federated Prime
<PAGE>
9
Money Fund II -- .50%, 72.04% and 72.54%; Investment Grade Bond Fund --
.74%, 3.57% and 4.31%; Capital Growth Fund -- 1.15%, 2.09% and 3.24%; Value
Income Stock Fund -- .80%, 1.92% and 2.72%; and Mid-Cap Equity Fund --
1.15%, 2.84% and 3.99%. Fee reductions and reimbursements are voluntary and
may be terminated at any time after one year from the date of this
prospectus. To the extent the assets of the Funds increase over time, it is
anticipated that the operating expenses identified in this footnote will be
significantly reduced. Other expenses prior to reimbursements and waivers
are based on estimated amounts for the current fiscal year.
EXAMPLE
You (the Owner) would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return under the following circumstances:
If you terminate your Contract or annuitize for a specified period of less than
120 months at the end of the applicable time period:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS
- ----------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Federated Prime Money Fund II................................................ $ 77 $ 107
Investment Grade Bond........................................................ $ 76 $ 105
Capital Growth............................................................... $ 80 $ 117
Value Income Stock........................................................... $ 78 $ 111
Mid-Cap Equity............................................................... $ 80 $ 117
</TABLE>
If you do not terminate your Contract or if you annuitize for a specified period
of 120 months or more at the end of the applicable time period:
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS
- ----------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Federated Prime Money Fund II................................................ $ 23 $ 71
Investment Grade Bond........................................................ $ 23 $ 69
Capital Growth............................................................... $ 27 $ 82
Value Income Stock........................................................... $ 25 $ 76
Mid-Cap Equity............................................................... $ 27 $ 82
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of
the example is to assist you in understanding the various costs and expenses
that you will bear directly or indirectly. Premium taxes are not reflected in
the example but may be applicable.
<PAGE>
10
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUE AND NUMBER
OF ACCUMULATION UNITS OUTSTANDING FOR
EACH SUB-ACCOUNT FROM INCEPTION TO DECEMBER 31, 1995
<TABLE>
<S> <C>
FEDERATED PRIME MONEY FUND II SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................. $ 10.000
Accumulation Unit Value, End of Period................................... $ 10.052
Number of Units Outstanding, End of Period............................... 132,650
INVESTMENT GRADE BOND SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................. $ 10.000
Accumulation Unit Value, End of Period................................... $ 10.336
Number of Units Outstanding, End of Period............................... 40,503
CAPITAL GROWTH SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................. $ 10.000
Accumulation Unit Value, End of Period................................... $ 10.661
Number of Units Outstanding, End of Period............................... 103,697
VALUE INCOME STOCK SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................. $ 10.000
Accumulation Unit Value, End of Period................................... $ 10.696
Number of Units Outstanding, End of Period............................... 124,596
MID-CAP EQUITY SUB-ACCOUNT
Accumulation Unit Value, Beginning of Period............................. $ 10.000
Accumulation Unit Value, End of Period................................... $ 10.285
Number of Units Outstanding, End of Period............................... 80,549
</TABLE>
All Sub-Accounts commenced operations on October 6, 1995. The Accumulation Unit
Values in this table reflect a Mortality and Expense Risk Charge of 1.25% and an
Administrative Expense Charge of 0.10%.
YIELD AND TOTAL RETURN DISCLOSURE
From time to time the Variable Account may advertise the yield and total return
investment performance of one or more of the Sub-accounts. Yield and
standardized total return advertisements include charges and expenses
attributable to the Contracts. Including these fees has the effect of decreasing
the advertised performance of a Sub-account, so that a Sub-account's investment
performance will not be directly comparable to that of an ordinary mutual fund.
When a Sub-account advertises its standardized total return it will usually be
calculated for one year, five years, and ten years or since inception if the
Sub-account has not been in existence for such periods. Total return is measured
by comparing the value of an investment in the Sub-account at the end of the
relevant period to the value of the investment at the beginning of the period.
In addition to the standardized total return, the Sub-account may advertise a
non-standardized total return. This figure will usually be calculated for one
year, five years, and ten years or other periods. Non-standardized total return
is measured in the same manner as the standardized total return described above,
except that the withdrawal charges under the Contract are not deducted.
Therefore, a non-standardized total return for a Sub-account can be higher than
a standardized total return for a Sub-account.
Certain Sub-accounts may advertise yield in addition to total return. The yield
will be computed in the following manner: the net investment income per unit
earned during a recent one month period is divided by the unit value on the last
day of the period, and then annualized. This figure reflects the recurring
charges at the Variable Account level.
The money market Sub-account (the Federated Prime Money Fund II) may advertise
its yield or effective yield. The yield refers to the income generated by an
investment in that Sub-account over a seven-day period.
<PAGE>
11
The income is then annualized (i.e., the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment). The effective yield is
calculated similarly but when annualized, the income earned by an investment in
the money market Sub-account (the Federated Prime Money Fund II) is assumed to
be reinvested at the end of each seven-day period. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment during a 52-week period.
The Variable Account may also disclose yield, standard total return, and
non-standard total return for periods prior to the date that the Variable
Account commenced operations. For periods prior to the date the Variable Account
commenced operations, performance information for the Sub-accounts will be
calculated based on the performance of the underlying Funds and the assumption
that the Sub-accounts were in existence for the same periods as those of the
underlying Funds, with a level of charges equal to those currently assessed
against the Sub-accounts.
Please refer to the Statement of Additional Information for a further
description of the method used to calculate a Sub-account's yield and total
return.
FINANCIAL STATEMENTS
The financial statements of Glenbrook Life and Annuity Company are on page F-1
of the prospectus. The financial statements of Glenbrook Life and Annuity
Company Variable Annuity Account are found in the Statement of Additional
Information, which is incorporated by reference into this prospectus and which
is available upon request. (See order form on page B-2)
GLENBROOK LIFE AND ANNUITY COMPANY AND THE VARIABLE ACCOUNT
GLENBROOK LIFE AND ANNUITY COMPANY
The Company is the issuer of the Contract. The Company is a stock life insurance
company which was organized under the insurance laws of the State of Illinois in
1992. The Company was originally organized under the laws of the State of
Indiana in 1965. From 1965 to 1983 the Company was known as "United Standard
Life Assurance Company" and from 1983 to 1992 the Company was known as "William
Penn Life Assurance Company of America." The Company is currently licensed to
operate in the District of Columbia and all states except New York. The Company
intends to market the Contract in those jurisdictions in which it is licensed to
operate and which SunTrust Banks, Inc., through its banking subsidiaries,
conducts business. The Company's home office is located at 3100 Sanders Road,
Northbrook, Illinois, 60062.
The Company is a wholly-owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), a stock life insurance company incorporated under the laws of
the State of Illinois. Allstate Life is a wholly-owned subsidiary of Allstate
Insurance Company ("Allstate"), a stock property-liability insurance company
incorporated under the laws of Illinois. All of the outstanding capital stock of
Allstate is owned by The Allstate Corporation ("Corporation"). In June 1995,
Sears, Roebuck and Co. ("Sears") distributed in a tax-free dividend to its
stockholders its remaining 80.3% ownership in the Corporation. As a result of
the distribution, Sears no longer has an ownership interest in the Corporation.
The Company and Allstate Life entered into a reinsurance agreement, effective
June 5, 1992. Under the reinsurance agreement, fixed account purchase payments
are automatically transferred to Allstate Life and become invested with the
assets of Allstate Life, and Allstate Life accepts 100% of the liability under
such contracts. However, the obligations of Allstate Life under the reinsurance
agreement are to the Company; the Company remains the sole obligor under the
Contract to the Owners.
THE VARIABLE ACCOUNT
Established on December 15, 1992, the Glenbrook Life and Annuity Company
Variable Annuity Account is a unit investment trust registered with the
Securities and Exchange Commission under the Investment Company Act of 1940.
However, such registration does not signify that the Commission supervises the
<PAGE>
12
management or investment practices or policies of the Variable Account. The
investment performance of the Variable Account is entirely independent of both
the investment performance of the Company's general account and the performance
of any other separate account.
The Variable Account has been divided into five Sub-accounts, each of which
invests solely in its corresponding portfolio of the STI Classic Variable Trust
and Federated Prime Money Fund II. Additional Variable Sub-accounts may be added
at the discretion of the Company. The Variable Account also funds other
contracts issued by the Company, which are separately accounted for.
The assets of the Variable Account are held separately from the other assets of
the Company. They are not chargeable with liabilities incurred in the Company's
other business operations. Accordingly, the income, capital gains and capital
losses, realized or unrealized, incurred on the assets of the Variable Account
are credited to or charged against the assets of the Variable Account, without
regard to the income, capital gains or capital losses arising out of any other
business the Company may conduct. The Company's obligations arising under the
Contracts are general corporate obligations of the Company. The Variable Account
may be subject to liabilities arising from Sub-accounts whose assets are
attributable to other variable contracts offered by the Variable Account which
are not described in this prospectus.
THE FUNDS
The Variable Account will invest in shares of the STI Classic Variable Trust and
the Federated Prime Money Fund II (the "Funds"). The Funds are registered with
the Securities and Exchange Commission as open-end, diversified management
investment companies. Registration of the Funds does not involve supervision of
its management, investment practices or policies by the Securities and Exchange
Commission. The Funds are designed to provide investment vehicles for variable
insurance contracts of various insurance companies, in addition to the Variable
Account.
Shares of the portfolios of the Funds are not deposits, or obligations of, or
guaranteed or endorsed by any bank and the shares are not federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other agency.
THE STI CLASSIC VARIABLE TRUST
The STI Classic Variable Trust offers four portfolios for use with this
Contract: the Investment Grade Bond portfolio, the Capital Growth portfolio, the
Value Income Stock portfolio and the Mid-Cap Equity portfolio. Each portfolio
has different investment objectives and policies and operates as a separate
investment fund.
The Investment Grade Bond portfolio seeks to provide as high a level of total
return through current income and capital appreciation as is consistent with the
preservation of capital primarily through investment in investment grade fixed
income securities.
The Capital Growth portfolio seeks to provide capital appreciation by investing
primarily in a portfolio of common stocks, warrants and securities convertible
into common stock which in the advisor's opinion are undervalued in the
marketplace at the time of purchase.
The Value Income Stock portfolio seeks to provide current income with the
secondary goal of achieving capital appreciation by investing primarily in
equity securities.
The Mid-Cap Equity portfolio seeks to provide capital appreciation by investing
primarily in a diversified portfolio of common stocks, preferred stocks and
securities convertible into common stock of small to mid-sized companies with
above-average growth of earnings. Current income will not be an important
criterion of investment selection and any such income should be considered
incidental.
THE FEDERATED PRIME MONEY FUND II, A PORTFOLIO OF FEDERATED INSURANCE SERIES
The investment objective of the Federated Prime Money Fund II is to provide
current income consistent with the stability of principal and liquidity by
investing exclusively in a portfolio of money market instruments maturing in 397
days or less.
<PAGE>
13
The Federated Prime Money Fund II attempts to maintain a stable net asset value
of $1.00 per share; however, an investment in the Fund is neither insured nor
guaranteed by the U.S. government, and there can be no assurance that the
portfolio will maintain a stable $1.00 per share price.
INVESTMENT ADVISORS FOR THE PORTFOLIOS
STI Capital Management, N.A. ("STI Capital") serves as advisor to the Investment
Grade Bond, Capital Growth, Value Income Stock and Mid-Cap Equity portfolios.
STI Capital is an indirect wholly-owned subsidiary of SunTrust Banks, Inc.
("SunTrust"), a southeastern regional bank holding company with assets of $46.5
billion as of December 31, 1995.
STI Capital, as advisor, makes the investment decisions for the assets of the
portfolios it advises and continuously reviews, supervises and administers the
respective portfolio's investment program. STI Capital charges the portfolios an
investment management fee. These fees are part of the portfolios' operating
expenses. See the attached prospectus for the STI Classic Variable Trust for a
discussion of the Fund's expenses.
The investment advisor for the Federated Prime Money Fund II is Federated
Advisers.
There is no assurance that the portfolios in each Fund will attain their
respective stated objectives. Additional information concerning the investment
objectives and policies of the portfolios can be found in the current prospectus
for each Fund accompanying this prospectus.
You will find more complete information about each Fund, including the risks
associated with each portfolio, in the accompanying prospectuses. You should
read the prospectus for each Fund in conjunction with this prospectus.
THE PROSPECTUS OF EACH FUND SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
CONCERNING THE ALLOCATION OF PURCHASE PAYMENTS TO A PARTICULAR VARIABLE
SUB-ACCOUNT.
FIXED ACCOUNT OPTIONS
THE STANDARD FIXED ACCOUNT
Purchase payments and transfers allocated to the Standard Fixed Account become
part of the general account of the Company, which supports insurance and annuity
obligations. The general account consists of the general assets of the Company
other than those in segregated asset accounts.
Instead of you bearing the investment risk, as is the case for amounts in the
Variable Account or in other segregated asset accounts of the Company, we bear
the investment risk for all amounts in the Standard Fixed Account. We have sole
discretion to invest the assets of the Standard Fixed Account, subject to
applicable law. We guarantee that the amounts allocated to the Standard Fixed
Account will be credited interest at a net effective annual interest rate at
least equal to the minimum guaranteed rate found in the Contract. Currently, the
amount of interest credited in excess of the guaranteed rate will vary
periodically at the sole discretion of the Company. Any interest held in the
Standard Fixed Account does not entitle an Owner to share in the investment
experience of the general account.
Money allocated to the Standard Fixed Account earns interest for a one year
period at the current rate in effect at the time of allocation. After the one
year period, a renewal rate will be declared. Subsequent renewal dates will be
every twelve months for each payment or transfer. The renewal interest rate will
be guaranteed by us for a full year and will not be less than the minimum
guaranteed rate found in the Contract.
We may declare more than one interest rate for different monies based upon the
date of allocation to the Standard Fixed Account. For current interest rate
information, please contact your sales representative or the Company's customer
support unit at 1-800/453-6038.
Any interest credited to amounts allocated to the Standard Fixed Account in
excess of the guaranteed rate found in the Contract will be determined at the
sole discretion of the Company.
<PAGE>
14
Amounts may be transferred from the Sub-accounts of the Variable Account to the
Standard Fixed Account, and prior to the Payout Start Date, amounts may also be
transferred from the Standard Fixed Account to any other Investment Alternative.
The maximum amount in any Contract Year which may be transferred from the
Standard Fixed Account to any other Investment Alternative is limited to the
greater of (1) 25% of the value in the Standard Fixed Account as of the most
recent Contract Anniversary; if 25% of the value as of the most recent Contract
Anniversary is less than $1,000, then up to $1,000 may be transferred; or (2)
25% of the sum of all purchase payments and transfers to the Standard Fixed
Account as of the most recent Contract Anniversary.
After the Payout Start Date no transfers may be made from the Fixed Account
Options. Transfers from the Variable Account to the Standard Fixed Account may
not be made for six months after the Payout Start Date and may be made
thereafter only once every six months.
Full and partial withdrawals from the Standard Fixed Account may be delayed for
up to six months.
THE GUARANTEED MATURITY AMOUNT FIXED ACCOUNT
Purchase payments and transfers allocated to one or more of the Sub-accounts of
the Guaranteed Maturity Amount Fixed Account become part of the general account
of the Company. Each Sub-account offers a separate interest rate Guarantee
Period. Guarantee Periods will be offered at the Company's discretion and may
range from one to ten years. Presently, the Company offers Guarantee Periods of
three, five, seven and ten years. The Owner must select the Sub-account(s) in
which to allocate each purchase payment and transfer. No less than $50 may be
allocated to any one Sub-account. The Company reserves the right to limit the
number of additional purchase payments.
Interest is credited daily to each Sub-account at a rate which compounds to the
effective annual interest rate declared for each Sub-account's Guarantee Period
that has been selected. The effective annual interest rate will never be less
than the minimum guaranteed rate, as found in the Contract.
The following example illustrates how the Sub-account value for a Sub-account of
the Guaranteed Maturity Amount Fixed Account would grow given an assumed
purchase payment, Guarantee Period, and effective annual interest rate:
EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD:
<TABLE>
<S> <C>
Purchase Payment:............................................................... $10,000.00
Guarantee Period:............................................................... 5 years
Effective Annual Rate:.......................................................... 5.55%
</TABLE>
<PAGE>
15
END OF CONTRACT YEAR:
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Beginning Sub-Account Value................ $ 10,000.00
X (1 + Effective Annual Rate) 1.0555
------------
$ 10,555.00
Sub-Account Value at end of Contract $ 10,555.00
year 1 X (1 + Effective Annual Rate) 1.0555
------------
$ 11,140.80
Sub-Account Value at end of Contract $ 11,140.80
year 2 X (1 + Effective Annual Rate) 1.0555
------------
$ 11,759.12
Sub-Account Value at end of Contract $ 11,759.12
year 3 X (1 + Effective Annual Rate) 1.0555
------------
$ 12,411.75
Sub-Account Value at end of Contract $ 12,411.75
year 4 X (1 + Effective Annual Rate) 1.0555
------------
Sub-Account Value at end of Guarantee
Period: $ 13,100.60
------------
------------
</TABLE>
TOTAL INTEREST CREDITED IN GUARANTEE PERIOD: $3,100.60 ($13,100.60 -
$10,000.00)
NOTE: The above illustration assumes no withdrawals of any amount during the
entire five year period. A Market Value Adjustment would apply to any such
interim withdrawal. A withdrawal charge may apply to any amount withdrawn in
excess of 10% of the Contract Value on the date of the first withdrawal in a
Contract Year. The hypothetical interest rate is for illustrative purposes only
and is not intended to predict future interest rates to be declared under the
Contract. Actual interest rates declared for any given Guarantee Period may be
more or less than shown above but will never be less than the guaranteed minimum
rate as found in the Contract.
<PAGE>
16
The Company has no specific formula for determining the rate of interest that it
will declare initially or in the future. Such interest rates will be reflective
of investment returns available at the time of the determination. In addition,
the management of the Company may also consider various other factors in
determining interest rates, including regulatory and tax requirements, sales
commissions and administrative expenses borne by the Company, general economic
trends, and competitive factors. For current interest rate information, please
contact your sales representative or the Company's customer support unit at
1-800/453-6038.
THE MANAGEMENT OF THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO THE
INTEREST RATES TO BE DECLARED. THE COMPANY CAN NEITHER PREDICT NOR GUARANTEE
FUTURE INTEREST RATES TO BE DECLARED.
Prior to the end of a Guarantee Period, a notice will be mailed to the Owner
outlining the options available at the end of a Guarantee Period. During the 30
day period after a Guarantee Period expires the Owner may:
- take no action and the Company will automatically renew the Sub-account
value to a Guarantee Period of the same duration to be established on the
day the previous Guaranteed Period expired; or
- notify the Company to apply the Sub-account value to a new Guarantee
Period or periods to be established on the day the previous Guarantee
Period expired; or
- notify the Company to apply the Sub-account value to the Standard Fixed
Account to be established on the day the Guarantee Period expired; or
- notify the Company to apply the Sub-account value to any Sub-accounts of
the Variable Account on the day we receive the notification.
- receive a portion of the Sub-account value or the entire Sub-account value
through a partial or full withdrawal that is not subject to a Market Value
Adjustment. In this case, the amount withdrawn will be deemed to have been
withdrawn on the date the Guarantee Period expired.
The Automatic Laddering Program allows the Owner to choose, in advance, one
renewal Guarantee Period for all renewing Sub-accounts. The Owner can select the
Automatic Laddering Program at any time during the accumulation phase, including
on the issue date. The Automatic Laddering Program will continue until the Owner
gives written notice to the Company.
WITHDRAWALS OR TRANSFERS:
All withdrawals and transfers, from a Sub-account of the Guaranteed Maturity
Amount Fixed Account other than during the 30 day period after a Guarantee
Period expires are subject to a Market Value Adjustment.
The main component in determining the amount received by the Owner is the amount
which was requested; however, there may be adjustments to the requested amount.
A withdrawal charge may reduce the amount received. A Market Value Adjustment
may apply which would reduce or increase the amount received. Premium taxes and
federal income tax withholding may also apply which would reduce the amount
received.
The amount received by the Owner under a withdrawal request equals the amount
requested, adjusted by any Market Value Adjustment, less any applicable
withdrawal charge (based upon the amount requested prior to any Market Value
Adjustment), less premium taxes and withholding (if applicable).
Amounts may be transferred from the Sub-accounts of the Variable Account to the
Guaranteed Maturity Amount Fixed Account, and prior to the Payout Start Date,
amounts may also be transferred from the Guaranteed Maturity Amount Fixed
Account to any other Investment Alternative.
<PAGE>
17
After the Payout Start Date no transfers may be made from the Fixed Account
Options. Transfers from the Variable Account to the Guaranteed Maturity Amount
Fixed Account may not be made for six months after the Payout Start Date and may
be made thereafter only once every six months.
Full and partial withdrawals from the Guaranteed Maturity Amount Fixed Account
may be delayed for up to six months.
MARKET VALUE ADJUSTMENT
The Market Value Adjustment reflects the relationship between (1) the current
effective annual interest rate for the time remaining in the Guarantee Period at
the time of the request for withdrawal or transfer, and (2) the effective annual
interest rate guaranteed for that Sub-account. Since current interest rates are
based, in part, upon investment yields available at the time, the effect of the
Market Value Adjustment will be closely related to the levels of such yields. As
such, the Owner bears some investment risk under the Contract.
It is possible, therefore, that should investment yields increase significantly
from the time the purchase payment was made, the Market Value Adjustment,
withdrawal charge, premium taxes and withholding (if applicable), would reduce
the amount received by the Owner upon full withdrawal of the Contract Value to
an amount that is less than the purchase payment plus interest at the minimum
guaranteed interest rate under the Contract.
Generally, if the effective annual interest rate for the Guarantee Period is
lower than the applicable current effective annual interest rate (interest rate
for a period equal to the time remaining in the Sub-account), then the Market
Value Adjustment will result in a lower amount payable to the Owner. Similarly,
if the effective annual interest rate for the Guarantee Period is higher than
the applicable current effective annual interest rate, then the Market Value
Adjustment will result in a higher amount payable to the Owner.
For example, assume the Owner purchases a Contract and selects an initial
Guarantee Period of five years and the Company's effective annual rate for that
duration is 5.55%. Assume that at the end of 3 years, the Owner makes a partial
withdrawal. If, at that later time, the current interest rate for a 2 year
Guarantee Period is 5.05%, then the Market Value Adjustment will be positive,
which will result in an increase in the amount payable to the Owner. Similarly,
if the current interest rate for the 2 year Guarantee Period is 6.05%, then the
Market Value Adjustment will be negative, which will result in a decrease in the
amount payable to the Owner.
The formula for calculating the Market Value Adjustment is set forth in Appendix
A to this prospectus which also contains additional illustrations of the
application of the Market Value Adjustment.
PURCHASE OF THE CONTRACTS
PURCHASE PAYMENT LIMITS
Your first purchase payment must be at least $3,000 unless the Contract is a
qualified Contract, in which case the first purchase payment must be at least
$2,000. All subsequent purchase payments must be $50 or more and may be made at
any time prior to the earlier of the Payout Start Date or your 86th birthday.
Subsequent purchase payments may also be made from your bank account by
automatic transfer.
We reserve the right to limit the amount of purchase payments we will accept.
FREE-LOOK PERIOD
You may cancel the Contract any time within 20 days after receipt of the
Contract and receive a full refund of purchase payments allocated to any Fixed
Account Option. Unless a refund of purchase payments is required by state or
federal law, purchase payments allocated to the Variable Account will be
returned after an adjustment to reflect investment gain or loss that occurred
from the date of allocation through the date of cancellation. In states where
this procedure has been approved, all money allocated to Sub-accounts of the
Variable Account during the 30 day period following the issue date will be
immediately invested in the
<PAGE>
18
Federated Prime Money Fund II during that 30 day period, after which it will be
allocated pursuant to your allocation instructions. In such cases, the amount
returned upon cancellation within 20 days after receipt of the Contract is the
greater of the purchase payment or the Contract Value.
CREDITING OF PURCHASE PAYMENTS
The initial purchase payment accompanied by a duly completed application will be
credited to the Contract within two business days of receipt by us at our home
office. If an application is not duly completed, we will credit the purchase
payments to the Contract within five business days or return it at that time
unless you specifically consent to us holding the purchase payment until the
application is complete. We reserve the right to reject any application.
Subsequent purchase payments will be credited to the Contract at the close of
the Valuation Period in which the purchase payment is received.
ALLOCATION OF PURCHASE PAYMENTS
On the application, you instruct us how to allocate the purchase payment among
the seven Investment Alternatives. Purchase payments may be allocated in whole
percents, from 0% to 100% (total allocation equals 100%) or in exact dollar
amounts, to any Investment Alternative. Unless you notify us in writing
otherwise, subsequent purchase payments are allocated according to the
allocation for the previous purchase payment.
For contracts issued in certain states, all money allocated to Sub-accounts of
the Variable Account during the 30 day period following the issue date of the
Contract will be invested in the Federated Prime Money Fund II during that 30
day period. On the 31st day, the Contract Value in the Federated Prime Money
Fund II will then be transferred to the Sub-account(s) you elected on the
application for the initial purchase payment and requested for any subsequent
purchase payments. This transfer is not subject to a $10 transfer charge and is
not included in the 12 free transfers per Contract Year. Please consult with
your sales representative for applicability of this requirement.
ACCUMULATION UNITS
Each purchase payment allocated to the Variable Account will be credited to the
Contract as Accumulation Units. For example, if a $10,000 purchase payment is
credited to the Contract when the Accumulation Unit value equals $10, then 1,000
Accumulation Units would be credited to the Contract. The Variable Account, in
turn, purchases shares of the corresponding portfolio.
For a brief summary of how purchase payments allocated to the Fixed Account are
credited to the Contract, see "Fixed Account Options" on page 13.
ACCUMULATION UNIT VALUE
The Accumulation Units in each Sub-account of the Variable Account are valued
separately. The value of Accumulation Units will change each Valuation Period
according to the investment performance of the shares purchased by each Variable
Sub-account and the deduction of certain expenses and charges.
The value of an Accumulation Unit in a Variable Sub-account for any Valuation
Period equals the value of the Accumulation Unit as of the immediately preceding
Valuation Period, multiplied by the Net Investment Factor for that Sub-account
for the current Valuation Period. The Net Investment Factor for a Valuation
Period is a number representing the change, since the last Valuation Date in the
value of 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.
TRANSFERS AMONG PORTFOLIOS
Prior to the Payout Start Date, you may transfer amounts among Investment
Alternatives. The Company reserves the right to assess a $10 charge on each
transfer in excess of 12 per Contract Year. Transfers to or
<PAGE>
19
from more than one fund on the same day are treated as one transfer. The Company
is presently waiving this charge. Transfers among Variable Sub-accounts before
the Payout Start Date may be made at any time. See "Withdrawals or Transfers,"
page 16 for the requirements on transfers from the Fixed Account.
After the Payout Start Date, transfers among Sub-accounts of the Variable
Account, or from the Variable Account to the Fixed Account may be made only once
every six months and may not be made during the first six months following the
Payout Start Date. After the Payout Start Date, transfers from the Fixed Account
Options are not allowed.
Transfers may be made pursuant to telephone instructions if the Owner completes
the telephone authorization form on the application or another form provided by
the Company. Telephone transfer requests will be accepted by the Company if
received at 1-800/453-6038 by 3:00 p.m., Central Time. Telephone transfer
requests received at any other telephone number or after 3:00 p.m., Central Time
will not be accepted by the Company. Telephone transfer requests received before
3:00 p.m., Central Time are effected at the next computed value. If telephone
transfers are not authorized, transfer requests must be in writing, on a form
provided by the Company. The Company utilizes procedures which the Company
believes will provide reasonable assurance that telephone authorized transfers
are genuine. Such procedures include taping of telephone conversations with
persons purporting to authorize such transfers and requesting identifying
information from such persons. Accordingly, the Company disclaims any liability
for losses resulting from such transfers by reason of their allegedly not having
been properly authorized. However, if the Company does not take reasonable steps
to help ensure that such authorizations are valid, the Company may be liable for
such losses.
The Company reserves the right to waive the transfer restrictions.
DOLLAR COST AVERAGING
Transfers may be made automatically through Dollar Cost Averaging prior to the
Payout Start Date. Dollar Cost Averaging permits the Owner to transfer a
specified amount every month from any Sub-account of the Variable Account or
from the Standard Fixed Account, to any other Sub-account of the Variable
Account. Dollar Cost Averaging cannot be used to transfer amounts to the Fixed
Account. Transfers made through Dollar Cost Averaging are not assessed a $10
charge and are not included in the 12 free transfers per Contract Year.
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 the Dollar Cost Averaging program does not assure you of a
greater profit from your purchases under the program; nor will it prevent or
alleviate losses in a declining market.
AUTOMATIC PORTFOLIO REBALANCING
Transfers may be made automatically through Automatic Portfolio Rebalancing
prior to the Payout Start Date. By electing Automatic Portfolio Rebalancing, all
of the money allocated to Sub-accounts of the Variable Account will be
rebalanced to the desired allocation on a quarterly basis, determined from the
first date that you decide to rebalance. Each quarter, money will be transferred
among Sub-accounts of the Variable Account to achieve the desired allocation.
The desired allocation will be the allocation initially selected, unless
subsequently changed. You may change the allocation at any time by giving us
written notice. The new allocation will be effective with the first rebalancing
that occurs after we receive the written request. We are not responsible for
rebalancing that occurs prior to receipt of the written request.
<PAGE>
20
Transfers made through Automatic Portfolio Rebalancing are not assessed a $10
charge and are not included in the 12 free transfers per Contract Year.
Any money allocated to a Fixed Account Option will not be included in the
rebalancing.
BENEFITS UNDER THE CONTRACT
WITHDRAWALS
You may withdraw all or part of the Contract Value at any time prior to the
earlier of the death of the Owner (the Annuitant if the Owner is not a natural
person) or the Payout Start Date. The amount available for withdrawal is the
Contract Value next computed after the Company receives the request for a
withdrawal at its home office, adjusted by any Market Value Adjustment, less any
withdrawal charges, contract maintenance charges and any premium taxes.
Withdrawals from the Variable Account will be paid within seven days of receipt
of the request, subject to postponement in certain circumstances. See "Delay of
Payments," page 25.
Money can be withdrawn from the Variable Account or the Fixed Account Options.
To complete the partial withdrawal from the Variable Account, the Company will
cancel Accumulation Units in an amount equal to the withdrawal and any
applicable withdrawal charge and premium taxes. The Owner must name the
Investment Alternative from which the withdrawal is to be made. If none is
named, then the withdrawal request is incomplete and cannot be honored.
The minimum partial withdrawal is $50. If the Contract Value after a partial
withdrawal would be less than $2,000, then the Company will treat the request as
one for a termination of the Contract and the entire Contract Value, adjusted by
any Market Value Adjustment, less any charges and premium taxes, will be paid
out. The Company will, however, require confirmation of the withdrawal request
before terminating the Contract.
Partial withdrawals may also be taken automatically through Systematic
Withdrawals on a monthly, quarterly, semi-annual or annual basis. Systematic
Withdrawals of $50 or more may be requested at any time prior to the Payout
Start Date. At the Company's discretion, Systematic Withdrawals may not be
offered in conjunction with Dollar Cost Averaging or Automatic Portfolio
Rebalancing.
Withdrawals and surrenders may be subject to income tax and a 10% tax penalty.
This tax is explained in "Federal Tax Matters," on page 26.
After the Payout Start Date, withdrawals are only permitted when you are
receiving payments from the Variable Account under an Income Plan with
Guaranteed Payments for a Specified Period. In that case, you may terminate the
Variable Account portion of the income payments at any time.
PAYOUT START DATE FOR INCOME PAYMENTS
The Payout Start Date is the day that income payments will start under the
Contract. You may change the Payout Start Date at any time by notifying the
Company in writing of the change at least 30 days before the scheduled Payout
Start Date. The Payout Start Date must be (a) at least one month after the Issue
Date; and (b) no later than the day the Annuitant reaches age 90, or the 10th
anniversary, if later.
AMOUNT OF VARIABLE ACCOUNT INCOME PAYMENTS
The amount of Variable Account income payments depends upon the investment
experience of the Sub-accounts selected by the Owner and any premium taxes, the
age and sex of the Annuitant, and the Income Plan chosen. The Company guarantees
that the amount of the income payment will not be affected by (1) actual
mortality experience and (2) the amount of the Company's administration
expenses.
The total income payments received may be more or less than the total purchase
payments made because (a) Variable Account income payments vary with the
investment results of the underlying portfolios, and (b) Annuitants may not live
as long as expected.
<PAGE>
21
If the actual net investment experience of the Variable Account is less than the
assumed investment rate, then the dollar amount of the income payments will
decrease. The dollar amount of the income payments will stay level if the net
investment experience equals the assumed investment rate and the dollar amount
of the income payments will increase if the net investment experience exceeds
the assumed investment rate. For purposes of the Variable Account income
payments, the assumed investment rate is 3 percent.
AMOUNT OF FIXED ACCOUNT INCOME PAYMENTS
Income payment amounts derived from any Fixed Account Option are guaranteed for
the duration of the Income Plan. The income payment based upon any Fixed Account
Option is calculated by applying the portion of the Contract Value in any Fixed
Account Option on the Payout Start Date, adjusted by any Market Value Adjustment
and less any applicable premium tax, to the greater of the appropriate value
from the income payment table selected or such other value as we are offering at
that time.
INCOME PLANS
The Contracts offered by this prospectus contain income payment tables that
provide for different benefit payments to men and women of the same age (except
in states which require unisex annuity tables). Nevertheless, in accordance with
the U.S. Supreme Court's decision in ARIZONA GOVERNING COMMITTEE V. NORRIS, in
certain employment-related situations, annuity tables that do not vary on the
basis of sex may be used. Accordingly, if the Contract is to be used in
connection with an employment-related retirement or benefit plan, consideration
should be given, in consultation with legal counsel, to the impact of NORRIS on
any such plan before making any contributions under these Contracts.
The Income Plan option selected will affect the dollar amount of each income
payment. For example, if an Income Plan Guaranteed for Life is chosen, the
income payments will be greater than income payments under an Income Plan for a
Minimum Specified Period and guaranteed thereafter for life.
You may elect income payments based on any Fixed Account Option and/or the
Variable Account. The Owner may change the Income Plan until 30 days before the
Payout Start Date. If an Income Plan is chosen which depends on the Annuitant or
Joint Annuitant's life, proof of age will be required before income payments
begin. Applicable premium taxes will be assessed. The Income Plans include:
INCOME PLAN 1 -- LIFE INCOME WITH GUARANTEED PAYMENTS
The Company will make payments for as long as the Annuitant lives. If the
Annuitant dies before the selected number of guaranteed payments have been
made, the Company will continue to pay the remainder of the guaranteed
payments.
INCOME PLAN 2 -- JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS
The Company will make payments for as long as either the Annuitant or Joint
Annuitant, named at the time of Income Plan selection, is living. If both the
Annuitant and the Joint Annuitant die before the selected number of
guaranteed payments have been made, the Company will continue to pay the
remainder of the guaranteed payments.
INCOME PLAN 3 -- GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD
The Company will make payments for a specified period beginning on the Payout
Start Date. These payments do not depend on the Annuitant's life. The number
of months guaranteed may be from 60 to 360.
The mortality and expense risk charge will be deducted from Variable Account
payments even though the Company does not bear any mortality risk. If Income
Plan 3 is chosen and the proceeds are derived from the Variable Account, you may
terminate the Contract at any time by notifying the Company in writing and you
will receive the Contract Value within seven days; however, a withdrawal charge
may apply if this occurs.
In the event that an Income Plan is not selected, the Company will make income
payments in accordance with Income Plan 1 with Guaranteed Payments for 120
Months. At the Company's discretion, other Income Plans may be available upon
request. The Company currently uses sex-distinct annuity tables. However, if
<PAGE>
22
legislation is passed by Congress or the states, the Company reserves the right
to use income payment tables which do not distinguish on the basis of sex.
Special rules and limitations may apply to certain qualified contracts.
If the Contract Value to be applied to an Income Plan is less than $2,000, or if
the monthly payments determined under the Income Plan are less than $20, the
Company may pay the Contract Value adjusted by any Market Value Adjustment less
any applicable taxes in a lump sum or change the payment frequency to an
interval which results in income payments of at least $20.
DEATH BENEFIT PAYABLE
We will pay a death benefit prior to the Payout Start Date on the death of any
Owner or, if the Owner is not a natural person, the death of the Annuitant. The
death benefit is paid to the Owner as determined immediately after the death.
This would be a surviving joint Owner or, if none, the Beneficiary.
If the Annuitant and Joint Annuitant, if applicable, die after the Payout Start
Date, the Company will continue to pay the remainder of the guaranteed payments
to the Owner.
DEATH BENEFIT AMOUNT
Prior to the Payout Start Date, the death benefit before any Market Value
Adjustment is equal to the greatest of: (a) the Contract Value on the date the
Company receives a complete request for payment of the death benefit, or (b) for
each previous Death Benefit Anniversary occurring prior to the Owner's 80th
birthday, the Contract Value at that anniversary; plus any purchase payments
made since that anniversary; minus any amounts the Company paid the Owner
(including income tax we withheld for you) since that anniversary. The death
benefit will be adjusted by any applicable Market Value Adjustment as of the
date the Company determines the death benefit. A Death Benefit Anniversary is
every seventh Contract Anniversary beginning with the issue date. For example,
the issue date, 7th and 14th Contract Anniversaries are the first three Death
Benefit Anniversaries. The death benefit will never be less than the sum of all
purchase payments less any amounts previously paid to the Owner (including
income tax withholding).
The value of the death benefit will be determined at the end of the Valuation
Period during which the Company receives a complete request for payment of the
death benefit, which includes due proof of death.
The Company will not settle any death claim until it receives due proof of
death.
DEATH BENEFIT PAYMENT PROVISIONS
The Owner eligible to receive death benefits has the following options:
1. If the Owner eligible to receive the death benefit is not a natural person,
then the Owner must receive the death benefit in a lump sum within five
years of the Date of Death.
2. Otherwise, within 60 days of the date when the death benefit is calculated,
the Owner may elect to receive the death benefit under an Income Plan or in
a lump sum.
Payments from the Income Plan must begin within one-year of the Date of
Death and must be payable throughout:
-the life of the Owner; or
-a period not to exceed the life expectancy of the Owner; or
-the life of the Owner with payments guaranteed for a period not to
exceed the life expectancy of the Owner.
Any death benefit payable in a lump sum must be paid within five years of
the date of death. If no election is made, funds will be distributed at the
end of the five year period.
3. If the surviving spouse of the deceased Owner is the new Owner, then the
spouse may elect one of the options listed above or may continue the
Contract in the accumulation phase as if the death had not occurred. If the
Contract is continued in the accumulation phase, the surviving spouse may
make a
<PAGE>
23
single withdrawal of any amount within one year of the date of death without
incurring a withdrawal charge. However, any applicable Market Value
Adjustment, determined as of the date of the withdrawal, will apply.
CHARGES AND OTHER DEDUCTIONS
DEDUCTIONS FROM PURCHASE PAYMENTS
No deductions are made from purchase payments. Therefore, the full amount of
every purchase payment is invested in the Investment Alternative(s).
WITHDRAWAL CHARGE (CONTINGENT DEFERRED SALES CHARGE)
You may withdraw the Contract Value at any time before the earliest of the
Payout Start Date, the death of any Owner or, if the Owner is not a natural
person, the death of the Annuitant.
There are no withdrawal charges on amounts withdrawn up to 10% of the Contract
Value on the date of the first withdrawal in a Contract Year. Amounts withdrawn
in excess of this may be subject to a withdrawal charge. Amounts not subject to
a withdrawal charge and not withdrawn in a Contract Year are not carried over to
later Contract Years. Withdrawal charges, if applicable, will be deducted from
the amount paid.
Free withdrawals and other partial withdrawals will be allocated on a first in,
first out basis to purchase payments. For purposes of calculating the amount of
the withdrawal charge, withdrawals are assumed to come from purchase payments
first, beginning with the oldest payment. Withdrawals made after all purchase
payments have been withdrawn, will not be subject to a withdrawal charge. For
partial withdrawals, the amount of payment received by the Owner, any withdrawal
charge, any applicable taxes and any Market Value Adjustment, will be deducted
from the Contract Value.
Withdrawal charges will be applied to amounts withdrawn in excess of 10% of the
Contract Value as set forth below:
<TABLE>
<CAPTION>
COMPLETE YEARS SINCE APPLICABLE
PURCHASE PAYMENT BEING WITHDRAWAL
WITHDRAWN WAS MADE CHARGE PERCENTAGE
- ---------------------------------------------- --------------------
<S> <C>
0 years...........................................................7%
1 year............................................................6%
2 years...........................................................5%
3 years...........................................................4%
4 years...........................................................3%
5 years...........................................................2%
6 years...........................................................1%
7 Years or more...................................................0%
</TABLE>
Withdrawal charges will be used to pay sales commissions and other promotional
or distribution expenses associated with the marketing of the Contracts. The
Company does not anticipate that the withdrawal charges will cover all
distribution expenses in connection with the Contract.
In addition, federal and state income tax may be withheld from withdrawal
amounts. Certain terminations may also be subject to a federal tax penalty. See
"Federal Tax Matters," page 26.
The Company will waive any withdrawal charge prior to the Payout Start Date if
at least 30 days after the Contract Date any Owner (or Annuitant if the Owner is
not a natural person) 1) is first confined to a long term care facility or
hospital for at least 90 consecutive days, confinement is prescribed by a
physician and is medically necessary, and the request for a withdrawal and
adequate written proof of confinement are received by us no later than 90 days
after discharge; or, 2) is first diagnosed by a physician as having a terminal
illness and a request for a withdrawal and adequate proof of diagnosis are
received by us. In addition, the withdrawal charge will be waived on withdrawals
taken to satisfy IRS Required Minimum Distribution Rules for this Contract.
<PAGE>
24
CONTRACT MAINTENANCE CHARGE
A contract maintenance charge is deducted annually from the Contract Value to
reimburse the Company for its actual costs in maintaining each Contract and the
Variable Account. The Company guarantees that the amount of this charge will not
exceed $30 per Contract Year over the life of the Contract. This charge will be
waived if the total purchase payments are $25,000 or more or if all money is
allocated to the Fixed Account Options on the Contract Anniversary.
Maintenance costs include but are not limited to expenses incurred in billing
and collecting purchase payments; keeping records; processing death claims, cash
withdrawals, and policy changes; proxy statements; calculating Accumulation Unit
and Annuity Unit values; and issuing reports to Owners and regulatory agencies.
The Company does not expect to realize a profit from this charge.
Prior to the Payout Start Date, on each Contract Anniversary, the contract
maintenance charge will be deducted from each Sub-account of the Variable
Account in the same proportion that the Owner's value in each bears to the total
value in all Sub-accounts of the Variable Account. After the Payout Start Date,
a pro rata share of the annual contract maintenance charge will be deducted from
each income payment. For example, 1/12 of the $30, or $2.50, will be deducted if
there are twelve income payments during the Contract Year. The portion of the
contract maintenance charge proportional to the part of the Contract Year
elapsed will be deducted from the amount paid upon termination of the Contract.
ADMINISTRATIVE EXPENSE CHARGE
The Company will deduct an administrative expense charge which is equal, on an
annual basis, to .10% of the daily net assets you have allocated to the
Sub-accounts of the Variable Account. This charge is designed to cover actual
administrative expenses which exceed the revenues from the contract maintenance
charge. The Company does not intend to profit from this charge. The Company
believes that the administrative expense charge and contract maintenance charge
have been set at a level that will recover no more than the actual costs
associated with administering the Contract. There is no necessary relationship
between the amount of administrative charge imposed on a given Contract and the
amount of expenses that may be attributable to that Contract.
MORTALITY AND EXPENSE RISK CHARGE
The Company will deduct a mortality and expense risk charge which is equal, on
an annual basis, to 1.25% of the daily net assets you have allocated to the
Sub-accounts of the Variable Account. The Company estimates that .85% is
attributable to the assumption of mortality risks and .40% is attributable to
the assumption of expense risks. The Company guarantees that the percentage for
this charge will not increase over the life of the Contract.
The mortality risk arises from the Company's guarantee to cover all death
benefits and to make income payments in accordance with the Income Plan selected
and the Income Payment Tables.
The expense risk arises from the possibility that the contract maintenance and
administrative expense charge, both of which are guaranteed not to increase,
will be insufficient to cover actual administrative expenses.
If the mortality and expense risk charge is insufficient to cover the Company's
mortality costs and excess expenses, the Company will bear the loss. If the
charge is more than sufficient, the Company will retain the balance as profit.
The Company currently expects a profit from this charge. Any such profit, as
well as any other profit realized by the Company and held in its general account
(which supports insurance and annuity obligations), would be available for any
proper corporate purpose, including, but not limited to, payment of distribution
expenses.
<PAGE>
25
TAXES
The Company will deduct applicable state premium taxes or other similar
policyholder taxes relative to the Contract (collectively referred to as
"premium taxes") either at the Payout Start Date, or when a total withdrawal
occurs. Current premium tax rates range from 0 to 3.5%. The Company reserves the
right to deduct premium taxes from the purchase payments.
At the Payout Start Date, the charge for premium taxes will be deducted from
each Investment Alternative in the proportion that the Owner's value in the
Investment Alternative bears to the total Contract Value.
TRANSFER CHARGES
The Company reserves the right to assess a $10 charge on each transfer in excess
of 12 per Contract Year, excluding transfers through Dollar Cost Averaging and
Automatic Portfolio Rebalancing. The Company is presently waiving this charge.
FUND EXPENSES
A complete description of the expenses and deductions from the portfolios in
each Fund is found in the prospectus for each Fund. This prospectus is
accompanied by the prospectus for each Fund.
GENERAL MATTERS
BENEFICIARY
Subject to the terms of any irrevocable Beneficiary designation, the Owner may
change the Beneficiary at any time by notifying the Company in writing. Any
change will be effective at the time it is signed by the Owner, whether or not
the Annuitant is living when the change is received by the Company. The Company
will not, however, be liable as to any payment or settlement made prior to
receiving the written notice.
Unless otherwise provided in the Beneficiary designation, if any Beneficiary
predeceases the Owner, the new Beneficiary will be: the Owner's spouse if
living; otherwise, the Owner's children, equally, if living; otherwise, the
Owner's estate. Multiple Beneficiaries may be named. Unless otherwise provided
in the Beneficiary designation, if more than one Beneficiary survives the Owner,
the surviving Beneficiaries will share equally in any amounts due.
ASSIGNMENTS
The Owner may not assign an interest in a Contract as collateral or security for
a loan. Otherwise, the Owner 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 due. No assignment will bind the Company
unless it is signed by the Owner and filed with the Company. The Company is not
responsible for the validity of an assignment.
DELAY OF PAYMENTS
Payment of any amounts due from the Variable Account under the Contract will
occur within seven days, unless:
1. The New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the Exchange is otherwise restricted;
2. An emergency exists as defined by the Securities and Exchange Commission; or
3. The Securities and Exchange Commission permits delay for the protection of
the Owners.
Payments or transfers from the Fixed Account Options may be delayed for up to 6
months.
<PAGE>
26
MODIFICATION
The Company may not modify the Contract without the consent of the Owner except
to make the Contract meet the requirements of the Investment Company Act of
1940, or to make the Contract comply with any changes in the Internal Revenue
Code or any changes required by the Code or by any other applicable law.
CUSTOMER INQUIRIES
The Owner or any persons interested in the Contract may make inquiries regarding
the Contract by calling or writing your representative or:
GLENBROOK LIFE AND ANNUITY COMPANY
3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
1-800/453-6038
FEDERAL TAX MATTERS
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax
consequences of ownership or receipt of distributions under an annuity contract
depend on the individual circumstances of each person. If you are concerned
about any tax consequences with regard to your individual circumstances, you
should consult a competent tax adviser.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL
Generally, an annuity contract owner is not taxed on increases in the Contract
Value until a distribution occurs. This rule applies only where (1) the owner is
a natural person, and (2) the issuing insurance company, instead of the annuity
owner, is considered the owner for federal income tax purposes of any separate
account assets funding the contract.
NON-NATURAL OWNERS
As a general rule, annuity contracts owned by non-natural persons are not
treated as annuity contracts for federal income tax purposes and the income on
such contracts is taxed as ordinary income received or accrued by the owner
during the taxable year. There are several exceptions to the general rule for
contracts owned by non-natural persons which are discussed in the Statement of
Additional Information.
DIVERSIFICATION REQUIREMENTS
For a Contract to be treated as an annuity for federal income tax purposes, the
investments in the Variable Account must be "adequately diversified" in
accordance with the standards provided in the Treasury regulations. If the
investments in the Variable Account are not adequately diversified, then the
Contract will not be treated as an annuity contract for federal income tax
purposes and the Owner will be taxed on the excess of the Contract Value over
the investment in the Contract. Although the Company does not have control over
the Funds or their investments, the Company expects the Funds to meet the
diversification requirements.
INVESTOR CONTROL
In connection with the issuance of the regulations on the adequate
diversification standards, the Department of the Treasury announced that the
regulations do not provide guidance concerning the extent to which contract
owners may direct their investments among Sub-accounts of a variable account.
The Internal
<PAGE>
27
Revenue Service has previously stated in published rulings that a variable
contract owner will be considered the owner of separate account assets if the
owner possesses incidents of ownership in those assets such as the ability to
exercise investment control over the assets. At the time the diversification
regulations were issued, Treasury announced that guidance would be issued in the
future regarding the extent that owners could direct their investments among
Sub-accounts without being treated as owners of the underlying assets of the
Variable Account. It is possible that Treasury's position, when announced, may
adversely affect the tax treatment of existing contracts. The Company,
therefore, reserves the right to modify the Contract as necessary to attempt to
prevent the Owner from being considered the federal tax owner of the assets of
the Variable Account.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal under a non-qualified contract, amounts
received are taxable to the extent the contract value before the withdrawal
exceeds the investment in the contract. In the case of a partial withdrawal
under a qualified contract, the portion of the payment that bears the same ratio
to the total payment that the investment in the contract bears to the contract
value, can be excluded from income. In the case of a full withdrawal under a
non-qualified contract or a qualified contract, the amount received will be
taxable only to the extent it exceeds the investment in the contract. If an
individual transfers an annuity contract without full and adequate consideration
to a person other than the individual's spouse (or to a former spouse incident
to a divorce), the owner will be taxed on the difference between the contract
value and the investment in the contract at the time of transfer. Other than in
the case of certain qualified contracts, any amount received as a loan under a
contract, and any assignment or pledge (or agreement to assign or pledge) of the
contract value is treated as a withdrawal of such amount or portion.
TAXATION OF ANNUITY PAYMENTS
Generally, the rule for income taxation of payments received from an annuity
contract provides for the return of the owner's investment in the contract in
equal tax-free amounts over the payment period. The balance of each payment
received is taxable. In the case of variable annuity payments, the amount
excluded from taxable income is determined by dividing the investment in the
contract by the total number of expected payments. In the case of fixed annuity
payments, the amount excluded from income is determined by multiplying the
payment by the ratio of the investment in the contract (adjusted for any refund
feature or period certain) to the total expected value of annuity payments for
the term of the contract.
TAXATION OF ANNUITY DEATH BENEFITS
Amounts may be distributed from an annuity contract because of the death of an
owner or annuitant. Generally, such amounts are includible in income as follows:
(1) if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal or (2) if distributed under an annuity option, the amounts are
taxed in the same manner as an annuity payment.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any premature distribution
from a non-qualified annuity contract. The penalty tax generally applies to any
distribution made prior to the owner attaining age 59 1/2. However, there should
be no penalty tax on distributions to owners (1) made on or after the owner
attains age 59 1/2; (2) made as a result of the owner's death or disability; (3)
made in substantially equal periodic payments over life or distributions under
certain qualified contracts. Please see the Statement of Additional Information
for a discussion of other situations in which the penalty tax may not apply.
AGGREGATION OF ANNUITY CONTRACTS
All non-qualified annuity contracts issued by the Company (or its affiliates) to
the same owner during any calendar year will be aggregated and treated as one
annuity contract for purposes of determining the taxable amount of a
distribution.
<PAGE>
28
TAX QUALIFIED CONTRACTS
Annuity contracts may be used as investments with certain tax qualified plans
such as: (1) Individual Retirement Annuities under Section 408(b) of the Code;
(2) Simplified Employee Pension Plans under Section 408(k) of the Code; (3) Tax
Sheltered Annuities under Section 403(b) of the Code; (4) Corporate and Self
Employed Pension and Profit Sharing Plans; and (5) State and Local Government
and Tax-Exempt Organization Deferred Compensation Plans. In the case of certain
tax qualified plans, the terms of the plans may govern the right to benefits,
regardless of the terms of the contract.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Code provides for tax-deferred retirement savings plans
for employees of certain non-profit and educational organizations. In accordance
with the requirements of Section 403(b), any annuity contract used for a 403(b)
plan must provide that distributions attributable to salary reduction
contributions made after 12/31/88, and all earnings on salary reduction
contributions, may be made only after the employee attains age 59 1/2, separates
from service, dies, becomes disabled or on the account of hardship (earnings on
salary reduction contributions may not be distributed on the account of
hardship).
INCOME TAX WITHHOLDING
The Company is required to withhold federal income tax at a rate of 20% on all
"eligible rollover distributions" unless an individual elects to make a "direct
rollover" of such amounts to another qualified plan or Individual Retirement
Account or Annuity (IRA). Eligible rollover distributions generally include all
distributions from qualified contracts, excluding IRAs, with the exception of
(1) required minimum distributions, or (2) a series of substantially equal
periodic payments made over a period of at least 10 years, or the life (joint
lives) of the participant (and beneficiary). For any distributions from
non-qualified annuity contracts, or distributions from qualified contracts which
are not considered eligible rollover distributions, the Company may be required
to withhold federal and state income taxes unless the recipient elects not to
have taxes withheld and properly notifies the Company of such election.
DISTRIBUTION OF THE CONTRACTS
Allstate Life Financial Services, Inc. ("ALFS"), 3100 Sanders Road, Northbrook
Illinois, a wholly owned subsidiary of Allstate Life, acts as the principal
underwriter of the Contracts. ALFS is registered as a broker-dealer under the
Securities Act of 1934 and became a member of the National Association of
Securities Dealers, Inc. on June 30, 1993. Contracts are sold by registered
representatives of broker-dealers or bank employees who are licensed insurance
agents appointed by the Company, either individually or through an incorporated
insurance agency. In some states, Contracts may be sold by representatives or
employees of banks which may be acting as broker-dealers without separate
registration under the Securities Exchange Act of 1934, pursuant to legal and
regulatory exceptions.
Commissions paid to registered representatives may vary, but in aggregate are
not anticipated to exceed 6% of any purchase payment. In addition, under certain
circumstances, certain sellers of the Contracts may be paid persistency bonuses
which will take into account, among other things, the length of time purchase
payments have been held under a Contract, and Contract Values. A persistency
bonus is not expected to exceed 0.25%, on an annual basis, of the Contract
Values considered in connection with the bonus. These commissions are intended
to cover distribution expenses.
The underwriting agreement with ALFS provides for indemnification by the
Company, to the principal underwriter, for liability to Owners arising out of
services rendered or Contracts issued.
VOTING RIGHTS
The Owner or anyone with a voting interest in the Sub-account of the Variable
Account may instruct the Company on how to vote at shareholder meetings of the
Funds. The Company will solicit and cast each vote according to the procedures
set up by the Funds and to the extent required by law. The Company reserves the
right to vote the eligible shares in its own right, if subsequently permitted by
the Investment Company Act of 1940, its regulations or interpretations thereof.
<PAGE>
29
Fund shares as to which no timely instructions are received will be voted in
proportion to the voting instructions which are received with respect to all
Contracts participating in that Sub-account. Voting instructions to abstain on
any item to be voted upon will be applied on a pro-rata basis to reduce the
votes eligible to be cast.
Before the Payout Start Date, the Owner holds the voting interest in the
Sub-account of the Variable Account (the number of votes for the Owner will be
determined by dividing the Contract Value attributable to a Sub-account by the
net asset value per share of the applicable eligible portfolio).
After the Payout Start Date, the person receiving income payments has the voting
interest. After the Payout Start Date, the votes decrease as income payments are
made and as the reserves for the Contract decrease. That person's number of
votes will be determined by dividing the reserve for such Contract allocated to
the applicable Sub-account by the net asset value per share of the corresponding
eligible portfolio.
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus beginning on page F-1.
GLENBROOK LIFE AND ANNUITY COMPANY
SELECTED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR-END FINANCIAL DATA 1995 1994 1993 1992(2)
- ------------------------------------------------------------------ ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
For The Years Ended December 31:
Income Before Taxes............................................. $ 4,455 $ 2,017 $ 836 $ 337
Net Income...................................................... 2,879 1,294 529 212
As of December 31:
Total Assets(1)................................................. 1,409,705 750,245 169,361 12,183
</TABLE>
- ------------
(1) The Company adopted SFAS No. 115, "Accounting for Certain Instruments in
Debt and Equity Securities" on December 31, 1993. See Note 3 to the
Financial Statements.
(2) For the period from April 1, 1992 (date of acquisition) to December 31,
1992.
<PAGE>
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following highlights significant factors influencing results of operations
and financial position.
Glenbrook Life and Annuity Company ("the Company"), which is wholly owned by
Allstate Life Insurance Company ("Allstate Life"), currently issues flexible
premium fixed annuities, and beginning in 1995, flexible premium deferred
variable annuity contracts through its Separate Accounts. The Company markets
its products through banks and other financial institutions.
The Company reinsures all of its annuity deposits with Allstate Life, and all
life insurance in-force with other reinsurers. Accordingly, the financial
results reflected in the Company's statements of operations relate only to the
investment of those assets of the Company that are not transferred to Allstate
Life or other reinsurers under the reinsurance treaties.
Separate Account assets and liabilities are legally segregated and carried at
fair value in the statements of financial position. The Separate Account
investment portfolios were initially funded with a $10 million seed money
contribution from the Company in 1995. Investment income and realized gains and
losses of the Separate Account investments, other than the portion related to
the Company's participation, accrue directly to the contractholders (net of
fees) and, therefore, are not included in the Company's statements of
operations.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
$ IN THOUSANDS
<S> <C> <C> <C>
Net investment income............................................................ $ 3,996 $ 2,017 $ 753
--------- --------- ---------
Realized capital gains (losses), after tax....................................... $ 298 $ -- $ 54
--------- --------- ---------
Net income....................................................................... $ 2,879 $ 1,294 $ 529
--------- --------- ---------
Fixed income securities, at amortized cost....................................... $ 44,112 $ 51,527 $ 9,543
--------- --------- ---------
</TABLE>
Net investment income increased $2.0 million in 1995, and $1.3 million in 1994.
In both years, the increases were attributable to an increased level of
investments, including the Company's participation in the Separate Accounts
during 1995, and a $40 million capital contribution received from Allstate Life
in the third quarter of 1994. Net income increases of $1.6 million and $0.8
million reflect the change in net investment income in both years.
Realized capital gains after tax of $0.3 million in 1995 were the result of
sales of investments to fund the Company's participation in the Separate
Accounts.
FINANCIAL POSITION
<TABLE>
<CAPTION>
1995 1994
------------ ------------
$ IN THOUSANDS
<S> <C> <C>
Fixed income securities, at fair value................................................ $ 48,815 $ 49,807
------------ ------------
Unrealized net capital gains (losses)(1).............................................. $ 5,164 $ (1,720)
------------ ------------
Separate Account assets, at fair value................................................ $ 15,578 $ --
------------ ------------
Contractholder funds.................................................................. $ 1,340,925 $ 696,854
------------ ------------
Reinsurance recoverable from Allstate Life............................................ $ 1,340,925 $ 696,854
------------ ------------
</TABLE>
- ------------
(1) Unrealized net capital gains (losses) exclude the effect of deferred income
taxes.
<PAGE>
31
Fixed income securities are classified as available for sale and carried in the
statements of financial position at fair value. Although the Company generally
intends to hold its fixed income securities for the long-term, such
classification affords the Company flexibility in managing the portfolio in
response to changes in market conditions.
At December 31, 1995 unrealized capital gains were $5.2 million compared to
unrealized capital losses of $1.7 million at December 31, 1994. The significant
change in the unrealized capital gain/loss position is primarily attributable to
declining interest rates.
At December 31, 1995 both contractholder funds and amounts recoverable from
Allstate Life under reinsurance treaties reflect an increase of $644 million.
These increases result from sales of the Company's single and flexible premium
deferred annuities partially offset by surrenders. Reinsurance recoverable from
Allstate Life relates to policy benefit obligations ceded to Allstate Life.
The Company's participation in the Separate Accounts of $10.5 million at
December 31, 1995 is included in the Separate Accounts assets. Unrealized net
capital gains arising from the Company's participation in the Separate Accounts
was $0.3 million, net of tax, at December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Allstate Life made a $40 million capital contribution to the Company in the
third quarter of 1994.
Under the terms of intercompany reinsurance agreements, assets of the Company
that relate to insurance in-force, excluding Separate Account assets, are
transferred to Allstate Life or other reinsurers, who maintain investment
portfolios which support the Company's products.
COMPETITION
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
competing in the sale of insurance and annuities. There are approximately 2,000
stock, mutual and other types of insurers in business in the United States.
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 the Company. A.M. Best Company also assigns the Company the
rating of A+(r) because the Company automatically reinsures all business with
Allstate Life. Standard & Poor's Insurance Rating Services assigns AA+
(Excellent) to the Company's claims-paying ability and Moody's assigns an Aa3
(Excellent) financial stability rating to the Company. The Company shares the
same ratings of its parent, Allstate Life Insurance Company. These ratings do
not relate to the investment performance of the Variable Account.
EMPLOYEES
As of December 31, 1995, Glenbrook Life and Annuity Company had approximately 43
employees at its home office in Northbrook, Illinois.
PROPERTIES
The Company occupies office space provided by its parent, Allstate Life, in
Northbrook, Illinois. Expenses associated with these offices are allocated on a
direct and indirect basis to the Company.
STATE AND FEDERAL REGULATION
The insurance business of the Company is subject to comprehensive and detailed
regulation and supervision throughout the United States.
The laws of the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum
<PAGE>
32
rates for accumulation of surrender values, prescribing the form and content of
required financial statements and regulating the type and amounts of investments
permitted. Each insurance company is required to file detailed annual reports
with supervisory agencies in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such agencies at
regular intervals.
Under insurance guaranty fund law, in most states, insurers doing business
therein can be assessed up to prescribed limits for contract owner losses
incurred as a result of company insolvencies. The amount of any future
assessments on the Company under these laws cannot be reasonably estimated. Most
of these laws do provide, however, that an assessment may be excused or deferred
if it would threaten an insurer's own financial strength.
In addition, several states, including Illinois, regulate affiliated groups of
insurers, such as the Company and its affiliates, under insurance holding
company legislation. Under such laws, intercompany transfers of assets and
dividend payments from insurance subsidiaries may be subject to prior notice or
approval, depending on the size of such transfers and payments in relation to
the financial positions of the companies.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
controls on medical care costs, 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 and
pension rates and benefits.
<PAGE>
33
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers are listed below, together with information
as to their ages, dates of election and principal business occupations during
the last five years (if other than their present business occupations).
LOUIS G. LOWER, II, 50, Chief Executive Officer and Chairman of the Board
(1995)*
He is also the President of Allstate Life Insurance Company; President and
Chairman of the Board of Allstate Life Insurance Company of New York, Glenbrook
Life Insurance Company, and Northbrook Life Insurance Company; Chairman of the
Board of Allstate Settlement Corporation; Chairman of the Board and Chief
Executive Officer of Lincoln Benefit Life Company and Surety Life Insurance
Company; and a Director of Allstate Insurance Company and Allstate Life
Financial Services, Inc. Prior to January 1, 1990, he was Executive Vice
President of Allstate Life Insurance Company. From 1990 to 1995, he was
President and Chairman of the Board of the Company.
MARLA G. FRIEDMAN, 42, President, Chief Operating Officer and Director (1995)*
She is also Vice President and Director of Allstate Life Insurance Company,
Glenbrook Life Insurance Company, and Northbrook Life Insurance Company; and a
Director of Allstate Life Financial Services, Inc. She was elected a Director of
the Company in 1992. Prior to 1995, she was Vice President and Director of the
Company.
MICHAEL J. VELOTTA, 50, Vice President, Secretary, General Counsel, and Director
(1993)*
He is also Vice President, Secretary, General Counsel and Director of Allstate
Life Insurance Company, Allstate Life Insurance Company of New York, Glenbrook
Life Insurance Company, Northbrook Life Insurance Company and Surety Life
Insurance Company; and a Director of Lincoln Benefit Life Company and Allstate
Life Financial Services, Inc. From 1989 through 1992, he was Vice President,
Assistant General Counsel of Allstate Insurance Company.
PETER H. HECKMAN, 50, Vice President and Director (1992)*
He is also Vice President and Director of Allstate Life Insurance Company; Vice
President of Allstate Life Insurance Company of New York, Northbrook Life
Insurance Company, Glenbrook Life Insurance Company; and Director of Surety Life
Insurance Company and Lincoln Benefit Life Company. He was elected a Director of
the Company in 1992. Prior to 1992, he held all of the above listed positions
except the current position with the Company.
G. CRAIG WHITEHEAD, 50, Senior Vice President, Assistant Vice President and
Director (1995)*
He is also Assistant Vice President and Director of Glenbrook Life Insurance
Company and Assistant Vice President of Allstate Life Insurance Company. Prior
to 1991, he was a director in the strategic planning area of Allstate.
BARRY S. PAUL, 40, Assistant Vice President and Controller (1992)*
He is also Assistant Vice President of Allstate Life Insurance Company;
Assistant Vice President and Corporate Actuary of Allstate Life Insurance
Company of New York; and Assistant Vice President and Controller of Glenbrook
Life Insurance Company and Northbrook Life Insurance Company. Prior to 1992, he
held all of the above listed positions except the current position with the
Company.
JAMES P. ZILS, 44, Treasurer (1995)*
He is also Teasurer of Allstate Life Financial Services, Inc., Allstate
Settlement Corporation, Allstate Life Insurance Company, Allstate Life Insurance
Company of New York, Northbrook Life Insurance Company, Glenbrook Life Insurance
Company, The Northbrook Corporation. He is Treasurer and Vice President of AEI
Group, Inc., Allstate International Inc., Allstate Motor Club, Inc., Direct
Marketing Center, Inc., Enterprises Services Corporation, The Allstate
Foundation, Forestview Mortgage Insurance Company, Allstate Indemnity Company,
Allstate Property and Casualty, Deerbrook Insurance Company, First Assurance
Company, Northbrook Indemnity Company, Northbrook National Insurance Company,
Northbrook Property and Casualty Insurance Company. Prior to 1995 he was Vice
President of Allstate Life Insurance Company. Prior to 1993 he held various
management positions.
<PAGE>
34
CASEY J. SYLLA, 52, Chief Investment Officer (1995)*
He is also Director of Allstate Insurance Company, Allstate Indemnity Company,
Allstate Property and Casualty Insurance Company, Deerbrook Insurance Company,
First Assurance Company, Northbrook Indemnity Company, Northbrook Life Insurance
Company, Northbrook National Insurance Company, Northbrook Property and Casualty
Insurance Company and Allstate Life Insurance Company. He is also Chief
Investment Officer of Allstate Settlement Corporation, The Northbrook
Corporation, Allstate Insurance Company, Allstate Indemnity Company, Allstate
Property and Casualty, Deerbrook Insurance Company, First Assurance Company,
Northbrook Indemnity Company, Northbrook National Insurance Company, Northbrook
Property and Casualty Insurance Company and Allstate Life Insurance Company.
Prior to 1995, he was Senior Vice President and Executive Officer Investments
for Northwestern Mutual Life Insurance Company.
* Date elected to current office.
<PAGE>
35
EXECUTIVE COMPENSATION
Executive officers of the Company also serve as officers of Allstate Life and
receive no compensation directly from the Company. Some of the officers also
serve as officers of other companies affiliated with the Company. Allocations
have been made as to each individual's time devoted to his or her duties as an
executive officer of the Company. However, no officer's compensation allocated
to the Company exceeded $100,000 in 1995. The allocated cash compensation of all
officers of the Company as a group for services rendered in all capacities to
the Company during 1995 totalled $5,976.86. Directors of the Company receive no
compensation in addition to their compensation as employees of the Company.
Shares of the Company and Allstate Life are not directly owned by any director
or officer of the Company. The percentage of shares of The Allstate Corporation
beneficially owned by any director, and by all directors and officers of the
Company as a group, does not exceed one percent of the class outstanding.
SUMMARY COMPENSATION TABLE
(ALLSTATE LIFE INSURANCE CO.)
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ---------------------------- --------------------
----------------------------------- (G)
(F) SECURITIES (H)
(A) (C) (D) (E) RESTRICTED UNDERLYING LTIP (I)
COMPENSATION NAME (B) SALARY BONUS OTHER ANNUAL STOCK OPTIONS/ PAYOUTS ALL OTHER
AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION AWARD(S) SARS (#) ($) ($)
- --------------------------- --------- --------- --------- ------------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louis G. Lower, II......... 1995 $ 416,000 $ 266,175 $ 17,044 $ 199,890 N/A $ 411,122 $ 5,250(1)
Chief Executive Officer
and 1994 $ 389,050 $ 26,950 $ 25,889 $ 170,660 N/A 0 $ 1,890(1)
Chairman of the Board 1993 $ 374,200 $ 294,683 $ 52,443 $ 318,625 N/A $ 13,451 $ 6,296(1)
of Directors
</TABLE>
- ---------------
(1) Amount received by Mr. Lower which represents the value allocated to his
account from employer contributions under the Profit Sharing Fund and to
its predecessor, The Savings and Profit Sharing Fund of Sears employees.
LEGAL PROCEEDINGS
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. Management, after consultation with legal counsel, does not anticipate
the ultimate liability arising from such pending or threatened litigation to
have a material effect on the financial condition of the Company.
EXPERTS
The financial statements of the Variable Account incorporated by reference in
this prospectus, and the financial statements and financial statement schedule
of the Company included in this prospectus have been audited by Deloitte &
Touche LLP, Two Prudential Plaza, 180 North Stetson Avenue, Chicago, Illinois
60601-6779, independent auditors, as stated in their reports appearing herein,
and incorporated by reference in this prospectus, and are included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the federal securities laws applicable to the
issue and sale of the Contracts have been passed upon by Routier and Johnson,
P.C., of Washington, D.C. All matters of Illinois law pertaining to the
Contracts, including the validity of the Contracts and the Company's right to
issue such Contracts under Illinois insurance law, have been passed upon by
Michael J. Velotta, General Counsel of the Company.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
GLENBROOK LIFE AND ANNUITY COMPANY:
We have audited the accompanying Statements of Financial Position of Glenbrook
Life and Annuity Company as of December 31, 1995 and 1994, and the related
Statements of Operations, Shareholder's Equity and Cash Flows for each of the
three years in the period ended December 31, 1995. Our audits also included
Schedule IV -- Reinsurance. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Glenbrook Life and Annuity Company as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, Schedule IV
- -- Reinsurance, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 3 to the financial statements, in 1993 the Company changed
its method of accounting for investments in fixed income securities.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 1, 1996
F-1
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------------ ----------
($ IN THOUSANDS)
<S> <C> <C>
Assets
Investments
Fixed income securities
Available for sale, at fair value (amortized cost $44,112 and $51,527).................. $ 48,815 $ 49,807
Short-term................................................................................ 2,102 924
------------ ----------
Total investments..................................................................... 50,917 50,731
Reinsurance recoverable from Allstate Life Insurance Company................................ 1,340,925 696,854
Cash........................................................................................ 264
Deferred income taxes....................................................................... 542
Other assets................................................................................ 2,021 2,118
Separate Accounts........................................................................... 15,578
------------ ----------
Total assets.......................................................................... $ 1,409,705 $ 750,245
------------ ----------
------------ ----------
Liabilities
Contractholder funds........................................................................ $ 1,340,925 $ 696,854
Income taxes payable........................................................................ 1,637 605
Deferred income taxes....................................................................... 1,828
Net payable to Allstate Life Insurance Company.............................................. 255 128
Separate Accounts........................................................................... 5,048
------------ ----------
Total liabilities..................................................................... 1,349,693 697,587
------------ ----------
Shareholder's equity
Common stock ($500 par value, 4,200 shares authorized, issued, and outstanding)............. 2,100 2,100
Additional capital paid-in.................................................................. 49,641 49,641
Unrealized net capital gains (losses)....................................................... 3,357 (1,118)
Retained income............................................................................. 4,914 2,035
------------ ----------
Total shareholder's equity............................................................ 60,012 52,658
------------ ----------
Total liabilities and shareholder's equity............................................ $ 1,409,705 $ 750,245
------------ ----------
------------ ----------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Net investment income................................................................... $ 3,996 $ 2,017 $ 753
Realized capital gains (losses)......................................................... 459 83
--------- --------- ---------
Income before income taxes................................................................ 4,455 2,017 836
Income tax expense........................................................................ 1,576 723 307
--------- --------- ---------
Net income................................................................................ $ 2,879 $ 1,294 $ 529
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED NET
COMMON CAPITAL CAPITAL GAINS RETAINED
STOCK PAID-IN (LOSSES) INCOME TOTAL
----------- ----------- -------------- ----------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992.................................. $ 2,100 $ 9,641 $ (10) $ 212 $ 11,943
Net income................................................ 529 529
Change in unrealized net capital gains and losses......... 703 703
----------- ----------- ------- ----------- ---------
Balance, December 31, 1993.................................. 2,100 9,641 693 741 13,175
Net income................................................ 1,294 1,294
Capital contribution...................................... 40,000 40,000
Change in unrealized net capital gains and losses......... (1,811) (1,811)
----------- ----------- ------- ----------- ---------
Balance, December 31, 1994.................................. 2,100 49,641 (1,118) 2,035 52,658
Net income................................................ 2,879 2,879
Change in unrealized net capital gains and losses......... 4,475 4,475
----------- ----------- ------- ----------- ---------
Balance, December 31, 1995.................................. $ 2,100 $ 49,641 $ 3,357 $ 4,914 $ 60,012
----------- ----------- ------- ----------- ---------
----------- ----------- ------- ----------- ---------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income........................................................................ $ 2,879 $ 1,294 $ 529
Adjustments to reconcile net income to net cash from operating activities
Deferred income taxes........................................................... (39)
Realized capital gains.......................................................... (459) (83)
Changes in other operating assets and liabilities............................... 1,217 (180) 656
---------- ---------- ---------
Net cash from operating activities............................................ 3,598 1,114 1,102
---------- ---------- ---------
Cash flows from investing activities
Fixed income securities available for sale
Proceeds from sales............................................................. 7,836 3,015
Investment collections.......................................................... 1,568 649 969
Investment purchases............................................................ (1,491) (42,729) (3,737)
Participation in Separate Account................................................. (10,069)
Change in short-term investments, net............................................. (1,178) 667 (1,102)
---------- ---------- ---------
Net cash from investing activities............................................ (3,334) (41,413) (855)
---------- ---------- ---------
Cash flows from financing activities
Capital contribution.............................................................. 40,000
---------- ---------- ---------
Net cash from financing activities............................................ -- 40,000 --
---------- ---------- ---------
Net increase (decrease) in cash..................................................... 264 (299) 247
Cash at beginning of year........................................................... -- 299 52
---------- ---------- ---------
Cash at end of year................................................................. $ 264 -- $ 299
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. ORGANIZATION AND NATURE OF OPERATIONS
Glenbrook Life and Annuity Company (the "Company") is wholly owned by
Allstate Life Insurance Company ("Allstate Life"), which is wholly owned by
Allstate Insurance Company ("Allstate"), a wholly-owned subsidiary of The
Allstate Corporation (the "Corporation"). On June 30, 1995, Sears, Roebuck and
Co. ("Sears") distributed its 80.3% ownership in the Corporation to Sears common
shareholders through a tax-free dividend (the "Distribution").
The Company develops and markets flexible premium deferred variable annuity
contracts and single and flexible premium deferred annuities to individuals
through banks and financial institutions in the United States.
Annuity contracts issued by the Company are subject to discretionary withdrawal
or surrender by the contractholder, subject to applicable surrender charges.
These contracts are reinsured with Allstate Life (Note 4) which selects assets
to meet the anticipated cash flow requirements of the assumed liabilities.
Allstate Life utilizes various modeling techniques in managing the relationship
between assets and liabilities and employs strategies to maintain investments
which are sufficiently liquid to meet obligations to contractholders in various
interest rate scenarios.
The Company monitors economic and regulatory developments which have the
potential to impact its business. Currently there is proposed legislation which
would permit banks greater participation in securities businesses, which could
eventually present an increased level of competition for sales of the Company's
annuity contracts. Furthermore, the federal government may enact changes which
could possibly eliminate the tax-advantaged nature of annuities or eliminate
consumers' need for tax deferral, thereby reducing the incentive for customers
to purchase the Company's products. While it is not possible to predict the
outcome of such issues with certainty, management evaluates the likelihood of
various outcomes and develops strategies, as appropriate, to respond to such
challenges.
Certain reclassifications have been made to the prior year financial statements
to conform to the presentation for the current year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIFE INSURANCE ACCOUNTING
The Company sells long-duration contracts that do not involve significant risk
of policyholder mortality or morbidity (principally single and flexible premium
annuities) which are considered investment contracts.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual contracts that
include an investment component. Payments received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received and interest accrued to the benefit of the contractholder less
withdrawals, mortality charges and administrative expenses. Credited interest
rates on contractholder funds ranged from 3.0% to 7.4% for those contracts with
fixed interest rates and from 4.25% to 7.9% for those with flexible rates during
1995.
SEPARATE ACCOUNTS
During 1995, the Company issued flexible premium deferred variable annuity
contracts, the assets and liabilities of which are legally segregated and
reflected in the accompanying statements of financial position as assets and
liabilities of the Separate Accounts (Glenbrook Life and Annuity Company
Variable Annuity Account and Glenbrook Life and Annuity Company Separate Account
A) unit investment trusts registered with the Securities and Exchange
Commission. Assets of the Separate Accounts are invested in funds of management
investment companies. For certain variable annuity contracts, the Company has
entered into an exclusive distribution arrangement with distributors.
F-6
<PAGE>
7
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The assets of the Separate Accounts are carried at fair value. Unrealized gains
and losses on the Company's participation in the Separate Account, net of
deferred income taxes, is shown as a component of shareholder's equity. The
Company's participation in the Separate Account, amounting to $10,530 at
December 31, 1995, is subject to certain withdrawal restrictions which are
dependent upon aggregate fund net asset values. In addition, limitations exist
with regard to the maximum amount which can be withdrawn by the Company within
any 30-day period.
Investment income and realized gains and losses of the Separate Accounts, other
than the portion related to the Company's participation, accrue directly to the
contractholders and, therefore, are not included in the accompanying statements
of operations. Revenues to the Company from the Separate Accounts consist of
contract maintenance fees, administrative fees and mortality and expense risk
charges, which are entirely ceded to Allstate Life.
REINSURANCE
Beginning June 5, 1992, the Company reinsures all new business to Allstate Life
(Note 4). Life insurance in force prior to that date is ceded to non-affiliated
reinsurers.
Contract charges and credited interest are ceded and reflected net of such
cessions in the statements of operations. Reinsurance recoverable and
contractholder funds are reported separately in the statements of financial
position.
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. Fixed
income securities are carried at fair value. The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a separate
component of shareholder's equity. Provisions are made to write down the
carrying value of fixed income securities for declines in value that are other
than temporary. Such writedowns are included in realized capital gains and
losses.
Short-term investments are carried at cost which approximates fair value.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method, based on the estimated principal repayments. 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.
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred tax
assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities and the enacted tax
rates. Deferred income taxes also arise from unrealized capital gains or losses
on fixed income securities carried at fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-7
<PAGE>
8
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
3. ACCOUNTING CHANGE
Effective December 31, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires that investments classified
as available for sale be carried at fair value. Previously, fixed income
securities classified as available for sale were carried at the lower of
amortized cost or fair value, determined in the aggregate. Unrealized holding
gains and losses are reflected as a separate component of shareholder's equity,
net of deferred income taxes. The net effect of adoption of this statement
increased shareholder's equity at December 31, 1993 by $693, with no impact on
net income.
4. RELATED PARTY TRANSACTIONS
REINSURANCE
Contract charges ceded to Allstate Life under reinsurance agreements were $1,523
and $409 in 1995 and 1994, respectively. Credited interest and expenses ceded to
Allstate Life amounted to $71,905 and $26,177 in 1995 and 1994, respectively.
Investment income earned on the assets which support contractholder funds is not
included in the Company's financial statements as those assets were transferred
to Allstate Life under the terms of reinsurance treaties. Reinsurance ceded
arrangements do not discharge the Company as the primary insurer.
BUSINESS OPERATIONS
The Company utilizes services and business facilities owned or leased, and
operated by Allstate in conducting its business activities. The Company
reimburses Allstate for the operating expenses incurred by Allstate on behalf of
the Company. The cost to the Company is determined by various allocation methods
and is primarily related to the level of services provided. Operating expenses,
including compensation and retirement and other benefit programs, allocated to
the Company were $348, $271 and $59 in 1995, 1994 and 1993, respectively.
Investment-related expenses are retained by the Company. All other costs are
assumed by Allstate Life under reinsurance treaties.
LAUGHLIN GROUP
Laughlin Group, Inc. ("Laughlin"), a wholly-owned subsidiary of Laughlin Group
Holdings Inc., a wholly-owned subsidiary of Allstate Life, which was acquired in
September 1995, is a third-party marketer which distributes the products of
insurance carriers including the Company. Laughlin markets the Company's
flexible premium deferred variable annuity contracts and flexible premium
deferred annuities. Sales commissions paid to Laughlin subsequent to the
acquisition date of $3,439 were ceded to Allstate Life.
5. INCOME TAXES
Allstate Life and its life insurance subsidiaries, including the Company,
will file a consolidated federal income tax return. Tax liabilities and benefits
realized by the consolidated group are allocated as generated by the respective
subsidiaries, whether or not such benefits generated by the subsidiaries would
be available on a separate return basis. The Corporation and its domestic
subsidiaries including the Company (the "Allstate Group"), will be eligible to
file a consolidated tax return beginning in the year 2000.
Prior to the Distribution, the Allstate Group joined with Sears and its domestic
business units (the "Sears Group") in the filing of a consolidated federal
income tax return (the "Sears Tax Group") and were parties to a federal income
tax allocation agreement (the "Tax Sharing Agreement"). As a member of the Sears
Tax Group, the Corporation was jointly and severally liable for the consolidated
income tax liability of the Sears Tax Group. Under the Tax Sharing Agreement,
the Company, through the Corporation, paid to or received from the Sears Group
the amount, if any, by which the Sears Tax Group's federal income tax liability
was affected by virtue of inclusion of the Allstate Group in the consolidated
federal income tax return. Effectively, this resulted in the Company's annual
income tax provision being computed as if the Company filed a separate return,
except that items such as net
F-8
<PAGE>
9
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
5. INCOME TAXES (CONTINUED)
operating losses, capital losses or similar items which might not be immediately
recognizable in a separate return, were allocated according to the Tax Sharing
Agreement and reflected in the Company's provision to the extent that such items
reduced the Sears Tax Group's federal tax liability.
The Allstate Group and Sears Group have entered into an agreement which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution ("Consolidated Tax Years"). The agreement
provides that all Consolidated Tax Years will continue to be governed by the Tax
Sharing Agreement with respect to the Company's federal income tax liability and
taxes payable to or recoverable from the Sears Group.
The components of the deferred income tax assets and liabilities at December 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Unrealized net capital losses on fixed income securities.............................................. -- $ 602
Other................................................................................................. 4
--------- ---------
Total deferred assets............................................................................... -- 606
--------- ---------
--------- ---------
Unrealized net capital gains on fixed income securities............................................... $ (1,807)
Difference in tax bases of investments................................................................ (21)
Other................................................................................................. (64)
--------- ---------
Total deferred liabilities.......................................................................... (1,828) (64)
--------- ---------
Net deferred (liability) asset...................................................................... $ (1,828) $ 542
--------- ---------
--------- ---------
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current................................................................................... $ 1,615 $ 652 $ 290
Deferred.................................................................................. (39) 71 17
--------- --------- ---------
Income tax expense...................................................................... $ 1,576 $ 723 $ 307
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company paid income taxes of $874, $57 and $290 in 1995, 1994 and 1993,
respectively, under the Tax Sharing Agreement. The Company had income tax
payable to Allstate Life of $1,637 and $605 at December 31, 1995 and 1994,
respectively.
F-9
<PAGE>
10
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
6. INVESTMENTS
FAIR VALUES
The amortized cost, fair value and gross unrealized gains and losses for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED --------------------
COST GAINS LOSSES FAIR VALUE
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1995
U.S. government and agencies................................................. $ 24,722 $ 3,470 -- $ 28,192
Corporate.................................................................... 1,304 120 1,424
Mortgage-backed securities................................................... 18,086 1,113 19,199
----------- --------- --------- -----------
Totals..................................................................... $ 44,112 $ 4,703 -- $ 48,815
----------- --------- --------- -----------
----------- --------- --------- -----------
AT DECEMBER 31, 1994
U.S. government and agencies................................................. $ 31,005 $ 30 $ 1,126 $ 29,909
Mortgage-backed securities................................................... 20,522 624 19,898
----------- --------- --------- -----------
Total...................................................................... $ 51,527 $ 30 $ 1,750 $ 49,807
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
SCHEDULED MATURITIES
The scheduled maturities of fixed income securities available for sale at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Due in one year or less.......................................................................... $ 398 $ 403
Due after one year through five years............................................................
Due after five years through ten years........................................................... 15,883 17,681
Due after ten years.............................................................................. 9,745 11,532
----------- ---------
26,026 29,616
Mortgage-backed securities....................................................................... 18,086 19,199
----------- ---------
Total.......................................................................................... $ 44,112 $ 48,815
----------- ---------
----------- ---------
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses on fixed income securities and the
Company's participation in the Separate Account included in shareholder's equity
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED FAIR NET GAINS/
COST VALUE (LOSSES)
----------- --------- -----------
<S> <C> <C> <C>
Fixed income securities.............................................................. $ 44,112 $ 48,815 $ 4,703
Participation in Separate Account.................................................... 10,069 10,530 461
Deferred income taxes................................................................ (1,807)
-----------
Total.............................................................................. $ 3,357
-----------
-----------
</TABLE>
F-10
<PAGE>
11
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
6. INVESTMENTS (CONTINUED)
The change in unrealized net capital gains and losses for fixed income
securities and the Company's participation in the Separate Account is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Fixed income securities.................................................................. $ 6,423 $ (2,786) $ 1,076
Participation in Separate Account in 1995................................................ 461
Deferred income taxes.................................................................... (2,409) 975 (373)
--------- --------- ---------
Change in unrealized net capital gains and losses........................................ $ 4,475 $ (1,811) $ 703
--------- --------- ---------
--------- --------- ---------
</TABLE>
COMPONENTS OF NET INVESTMENT INCOME
Investment income by investment type is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Investment income:
Fixed income securities.................................................................... $ 3,850 $ 1,984 $ 729
Short-term................................................................................. 113 48 35
Participation in Separate Account.......................................................... 69
--------- --------- ---------
Investment income, before expense............................................................ 4,032 2,032 764
Investment expense........................................................................... 36 15 11
--------- --------- ---------
Net investment income........................................................................ $ 3,996 $ 2,017 $ 753
--------- --------- ---------
--------- --------- ---------
</TABLE>
REALIZED CAPITAL GAINS AND LOSSES
Realized capital gains on investments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed income securities............................................................................. $459 $ -- $83
Income tax.......................................................................................... 161 29
---- ---- ----
Net realized gains.................................................................................. $298 $ -- $54
---- ---- ----
---- ---- ----
</TABLE>
PROCEEDS FROM SALES OF FIXED INCOME SECURITIES
The proceeds from sales of investments in fixed income securities, excluding
calls, were $7,836 and $3,015, with related gross realized gains of $459 and $22
for 1995 and 1993, respectively. There were no such amounts realized in 1994.
SECURITIES ON DEPOSIT
At December 31, 1995, fixed income securities with a carrying value of $10,085
were on deposit with regulatory authorities as required by law.
F-11
<PAGE>
12
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
7. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value of all financial
assets other than fixed income securities and all liabilities other than
contractholder funds approximates their carrying value as they are short-term in
nature.
Fair values for fixed income securities are based on quoted market prices. The
December 31, 1995 and 1994 fair values and carrying values of fixed income
securities are discussed in Note 6.
The fair value of contractholder funds 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 fund balance less surrender charge. The fair value of immediate
annuities with fixed terms are estimated using discounted cash flow calculations
based on interest rates currently offered for contracts with similar terms and
duration. Contractholder funds on investment contracts had a carrying value of
$1,340,925 at December 31, 1995 and a fair value of $1,282,248. The carrying
value and fair value at December 31, 1994 were $696,854 and $670,930,
respectively.
8. STATUTORY FINANCIAL INFORMATION
The following tables reconcile net income and shareholder's equity as
reported herein in conformity with generally accepted accounting principles with
statutory net income and capital and surplus, determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities:
<TABLE>
<CAPTION>
NET INCOME
YEAR ENDED
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance per generally accepted accounting principles.................................... $ 2,879 $ 1,294 $ 529
Income taxes.......................................................................... (164) 29 8
Interest maintenance reserve.......................................................... (53) 27
Non-admitted assets and statutory reserves............................................ (46) 15 (47)
--------- --------- ---------
Balance per statutory accounting practices.............................................. $ 2,669 $ 1,285 $ 517
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER'S
EQUITY
DECEMBER 31,
----------------
1995 1994
------- -------
<S> <C> <C>
Balance per generally accepted accounting principles.................................... $60,012 $52,658
Income taxes.......................................................................... 698 (575)
Unrealized net capital gains (losses)................................................. (4,703) 1,719
Non-admitted assets and statutory reserves............................................ (1,702) (1,635)
------- -------
Balance per statutory accounting practices.............................................. $54,305 $52,167
------- -------
------- -------
</TABLE>
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares their statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the insurance
department of the State of Illinois. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners, as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The Company does not follow any permitted statutory
accounting practices that have a material effect on statutory surplus or
risk-based capital.
F-12
<PAGE>
13
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
($ IN THOUSANDS)
8. STATUTORY FINANCIAL INFORMATION (CONTINUED)
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by insurance companies without the prior approval of
the state insurance regulator is limited to formula amounts based on net income
and capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 1996 without prior approval of both the Illinois and California
Departments of Insurance is $5,220.
F-13
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS NET
AMOUNT CEDED AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Life insurance in force.................................................................... $ 1,250 $ 1,250 $ --
--------- --------- ---------
--------- --------- ---------
Premiums and contract charges:
Life and annuities....................................................................... $ 6,571 $ 6,571 $ --
--------- --------- ---------
--------- --------- ---------
<CAPTION>
GROSS NET
AMOUNT CEDED AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Life insurance in force.................................................................... $ 1,250 $ 1,250 $ --
--------- --------- ---------
--------- --------- ---------
Premiums and contract charges:
Life and annuities....................................................................... $ 409 $ 409 $ --
--------- --------- ---------
--------- --------- ---------
<CAPTION>
GROSS NET
AMOUNT CEDED AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Life insurance in force.................................................................... $ 1,250 $ 1,250 $ --
--------- --------- ---------
--------- --------- ---------
Premiums and contract charges:
Life..................................................................................... 6 6 --
Contract charges......................................................................... 70 70 --
--------- --------- ---------
$ 76 $ 76 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
A-1
APPENDIX A
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is based on the following:
I = the Interest Crediting Rate for that Sub-account
N = the number of whole and partial years from the date we receive the transfer,
withdrawal, or death benefit request, or from the Payout Start Date to the
end of the Sub-account's Guarantee Period; and
J = the current interest crediting rate offered for a Guarantee Period or
length N on the date we determine the Market Value Adjustment.
J will be determined by a linear interpolation between the current interest
rates for the next higher and lower integral years. For purposes of
interpolation, current interest rates for Guarantee Periods not available
under this Contract will be calculated in a manner consistent with those
which are available.
The Market Value Adjustment factor is determined from the following formula:
.9 * (I--J)* N
Any transfer, withdrawal, or death benefit paid from a Sub-account of the
Guaranteed Maturity Amount Fixed Account will be multiplied by the Market Value
Adjustment factor to determine the Market Value Adjustment.
ILLUSTRATION
EXAMPLE OF MARKET VALUE ADJUSTMENT
<TABLE>
<S> <C>
Purchase Payment: $10,000
Guarantee Period: 5 years
Interest Rate: 5.55%
Full Surrender: End of Contract Year 3
</TABLE>
NOTE: This illustration assumes that premium taxes were not applicable.
Example 1: (Assumes declining interest rates)
Step 1: Calculate Account Value at End of Contract Year 3:
= 10,000.00 * (1.0555)3 = $11,759.12
Step 2: Calculate the Free Withdrawal Amount
= .10 * 11,759.12 = $1,175.91
Step 3: Calculate the Withdrawal Charge:
= .05 * (10,000.00 - 1,175.91) = $441.20
<PAGE>
A-2
Step 4: Calculate the Market Value Adjustment:
I= 5.55%
J= 5.05%
N =730 days = 2
365 days
Market Value Adjustment Factor: .9 * (I--J) * N
= .9 * (.0555 - .0505) * 730/365 = .009
Market Value Adjustment = Factor * Amount Subject to Market Value Adjustment:
= .009 * 11,759.12 = $105.83
Step 4: Calculate The Amount Received by Customers as a Result of Full
Withdrawal at the end of Contract Year 3:
= 11,759.12 - 441.20 + 105.83 = $11,423.75
Example 2: (Assumes rising interest rates)
Step 1: Calculate Account Value at End of Contract Year 3:
= 10,000.00 * (1.0555)3 = $11,759.12
Step 2: Calculate the Free Withdrawal Amount:
= .10 * (11,759.12) = $1,175.91
Step 3: Calculate the Withdrawal Charge:
= .05 * (10,000.00 - 1,175.91) = $441.20
Step 4: Calculate the Market Value Adjustment:
I= 5.55%
J= 6.05%
N =730 days = 2
365 days
Market Value Adjustment Factor: .9 * (I--J) * N
= .9 * (.0555 - .0605) * (730/365) = -.009
Market Value Adjustment = Factor * Amount Subject to Market Value Adjustment
= -.009 * $11,759.12 = - $105.83
Step 4: Calculate The Amount Received by Customers as a Result of Full
Withdrawal at the end of Contract Year 3:
= 11,759.12 - 441.20 - 105.83 = $11,212.09
<PAGE>
B-1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Additions, Deletions or Substitutions of
Investments................................... 3
Reinvestment.................................... 3
The Contract.................................... 3
Purchase of Contracts......................... 3
Performance Data.............................. 3
Tax-free Exchanges (1035 Exchanges, Rollovers
and Transfers)............................... 5
Premium Taxes................................. 5
Tax Reserves.................................. 5
Income Payments............................... 5
Calculation of Annuity Unit Values............ 5
General Matters................................. 6
Incontestability.............................. 6
Settlements................................... 6
<CAPTION>
PAGE
-----
<S> <C>
Safekeeping of the Variable Account's
Assets....................................... 6
Federal Tax Matters............................. 6
Introduction.................................. 6
Taxation of Glenbrook Life and Annuity
Company...................................... 7
Exceptions to the Non-Natural Owner Rule...... 7
Penalty Tax on Premature Distributions........ 7
IRS Required Distribution at Death Rules...... 7
Qualified Plans............................... 8
Types of Qualified Plans...................... 8
Sales Commissions............................... 9
Variable Account Financial Statements........... F-1
</TABLE>
<PAGE>
B-2
ORDER FORM
Please send me a copy of the most recent Statement of Additional Information for
the Glenbrook Life and Annuity Company Variable Annuity Account.
<TABLE>
<S> <C> <C>
- ------------------- --------------------------------------
(Date) (Name)
--------------------------------------
(Street Address)
--------------------------------------
(City) (State) (Zip Code)
</TABLE>
Send to: Glenbrook Life and Annuity Company
Post Office Box 94042
Palatine, Illinois 60094
Attention: VA Customer Service Unit
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GLENBROOK LIFE AND ANNUITY COMPANY
VARIABLE ANNUITY ACCOUNT
OFFERED BY
GLENBROOK LIFE AND ANNUITY COMPANY
3100 SANDERS ROAD
NORTHBROOK, IL 60062
1-800/755-5275
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY CONTRACTS
This Statement of Additional Information supplements the information in the
prospectus for the Individual Flexible Premium Deferred Variable Annuity
Contract offered by Glenbrook Life and Annuity Company ("Company"), a wholly
owned subsidiary of Allstate Life Insurance Company. The Contract is primarily
designed to aid individuals in long-term financial planning and it can be used
for retirement planning regardless of whether the plan qualifies for special
federal income tax treatment. The prospectus may be obtained from Glenbrook Life
and Annuity Company by writing or calling the address or telephone number listed
above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT
THE PROSPECTUS, DATED MAY 1, 1996, HAS BEEN FILED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
DATED MAY 1, 1996.
<PAGE>
2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Additions, Deletions or Substitutions of
Investments................................. 3
Reinvestment.................................. 3
The Contract.................................. 3
Purchase of Contracts....................... 3
Performance Data............................ 3
Tax-free Exchanges (1035 Exchanges,
Rollovers and Transfers)................... 5
Premium Taxes............................... 5
Tax Reserves................................ 6
Income Payments............................... 6
Calculation of Annuity Unit Values.......... 6
General Matters............................... 6
Incontestability............................ 6
Settlements................................. 6
<CAPTION>
PAGE
-----
<S> <C>
Safekeeping of the Variable Account's
Assets..................................... 6
Federal Tax Matters........................... 7
Introduction................................ 7
Taxation of Glenbrook Life and Annuity
Company.................................... 7
Exceptions to the Non-Natural Owner Rule.... 7
Penalty Tax on Premature Distributions...... 8
IRS Required Distribution at Death Rules.... 8
Qualified Plans............................. 8
Types of Qualified Plans.................... 8
Sales Commissions............................. 9
Variable Account Financial Statements......... F-1
</TABLE>
<PAGE>
3
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
The Company retains the right, subject to any applicable law, to make additions
to, deletions from or substitutions for the Portfolio shares held by any
Sub-account of the Variable Account. The Company reserves the right to eliminate
the shares of any of the Portfolios and to substitute shares of another
Portfolio of the Funds, or of another open-end, registered investment company,
if the shares of the Portfolio are no longer available for investment, or if, in
the Company's judgment, investment in any Portfolio would become inappropriate
in view of the purposes of the Variable Account. Substitutions of shares
attributable to an Owner's interest in a Sub-account will not be made until the
Owner has been notified of the change, and until the Securities and Exchange
Commission has approved the change, to the extent such notification and approval
is required by the Investment Company Act of 1940. Nothing contained in this
Statement of Additional Information shall prevent the Variable Account from
purchasing other securities for other series or classes of contracts, or from
effecting a conversion between series or classes of contracts on the basis of
requests made by Owners.
The Company may also establish additional Sub-accounts or series of Sub-accounts
of the Variable Account. Each additional Sub-account would purchase shares in a
new Portfolio of the Fund or in another mutual fund. New Sub-accounts may be
established when, in the sole discretion of the Company, marketing needs or
investment conditions warrant. Any new Sub-accounts offered in conjunction with
the Contract will be made available to existing Owners on a basis to be
determined by the Company. The Company may also eliminate one or more
Sub-accounts if, in its sole discretion, marketing, tax or investment conditions
so warrant.
In the event of any such substitution or change, the Company may, by appropriate
endorsement, make such changes in the Contract as may be necessary or
appropriate to reflect such substitution or change. If deemed to be in the best
interests of persons having voting rights under the policies, the Variable
Account may be operated as a management company under the Investment Company Act
of 1940 or it may be deregistered under such Act in the event such registration
is no longer required.
REINVESTMENT
All dividends and capital gains distributions from the Portfolios are
automatically reinvested in shares of the distributing Portfolio at their net
asset value.
THE CONTRACT
PURCHASE OF CONTRACTS
The Contracts are offered to the public through banks as well as brokers
licensed under the federal securities laws and state insurance laws. The
Contracts are distributed through the principal underwriter for the Variable
Account, Allstate Life Financial Services, Inc., an affiliate of Glenbrook Life
and Annuity Company. The offering of the Contracts is continuous and the Company
does not anticipate discontinuing the offering of the Contracts. However, the
Company reserves the right to discontinue the offering of the Contracts.
PERFORMANCE DATA
From time to time the Variable Account may publish advertisements containing
performance data relating to its Sub-accounts. The performance data for the
Sub-accounts (other than for the Federated Prime Money Fund II Sub-account) will
always be accompanied by total return quotations. Performance figures used by
the Variable Account are based on actual historical performance of its
Sub-accounts for specified periods, and the figures
<PAGE>
4
are not intended to indicate future performance. The Variable Account may also
disclose yield, standard total return, and non-standard total return for periods
prior to the date that the Variable Account commenced operations. For periods
prior to the date the Variable Account commenced operations, performance
information for the Sub-accounts will be calculated based on the performance of
the underlying Funds and the assumption that the Sub-accounts were in existence
for the same periods as those of the underlying Funds, with a level of charges
equal to those currently assessed against the Sub-accounts.
A Sub-account's "average annual total return" represents an annualization of the
Sub-account's total return over a particular period and is computed by finding
the annual percentage rate which, 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 Sub-account's operations, if shorter than any of the foregoing. The average
annual total return is obtained by dividing the ending redeemable value, after
deductions for any Withdrawal Charges or Contract Maintenance Charges imposed on
the Contracts by the Variable Account, by the initial hypothetical $1,000
Purchase Payment, taking the "n"th root of the quotient (where "n" is the number
of years in the period) and subtracting 1 from the result.
The Withdrawal Charges assessed upon redemption are computed as follows: no
Withdrawal Charge is assessed on 10% of the Contract Value, as determined on the
date of the first withdrawal during the Contract Year. Withdrawal Charges are
charged on the amount of redemption equal to the Purchase Payment, reduced by
the amount entitled to the 10% exception, if any. The remaining amount of the
redemption, if any, is not assessed a Withdrawal Charge. The Withdrawal Charge
Schedule specifies rates based on the number of complete years since the
Purchase Payment being withdrawn was made. One rate is specified for Purchase
Payments made in the current Contract Year, another rate for Purchase Payments
made in the prior Contract Year, another rate for Purchase Payments made in the
second prior Contract Year, and so on until a rate for Purchase Payments made in
the seventh prior Contract Year or prior to it is reached. For a one year total
return calculation the second rate, (i.e., the rate for Purchase Payments made
in the prior complete year since Purchase Payment being withdrawn was made), is
assessed. The Contract Maintenance Charge ($30 per contract) used in the total
return calculation is normally prorated using the following method: The total
amount of annual Contract fees collected during the year is divided by the total
average net assets of all the Sub-accounts. The resulting percentage is then
multiplied by the ending Contract Value.
The standard total returns for the Sub-accounts for the period of each
Sub-account's operations during 1995 are presented below. Note that these total
returns have not been annualized.
<TABLE>
<CAPTION>
STANDARDIZED TOTAL RETURN
FOR THE PERIOD FROM
INCEPTION OF THE SUB-ACCOUNT
SUB-ACCOUNT (10/6/95) TO 12/31/95
- ----------------------------------------------------------------------------- ----------------------------
<S> <C>
Investment Grade Bond........................................................ -2.94%
Capital Growth............................................................... 0.33%
Value Income................................................................. 0.68%
Mid-Cap Equity............................................................... -3.45%
Federated Prime Money Fund II................................................ N/A
</TABLE>
<PAGE>
5
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the Surrender Charge. These are
calculated in exactly the same way as the average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered.
The non-standard total returns for the Sub-acounts (not including deduction of
the Surrender Charge), for the period of each Sub-account's operations during
1995 are presented below. Note that these total returns have not been
annualized.
<TABLE>
<CAPTION>
NON-STANDARDIZED TOTAL RETURN
FOR THE PERIOD FROM
INCEPTION OF THE SUB-ACCOUNT
SUB-ACCOUNT (10/6/95) TO 12/31/95
- ----------------------------------------------------------------------------- -----------------------------
<S> <C>
Investment Grade Bond........................................................ 3.36%
Capital Growth............................................................... 6.61%
Value Income................................................................. 6.96%
Mid-Cap Equity............................................................... 2.85%
Federated Prime Money Fund II................................................ N/A
</TABLE>
The Variable Account may also advertise the performance of the Sub-accounts
relative to certain performance rankings and indexes compiled by independent
organizations, such as: (a) Lipper Analytical Services, Inc.; (b) the Standard &
Poor's 500 Composite Stock Price Index ("S & P 500"); (c) A.M. Best Company; (d)
Bank Rate Monitor; and (e) Morningstar.
TAX-FREE EXCHANGES (1035 EXCHANGES, ROLLOVERS AND TRANSFERS)
The Company accepts Purchase Payments which are the proceeds of a Contract in a
transaction qualifying for a tax-free exchange under Section 1035 of the
Internal Revenue Code. Except as required by federal law in calculating the
basis of the Contract, the Company does not differentiate between Section 1035
Purchase Payments and non-Section 1035 Purchase Payments.
The Company also accepts "rollovers" and transfers from Contracts qualifying as
tax-sheltered annuities ("TSAs"), individual retirement annuities or accounts
("IRAs"), or any other Qualified Contract which is eligible to "rollover" into
an IRA. The Company differentiates among Non-Qualified Contracts, TSAs, IRAs and
other Qualified Contracts to the extent necessary to comply with federal tax
laws. For example, the Company restricts the assignment, transfer or pledge of
TSAs and IRAs so the Contracts will continue to qualify for special tax
treatment. An Owner contemplating any such exchange, rollover or transfer of a
Contract should contact a competent tax adviser with respect to the potential
effects of such a transaction.
PREMIUM TAXES
Applicable premium tax rates depend on the Owner's state of residency and the
insurance laws and status of the Company in those states where premium taxes are
incurred. Premium tax rates may be changed by legislation, administrative
interpretations or judicial acts.
<PAGE>
6
TAX RESERVES
The Company does not establish capital gains tax reserves for the Sub-account
nor deduct charges for tax reserves because the Company believes that capital
gains attributable to the Variable Account will not be taxable. However, the
Company reserves the right to deduct charges to establish tax reserves for
potential taxes on realized or unrealized capital gains.
INCOME PAYMENTS
CALCULATION OF VARIABLE ANNUITY UNIT VALUES
The amount of the first Income Payment is calculated by applying the Contract
Value allocated to each Variable Sub-account less any applicable premium tax
charge deducted at this time, to the income payment tables in the Contract. The
first Variable Annuity Income Payment is divided by the Sub-account's then
current Annuity Unit value to determine the number of Annuity Units upon which
later Income Payments will be based. Variable Annuity Income Payments after the
first will be equal to the sum of the number of Annuity Units determined in this
manner for each Sub-account times the then current Annuity Unit value for each
respective Sub-account.
Annuity Units in each variable Sub-account are valued separately and Annuity
Unit values will depend upon the investment experience of the particular
Portfolios in which the Sub-account invests. The value of the Annuity Unit for
each variable Sub-account at the end of any Valuation Period is calculated by:
(a) multiplying the Annuity Unit Value at the end of the immediately preceding
Valuation Period by the Sub-accounts's Net Investment Factor during the period;
and then (b) dividing the product by the sum of 1.0 plus the assumed investment
rate for the period. The assumed investment rate adjusts for the interest rate
assumed in the Income Payment tables used to determine the dollar amount of the
first Variable Annuity Income Payment, and is at an effective annual rate which
is disclosed in the Contract.
The amount of the first Income Payment paid under an income plan is determined
using the interest rate and mortality table disclosed in the Contract. Due to
judicial or legislative developments regarding the use of tables which do not
differentiate on the basis of sex, different annuity tables may be used.
GENERAL MATTERS
INCONTESTABILITY
The Contract will not be contested after it is issued.
SETTLEMENTS
The Contract must be returned to the Company prior to any settlement. Due proof
of the Owner(s) death (or Annuitant's death if there is a non-natural Owner)
must be received prior to settlement of a death claim.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
The Company holds title to the assets of the Variable Account. The assets are
kept physically segregated and held separate and apart from the Company's
general corporate assets. Records are maintained of all purchases and
redemptions of the Portfolio shares held by each of the variable Sub-accounts.
<PAGE>
7
The Funds do not issue certificates and, therefore, the Company holds the
Account's assets in open account in lieu of stock certificates. See the Funds'
prospectuses for a more complete description of the custodian of the Funds.
FEDERAL TAX MATTERS
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax
consequences of ownership or receipt of distributions under an annuity contract
depend on the individual circumstances of each person. If you are concerned
about any tax consequences with regard to your individual circumstances, you
should consult a competent tax adviser.
TAXATION OF GLENBROOK LIFE AND ANNUITY COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code. The following discussion assumes that the Company is
taxed as a life insurance company under Part I of Subchapter L. Since the
Variable Account is not an entity separate from the Company, and its operations
form a part of the Company, it will not be taxed separately as a "regulated
Investment Company" under Subchapter M of the Code. Investment income and
realized capital gains are automatically applied to increase reserves under the
contract. Under existing federal income tax law, the Company believes that the
Variable Account investment income and realized net capital gains will not be
taxed to the extent that such income and gains are applied to increase the
reserves under the contract.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Variable Account, and therefore the
Company does not intend to make provisions for any such taxes.
However, if changes in the federal tax laws or interpretations thereof result in
the Company being taxed on income or gains attributable to the Variable Account,
then the Company may impose a charge against the Variable Account (with respect
to some or all contracts) in order to set aside provisions to pay such taxes.
EXCEPTIONS TO THE NON-NATURAL OWNER RULE
There are several exceptions to the general rule that contracts held by a
non-natural owner are not 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.
<PAGE>
8
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any payment received from a
non-qualified annuity contract unless the payment is: (1) made after the owner
reaches 59 1/2; (2) attributable to the owner's disability; (3) attributable to
investment before August 14, 1982, including earnings on pre-August 14, 1982
investments; (4) made from certain qualified contracts; (5) made after the death
of the owner; (6) made under an immediate annuity contract; (7) made from an
annuity purchased and held by an employer upon the termination of a qualified
retirement plan; (8) made under a qualified funding asset; (9) made as part of a
series of substantially equal periodic payments (not less frequently than
annually) for the life or life expectancy of the owner or the joint lives or the
joint life expectancies of the owner and designated beneficiary. Similar rules
apply in the case of qualified contracts.
IRS REQUIRED DISTRIBUTION AT DEATH RULES
In order to be considered an annuity contract for federal income tax purposes,
an annuity contract must provide: (1) if any owner dies on or after the annuity
start date but before the entire interest in the contract has been distributed,
the remaining portion of such interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of the owner's
death; (2) if any owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which is payable to (or for the benefit of) a designated
beneficiary is distributed over the life of such beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary) and the
distributions begin within one year of the owner's death. If the owner's
designated beneficiary is the surviving spouse of the owner, the contract may be
continued with the surviving spouse as the new owner. If the owner of the
contract is a non-natural person, then the annuitant will be treated as the
owner for purposes of applying the distribution at death rules. In addition, a
change in the annuitant on a contract owned by a non-natural person will be
treated as the death of the owner.
QUALIFIED PLANS
This annuity contract may be used with several types of qualified plans. The tax
rules applicable to participants in such qualified plans vary according to the
type of plan and the terms and conditions of the plan itself. Adverse tax
consequences may result from excess contributions, premature distributions,
distributions that do not conform to specified commencement and minimum
distribution rules, excess distributions and in other circumstances. Owners and
participants under the plan and annuitants and beneficiaries under the contract
may be subject to the terms and conditions of the plan regardless of the terms
of the contract.
TYPES OF QUALIFIED PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity.
Individual Retirement Annuities are subject to limitations on the amount that
can be contributed and on the time when distributions may commence. Certain
distributions from other types of qualified plans may be "rolled over" on a
tax-deferred basis into an Individual Retirement Annuity.
<PAGE>
9
SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' individual retirement
annuities if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to their individual retirement annuities.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase annuity contracts for them, and subject
to certain limitations, to exclude the purchase payments from the employees'
gross income. An annuity contract used for a Section 403(b) plan must provide
that distributions attributable to salary reduction contributions made after
12/31/88, and all earnings on salary reduction contributions, may be made only
after the employee attains age 59 1/2, separates from service, dies, becomes
disabled or on the account of hardship (earnings on salary reduction
contributions may not be distributed for hardship).
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Sections 401(a) and 403(a) of the Code permit corporate employers to establish
various types of tax favored retirement plans for employees. The Self-Employed
Individuals Retirement Act of 1962, as amended, (commonly referred to as "H.R.
10" or "Keogh") permits self-employed individuals to establish tax favored
retirement plans for themselves and their employees. Such retirement plans may
permit the purchase of annuity contracts in order to provide benefits under the
plans.
STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION DEFERRED COMPENSATION
PLANS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. Under these plans, contributions made for the benefit of the
employees will not be includible in the employees' gross income until
distribution from the plan.
SALES COMMISSIONS
Commissions paid to registered representatives may vary, but in aggregate are
not anticipated to exceed 6.0% of any purchase payment. In addition, under
certain circumstances, certain sellers of the Contracts may be paid persistency
bonuses which will take into account, among other things, the length of time
purchase payments have been held under a Contract, and Contract Values. A
persistency bonus is not expected to exceed 0.25%, on an annual basis, of the
Contract Values considered in connection with the bonus. These commissions are
intended to cover distribution expenses.
VARIABLE ACCOUNT FINANCIAL STATEMENTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
GLENBROOK LIFE AND ANNUITY COMPANY
We have audited the accompanying Statement of Net Assets of Glenbrook Life And
Annuity Company Variable Annuity Account (the "Account") as of December 31,
1995, and the related Statements of Operations and Changes in Net Assets for the
period from October 6, 1995 (date operations commenced), to December 31, 1995,
of the Capital Growth, Investment Grade Bond, Aggressive Growth, Value Income
Portfolios and the Prime Money Fund that comprise the Account. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1995. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Account as of December 31, 1995, and the
results of its operations and the changes in net assets of each of the funds
comprising the Account for the period from October 6, 1995 (date operations
commenced), to December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 1, 1996
F-1
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY VARIABLE ANNUITY ACCOUNT
STATEMENT OF NET ASSETS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in the STI Classic Variable Trust:
Capital Growth Portfolio
354,551 shares (cost $3,594,555)......................................... $3,777,951
Investment Grade Bond Portfolio
294,052 shares (cost $2,944,428)......................................... 3,012,573
Aggressive Growth Portfolio
331,862 shares (cost $3,334,229)......................................... 3,409,003
Value Income Portfolio
376,142 shares (cost $3,814,241)......................................... 4,014,776
Investments in the Insurance Management Series:
Prime Money Fund
1,333,324 shares (cost $1,333,324)....................................... 1,333,324
----------
Total assets......................................................... 15,547,627
LIABILITIES
Payable to Glenbrook Life and Annuity Company --
Accrued contract maintenance charges....................................... 674
----------
Net assets........................................................... $15,546,953
----------
----------
COMPONENTS OF NET ASSETS
Equity of Contractholders $5,016,998
Equity of Glenbrook Life and Annuity Company 10,529,955
----------
$15,546,953
----------
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-2
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 6, 1995
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
INSURANCE
MANAGEMENT
STI CLASSIC VARIABLE TRUST SERIES
------------------------------------------- ----------
INVESTMENT
CAPITAL GRADE AGGRESSIVE VALUE PRIME
GROWTH BOND GROWTH INCOME MONEY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND TOTAL
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends............. $ 12,349 $ 34,320 $ 15,808 $ 22,244 $ 6,513 $ 91,234
Less charges from
Glenbrook Life and
Annuity Company:
Mortality and
expense risk....... (1,148 ) (500 ) (994 ) (1,388 ) (2,459 ) (6,489)
Administrative
expense............ (92 ) (40 ) (79 ) (111 ) (197 ) (519)
--------- ---------- --------- --------- ---------- ---------
Net investment income... 11,109 33,780 14,735 20,745 3,857 84,226
--------- ---------- --------- --------- ---------- ---------
REALIZED AND UNREALIZED
GAINS AND LOSSES ON
INVESTMENTS:
Realized gains and
losses from sales of
investments:
Proceeds from
sales.............. 213 213 330 246 478,457 479,459
Cost of investments
sold............... (210 ) (212 ) (332 ) (240 ) (478,457 ) (479,451)
--------- ---------- --------- --------- ---------- ---------
Net realized gains and
losses................. 3 1 (2 ) 6 -- 8
--------- ---------- --------- --------- ---------- ---------
Change in unrealized
gains and losses....... 183,396 68,145 74,774 200,535 -- 526,850
--------- ---------- --------- --------- ---------- ---------
Net gains and losses on
investments............ 183,399 68,146 74,772 200,541 -- 526,858
--------- ---------- --------- --------- ---------- ---------
CHANGE IN NET ASSETS
RESULTING FROM
OPERATIONS............. $194,508 $ 101,926 $ 89,507 $221,286 $ 3,857 $ 611,084
--------- ---------- --------- --------- ---------- ---------
--------- ---------- --------- --------- ---------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY VARIABLE ANNUITY ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM OCTOBER 6, 1995
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
INSURANCE
MANAGEMENT
STI CLASSIC VARIABLE TRUST SERIES
---------------------------------------------- -----------
INVESTMENT
CAPITAL GRADE AGGRESSIVE VALUE PRIME
GROWTH BOND GROWTH INCOME MONEY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO TOTAL
---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment
income......... $ 11,109 $ 33,780 $ 14,735 $ 20,745 $ 3,857 $ 84,226
Net realized
gains and
losses......... 3 1 (2 ) 6 8
Net change in
unrealized
gains and
losses......... 183,396 68,145 74,774 200,535 526,850
---------- ---------- ---------- ---------- ----------- -----------
194,508 101,926 89,507 221,286 3,857 611,084
---------- ---------- ---------- ---------- ----------- -----------
FROM CAPITAL
TRANSACTIONS:
Additions
(deductions):
Deposits...... 3,144,887 2,823,934 3,060,703 3,203,011 2,720,805 14,953,340
Benefit
payments..... --
Payments on
termination... (845) (34 ) (846) (3,240 ) (4,965)
Contract
maintenance
charges...... (149) (56 ) (111 ) (179) (179 ) (674)
Transfers
among the
portfolios
and with the
Fixed
Account,
net.......... 439,401 86,747 258,793 591,325 (1,388,098 ) (11,832)
---------- ---------- ---------- ---------- ----------- -----------
3,583,294 2,910,591 3,319,385 3,793,311 1,329,288 14,935,869
---------- ---------- ---------- ---------- ----------- -----------
Increase in net
assets........... 3,777,802 3,012,517 3,408,892 4,014,597 1,333,145 15,546,953
Net assets,
beginning of
period........... -- -- -- -- -- --
---------- ---------- ---------- ---------- ----------- -----------
Net assets, end of
period........... $3,777,802 $3,012,517 $3,408,892 $4,014,597 $1,333,145 $15,546,953
---------- ---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ---------- ----------- -----------
NET ASSET VALUE
PER UNIT, END OF
PERIOD........... $ 10.66 $ 10.34 $ 10.29 $ 10.68 $ 10.05
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
CONTRACTHOLDER
UNITS
OUTSTANDING, END
OF PERIOD........ 103,697 40,503 80,549 124,596 132,650
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM OCTOBER 6, 1995
(DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1995
1. ORGANIZATION
Glenbrook Life and Annuity Company Variable Annuity Account (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 Glenbrook
Life and Annuity Company ("Glenbrook Life"), which is wholly owned by Allstate
Life Insurance Company ("Allstate Life"), a wholly-owned subsidiary of Allstate
Insurance Company ("Allstate"), which is wholly owned by The Allstate
Corporation (the "Corporation"). The Account was established on December 15,
1992, by resolution of the Board of Directors of Glenbrook Life and began
accepting contractholder deposits on October 6, 1995.
Glenbrook Life writes certain annuity contracts, the proceeds of which are
invested at the discretion of the contractholder. Contractholders primarily
invest in units of the portfolios comprising the Account, for which they bear
investment risk. The Account, in turn, invests solely in shares of the
portfolios of the STI Classic Variable Trust and Insurance Management
Series.(collectively the "Funds"). The contractholder may also invest in the
general account of Glenbrook Life ("Fixed Account"). Glenbrook Life provides
administrative and insurance services to the Account for a fee.
During 1995, Glenbrook Life made an initial investment of $10 million (
"seed money") in the Account to enhance the diversification of the Account's
investments. Glenbrook Life has agreed to certain restrictions, including
requirements that the aggregate net asset value of any individual portfolio
equals or exceeds $10 million, excluding the value of shares attributable to the
seed money, prior to redemption, and that Glenbrook Life shall not redeem more
than $500,000 from any one portfolio within any 30-day period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Valuation of investments
Investments consist of shares of the Funds which are stated at fair value
based on quoted market prices.
Recognition of investment income
Investment income consists of dividends declared by the Funds, and is
recognized on the date of record.
Realized gains and losses
Realized gains and losses on the sale of shares by the Account are computed
on a weighted average cost ("cost") basis.
Contractholder account activity
Account activity is reflected in individual contractholder accounts on a
daily basis.
For each year or portion of a year a contract is in effect, Glenbrook Life
deducts a fixed annual contract maintenance charge of $30 as reimbursement for
expenses related to the maintenance of each contract and the Account. The amount
of this charge is guaranteed not to increase over the life of the contract. This
charge is waived if the total purchase payments are $25,000 or more on a
contract anniversary, or if all money is allocated to the Fixed Account on the
contract anniversary.
F-5
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Federal income taxes
Net investment income and realized gains and losses on investments of the
Account are taxable to the contractholders generally upon distribution.
Accordingly, no provision for income taxes has been recorded.
3. MORTALITY AND EXPENSE CHARGES
Glenbrook Life assumes mortality and expense risks related to the operations
of the Account and deducts charges daily at a rate, on an annual basis, equal to
1.25% of the daily net assets of the Account. Glenbrook Life guarantees that the
amount of this charge will not increase over the life of the contract.
4. ADMINISTRATIVE EXPENSE CHARGE
Glenbrook Life deducts administrative expense charges daily at a rate, on an
annual basis, equal to .10% of the daily net assets of the Account. This charge
is designed to cover additional administrative expenses.
5. CONTRACTHOLDER UNITS ISSUED AND REDEEMED
Contractholder units issued and redeemed by the Account during 1995 were as
follows:
<TABLE>
<CAPTION>
INSURANCE
MANAGEMENT
STI CLASSIC VARIABLE TRUST SERIES
---------------------------------------------- -----------
INVESTMENT
CAPITAL GRADE AGGRESSIVE VALUE PRIME
GROWTH BOND GROWTH INCOME MONEY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
CONTRACTHOLDER
UNITS OUTSTANDING
OCTOBER 6, 1995
(DATE OPERATIONS
COMMENCED)....... -- -- -- -- --
Contractholder
unit activity
from October 6,
1995 (date
operations
commenced) to
December 31, 1995
Issued.......... 103,890 40,611 80,659 124,696 273,325
Redeemed........ (193) (108 ) (110 ) (100) (140,675 )
---------- ---------- ---------- ---------- -----------
CONTRACTHOLDER
UNITS
OUTSTANDING,
DECEMBER 31,
1995............. 103,697 40,503 80,549 124,596 132,650
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
UNITS REDEEMED INCLUDES UNITS DEDUCTED FOR ACCRUED CONTRACT MAINTENANCE CHARGES.
F-6
