<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY 3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062 (800) 776-6978
FLEXIBLE PAYMENT DEFERRED ANNUITY CONTRACTS
AND
SINGLE PAYMENT DEFERRED ANNUITY CONTRACTS
This prospectus describes the Flexible Payment Deferred Annuity Contract and the
Single Payment Deferred Annuity Contract ("Contracts") offered by Glenbrook Life
and Annuity Company ("Company"), a wholly owned subsidiary of Allstate Life
Insurance Company. Allstate Life Financial Services, Inc., a wholly owned
subsidiary of Allstate Life Insurance Company, is the principal underwriter.
The Contracts are issued as individual Contracts or as group Contracts. In
states where the Contracts are available only as group Contracts, a certificate
is issued that summarizes the provisions of the group Contract. For convenience,
this prospectus refers to both Contracts and certificates as "Contracts."
The Contracts have the flexibility to allow You to shape an annuity to fit your
particular needs. The Flexible Payment Deferred Annuity Contract ("Flexible
Payment Contract") permits You to add additional purchase payments to your
Flexible Payment Contract. Additional purchase payments of any amount may be
added to the Flexible Payment Contract until the Payout Start Date.
The Single Payment Deferred Annuity Contract permits You to plan for retirement
with one single purchase payment. The Contracts are designed to aid You in your
choice of short-term, mid-term, or long-term financial planning and can be used
for retirement planning regardless of whether the plan qualifies for special
federal income tax treatment. The Company will accept a minimum initial purchase
payment of $5,000 for the Contracts ($2,000 for Qualified Contracts). The
maximum issue age for both the Owner and the Annuitant is age 90.
Withdrawals under the Contracts may be subject to a Market Value Adjustment.
Therefore, the Owner bears some investment risk under the Contracts.
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 are not deposits, or obligations of, or guaranteed by
such institutions or any federal regulatory agency. Investment in the Contracts
involves investment risks, including possible loss of principal. These Contracts
are not FDIC insured.
The Securities and Exchange Commission has not approved or disapproved these
securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Please read this prospectus carefully and retain it for future reference.
The Contracts may not be available in all states.
At least once each Contract Year prior to the Payout Start Date, the Company
will send You an annual statement that contains certain information pertinent to
your individual Contract. The annual statement details values and specific
Contract data for each Contract. The annual statement does not contain financial
statements of the Company although the Company's financial statements are on
page F-1 of this prospectus.
The Company files annual and quarterly reports and other information with the
SEC. You may read and copy any reports, statements or other information We file
at the SEC's public reference room in Washington, DC. You can request copies of
these documents upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings are also available to the public on the
SEC Internet site (http://www.sec.gov).
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.
PROSPECTUS
May 1, 1998
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TABLE OF CONTENTS
PAGE
GLOSSARY.................................................................. 3
THE CONTRACTS............................................................. 4
The Purchase of Contracts................................................. 4
The Accumulation Phase.................................................... 4
Adjustments to Account Value (Withdrawal Charge, Market Value Adjustment
and Taxes)................................................................ 6
The Parties to the Contract............................................... 8
The Death Benefit Provisions.............................................. 8
The Payout Phase.......................................................... 9
AMENDMENT OF THE CONTRACTS................................................ 10
DISTRIBUTION OF THE CONTRACTS............................................. 11
FEDERAL TAX MATTERS....................................................... 11
Introduction.............................................................. 11
Taxation of the Company................................................... 11
Taxation of Annuities in General.......................................... 11
Tax Deferral......................................................... 11
Delayed Maturity Date................................................ 11
Taxation of Partial and Full Withdrawals............................. 11
Taxation of Annuity Payments......................................... 12
Taxation of Annuity Death Benefits................................... 12
Penalty Tax on Premature Distributions............................... 12
Aggregation of Annuity Contracts..................................... 12
IRS Required Distribution at Death Rules............................. 12
Qualified Plans........................................................... 12
Types of Qualified Plans.................................................. 13
Individual Retirement Annuities...................................... 13
Roth Individual Retirement Annuities................................. 13
Simplified Employee Pension Plans.................................... 13
Savings Incentive Match Plans for Employees (SIMPLE Plans)........... 13
Tax Sheltered Annuities................................................... 13
Corporate and Self-Employed Pension and Profit Sharing Plans.............. 13
State and Local Government and Tax-Exempt Organization Deferred
Compensation Plans................................................... 14
Income Tax Withholding.................................................... 14
THE COMPANY............................................................... 14
Business.................................................................. 14
Reinsurance Agreements.................................................... 14
Investments by the Company................................................ 14
SELECTED FINANCIAL DATA................................................... 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................ 15
COMPETITION............................................................... 19
EMPLOYEES................................................................. 19
PROPERTIES................................................................ 19
STATE AND FEDERAL REGULATION.............................................. 19
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY........................... 20
EXECUTIVE COMPENSATION.................................................... 22
LEGAL PROCEEDINGS......................................................... 22
EXPERTS................................................................... 22
LEGAL MATTERS............................................................. 22
FINANCIAL STATEMENTS...................................................... F-1
APPENDIX A................................................................ A-1
<PAGE>
GLOSSARY
ACCOUNT--An Account consists of funds that are allocated to a Guarantee Period.
An Account is established when a purchase payment is made or when a previous
Guarantee Period expires and a new Guarantee Period is selected.
ACCOUNT VALUE--The Account Value is equal to the funds allocated to an
Account(s) plus interest credited less any withdrawals.
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 Payment Deferred
Annuity Contract ("Flexible Payment Contract"), or the Glenbrook Life and
Annuity Company Single Payment Deferred Annuity Contract ("Single Payment
Contract") known as "The Glenbrook Value Reserve" that is described in this
prospectus. The Flexible Payment Contract and the Single Payment Contract are
collectively referred to as the "Contracts".
CONTRACT ANNIVERSARY--An anniversary of the date that the Contract was issued.
CONTRACT VALUE--The sum of the Account Values.
CONTRACT YEAR--A period of 12 months starting with the issue date or any
Contract Anniversary.
DEATH BENEFIT--The Death Benefit is equal to either the Contract Value or the
amount that would have been payable in the event of a full withdrawal of the
Contract Value on the date We determine the Death Benefit.
FREE WITHDRAWAL AMOUNT--A portion of the Account Value which may be withdrawn
each year without incurring a Withdrawal Charge or a Market Value Adjustment.
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 on the Payout Start Date.
ISSUE DATE--The date the Contract becomes effective.
MARKET VALUE ADJUSTMENT--The Market Value Adjustment is an increase or decrease
in a withdrawal payment, an increase in a Death Benefit payment, or an increase
or decrease in an amount applied to an Income Plan reflecting the impact of
changes in interest rates between the time the Account was established and the
time of distribution.
OWNER(S)("YOU")--The person or persons designated as the Owner(s) in the
Contract.
PAYOUT START DATE--The date the Contract Value adjusted by any Market Value
Adjustment is applied to an Income Plan.
TREASURY RATE--The U.S. Treasury Note Constant Maturity weekly yield as reported
in Federal Reserve Bulletin Release H.15.
WITHDRAWAL CHARGE--The charge that is assessed by the Company on withdrawals in
excess of the Free Withdrawal Amount.
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THE CONTRACTS
THE PURCHASE OF CONTRACTS
1. WHAT IS THE PURPOSE OF THE CONTRACTS?
The Contracts described in this prospectus are designed to aid You in your
choice of short-term, mid-term, or long-term financial planning and can be used
for retirement planning regardless of whether the plan qualifies for special
federal income tax treatment. The Flexible Payment Contract permits You to add
additional purchase payments to your Flexible Payment Contract. The Single
Payment Contract permits You to plan for retirement with one single purchase
payment. The Contracts have an accumulation phase and a payout phase. The
accumulation phase is the first phase and begins on the Issue Date and continues
until the Payout Start Date. During the accumulation phase, interest is credited
to your purchase payment and both a cash withdrawal benefit and a Death Benefit
are available. The payout phase begins on the Payout Start Date and provides
income payments under an Income Plan You select. The payout phase continues
until the Company makes the last payment as provided by the Income Plan.
2. HOW ARE THE CONTRACTS PURCHASED?
The minimum initial purchase payment the Company will accept is $5,000 ($2,000
for qualified Contracts). Additional purchase payments of any amount may be
added to the Flexible Payment Contract until the Payout Start Date. The Owner of
a Flexible Payment Contract may make additional purchase payments by check or
through automatic additions. The Company reserves the right to limit the number
of additional purchase payments it will accept. The maximum issue age for both
the Owner and the Annuitant is age 90. The Owner must select the Guarantee
Period(s) in which to allocate the purchase payment. The Owner may elect to
allocate the purchase payments to one Guarantee Period or may split the purchase
payments between many Guarantee Periods. The Company expects to offer Guarantee
Periods for 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 years for the Flexible Payment
Contract and a limited number of Guarantee Periods for the Single Payment
Contract. Guarantee Periods will be offered at the Company's discretion and may
range from one to fifteen years. The Company reserves the right to limit or
increase the amount of the purchase payments it will accept.
3. DO THE CONTRACTS HAVE A FREE-LOOK PROVISION?
Yes. The Owner may cancel the Contract within 20 days after receipt of the
Contract, or longer if required by state law, and receive a full refund of the
initial purchase payment.
4. ONCE A CONTRACT IS PURCHASED, HOW IS THE OWNER INFORMED AS TO THE STATUS OF
THE CONTRACT?
At least once a year, prior to the Payout Start Date, the Owner will be sent a
statement containing information about the Account Value of the Contract. In
addition, the Owner can call the Company's Customer Support Unit directly at
1-800-776-6978 at any time.
THE ACCUMULATION PHASE
5. HOW IS INTEREST CREDITED TO THE CONTRACTS?
Interest will be credited to the purchase payments from the Issue Date or, under
the Flexible Payment Contract, from the date of receipt for additional purchase
payments. No deductions are made from the purchase payment. Therefore, the full
amount of the purchase payment is invested in an Account for accumulation of
interest. Interest is credited daily to each Guarantee Period in the Contract
and is based upon the interest rate structure of the Guarantee Period which has
been chosen. For current interest rate information, please contact your sales
representative or the Company's Customer Support Unit at 1-800-776-6978.
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The following example illustrates how an Account Value would grow given an
assumed purchase payment, Guarantee Period, and effective annual interest rate.
The effective annual interest rate is defined as the amount resulting when
interest credited at the underlying daily rate has compounded for a full year.
EXAMPLE OF INTEREST CREDITING DURING THE GUARANTEE PERIOD:
Purchase Payment:...................................................$10,000.00
Guarantee Period:................................................... 5 years
Assumed Effective Annual Rate:...................................... 4.50%
<TABLE>
<CAPTION>
END OF CONTRACT YEAR:
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Beginning Account Value $10,000.00
x (1 + Effective Annual Rate) 1.045
----------
$10,450.00
Account Value at end of Contract $10,450.00
year 1 x (1 + Effective Annual Rate) 1.045
----------
$10,920.25
Account Value at end of Contract $10,920.25
year 2 x (1 + Effective Annual Rate) 1.045
----------
$11,411.66
Account Value at end of Contract $11,411.60
year 3 x (1 + Effective Annual Rate) 1.045
----------
$11,925.19
Account Value at end of Contract $11,925.19
year 4 x (1 + Effective Annual Rate) 1.045
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$12,461.82
----------
Total Interest Credited in Guarantee Period: $2,461.82 ($12,461.82 - $10,000.00)
</TABLE>
NOTE: The above illustration assumes no withdrawals of any amount during
the entire five-year period. A Market Value Adjustment and Withdrawal
Charge would apply to any such interim withdrawal in excess of the Free
Withdrawal Amount. The hypothetical interest rate is for illustrative
purposes only and is not intended to predict future interest rates
declared under the Contract. Actual interest rates declared for any given
Guarantee Period may be more or less than shown above.
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.
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.
6. WHAT HAPPENS TO THE ACCOUNT VALUE AT THE END OF A GUARANTEE PERIOD?
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. Within 30 days
after the end of a Guarantee Period the Owner may:
- take no action and the Company will automatically apply the Account
Value to a new Guarantee Period of the same duration as the expiring
Guarantee Period to be established on the day the previous Guarantee
Period expired; or
- notify the Company to apply the Account Value to a new Guarantee
Period(s) to be established on the - day the previous Guarantee Period
expired; or
- receive a portion of the Account Value or the entire Account Value
through a partial or full withdrawal that is not subject to a Market
Value Adjustment (Withdrawal Charges may apply). In this case, the
amount withdrawn will be deemed to have been withdrawn on the day the
Guarantee Period expired.
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7. IS IT POSSIBLE TO PRESELECT A RENEWAL GUARANTEE PERIOD AT THE POINT OF
PURCHASE?
Yes. The Automatic Laddering Program allows the Owner to choose, in advance, one
renewal Guarantee Period for the renewing Account. 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.
8. CAN A PARTIAL WITHDRAWAL OR A FULL WITHDRAWAL BE TAKEN AT ANY TIME?
Yes. As long as the Contract is still in the accumulation phase and has not
entered the payout phase, the Owner may withdraw money from the Contract or
surrender the Contract at any time (a Withdrawal Charge, Market Value Adjustment
and taxes may apply, including a 10% penalty tax for withdrawals prior to the
Owner attaining age 59 1/2). Partial withdrawals may be taken automatically
through systematic withdrawals. The Owner must specify the Account from which
the withdrawal will be taken. If a partial withdrawal reduces the Contract Value
to less than $2,000, the withdrawal will be treated as a request to withdraw the
entire Contract Value. If You withdraw the entire Contract Value, the Contract
will terminate. The Company may defer payment of any partial withdrawal or full
withdrawal for a period not exceeding six months from the date of the receipt of
the request.
ADJUSTMENTS TO ACCOUNT VALUE (WITHDRAWAL CHARGE, MARKET VALUE ADJUSTMENT AND
TAXES)
9. IF A PARTIAL WITHDRAWAL OR FULL WITHDRAWAL IS REQUESTED, HOW IS THE AMOUNT
RECEIVED DETERMINED?
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 requested. A Market Value Adjustment
may apply which may reduce or increase the amount requested. Premium taxes and
federal income tax withholding may apply and would reduce the amount requested.
In summary:
The amount received by the Owner under a partial withdrawal or full withdrawal
request equals the amount requested less a Withdrawal Charge (if applicable)
plus or minus a Market Value Adjustment (if applicable) less premium taxes and
withholding (if applicable).
The questions which follow further clarify the components used in determining
the amount received upon a partial withdrawal or full withdrawal.
10. UPON A PARTIAL WITHDRAWAL OR FULL WITHDRAWAL, IS THE ENTIRE AMOUNT REQUESTED
SUBJECT TO A WITHDRAWAL CHARGE AND A MARKET VALUE ADJUSTMENT?
No. Only amounts in excess of the Free Withdrawal Amount will be subject to a
Withdrawal Charge and a Market Value Adjustment. Each year the Free Withdrawal
Amount for each Account is equal to 10% of the purchase payments. Any Free
Withdrawal Amount which is not actually withdrawn in a year may not be carried
over to increase the Free Withdrawal Amount in a following year. Also, the Free
Withdrawal Amount that is not withdrawn from one Account may not be transferred
to increase a Free Withdrawal Amount in another Account.
In addition to the Free Withdrawal Amount, any funds withdrawn which are within
the first 30 days of their renewal Guarantee Period will be completely free from
any Market Value Adjustment.
11. WHAT IS THE WITHDRAWAL CHARGE UPON A PARTIAL WITHDRAWAL OR FULL WITHDRAWAL?
The amount withdrawn from the Account Value in excess of the Free Withdrawal
Amount is subject to the following Withdrawal Charge:
PURCHASE PAYMENT YEAR 1 2 3 4 5 6 7 8 AND LATER
- --------------------- - - - - - - - -----------
Percentage.............................. 7% 7% 6% 5% 4% 3% 2% 0%
For each withdrawal, the year in the above table is measured starting from the
date We receive the purchase payment.
The Withdrawal Charge is determined by multiplying the percentage corresponding
to the purchase payment year times the amount withdrawn in excess of the Free
Withdrawal Amount.
At the expiration of the 5 year and the 6 year Guarantee Periods, any funds
withdrawn which are within the first 30 days of their renewal Guarantee Period
will be completely free from Withdrawal Charges.
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For Flexible Payment Contracts only, the Company will waive any Withdrawal
Charge and any Market Value Adjustment prior to the Payout Start Date if at
least 30 days after the Issue 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 and the request for a withdrawal and adequate
written proof of confinement are received by Us no later than 90 days after
discharge. Confinement is prescribed by a physician and is medically necessary;
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.
12. WHAT IS THE MARKET VALUE ADJUSTMENT UPON A PARTIAL OR FULL WITHDRAWAL, AT
DEATH, OR APPLIED TO AN INCOME PLAN?
The Market Value Adjustment will be applied to all amounts withdrawn, some
amounts paid at death, or all amounts applied to an Income Plan which are not
exempt from adjustment as discussed in question 10.
The Market Value Adjustment reflects the relationship between (1) the current
Treasury Rate at the time of request for withdrawal, death, or Income Plan
payment request for a maturity equal to the Account Guarantee Period, and (2)
the original Treasury Rate at the time the Account was established for a
maturity equal to the Account Guarantee Period. Since current Treasury Rates are
the basis for the investment yields at the time, and current interest rates are
based, in part, upon investment yields available when the Account was
established, 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.
Generally, if the original Treasury Rate at the time the Account was established
is higher than the applicable current Treasury Rate (interest rate for a period
equal to the Account Guarantee Period), then the Market Value Adjustment will
result in a higher amount payable to the Owner. Similarly, if the original
Treasury Rate at the time the Account was established is lower than the current
Treasury Rate, then the Market Value Adjustment will result in a lower amount
payable to the Owner.
For example, assume the Owner purchases a Contract and selects an initial
Guarantee Period of five years and the Treasury Rate for that duration is 4.50%.
Assume that at the end of three years, the Owner makes a partial withdrawal. If,
at that later time, the current Treasury Rate for a five year Guarantee Period
is 4.20%, 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
Treasury Rate for the five year Guarantee Period is 4.80%, 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.
13. THE IRS REQUIRES ANNUAL WITHDRAWALS TO BE TAKEN FROM QUALIFIED CONTRACTS
UPON ATTAINMENT OF AGE 70 1/2. WILL THESE WITHDRAWALS INCUR WITHDRAWAL CHARGES
AND MARKET VALUE ADJUSTMENTS?
No. Both the Withdrawal Charge and the Market Value Adjustment will be waived on
withdrawals taken to satisfy IRS required minimum distribution rules for this
Contract.
14. WHAT ARE THE TAX IMPLICATIONS ASSOCIATED WITH THE CONTRACTS?
It varies based upon the Owner's circumstances. Generally, the two areas which
may give rise to a taxable situation are personal federal and state income
taxation and taxation of the Company.
With respect to personal federal and state income tax, an annuity contract owner
who is a natural person is not taxed on increases in the contract value until a
distribution occurs. For federal income tax purposes, distributions include the
receipt of proceeds from an assignment or pledge of any portion of the value of
the contract, as well as withdrawals, income payments, or death benefits. In
addition, personal federal and state income tax withholding may be deducted from
partial withdrawal and full withdrawal payments. Amounts withheld for personal
taxes do not necessarily represent the Owner's entire income tax liability.
With respect to taxation of the Company, premium taxes and other applicable
taxes imposed on the Company may be deducted from the Contract's purchase
payment or Contract Value upon a full withdrawal or annuitization of the
Contract. Current premium tax rates range from 0 to 3.5%, but are subject to
change by state regulation.
There are several exceptions to the above generalizations. More complete
information can be found in the "Federal Tax Matters" section found on page 11
of this prospectus.
<PAGE>
THE PARTIES TO THE CONTRACT
15. WHAT RIGHTS DOES AN OWNER HAVE UNDER THIS CONTRACT?
This Contract offers the Owner several rights. The Owner may:
- receive any withdrawals or periodic income payments from the Contract,
unless the Owner has directed the Company to pay them to someone else;
- name and change the Owner, Beneficiary, and Annuitant (only if the
Owner is a natural person);
- assign periodic income payments under the Contract prior to the Payout
Start Date;
- elect a Death Benefit option upon death of a co-Owner or Annuitant if
the Owner is not a natural person; and
- terminate the Contract.
The above may be subject to the rights of any irrevocable Beneficiary.
16. WHAT PURPOSE DOES THE ANNUITANT SERVE?
The Annuitant's life determines the income payments which will begin on the
Payout Start Date. This Contract requires an Annuitant at all times during the
accumulation phase and on the Payout Start Date. The Annuitant must be a natural
person. A Death Benefit may be payable upon the death of the Annuitant only if
the Owner is not a natural person. Joint Annuitants are only permitted on or
after the Payout Start Date.
17. WHO IS THE BENEFICIARY TO THE CONTRACT?
The Beneficiary varies based upon who the Owner is, and the designation of the
parties to the Contract by the Owner. The Beneficiary will be determined from
the most recent written request of the Owner. If the Owner does not name a
Beneficiary or if the Beneficiaries named are no longer living, the Beneficiary
will be:
- a contingent beneficiary named by the Owner; otherwise
- the Owner's spouse if living; otherwise
- the Owner's children, equally, if living; otherwise
- the Owner's estate.
18. WHAT PURPOSE DOES THE BENEFICIARY SERVE?
The Beneficiary becomes the new Owner if the sole surviving Owner dies prior to
the Payout Start Date. If the sole surviving Owner dies after the Payout Start
Date, the Beneficiary will receive any guaranteed income payments scheduled to
continue.
THE DEATH BENEFIT PROVISIONS
19. UPON DEATH OF THE OWNER, WHO IS THE NEW OWNER OF THE CONTRACT?
The new Owner is any surviving joint Owner(s) or if none, the Beneficiary(ies).
20. UPON DEATH OF THE OWNER, WHAT OPTIONS DOES THE NEW OWNER HAVE?
If the Owner eligible to receive a distribution upon death is not a natural
person, then the Owner may elect to receive the distribution upon death in one
or more distributions as long as all distributions are completed within five
years of death. Otherwise, if the Owner is a natural person, the Owner may elect
to receive a distribution upon death in one or more distributions or periodic
payments through an Income Plan.
A Death Benefit will be paid: 1) if the Owner elects to receive the Death
Benefit in a single payment distributed within 180 days of the date of death;
and 2) if the Death Benefit is paid as of the day the value of the Death Benefit
is determined. Otherwise the settlement value will be paid. The settlement value
is the same amount that would be paid in the event of withdrawal of the Contract
Value. The Company will calculate the settlement value at the end of the period
coinciding with the requested distribution date for payment or on the mandatory
distribution date of 5 years after the date of death. The Company is currently
waiving the 180 day limit. The Company reserves the right to enforce the
limitation in the future.
<PAGE>
In any event, the entire distribution upon death must be distributed within five
years after the date of death unless an Income Plan is selected or a surviving
spouse continues the Contract in accordance with the following sections:
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.
Prior to the Payout Start Date, the benefit is equal to the greatest of:
(a) the Contract Value on the date the Company determines the Death
Benefit; or
(b) the amount that would have been payable in the event of a full
withdrawal of the Contract Value on the date the Company determines
the Death Benefit; or
If the new Owner is the spouse of the deceased Owner, the new Owner may
elect to continue the Contract. See question 21, below.
The Company will not settle any death claims until it receives due proof of
death.
21. IF THE NEW OWNER IS THE SURVIVING SPOUSE OF THE DECEASED OWNER, WHAT HAPPENS
TO THE CONTRACT UPON THE OWNER'S DEATH?
In addition to the options available in question 20, the surviving spouse of the
deceased Owner has the following options:
- continue the Contract as if the death had not occurred; and
- if the Contract is continued, one withdrawal of any amount within one
year of the date of death is allowed without incurring a Withdrawal
Charge. However, a Market Value Adjustment will apply.
22. IF THE OWNER IS NOT THE ANNUITANT AND THE ANNUITANT DIES PRIOR TO THE PAYOUT
START DATE, WHAT HAPPENS TO THE CONTRACT?
In most cases, the Contract will continue as if the death had not occurred and
the new Annuitant will be the youngest Owner. However, when the Annuitant dies
and the Owner is not a natural person, the Owner may elect to receive the
distribution upon death in one or more distributions within five years of the
Annuitant's death. A Death Benefit will be paid: 1) if the Owner elects to
receive the Death Benefit in a single payment distributed within 180 days of the
date of death; and 2) if the Death Benefit is paid as of the day the value of
the Death Benefit is determined. Otherwise, the settlement value will be paid.
The Company is currently waiving the 180 day limit. The Company reserves the
right to enforce the limitation in the future.
THE PAYOUT PHASE
23. WHAT IS THE PAYOUT START DATE?
The date on which the accumulation phase ceases and the payout phase begins.
During the payout phase, the Owner receives income payments based upon an Income
Plan selected by the Owner. The payout phase will continue until the Company
makes the last payment as provided by the Income Plan chosen. The Owner may
change the Payout Start Date 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 at least one month after the Issue Date and on or before:
- the Annuitant's 90th birthday; or
- the 10th anniversary of the Contract's Issue Date, whichever is later.
24. WHAT TYPES OF INCOME PLANS ARE AVAILABLE IN THE CONTRACT?
Income payments are made under an Income Plan which may be chosen by the Owner.
The types of Income Plans which are available are as follows:
<PAGE>
LIFE INCOME WITH GUARANTEED PAYMENTS--Payments will be made for the life of
the Annuitant. If the Annuitant dies before all the guaranteed payments
have been made, the remainder of the guaranteed payments will be made to
the Owner; or
JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS--Payments will be
made for the life of either the Annuitant or joint Annuitant. If both the
Annuitant and joint Annuitant die before all the guaranteed payments have
been made, the remainder of the guaranteed payments will be made to the
Owner; or
GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD--Payments will be made for a
specified period beginning on the Payout Start Date. Payments under this
option do not depend on the continuation of the Annuitant's life.
Any period for which payments are guaranteed may range from 60 to 360 months. If
any Owner dies, guaranteed income payments will continue as scheduled. Up to 30
days before the Payout Start Date, the Owner may change the Income Plan or
request any other form of Income Plan agreeable to both the Company and the
Owner. If the Company does not receive a written choice from the Owner, the
Income Plan will be life income with 120 monthly guaranteed payments. If an
Income Plan is chosen which depends on the Annuitant's or joint Annuitant's
life, proof that the Annuitant or joint Annuitant is still alive before each
payment and proof of age and sex may be required before income payments begin.
The Company reserves the right to offer other Income Plans.
25. HOW ARE THE INCOME PAYMENTS FROM AN INCOME PLAN DETERMINED?
To determine the income payments, the Contract Value, adjusted by any Market
Value Adjustment less any applicable premium taxes, will be applied to the
greater of:
- payment plan rates declared by the Company; or
- guaranteed payment plan rates as described in the Contract.
If the monthly income 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 premium taxes, in a lump sum or change the
payment frequency to an interval which results in income payments of at least
$20.
The Contracts are based on life annuity 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 dollar amount of income payments is generally affected by the duration of
the Income Plan selected. For example, if an Income Plan Guaranteed for Life is
chosen, the income payments may be greater or lesser than income payments under
an Income Plan for a specified period depending on the life expectancy of the
Annuitant. Also, the Company may require proof that the Annuitant or joint
Annuitant is still alive before the Company makes each payment that depends on
either Annuitant's continued life.
26. CAN PARTIAL WITHDRAWALS BE TAKEN FROM THE CONTRACT OR CAN THE CONTRACT BE
SURRENDERED ONCE IT HAS ENTERED THE PAYOUT PHASE?
No. After the Contract Value has been applied to an Income Plan on the Payout
Start Date, the Income Plan can not be changed, the exchange of the Contract
Value for an Income Plan can not be reversed, and no withdrawals can be made.
AMENDMENT OF THE CONTRACTS
The Company reserves the right to amend the Contracts to meet the requirements
of applicable federal or state laws or regulations. The Company will notify the
Owner of any such amendments.
<PAGE>
DISTRIBUTION OF THE CONTRACTS
Allstate Life Financial Services, Inc. ("ALFS"), 3100 Sanders Road, Northbrook,
Illinois, a wholly owned subsidiary of Allstate Life Insurance Company, acts as
the principal underwriter of the Contracts. ALFS is registered as a
broker-dealer under the Securities Exchange 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 unaffiliated broker-dealers or bank
employees who are licensed insurance agents appointed by the Company, either
individually or through an incorporated insurance agency and who have entered
into a selling agreement with ALFS and the Company to sell the Contract. In some
states, Contracts may be sold by representatives or employees of banks that may
be acting as broker-dealers without separate registration under the Securities
Exchange Act of 1934, pursuant to legal and regulatory exceptions.
Commissions paid may vary, but in aggregate are not anticipated to exceed 8% 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
1.20%, 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 between the Company and ALFS provides that the
Company will indemnify ALFS for certain damages that may be caused by actions,
statements or omissions by the Company.
The Company and ALFS reserve the right to offer the Contract at a special
interest rate(s) for specific time periods to customers of certain broker-
dealers. The Company and ALFS may also negotiate special commissions with such
broker-dealers.
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 THE 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.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL
In general, an annuity contract owned by a natural person is not taxed on
increases in the contract value until a distribution occurs. Annuity contracts
owned by nonnatural persons are generally 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 exceptions to the nonnatural owner rule and You should discuss these with
your tax advisor.
DELAYED MATURITY DATE
If the contract's scheduled maturity date is at a time when the annuitant has
reached an advanced age, it is possible that the contract would not be treated
as an annuity. In that event, the income and gains under the contract would be
currently includible in the owner's income.
<PAGE>
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal under a non-qualified contract, amounts
received are taxable to the extent the contract value, without regard to any
surrender charges, exceeds the investment in the contract. The investment in the
contract is the gross premium or other consideration paid for the contract
reduced by any amounts previously received from the contract to the extent such
amounts were properly excluded from the owner's gross income. In the case of a
partial withdrawal under a qualified contract, the portion of the payment that
bears the same ratio to the total payment that the investment in the contract
bears to the contract value, can be excluded from income. No definitive guidance
exists on the proper tax treatment of Market Value Adjustments, so you should
contact a competent tax advisor with respect to the potential tax consequences
of a Market Value Adjustment. 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 fixed annuity payments, the amount excluded
from income is determined by multiplying the payment by the ratio of the
investment in the contract (adjusted for any refund feature or period certain)
to the total expected value of annuity payments for the term of the contract.
Once the total amount of the investment in the contract is excluded using this
ratio, the annuity payments will be fully taxable. If annuity payments cease
because of the death of the annuitant before the total amount of the investment
in the contract is recovered, the unrecovered amount will be allowed as a
deduction to the annuitant for his last taxable year.
TAXATION OF ANNUITY DEATH BENEFITS
Amounts may be distributed from an annuity contract because of the death of an
owner or annuitant. Generally, such amounts are includible in income as follows:
(1) if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal or (2) if distributed under an annuity option, the amounts are
taxed in the same manner as an annuity payment.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
There is a 10% penalty tax on the taxable amount of any premature distribution
from a non-qualified annuity contract. The penalty tax generally applies to any
distribution made prior to the date the owner attains age 59 1/2. However, there
should be no penalty tax on distributions to owners (1) made on or after the
date the owner attains age 59 1/2; (2) made as a result of an owner's death or
disability; (3) made in substantially equal periodic payments over life or life
expectancy; or (4) made under an immediate annuity. Similar rules apply for
distributions from qualified contracts. Consult a competent tax advisor for
other possible exceptions to the penalty tax.
AGGREGATION OF ANNUITY CONTRACTS
All non-qualified deferred annuity contracts issued by the Company (or its
affiliates) to the same owner during any calendar year will be aggregated and
treated as one annuity contract for purposes of determining the taxable amount
of a distribution.
IRS REQUIRED DISTRIBUTION AT DEATH RULES
In order to be considered an annuity contract for federal income tax purposes,
an annuity contract must provide: (1) if any owner dies on or after the annuity
start date but before the entire interest in the contract has been distributed,
the remaining portion of such interest must be distributed at least as rapidly
as under the method of distribution being used as of the date of the owner's
death; (2) if any owner dies prior to the annuity start date, the entire
interest in the contract will be distributed within five years after the date of
the owner's death. These requirements are satisfied if any portion of the
owner's interest which is payable to, or for the benefit of, a designated
beneficiary is distributed over the life of such beneficiary (or over a period
not extending beyond the life expectancy of the beneficiary) and the
distributions begin within one year of the owner's death. If the owner's
designated beneficiary is the surviving spouse of the owner, the contract may be
continued with the surviving spouse as the new owner. If the owner of the
contract is a nonnatural person, then the annuitant will be treated as the owner
for purposes of applying the distribution at death rules. Also, a change of
annuitant on a contract owned by a nonnatural person will be treated as the
death of the owner.
<PAGE>
QUALIFIED PLANS
This annuity contract may be used with several types of qualified plans. The tax
rules applicable to participants in such qualified plans vary according to the
type of plan and the terms and conditions of the plan itself. Adverse tax
consequences may result from excess contributions, premature distributions,
distributions that do not conform to specified commencement and minimum
distribution rules, excess distributions and in other circumstances. Owners and
participants under the plan and annuitants and beneficiaries under the contract
may be subject to the terms and conditions of the plan regardless of the terms
of the contract.
TYPES OF QUALIFIED PLANS
INDIVIDUAL RETIREMENT ANNUITIES
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity.
Individual Retirement Annuities are subject to limitations on the amount that
can be contributed and on the time when distributions may commence. Certain
distributions from other types of qualified plans may be "rolled over" on a
tax-deferred basis into an Individual Retirement Annuity.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth Individual
Retirement Annuity. Roth Individual Retirement Annuities are subject to
limitations on the amount that can be contributed and on the time when
distributions may commence. "Qualified distributions" from Roth Individual
Retirement Annuities are not includible in gross income. "Qualified
distributions" are any distributions made more than five taxable years after the
taxable year of the first contribution to the Roth Individual Retirement
Annuity, and which are made on or after the date the individual attains age 59
1/2 , made to a beneficiary after the owner's death, attributable to the owner
being disabled or for a first time home purchase (first time home purchases are
subject to a lifetime limit of $10,000). "Nonqualified distributions" are
treated as made from contributions first and are includible in gross income to
the extent such distributions exceed the contributions made to the Roth
Individual Retirement Annuity. The taxable portion of a "nonqualified
distribution" may be subject to the 10% penalty tax on premature distributions.
Subject to certain limitations, a traditional Individual Retirement Account or
Annuity may be converted or "rolled over" to a Roth Individual Retirement
Annuity. The taxable portion of a conversion or rollover distribution is
includible in gross income, but is exempted from the 10% penalty tax on
premature distributions.
SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408(k) of the Code allows employers to establish simplified employee
pension plans for their employees using the employees' Individual Retirement
Annuities if certain criteria are met. Under these plans the employer may,
within specified limits, make deductible contributions on behalf of the
employees to their Individual Retirement Annuities.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE PLANS)
Sections 408(p) and 401(k) of the Code allow employers with 100 or fewer
employees to establish SIMPLE retirement plans for their employees. SIMPLE plans
may be structured as a SIMPLE retirement account using an employee's Individual
Retirement Annuity to hold the assets or as a Section 401(k) qualified cash or
deferred arrangement. In general, a SIMPLE plan consists of a salary deferral
program for eligible employees and matching or nonelective contributions made by
employers. Employers intending to use the contract in conjunction with SIMPLE
plans should seek competent tax and legal advice.
TAX SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees of
certain types of tax-exempt organizations (specified in Section 501(c)(3) of the
Code) to have their employers purchase annuity contracts for them, and subject
to certain limitations, to exclude the purchase payments from the employees'
gross income. An annuity contract used for a Section 403(b) plan must provide
that distributions attributable to salary reduction contributions made after
12/31/88, and all earnings on salary reduction contributions, may be made only
on or after the date the employee attains age 59 1/2, separates from service,
dies, becomes disabled or on the account of hardship (earnings on salary
reduction contributions may not be distributed for hardship).
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.
<PAGE>
STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION DEFERRED COMPENSATION
PLANS
Section 457 of the Code permits employees of state and local governments and
tax-exempt organizations to defer a portion of their compensation without paying
current taxes. The employees must be participants in an eligible deferred
compensation plan. To the extent the contracts are used in connection with an
eligible plan, employees are considered general creditors of the employer and
the employer as owner of the contract has the sole right to the proceeds of the
contract. Generally, under the non-natural owner rules, such contracts are not
treated as annuity contracts for federal income tax purposes. However, under
these plans, contributions made for the benefit of the employees will not be
includible in the employees' gross income until distributed from the plan.
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.
THE COMPANY
BUSINESS
The Company is a stock life insurance company which was organized under the 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." As of the date of
this prospectus, the Company is licensed to operate in Puerto Rico, 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. The
Company's home office is located at 3100 Sanders Road, Northbrook, Illinois
60062.
The Company is wholly owned by Allstate Life Insurance Company ("Allstate Life"
or "ALIC"), which is wholly owned by Allstate Insurance Company, 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.
REINSURANCE AGREEMENTS
Effective December 31, 1993, the Company entered into an assumption reinsurance
treaty with an affiliate, Glenbrook Life Insurance Company, to reinsure certain
annuity contracts. Under the terms of the agreement, the Company assumed all of
Glenbrook Life Insurance Company's liability under such contracts.
The Company and Allstate Life entered into a reinsurance agreement effective
June 5, 1992. All business issued after that date is reinsured with Allstate
Life, while business issued before that date is reinsured with non-affiliated
reinsurers. Under the reinsurance agreement, purchase payments under general
account contracts are transferred to and become invested with the assets of
Allstate Life, which accepts 100% of the liability under such contracts.
Accordingly, the results of operations with respect to applications received and
contracts issued by the Company are not reflected in the Company's financial
statements. The amounts reflected in the Company's financial statements relate
only to the investment of those assets of the Company that are not transferred
to Allstate Life under the reinsurance agreement. The obligations of Allstate
Life under the terms of the reinsurance agreement are to the Company; the
Company remains the sole obligor under the Contracts to the Owners.
INVESTMENTS BY THE COMPANY
The Company's general account assets, like the general account assets of other
insurance companies, including Allstate Life, must be invested in accordance
with applicable state laws. These laws govern the nature and quality of
investments that may be made by life insurance companies and the percentage of
their assets that may be committed to any particular type of investment. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state, and municipal obligations, corporate
bonds, preferred stocks, real estate mortgages, real estate and certain other
investments. All of the Company's general account assets are available to meet
the Company's obligations.
The Company will primarily invest its general account assets in investment-
grade fixed income securities including the following:
<PAGE>
Securities issued by the United States Government or its agencies or
instrumentalities, which may or may not be guaranteed by the United States
Government;
Debt instruments, including, but not limited to, issues of or guaranteed by
banks or bank holding companies, and of corporations, which are deemed by the
Company's management to have qualities appropriate for inclusion in this
portfolio;
Commercial mortgages, mortgage-backed securities collateralized by real estate
mortgage loans, or securities collateralized by other assets, that are insured
or guaranteed by the Federal Home Loan Mortgage Association, the Federal
National Mortgage Association or the Government National Mortgage Association,
or that have an investment grade at time of purchase within the four highest
grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa),
Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally
recognized rating service;
Commercial paper, cash, or cash equivalents, and other short-term investments
having a maturity of less than one year that are considered by the Company's
management to have investment quality comparable to securities having the
ratings stated above.
In addition, interest rate swaps, futures, options, rate caps, and other
hedging instruments may be used solely for non-speculative hedging purposes.
Anticipated use of these financial instruments shall be limited to protecting
the value of portfolio sales or purchases, or to enhance yield through the
creation of a synthetic security.
In addition, the Company maintains certain unitized separate accounts which
invest in shares of open-end investment companies registered under the
Investment Company Act of 1940. These separate account assets, which relate to
the Company's variable annuity and variable life contracts, do not support the
Company's obligations under the Contracts.
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.
<TABLE>
<CAPTION>
GLENBROOK LIFE AND ANNUITY COMPANY
SELECTED FINANCIAL DATA
($ IN THOUSANDS)
YEAR-END FINANCIAL DATA 1997 1996 1995 1994 1993
- ------------------------ ---- ---- ---- ---- ----
For The Years Ended December 31:
<S> <C> <C> <C> <C> <C>
Income Before Income Tax Expense $ 8,764 $ 3,774 $ 4,455 $ 2,017 $ 836
Net Income ...................... 5,686 2,435 2,879 1,294 529
As of December 31:
Total Assets .................... 3,351,541 2,404,527 1,409,705 750,245 169,361
</TABLE>
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Glenbrook Life and
Annuity Company (the "Company"). It should be read in conjunction with the
financial statements and related notes.
The Company, a wholly owned subsidiary of Allstate Life Insurance
Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a
wholly owned subsidiary of The Allstate Corporation, markets life insurance and
annuity products through banks and broker-dealers.
The Company issues flexible premium deferred variable annuity contracts
and variable life policies, the assets and liabilities of which are legally
segregated and reflected as Separate Account assets and liabilities. Separate
Account assets and liabilities are carried at fair value in the statements of
financial position. Certain of the Separate Account investment portfolios were
initially funded with a $10.0 million seed money contribution from the Company
in 1995. During 1997, the Company liquidated its funding in the Separate Account
investment portfolios. Investment income and realized gains and losses of the
Separate Accounts, other than the portion related to the Company's
participation, accrue directly to the contractholders (net of fees) and,
therefore, are not included in the Company's statements of operations.
<PAGE>
Results of Operations
- ---------------------
($ in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net investment income $ 5,304 $ 3,774 $ 3,996
======= ======= =======
Realized capital gains and losses, after-tax $ 2,249 $ - $ 298
======= ======= =======
Net income $ 5,686 $ 2,435 $ 2,879
======= ======= =======
Investments $90,474 $50,676 $50,917
======= ======= =======
</TABLE>
The Company and ALIC entered into a reinsurance agreement effective
June 5, 1992. All business issued subsequent to that date is ceded to ALIC. Life
insurance in force prior to that date is ceded to non-affiliated reinsurers. The
Company's results of operations include only investment income and realized
capital gains and losses earned on the assets of the Company that are not
transferred to ALIC under the reinsurance agreement.
Net income increased $3.3 million in 1997 due to realized capital gains
arising primarily from the withdrawal of the seed money from the Separate
Account and the increase in net investment income. The $444 thousand decrease in
net income in 1996 reflects the decrease in net investment income and realized
capital gains.
Pretax net investment income in 1997 increased 40.5%, or $1.5 million,
to $5.3 million compared to $3.8 million in 1996. This higher net investment
income was caused by a significant increase in the level of investments
primarily arising from a $20.0 million capital contribution received from ALIC
in January 1997 and the liquidation of the Company's seed money investment in
the Separate Account, partially offset by an increase in investment expenses.
Net investment income decreased $222 thousand in 1996 due to the impact of the
Company's $10.0 million original investment in the variable funds of the
Separate Account, whose assets are invested predominantly in equity securities.
The dividend yield on the variable funds is significantly below the level of
interest earned on fixed income securities in which the $10.0 million was
invested prior to the fourth quarter of 1995. This decrease in income was
partially offset by additional investment income earned on the higher investment
balances arising from positive cash flows from operating activities in 1996.
Realized capital gains after tax of $2.2 million in 1997 were
associated primarily with the withdrawal of the investment in Separate Account
portfolios. Realized capital gains after tax of $298 thousand in 1995 were the
result of sales of investments to fund the Company's participation in the
Separate Accounts.
<PAGE>
Financial Position
- ------------------
($ in thousands)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Fixed income securities (1) $ 86,243 $ 49,389
Short-term investments 4,231 1,287
------------ -----------
Total investments $ 90,474 $ 50,676
============ ===========
Reinsurance recoverable from ALIC $ 2,637,983 $ 2,060,419
============ ===========
Separate Account assets $ 620,535 $ 272,420
============ ===========
Contractholder funds $ 2,637,983 $ 2,060,419
============ ===========
Separate Account liabilities $ 620,535 $ 260,290
============ ===========
</TABLE>
(1) Fixed income securities are carried at fair value. Amortized
cost for these securities was $81,369 and $46,925 at December
31, 1997 and 1996, respectively.
The Company's fixed income securities portfolio consists of
mortgage-backed securities, U.S. government bonds, publicly traded corporate
bonds and tax-exempt municipal bonds. The Company generally holds its fixed
income securities for the long term, but has classified all of these securities
available for sale to allow maximum flexibility in portfolio management.
Investments grew $39.8 million, or 78.5%, during 1997. The increase in
investments is primarily due to the receipt of a $20.0 million capital
contribution from ALIC in January 1997 and liquidation of the seed money from
the Separate Account during 1997. In addition, at December 31, 1997, unrealized
net capital gains on the fixed income securities portfolio were $4.9 million
compared to $2.5 million as of December 31, 1996, primarily attributable to the
increase in the Company's fixed income securities portfolio during 1997.
At the end of 1997, all of the Company's fixed income securities
portfolio is rated investment grade, with a National Association of Insurance
Commissioners ("NAIC") rating of 1 or a Moody's rating of Aaa, Aa or A.
At December 31, 1997 and 1996, $31.9 million and $16.4 million,
respectively, of the fixed income securities portfolio were invested in
mortgage-backed securities ("MBS"). At December 31, 1997, all of the MBS had
underlying collateral that is guaranteed by U.S. government entities, thus
credit risk was minimal.
MBS, however, are subject to interest rate risk as the duration and
ultimate realized yield are affected by the rate of repayment of the underlying
mortgages. The Company attempts to limit interest rate risk by purchasing MBS
whose cost does not significantly exceed par value, and with repayment
protection to provide a more certain cash flow to the Company. At December 31,
1997, the amortized cost of the MBS portfolio was below par value by $417
thousand and over 31% of the MBS portfolio was invested in planned amortization
class bonds. This type of MBS is purchased to provide additional protection
against rising interest rates.
The Company closely monitors its fixed income securities portfolio for
declines in value that are other than temporary. Securities are placed on
non-accrual status when they are in default or when the receipt of interest
payments is in doubt.
The Company's short-term investment portfolio was $4.2 million and $1.3
million at December 31, 1997 and 1996, respectively. The Company invests
available cash balances primarily in taxable short-term securities having a
final maturity date or redemption date of one year or less.
During 1997, contractholder funds and amounts recoverable from ALIC
under the reinsurance agreement increased by $577.6 million. The increases
resulted from sales of the Company's single and flexible premium deferred
annuities, interest credited to contractholders, partially offset by surrenders,
withdrawals and benefits paid. Reinsurance recoverable from ALIC relates to
contract benefit obligations ceded to ALIC.
<PAGE>
Separate Account assets increased by $348.1 million and Separate
Account liabilities increased by $360.2 million as compared with December 31,
1996. The increases were primarily attributable to increased sales of flexible
premium deferred variable annuity contracts and the favorable investment
performance of the Separate Account investment portfolios, partially offset by
variable annuity surrenders and withdrawals. Additionally, the Separate Account
asset was reduced by the Company's liquidation of its seed money investment
during 1997.
Market Risk
- -----------
Market risk is the risk that the Company will incur losses due to
adverse changes in market rates and prices. The Company's primary market risk
exposure is to changes in interest rates. Interest rate risk is the risk that
the Company will incur economic losses due to adverse changes in interest rates,
as the Company invests substantial funds in interest-sensitive assets.
One way to quantify this exposure is duration. Duration measures the
sensitivity of the fair value of assets to changes in interest rates. For
example, if interest rates increase 1%, the fair value of an asset with a
duration of 5 years is expected to decrease in value by approximately 5%. At
December 31, 1997, the Company's asset duration was approximately 5.3 years.
To calculate duration, the Company projects asset cash flows, and
discounts them to a net present value basis using a risk-free market rate
adjusted for credit quality, sector attributes, liquidity and other specific
risks. Duration is calculated by revaluing these cash flows at an alternative
level of interest rates, and determining the percentage change in fair value
from the base case. The projections include assumptions (based upon historical
market and Company specific experience) reflecting the impact of changing
interest rates on the prepayment and/or option features of instruments, where
applicable. Such assumptions relate primarily to mortgage-backed securities,
collateralized mortgage obligations, and municipal and corporate obligations.
Based upon the information and assumptions the Company uses in its
duration calculation and in effect at December 31, 1997, management estimates
that a 100 basis point immediate, parallel increase in interest rates ("rate
shock") would decrease the net fair value of its total investments by
approximately $4.5 million. The selection of a 100 basis point immediate rate
shock should not be construed as a prediction by the Company's management of
future market events; but rather, to illustrate the potential impact of such an
event.
To the extent that actual results differ from the assumptions utilized,
the Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes that the current relationship
between short-term and long-term interest rates (the term structure of interest
rates) will remain constant over time. As a result, these calculations may not
fully capture the impact of non-parallel changes in the term structure of
interest rates and/or large changes in interest rates.
In formulating and implementing policies for investing new and existing
funds, AIC, as parent company of ALIC, administers and oversees investment risk
management processes primarily through three oversight bodies: the Boards of
Directors and Investment Committees of its operating subsidiaries, and the
Credit and Risk Management Committee ("CRMC"). The Boards of Directors and
Investment Committees provide executive oversight of investment activities. The
CRMC is a senior management committee consisting of the Chief Investment
Officer, the Investment Risk Manager, and other investment officers who are
responsible for the day-to-day management of market risk. The CRMC meets at
least monthly to provide detailed oversight of investment risk, including market
risk.
AIC has investment guidelines that define the overall framework for
managing market and other investment risks, including the accountabilities and
controls over these activities. In addition, AIC has specific investment
policies for each of its affiliates, including the Company, that delineate the
investment limits and strategies that are appropriate for the Company's
liquidity, surplus, product and regulatory requirements.
<PAGE>
Liquidity and Capital Resources
- -------------------------------
In January 1997, a $20.0 million capital contribution that was accrued
at December 31, 1996 was received from ALIC.
Under the terms of reinsurance agreements, premiums and deposits on
universal life policies and investment contracts, excluding those relating to
Separate Accounts, are transferred to ALIC, which maintains the investment
portfolios supporting the Company's products. The Company continues to have
primary liability as a direct insurer for risks reinsured.
The NAIC has a standard for assessing the solvency of insurance
companies, which is referred to as risk-based capital ("RBC"). The requirement
consists of a formula for determining each insurer's RBC and a model law
specifying regulatory actions if an insurer's RBC falls below specified levels.
The RBC formula for life insurance companies establishes capital requirements
relating to insurance, business, asset and interest rate risks. At December 31,
1997, RBC for the Company was significantly above a level that would require
regulatory action.
Year 2000
- ---------
The Company is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, and policy and contract
administration. Since many of the Company's older computer software programs
recognize only the last two digits of the year in any date, some software may
fail to operate properly in or after the year 1999, if the software is not
reprogrammed or replaced, ("Year 2000 Issue"). The Company believes that many of
its counterparties and suppliers also have Year 2000 Issues which could affect
the Company. In 1995, AIC commenced a plan intended to mitigate and/or prevent
the adverse effects of Year 2000 Issues. These strategies include normal
development and enhancement of new and existing systems, upgrades to operating
systems already covered by maintenance agreements and modifications to existing
systems to make them Year 2000 compliant. The plan also includes the Company
actively working with its major external counterparties and suppliers to assess
their compliance efforts and the Company's exposure to them. The Company
presently believes that it will resolve the Year 2000 Issue in a timely manner,
and the financial impact will not materially affect its results of operations,
liquidity or financial position. Year 2000 costs are and will be expensed as
incurred.
Pending Accounting Standards
- ----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 requires the presentation of comprehensive
income in the financial statements. Comprehensive income is a measurement of all
changes in equity that result from transactions and other economic events other
than transactions with stockholders. The requirements of this statement will be
adopted effective January 1, 1998.
SFAS No. 131 redefines how segments are determined and requires
additional segment disclosures for both annual and quarterly reporting. Under
this statement, segments are determined using the "management approach" for
financial statement reporting. The management approach is based on the way an
enterprise makes operating decisions and assesses performance of its businesses.
The Company is currently reviewing the requirements of the SFAS and has yet to
determine its impact on its current reporting segments. The requirements of this
statement will be adopted effective December 31, 1998.
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP provides guidance concerning when to
recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related assessments
should be recognized as liabilities when all of the following criteria have been
met: a) an assessment has been imposed or it is probable that an assessment will
be imposed, b) the event obligating an entity to pay an assessment has occurred
and c) the amount of the assessment can be reasonably estimated. The
requirements of this standard will be adopted in 1999 and are not expected to
have a material impact on the results of operations, cash flows or financial
position of the Company. The SOP is expected to be adopted in 1999.
<PAGE>
In March 1998, the Accounting Standards Executive Committee of the
AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." The SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Specifically,
certain external, payroll and payroll related costs should be capitalized during
the application development state of a project and depreciated over the computer
software's useful life. The Company currently expenses these costs as incurred
and is evaluating the effects of this SOP on its accounting for internally
developed software. The SOP is expected to be adopted in 1998.
Forward-Looking Statements
- --------------------------
The statements contained in this Management's Discussion and Analysis
that are not historical information are forward-looking statements that are
based on management's estimates, assumptions and projections. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under The
Securities Act of 1933 and The Securities Exchange Act of 1934 for
forward-looking statements.
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 1,700
stock, mutual and other types of insurers in business in the United States.
Several independent rating agencies regularly evaluate life insurer's
claims-paying ability, quality of investments and overall stability. A.M. Best
Company assigns A+ (Superior) to Allstate Life which reinsures all net business
of the Company. A.M. Best Company also assigns the Company the rating of A+(r)
because the Company reinsures all net business with Allstate Life. Standard &
Poor's Insurance Rating Services assigns AA+ (Excellent) to Glenbrook Life's
claims-paying ability and Moody's assigns an Aa2 (Excellent) financial strength
rating to Glenbrook Life. The Company shares the same ratings of its parent,
Allstate Life Insurance Company.
EMPLOYEES
As of December 31, 1997, Glenbrook Life and Annuity Company has approximately
125 employees at its home office in Northbrook, Illinois.
PROPERTIES
The Company occupies office space provided by Allstate Insurance Company, 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 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.
<PAGE>
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.
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, 52, Chief Executive Officer and Chairman of the Board
(1995)*
Also Director (1986-Present) and Senior Vice President (1995-Present) of
Allstate Insurance Company; Director (1991-Present) of Allstate Life Financial
Services, Inc.; Director (1986-Present) and President (1990-Present) Allstate
Life Insurance Company; Director (1983-Present) and Chairman of the Board
(1990-Present) of Allstate Life Insurance Company of New York; Director (1990-
1997), Chairman of the Board of Directors and Chief Executive Officer (1995-
1997), Chairman of the Board of Directors and President (1990-1995) of Glenbrook
Life Insurance Company; Director and Chairman of the Board (1995- Present) of
Laughlin Group Holdings, Inc.; Director and Chairman of the Board of Directors
and Chief Executive Officer (1989-Present) Lincoln Benefit Life Company;
Director (1986-Present), Chairman of the Board of Directors and Chief Executive
Officer (1995-Present) of Northbrook Life Insurance Company; and Chairman of the
Board of Directors and Chief Executive Officer (1995-Present) Surety Life
Insurance Company; and Trustee (1991-Present) and Vice President (1995-Present)
The Allstate Foundation.
PETER H. HECKMAN, 52, President, Chief Operating Officer and Director (1996)*
Also Director and Vice President (1988-Present) of Allstate Life Insurance
Company; Director (1990-1996), Vice President (1989-Present), Allstate Life
Insurance Company of New York; Director (1991-1993) of Allstate Life Financial
Services, Inc.; Director (1990-1997), President and Chief Operating Officer
(1996-1997), and Vice President (1990-1996), Glenbrook Life Insurance Company;
Director (1995-Present) and Vice Chairman of the Board (1996-Present) Laughlin
Group Holdings, Inc.; Director (1990-Present) and Vice Chairman of the Board
(1996-Present) Lincoln Benefit Life Company; Director (1988-Present) President
and Chief Operating Officer (1996-Present), and was Vice President (1989-1996),
Northbrook Life Insurance Company; and Director (1995-Present) and Vice Chairman
of the Board (1996-Present) Surety Life Insurance Company.
MICHAEL J. VELOTTA, 52, Vice President, Secretary, General Counsel, and Director
(1992)*
Also Director and Secretary (1993-Present) of Allstate Life Financial Services,
Inc.; Director (1992-Present) Vice President, Secretary and General Counsel
(1993-Present) Allstate Life Insurance Company; Director (1992-Present) Vice
President, Secretary and General Counsel (1993-Present) Allstate Life Insurance
Company of New York; Director (1992-1997) Vice President, Secretary and General
Counsel (1993-1997) Glenbrook Life Insurance Company; Director and Secretary
(1995-Present) Laughlin Group Holdings, Inc.; Director (1992-Present) and
Assistant Secretary (1995-Present) Lincoln Benefit Life Company; Director
(1992-Present) Vice President, Secretary and General Counsel (1993-Present)
Northbrook Life Insurance Company; and Director and Assistant Secretary
(1995-Present) Surety Life Insurance Company.
JOHN R. HUNTER, 43, Director (1996)* and Senior Vice President (1995)*
Also Assistant Vice President (1990-Present) Allstate Life Insurance Company;
Assistant Vice President (1996-Present) Allstate Life Insurance Company of New
York; Director (1996-1997) Glenbrook Life Insurance Company; President and Chief
Operating Officer (1998-Present) Allstate Life Financial Services, Inc.; and
Director (1994-Present) and Assistant Vice President (1990-Present) Northbrook
Life Insurance Company.
G. CRAIG WHITEHEAD, 51, Senior Vice President and Director (1995)*
Also Assistant Vice President (1991-Present) Allstate Life Insurance Company;
Director (1994-1997) Assistant Vice President (1991-1997) Glenbrook Life
Insurance Company; Assistant Vice President (1992-Present) Secretary (1995)
Glenbrook Life and Annuity Company; Director (1995-Present) Laughlin Group
Holdings, Inc.
<PAGE>
MARLA G. FRIEDMAN, 44, Vice President (1996)*
Also Director (1991-Present) and Vice President (1988-Present) Allstate Life
Insurance Company; Director (1993-1996) Allstate Life Financial Services, Inc.;
Director (1997-Present) and Assistant Vice President (1996-Present) Allstate
Life Insurance Company of New York; Director (1995-1996) Allstate Settlement
Corporation; Director (1991-1996), President and Chief Operating Officer
(1995-1996) and Vice President (1990-1995) and (1996-1997) Glenbrook Life
Insurance Company; Director and Vice Chairman of the Board (1995-1996) Laughlin
Group Holdings, Inc.; and Director (1989-1996), President and Chief Operating
Officer (1995-1996) and Vice President (1996-Present) Northbrook Life Insurance
Company.
KEVIN R. SLAWIN, 40, VICE PRESIDENT (1996)*
Also Assistant Vice President and Assistant Treasurer (1995-1996) Allstate
Insurance Company; Director (1996-Present) and Assistant Treasurer (1995-1996)
Allstate Life Financial Services, Inc.; Director and Vice President (1996-
Present) and Assistant Treasurer (1995-1996) Allstate Life Insurance Company;
Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996)
Allstate Life Insurance Company of New York; Director and Vice President
(1996-1997) and Assistant Treasurer (1995-1996) Glenbrook Life Insurance
Company; Director (1996-Present) and Assistant Treasurer (1995-1996) Laughlin
Group Holdings, Inc.; Director (1996-Present) Lincoln Benefit Life Company;
Director and Vice President (1996-Present) and Assistant Treasurer (1995-1996)
Northbrook Life Insurance Company; Director (1996-Present) Surety Life Insurance
Company; and Assistant Treasurer and Director (1994-1995) Sears Roebuck and Co.;
and Treasurer and First Vice President (1986-1994) Sears Mortgage Corporation.
CASEY J. SYLLA, 54, Chief Investment Officer (1995)*
Also Director (1995-Present ) Senior Vice President and Chief Investment Officer
(1995-Present) Allstate Insurance Company; Director (1995-Present) Chief
Investment Officer (1995-Present) Allstate Life Insurance Company; Chief
Investment Officer (1995-Present) Allstate Life Insurance Company of New York;
Chief Investment Officer (1995-1997) Glenbrook Life Insurance Company; and
Director and Chief Investment Officer (1995-Present) Northbrook Life Insurance
Company. Prior to 1995 he was Senior Vice President and Executive Officer--
Investments (1992-1995) of Northwestern Mutual Life Insurance Company.
JAMES P. ZILS, 47, Treasurer (1995)*
Also Vice President and Treasurer (1995-Present) Allstate Insurance Company;
Treasurer (1995-Present) Allstate Life Financial Services, Inc.; Treasurer
(1995-Present) Allstate Life Insurance Company; Treasurer (1995-Present)
Allstate Life Insurance Company of New York; Treasurer (1995-1997) Glenbrook
Life Insurance Company; Treasurer (1995-Present) Laughlin Group Holdings, Inc.;
and Treasurer (1995-Present) Northbrook Life Insurance Company. Prior to 1995 he
was Vice President of Allstate Life Insurance Company. Prior to 1993 he held
various management positions.
*Date elected/appointed to current office.
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 1997. The allocated cash compensation of all
officers of the Company as a group for services rendered in all capacities to
the Company during 1997 totaled $214,774.75. Directors of the Company receive no
compensation in addition to their compensation as employees of the Company.
Shares of the Company and Allstate Life are not directly owned by any director
or officer of the Company. The percentage of shares of the Corporation
beneficially owned by any director, and by all directors and officers of the
Company as a group, does not exceed one percent of the class outstanding.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(ALLSTATE LIFE INSURANCE COMPANY)
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK OPTIONS/ PAYOUTS COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) SARS(#) ($) ($)
-------- ---- --------- --------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louis G. Lower, II ...... 1997 $453,225 $500,000 $27,768 $280,589 25,914 $570,068 $8,000(1)
Chief Executive Officer 1996 $436,800 $246,781 $10,246 $ 0 18,258 $ 0 $5,250(1)
and Chairman of the 1995 $416,000 $286,650 $17,044 $ 0 89,359 $411,122 $5,250(1)
Board of Directors
</TABLE>
(1) Amount received by Mr. Lower which represents the value allocated to
his account from employer contributions under The Savings and Profit
Sharing Fund of Allstate Employees and prior to 1996, The Profit Sharing
Fund and to its predecessor, The Savings and Profit Sharing Fund of Sears
employees.
LEGAL PROCEEDINGS
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 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 report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds, Washington, DC has advised the Company on
certain federal securities law matters. All matters of Illinois law pertaining
to the Contracts, including the validity of the Contracts and the Company's
right to issue such Contracts under Illinois insurance law, have been passed
upon by Michael J. Velotta, General Counsel of 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 (the "Company") as of December 31, 1997 and 1996, and
the related Statements of Operations, Shareholder's Equity and Cash Flows for
each of the three years in the period ended December 31, 1997. Our audits also
included Schedule IV - Reinsurance. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 20, 1998
F-1
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
------------
($ in thousands) 1997 1996
---------- ---------
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $81,369 and $46,925) $ 86,243 $ 49,389
Short-term 4,231 1,287
--------------- ---------------
Total investments 90,474 50,676
Reinsurance recoverable from Allstate Life Insurance
Company 2,637,983 2,060,419
Net receivable from affiliates - 18,963
Other assets 2,549 2,049
Separate Accounts 620,535 272,420
--------------- ---------------
Total assets $ 3,351,541 $ 2,404,527
=============== ===============
LIABILITIES
Contractholder funds $ 2,637,983 $ 2,060,419
Income taxes payable 609 410
Deferred income taxes 1,772 1,528
Net payable to affiliates 2,698 -
Separate Accounts 620,535 260,290
--------------- ---------------
Total liabilities 3,263,597 2,322,647
=============== ===============
SHAREHOLDER'S EQUITY
Common stock, $500 par value, 4,200 shares
authorized, issued, and outstanding 2,100 2,100
Additional capital paid-in 69,641 69,641
Unrealized net capital gains 3,168 2,790
Retained income 13,035 7,349
--------------- ---------------
Total shareholder's equity 87,944 81,880
--------------- ---------------
Total liabilities and shareholder's equity $ 3,351,541 $ 2,404,527
=============== ===============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
---------------- --------------- ----------------
<S> <C> <C> <C>
REVENUES
Net investment income $ 5,304 $ 3,774 $ 3,996
Realized capital gains and losses 3,460 - 459
---------------- --------------- ----------------
INCOME BEFORE INCOME TAX EXPENSE 8,764 3,774 4,455
INCOME TAX EXPENSE 3,078 1,339 1,576
---------------- --------------- ----------------
NET INCOME $ 5,686 $ 2,435 $ 2,879
================ =============== ================
</TABLE>
See notes to financial statements.
F-3
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
($ in thousands) 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
COMMON STOCK $ 2,100 $ 2,100 $ 2,100
--------------- --------------- ---------------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year 69,641 49,641 49,641
Capital contributions - 20,000 -
--------------- --------------- ---------------
Balance, end of year 69,641 69,641 49,641
--------------- --------------- ---------------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 2,790 3,357 (1,118)
Net change 378 (567) 4,475
--------------- --------------- ---------------
Balance, end of year 3,168 2,790 3,357
--------------- --------------- ---------------
RETAINED INCOME
Balance, beginning of year 7,349 4,914 2,035
Net income 5,686 2,435 2,879
--------------- --------------- ---------------
Balance, end of year 13,035 7,349 4,914
--------------- --------------- ---------------
Total shareholder's equity $ 87,944 $ 81,880 $ 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,
-----------------------
($ in thousands) 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,686 $ 2,435 $ 2,879
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, amortization and other non-cash
items 29 - -
Realized capital gains and losses (3,460) - (459)
Change in deferred income taxes 41 4 (39)
Changes in other operating assets and liabilities 1,160 (510) 1,217
------------ ------------ ------------
Net cash provided by operating activities 3,456 1,929 3,598
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,405 - 7,836
Investment collections 14,217 2,891 1,568
Investment purchases (50,115) (5,667) (1,491)
Participation in Separate Accounts 13,981 (232) (10,069)
Change in short-term investments, net (2,944) 815 (1,178)
------------ ------------ ------------
Net cash used in investing activities (23,456) (2,193) (3,334)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution 20,000 - -
------------ ------------ ------------
Net cash provided by financing activities 20,000 - -
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH - (264) 264
CASH AT BEGINNING OF YEAR - 264 -
------------ ------------ ------------
CASH AT END OF YEAR $ - $ - $ 264
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Noncash financing activity:
Capital contribution receivable from
Allstate Life Insurance Company $ - $ 20,000 $ -
============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. General
Basis of presentation
The accompanying financial statements include the accounts of Glenbrook Life and
Annuity Company (the "Company"), a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"). On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed
its 80.3% ownership in the Corporation to Sears common shareholders through a
tax-free dividend (the "Distribution"). These financial statements have been
prepared in conformity with generally accepted accounting principles.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
Nature of operations
The Company markets life insurance and annuity products in the United States
through banks and broker-dealers. Life insurance includes both
interest-sensitive and variable life insurance products. Annuities include
deferred annuities, such as variable annuities and fixed rate flexible premium
annuities. The Company has entered into exclusive distribution arrangements with
management investment companies to market its variable annuity contracts.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary withdrawal or surrender by customers, subject to applicable
surrender charges. These policies and contracts are reinsured with ALIC (see
Note 3), which invests premiums and deposits to provide cash flows that will be
used to fund future benefits and expenses. In order to support competitive
crediting rates and limit interest rate risk, ALIC , as the Company's reinsurer,
adheres to a basic philosophy of matching assets with related liabilities while
maintaining adequate liquidity and a prudent and diversified level of credit
risk.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be new and proposed federal
and state regulation and legislation that would allow banks greater
participation in the securities and insurance businesses, which will present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and interest-sensitive
life insurance is enhanced by the tax incentives available under current law.
Any legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Although the Company currently benefits from agreements with financial services
entities who market and distribute its products, consolidation within that
industry and specifically, a change in control of those entities with which the
Company partners, could affect the Company's sales.
Enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; (2) increasing competition in capital
markets; and (3) reopening stock/mutual company disagreements related to such
issues as taxation disparity between mutual and stock insurance companies.
The Company is authorized to sell life and annuity products in all states except
New York, as well as in the District of Columbia. The Company is also authorized
to sell variable annuities in Puerto Rico. The top geographic locations for
statutory premiums and deposits earned by the Company are Florida, Pennsylvania,
California, Texas and Michigan for the year ended December 31, 1997. No other
jurisdiction accounted for more than 5% of statutory premiums and deposits. All
premiums and contract charges are ceded to ALIC under reinsurance agreements.
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ( "available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are recognized for declines in the value of
fixed income securities that are other than temporary. Such writedowns are
included in realized capital gains and losses. Short-term investments are
carried at cost which approximates fair value.
F-6
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method, based on the estimated principal repayments. Accrual
of income is suspended for fixed income securities that are in default or when
the receipt of interest payments is in doubt. Realized capital gains and losses
are determined on a specific identification basis.
Reinsurance
The Company and ALIC entered into a reinsurance agreement effective June 5,
1992. All business issued subsequent to that date is ceded to ALIC. Life
insurance in force prior to that date is ceded to non-affiliated reinsurers.
Contract charges, credited interest, policy benefits and certain expenses are
ceded to ALIC and reflected net of such cessions in the statements of
operations. The amounts shown in the Company's statements of operations relate
to the investment of those assets of the Company that are not transferred to
ALIC under the reinsurance agreements. Reinsurance recoverable and
contractholder funds are reported separately in the statements of financial
position. The Company continues to have primary liability as the direct insurer
for risks reinsured.
Recognition of premium revenue and contract charges
Revenues on interest-sensitive life insurance policies are comprised of contract
charges and fees, and are recognized when assessed against the policyholder
account balance. Revenues on annuities, which are considered investment
contracts, include contract charges and fees for contract administration and
surrenders. These revenues are recognized when levied against the contract
balance.
Income taxes
The income tax provision is calculated under the liability method. Deferred tax
assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates, and reflect the impact of reinsurance agreements. Deferred income taxes
arise primarily from unrealized capital gains and losses on fixed income
securities carried at fair value.
Separate Accounts
The Company issues flexible premium deferred variable annuity contracts and
single premium variable life policies, the assets and liabilities of which are
legally segregated and reflected in the accompanying statements of financial
position as assets and liabilities of the Separate Accounts (Glenbrook Life and
Annuity Company Variable Annuity Account, Glenbrook Life and Annuity Company
Separate Account A, Glenbrook Life Multi-Manager Variable Account and Glenbrook
Life Variable Life Separate Account A, unit investment trusts registered with
the Securities and Exchange Commission).
Assets of the Separate Accounts, including the Company's ownership interest
("Participation"), are carried at fair value. Unrealized gains and losses on the
Company's Participation, net of deferred income taxes, are shown as a component
of shareholder's equity. Investment income and realized capital gains and losses
arising from the Participation are included in the Company's statements of
operations. The Company liquidated its Participation during 1997, resulting in a
realized capital gain of $3,515. At December 31, 1996, the Participation
amounted to $12,130.
Investment income and realized capital gains and losses of the Separate
Accounts, other than the portion related to the Participation, accrue directly
to the contractholders and, therefore, are not included in the Company's
statements of operations. Revenues to the Company from the Separate Accounts
consist of contract maintenance fees, administrative fees, mortality and expense
risk charges, cost of insurance charges and tax expense charges, all of which
are ceded to ALIC.
Contractholder funds
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most annuities and
universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the customer less withdrawals, mortality charges and
administrative expenses. During 1997, credited interest rates on contractholder
funds ranged from 3.55% to 7.45% for those contracts with fixed interest rates
and from 3.70% to 7.85% for those with flexible rates.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-7
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
3. Related Party Transactions
Reinsurance
Contract charges ceded to ALIC were $11,641, $4,254 and $1,523 in 1997, 1996 and
1995, respectively. Credited interest, policy benefits and expenses ceded to
ALIC amounted to $179,954, $113,703 and $71,905 in 1997, 1996 and 1995,
respectively. Investment income earned on the assets which support
contractholder funds is not included in the Company's financial statements as
those assets are owned and managed by ALIC under the terms of reinsurance
agreements.
Business operations
The Company utilizes services and business facilities owned or leased, and
operated by AIC in conducting its business activities. The Company reimburses
AIC for the operating expenses incurred by AIC on behalf of the Company. The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $5,959, $759 and $348 in 1997, 1996 and 1995, respectively. Of these costs,
the Company retains investment related expenses. All other costs are ceded to
ALIC under reinsurance agreements.
Laughlin Group
Laughlin Group, Inc. ("Laughlin") is an indirect wholly owned subsidiary of
ALIC. Laughlin markets certain of the Company's flexible premium deferred
variable annuity contracts and flexible premium deferred fixed annuity
contracts. Sales commissions paid to Laughlin, for which the related cost was
ceded to ALIC, were $945 and $8,623 during 1997 and 1996, respectively. The
Company had a receivable of $850 from Laughlin at December 31, 1996, which is
included in net receivable from affiliates in the statements of financial
position.
4. Investments
Fair values
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
Gross Unrealized
----------------
Amortized Fair
Cost Gains Losses Value
--------- ----- ------ -----
<S> <C> <C> <C> <C>
At December 31, 1997
U.S. government and agencies $ 24,419 $ 2,961 $ - $ 27,380
Municipal 656 17 - 673
Corporate 25,476 840 - 26,316
Mortgage-backed securities 30,818 1,056 - 31,874
-------- ------- --------- --------
Total fixed income securities $ 81,369 $ 4,874 $ - $ 86,243
======== ======= ========= ========
At December 31, 1996
U.S. government and agencies $ 24,265 $ 1,722 $ (3) $ 25,984
Corporate 6,970 96 (15) 7,051
Mortgage-backed securities 15,690 664 - 16,354
-------- ------- --------- --------
Total fixed income securities $ 46,925 $ 2,482 $ (18) $ 49,389
======== ======= ========= ========
</TABLE>
F-8
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Due in one year or less $ 400 $ 400
Due after one year through five years 3,838 3,877
Due after five years through ten years 33,245 35,102
Due after ten years 13,068 14,990
----------- ------------
50,551 54,369
Mortgage-backed securities 30,818 31,874
----------- ------------
Total $ 81,369 $ 86,243
=========== ============
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
<TABLE>
<CAPTION>
Net investment income
Year Ended December 31, 1997 1996 1995
----------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed income securities $ 5,014 $ 3,478 $ 3,850
Short-term investments 231 126 113
Participation in Separate Accounts 161 232 69
-------------- -------------- --------------
Investment income, before expense 5,406 3,836 4,032
Investment expense 102 62 36
-------------- -------------- --------------
Net investment income $ 5,304 $ 3,774 $ 3,996
============== ============== ==============
</TABLE>
Realized capital gains and losses
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
----------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed income securities $ (61) $ - $ 459
Short-term investments 6 - -
Participation in Separate Accounts 3,515 - -
------------- ------------- -------------
Realized capital gains and losses 3,460 - 459
Income taxes (1,211) - (161)
------------- ------------- -------------
Realized capital gains and losses,
after tax $ 2,249 $ - $ 298
============= ============= =============
</TABLE>
Excluding calls and prepayments, gross losses of $61 and gross gains of $459
were realized on sales of fixed income securities during 1997 and 1995,
respectively.
F-9
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Unrealized net capital gains
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Cost/ Unrealized
Amortized Fair Net
Cost Value Gains
--------- ----- -----------
<S> <C> <C> <C>
Fixed income securities $ 81,369 $ 86,243 $ 4,874
Deferred income taxes ======== ======== (1,706)
-------
Unrealized net capital gains $ 3,168
=======
</TABLE>
Change in unrealized net capital gains
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Fixed income securities $ 2,410 $ (2,239) $ 6,423
Participation in Separate Accounts (1,829) 1,368 461
Deferred income taxes (203) 304 (2,409)
------------- ------------- -------------
Increase (decrease) in unrealized net capital gains $ 378 $ (567) $ 4,475
============= ============== =============
</TABLE>
Securities on deposit
At December 31, 1997, fixed income securities with a carrying value of
$10,108 were on deposit with regulatory authorities as required by law.
5. Financial Instruments
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including deferred income
taxes) are not considered financial instruments and are not carried at fair
value. Other assets and liabilities considered financial instruments, such as
accrued investment income, are generally of a short-term nature. It is assumed
that their carrying value approximates fair value.
F-10
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Financial assets
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Fixed income securities $ 86,243 $ 86,243 $ 49,389 $ 49,389
Short-term investments 4,231 4,231 1,287 1,287
Separate Accounts 620,535 620,535 272,420 272,420
</TABLE>
Fair values for fixed income securities are based on quoted market prices.
Short-term investments are highly liquid investments with maturities of less
than one year whose carrying value approximates fair value.
Separate Accounts assets are carried in the statements of financial position at
fair value.
Financial liabilities
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $2,636,331 $2,492,095 $2,059,642 $1,949,329
Separate Accounts 620,535 620,535 260,290 260,290
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
F-11
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
6. Income Taxes
For 1996 and 1995, the Company filed a separate federal income tax return. The
Company will join the Corporation and its other eligible domestic subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
for 1997 and is party to a federal income tax allocation agreement (the "Tax
Sharing Agreement"). Under the Tax Sharing Agreement, the Company paid to or
received from the Corporation the amount, if any, by which the Allstate Group's
federal income tax liability was affected by virtue of inclusion of the Company
in the consolidated federal income tax return. Effectively, this results in the
Company's annual income tax provision being computed, with adjustments, as if
the Company filed a separate return.
Prior to the Distribution, the Corporation and all of its eligible domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax
Sharing Agreement, the Company, through the Corporation, paid to or received
from the Sears Group the amount, if any, by which the Sears Tax Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Allstate Group
filed a separate consolidated return, except that items such as net operating
losses, capital losses or similar items, which might not be recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.
The Allstate Group and Sears Group have entered into an agreement which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution ("Consolidated Tax Years"). The agreement
provides that all Consolidated Tax Years will continue to be governed by the
Sears Tax Sharing Agreement with respect to the Allstate Group's federal income
tax liability.
The components of the deferred income tax liability at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Unrealized net capital gains on fixed income securities $ 1,706 $ 1,503
Difference in tax bases of investments 66 25
------------- -------------
Total deferred liability $ 1,772 $ 1,528
============= =============
</TABLE>
F-12
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 3,037 $ 1,335 $ 1,615
Deferred 41 4 (39)
------- ------- -------
Total income tax expense $ 3,078 $ 1,339 $ 1,576
======= ======= =======
</TABLE>
The Company paid income taxes of $2,839, $2,446 and $866 in 1997, 1996 and 1995,
respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Other .1 .5 .4
---- ---- ----
Effective federal income tax rate 35.1% 35.5% 35.4%
==== ==== ====
</TABLE>
F-13
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ in thousands)
7. Statutory Financial Information
The following tables reconcile net income for the year ended December 31, and
shareholder's equity at December 31, as reported herein in conformity with
generally accepted accounting principles with statutory net income and capital
and surplus, determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities:
<TABLE>
<CAPTION>
Net Income
----------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance per generally accepted accounting principles $ 5,686 $ 2,435 $ 2,879
Deferred income taxes 41 4 (39)
Unrealized gain on participation in
Separate Accounts (1,829) 1,368 -
Statutory investment reserves 93 35 (279)
Other (354) (85) 108
----------- ------------ ------------
Balance per statutory accounting practices $ 3,637 $ 3,757 $ 2,669
=========== ============ ============
Shareholder's Equity
--------------------
1997 1996
---- ----
Balance per generally accepted accounting principles $ 87,944 $ 81,880
Deferred income taxes 1,772 1,528
Unrealized gain/loss on fixed income securities (4,874) (2,464)
Non-admitted assets (86) (850)
Statutory investment reserves 958 (2,282)
Other (3,114) (2,118)
---------- ------------
Balance per statutory accounting practices $ 82,600 $ 75,694
========== ============
</TABLE>
Permitted statutory accounting practices
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Illinois
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company does not follow any permitted statutory accounting
practices that have a material effect on statutory surplus, statutory net income
or risk-based capital.
Final approval of the NAIC's proposed "Comprehensive Guide" on statutory
accounting principles is expected in early 1998. The requirements may be
effective as early as January 1, 1999, and are not expected to have a material
impact on statutory surplus of the Company.
Dividends
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by insurance companies without the prior approval of
the state insurance regulator is limited to formula amounts based on net income
and capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 1998 without prior approval of the Illinois Department of Insurance is
$8,050.
F-14
<PAGE>
GLENBROOK LIFE AND ANNUITY COMPANY
SCHEDULE IV--REINSURANCE
($ in thousands)
<TABLE>
<CAPTION>
Gross Net
Year Ended December 31, 1997 amount Ceded amount
- ---------------------------- --------- ------------ --------
<S> <C> <C> <C>
Life insurance in force $ 4,095 $ 4,095 $ -
================== ================== ==================
Premiums and contract charges:
Life and annuities $ 11,641 $ 11,641 $ -
================== ================== ==================
Gross Net
Year Ended December 31, 1996 amount Ceded amount
- ---------------------------- --------- ------------ --------
Life insurance in force $ 2,436 $ 2,436 $ -
================== ================== ==================
Premiums and contract charges:
Life and annuities $ 4,254 $ 4,254 $ -
================== =================== ==================
Gross Net
Year Ended December 31, 1995 amount Ceded amount
- ---------------------------- --------- ------------ --------
Life insurance in force $ 1,250 $ 1,250 $ -
================== ================== ==================
Premiums and contract charges:
Life and annuities $ 6,571 $ 6,571 $ -
================== ================== ==================
</TABLE>
F-15
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is based on the following:
I= the Treasury Rate for a maturity equal to the Account's Guarantee Period
for the week preceding the establishment of the Account.
N= the number of whole and partial years from the date We receive the
withdrawal or Death Benefit request, or from the Payout Start Date to the
end of the Account's Guarantee Period; and
J= the Treasury Rate for a maturity equal to the Account's Guarantee Period
for the week preceding the receipt of the withdrawal request, death benefit
request, or income payment request. If a note with a maturity of the
original Guarantee Period is not available, a weighted average will be
used.
The Market Value Adjustment factor is determined from the following formula:
.9 x (I - J) x N
Any amount withdrawn in excess of the Free Withdrawal Amount will be multiplied
by the Market Value Adjustment factor to determine the Market Value Adjustment.
ILLUSTRATION
EXAMPLE OF MARKET VALUE ADJUSTMENT
Purchase Payment: $10,000
Guarantee Period: 5 years
Guaranteed Interest Rate: 4.50%
Full Withdrawal: End of Contract Year 3
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 x (1.045)3 = $11,411.66
Step 2: Calculate the Free Withdrawal Amount:
Free Withdrawal Amount:
= .10 x 10,000.00 = $1,000.00
Step 3: Calculate the Withdrawal Charge:
= .06 x (11,411.66 - 1,000) = $624.70
Step 4: Calculate the Market Value Adjustment:
I= 4.50%
J= 4.20%
N= 2 years (5 years - 3 years)
Market Value Adjustment factor: .9 x (I - J) x N
.9 x (.045 - .042) x 2 = .0054
A-1
<PAGE>
Market Value Adjustment = factor x amount subject to Market Value Adjustment:
= .0054 x (11,411.66 - 1,000) = $56.22
Step 5: Calculate the actual amount received by customers as a result of a full
withdrawal at the end of Contract Year 3:
= 11,411.66 - 624.70 + 56.22 = $10,843.18
EXAMPLE 2: (ASSUMES RISING INTEREST RATES)
Step 1: Calculate Account Value at end of Contract Year 3:
= 10,000.00 x (1.045)3 = $11,411.66
Step 2: Calculate the Free Withdrawal Amount:
Free Withdrawal Amount:
= .10 x 10,000.00 = $1,000.00
Step 3: Calculate the Withdrawal Charge:
= .06 x (11,411.66 - 1,000) = $624.70
Step 4: Calculate the Market Value Adjustment:
I= 4.50%
J= 4.80%
N= 2 years (5 years - 3 years)
Market Value Adjustment factor: .9 x (I-J) x N
= .9 x (.045 - .048) x 2 = -.0054
Market Value Adjustment = factor x amount subject to Market Value
Adjustment:
= - .0054 x (11,411.66 - 1,000) = - $56.22
Step 5: Calculate the net surrender value at end of Contract Year 3:
= 11,411.66 - 624.70 - 56.22 = $10,730.74
A-2
