GLENBROOK LIFE AND ANNUITY COMPANY SEPARATE ACCOUNT A
OFFERED BY
GLENBROOK LIFE AND ANNUITY COMPANY
POST OFFICE BOX 94039
PALATINE, ILLINOIS 60094-4039
1(800)776-6978
INDIVIDUAL AND GROUP FLEXIBLE PREMIUM DEFERRED VARIABLE
ANNUITY CONTRACTS
------------------------------
PROSPECTUS
June 1, 1998
This prospectus describes the AIM Lifetime Plus(SM) II Variable Annuity, a
Flexible Premium Deferred Variable Annuity Contract ("Contract") designed to aid
you in long-term financial planning and which can be used for retirement
planning. The Contracts are issued by Glenbrook Life and Annuity Company
("Company"), a wholly owned subsidiary of Allstate Life Insurance Company.
Purchase payments for the Contracts will be allocated to a series of Variable
Sub-accounts of the Glenbrook Life and Annuity Company Separate Account A
("Variable Account") and/or to the Fixed Account funded through the Company's
general account.
The Variable Sub-accounts invest in shares of AIM Variable Insurance Funds,
Inc. (the "Fund Series"). The Fund Series is made up of separate investment
portfolios (each, a "Fund"), each with a distinct investment objective. The
investment objective of each Fund corresponds with a variable sub-account within
the Variable Account. Thirteen Funds are currently available for investment
within the Variable Account: (1) AIM V.I. Aggressive Growth Fund; (2) AIM V.I.
Balanced Fund; (3) AIM V.I. Capital Appreciation Fund; (4) AIM V.I. Capital
Development Fund; (5) AIM V.I. Diversified Income Fund; (6) AIM V.I. Global
Utilities Fund; (7) AIM V.I. Government Securities Fund; (8) AIM V.I. Growth
Fund; (9) AIM V.I. Growth and Income Fund; (10) AIM V.I. High Yield Fund; (11)
AIM V.I. International Equity Fund; (12) AIM V.I. Money Market Fund; and (13)
AIM V.I. Value Fund. The Fixed Account and the Funds make up the Investment
Alternatives available to you under the Contract. Not all of the Funds may be
available for investment under your Contract. You should check with your
representative for further information on the availability of Funds. The
investment advisor for the AIM V.I. Aggressive Growth Fund has determined that,
due to the limited availability of common stocks of small capitalized companies
that meet the investment criteria for the AIM V.I. Aggressive Growth Fund, the
Fund will be closed to new purchasers as soon as reasonably practicable once the
Fund achieves a size in assets under management of $200 million. To the extent
that the Fund is closed, any Owner of a Contract that maintains his allocation
to the Fund will be permitted to allocate additional premium payments to the
Fund despite the closure of the Fund to new allocations.
This prospectus presents information you should know before making a
decision to invest in the Contract and the available Investment Alternatives.
The Contract Value will vary daily as a function of the investment
performance of the Variable Sub-accounts to which you have allocated premium(s)
and any interest credited to the Fixed Account, if applicable. The Company does
not guarantee any minimum Contract Value for amounts allocated to the Variable
Account. Benefits provided by this Contract, when based on the Guarantee
Period(s) of the Fixed Account, are subject to a Market Value Adjustment, the
operation of which may result in upward or downward adjustments in withdrawal
benefits, death benefits, settlement values, transfers to other Variable
Sub-accounts, or periodic income payments.
THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS WHICH HAVE
RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH
BANKS; HOWEVER, THE CONTRACTS AND THE INVESTMENTS IN THE FUNDS ARE NOT DEPOSITS,
OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK, AND THE FUNDS' SHARES
ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
The Company has prepared and filed a Statement of Additional Information
dated June 1, 1998 with the U.S. Securities and Exchange Commission. If you wish
to receive the Statement of Additional Information, you may obtain a free copy
by calling or writing the Company at the address above. For your convenience, an
order form for the Statement of Additional Information may be found on page B-2
of this prospectus. Before ordering, you may wish to review the Table of
Contents of the Statement of Additional Information on page B-1 of this
prospectus. The Statement of Additional Information has been incorporated by
reference into this prospectus.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY A CURRENT
PROSPECTUS FOR AIM VARIABLE INSURANCE FUNDS, INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE
The Contract is not available in all states.
<PAGE>
At least once each Contract year, the Company will send the Owner an annual
statement that contains certain information pertinent to the individual Owner's
Contract. The annual statement details values and specific Contract data for
each particular Contract. The annual statement does not contain financial
statements of the Company, although the Company's Financial Statements begin 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, D.C.
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 its public reference room. 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.
THE DATE OF THIS PROSPECTUS IS JUNE 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
----
GLOSSARY..................................................................
HIGHLIGHTS................................................................
SUMMARY OF VARIABLE ACCOUNT EXPENSES......................................
CONDENSED FINANCIAL INFORMATION...........................................
YIELD AND TOTAL RETURN DISCLOSURE.........................................
FINANCIAL STATEMENTS......................................................
GLENBROOK LIFE AND ANNUITY COMPANY AND
THE VARIABLE ACCOUNT.....................................................
Glenbrook Life and Annuity Company......................................
The Variable Account....................................................
THE FUND SERIES...........................................................
AIM Variable Insurance Funds, Inc.......................................
Investment Advisor for the Funds........................................
THE FIXED ACCOUNT.........................................................
Dollar Cost Averaging...................................................
Guarantee Periods.......................................................
Example of Interest Crediting During
the Guarantee Period................................................
Withdrawals or Transfers..............................................
Market Value Adjustment...............................................
PURCHASE OF THE CONTRACTS.................................................
Purchase Payment Limits.................................................
Free-Look Period........................................................
Crediting of Initial Purchase Payment...................................
Allocation of Purchase Payments.........................................
Accumulation Units......................................................
Accumulation Unit Value.................................................
Transfers Among Investment Alternatives.................................
Dollar Cost Averaging...................................................
Automatic Fund Rebalancing..............................................
BENEFITS UNDER THE CONTRACT...............................................
Withdrawals.............................................................
Income Payments.........................................................
Payout Start Date for Income Payments................................
Variable Account Income Payments.....................................
Fixed Amount Income Payments.........................................
Income Plans.........................................................
DEATH BENEFIT.............................................................
Distribution Upon Death Payment Provisions..............................
Death Benefit Amount....................................................
Enhanced Death Benefit Rider ...........................................
Enhanced Death Benefit A ............................................
Enhanced Death Benefit B ............................................
Enhanced Death and Income Benefit Combination Rider.....................
CHARGES AND OTHER DEDUCTIONS..............................................
Deductions from Purchase Payments.......................................
Withdrawal Charge (Contingent Deferred
Sales Charge)..........................................................
Contract Maintenance Charge.............................................
Administrative Expense Charge...........................................
Mortality and Expense Risk Charge.......................................
Taxes ..................................................................
Transfer Charges........................................................
Fund Expenses...........................................................
GENERAL MATTERS...........................................................
Owner...................................................................
Beneficiary.............................................................
Assignments.............................................................
Delay of Payments.......................................................
Modification............................................................
Customer Inquiries......................................................
FEDERAL TAX MATTERS.......................................................
Introduction............................................................
Taxation of Annuities in General........................................
Tax Deferral.........................................................
Non-Natural Owners...................................................
Diversification Requirements.........................................
Ownership Treatment..................................................
Delayed Maturity Dates...............................................
Taxation of Partial and Full Withdrawals.............................
Taxation of Annuity Payments.........................................
Taxation of Annuity Death Benefits...................................
Penalty Tax on Premature Distributions...............................
Aggregation of Annuity Contracts.....................................
Tax Qualified Contracts..............................................
Restrictions Under Section 403(b) Plans..............................
Roth Individual Retirement Annuities.................................
Income Tax Withholding...............................................
DISTRIBUTION OF THE CONTRACTS.............................................
VOTING RIGHTS.............................................................
SELECTED FINANCIAL DATA...................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...............................................................
COMPETITION...............................................................
EMPLOYEES.................................................................
PROPERTIES................................................................
STATE AND FEDERAL REGULATION..............................................
EXECUTIVE OFFICERS AND DIRECTORS OF THE
COMPANY..................................................................
EXECUTIVE COMPENSATION....................................................
LEGAL PROCEEDINGS.........................................................
EXPERTS...................................................................
LEGAL MATTERS.............................................................
FINANCIAL STATEMENTS...................................................... F-1
APPENDIX A -- Market Value Adjustment..................................... A-1
STATEMENT OF ADDITIONAL INFORMATION:
TABLE OF CONTENTS........................................................ B-1
ORDER FORM............................................................... B-2
<PAGE>
GLOSSARY
ACCUMULATION UNIT: A measure of your ownership interest in a Sub-account of the
Variable Account prior to the Payout Start Date.
ACCUMULATION UNIT VALUE: The value of each Accumulation Unit which is calculated
each Valuation Date. Each Sub-account of the Variable Account has its own
Accumulation Unit Value.
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. Joint annuitants
are only permitted on or after the Payout Start Date. Joint Annuitants may be
permitted prior to the Payout Start Date at the Company's discretion.
BENEFICIARY(IES): The person(s) to whom any benefits are due when a death
benefit is payable and there is no surviving Owner.
COMPANY: Glenbrook Life and Annuity Company.
CONTRACT: The Glenbrook Life and Annuity Company Flexible Premium Deferred
Variable Annuity Contract, known as the "AIM Lifetime Plus(SM) II Variable
Annuity," that is described in this prospectus. 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 to you, as the
certificate holder, that summarizes the provisions of the group Contract. For
convenience, this prospectus refers to both Contracts and certificates as
"Contracts."
CONTRACT ANNIVERSARY: An anniversary of the date that the Contract was issued.
CONTRACT VALUE: The value of all amounts accumulated under the Contract prior to
the Payout Start Date, equivalent to the Accumulation Units in each Sub-account
of the Variable Account multiplied by the respective Accumulation Unit Value,
plus the value in the Fixed Account.
CONTRACT YEAR: A period of 12 months starting with the issue date or any
Contract Anniversary.
DEATH BENEFIT ANNIVERSARY: Every seventh Contract Anniversary beginning on the
Contract Anniversary. For example, the 7th, the 14th and the 21st Contract
Anniversaries are the first three Death Benefit Anniversaries.
DOLLAR COST AVERAGING: There are three dollar cost averaging options available
to you. Dollar Cost Averaging Option I allows you to allocate purchase payments
to the Fixed Account for the specific purpose of dollar cost averaging. Dollar
Cost Averaging Option II allows you to dollar cost average out of any Variable
Sub-account into any other Variable Sub-account(s). Interest Only Dollar Cost
Averaging allows you to transfer interest credited from a Guarantee Period(s) to
any Variable Sub-account, without application of a Market Value Adjustment.
FIXED ACCOUNT: All of the assets of the Company that are not in separate
accounts.
GUARANTEE PERIOD: A period of years for which a specified effective annual
interest rate is guaranteed by the Company. You may select a Guarantee Period
when allocating purchase payments to the Fixed Account; when previous Guarantee
Periods expire and a new Guarantee Period is selected; and when you transfer an
amount to a Guarantee Period of the Fixed Account.
INCOME PLAN: One of several ways in which a series of payments are made after
the Payout Start Date. Income payments are based on the Contract Value adjusted
by any applicable Market Value Adjustment and applicable taxes on the Payout
Start Date. Income payment amounts may vary based on any Variable Sub-account
and/or may be fixed for the duration of the Income Plan.
INVESTMENT ALTERNATIVES: The Sub-accounts of the Variable Account and the Fixed
Account.
MARKET VALUE ADJUSTMENT: The Market Value Adjustment is the adjustment made to
the money distributed from a Guarantee Period, prior to the end of the Guarantee
Period, to reflect the impact of changes in interest rates between the time the
Guarantee Period was established and the time of distribution.
NON-QUALIFIED CONTRACTS: Contracts other than Qualified Contracts.
OWNER(S)("YOU"): The person or persons designated as the Owner in the Contract.
PAYOUT START DATE: The date on which income payments begin.
QUALIFIED CONTRACTS: Contracts issued under plans that qualify for special
federal income tax treatment under Sections 401(a), 403(a), 403(b), 408A and 408
of the Internal Revenue Code.
VALUATION DATE: Each day that the New York Stock Exchange is open for business.
The Valuation Date does not include such Federal and non-Federal holidays as are
observed by the New York Stock Exchange.
VALUATION PERIOD: The period between successive Valuation Dates, commencing at
the close of regular trading on the New York Stock Exchange (which is normally
4:00 pm Eastern Time) and ending as of the close of regular trading on the New
York Stock Exchange on the next succeeding Valuation Date.
VARIABLE ACCOUNT: Glenbrook Life and Annuity Company Separate Account A, a
separate investment account established by the Company to receive and invest
purchase payments paid under the Contracts.
VARIABLE SUB-ACCOUNT: A portion of the Variable Account invested in shares of a
corresponding Fund. The investment performance of each Variable Sub-account is
linked directly to the investment performance of its corresponding Fund.
HIGHLIGHTS
THE CONTRACT
This Contract is designed for long-term financial planning and retirement
planning. Money can be allocated to any combination of Investment Alternatives.
You have access to your monies either through withdrawals of Contract Value or
through periodic income payments. You bear the entire investment risk for
Contract Values and income payments based upon the Variable Account, because
values will vary depending on the investment performance of the Fund(s) you
select. See "Accumulation Unit Value," page 14 and "Income Plans," page 16. You
will also bear the investment risk of adverse changes in interest rates if
amounts are prematurely withdrawn or transferred from a Guarantee Period. See
"The Fixed Account," page 11.
FREE-LOOK
You may cancel the Contract any time within 20 days after receipt of the
Contract and receive a full refund of purchase payments allocated to the Fixed
Account. Purchase payments allocated to the Variable Account will be returned
after an adjustment to reflect investment gain or loss that occurred from the
date of allocation through the date of cancellation, unless a refund of purchase
payments is required by state or federal law. See "Free-Look Period," page 13.
HOW TO INVEST
Your first purchase payment must be at least $5,000 (for Qualified
Contracts, $2,000). Subsequent purchase payments must be at least $500.
Subsequent purchase payments of at least $100 may also be made pursuant to an
Automatic Addition Program. See "Purchase Payment Limits," page 13. At the time
of your application, you will allocate your purchase payment among the
Investment Alternatives. See "Allocation of Purchase Payments," page 13. All
allocations must be in whole percents from 0% to 100% (total allocation must
equal 100%) or in whole dollars (total allocation must equal entire dollar
amount of purchase payment). Allocations may be changed by notifying the
Company. See "Allocation of Purchase Payments," page 13.
INVESTMENT ALTERNATIVES
The Variable Account invests in shares of AIM Variable Insurance Funds,
Inc.(the "Fund Series"). The Fund Series has a total of thirteen Funds available
under the Contract. The Funds include: (1) AIM V.I. Aggressive Growth Fund; (2)
AIM V.I. Balanced Fund; (3) AIM V.I. Capital Appreciation Fund; (4) AIM V.I.
Capital Development Fund; (5) AIM V.I. Diversified Income Fund; (6) AIM V.I.
Global Utilities Fund; (7) AIM V.I. Government Securities Fund; (8) AIM V.I.
Growth Fund; (9) AIM V.I. Growth and Income Fund; (10) AIM V.I. High Yield Fund;
(11) AIM V.I. International Equity Fund; (12) AIM V.I. Money Market Fund; and
(13) AIM V.I. Value Fund. The assets of each Fund are held separately from the
other Funds and each has distinct investment objectives and policies which are
described in the accompanying prospectus for the Fund Series. In addition to the
Variable Account, Owners can also allocate all or part of their purchase
payments to the Fixed Account. See "The Fixed Account," on page 11.
TRANSFERS AMONG INVESTMENT ALTERNATIVES
Prior to the Payout Start Date, you may transfer amounts among the
Investment Alternatives. The Company reserves the right to assess a $10 charge
on each transfer in excess of twelve per Contract Year. The Company is presently
waiving this charge. Certain Fixed Account transfers may be restricted. See
"Transfers Among Investment Alternatives," page 14. You may want to enroll in a
Dollar Cost Averaging Program or an Automatic Fund Rebalancing Program. See
"Dollar Cost Averaging," page 14, and "Automatic Fund Rebalancing," page 15.
CHARGES AND DEDUCTIONS
The costs of the Contract include: a contract maintenance charge ($35
annually), a mortality and expense risk charge (deducted daily, equal on an
annual basis to 1.00% of the daily net assets of the Variable Account), and an
administrative expense charge (deducted daily, equal on an annual basis to .10%
of the daily net assets of the Variable Account). If you select the Enhanced
Death Benefit Rider, the mortality and expense risk charge to be deducted daily
will be equal on an annual basis to 1.20% (rather than 1.00%) of the daily net
assets of the Variable Account. If you elect the Enhanced Death Benefit and
Income Combination Rider, the mortality and expense risk charge to be deducted
daily will be equal on an annual basis to 1.40% (rather than 1.00%) of the daily
net assets of the Variable Account. The Company reserves the right to assess a
transfer charge ($10 on each transfer in excess of twelve per Contract Year).
Additional deductions may be made for certain taxes. See "Contract Maintenance
Charge," page 20, "Mortality and Expense Risk Charge," page 20, "Administrative
Expense Charge," page 20, "Transfer Charges," page 20, and "Taxes," page 20.
WITHDRAWALS
You may withdraw all or part of the Contract Value before the earlier of
the Payout Start Date, the death of any Owner or, if the Owner is not a natural
person, the death of the Annuitant. Each Contract Year, you may withdraw up to
15% of the Contract Value as of the beginning of that Contract Year and no
withdrawal charges or Market Value Adjustment will be applied to the amounts
withdrawn. Amounts withdrawn in excess of the 15% may be subject to a withdrawal
charge of 0% to 7% depending on how long purchase payments have been invested in
the Contract. Amounts withdrawn from a Guarantee Period of the Fixed Account, in
excess of the 15%, except during the 30 day period after the Guarantee Period
expires, will be subject to a Market Value Adjustment. See "Withdrawals," page
15, "Withdrawals or Transfers," page 13, and "Taxation of Annuities in General,"
page 22.
DEATH BENEFIT
The Company will pay a death benefit prior to the Payout Start Date on the
death of any Owner or, if the Owner is not a natural person, the death of the
Annuitant. See "Death Benefit Amount," page 17.
INCOME PAYMENTS
You will receive periodic income payments beginning on the Payout Start
Date. You may choose among several Income Plans to fit your needs. Income
payments may be received for a specified period or for life (either single or
joint life), with or without a guaranteed number of payments. You can select
income payments that are fixed, variable or a combination of fixed and variable.
See "Income Payments," page 15.
<PAGE>
SUMMARY OF VARIABLE ACCOUNT EXPENSES
The following table illustrates all expenses and fees that you will incur.
The expenses and fees set forth in the table are based on charges under the
Contracts, the expenses of the Variable Account and the underlying Fund Series.
OWNER TRANSACTION EXPENSES (ALL SUB-ACCOUNTS)
Sales Load Imposed on Purchases (as a percentage of purchase
payments)................................................. None
Contingent Deferred Sales Charge (as a percentage of
purchase payments)........................................ *
APPLICABLE YEAR SINCE
PREMIUM PAYMENT WITHDRAWAL
ACCEPTED CHARGE PERCENTAGE
- ------------------------ -----------------
1st Year............................................ 7%
2nd Year............................................ 7%
3rd Year............................................ 6%
4th Year............................................ 6%
5th Year............................................ 5%
6th Year............................................ 4%
7th Year............................................ 3%
Thereafter.......................................... 0%
Transfer Fee............................................... **
Annual Contract Fee ............................... $35***
Variable Account Annual Expenses (as a percentage of the Contract's average net
assets in the Variable Account)
Mortality and Expense Risk Charge......................... 1.00%****+
Administrative Expense Charge............................. 0.10%+
Total Variable Account Annual Expenses.................... 1.10%-1.50%
- ----------------
* Each Contract Year, up to 15% of the Contract Value as of the beginning of the
Contract Year may be withdrawn without imposition of a withdrawal charge or a
Market Value Adjustment.
** Currently, the Company does not impose a transfer charge. The Company
reserves the right in the future to assess a $10 charge for each transfer in
excess of twelve in any Contract Year, excluding transfers due to dollar cost
averaging and automatic fund rebalancing.
*** During the accumulation phase, the annual Contract Fee will be waived if
total purchase payments as of a Contract Anniversary, or upon a full withdrawal,
are $50,000 or if the entire Contract value is allocated to the Fixed Account.
During the payout phase, different restrictions may apply. Please see your
Contract for further details.
**** If you select the Enhanced Death Benefit Rider, the mortality and expense
risk charge to be deducted daily will be equal on an annual basis to 1.20%
(rather than 1.00%) of the daily net assets of the Variable Account. If you
select the Enhanced Death Benefit and Income Combination Rider, the mortality
and expense risk charge to be deducted daily will be equal on an annual basis to
1.40% (rather than 1.00%) of the daily net assets of the Variable Account.
+For amounts allocated to the Variable Account, the mortality and expense risk
charge and the administrative expense risk charge are assessed during both the
accumulation and the payout phases of the Contract.
<PAGE>
<TABLE>
<CAPTION>
FUND EXPENSES
(AS A PERCENTAGE OF FUND ASSETS*)
MANAGEMENT OTHER TOTAL FUND
FUND FEES EXPENSES ANNUAL EXPENSES
- ---- ---------- -------- ---------------
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund** .80% .36% 1.16%
AIM V.I. Balanced Fund** .75% .44% 1.19%
AIM V.I. Capital Appreciation Fund .63% .05% .68%
AIM V.I. Capital Development Fund** .75% .44% 1.19%
AIM V.I. Diversified Income Fund .60% .20% .80%
AIM V.I. Global Utilities Fund .65% .63% 1.28%
AIM V.I. Government Securities Fund .50% .37% .87%
AIM V.I. Growth Fund .65% .08% .73%
AIM V.I. Growth and Income Fund .63% .06% .69%
AIM V.I. High Yield Fund** .63% .48% 1.11%
AIM V.I. International Equity Fund .75% .18% .93%
AIM V.I. Money Market Fund .40% .19% .59%
AIM V.I. Value Fund .62% .08% .70%
- ----------------
</TABLE>
* A I M Advisors, Inc. ("AIM") may from time to time voluntarily waive or
reduce its respective fees. Effective May 1, 1998, the Funds reimburse AIM
in an amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services. Currently, the fee only
applies to the average net asset value of each Fund in excess of the net
asset value of each Fund as calculated on April 30, 1998.
** For the Funds designated above with a double asterisk, the fees and
expenses are based on estimated expenses for the current year.
EXAMPLE
You (the Owner) would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return, and the base contract with a mortality
and expense risk charge of 1.00% and an administrative expense charge of .10% of
the daily net assets of the Variable Account, under the following circumstances:
If you terminate your Contract or annuitize for a specified period of less
than 120 months at the end of the applicable time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
AIM V.I. Aggressive Growth Fund $85 $128 $173 $267
AIM V.I. Balanced Fund $85 $129 $175 $270
AIM V.I. Capital Appreciation Fund $80 $114 $150 $216
AIM V.I. Capital Development Fund $85 $129 $175 $270
AIM V.I. Diversified Income Fund $81 $118 $156 $229
AIM V.I. Global Utilities Fund $86 $132 $179 $279
AIM V.I. Government Securities Fund $82 $120 $159 $237
AIM V.I. Growth Fund $81 $116 $152 $222
AIM V.I. Growth and Income Fund $80 $114 $150 $217
AIM V.I. High Yield Fund $84 $127 $171 $262
AIM V.I. International Equity Fund $83 $122 $162 $243
AIM V.I. Money Market Fund $79 $112 $145 $207
AIM V.I. Value Fund $80 $115 $151 $219
</TABLE>
<PAGE>
If you do not terminate your Contract or if you annuitize for a specified
period of 120 months or more at the end of the applicable time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Aggressive Growth Fund $24 $73 $125 $267
AIM V.I. Balanced Fund $24 $74 $127 $270
AIM V.I. Capital Appreciation Fund $19 $58 $100 $246
AIM V.I. Capital Development Fund $24 $74 $127 $270
AIM V.I. Diversified Income Fund $20 $62 $106 $229
AIM V.I. Global Utilities Fund $25 $77 $131 $279
AIM V.I. Government Securities Fund $21 $64 $110 $237
AIM V.I. Growth Fund $19 $60 $103 $222
AIM V.I. Growth and Income Fund $19 $59 $101 $217
AIM V.I. High Yield Fund $23 $72 $123 $262
AIM V.I. International Equity Fund $21 $66 $113 $243
AIM V.I. Money Market Fund $18 $55 $ 95 $207
AIM V.I. Value Fund $19 $59 $101 $219
</TABLE>
You (the Owner) would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return and a contract with the Enhanced Death
Benefit Rider and a mortality and expense risk charge of 1.20% and an
administrative expense charge of .10% of the daily net assets of the Variable
Account, under the following circumstances:
If you terminate your Contract or annuitize for a specified period of less
than 120 months at the end of the applicable time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Aggressive Growth Fund $87 $134 $183 $287
AIM V.I. Balanced Fund $87 $135 $185 $291
AIM V.I. Capital Appreciation Fund $82 $120 $160 $238
AIM V.I. Capital Development Fund $87 $135 $185 $291
AIM V.I. Diversified Income Fund $83 $124 $166 $250
AIM V.I. Global Utilities Fund $88 $138 $189 $300
AIM V.I. Government Securities Fund $84 $126 $169 $258
AIM V.I. Growth Fund $83 $122 $162 $243
AIM V.I. Growth and Income Fund $82 $120 $160 $239
AIM V.I. High Yield Fund $86 $133 $181 $282
AIM V.I. International Equity Fund $85 $127 $172 $264
AIM V.I. Money Market Fund $81 $117 $155 $228
AIM V.I. Value Fund $82 $121 $161 $240
</TABLE>
If you do not terminate your Contract or if you annuitize for a specified
period of 120 months or more at the end of the applicable time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Aggressive Growth Fund $26 $79 $135 $287
AIM V.I. Balanced Fund $26 $80 $136 $291
AIM V.I. Capital Appreciation Fund $21 $64 $111 $238
AIM V.I. Capital Development Fund $26 $80 $136 $291
AIM V.I. Diversified Income Fund $22 $68 $117 $250
AIM V.I. Global Utilities Fund $27 $83 $141 $300
AIM V.I. Government Securities Fund $23 $70 $120 $258
AIM V.I. Growth Fund $21 $66 $113 $243
AIM V.I. Growth and Income Fund $21 $65 $111 $239
AIM V.I. High Yield Fund $25 $78 $133 $282
AIM V.I. International Equity Fund $23 $72 $124 $264
AIM V.I. Money Market Fund $20 $62 $106 $228
AIM V.I. Value Fund $21 $65 $112 $240
</TABLE>
<PAGE>
You (the Owner) would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return and a Contract with the Enhanced Death
Benefit and Income Combination Rider and a mortality and expense risk charge of
1.40% and an administrative expense charge of .10% of the daily net assets of
the Variable Account, under the following circumstances:
If you terminate your Contract or annuitize for a specified period of less
than 120 months at the end of the applicable time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Aggressive Growth Fund $89 $140 $193 $308
AIM V.I. Balanced Fund $89 $141 $194 $310
AIM V.I. Capital Appreciation Fund $84 $126 $170 $259
AIM V.I. Capital Development Fund $89 $141 $194 $310
AIM V.I. Diversified Income Fund $85 $129 $175 $271
AIM V.I. Global Utilities Fund $90 $143 $199 $319
AIM V.I. Government Securities Fund $86 $131 $179 $278
AIM V.I. Growth Fund $85 $127 $172 $264
AIM V.I. Growth and Income Fund $84 $126 $170 $260
AIM V.I. High Yield Fund $88 $138 $191 $303
AIM V.I. International Equity Fund $86 $133 $182 $284
AIM V.I. Money Market Fund $83 $123 $165 $249
AIM V.I. Value Fund $84 $127 $171 $261
</TABLE>
If you do not terminate your Contract or if you annuitize for a specified
period of 120 months or more at the end of the applicable time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
AIM V.I. Aggressive Growth Fund $28 $85 $146 $308
AIM V.I. Balanced Fund $28 $86 $147 $310
AIM V.I. Capital Appreciation Fund $23 $71 $121 $259
AIM V.I. Capital Development Fund $28 $86 $147 $310
AIM V.I. Diversified Income Fund $24 $74 $127 $271
AIM V.I. Global Utilities Fund $29 $89 $152 $319
AIM V.I. Government Securities Fund $25 $77 $131 $278
AIM V.I. Growth Fund $23 $72 $124 $264
AIM V.I. Growth and Income Fund $23 $71 $121 $260
AIM V.I. High Yield Fund $27 $84 $143 $303
AIM V.I. International Equity Fund $26 $78 $134 $284
AIM V.I. Money Market Fund $22 $68 $116 $249
AIM V.I. Value Fund $23 $71 $122 $261
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of
the example is to assist you in understanding the various costs and expenses
that you will bear directly or indirectly. Premium taxes, which vary from 0 -
3.5% depending upon the state where the Contract is sold, may also be imposed
but are not reflected in the example.
CONDENSED FINANCIAL INFORMATION
Condensed financial information is not included herein because, as of the
date of this prospectus, sales of the Contracts had not commenced. Accordingly,
as of the date of this prospectus, no monies had been allocated to the Separate
Account for the Contracts offered by this prospectus. Therefore, accumulation
unit values for these Contracts were not available.
YIELD AND TOTAL RETURN DISCLOSURE
From time to time the Variable Account may advertise the yield and total
return investment performance of one or more Variable Sub-accounts. Yield and
standardized total return advertisements include all charges and expenses
attributable to the Contracts. Thus, the standardized performance reflects not
only the actual investment performance of invested assets but also the effect of
contractual fees and charges.
When a Sub-account advertises its standardized total return it will usually
be calculated for one year, five years, and ten years or since inception if the
Sub-account has not been in existence for such periods. Total return is measured
by comparing the value of an investment in the Sub-account at the end of the
relevant period to the value of the investment at the beginning of the period.
In addition to the standardized total return, the Sub-account may advertise
non-standardized total return. This figure will usually be calculated for one
year, five years, and ten years or other periods. Non-standardized total return
is measured in the same manner as the standardized total return described above,
except that the withdrawal charges under the Contract are not deducted.
Therefore, non-standardized total return for a Sub-account will be higher than a
standardized total return for a Sub-account, as it assumes the Contract is held
for its long-term retirement purpose.
Certain Sub-accounts may advertise yield in addition to total return.
Except in the case of the AIM V.I. Money Market Sub-account, the yield will be
computed in the following manner: the net investment income per unit earned
during a recent one month period is divided by the unit value on the last day of
the period, and then annualized. This figure reflects the recurring charges at
the separate account level.
The AIM V.I. Money Market Sub-account may advertise, in addition to the
total return, either yield or the effective yield. The yield in this case refers
to the income generated by an investment in that Sub-account over a seven-day
period net of recurring charges at the separate account level. The income is
then annualized (i.e., the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment). The effective yield is calculated
similarly but when annualized, the income earned by an investment in the AIM
V.I. Money Market Sub-account is assumed to be reinvested at the end of each
seven-day period. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment during a 52-week
period.
The Variable Account may also disclose yield, standard total return, and
non-standard total return for periods prior to the date that the Variable
Account commenced operations. For periods prior to the date the Variable Account
commenced operations, performance information for the Sub-accounts will be
calculated based on the performance of the underlying Funds and the assumption
that the Sub-accounts were in existence for the same periods as those of the
underlying Funds, with a level of charges equal to those currently assessed
against the Sub-accounts under the Contracts.
Please refer to the Statement of Additional Information for a further
description of the method used to calculate a Sub-account's yield and total
return.
FINANCIAL STATEMENTS
The financial statements of Glenbrook Life and Annuity Company begin on
page F-1 of this prospectus. The financial statements of the Glenbrook Life and
Annuity Company Separate Account A may be found in the Statement of Additional
Information, which is incorporated by reference into this prospectus and which
is available from the Company free of charge upon request. (See order form on
page B-2)
GLENBROOK LIFE AND ANNUITY COMPANY AND THE VARIABLE ACCOUNT
GLENBROOK LIFE AND ANNUITY COMPANY
The Company is the issuer of the Contract. The Company is a stock life
insurance company which was organized under the laws of Illinois in 1992. The
Company was originally organized under the laws of Indiana in 1965. From 1965 to
1983 the Company was known as "United Standard Life Assurance Company" and from
1983 to 1992 the Company was known as "William Penn Life Assurance Company of
America." The Company is licensed to operate in the District of Columbia, Puerto
Rico, 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 a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), a stock life insurance company incorporated under the laws of
Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance
Company ("Allstate"), a stock property-liability insurance company incorporated
under the laws of Illinois. All of the outstanding capital stock of Allstate is
owned by The Allstate Corporation ("Corporation"). 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 Company and Allstate Life entered into a reinsurance agreement,
effective June 5, 1992. Under the reinsurance agreement, Fixed Account purchase
payments are automatically transferred to Allstate Life and become invested with
the assets of Allstate Life, and Allstate Life accepts 100% of the liability
under such contracts. However, the obligations of Allstate Life under the
reinsurance agreement are to the Company; the Company remains the sole obligor
under the Contract to the Owners.
THE VARIABLE ACCOUNT
Established on September 6, 1995, the Glenbrook Life and Annuity Company
Separate Account A is a unit investment trust registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. Such registration,
however, does not signify that the Commission supervises the management or
investment practices or policies of the Variable Account. The investment
performance of the Variable Account is independent of both the investment
experience of the Company's general account and the performance of any other
separate account.
The Variable Account has been divided into thirteen Sub-accounts, each of
which invests solely in a corresponding Fund of AIM Variable Insurance Funds,
Inc. Additional Variable Sub-accounts may be added at the discretion of the
Company. The Variable Account may also add other sub-accounts that may be
available under other variable annuity contracts.
The assets of the Variable Account are held separately from the other
assets of the Company. The assets are not chargeable with liabilities incurred
in the Company's other business operations. Accordingly, the income, capital
gains and capital losses, realized or unrealized, incurred on the assets of the
Variable Account are credited to or charged against the assets of the Variable
Account, without regard to the income, capital gains or capital losses arising
out of any other business the Company may conduct. The Company's obligations
arising under the Contracts are general corporate obligations of the Company.
THE FUND SERIES
The Variable Account will invest in shares of the AIM Variable Insurance
Funds, Inc. (the "Fund Series"). The Fund Series is registered with the
Securities and Exchange Commission as an open-end, series, management investment
company. Registration of the Fund Series does not involve supervision of its
management, investment practices or policies by the Securities and Exchange
Commission. The Funds are designed to provide investment vehicles for variable
insurance contracts of various insurance companies, in addition to the Variable
Account.
Shares of the Funds are not deposits, or obligations of, or guaranteed or
endorsed by any bank and the shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
AIM VARIABLE INSURANCE FUNDS, INC.
AIM Variable Insurance Funds, Inc. offers thirteen Funds for use with this
Contract: (1) AIM V.I. Aggressive Growth Fund; (2) AIM V.I. Balanced Fund; (3)
AIM V.I. Capital Appreciation Fund; (4) AIM V.I. Capital Development Fund; (5)
AIM V.I. Diversified Income Fund; (6) AIM V.I. Global Utilities Fund; (7) AIM
V.I. Government Securities Fund; (8) AIM V.I. Growth Fund; (9) AIM V.I. Growth
and Income Fund; (10) AIM V.I. High Yield Fund; (11) AIM V.I. International
Equity Fund; (12) AIM V.I. Money Market Fund; and (13) AIM V.I. Value Fund. Each
Fund has different investment objectives and policies and operates as a separate
investment fund. The following is a brief description of the investment
objectives and programs of the Funds:
AIM V.I. Aggressive Growth Fund ("Aggressive Growth Fund") is a diversified
Fund which seeks to achieve long-term growth of capital by investing primarily
in common stocks, convertible bonds, convertible preferred stocks and warrants
of companies, which in the opinion of the Fund's investment advisor are expected
to achieve earnings growth over time at a rate in excess of 15% per year.
AIM V.I. Balanced Fund ("Balanced Fund") is a diversified Fund which seeks
to achieve as high a total return as possible, consistent with preservation of
capital, by investing in a broadly diversified portfolio of high-yielding
securities, including common stocks, preferred stocks, convertible securities
and bonds. The fund may invest up to 10% of its total assets in debt securities
rated lower than Baa by Moody's Investors Service, Inc. or BBB by Standard &
Poor's Ratings Services. These debt securities are commonly known as "junk
bonds." The risks of investing in junk bonds are described in the accompanying
prospectus for the Fund Series, which should be read carefully before investing.
AIM V.I. Capital Appreciation Fund ("Capital Appreciation Fund") is a
diversified Fund which seeks to provide capital appreciation through investments
in common stocks, with emphasis on medium-sized and smaller emerging growth
companies.
AIM V.I. Capital Development Fund ("Capital Development Fund") is a
diversified Fund which seeks to invest primarily in common stocks, convertible
securities and bonds. The fund will invest primarily in securities of small and
medium-sized companies (i.e., companies which fall in the smallest 85% by market
capitalization of publicly traded companies in the United States). The Fund may
also register up to 10% of its total assets in securities of other registered
investment companies.
AIM V.I. Diversified Income Fund ("Diversified Income Fund") is a
diversified Fund which seeks to achieve a high level of current income primarily
by investing in a diversified portfolio of foreign and U.S. government and
corporate debt securities, including lower rated high yield debt securities
(commonly known as "junk bonds"). The risks of investing in junk bonds are
described in the accompanying prospectus for the Fund Series, which should be
read carefully before investing.
AIM V.I. Global Utilities Fund ("Global Utilities Fund") is a
non-diversified Fund which seeks to achieve a high level of current income and,
as a secondary objective, to achieve capital appreciation, by investing
primarily in common and preferred stocks of public utility companies (either
domestic or foreign).
AIM V.I. Government Securities Fund ("Government Securities Fund") is a
diversified Fund which seeks to achieve a high level of current income
consistent with reasonable concern for safety of principal by investing in debt
securities issued, guaranteed or otherwise backed by the U.S. Government.
AIM V.I. Growth Fund ("Growth Fund") is a diversified Fund which seeks to
provide growth of capital through investments primarily in common stocks of
leading U.S. companies considered by AIM to have strong earnings momentum.
AIM V.I. Growth and Income Fund ("Growth and Income Fund") is a diversified
Fund which seeks to provide growth of capital, with current income as a
secondary objective by investing primarily in dividend paying common stocks
which have prospects for both growth of capital and dividend income.
AIM V.I. High Yield Fund ("High Yield Fund") is a diversified fund which
seeks to achieve a high level of current income by investing primarily in
publicly traded debt securities of less than investment grade. Debt securities
of less than investment grade are considered "high risk" securities, commonly
referred to as "junk bonds." At least 80% of the value of the fund's total
assets will be invested in debt securities. The fund may also invest in
preferred stocks. At least 65% of the value of the fund's assets will be
invested in high yield debt securities. The securities held by the fund may be
subject to greater risk of loss of income and principal and are more speculative
in nature. The risks of investing in junk bonds are described in the
accompanying prospectus for the Fund Series, which should be read carefully
before investing.
AIM V.I. International Equity Fund ("International Equity Fund") is a
diversified Fund which seeks to provide long-term growth of capital by investing
in international equity securities, the issuers of which are considered by AIM
to have strong earnings momentum.
AIM V.I. Money Market Fund ("Money Market Fund") is a diversified Fund
which seeks to provide as high a level of current income as is consistent with
the preservation of capital and liquidity by investing in a diversified
portfolio of money market instruments.
AIM V.I. Value Fund ("Value Fund") is a diversified Fund which seeks to
achieve long-term growth of capital by investing primarily in equity securities
judged by AIM to be undervalued relative to the current or projected earnings of
the companies issuing the securities, or relative to current market values of
assets owned by the companies issuing the securities or relative to the equity
markets generally. Income is a secondary objective.
INVESTMENT ADVISOR FOR THE FUNDS
A I M Advisors, Inc., ("AIM") serves as the investment advisor to each
Fund. AIM was organized in 1976, and, together with its domestic subsidiaries,
manages or advises over 50 investment company portfolios (including the Funds)
encompassing a broad range of investment objectives. AIM is a wholly owned
subsidiary of A I M Management Group Inc., ("AIM Management"). AIM Management is
a holding company engaged in the financial services business and is an indirect
wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are
an independent investment management group engaged in institutional investment
management and retail mutual fund business in the United States, Europe, and the
Pacific Region. AIM manages each Fund's assets pursuant to a master investment
advisory agreement dated February 28, 1997.
The Company may receive compensation from the Funds or the investment
advisors of the Funds for services related to the Funds. the compensation will
be consistent with the services rendered or the cost savings resulting from the
arrangment(s).
There is no assurance that the Funds will attain their respective stated
objectives. You will find more complete information about the Funds, including
the risks associated with each Fund, in the accompanying prospectus. You should
read the prospectus for the Fund Series in conjunction with this prospectus.
THE FUND SERIES PROSPECTUS SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS
MADE CONCERNING THE ALLOCATION OF PURCHASE PAYMENTS TO A PARTICULAR VARIABLE
SUB-ACCOUNT.
THE FIXED ACCOUNT
You may allocate all or a portion of your purchase payment(s) to Dollar
Cost Averaging. You may also choose to allocate all or a portion of your
purchase payment(s) or of amounts transferred to one or more Guarantee
Period(s). If you elect to allocate monies to the Fixed Account under either
option, the amounts so allocated become part of the general account of the
Company.
DOLLAR COST AVERAGING
You may allocate purchase payments to Dollar Cost Averaging Option I ("DCA
Option I"). Purchase payments allocated to DCA Option I will earn interest for
one year at the current rate in effect at the time you make your allocation to
DCA Option I. Monies so allocated will earn interest at a rate set by the
Company which may differ from that declared for one or more Guarantee Period(s).
The rate will never be less than 3%. All purchase payments and interest earned
on those payments become part of the general account of the Company. You may not
transfer funds from other Investment Alternatives in to DCA Option I.
When you make your allocation to DCA Option I, you must designate a
percentage (whole percentages only, which must total 100%) of the allocated
amount that will be transferred to the Investment Alternative(s) you select. An
amount equal to the percentage you designated will be transferred into the
Investment Alternatives you designate in equal monthly installments over the
number of months you select. The number of monthly transfers selected may not
exceed 12. At the end of 12 months from the date of allocation to DCA Option I,
any remaining amount in DCA Option I will be transferred to the Investment
Alternatives you designated.
There may be certain restrictions on this program based upon state law.
Please consult your sales representative for information regarding the
availability of dollar cost averaging in your state.
GUARANTEE PERIODS
When you elect to allocate purchase payment(s) amounts or transferred
amounts to the Fixed Account, you may allocate the monies to one or more
Guarantee Periods. Guarantee Periods are offered at the Company's discretion and
may range from one to ten years in duration. Presently, the Company offers
Guarantee Periods of one, three, five, seven and ten years. The Owner must
select the Guarantee Period(s) to which each purchase payment or transfer amount
will be allocated. The Company reserves the right to limit the number of
additional purchase payments. The Guarantee Period(s) of the Fixed Account
Investment Alternative may not be available in all states. Please consult with
your sales representative for further information regarding availability in your
state.
Interest is credited daily to each Guarantee Period at a rate which
compounds to the effective annual interest rate declared for each Guarantee
Period that has been selected. Guarantee Periods of the same duration may vary
as to the declared interest rate depending on the time purchase payments are
allocated to the Guarantee Periods.
The following example illustrates how interest would be credited given an
assumed purchase payment, Guarantee Period, and effective annual interest rate:
Example Of Interest Crediting During The Guarantee Period:
Purchase Payment:...........................................$10,000.00
Guarantee Period:..............................................5 years
Effective Annual Rate:.........................................4.50%
<PAGE>
END OF CONTRACT YEAR:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
--------- ---------- ---------- -------- ----------
Beginning Value $10,000.00
X (1 + Effective Annual Rate) 1.045
----------
$10,450.00
Value at end of Contract year $10,450.00
1 X (1 + Effective Annual Rate) 1.045
----------
$10,920.25
Value at end of Contract year $10,920.25
2 X (1 + Effective Annual Rate) 1.045
----------
$11,411.66
Value at end of Contract year $11,411.66
3 X (1 + Effective Annual Rate) 1.045
----------
$11,925.19
Value at end of Contract year $11,925.19
4 X (1 + Effective Annual Rate) 1.045
----------
Value at end of Guarantee Period: $12,461.82
==========
TOTAL INTEREST CREDITED IN GUARANTEE PERIOD: $2,461.82 ($12,461.82 - $10,000.00)
</TABLE>
NOTE: The above example assumes no withdrawals of any amount during the
entire five year period. A withdrawal charge and a Market Value
Adjustment may apply to any amount withdrawn in a Contract Year in
excess of 15% of the Contract Value for that Contract Year. The
hypothetical interest rate is for illustrative purposes only and is not
intended to predict future interest rates to be declared under the
Contract.
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 interest rates available when the rate(s) is declared. In
addition, 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 Company guarantees that the interest rates will never
be less than the minimum guaranteed rate shown in the Contract. For current
interest rate information, please contact your sales representative or the
Company's Customer Support Unit at 1 (800) 776-6978.
THE MANAGEMENT OF THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO THE
INTEREST RATES TO BE DECLARED. THE COMPANY CAN NEITHER PREDICT NOR GUARANTEE
FUTURE INTEREST RATES TO BE DECLARED.
Prior to the end of a Guarantee Period, a notice will be mailed to the
Owner outlining the options available at the end of a Guarantee Period. During
the 30 day period after a Guarantee Period expires the Owner may:
- take no action and the Company will automatically establish a
Guarantee Period of the same duration as that of the expiring Guarantee
Period effective on the day the previous Guaranteed Period expired;
amounts allocated to the expiring Guarantee Period (the "allocated
amount") will be placed in the newly established Guarantee Period; or
- notify the Company to apply the allocated amount to a new Guarantee
Period or periods to be established on the day the previous Guarantee
Period expired; or
- notify the Company to apply the allocated amount to any Variable
Sub-account on the day we receive the notification; or
- receive a portion of the allocated amount or the entire allocated
amount 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.
Withdrawals or Transfers
With the exception of transfers made automatically through Dollar Cost
Averaging, all withdrawals and transfers paid from a Guarantee Period(s) other
than during the 30 day period after a Guarantee Period expires are subject to a
Market Value Adjustment.
The amount received by the Owner under a withdrawal request equals the
amount requested, adjusted by any Market Value Adjustment, less any applicable
withdrawal charge (based upon the amount requested prior to any Market Value
Adjustment), less premium taxes and withholding (if applicable).
Market Value Adjustment
The Market Value Adjustment reflects the relationship between: (1) the
current Treasury Rate for a maturity equal to the Guarantee Period at the time
of the request for withdrawal or transfer, or application to an Income Plan, and
(2) the original Treasury Rate for a maturity equal to the Guarantee Period at
the time the Guarantee Period was established. As such, the Owner bears some
investment risk under the Contract. Treasury Rate means the U.S. Treasury Note
Constant Maturity yield for the preceding week as reported in Federal Reserve
Bulletin Release H.15.
Generally, if the original Treasury Rate at the time the Guarantee Period
was established is higher than the applicable current Treasury Rate, then the
Market Value Adjustment will result in a higher amount payable to the Owner,
transferred, or applied to an Income Plan. Similarly, if the Treasury Rate at
the time the Guarantee Period was established is lower than the applicable
current Treasury Rate, then the Market Value Adjustment will result in a lower
amount payable to the Owner, transferred, or applied to an Income Plan.
For example, assume the Owner purchases a Contract and selects an initial
Guarantee Period of five years and the five year Treasury Rate for that duration
is 4.50%. Assume that at the end of 3 years, the Owner makes a partial
withdrawal. If, at that later time, the current five year Treasury Rate 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 five
year Treasury Rate 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 examples of the
application of the Market Value Adjustment. The Market Value Adjustment will be
waived on withdrawals taken to satisfy IRS required minimum distribution rules
for this Contract.
PURCHASE OF THE CONTRACTS
PURCHASE PAYMENT LIMITS
Your first purchase payment must be at least $5,000 unless the Contract is
a Qualified Contract, in which case the first purchase payment must be at least
$2,000. All subsequent purchase payments must be $500 or more and may be made at
any time prior to the Payout Start Date. Subsequent purchase payments may also
be made from your bank account through Automatic Additions. Under an Automatic
Additions Program, the minimum purchase payment is $100. Please consult with
your sales representative for detailed information about Automatic Additions.
We reserve the right to limit the amount of purchase payments we will
accept.
FREE-LOOK PERIOD
You may cancel the Contract any time within 20 days after receipt of the
Contract and receive a full refund of purchase payments allocated to the Fixed
Account. Purchase payments allocated to the Variable Account will be returned
after an adjustment to reflect investment gain or loss that occurred from the
date of allocation through the date of cancellation unless a refund of purchase
payments is required by state or federal law. Your state may require a different
free look period. Please consult your Contract for more information.
CREDITING OF INITIAL PURCHASE PAYMENT
The initial purchase payment accompanied by a duly completed application
will be credited to the Contract within two business days of receipt by us at
our home office. If an application is not duly completed, we will credit the
purchase payments to the Contract within five business days or return it to you
at that time unless you specifically consent to us holding the purchase payment
until the application is complete. We reserve the right to reject any
application. Subsequent purchase payments will be credited to the Contract at
the close of the Valuation Period in which the purchase payment is received by
the Company at its home office.
ALLOCATION OF PURCHASE PAYMENTS
On the application, you instruct us how to allocate the purchase payment
among the Investment Alternatives. Purchase payments may be allocated to any
Investment Alternative in whole percents, from 0% to 100% (total allocation must
equal 100%) or in whole dollars (total allocation must equal entire dollar
amount of purchase payments). Unless you notify us in writing otherwise,
subsequent purchase payments are allocated according to the allocation
instructions for the previous purchase payment. Any change in allocation
instructions will be effective at the time we receive the notice in good order.
<PAGE>
ACCUMULATION UNITS
Each purchase payment allocated to the Variable Account will be
credited to the Contract as Accumulation Units. For example, if a $10,000
purchase payment is credited to the Contract when the Accumulation Unit value
equals $10, then 1,000 Accumulation Units would be credited to the Contract. The
Variable Account, in turn, purchases shares of the corresponding Fund.
ACCUMULATION UNIT VALUE
The Accumulation Units in each Variable Sub-account are valued
separately. The value of Accumulation Units will change each Valuation Period
according to the investment performance of the shares held by each Variable
Sub-account and the deduction of certain expenses and charges.
The value of an Accumulation Unit in a Variable Sub-account for any
Valuation Period equals the value of the Accumulation Unit as of the immediately
preceding Valuation Period, multiplied by the Net Investment Factor for that
Sub-account for the current Valuation Period. The Net Investment Factor for a
Valuation Period is a number representing the change, since the last Valuation
Date in the value of Sub-account assets per Accumulation Unit due to investment
income, realized or unrealized capital gain or loss, deductions for taxes, if
any, and deductions for the mortality and expense risk charge and administrative
expense charge.
TRANSFERS AMONG INVESTMENT ALTERNATIVES
Amounts may be transferred among Investment Alternatives, subject to the
following restrictions. The Company reserves the right to assess a $10 charge on
each transfer in excess of twelve per Contract Year. The Company is presently
waiving this charge. Transfers to or from more than one Investment Alternative
on the same day are treated as one transfer. Transfers through Dollar Cost
Averaging or Automatic Fund Rebalancing are not included in the twelve free
transfers per Contract Year. Currently, there is neither a minimum nor a maximum
amount for the amount of the transfer.
Transfers among Investment Alternatives before the Payout Start Date may be
made at any time. Transfers are not permitted into DCA Option I. See
"Withdrawals or Transfers," page 13 for the requirements on transfers from the
Fixed Account. After the Payout Start Date, transfers among Variable
Sub-accounts or from a variable amount income payment to a fixed amount income
payment may be made only once every six months and may not be made during the
first six months following the Payout Start Date. After the Payout Start Date,
transfers from a fixed amount income payment are not permitted.
Telephone transfer requests will be accepted by the Company on each
Valuation Date if received at 1 (800) 776 - 6978 by 3:00 p.m., Central Time.
Telephone transfer requests received at any other telephone number or after 3:00
p.m., Central Time will not be accepted by the Company. Telephone transfer
requests received before 3:00 p.m., Central Time are effected at the next
computed value. In the event that the New York Stock Exchange ("NYSE") closes
early, i.e., before 3:00 p.m. Central Time, or in the event that the NYSE closes
early for a period of time but then reopens for trading on the same day,
telephone transfer requests will be processed by the Company as of the close of
the NYSE on that particular day. Telephone requests received at any telephone
number other than the number that appears in this paragraph or received after
the close of trading on the NYSE will not be accepted by the Company.
The Company utilizes procedures which the Company believes will provide
reasonable assurance that telephone authorized transfers are genuine. Such
procedures include taping of telephone conversations with persons purporting to
authorize such transfers and requesting identifying information from such
persons. Accordingly, the Company disclaims any liability for losses resulting
from such transfers by reason of their allegedly not having been properly
authorized. However, if the Company does not take reasonable steps to help
ensure that such authorizations are valid, the Company may be liable for such
losses.
The Company reserves the right to waive transfer restrictions.
DOLLAR COST AVERAGING
Transfers may be made automatically through Dollar Cost Averaging prior to
the Payout Start Date. There are three dollar cost averaging options available
to you (collectively, "Dollar Cost Averaging"). Dollar Cost Averaging Option I
allows you to allocate purchase payments to the Fixed Account for the specific
purpose of dollar cost averaging. Dollar Cost Averaging Option II allows you to
dollar cost average out of any Variable Sub-account into any other Variable
Sub-account(s). Interest Only Dollar Cost Averaging allows you to transfer
interest credited from a Guarantee Period(s) to any Variable Sub-account without
application of a Market Value Adjustment. In addition, such transfers are not
assessed a $10 charge and are not included in the twelve free transfers per
Contract Year.
<PAGE>
The theory of Dollar Cost Averaging is that, if purchases of equal dollar
amounts are made at fluctuating prices, the aggregate average cost per unit will
be less than the average of the unit prices on the same purchase dates. However,
participation in Dollar Cost Averaging does not assure you of a greater profit
from your purchases, nor will it prevent or alleviate losses in a declining
market.
AUTOMATIC FUND REBALANCING
Transfers may be made automatically through Automatic Fund Rebalancing
prior to the Payout Start Date. By electing Automatic Fund Rebalancing, all of
the money allocated to Variable Sub-accounts will be rebalanced to the desired
allocation on a quarterly basis, determined from the first date that you decide
to rebalance. Each quarter, money will be transferred among Variable
Sub-accounts to achieve the desired allocation.
The desired allocation will be the allocation initially selected, unless
subsequently changed. You may change the allocation at any time by giving us
proper notice. The new allocation will be effective with the first rebalancing
that occurs after we receive the proper notice of your request.
Transfers made through Automatic Fund Rebalancing are not assessed a $10
charge and are not included in the twelve free transfers per Contract Year.
Any money allocated to the Fixed Account will not be included in the
rebalancing.
BENEFITS UNDER THE CONTRACT
WITHDRAWALS
You may withdraw all or part of the Contract Value at any time prior to the
earlier of the death of the Owner (or the Annuitant if the Owner is not a
natural person) or the Payout Start Date. The amount available for withdrawal is
the Contract Value next computed after the Company receives the request for a
withdrawal at its home office, adjusted by any applicable Market Value
Adjustment, less any withdrawal charges, contract maintenance charges and any
premium taxes. See "Charges and Other Deductions," page 19. Withdrawals from the
Variable Account will be paid within seven days of receipt of the request,
subject to postponement in certain circumstances. See "Delay of Payments," page
21.
Money can be withdrawn from the Variable Account or the Fixed Account. To
complete the partial withdrawal from the Variable Account, the Company will
redeem Accumulation Units in an amount equal to the withdrawal and any
applicable withdrawal charge and premium taxes. The Owner must name the
Investment Alternatives from which the withdrawal is to be made. If no
Investment Alternative is named, then the withdrawal request is incomplete and
will not be honored.
The minimum partial withdrawal is $50. If the Contract Value after a
partial withdrawal would be less than $1,000, then the Company will treat the
request as one for termination of the Contract and the entire Contract Value,
adjusted by any Market Value Adjustment, less any charges and premium taxes,
will be paid out.
Partial withdrawals may also be taken automatically through Systematic
Withdrawals on a monthly, quarterly, semi-annual or annual basis. Systematic
Withdrawals of $50 or more may be requested at any time prior to the Payout
Start Date. The Company reserves the right to prohibit the use of Systematic
Withdrawals in conjunction with Dollar Cost Averaging or Automatic Fund
Rebalancing.
Partial and full withdrawals may be subject to current income tax and a 10%
tax penalty. This tax and penalty are explained in "Federal Tax Matters," on
page 22.
After the Payout Start Date, withdrawals are only permitted when payments
from the Variable Account are being made for a specified number of payments only
(i.e. Income Plan 3). In that case, you may terminate the Variable Account
portion of the income payments at any time and receive a lump sum equal to the
commuted balance of the remaining variable payments due, less any applicable
withdrawal charge.
INCOME PAYMENTS
PAYOUT START DATE FOR INCOME PAYMENTS
The Payout Start Date is the day that income payments will start under the
Contract. You may change the Payout Start Date at any time by notifying the
Company in writing of the change at least 30 days before the scheduled Payout
Start Date. The Payout Start Date must be (a) at least one month after the issue
date; and (b) no later than the day the Annuitant reaches age 90, or the 10th
anniversary of the issue date, if later.
VARIABLE ACCOUNT INCOME PAYMENTS
The amount of Variable Account income payments depends upon the investment
experience of the Variable Sub-accounts selected by the Owner and any premium
taxes, the age and sex of the Annuitant, and the Income Plan chosen. The Company
guarantees that the amount of the income payment will not be affected by (1)
actual mortality experience and (2) the amount of the Company's administration
expenses.
The Contracts offered by this prospectus contain income payment tables that
provide for different benefit payments to men and women of the same age (except
in states which require unisex annuity tables). Nevertheless, in accordance with
the U.S. Supreme Court's decision in Arizona Governing Committee v. Norris, in
certain employment-related situations, annuity tables that do not vary on the
basis of sex will be used.
The total income payments received may be more or less than the total
purchase payments made because (a) Variable Account income payments vary with
the investment results of the underlying Funds, and (b) Annuitants may not live
longer than, or not as long as, expected.
The Income Plan option selected will affect the dollar amount of each
income payment. For example, if an Income Plan for a Life Income is chosen, the
income payments will be greater than income payments under an Income Plan for a
Life Income with Guaranteed Payments.
Income payments are determined based on an assumed investment rate and the
investment performance of the applicable Variable Sub-accounts. If the actual
net investment experience of the Variable Account is less than the assumed
investment rate, then the dollar amount of the income payments will decrease.
The dollar amount of the income payments will stay level if the net investment
experience equals the assumed investment rate and the dollar amount of the
income payments will increase if the net investment experience exceeds the
assumed investment rate. For purposes of the Variable Account income payments,
the assumed investment rate is 3 percent. The Company may offer an assumed
investment rate greater than 3%. For more detailed information as to how
Variable Account income payments are determined, see the Statement of Additional
Information.
FIXED AMOUNT INCOME PAYMENTS
Income payment amounts derived from any monies allocated to the Fixed
Account during the accumulation phase are fixed for the duration of the Income
Plan. The fixed amount income payment amount is calculated by applying the
portion of the Contract Value in the Fixed Account on the Payout Start Date,
adjusted by any Market Value Adjustment and less any applicable premium tax, to
the greater of the appropriate value from the income payment table selected or
such other value as we are offering at that time.
INCOME PLANS
The Income Plans include:
Income Plan 1 -- Life Income with Guaranteed Payments
The Company will make payments for as long as the Annuitant lives. If the
Annuitant dies before the selected number of guaranteed payments have been made,
the Company will continue to pay the remainder of the guaranteed payments.
Income Plan 2 -- Joint and Survivor Life Income with Guaranteed Payments
The Company will make payments for as long as either the Annuitant or Joint
Annuitant, named at the time of Income Plan selection, is living. If both the
Annuitant and the Joint Annuitant die before the selected number of guaranteed
payments have been made, the Company will continue to pay the remainder of the
guaranteed payments.
Income Plan 3 -- Guaranteed Number of Payments
The Company will make payments for a specified number of months beginning
on the Payout Start Date. These payments do not depend on the Annuitant's life.
The number of months guaranteed may be from 60 to 360. Income payments for less
than 120 months may be subject to a withdrawal charge. The mortality and expense
risk charge will be deducted from Variable Account assets supporting these
payments even though the Company does not bear any mortality risk.
The Owner may change the Income Plan until 30 days before the Payout Start
Date. If an Income Plan is chosen which depends on the Annuitant or Joint
Annuitant's life, proof of age will be required before income payments begin.
Applicable premium taxes will be assessed.
In the event that an Income Plan is not selected, the Company will make
income payments in accordance with Income Plan 1 with Guaranteed Payments for
120 Months. At the Company's discretion, other Income Plans may be available
upon request. The Company currently uses sex-distinct annuity tables. However,
if legislation is passed by Congress or the states, the Company reserves the
right to use income payment tables which do not distinguish on the basis of sex.
Special rules and limitations may apply to certain Qualified Contracts.
If the Contract Value to be applied to an Income Plan is less than $2,000,
or if the monthly payments determined under the Income Plan are less than $20,
the Company may pay the Contract Value adjusted by any Market Value Adjustment
and less any applicable taxes in a lump sum or change the payment frequency to
an interval which results in income payments of at least $20.
DEATH BENEFIT
DISTRIBUTION UPON DEATH PAYMENT PROVISIONS
A distribution upon death may be paid to the Owner determined immediately
after the death if, prior to the Payout Start Date:
- any Owner dies; or
- the Annuitant dies and the Owner is not a natural person.
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. 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 within 180 days of the date of death; and 2) if payment is made as of
the date the value of the death benefit is determined. The Company is currently
waiving the 180 day limitation. The Company reserves the right to enforce the
limitation in the future. Otherwise, the settlement value will be paid. The
settlement value is the same amount that would be paid in the event of a full
withdrawal of the Contract Value. The Company will calculate the settlement
value at the end of the Valuation Period coinciding with the requested
distribution date for payment or on the mandatory distribution date of five
years after the date of death, whichever is earlier. 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:
If an Income Plan is elected, 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.
If the surviving spouse of the deceased Owner is the new Owner, then the
spouse may elect one of the options listed above or may continue the Contract in
the accumulation phase as if the death had not occurred. The Company will only
permit the Contract to be continued once. If the Contract is continued in the
accumulation phase, the following conditions apply:
(1) on the day the Contract is continued, the Contract Value will be
the death benefit as determined at the end of the Valuation Period
during which the Company received due proof of death;
(2) the surviving spouse may make a single withdrawal of any amount
within one year of the date of death without incurring a withdrawal
charge or a Market Value Adjustment; and
(3) prior to the payout start date, the death benefit of the continued
Contract will be the greater of:
(a) the sum of all purchase payments reduced by a withdrawal
adjustment, as defined in the death benefit provision, or
(b) the Contract Value on the date we determine the death
benefit.
DEATH BENEFIT AMOUNT
Prior to the Payout Start Date, the death 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 (the "Settlement Value"); or
(c) the sum of all purchase payments reduced by a withdrawal
adjustment, as defined below; or
(d) the Contract Value on each Death Benefit Anniversary prior to
the date we determine the Death Benefit, increased by any
purchase payments made since that Death Benefit Anniversary and
reduced by a withdrawal adjustment, as defined below.
Death Benefit Anniversaries are dates during the accumulation phase when
potential death benefit minimum amounts are determined. The first Death Benefit
Anniversary is the 7th Contract Anniversary, while subsequent Death Benefit
Anniversaries are those Contract Anniversaries that are multiplies of 7 Contract
Years, beginning with the 14th Contract Anniversary. For example, the 7th, 14th,
and 21st Contract Anniversaries are the first three Death Benefit Anniversaries.
The withdrawal adjustment is equal to (a) divided by (b), with the result
multiplied by (c), where:
(a) = the withdrawal amount;
(b) = the Contract Value immediately prior to the withdrawal; and
(c) = the value of the applicable Death Benefit alternative immediately
prior to the withdrawal.
The Company will determine the value of the Death Benefit as of the end of
the Valuation Period during which the Company receives a complete request for
payment of the Death Benefit. A complete request includes due proof of death,
and such other documentation as the Company may require in its discretion. In
addition to the above alternatives, upon purchase of the Contract, if the Owner
is age 80 or less, the Owner can select either the Enhanced Death Benefit Rider
or the Enhanced Death and Income Benefit Combination Rider.
ENHANCED DEATH BENEFIT RIDER
If the Owner of the Contract is a living individual, the enhanced death
benefit applies only for the death of the Owner. If the Owner is not a living
individual, the enhanced death benefit applies only for the death of the
Annuitant. If you select this rider, the Death Benefit will be the greater of
the values stated in your Contract, or the value of the Enhanced Death Benefit.
The Enhanced Death Benefit is equal to the greater of the Enhanced Death Benefit
A or Enhanced Death Benefit B. Enhanced Death Benefit B may not be available in
all states.
The value of the Death Benefit will be determined at the end of the
Valuation Period during which the Company receives a complete request for
payment of the Death Benefit, which includes due proof of death. The Company
will not settle any death claim until it receives due proof of death.
Enhanced Death Benefit A
At issue, Enhanced Death Benefit A is equal to the initial purchase
payment. After issue, the Enhanced Death Benefit A is recalculated on each
Contract Anniversary, or when a purchase payment or withdrawal is made as
follows:
- On each Contract anniversary, the Enhanced Death Benefit A is
equal to the greater of the Contract Value or the most recently
calculated Enhanced Death Benefit A.
- For purchase payments, the Enhanced Death Benefit A is equal to
the most recently calculated Enhanced Death Benefit A plus the
purchase payment.
- For withdrawals, the Enhanced Death Benefit A is equal to the
most recently calculated Enhanced Death Benefit A reduced by the
withdrawal adjustment, as defined in "Death Benefit Amount."
In the absence of any withdrawals or purchase payments, the Enhanced Death
Benefit A will be the greatest of all Contract anniversary Contract Values on or
prior to the date the Company calculates the Death Benefit.
The Enhanced Death Benefit A will be recalculated for purchase payments,
withdrawals, and, on Contract Anniversaries until the oldest Owner or, if the
Owner is not a natural person, the Annuitant, attains age 85. After age 85, the
Enhanced Death Benefit A will be recalculated only for purchase payments and
withdrawals.
Enhanced Death Benefit B
The Enhanced Death Benefit B is equal to total purchase payments made
reduced by a withdrawal adjustment. Each purchase payment and each withdrawal
adjustment will accumulate daily at a rate equivalent to 5% per year until the
earlier of the date the Company determines the Death Benefit; or the first day
of the month following the oldest Owner's or, if the Owner is not a living
individual, the Annuitant's, 85th birthday. The Enhanced Death Benefit B will
never be greater than the maximum death benefit allowed by any nonforfeiture
laws which govern the Contract.
ENHANCED DEATH AND INCOME BENEFIT COMBINATION RIDER
You may elect not to choose the Enhanced Death Benefit Rider and may
instead choose the Enhanced Death and Income Benefit Combination Rider. The
Enhanced Death Benefit portion of the Enhanced Death and Income Benefit
Combination Rider is as described above in "ENHANCED DEATH BENEFIT RIDER." The
Enhanced Income Benefit defines a minimum amount applied to the payout phase.
This minimum amount is equal to what the value of the Enhanced Death Benefit
would be on the Payout Start Date. The Enhanced Income Benefit will apply if the
Owner elects a Payout Start Date that: is on or after the tenth Contract
Anniversary; and is prior to the Annuitant's age 90. On the Payout Start Date,
the greater of the Contract Value or the Enhanced Income Benefit will be applied
to the payout phase of the Contract. No Market Value Adjustment will be applied
to the Enhanced Income Benefit amount. The Enhanced Income Benefit will only
apply if the Income Plan selected provides payments guaranteed for either single
or joint life with a period certain of at least: (a) 10 years, if the youngest
Annuitant's age is 80 or less on the date the amount is applied; or (b) 5 years,
if the youngest Annuitant's age is greater than 80 on the date the amount is
applied. If, however, the amount applied to the Income Plan selected is the
Contract Value and not the Enhanced Income Benefit, then you may select any
Income Plan then offered by the Company.
CHARGES AND OTHER DEDUCTIONS
DEDUCTIONS FROM PURCHASE PAYMENTS
No deductions are made from purchase payments. Therefore, the full amount
of every purchase payment is invested in the Investment Alternative(s) you
select.
WITHDRAWAL CHARGE (CONTINGENT DEFERRED SALES CHARGE)
You may withdraw the Contract Value at any time before the earlier of the
Payout Start Date or the death of any Owner (or, if the Owner is not a natural
person, the death of the Annuitant).
There are no withdrawal charges on amounts withdrawn in a Contract Year up
to 15% of the Contract Value at the beginning of that Contract Year. Amounts
withdrawn in excess of this 15% may be subject to a withdrawal charge. Amounts
not subject to a withdrawal charge are calculated each Contract Year and any
unused amounts not withdrawn in a Contract Year are not carried over to later
Contract Years. Withdrawal charges, if applicable, will be deducted from the
amount paid.
Free withdrawals and other partial withdrawals will be allocated on a first
in, first out basis to purchase payments. For purposes of calculating the amount
of the withdrawal charge, withdrawals are assumed to come from purchase payments
first, beginning with the oldest payment. Withdrawals made after all purchase
payments have been withdrawn will not be subject to a withdrawal charge. For
partial withdrawals, the Contract Value will be adjusted to reflect the amount
of payment received by the Owner, any withdrawal charge, any applicable taxes
and any Market Value Adjustment.
Withdrawals in excess of the free withdrawal amount will be subject to a
withdrawal charge as set forth below:
APPLICABLE
YEAR APPLICABLE SINCE WITHDRAWAL
PREMIUM PAYMENT ACCEPTED CHARGE PERCENTAGE
- ------------------------ -----------------
1st Year................................................ 7%
2nd Year................................................ 7%
3rd Year................................................ 6%
4th Year................................................ 6%
5th Year................................................ 5%
6th Year................................................ 4%
7th Year................................................ 3%
Thereafter.............................................. 0%
Withdrawal charges will be used to pay sales commissions and other
promotional or distribution expenses associated with the marketing of the
Contracts.
In addition, federal and state income tax may be withheld from withdrawal
amounts. Certain terminations may also be subject to a federal tax penalty. See
"Federal Tax Matters," page 22.
The Company will waive any withdrawal charge and any Market Value
Adjustment on any withdrawal taken prior to the Payout Start Date if at least 30
days after the Contract Date any Owner, or Annuitant if the Owner is not a
living individual, is first confined to a long term care facility or hospital
for at least 90 consecutive days, confinement is prescribed by a physician and
is medically necessary, and the request for a withdrawal and adequate written
proof of confinement are received by us no later than 90 days after discharge.
Further, the Company will waive any withdrawal charge and any Market Value
Adjustment on any withdrawal taken prior to the Payout Start Date if at least 30
days after the Contract Date any Owner, or any Annuitant if the Owner is not a
living individual, is first diagnosed by a physician as having a Terminal
Illness, as defined in the Contract. Finally, the Company will permit a one time
waiver of any withdrawal charge and Market Value Adjustment on a partial or full
withdrawal taken prior to the Payout Start Date if: the Owner, or, if the Owner
is not a living individual, the Annuitant, becomes unemployed at least one year
after the Contract Date; the Owner, or, if the Owner is not a living individual,
the Annuitant, receives at least 30 consecutive days of Unemployment
Compensation, as defined in the Contract, for that unemployment; and, the Owner,
or, if the Owner is not a living individual, the Annuitant, request the waiver
within 180 days of the Owner's, or, if the Owner is not a living individual, the
Annuitant's, initial receipt of Unemployment Compensation, as defined in the
Contract. The laws of your state may limit the availability of these waivers and
may also change certain terms and/or benefits available under the waivers. You
should consult your Contract for further details on these variations. The
Company will also waive the withdrawal charge on withdrawals taken to satisfy
IRS required minimum distribution rules for this Contract.
CONTRACT MAINTENANCE CHARGE
A contract maintenance charge is deducted annually from the Contract Value
to reimburse the Company for its costs in maintaining each Contract and the
Variable Account. The Company guarantees that the amount of this charge will not
exceed $35 per Contract Year over the life of the Contract. This charge will be
waived if the total purchase payments are $50,000 or more on a Contract
Anniversary or if all money is allocated to the Fixed Account on the Contract
Anniversary. After the Payout Start Date, the contract maintenance charge will
be deducted in equal parts from each income payment. The charge will be waived
if the Contract Value on the Payout Start Date is $50,000 or more or if all
payments are Fixed Amount Income Payments.
Maintenance costs include but are not limited to expenses incurred in
billing and collecting purchase payments; keeping records; processing death
claims, cash withdrawals, and policy changes; calculating Accumulation Unit and
Annuity Unit values; and issuing reports to Owners and regulatory agencies.
On each Contract Anniversary prior to the Payout Start Date, the contract
maintenance charge will be deducted from the Variable Sub-accounts in the same
proportion that the Owner's value in each bears to the total value in all
Variable Sub-accounts. After the Payout Start Date, a pro rata share of the
annual contract maintenance charge will be deducted from each income payment.
For example, 1/12 of the $35, or $2.92, will be deducted if there are twelve
income payments during the Contract Year. A full contract maintenance charge
will be deducted if the Contract is terminated on any date other than a Contract
Anniversary.
ADMINISTRATIVE EXPENSE CHARGE
The Company will deduct an administrative expense charge which is equal, on
an annual basis, to .10% of the daily net assets you have allocated to the
Variable Sub-accounts. This charge is designed to cover actual administrative
expenses which exceed the revenues from the contract maintenance charge. There
is no necessary relationship between the amount of administrative charge imposed
on a given Contract and the amount of expenses that may be attributable to that
Contract.
MORTALITY AND EXPENSE RISK CHARGE
The Company will deduct a mortality and expense risk charge which is equal,
on an annual basis, to 1.00% of the daily net assets you have allocated to the
Variable Sub-accounts. The Company guarantees that the amount of this charge
will not increase over the life of the Contract. For amounts allocated to the
Variable Account, the mortality and expense risk charge is deducted during the
accumulation and payout phases of the Contract.
The mortality risk arises from the Company's guarantee to cover all death
benefits and to make income payments in accordance with the Income Plan selected
and the Income Payment Tables.
The expense risk arises from the possibility that the contract maintenance
and administrative expense charges, both of which are guaranteed not to
increase, will be insufficient to cover actual administrative expenses.
If you select the Enhanced Death Benefit Rider, the Company will deduct a
mortality and expense risk charge equal, on an annual basis, to 1.20% of the
daily net assets you have allocated to the Variable Sub-accounts.
If you select the Enhanced Death and Income Benefit Rider, the Company will
deduct a mortality and expense risk charge equal, on an annual basis, to 1.40%
of the daily net assets you have allocated to the Variable Sub-accounts.
The Company guarantees that the amount of this charge will not increase
over the life of Your Contract. For amounts allocated to the Variable Account,
the mortality and expense risk charge is deducted during the accumulation and
payout phases of the Contract.
TAXES
The Company will deduct applicable state premium taxes or other similar
policyholder taxes relative to the Contract (collectively referred to as
"premium taxes") either at the Payout Start Date, or when a total withdrawal
occurs. Current premium tax rates range from 0 to 3.5%. The Company reserves the
right in the future to deduct premium taxes from the purchase payments even
where the premium taxes are assessed at the Payout Start Date or upon total
withdrawal.
At the Payout Start Date, the charge for premium taxes will be deducted
from each Investment Alternative in the proportion that the Owner's value in the
Investment Alternative bears to the total Contract Value.
TRANSFER CHARGES
The Company reserves the right to assess a $10 charge on each transfer in
excess of twelve per Contract Year, excluding transfers through Dollar Cost
Averaging and Automatic Fund Rebalancing. The Company is presently waiving this
charge.
FUND EXPENSES
A complete description of the expenses and deductions from the Funds may be
found in the prospectus for the Fund Series. This prospectus is accompanied by
the prospectus for the Fund Series. You should review the prospectus for the
Fund Series for a full discussion of the charges and fees of the Fund Series.
GENERAL MATTERS
OWNER
The Owner has the sole right to exercise all rights and privileges under
the Contract, except as otherwise provided in the Contract. The Contract cannot
be jointly owned by both a non-natural person and a natural person.
BENEFICIARY
Subject to the terms of any irrevocable Beneficiary designation, the Owner
may change the Beneficiary at any time by notifying the Company in writing. Any
change will be effective at the time it is signed by the Owner, whether or not
the Annuitant is living when the change is received by the Company. The Company
will not, however, be liable as to any payment or settlement made prior to the
Company receiving the written notice.
Unless otherwise provided in the Beneficiary designation, if a Beneficiary
predeceases the Owner and there are no other surviving beneficiaries, the new
Beneficiary will be: the Owner's spouse if living; otherwise, the Owner's
children, equally, if living; otherwise, the Owner's estate. Multiple
Beneficiaries may be named. Unless otherwise provided in the Beneficiary
designation, if more than one Beneficiary survives the Owner, the surviving
Beneficiaries will share equally in any amounts due.
ASSIGNMENTS
The Company will not honor an assignment of an interest in a Contract as
collateral or security for a loan. Otherwise, the Owner may assign benefits
under the Contract prior to the Payout Start Date. No Beneficiary may assign
benefits under the Contract until they are due. No assignment will bind the
Company unless it is signed by the Owner and filed with the Company. The Company
is not responsible for the validity of an assignment. Federal law prohibits or
restricts the assignment of benefits under many types of retirement plans and
the terms of such plans may themselves contain restrictions on assignments.
DELAY OF PAYMENTS
Payment of any amounts due from the Variable Account under the Contract
will occur within seven days, unless:
1. The New York Stock Exchange is closed for other than usual weekends
or holidays, or trading on the Exchange is otherwise restricted;
2. An emergency exists as defined by the Securities and Exchange
Commission; or
3. The Securities and Exchange Commission permits delay for the
protection of the Owners.
Payments or transfers from the Fixed Account may be delayed for up to 6
months.
MODIFICATION
The Company may not modify the Contract without the consent of the Owner
except to make the Contract meet the requirements of the Investment Company Act
of 1940, or to make the Contract comply with any changes in the Internal Revenue
Code or to make any changes required by the Code or by any other applicable law.
<PAGE>
CUSTOMER INQUIRIES
The Owner or any persons interested in the Contract may make inquiries
regarding the Contract by calling or writing your representative or the Company
at:
GLENBROOK LIFE AND ANNUITY COMPANY
POST OFFICE BOX 94039
PALATINE, ILLINOIS 60094-4039
1 (800) 776-6978
<PAGE>
FEDERAL TAX MATTERS
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT.
Federal, state, local and other tax consequences of ownership or receipt of
distributions under an annuity contract depend on the individual circumstances
of each person. If you are concerned about any tax consequences with regard to
your individual circumstances, you should consult a competent tax adviser.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL
Generally, an annuity contract owner is not taxed on increases in the
Contract Value until a distribution occurs. This rule applies only where (1) the
owner is a "natural person" (see "Non-Natural Owners" below for exception), (2)
the investments of the Variable Account are "adequately diversified" in
accordance with Treasury Department Regulations, and (3) the issuing insurance
company, instead of the annuity owner, is considered the owner for federal
income tax purposes of any separate account assets funding the contract.
NON-NATURAL OWNERS
As a general rule, annuity contracts owned by non-natural persons such as
corporations, trusts, or other entities are not treated as annuity contracts for
federal income tax purposes and the income on such contracts is taxed as
ordinary income received or accrued by the owner during the taxable year. There
are several exceptions to the general rule for contracts owned by non-natural
persons which are discussed in the Statement of Additional Information.
DIVERSIFICATION REQUIREMENTS
For a Contract to be treated as an annuity for federal income tax purposes,
the investments in the Variable Account must be "adequately diversified" in
accordance with the standards provided in the Treasury regulations. If the
investments in the Variable Account are not adequately diversified, then the
Contract will not be treated as an annuity contract for federal income tax
purposes and the Owner will be taxed on the excess of the Contract Value over
the investment in the Contract. Although the Company does not have control over
the Funds or their investments, the Company expects the Funds to meet the
diversification requirements.
OWNERSHIP TREATMENT
In connection with the issuance of the regulations on the adequate
diversification standards, the Department of the Treasury announced that the
regulations do not provide guidance concerning the extent to which contract
owners may direct their investments among Sub-accounts of a variable account.
The Internal Revenue Service has previously stated in published rulings that a
variable contract owner will be considered the owner of separate account assets
if the owner possesses incidents of ownership in those assets such as the
ability to exercise investment control over the assets. At the time the
diversification regulations were issued, Treasury announced that guidance would
be issued in the future regarding the extent that owners could direct their
investments among Sub-accounts without being treated as owners of the underlying
assets of the Variable Account.
The ownership rights under this contract are similar to, but different in
certain respects from, those described by the Service in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the owner of this contract has the choice of more investment options to
which to allocate premiums and contract values, and may be able to transfer
among investment options more frequently than in such rulings. These differences
could result in the contract owner being treated as the owner of the assets of
the Variable Account. In those circumstances, income and gains from the Variable
Account assets would be includible in the Contract Owners' gross income. In
addition, the Company does not know what standards will be set forth in the
regulations or rulings which the Treasury Department has stated it expects to
issue. It is possible that the Treasury's position, when announced, may
adversely affect the tax treatment of existing contracts. The Company,
therefore, reserves the right to modify the Contract as necessary to attempt to
prevent the Owner from being considered the federal tax owner of a pro rata
share of the assets of the Variable Account. However, the Company makes no
guarantee that such modification to the contract will be successful.
DELAYED MATURITY DATES
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
could be currently includible in the owner's income.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal under a non-qualified contract, amounts
received are taxable to the extent the contract value, without regard to any
surrender charge, exceeds the investment in the contract. The contract value is
the sum of all account values. No matter which account a withdrawal is made
from, all account values are combined and the total contract value is used to
determine the amount of taxable income. The investment in the contract is the
gross premium or other consideration paid for the contract reduced by any
amounts previously received from the contract to the extent such amounts were
properly excluded from the owner's gross income. In the case of a partial
withdrawal under a qualified contract, the portion of the payment that bears the
same ratio to the total payment that the investment in the contract (i.e.,
nondeductible IRA contributions, after tax contributions to qualified plans)
bears to the contract value, can be excluded from income. No definitive guidance
exists on the proper tax treatment of Market Value Adjustments and you should
consult with 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 variable annuity payments, the
amount excluded from taxable income is determined by dividing the investment in
the contract by the total number of expected payments. In the case of fixed
annuity payments, the amount excluded from income is determined by multiplying
the payment by the ratio of the investment in the contract (adjusted for any
refund feature or period certain) to the total expected value of annuity
payments for the term of the contract. Once the total amount of the investment
in the contract is excluded using these ratios, the annuity payments will be
fully taxable. If annuity payments cease because of the death of the annuitant
before the total amount of the investment in the contract is recovered, the
unrecovered amount generally 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 591/2.
However, there should be no penalty tax on distributions to owners (1) made on
or after the date the owner attains age 591/2; (2) made as a result of an
owner's death or disability; (3) made in substantially equal periodic payments
over life or life expectancy; (4) made under an immediate annuity; or (5)
attributable to an investment in the contract before August 14, 1982. Similar
rules apply for distributions from certain qualified contracts. A competent tax
advisor should be consulted to determine if any other exceptions to the penalty
apply to your specific circumstances.
AGGREGATION OF ANNUITY CONTRACTS
All non-qualified deferred annuity contracts issued by the Company (or its
affiliates) to the same owner during any calendar year will be aggregated and
treated as one annuity contract for purposes of determining the taxable amount
of a distribution.
TAX QUALIFIED CONTRACTS
Annuity contracts may be used as investments with certain tax qualified
plans such as: (1) Individual Retirement Annuities under Section 408(b) of the
Code; (2) Roth Individual Retirement Annuities under Section 408A of the Code;
(3) Simplified Employee Pension Plans under Section 408(k) of the Code; (4)
Savings Incentive Match Plans for Employees (SIMPLE) Plans under Section 408(p)
of the Code; (5) Tax Sheltered Annuities under Section 403(b) of the Code; (6)
Corporate and Self Employed Pension and Profit Sharing Plans; and (7) State and
Local Government and Tax-Exempt Organization Deferred Compensation Plans. In the
case of certain tax qualified plans, the terms of the plans may govern the right
to benefits, regardless of the terms of the contract.
RESTRICTIONS UNDER SECTION 403(b) PLANS
Section 403(b) of the Code provides for tax-deferred retirement savings
plans for employees of certain non-profit and educational organizations. In
accordance with the requirements of Section 403(b), any annuity contract used
for a 403(b) plan must provide that distributions attributable to salary
reduction contributions made after 12/31/88, and all earnings on salary
reduction contributions, may be made only after the employee attains age 591/2,
separates from service, dies, becomes disabled or on account of hardship
(earnings on salary reduction contributions may not be distributed on the
account of hardship). These limitations do not apply to withdrawals where the
Company is directed to transfer some or all of the contract value to another
Section 403(b) plan.
ROTH INDIVIDUAL RETIREMENT ANNUITIES
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth Individual
Retirement Annuity. Roth Individual Retirement Annuities are subject to
limitations on the amount that can be contributed and on the time when
distributions may commence. "Qualified distributions" from Roth Individual
Retirement Annuities are not includible in gross income. "Qualified
distributions" are any distributions made more than five taxable years after the
taxable year of the first contribution to the Roth Individual Retirement
Annuity, and which are made on or after the date the individual attains age 59
1/2, made to a beneficiary after the owner's death, attributable to the owner
being disabled or for a first time home purchase (first time home purchases are
subject to a lifetime limit of $10,000). "Nonqualified distributions" are
treated as made from contributions first and are includible in gross income to
the extent such distributions exceed the contributions made to the Roth
Individual Retirement Annuity. The taxable portion of a "nonqualified
distribution" may be subject to the 10% penalty tax on premature distributions.
Subject to certain limitations, a traditional Individual Retirement Account or
Annuity may be converted or "rolled over" to a Roth Individual Retirement
Annuity. The taxable portion of a conversion or rollover distribution is
includible in gross income, but is exempted from the 10% penalty tax on
premature distributions.
INCOME TAX WITHHOLDING
The Company is required to withhold federal income tax at a rate of 20% on
all "eligible rollover distributions" unless an individual elects to make a
"direct rollover" of such amounts to another qualified plan or Individual
Retirement Account or Annuity (IRA). Eligible rollover distributions generally
include all distributions from qualified contracts, excluding IRAs, with the
exception of (1) required minimum distributions, or (2) a series of
substantially equal periodic payments made over a period of at least 10 years,
or the life (joint lives) of the participant (and beneficiary). For any
distributions from non-qualified annuity contracts, or distributions from
qualified contracts which are not considered eligible rollover distributions,
the Company may be required to withhold federal and state income taxes unless
the recipient elects not to have taxes withheld and properly notifies the
Company of such election.
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
which may be acting as broker-dealers without separate registration under the
Securities Exchange Act of 1934, pursuant to legal and regulatory exceptions.
Commissions paid 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. Sale of the Contracts may count toward incentive
program awards for the registered representative.
The underwriting agreement with ALFS provides for indemnification of ALFS
by the Company for liability to Owners arising out of services rendered or
Contracts issued.
VOTING RIGHTS
The Owner or anyone with a voting interest in a Variable Sub-account may
instruct the Company on how to vote at shareholder meetings of the Fund Series.
The Company will solicit and cast each vote according to the procedures set up
by the Fund Series and to the extent required by law. The Company reserves the
right to vote the eligible shares in its own right, if subsequently permitted by
the Investment Company Act of 1940, its regulations or interpretations thereof.
Fund shares as to which no timely instructions are received will be voted
in proportion to the voting instructions which are received with respect to all
Contracts participating in that Sub-account. Voting instructions to abstain on
any item to be voted upon will be applied on a pro-rata basis to reduce the
votes eligible to be cast.
Before the Payout Start Date, the Owner holds the voting interest in the
Variable Sub-account. (The number of votes for the Owner will be determined by
dividing the Contract Value attributable to a Sub-account by the net asset value
per share of the applicable eligible Fund.)
After the Payout Start Date, the person receiving variable income payments
has the voting interest. After the Payout Start Date, the votes decrease as
income payments are made and as the reserves for the Contract decrease. That
person's number of votes will be determined by dividing the reserve for such
Contract allocated to the applicable Sub-account by the net asset value per
share of the corresponding eligible Fund.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the 1997 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>
<PAGE>
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 $10.0 million seed money contribution from the Company
in 1995. During 1997, the Company liquidated its funding in the Separate Account
investment portfolios. Investment income and realized gains and losses of the
Separate Accounts, other than the portion related to the Company's
participation, accrue directly to the contractholders (net of fees) and,
therefore, are not included in the Company's statements of operations.
Results of Operations
- ---------------------
($ 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.
<PAGE>
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 automatically reinsures all
net business of the Company. A.M. Best Company also assigns the Company the
rating of A+(r) because the Company automatically reinsures all business with
Allstate Life. Standard & Poor's Insurance Rating Services assigns AA+
(Excellent) to the Company's claims-paying ability and Moody's assigns an Aa2
(Excellent) financial strength rating to the Company. The Company shares the
same ratings of its parent, Allstate Life Insurance Company. These ratings do
not relate to the investment performance of the Variable Account.
EMPLOYEES
As of December 31, 1997, Glenbrook Life and Annuity Company had
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.
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 L. 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-Present), Chairman of the Board of Directors and Chief Executive Officer
(1995-Present), 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.
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-Present), President and Chief Operating Officer
(1996-Present), 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-Present) Vice President, Secretary
and General Counsel (1993-Present) 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)*
Also Assistant Vice President (1990-Present) Allstate Life Insurance
Company; Assistant Vice President (1996-Present) Allstate Life Insurance Company
of New York; Director (1996-Present) Glenbrook Life Insurance Company; 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-Present) Assistant Vice President (1991-Present)
Glenbrook Life Insurance Company; Assistant Vice President (1992-Present)
Secretary (1995) Glenbrook Life and Annuity Company; Director (1995-Present)
Laughlin Group Holdings, Inc.
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.; Assistant Vice President (1996-Present) Allstate Life Insurance Company of
New York; Director (1991-1996), President and Chief Operating Officer
(1995-1996) and Vice President (1990-1995) and (1996-Present) 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 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-Present)
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-Present) 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-Present) 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. 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 $214,774.75. Directors of the Company receive no
compensation in addition to their compensation as employees of the Company.
Shares of the Company and Allstate Life are not directly owned by any
director or officer of the Company. The percentage of shares of The Allstate
Corporation beneficially owned by any director, and by all directors and
officers of the Company as a group, does not exceed one percent of the class
outstanding.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(ALLSTATE LIFE INSURANCE COMPANY)
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- --------------------- --------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK OPTIONS PAYOUTS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($) AWARDS(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 and 1996 $436,800 $246,781 $ 10,246 $ 0 18,258 $ 0 $ 5,250(1)
Chairman of the Board of Directors 1995 $416,000 $286,650 $ 17,044 $ 0 89,359 $411,122 $ 5,250(1)
</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
From time to time the Company is involved in pending and threatened
litigation in the normal course of its business in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate the ultimate liability arising from such pending or threatened
litigation to have a material effect on the financial condition of the Company.
EXPERTS
The financial statements of the Variable Account incorporated by reference
in this prospectus, and the financial statements and financial statement
schedule of the Company included in this prospectus have been audited by
Deloitte & Touche LLP, Two Prudential Plaza, 180 North Stetson Avenue, Chicago,
IL 60601-6779, independent auditors, as stated in their reports appearing herein
and incorporated by reference in this prospectus, and are included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Jorden Burt Boros Cicchetti Berenson & Johnson LLP, Washington, D.C. has
provided advice on certain legal matters relating to the federal securities laws
applicable to the issue and sale of the Contracts. 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 Guarantee Period, for the
week preceding the establishment of the Guarantee Period.
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 Guarantee Period.
J = the Treasury Rate, for a maturity equal to the 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.
Treasury Rate means the U.S. Treasury Note Constant Maturity yield as reported
in Federal Reserve Bulletin Release H.15.
The Market Value Adjustment factor is determined from the following formula:
.9 X (I - J) X N
Any transfer, withdrawal in excess of the free withdrawal amount, or death
benefit paid from the Guarantee Period 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%
5 Year Treasury Rate at the time
the Guarantee Period is established: 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:
= 15% X 11,411.66 = $1,711.75
Step 3: Calculate the Withdrawal Charge:
= .06 X (10,000.00 - 1,711.75) = $497.30
Step 4: Calculate the Market Value Adjustment:
I = 4.50%
J = 4.20%
N = 730 Days = 2
-----------------
365 days
Market Value Adjustment Factor: .9 X (I-J) X N
= .9 X (.045 - .042) X 2 = .0054
Market Value Adjustment = Factor X Amount Subject to Market Value Adjustment:
= .0054 X (11,411.66 - 1,711.75) = $52.38
Step 5: Calculate The Net Withdrawal Value at End of Contract Year 3:
= 11,411.66 - 497.30 + 52.38 = $10,966.74
A-1
<PAGE>
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
= 15% X 11,411.66 = $1,711.75
Step 3: Calculate the Withdrawal Charge:
= .06 X (10,000.00 - 1,711.75) = $497.30
Step 4: Calculate the Market Value Adjustment:
I = 4.50%
J = 4.80%
N = 730 Days = 2
-----------------
365 days
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 - 1,711.75) = -$52.38
Step 5: Calculate The Net Withdrawal Value at End of Contract Year 3:
= 11,411.66 - 497.30 - 52.38 = $10,861.98
A-2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION: TABLE OF CONTENTS
Page
----
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS.................
REINVESTMENT.........................................................
THE CONTRACT.........................................................
Purchase of Contracts............................................
Performance Data.................................................
Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers).....
Premium Taxes....................................................
Tax Reserves.....................................................
INCOME PAYMENTS......................................................
Calculation of Variable Annuity Unit Values......................
GENERAL MATTERS......................................................
Inconstestability................................................
Settlements......................................................
Safekeeping of the Variable Account's Assets.....................
FEDERAL TAX MATTERS..................................................
Introduction.....................................................
Taxation of Glenbrook Life and Annuity Company...................
Exceptions to the Non-Natural Owner Rule.........................
IRS Required Distribution at Death Rules.........................
Qualified Plans..................................................
Types of Qualified Plans.........................................
SEPARATE ACCOUNT A VARIABLE ACCOUNT FINANCIAL STATEMENTS............. F-1
B-1
<PAGE>
ORDER FORM
Please send me a copy of the most recent Statement of Additional Information for
the Glenbrook Life and Annuity Company Separate Account A.
- ----------------------------- -----------------------------------------
(Date) (Name)
-----------------------------------------
(Street Address)
-----------------------------------------
(City) (State) (Zip Code)
Send to:
Glenbrook Life and Annuity Company
Post Office Box 94039
Palatine, Illinois 60094-4039
Attention: Broker Dealer Distribution
B-2
