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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
The registrant meets the conditions set forth in General Instruction
I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
For fiscal year ended December 31, 1999 Commission file numbers: 033-62193
033-91916
033-92842
333-00987
333-07275
333-50873
333-60337
333-50879
033-91914
333-00999
333-02581
333-28227
333-25045
033-62203
GLENBROOK LIFE AND ANNUITY COMPANY
(Exact name of registrant as specified in its charter)
ARIZONA 35-1113325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
(Address of Principal executive offices)(Zip Code)
847/402-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of December 31, 1999, there were 5,000 shares of common capital stock
outstanding, par value $500 per share, all of which shares are held by Allstate
Life Insurance Company.
GLENBROOK LIFE AND ANNUITY COMPANY
(A wholly owned subsidiary of Allstate Life Insurance Company)
Annual Report for 1999 On Form 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. Business**......................................................3
ITEM 2. Properties**....................................................4
ITEM 3. Legal Proceedings...............................................4
ITEM 4. Submission of Matters to a Vote of Security Holders*........... N/A
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters.....................................5
ITEM 6. Selected Financial Data*....................................... N/A
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................6
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk.....................................................13
ITEM 8. Financial Statements and Supplementary Data.....................13
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................13
PART III
ITEM 10. Directors and Executive Officers of the Registrant*............ N/A
ITEM 11. Executive Compensation*.........................................N/A
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management*.....................................................N/A
ITEM 13. Certain Relationships and Related Transactions*.................N/A
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................14
Index to Financial Statement Schedules......................................15
Signatures..................................................................16
Exhibit Index...............................................................E-1
* Omitted pursuant to General Instruction I(2) of Form 10-K.
** Item prepared in accordance with General Instruction I(2) of Form 10-K.
PART I
ITEM 1. BUSINESS
Glenbrook Life and Annuity Company (hereinafter "Glenbrook Life" or the
"Company"), is a stock life insurance company which was organized under the laws
of the State of Illinois in 1992 and redomesticated to Arizona in December,
1998. The Company was originally organized under the laws of the State of
Indiana in 1965. From 1965 to 1983 the Comany 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."
Glenbrook Life is a wholly owned subsidiary of Allstate Life Insurance
Company ("ALIC"), a stock life insurance company incorporated under the laws of
Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance
Company ("AIC"), a stock property-liability insurance company incorporated under
the laws of Illinois. All of the outstanding capital stock of AIC is owned by
The Allstate Corporation ("Corporation").
Glenbrook Life's operations consist of one business segment which is the
sale of life insurance and savings products.
Glenbrook Life and ALIC entered into reinsurance agreements, effective June
5, 1992, under which Glenbrook Life reinsures substantially all of its business
with ALIC. Under the agreements, purchase payments under substantially all
general account contracts are transferred to ALIC and become invested with the
assets of ALIC, and ALIC is bound to stand behind the Company's contractual
obligations to its policyholders. However, the obligations of ALIC under the
reinsurance agreements are to the Company. In addition, assets of the Company
that relate to insurance in-force excluding Separate Account assets are
transferred to ALIC. Therefore, the funds necessary to support the operations of
the Company are provided by ALIC and the Company is not required to obtain
additional capital to support in-force or future business.
Under the Company's reinsurance agreements with ALIC, the Company reinsures
substantially all reserve liabilities with ALIC except for variable contracts.
The Company's variable contract assets and liabilities are held in
legally-segregated, unitized Separate Accounts and are retained by the Company.
However, the transactions related to such variable contracts such as premiums,
expenses and benefits are transferred to ALIC.
Glenbrook Life's and ALIC's general account assets must be invested in
accordance with applicable state laws. These laws govern the nature and quality
of investments that may be made by life insurance companies and the percentage
of their assets that may be committed to any particular type of investment.
3
Glenbrook Life 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 ALIC which automatically reinsures all
net business of Glenbrook Life. A.M. Best Company also assigns Glenbrook Life
the rating of A+(r) because Glenbrook Life automatically reinsures all business
with ALIC. Standard & Poor's Insurance Rating Services assigns AA+(Excellent) to
the Company's claims-paying ability and Moody's Investors Service assigns an Aa2
(excellent) financial strength rating to the Company. Glenbrook Life shares the
same ratings of its parent, ALIC.
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 measures which may significantly
affect the Company's insurance business relate to the taxation of insurance
companies, the tax treatment of insurance products and the removal of barriers
preventing banks from engaging in the insurance business.
Glenbrook Life is registered with the Securities and Exchange Commission
("SEC") as an issuer of registered products. The SEC also regulates certain
Glenbrook Life Separate Accounts which issue variable life contracts or,
together with the Company, issue variable annuity contracts.
ITEM 2. PROPERTIES
Glenbrook Life occupies office space provided by AIC, in Northbrook,
Illinois. Expenses associated with these offices are allocated to Glenbrook
Life.
ITEM 3. LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal
proceedings pending to which the Company is a party or which would materially
affect the Company. 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 position or results of operations of the Company.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by its parent, ALIC.
ALIC's outstanding shares are owned by AIC. All of the outstanding shares of AIC
are owned by The Corporation.
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights significant factors influencing results
of operations and changes in financial position of Glenbrook Life and Annuity
Company (the "Company"). It should be read in conjunction with the financial
statements and related notes.
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets savings and life insurance products through banks and
securities firms. Savings products include deferred annuities and immediate
annuities without life contingencies. Deferred annuities include fixed rate,
market value adjusted, indexed and variable annuities. Life insurance consists
of interest-sensitive life and variable life insurance.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable annuity and variable life
contracts are legally segregated and reflected as Separate Accounts. The assets
of the Separate Accounts are carried at fair value. Separate Accounts
liabilities represent the contractholders' claim to the related assets and are
carried at the fair value of the assets. In the event that the asset value of
certain contractholder accounts are projected to be below the value guaranteed
by the Company, a liability is established through a charge to earnings.
Investment income and realized capital gains and losses of the Separate Accounts
accrue directly to the contractholders and therefore, are not included in the
Company's statements of operations and comprehensive income.
Certain Separate Accounts investment portfolios were initially funded with
$10.0 million of seed money contributed by the Company in 1995. During 1997, the
Company liquidated its ownership interest in the Separate Accounts investment
portfolios ("Participation"). Investment income and realized gains and losses of
the Separate Accounts, other than the portion related to the Company's
Participation in 1997, accrue directly to the contractholders (net of fees) and,
therefore, are not included in the Company's statements of operations and
comprehensive income.
RESULTS OF OPERATIONS
($ in thousands)
1999 1998 1997
-------- -------- --------
Net investment income $ 6,579 $ 6,231 $ 5,304
======== ======== ========
Realized capital gains and losses, after-tax $ 203 $ (3) $ 2,249
======== ======== ========
Net income $ 4,509 $ 4,044 $ 5,686
======== ======== ========
Total investments $146,000 $ 98,976 $ 90,474
======== ======== ========
The Company has reinsurance agreements under which substantially all
contract and policy related transactions are transferred to ALIC. The Company's
results of operations include only net investment income and realized capital
gains and losses earned on the assets of the Company that are not transferred
under the reinsurance agreements.
1
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net income increased $465 thousand to $4.5 million in 1999 from $4.0
million in 1998 due to increases in net investment income and realized capital
gains. In 1998, net income decreased $1.6 million as increases in net investment
income were more than offset by realized capital losses.
Pretax net investment income increased 5.6% to $6.6 million in 1999 as
higher investment balances, before the impact of unrealized gains and losses
from fixed income securities, were partially offset by lower investment yields.
In 1998, pretax net investment income increased 17.5% to $6.2 million as
additional investment income was earned on higher investment balances. For both
years the higher investment balances arose from positive cash flows from
operating activities. In addition, in 1998, positive cash flows from operating
activities were favorably impacted by changes in inter-company settlement
procedures. Investments, excluding Separate Accounts and unrealized gains and
losses on fixed income securities, grew 60.0% and 7.6% in 1999 and 1998,
respectively. The large increase in investments at December 31, 1999, excluding
Separate Accounts and unrealized gains on fixed income securities, was due in
part to a $49.6 million capital contribution the Company received from ALIC in
December 1999. Despite recent increases in interest rates, current investment
yields are still lower than average portfolio yields, therefore funds from
maturing investments were generally reinvested at lower yields resulting in
reduced investment income. If interest rates continue to rise, this trend may
reverse over time.
Realized capital gains, after tax, were $203 thousand in 1999 compared to
realized capital losses of $3 thousand in 1998. In 1999, realized capital gains
resulted from the sale of fixed income securities. Year to year fluctuations in
realized capital gains and losses are largely the result of the timing of sales
decisions reflecting management's view of individual securities and overall
market conditions.
FINANCIAL POSITION
($ in thousands)
1999 1998
---------- ----------
Fixed income securities (1) $ 92,937 $ 94,313
Short-term investments 53,063 4,663
---------- ----------
Total investments $ 146,000 $ 98,976
========== ==========
Reinsurance recoverable from ALIC $4,144,165 $3,113,278
========== ==========
Separate Accounts assets and liabilities $1,541,756 $ 993,622
========== ==========
Contractholder funds $4,143,365 $3,113,278
========== ==========
(1) Fixed income securities are carried at fair value. Amortized cost
for these securities was $94,173 and $87,415 at December 31, 1999
and 1998, respectively.
Total investments increased to $146.0 million at December 31, 1999 from
$99.0 million at December 31, 1998. The increase was primarily due to a $49.6
million capital contribution received from ALIC in December 1999 partially
offset by unrealized losses on fixed income securities.
2
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIXED INCOME SECURITIES The Company's fixed income securities portfolio
consists of publicly traded corporate bonds, U.S. government bonds,
mortgage-backed securities and tax-exempt municipal bonds. The Company
generally holds its fixed income securities to maturity, but has classified
all of these securities as available for sale to allow maximum flexibility in
portfolio management. At December 31, 1999, unrealized net capital losses on
the fixed income securities portfolio totaled $1.2 million compared to
unrealized net capital gains of $6.9 million at December 31, 1998. The change
in the unrealized position is primarily attributable to an increase in
interest rates.
At December 31, 1999, all of the Company's fixed income securities
portfolio was rated investment grade, which is defined by the Company as a
security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating. The quality mix of the Company's fixed income securities
portfolio at December 31, 1999 is presented in the following table.
($ in thousands)
NAIC
RATINGS MOODY'S EQUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL
------- ------------------------------ ---------- ----------------
1 Aaa/Aa/A $84,459 90.9%
2 Baa 8,478 9.1
------- -----
$92,937 100.0%
======= =====
At December 31, 1999 and 1998, $18.6 million and $30.4 million,
respectively, of the fixed income securities portfolio was invested in
mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of
securities which were issued by or have underlying collateral that is guaranteed
by U.S. government agencies or sponsored entities, thus minimizing credit risk.
The MBS portfolio is subject to interest rate risk since the price
volatility and ultimate realized yield are affected by the rate of repayment of
the underlying mortgages. The Company attempts to limit interest rate risk on
these securities by investing a portion of the portfolio in securities that
provide prepayment protection. At December 31, 1999, over 36% of the MBS
portfolio was invested in planned amortization class bonds.
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.
SHORT-TERM INVESTMENTS The Company's short-term investment portfolio was
$53.1 million and $4.7 million at December 31, 1999 and 1998, respectively.
The significant increase is primarily due to a $49.6 million capital
contribution from ALIC in December 1999. 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.
CONTRACTHOLDER FUNDS AND REINSURANCE RECOVERABLE FROM ALIC During 1999,
contractholder funds and amounts recoverable from ALIC under the reinsurance
agreement increased by $1.03 billion. The increases resulted primarily from
sales of the Company's fixed rate annuity contracts. Reinsurance recoverable
from ALIC relates to contract benefit obligations ceded to ALIC.
3
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPARATE ACCOUNTS Separate Accounts assets and liabilities increased 55.2%
to $1.54 billion in 1999. The increases were primarily attributable to
increased sales of variable annuity contracts, favorable investment
performance of the Separate Accounts investment portfolios and transfers from
the fixed account, partially offset by surrenders and withdrawals.
MARKET RISK
Market risk is the risk that the Company will incur losses due to adverse
changes in equity prices or interest rates. The Company's primary market risk
exposure is to changes in interest rates, although the Company also has certain
exposures to changes in equity prices.
CORPORATE OVERSIGHT In formulating and implementing policies for investing
new and existing funds, the Corporation, an indirect parent of the Company,
administers and oversees investment risk management processes primarily
through 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.
The Corporation 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.
INTEREST RATE RISK 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 of the measures used 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, 1999, the Company's asset duration was approximately 4.9 years,
versus 4.6 years at December 31, 1998.
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 interest rates in effect at December 31, 1999, management
estimates that a 100 basis point immediate, parallel increase in interest rates
("rate shock") would decrease the net fair value of its assets identified
4
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
above by approximately $4.5 million, versus $4.3 million at December 31, 1998.
The selection of a 100 basis point immediate parallel increase in interest rates
should not be construed as a prediction by the Company's management of future
market events, but rather, is intended 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.
EQUITY PRICE RISK Equity price risk is the risk that the Company will
incur economic losses due to adverse changes in a particular stock, stock
fund or stock index. At December 31, 1999 the Company had variable annuity
and variable life funds with balances totaling $1.54 billion. This is an
increase over the $993.6 million of variable funds at December 31, 1998. The
Company earns mortality and expense fees as a percentage of fund balance. In
the event of an immediate decline of 10% in the fund balances due to equity
market declines, the Company would earn approximately $1.8 million less in
annualized fee income which would be ceded to ALIC. This is an increase over
the $1.3 million amount determined at December 31, 1998. The contractholder
of a variable annuity product may elect to purchase a minimum death benefit
guarantee or a minimum income benefit guarantee, generally at the time of
purchase. Both guarantees may subject the Company to additional equity price
risk, as the beneficiary or contractholder may receive their benefit for an
amount greater than the fund balance under contractually defined
circumstances and terms. The Company recorded actuarially determined reserves
as of December 31, 1999 for these exposures and has ceded them to either ALIC
or a third party. The Company expects growth in its variable annuity products
in the future, stemming from both new sales as well as market value
appreciation, which will increase its exposure to equity price risk.
LIQUIDITY AND CAPITAL RESOURCES
Under the terms of reinsurance agreements, substantially all premiums and
deposits, excluding those relating to Separate Accounts, are transferred to
ALIC, which maintains the investment portfolios supporting the Company's
products. Substantially all payments of policyholder claims, benefits, contract
maturities, contract surrenders and withdrawals and certain operating costs are
also reimbursed by ALIC, under the terms of the reinsurance agreements. The
Company continues to have primary liability as a direct insurer for risks
reinsured. The Company's ability to meet liquidity demands is dependent on
ALIC's ability to meet those demands. ALIC's claims-paying ability was rated
Aa2, AA+ and A+ by Moody's, Standard and Poor's and A.M. Best, respectively, at
December 31, 1999.
The primary sources for the remainder of the Company's funds are collection
of principal and interest from the investment portfolio and capital
contributions from ALIC. The primary uses for the remainder of the Company's
funds are to purchase investments and pay costs associated with the maintenance
of the Company's investment portfolio.
At December 31, 1999, the Moody's and Standard and Poor's claims-paying
ratings for the Company were Aa2 and AA+, respectively.
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
5
GLENBROOK LIFE AND ANNUITY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and a model law specifying regulatory actions if an insurer's RBC falls below
specified levels. The RBC formula for life insurance companies establishes
capital requirements relating to insurance, business, asset and interest rate
risks. At December 31, 1999, RBC for the Company was significantly above a level
that would require regulatory action.
YEAR 2000
The Company is dependent upon certain service provided for it by the
Corporation including computer-related systems, and systems and equipment that
are not typically thought of as computer-related (referred to as "non-IT"). For
this reason, the Company is reliant upon the Corporation for the establishment
and maintenance of its computer-related systems and non-IT.
In 1995, the Corporation commenced a four phase plan which included
reprogramming, remediating or replacing computer systems and equipment which may
have failed to operate properly in or after the year 1999, due to the inability
of the systems and equipment to only recognize the last two digits of the year
in any date ("Year 2000"). Because of the comprehensiveness of the Corporation's
plan, and its timely completion, the Corporation has experienced no material
impacts on its results of operations, liquidity or financial position due to the
Year 2000 issue. The Corporation expects to incur total costs related to this
plan of $109 million between the years of 1995 and 2000. These costs are
expensed as incurred. A portion of these costs were incurred by the Company on a
pro rata basis of usage of computer-related systems and non-IT, as compared to
the usage of all the entities which shares these services with the Corporation.
These amounts were not material to the results of operations of the Company.
OTHER DEVELOPMENTS
The NAIC's codification initiative has produced a comprehensive guide of
statutory accounting principles, which the Company will implement in January
2001. The Company's state of domicile, Arizona, has passed legislation revising
various statutory accounting requirements to conform to codification. These
requirements are not expected to have a material impact on the statutory surplus
of the Company.
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.
6
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The pertinent provisions of Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 9 to 10 are herein incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required by this Item.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS. The Registrants financial statements, for the
year ended December 31, 1999, together with the Report of Independent
Accountants are set forth on pages F-1 - F-19 of this report.
2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part IV
of this report:
Schedule IV - Reinsurance page F-19
All other schedules have been omitted because they are not applicable
or not required or because the required information is included in the financial
statements or notes thereto.
3. EXHIBITS. The exhibits required to be filed by Item 601 of
Regulation S-K are listed under the caption "Exhibits" in Item 14(c).
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended December 31, 1999.
(c) EXHIBITS
Exhibit No. Description
3(i) Amended and Restated Articles of Incorporation and Articles of
Redomestication of Glenbrook Life and Annuity Insurance Company
(previously file on Form 10-K, dated March 30, 1999)
3(ii) Amended and Restated By-laws of Glenbrook Life and Annuity Company
(previously filed on Form 10-K, dated March 30, 1999)
27 Financial Data Schedule (filed herewith)
99 Power of Attorney (filed herewith)
14
Financial Statements
INDEX
PAGE
Independent Auditors' Report................................................F-1
Financial Statements:
Statements of Financial Position
December 31, 1999 and 1998........................................F-2
Statements of Operations and Comprehensive Income for the Years Ended
December 31, 1999, 1998 and 1997..................................F-3
Statements of Shareholder's Equity for the Years Ended
December 31, 1999, 1998 and 1997..................................F-4
Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997..................................F-5
Notes to Financial Statements........................................F-6
Schedule IV - Reinsurance for the Years Ended
December 31, 1999, 1998 and 1997..................................F-19
15
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", an affiliate of The Allstate
Corporation) as of December 31, 1999 and 1998, and the related Statements of
Operations and Comprehensive Income, Shareholder's Equity and Cash Flows for
each of the three years in the period ended December 31, 1999. Our audits also
included Schedule IV - Reinsurance. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999 and
1998, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 25, 2000
F-1
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
---------------------------
1999 1998
---------- ------------
($ in thousands, except par value data)
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $94,173 and $87,415 ) $ 92,937 $ 94,313
Short-term 53,063 4,663
----------- -----------
Total investments 146,000 98,976
Cash 9 --
Reinsurance recoverable from
Allstate Life Insurance Company 4,144,165 3,113,278
Deferred income taxes 293 --
Other assets 2,706 2,590
Separate Accounts 1,541,756 993,622
----------- -----------
TOTAL ASSETS $ 5,834,929 $ 4,208,466
=========== ===========
LIABILITIES
Reserve for life-contingent contract benefits $ 800 $ --
Contractholder funds 4,143,365 3,113,278
Current income taxes payable 2,360 2,181
Deferred income taxes -- 2,499
Payable to affiliates, net 4,122 3,583
Separate Accounts 1,541,756 993,622
----------- -----------
TOTAL LIABILITIES 5,692,403 4,115,163
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 11)
SHAREHOLDER'S EQUITY
Common stock, $500 par value, 10,000 and
4,200 shares authorized, 5,000 and
4,200 shares issued
and outstanding 2,500 2,100
Additional capital paid-in 119,241 69,641
Retained income 21,588 17,079
Accumulated other comprehensive (loss) income:
Unrealized net capital (losses) gains (803) 4,483
----------- -----------
TOTAL ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME (803) 4,483
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 142,526 93,303
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 5,834,929 $ 4,208,466
=========== ===========
See notes to financial statements.
F-2
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
-----------------------------
($ in thousands) 1999 1998 1997
------- ------- -------
REVENUES
Net investment income $ 6,579 $ 6,231 $ 5,304
Realized capital gains and losses 312 (5) 3,460
------- ------- -------
INCOME FROM OPERATIONS
BEFORE INCOME TAX EXPENSE 6,891 6,226 8,764
Income tax expense 2,382 2,182 3,078
------- ------- -------
NET INCOME 4,509 4,044 5,686
------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME, AFTER-TAX
Change in unrealized net capital gains and losses (5,286) 1,315 378
------- ------- -------
COMPREHENSIVE (LOSS) INCOME $ (777) $ 5,359 $ 6,064
======= ======= =======
See notes to financial statements.
F-3
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
($ in thousands)
COMMON STOCK
Balance, beginning of year $ 2,100 $ 2,100 $ 2,100
Issuance of new shares of stock 400 -- --
--------- --------- ---------
Balance, end of year 2,500 2,100 2,100
--------- --------- ---------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year $ 69,641 $ 69,641 $ 69,641
Capital contribution 49,600 -- --
--------- --------- ---------
Balance, end of year 119,241 69,641 69,641
--------- --------- ---------
RETAINED INCOME
Balance, beginning of year $ 17,079 $ 13,035 $ 7,349
Net income 4,509 4,044 5,686
--------- --------- ---------
Balance, end of year 21,588 17,079 13,035
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance, beginning of year $ 4,483 $ 3,168 $ 2,790
Change in unrealized net capital gains
and losses (5,286) 1,315 378
--------- --------- ---------
Balance, end of year (803) 4,483 3,168
--------- --------- ---------
TOTAL SHAREHOLDER'S EQUITY $ 142,526 $ 93,303 $ 87,944
========= ========= =========
See notes to financial statements.
F-4
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
($ in thousands) 1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,509 $ 4,044 $ 5,686
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization and other non-cash items (65) (24) 29
Realized capital gains and losses (312) 5 (3,460)
Changes in:
Income taxes payable 235 1,590 240
Other operating assets and liabilities 264 915 961
-------- -------- --------
Net cash provided by operating activities 4,631 6,530 3,456
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 9,049 1,966 1,405
Investment collections 4,945 7,123 14,217
Investment purchases (20,328) (15,250) (50,115)
Participation in Separate accounts -- -- 13,981
Change in short-term investments, net (48,288) (369) (2,944)
-------- -------- --------
Net cash used in investing activities (54,622) (6,530) (23,456)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 400 -- --
Capital contribution 49,600 -- 20,000
-------- -------- --------
Net cash provided by financing activities 50,000 -- 20,000
-------- -------- --------
NET INCREASE IN CASH 9 -- --
CASH AT THE BEGINNING OF YEAR -- -- --
-------- -------- --------
CASH AT END OF YEAR $ 9 $ -- $ --
======== ======== ========
See notes to financial statements.
F-5
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"). These financial statements have been prepared in conformity with
generally accepted accounting principles.
NATURE OF OPERATIONS
The Company markets savings and life insurance products through banks and
securities firms. Savings products include deferred annuities and immediate
annuities without life contingencies. Deferred annuities include fixed rate,
market value adjusted, indexed and variable annuities. Life insurance consists
of interest-sensitive life and variable life insurance. In 1999, substantially
all of the Company's statutory premiums and deposits were from annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary surrender or withdrawal by customers, subject to applicable
surrender charges. These policies and contracts are reinsured primarily with
ALIC (see Note 3), which invests premiums and deposits to provide cash flows
that will be used to fund future benefits and expenses.
The Company monitors economic and regulatory developments which have the
potential to impact its business. Recently enacted federal legislation will
allow for banks and other financial organizations to have greater participation
in the securities and insurance businesses. This legislation may present an
increased level of competition for sales of the Company's products. Furthermore,
the market for deferred annuities and interest-sensitive life insurance is
enhanced by the tax incentives available under current law. Any legislative
changes which lessen these incentives are likely to negatively impact the demand
for these products.
Additionally, traditional demutualizations of mutual insurance companies and
enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; and (2) increasing competition in the
capital markets.
Although the Company currently benefits from agreements with financial services
entities who market and distribute its products, change in control of these
non-affiliated entities with which the Company has alliances could negatively
impact the Company's sales.
The Company is authorized to sell life and savings products in all states except
New York, as well as in the District of Columbia. The top geographic locations
for statutory premiums and deposits for the Company were Florida, California,
Pennsylvania, Michigan, Texas, Illinois and New Jersey for the year ended
December 31, 1999. No other jurisdiction accounted for more than 5% of statutory
premiums and deposits. Substantially all premiums and deposits are ceded to ALIC
under reinsurance agreements.
F-6
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds and mortgage-backed securities. All
fixed income securities are carried at fair value and may be sold prior to
their contractual maturity ("available for sale"). The difference between
amortized cost and fair value, net of deferred income taxes, is reflected as
a component of shareholder's equity. Provisions are recognized for declines
in the value of fixed income securities that are other than temporary. Such
writedowns are included in realized capital gains and losses. Short-term
investments are carried at cost or amortized cost, which approximates fair
value.
Investment income consists primarily of interest and short-term investment
dividends. Interest is recognized on an accrual basis and dividends are recorded
at the ex-dividend date. Interest income on mortgage-backed securities is
determined on the effective yield method, based on the estimated principal
repayments. Accrual of income is suspended for fixed income securities that are
in default or when the receipt of interest payments is in doubt. Realized
capital gains and losses are determined on a specific identification basis.
REINSURANCE RECOVERABLE
The Company has reinsurance agreements whereby substantially all contract
charges, credited interest, policy benefits and certain expenses are ceded to
ALIC. Such amounts are reflected net of such reinsurance in the statements of
operations and comprehensive income. Investment income earned on the assets
which support contractholder funds and the reserve for life-contingent contract
benefits is not included in the Company's financial statements as those assets
are owned and managed under terms of reinsurance agreements. Reinsurance
recoverable and the related reserve for life-contingent contract benefits and
contractholder funds are reported separately in the statements of financial
position. The Company continues to have primary liability as the direct insurer
for risks reinsured.
RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED
Interest-sensitive life contracts are insurance contracts whose terms are not
fixed and guaranteed. The terms that may be changed include premiums paid by the
contractholder, interest credited to the contractholder account balance and one
or more amounts assessed against the contractholder. Premiums from these
contracts are reported as deposits to contractholder funds. Contract charge
revenue consists of fees assessed against the contractholder account balance for
cost of insurance (mortality risk), contract administration and surrender
charges. Contract benefits include interest credited to contracts and claims
incurred in excess of the related contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed rate
annuities, market value adjusted annuities, indexed annuities and immediate
annuities without life contingencies are considered investment contracts.
Deposits received for such contracts are reported as deposits to contractholder
funds. Contract charge revenue for investment contracts consists of charges
assessed against the contractholder account balance for contract administration
and surrenders. Contract benefits include interest credited and claims incurred
in excess of the related contractholder account balance.
F-7
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Crediting rates for fixed rate and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions.
Crediting rates for indexed annuities are based on an interest rate index, such
as LIBOR or an equity index, such as the S&P 500.
Investment contracts include variable annuity and variable life contracts which
are sold as Separate Accounts products. The assets supporting these products are
legally segregated and available only to settle Separate Accounts contract
obligations. Deposits received are reported as Separate Accounts liabilities.
The Company's contract charge revenue for these contracts consists of charges
assessed against the Separate Accounts fund balances for contract maintenance,
administration, mortality, expense and surrenders.
All contract charges, contract benefits and interest credited are reinsured.
INCOME TAXES
The income tax provision is calculated under the liability method and presented
net of reinsurance. Deferred tax assets and liabilities are recorded based on
the difference between the financial statement and tax bases of assets and
liabilities at the enacted tax rates. Deferred income taxes arise primarily from
unrealized capital gains and losses on fixed income securities carried at fair
value and differences in the tax bases of investments.
SEPARATE ACCOUNTS
The Company issues deferred variable annuity and variable life contracts, the
assets and liabilities of which are legally segregated and recorded as assets
and liabilities of the Separate Accounts. Absent any contract provisions wherein
the Company contractually guarantees either a minimum return or account value to
the beneficiaries of the contractholders in the form of a death benefit, the
contractholders bear the investment risk that the Separate Accounts' funds may
not meet their stated objectives.
The assets of the Separate Accounts are carried at fair value. Separate
Accounts liabilities represent the contractholders' claim to the related
assets and are carried at the fair value of the assets. In the event that the
asset value of certain contractholder accounts are projected to be below the
value guaranteed by the Company, a liability is established through a charge
to earnings. Investment income and realized capital gains and losses of the
Separate Accounts accrue directly to the contractholders and therefore, are
not included in the Company's statements of operations and comprehensive
income. Revenues to the Company from the Separate Accounts consist of
contract maintenance and administration fees, and mortality, surrender and
expense charges.
Prior to 1998, the Company had an ownership interest ("Participation") in the
Separate Accounts. The Company's Participation was carried at fair value and
unrealized gains and losses, net of deferred income taxes, were shown as a
component of shareholder's equity. Investment income and realized capital gains
and losses which arose from the Participation were included in the Company's
statements of operations and comprehensive income. The Company liquidated its
Participation during 1997, which resulted in a pretax realized capital gain of
$3.5 million.
F-8
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to certain
variable annuity contract guarantees, is computed on the basis of assumptions as
to mortality, future investment yields, terminations and expenses at the time
the policy is issued. These assumptions include provisions for adverse deviation
and generally vary by such characteristics as type of coverage, year of issue
and policy duration. Detailed reserve assumptions and reserve interest rates are
outlined in Note 6.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of interest-sensitive life and
certain investment contracts. Deposits received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received, net of commissions, and interest credited to the benefit of the
contractholder less withdrawals, mortality charges, and administrative
expenses. Detailed information on crediting rates and surrender and
withdrawal protection on contractholder funds are outlined in Note 6.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In 1999, the Company adopted Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." The SOP
provides guidance concerning when to recognize a liability for insurance-related
assessments and how those liabilities should be measured. Specifically,
insurance-related assessments should be recognized as liabilities when all of
the following criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an entity
to pay an assessment has occurred and 3) the amount of the assessment can be
reasonably estimated. Adoption of this statement was not material to the
Company's results of operations or financial position.
F-9
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements whereby substantially all contract
charges, credited interest, policy benefits and certain expenses are ceded to
ALIC and reflected net of such reinsurance in the statements of operations and
comprehensive income. Reinsurance recoverable and the related reserve for
life-contingent contract benefits and 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.
Investment income earned on the assets which support contractholder funds and
the reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed under terms
of reinsurance agreements. The following amounts were ceded to ALIC under
reinsurance agreements.
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
-------- -------- --------
Contract charges $ 27,175 $ 19,009 $ 11,641
Credited interest, policy benefits,
and certain expenses 253,945 218,008 179,954
BUSINESS OPERATIONS
The Company utilizes services performed by AIC and ALIC and business facilities
owned or leased, and operated by AIC in conducting its business activities. The
Company reimburses AIC and ALIC for the operating expenses incurred on behalf of
the Company. The Company is charged for the cost of these operating expenses
based on the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $26,555, $15,949, and $19,243 in 1999, 1998 and 1997, respectively. Of
these costs, the Company retains investment related expenses. All other costs
are ceded to ALIC under reinsurance agreements.
F-10
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ------- -------- ------
AT DECEMBER 31, 1999
U.S. government and agencies $24,274 $ 1,260 $ - $25,534
Municipal 1,656 - (112) 1,544
Corporate 49,255 9 (2,022) 47,242
Mortgage-backed securities 18,988 96 (467) 18,617
------- ------- ------- -------
Total fixed income securities $94,173 $ 1,365 $(2,601) $92,937
======= ======= ======= =======
AT DECEMBER 31, 1998
U.S. government and agencies $24,350 $ 4,308 $ - $28,658
Municipal 656 24 - 680
Corporate 33,009 1,575 (39) 34,545
Mortgage-backed securities 29,400 1,047 (17) 30,430
------- ------- ------- -------
Total fixed income securities $87,415 $ 6,954 $ (56) $94,313
======= ======= ======= =======
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1999:
AMORTIZED FAIR
COST VALUE
--------- ----------
Due after one year through five years $ 30,974 $ 31,085
Due after five years through ten years 32,583 30,911
Due after ten years 11,628 12,324
--------- ----------
75,185 74,320
Mortgage-backed securities 18,988 18,617
--------- -----------
Total $ 94,173 $ 92,937
========= ===========
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 1999 1998 1997
------ ------ ------
Fixed income securities $6,458 $6,151 $5,014
Short-term investments 230 183 231
Participation in Separate Accounts -- -- 161
------ ------ ------
Investment income, before expense 6,688 6,334 5,406
Investment expense 109 103 102
------ ------ ------
Net investment income $6,579 $6,231 $5,304
====== ====== ======
F-11
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1999 1998 1997
--------- --------- --------
Fixed income securities $ 312 $ (5) $ (61)
Short-term investments -- -- 6
Participation in Separate Accounts -- -- 3,515
--------- --------- --------
Realized capital gains and losses 312 (5) 3,460
Income taxes (109) 2 (1,211)
--------- --------- --------
Realized capital gains and
losses, after tax $ 203 $ (3) $ 2,249
========= ========= =======
Excluding calls and prepayments, gross gains of $370 were realized on sales of
fixed income securities during 1999, and gross losses of $58, $5 and $61 were
realized on sales of fixed income securities during 1999, 1998 and 1997,
respectively. There were no gross gains realized on sales of fixed income
securities during 1998 and 1997.
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital losses on fixed income securities included in
shareholder's equity at December 31, 1999 are as follows:
COST/ FAIR GROSS UNREALIZED UNREALIZED
AMORTIZED COST VALUE GAINS LOSSES NET LOSSES
-------------- -------- ------- ------- ----------
Fixed income securities $ 94,173 $ 92,937 $ 1,365 $(2,601) $(1,236)
========= ======== ======= =======
Deferred income taxes 433
-------
Unrealized net capital losses $ (803)
=======
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1999 1998 1997
------- -------- -------
Fixed income securities $(8,134) $ 2,024 $ 2,410
Participation in Separate Accounts -- -- (1,829)
Deferred income taxes 2,848 (709) (203)
------- ------- -------
(Decrease) increase in unrealized net
capital gains $(5,286) $ 1,315 $ 378
======= ======= =======
SECURITIES ON DEPOSIT
At December 31, 1999, fixed income securities with a carrying value of $10,346
were on deposit with regulatory authorities as required by law.
F-12
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
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 deferred income taxes) and liabilities
(including interest-sensitive life insurance reserves) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income
and cash, are generally of a short-term nature. Their carrying values are
assumed to approximate fair value.
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
1999 1998
----- -----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- ------------
Fixed income securities $ 92,937 $ 92,937 $ 94,313 $ 94,313
Short-term investments 53,063 53,063 4,663 4,663
Separate Accounts 1,541,756 1,541,756 993,622 993,622
Fair values for fixed income securities are based on quoted market prices where
available. Non-quoted securities are valued based on discounted cash flows using
current interest rates for similar securities. Short-term investments are highly
liquid investments with maturities of less than one year whose carrying value
are deemed to approximate fair value. Separate Accounts assets are carried in
the statements of financial position at fair value based on quoted market
prices.
FINANCIAL LIABILITIES
The carrying value and fair value of financial liabilities at December 31, are
as follows:
1999 1998
----- -----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- ------------
Contractholder funds on
investment contracts $ 4,156,964 $ 3,924,117 $ 3,130,228 $ 2,967,101
Separate Accounts 1,541,756 1,541,756 993,622 993,622
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-13
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, 1999 the reserve for life-contingent contract benefits consisted
of reserves for immediate annuities. The assumptions for mortality generally
utilized in calculating immediate annuity reserves is the 1983 group annuity
mortality table. Interest rate assumptions for immediate annuities vary from
3.5% to 7.2%. Other estimation methods used for immediate annuities include the
present value of contractually fixed benefits.
At December 31, contractholder funds consists of the following:
1999 1998
----------- -----------
Interest-sensitive life $ 9,503 $ 3,335
Fixed annuities:
Immediate annuities 17,856 12,643
Deferred annuities 4,116,006 3,097,300
----------- -----------
Total contractholder funds $ 4,143,365 $ 3,113,278
=========== ===========
Contractholder funds are equal to deposits received, net of commissions, and
interest credited to the benefit of the contractholder less withdrawals,
mortality charges and administrative expenses. Interest rates credited range
from 4.0% to 7.2% for interest-sensitive life contracts; 3.5% to 7.2% for
immediate annuities and 4.3% to 6.7% for deferred annuities. Withdrawal and
surrender charge protection includes: i) for interest-sensitive life, either a
percentage of account balance or dollar amount grading off generally over 20
years; and, ii) for deferred annuities not subject to a market value adjustment,
either a declining or a level percentage charge generally over nine years or
less. Approximately 1% of deferred annuities are subject to a market value
adjustment.
7. CORPORATION RESTRUCTURING
On November 10, 1999 the Corporation announced a series of strategic initiatives
to aggressively expand its selling and service capabilities. The Corporation
also announced that it is implementing a program to reduce expenses by
approximately $600 million. The reduction will result in the elimination of
approximately 4,000 current non-agent positions, across all employment grades
and categories by the end of 2000, or approximately 10% of the Corporation's
non-agent work force. The impact of the reduction in employee positions is not
expected to materially impact the results of operations of the Company.
These cost reductions are part of a larger initiative to redeploy the cost
savings to finance new initiatives including investments in direct access and
internet channels for new sales and service capabilities, new competitive
pricing and underwriting techniques, new agent and claim technology and enhanced
marketing and advertising. As a result of the cost reduction program, the
Corporation recorded restructuring and related charges of $81 million pretax
during the fourth quarter of 1999. The Corporation anticipates that additional
pretax restructuring related charges of approximately $100 million will be
expensed as incurred throughout 2000. The
F-14
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
Company's allocable share of these expenses were immaterial in 1999 and are
expected to be immaterial in 2000.
8. INCOME TAXES
For 1996, the Company filed a separate federal income tax return. Beginning in
1997, the Company joined the Corporation and its other eligible domestic
subsidiaries (the "Allstate Group") in the filing of a consolidated federal
income tax return and is party to a federal income tax allocation agreement (the
"Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the
Company pays to or receives from the Corporation the amount, if any, by which
the Allstate Group's federal income tax liability is affected by virtue of
inclusion of the Company in the consolidated federal income tax return.
Effectively, this results in the Company's annual income tax provision being
computed, with adjustments, as if the Company filed a separate return.
Prior to June 30, 1995, the Corporation was a subsidiary of Sears Roebuck & Co.
("Sears") and was, with its eligible domestic subsidiaries, included in the
Sears consolidated federal income tax return and federal income tax allocation
agreement. Effective June 30, 1995, the Corporation and Sears entered into a new
tax sharing agreement, which governs their respective rights and obligations
with respect to federal income taxes for all periods during which the
Corporation was a subsidiary of Sears, including the treatment of audits of tax
returns for such periods.
The Internal Revenue Service ("IRS") has completed its review of the Allstate
Group's federal income tax returns through the 1993 tax year. Any adjustment
that may result from IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or results of operations of
the Company.
The components of the deferred income tax assets and liabilities at December 31,
are as follows:
1999 1998
------ -------
DEFERRED ASSETS
Unrealized net capital losses $ 433 $ -
----- -------
Total deferred assets 433 -
DEFERRED LIABILITIES
Difference in tax bases of investments (140) (84)
Unrealized net capital gains -- (2,415)
----- -------
Total deferred liabilities (140) (2,499)
----- -------
Net deferred asset (liability) $ 293 $(2,499)
===== =======
Although realization is not assured, management believes it is more likely than
not that the deferred tax asset will be realized based on the assumptions that
certain levels of income will be achieved.
F-15
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
The components of income tax expense for the year ended December 31, are as
follows:
1999 1998 1997
------- ------- -------
Current $2,326 $2,164 $3,037
Deferred 56 18 41
------ ------ ------
Total income tax expense $2,382 $2,182 $3,078
====== ====== ======
The Company paid income taxes of $2,148, $592 and $2,839 in 1999, 1998 and 1997,
respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
1999 1998 1997
------- ------- -------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Other (.4) - .1
------ ------ ------
Effective income tax rate 34.6% 35.0% 35.1%
====== ====== ======
9. STATUTORY FINANCIAL INFORMATION
The Company's statutory capital and surplus was $141,362 and $84,865 at December
31, 1999 and 1998, respectively. The Company's statutory net income was $4,179,
$4,698 and $3,636 for the years ended December 31, 1999, 1998 and 1997,
respectively.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Arizona Department of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The Company does not follow any permitted statutory accounting
practices that have a significant impact on statutory surplus or statutory net
income.
The NAIC's codification initiative has produced a comprehensive guide of
statutory accounting principles, which the Company will implement in January
2001. The Company's state of domicile, Arizona, has passed legislation revising
various statutory accounting requirements to conform to codification. These
requirements are not expected to have a material impact on the statutory surplus
of the Company.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by the Company without the prior approval of the state
insurance regulator is limited to formula amounts based on net income and
capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve
F-16
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
months. The maximum amount of dividends that the Company can distribute during
2000 without prior approval of the Arizona Department of Insurance is $4,179.
RISK-BASED CAPITAL
The NAIC has a standard for assessing the solvency of insurance companies, which
is referred to as risk-based capital ("RBC"). The requirement consists of a
formula for determining each insurer's RBC and a model law specifying regulatory
actions if an insurer's RBC falls below specified levels. The RBC formula for
life insurance companies establishes capital requirements relating to insurance,
business, asset and interest rate risks. At December, 31 1999, RBC for the
Company was significantly above levels that would require regulatory action.
10. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax basis for
the year ended December 31, are as follows:
1999 1998 1997
------------------------------ ------------------------------- ---------------------------
After- After- After-
Pretax Tax Tax Pretax Tax Tax Pretax Tax Tax
--------- -------- ------- -------- ------- -------- -------- -------- -------
UNREALIZED CAPITAL GAINS
AND LOSSES:
- -------------------------------
Unrealized holding (losses)
gains arising during
the period $(7,822) $ 2,739 $(5,083) $2,019 $ (707) $ 1,312 $ 4,034 $(1,412) $ 2,622
Less: reclassification
adjustments 312 (109) 203 (5) 2 (3) 3,453 (1,209) 2,244
--------- -------- ------- -------- ------- -------- -------- -------- -------
Unrealized net capital
(losses) gains (8,134) 2,848 (5,286) 2,024 (709) 1,315 581 (203) 378
--------- -------- ------- -------- ------- -------- -------- -------- -------
Other comprehensive
(loss) income $(8,134) $ 2,848 $(5,286) $2,024 $ (709) $ 1,315 $ 581 $ (203) $ 378
======= ======= ======= ======== ======== ======= ===== ======== =======
11. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social, economic
and regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing banks
from engaging in the securities and insurance business, tax law changes
affecting the taxation of insurance companies, the tax treatment of insurance
products and its impact on the relative desirability of various personal
investment vehicles, and proposed legislation to prohibit the use of gender in
determining insurance rates and benefits. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. In the opinion of management, the ultimate liability, if any, arising
from such pending or threatened litigation is not expected to have a material
effect on the results of operations, liquidity or financial position of the
Company.
F-17
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
GUARANTY FUNDS
Under state insurance guaranty fund laws, insurers doing business
in a state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to policyholders and claimants. The Company's
expenses related to these funds have been immaterial. These expenses are ceded
to ALIC under reinsurance agreements.
MARKETING AND COMPLIANCE ISSUES
Companies operating in the insurance and financial services markets have come
under the scrutiny of regulators with respect to market conduct and compliance
issues. Under certain circumstances, companies have been held responsible for
providing incomplete or misleading sales materials and for replacing existing
policies with policies that were less advantageous to the policyholder. The
Company monitors its sales materials and enforces compliance procedures to
mitigate any exposure to potential litigation. The Company is a member of the
Insurance Marketplace Standards Association, an organization which advocates
ethical market conduct.
F-18
GLENBROOK LIFE AND ANNUITY COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
GROSS NET
YEAR ENDED DECEMBER 31, 1999 AMOUNT CEDED AMOUNT
- ---------------------------- --------- ------------ ----------
Life insurance in force $ 23,586 $ 23,586 $ --
========== ========== ==========
Premiums and contract charges:
Life and annuities $ 27,175 $ 27,175 $ --
========== ========== ==========
GROSS NET
YEAR ENDED DECEMBER 31, 1998 AMOUNT CEDED AMOUNT
- ---------------------------- --------- ------------ ----------
Life insurance in force $ 12,056 $ 12,056 $ --
========== ========== ==========
Premiums and contract charges:
Life and annuities $ 19,009 $ 19,009 $ --
========== ========== ==========
GROSS NET
YEAR ENDED DECEMBER 31, 1997 AMOUNT CEDED AMOUNT
- ---------------------------- --------- ------------ ----------
Life insurance in force $ 4,095 $ 4,095 $ --
========== ========== ==========
Premiums and contract charges:
Life and annuities $ 11,641 $ 11,641 $ --
========== ========== ==========
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLENBROOK LIFE AND ANNUITY COMPANY
By /s/ THOMAS J. WILSON, II
------------------------
Thomas J. Wilson, II
President and Chief Operating Officer
(Principal Executive Officer)
Date March 28, 2000
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By */s/ KEVIN R. SLAWIN
---------------------
Kevin R. Slawin
Director
Date March 24, 2000
---------------------
By /s/ SAMUEL H. PILCH
-----------------------
Samuel H. Pilch
Controller
(Chief Accounting Officer)
Date March 28, 2000
---------------------
By */s/ SARAH R. DONAHUE
--------------------
Sarah R. Donahue
Director
Date March 24, 2000
-----------------
By */s/ BRENT H. HAMANN
-------------------
Brent H. Hamann
Director
Date March 24, 2000
-----------------
By */s/ JOHN R. HUNTER
------------------
John R. Hunter
Director
Date March 24, 2000
-----------------
By */s/ TIMOTHY N. VANDER PAS
-------------------------
Timothy N. Vander Pas
Director
Date March 24, 2000
-----------------
By */s/ G. CRAIG WHITEHEAD
----------------------
G. Craig Whitehead
Director
Date March 24, 2000
-----------------
*Power of Attorney filed herewith.
EXHIBIT INDEX
The Glenbrook Life and Annuity Company
Form 10-K for the year ended December 31, 1999
Exhibit No. Description
27 Financial Data Schedule (filed herewith)
99 Powers of Attorney
E-1