UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
The registrant meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore
filing this Form with the reduced disclosure
format.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-88870
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)
Registrant's telephone number, including are code: 847/402-5000
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
As of July 31, 2002, Registrant had 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
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the Three Month and Six
Month Periods Ended June 30, 2002 and 2001 (unaudited) 3
Condensed Statements of Financial Position as of June 30, 2002
(unaudited) and December 31, 2001 4
Condensed Statements of Cash Flows for the Six Month Periods Ended
June 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
GLENBROOK LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
------------------------- ---------------------------
(in thousands) 2002 2001 2002 2001
------------ ---------- ------------ -------------
(Unaudited) (Unaudited)
REVENUES
Net investment income $ 2,576 $ 2,658 $ 5,149 $ 5,394
Realized capital gains and losses - - 54 (46)
Administration fees - 28 - 57
----------- ---------- ------------ -------------
2,576 2,686 5,203 5,405
COSTS AND EXPENSES
Administration expenses - 22 - 43
----------- ---------- ------------ -------------
INCOME FROM OPERATIONS BEFORE INCOME TAX
EXPENSE 2,576 2,664 5,203 5,362
Income tax expense 900 930 1,818 1,873
----------- ---------- ------------ -------------
NET INCOME $ 1,676 $ 1,734 $ 3,385 $ 3,489
=========== ========== ============ =============
See notes to condensed financial statements.
3
GLENBROOK LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
2002 2001
--------------- -----------------
--------------- -----------------
(in thousands, except par value data) (Unaudited)
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $153,331 and $154,154) $ 162,282 $ 160,974
Short-term 8,791 6,592
--------------- ----------------
Total investments 171,073 167,566
Cash 8,287 -
Reinsurance recoverable from Allstate Life Insurance Company, net 5,868,403 5,378,036
Other assets 3,457 3,404
Separate Accounts 1,344,947 1,547,953
--------------- ----------------
TOTAL ASSETS $ 7,396,167 $ 7,096,959
=============== ================
LIABILITIES
Contractholder funds $ 5,861,211 $ 5,370,475
Reserve for life-contingent contract benefits 7,192 7,561
Current income taxes payable 1,813 3,844
Deferred income taxes 3,358 2,610
Other liabilities and accrued expenses 3,645 -
Payable to affiliates, net 6,913 2,198
Separate Accounts 1,344,947 1,547,953
--------------- ----------------
TOTAL LIABILITIES 7,229,079 6,934,641
--------------- ----------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
SHAREHOLDER'S EQUITY
Common stock, $500 par value, 10,000 shares authorized, 5,000 shares issued and
outstanding 2,500 2,500
Additional capital paid-in 119,241 119,241
Retained income 39,529 36,144
Accumulated other comprehensive income:
Unrealized net capital gains and losses 5,818 4,433
--------------- ----------------
Total accumulated other comprehensive income 5,818 4,433
--------------- ----------------
TOTAL SHAREHOLDER'S EQUITY 167,088 162,318
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,396,167 $ 7,096,959
=============== ================
See notes to condensed financial statements.
4
GLENBROOK LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
---------------------------
---------------------------
(in thousands) 2002 2001
------------ -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,385 $ 3,489
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and other non-cash items 15 (44)
Realized capital gains and losses (54) 46
Changes in:
Income taxes payable (2,029) 1,873
Payable to affiliates, net 4,715 (2,888)
Other operating assets and liabilities 3,592 (221)
----------- ------------
Net cash provided by operating activities 9,624 2,255
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 2,222 1,251
Investment collections 8,837 4,433
Investments purchases (10,197) (21,143)
Change in short-term investments, net (2,199) (296)
----------- ------------
Net cash used in investing activities (1,337) (15,755)
----------- ------------
NET INCREASE (DECREASE) IN CASH 8,287 (13,500)
CASH AT BEGINNING OF PERIOD - 13,500
----------- ------------
CASH AT END OF PERIOD $ 8,287 $ -
=========== ============
See notes to condensed financial statements.
5
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed 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").
The condensed financial statements and notes as of June 30, 2002 and for
the three-month and six-month periods ended June 30, 2002 and 2001 are
unaudited. The condensed financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for the fair presentation of the financial position,
results of operations and cash flows for the interim periods. These condensed
financial statements and notes should be read in conjunction with the financial
statements and notes thereto included in the Glenbrook Life and Annuity Company
Annual Report on Form 10-K for the year ended December 31, 2001. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
To conform with the 2002 and year-end 2001 presentations, certain prior
year amounts have been reclassified.
NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and other
Intangible Assets", which eliminates the requirement to amortize goodwill, and
requires that goodwill and separately identified intangible assets with
indefinite lives be evaluated for impairment on an annual basis (or more
frequently if impairment indicators arise) on a fair value basis. The Company
adopted SFAS No. 142 effective January 1, 2002. The non-amortization provisions
of SFAS No. 142 had no impact on the Company as all expenses of the Company,
including goodwill amortization, are ceded to ALIC pursuant to a reinsurance
agreement. During the second quarter of 2002, the Company completed the initial
goodwill impairment test required by SFAS No. 142 and concluded that goodwill
was not impaired.
PENDING ACCOUNTING STANDARD
On July 31, 2002, the AICPA issued an exposure draft Statement of Position
("SOP") entitled "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts". The
accounting guidance contained in the proposed SOP applies to several of the
Company's products and product features. The proposed effective date of the SOP
is fiscal years beginning after December 15, 2003, with earlier adoption
encouraged. Initial application should be as of the beginning of the fiscal
year; therefore, if adopted during an interim period of 2003, prior interim
periods should be restated. Most provisions of the proposed SOP will have a
minimal impact to the Company, however, a provision that requires the
establishment of a liability in addition to the account balance for contracts
that contain death or other insurance benefits may have a material impact on the
condensed statement of operations ceded to ALIC depending on the market
conditions at the time of adoption. Contracts affected are those that contain
provisions wherein the amounts assessed against the contractholder each period
for the insurance benefit feature are not proportionate to the insurance
coverage provided for the period. These contract provisions are commonly
referred to as guaranteed minimum death benefits. The SOP concludes, in
accordance with the Company's policy, that no liability should be recognized
during the accumulation phase for contract features that guarantee a minimum
amount for annuitization, upon election by the contractholder, at a
contractually specified future date. These product features are commonly
referred to as guaranteed minimum income benefits.
6
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. REINSURANCE
The Company has reinsurance agreements whereby all contract charges,
credited interest, policy benefits and certain expenses are ceded to ALIC and
are reflected net of such reinsurance in the condensed statements of operations.
Reinsurance recoverables and the related reserve for life-contingent contract
benefits and contractholder funds are reported separately in the condensed
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 condensed financial statements as those assets are owned and managed
by ALIC under the terms of reinsurance agreements.
The following table summarizes amounts ceded to ALIC under reinsurance
agreements.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
------------ ------------- ----------- -----------
(in thousands) 2002 2001 2002 2001
------------ ------------- ----------- -----------
Contract charges $ 8,479 $ 7,828 $ 15,775 $ 16,443
Credited interest, policy
benefits and certain expenses 90,345 104,023 176,972 196,026
7
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis are as follows:
Three Months Ended June 30,
--------------------------------------------------------------------------------
(in thousands) 2002 2001
------------------------------------- ---------------------------------------
After- After-
Pretax Tax tax Pretax Tax tax
--------- -------- --------- ---------- --------- ----------
--------- -------- --------- ---------- --------- ----------
UNREALIZED CAPITAL GAINS AND LOSSES:
Unrealized holding gains (losses)
arising during the period $ 4,032 $ (1,411) $ 2,621 $ (1,827) $ 639 $ (1,188)
Less: reclassification adjustments - - - - -
--------- -------- --------- --------- --------- ---------
Unrealized net capital gains (losses) 4,032 (1,411) 2,621 (1,827) 639 (1,188)
--------- -------- --------- --------- --------- ---------
Other comprehensive income (loss) $ 4,032 $ (1,411) 2,621 $ (1,827) $ 639 (1,188)
========= ========= ========= =========
Net income 1,676 1,734
--------- ---------
Comprehensive income $ 4,297 $ 546
========= =========
Six Months Ended June 30,
--------------------------------------------------------------------------------
(in thousands) 2002 2001
------------------------------------- ---------------------------------------
After- After-
Pretax Tax tax Pretax Tax tax
--------- -------- --------- ---------- --------- ----------
--------- -------- --------- ---------- --------- ----------
UNREALIZED CAPITAL GAINS AND LOSSES:
Unrealized holding gains (losses)
arising during the period $ 2,185 $ (765) $ 1,420 $ 272 $ (95) $ 177
Less: reclassification adjustments 54 (19) 35 (46) 16 (30)
--------- -------- --------- --------- --------- ---------
Unrealized net capital gains (losses) 2,131 (746) 1,385 318 (111) 207
--------- -------- --------- --------- --------- ---------
Other comprehensive income (loss) $ 2,131 $ (746) 1,385 $ 318 $ (111) 207
========= ======== ========= =========
Net income 3,385 3,489
--------- ---------
Comprehensive income $ 4,770 $ 3,696
========= =========
4. REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing social,
economic and regulatory environment. State and federal regulatory initiatives
have varied and have included employee benefit regulations, removal of barriers
preventing banks from engaging in the securities and insurance businesses, 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 the overall expansion of regulation. The
ultimate changes and eventual effects, if any, of these initiatives are
uncertain.
Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the target of an increasing
number of class action lawsuits and other types of litigation based on a variety
of issues, some of which involve claims for substantial and/or indeterminate
amounts (including punitive and treble damages) and the outcomes of which are
unpredictable. However, at this time, based on their present status, it is the
opinion of management that the ultimate liability, if any, in one or more of
these other actions in excess of amounts currently reserved is not expected to
have a material effect on the results of operations, liquidity or financial
position of the Company.
8
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. THIRD PARTY ADMINISTRATION AGREEMENT
On July 18, 2001, the Company entered into an administrative services
agreement with American Maturity Life Insurance Company ("American Maturity"),
which was effective as of January 2, 2001, to administer certain blocks of
annuities that American Maturity reinsures to ALIC. Pursuant to the terms of the
agreement, the Company is to provide insurance contract administration and
financial services for all contracts covered under the reinsurance agreement.
The administrative services agreement can be terminated by either the Company or
American Maturity upon mutual consent or as otherwise provided for in the terms
of the agreement. Beginning in the 4th quarter of 2001, all Administrative Fees
earned and Administrative Expenses incurred by the Company are ceded to ALIC in
accordance with reinsurance agreements.
9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
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 CONDENSED
FINANCIAL STATEMENTS AND RELATED NOTES THERETO FOUND UNDER PART I. ITEM 1.
CONTAINED HEREIN AND WITH THE DISCUSSION, ANALYSIS, FINANCIAL STATEMENTS AND
NOTES THERETO IN PART I. ITEM 1. AND PART II. ITEM 7. AND ITEM 8. OF THE
GLENBROOK LIFE AND ANNUITY COMPANY ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2001, WHICH INCLUDES A DISCUSSION OF THE COMPANY'S CRITICAL
ACCOUNTING POLICIES.
OVERVIEW
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 a diversified group of products to meet consumers'
lifetime needs in the areas of protection and retirement solutions through
financial services firms. The Company's products include interest-sensitive
life, including single premium life and variable life; fixed annuities,
including market value adjusted annuities and equity-indexed annuities;
immediate annuities; and variable annuities.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable 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' claims to the related assets and are carried at the fair value
of the assets. 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 condensed statements of operations. Revenues to the
Company from the Separate Accounts consist of contract maintenance and
administration fees and mortality, surrender and expense charges, all of which
are ceded to ALIC.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
and variable life contractholders bear the investment risk that the Separate
Accounts' funds may not meet their stated objectives. These guarantees are ceded
to ALIC in accordance with the reinsurance agreements.
RESULTS OF OPERATIONS
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
---------- --- ------------- ---------- --- -----------
2002 2001 2002 2001
---------- ------------- ---------- -----------
---------- ------------- ---------- -----------
Net investment income $ 2,576 $ 2,658 $ 5,149 $ 5,394
Realized capital gains and losses - - 54 (46)
Administration fees - 28 - 57
Administration expenses - 22 - 43
Income tax expense 900 930 1,818 1,873
---------- ------------ ----------- ---------
Net income $ 1,676 $ 1,734 $ 3,385 $ 3,489
========== ============ =========== =========
The Company has reinsurance agreements under which all contract and policy
related liabilities are transferred to ALIC. The Company's results of operations
include net investment income and realized capital gains and losses earned on
the assets of the Company that are not transferred under the reinsurance
agreements.
Net income decreased 3.3% in the second quarter of 2002 compared to the
same period in 2001. Net income for the first six months of 2002 decreased 3.0%
compared to the same period last year. These decreases are primarily a result of
a decrease in net investment income.
Pretax net investment income decreased 3.1% in the second quarter of 2002
compared to the same period in 2001. For the first six months of 2002 pretax net
investment income decreased 4.5% compared to the same period last year. The
decrease in net investment income is due to lower yields partially offset by
increased investment balances. Investments at June 30, 2002, excluding Separate
Accounts and unrealized capital gains
10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
and losses, grew 2.2% as compared to June 30, 2001. This increase was due to
positive cash flows from operations.
There were no after-tax realized capital gains or losses in the second
quarter of 2002 and 2001. For the first six months of 2002, after-tax realized
capital gains were $35 thousand compared to after-tax realized capital losses of
$30 thousand in the same period last year. Realized capital gains and losses
result from the sale of fixed income securities. Period to period fluctuations
in realized capital gains and losses are the result of timing of sales decisions
reflecting management's decision on positioning of the portfolio, assessments of
individual securities, overall market conditions and write-downs when the
Company determines that a decline in the value of a security is other than
temporary.
FINANCIAL POSITION
(in thousands)
June 30, December 31,
2002 2001
---------------- ------------------
---------------- ------------------
Fixed income securities (1) $ 162,282 $ 160,974
Short-term 8,791 6,592
--------------- ----------------
Total investments $ 171,073 $ 167,566
=============== ================
Cash $ 8,287 $ --
=============== ================
Reinsurance recoverable from ALIC, net $ 5,868,403 $ 5,378,036
=============== ================
Contractholder funds $ 5,861,211 $ 5,370,475
=============== ================
Reserve for life-contingent contract benefits $ 7,192 $ 7,561
=============== ================
Separate Accounts assets and liabilities $ 1,344,947 $ 1,547,953
=============== ================
(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $153.3 million and $154.2 million at June 30, 2002 and
December 31, 2001, respectively.
Total investments were $171.1 million at June 30, 2002 compared to $167.6
million at December 31, 2001. The increase was primarily due to positive cash
flows generated from operations and increased unrealized gains on fixed income
securities. At June 30, 2002, unrealized capital gains on fixed income
securities were $9.0 million compared to $6.8 million at December 31, 2001.
At June 30, 2002, 97.2% of the Company's fixed income securities portfolio
was rated investment grade, which is defined by the Company as a security having
a rating from the National Association of Insurance Commissioners ("NAIC") of 1
or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal
rating.
Commencing in late July 2002, deterioration of U.S. credit markets
significantly escalated. For example, in July the Lehman Bothers U.S.
Investment-Grade Credit Index under-performed U.S. Treasuries by 259 basis
points, its second-worst month ever. In particular, the telecommunications,
airlines, and energy sectors in which the Company has holdings have been
adversely affected. This deterioration, along with reduced market liquidity,
could also extend to other segments of the economy and is expected to lead to
increased recognition of realized capital losses from investment write-downs and
portfolio trading in subsequent periods.
At June 30, 2002, cash was $8.3 million compared to none at December 31,
2001. Cash increased due to a change in the management process for Separate
Accounts receipts and disbursements.
At June 30, 2002, Contractholder funds increased $490.7 million to $5.86
billion from $5.37 billion at December 31, 2001 as a result of additional
deposits from fixed annuities and credited interest, partially offset by
surrenders and withdrawals. Reinsurance recoverable from ALIC increased
correspondingly by $490.4 million due to the increase in contractholder funds.
At June 30, 2002, Separate Accounts assets and liabilities decreased 13.1%
to $1.34 billion compared to the December 31, 2001 balance. The decreases were
primarily attributable to unrealized losses in the Separate Accounts investment
portfolios due to equity market conditions and surrenders and withdrawals,
partially offset by sales of variable annuity contracts and transfers from the
fixed account contract option to variable Separate Accounts funds.
11
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
The company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources.
June 30, December 31,
(in thousands) 2002 2001
-------------- ----------------
-------------- ----------------
Common stock and retained income $ 161,270 $ 157,885
Accumulated other comprehensive income 5,818 4,433
------------ --------------
Total shareholder's equity $ 167,088 $ 162,318
============ ==============
SHAREHOLDER'S EQUITY
Shareholder's equity increased $4.8 million in the first six months of 2002
when compared to December 31, 2001, due to an increase in net income and an
increase in unrealized net capital gains and losses.
DEBT
The Company had no outstanding debt at June 30, 2002 and December 31, 2001.
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and, generally, may
be expected to have an effect on an insurance company's sales. On an ongoing
basis, rating agencies review the financial performance and condition of
insurers. A multiple level downgrade, while not expected, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company shares its financial strength ratings with its parent,
ALIC, due to the 100% reinsurance agreements.
In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings.
Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and
affiliates, including the Company, to "negative" from "stable". This revision is
part of an ongoing life insurance industry review being conducted by Standard &
Poor's. Moody's and A.M. Best reaffirmed their ratings and outlook for the
Company and ALIC.
12
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
LIQUIDITY
The principal sources of funds for the Company include the following activities:
SOURCES OF FUNDS
Statutory premiums and deposits
Reinsurance recoveries
Receipts of principal, interest and dividends on investments
Sales of investments
Capital contributions from ALIC
Inter-company loans
The principal uses of funds for the Company include the following activities:
USES OF FUNDS
Payment of contract benefits, maturities, surrenders and withdrawals
Reinsurance cessions and payments
Operating expenses
Purchase of investments
Repayment of inter-company loans
Dividends to ALIC
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 or policyholder claims, benefits, including
guaranteed minimum income or death benefits, contract maturities, contract
surrenders and withdrawals and certain operating costs, excluding those relating
to Separate Accounts, 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 its obligations under the
reinsurance program. ALIC's financial strength was rated Aa2, AA+, and A+ by
Moody's, Standard & Poor's and A.M. Best, respectively, at June 30, 2002.
The Company has entered into an inter-company loan agreement with the
Corporation. The amount of inter-company loans available to the Company is at
the discretion of the Corporation. The maximum amount of loans the Corporation
will have outstanding to all its eligible subsidiaries at any given point in
time is limited to $1.00 billion. No amounts were outstanding for the Company
under the inter-company loan agreement at June 30, 2002 and December 31, 2001.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate results
based on management's plans that are subject to uncertainty. These statements
are made subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or current
facts and may be identified by their use of words like "plans," "expects,"
"will," "anticipates," "estimates," "intends," "believes," "likely," and other
words with similar meanings. These statements may address, among other things,
our strategy for growth, product development, regulatory approvals, market
position, expenses, financial results and reserves. Forward-looking statements
are based on management's current expectations of future events. We cannot
guarantee that any forward-looking statement will be accurate. However, we
believe that our forward-looking statements are based on reasonable, current
expectations and assumptions. We assume no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual results
could differ materially from those communicated in these forward-looking
statements. In addition to the normal risks of business, the Company is subject
to significant risk factors, including those listed below which apply to it as
an insurance business and a provider of other financial services.
13
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
o Currently, the Corporation is examining the potential exposure, if any, of
its insurance operations from acts of terrorism. The Corporation is also
examining how best to address this exposure, if any, considering the
interests of policyholders, shareholders, the lending community, regulators
and others. The Company generally does not have exclusions for terrorist
events included in its life insurance policies. In the event that a
terrorist act occurs, the Company may be adversely impacted, depending on
the nature of the event. With respect to the Company's investment
portfolio, in the event that commercial insurance coverage for terrorism
becomes unavailable or too expensive, there could be significant adverse
impacts on some portion of the Company's portfolio, particularly in sectors
such as airlines and real estate. For example, certain debt obligations
might be adversely affected due to the inability to obtain coverage to
restore the related real estate or other property, thereby creating the
potential for increased default risk.
o Changes in market interest rates can have adverse effects on the Company's
investment portfolio and investment income. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
In addition, increases in market interest rates as compared to rates
offered on some of the Company's products could make those products less
attractive and lead to lower sales and/or increase the level of surrenders
on these products. Declining market interest rates could have an adverse
impact on the Company's investment income as the Company reinvests proceeds
from positive cash flows from operations and proceeds from maturities,
calls and prepayments of investments into new investments that could be
yielding less than the portfolio's average rate. Changes in market interest
rates as compared to rates offered on some of the Company's products could
make those products less attractive if competitive investment margins are
not maintained, leading to lower sales and/or changes in the level of
surrenders and withdrawals on these products.
o The Company amortizes deferred policy acquisition costs ("DAC") related to
interest-sensitive life and investment contracts in proportion to gross
profits over the estimated lives of the contract periods. Periodically, the
Company updates the assumptions underlying the gross profits, which include
estimated future contract charges, investment margins and expenses, in
order to reflect actual and expected experience and its potential impact to
the valuation of DAC. Updates to these assumptions could potentially result
in adjustment to the cumulative amortization of DAC. For example, reduced
estimated future gross profits resulting from declines in contract charges
assessed against the Separate Accounts' balances invested in equity
securities which have declined in value, could potentially result in
increased amortization of DAC. An adjustment, if any, may have a material
effect on results of operations ceded to ALIC. DAC and any related
adjustments are ceded to ALIC.
o The impact of decreasing Separate Accounts balances resulting from volatile
market conditions, underlying fund performance and sales management
performance could cause contract charges realized by the Company, as well
as ALIC, to decrease and lead to an increase of exposure to pay guaranteed
minimum income and death benefits and could result in increased statutory
reserves for these benefits, reducing the Company's, as well as ALIC's
statutory capital and surplus. In addition, it is possible that the
assumptions and projections used by the Company in establishing prices for
the guaranteed minimum death benefits and guaranteed minimum income
benefits on variable annuities, particularly assumptions and projections
about investment performance, do not accurately anticipate the level of
costs that the Company will ultimately incur and cede to ALIC in providing
those benefits, resulting in adverse mortality trends that may have a
material effect on results of operations ceded to ALIC.
o Conditions in the U.S. and international stock markets can have an impact
on the Company's variable annuity sales. In general, sales of variable
annuities increase when the stock markets are generally rising over an
extended period of time and decrease when the stock markets are falling
over an extended period of time.
o In order to manage interest rate risk, from time to time the Company
adjusts the effective duration of assets in the investment portfolio. Those
adjustments may have an impact on the value of the investment portfolio and
on investment income.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not occur until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations ceded to ALIC.
14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
o Under current U.S. tax law and regulations, deferred and immediate
annuities and life insurance, including interest-sensitive products,
receive favorable policyholder tax treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance used
in estate planning.
o The Company is affiliated with various entities registered under the
federal securities laws as broker-dealers, investment advisers and/or
investment companies. These entities are subject to the regulatory
jurisdiction of the Securities and Exchange Commission, the National
Association of Securities Dealers and/or, in some cases, state securities
administrators. The laws regulating the securities products and activities
of the Company are complex, numerous and subject to change. As with any
highly regulated industry, there is some degree of risk of regulatory
non-compliance; however the Company has in place various legal and
compliance personnel, procedures and systems designed to reasonably assure
compliance with these requirements.
o The Company distributes its products under agreements with other members of
the financial services industry that are not affiliated with the Company.
Termination of one or more of these agreements due to, for example, changes
in control of any of these entities, could have a detrimental effect on the
Company's sales. This risk may be exacerbated due to the enactment of the
Gramm-Leach-Bliley Act of 1999, which eliminated many federal and state law
barriers to affiliations among banks, securities firms, insurers and other
financial service providers.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophe which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade in AIC's financial strength rating
from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best,
respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard &
Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a
downgrade of the Corporation's ratings, ALIC and its subsidiaries could
also experience a similar downgrade.
o The events of September 11, 2001, and the resulting disruption in the
financial markets revealed weaknesses in the physical and operational
infrastructure that underlies the U.S. and worldwide financial systems.
Those weaknesses did not impair the Company's liquidity in the wake of
September 11, 2001. However, if an event of similar or greater magnitude
occurred in the future and if the weaknesses in the physical and
operational infrastructure of the U.S. and worldwide financial systems are
not remedied, the Company could encounter significant difficulties in
transferring funds, buying and selling securities and engaging in other
financial transactions that support its liquidity.
o Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers and could downgrade or change a
company's ratings due to, for example, a decline in the value of a
company's investment portfolio or increased reserves due to additional
minimum income or death benefit exposure resulting from market declines. A
multiple level downgrade of either the Company or ALIC, while not expected,
could have a material adverse effect on the Company's sales, including the
competitiveness of the Company's product offerings, its ability to market
products, and its financial condition and results of operations. Also, the
rating agencies have a variety of policies and practices regarding the
relationships among ratings of affiliated entities. As such, the ratings of
the Company or ALIC could be affected by changes in ratings of AIC and/or
the Corporation.
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends to ALIC and use its capital in other ways.
15
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANICAL CONDITION AND RESULTS OF OPERATONS FOR THE THREE MONTH AND
SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
o The Company currently has Separate Account liabilities which contain death
benefit features covered by the exposure draft Statement of Position
("SOP") entitled "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts".
The Company does not currently hold liabilities for death benefit features
covered by the SOP. If adopted, the Company's establishment of liabilities
with respect to the contracts could have a material impact on the statement
of operations ceded to ALIC, however the market values at the time of
adoption will affect the amount of the liability required.
o Following enactment of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the United States insurance business in an effort to determine the
proper role of state insurance regulation in the U.S. financial services
industry. In addition, members of Congress have introduced or discussed
measures to permit optional federal chartering, and thus regulation, of
some types of insurance business, such as life insurance and annuities. We
cannot predict whether any state or federal measures will be adopted to
change the nature or scope of the regulation of the insurance business or
what affect any such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition, grandfathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
o The impact of The Sarbanes-Oxley Act of 2002 on the business of the Company
is being evaluated but cannot be determined at this time.
16
PART II - Other Information
Item 1. Legal Proceedings
The discussion "Regulation and Legal Proceedings" in Part I, Item 1,
Note 5 of this Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
(b) Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements 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.
Dated August 13, 2002. GLENBROOK LIFE AND ANNUITY COMPANY
------------------------------------
(Registrant)
By /s/SAMUEL H. PILCH
------------------
Samuel H. Pilch
Group Vice President and Controller
(chief accounting officer and
authorized officer of registrant)
18
Exhibit Index
EXHIBIT NO. DESCRIPTION
10.1 Underwriting Agreement for "Provider" Variable Annuity Contracts between
Glenbrook Life and Annuity Company and ALFS, Inc. effective January 1, 1997
10.2 Underwriting Agreement for "Provider" Variable Life Insurance between
Glenbrook Life and Annuity Company and ALFS, Inc. effective January 1, 1997
10.3 Reinsurance Agreement between Glenbrook Life and Annuity Company and
Allstate Life Insurance Company effective June 5, 1992 as amended by
Amendment No.1 effective June 8, 1995, Amendment No.2 executed December 18,
1995 and Amendment No.3 executed October 22, 1998
10.4 Reinsurance Agreement between Glenbrook Life and Annuity Company and
Allstate Life Insurance Company effective September 1, 1993, as amended by
Amendment No.1 executed June 8, 1995, Amendment No.2 effective January 1,
1993 and Amendment No. 3 executed October 22, 1998
E-1