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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, 1998 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)
ILLINOIS 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, 1998, there were 4,200 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 1998 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 accepts 100% of the liability under such contracts.
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
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Glenbrook Life and
Annuity Company (the "Company"). It should be read in conjunction with the
financial statements and related notes.
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly
owned subsidiary of The Allstate Corporation (the "Corporation"), markets
savings products and life insurance products through banks, direct marketing and
broker-dealers. Savings products include deferred annuities, such as variable
annuities, and fixed rate single and flexible premium annuities. Life insurance
includes universal life and variable life products. The Company has identified
itself as a single segment entity.
The assets and liabilities related to flexible premium deferred variable
annuity contracts and variable life policies are legally segregated and
reflected as Separate Account assets and liabilities and are carried at fair
value in the statements of financial position. Certain Separate Account
investment portfolios were initially funded with a $10.0 million seed money
contribution from the Company in 1995. During 1997, the Company liquidated its
ownership interest in the Separate Account investment portfolios
("Participation"). Investment income and realized gains and losses of the
Separate Accounts, other than the portion related to the Company's Participation
in 1996 and 1997, accrue directly to the contractholders (net of fees) and,
therefore, are not included in the Company's statements of operations and
comprehensive income.
RESULTS OF OPERATIONS
($ in thousands)
1998 1997 1996
-------- -------- --------
Net investment income $ 6,231 $ 5,304 $ 3,774
======== ======== ========
Realized capital gains and losses, after-tax $ (3) $ 2,249 $ --
======== ======== ========
Net income $ 4,044 $ 5,686 $ 2,435
======== ======== ========
Total investments $ 98,976 $ 90,474 $ 50,676
======== ======== ========
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.
Net income decreased $1.6 million in 1998 as increases in net investment
income were more than offset by a decline in realized capital gains. In 1997,
net income increased $3.3 million due to realized capital gains and higher net
investment income. In 1997, the Company liquidated its Participation which
resulted in a $2.2 million, after tax, realized capital gain.
Pretax net investment income increased 17.5% to $6.2 million in 1998 as
additional investment income was earned on higher investment balances arising
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. In 1997, pretax net investment income
increased 40.5% to $5.3 million. This higher investment income was caused by a
significant increase in the level of investments primarily arising from a $20.0
million capital contribution received from ALIC in January 1997 and the
liquidation of the Company's Separate Accounts Participation, partially offset
by an increase in investment expenses.
6
FINANCIAL POSITION
($ in thousands)
1998 1997
---------- ----------
Fixed income securities (1) $ 94,313 $ 86,243
Short-term investments 4,663 4,231
---------- ----------
Total investments $ 98,976 $ 90,474
========== ==========
Reinsurance recoverable from ALIC $3,113,278 $2,637,983
========== ==========
Separate Account assets and liabilities $ 993,622 $ 620,535
========== ==========
Contractholder funds $3,113,278 $2,637,983
========== ==========
(1) Fixed income securities are carried at fair value. Amortized
cost for these securities was $87,415 and $81,369 at December
31, 1998 and 1997, respectively.
Total investments increased to $99.0 million at December 31, 1998 from
$90.5 million at December 31, 1997. The increase was primarily due to amounts
invested from positive cash flows generated from operations and an increase in
the unrealized gain on fixed income securities. In 1998, positive cash flows
from operating activities were favorably impacted by changes in inter-company
cash settlement procedures.
FIXED INCOME SECURITIES The Company's fixed income securities portfolio consists
of publicly traded corporate bonds, mortgage-backed securities, U.S. government
bonds and tax-exempt municipal bonds. The Company generally holds its fixed
income securities for the long term, but has classified all of these securities
as available for sale to allow maximum flexibility in portfolio management. At
December 31, 1998, unrealized net capital gains on the fixed income securities
portfolio totaled $6.9 million compared to $4.9 million as of December 31, 1997.
The increase in the unrealized gain position is primarily attributable to lower
interest rates.
7
At December 31, 1998, all of the Company's fixed income securities
portfolio was rated investment grade, which is defined by the Company as a
security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating. The quality mix of the Company's fixed income securities
portfolio at December 31, 1998 is presented below.
($ in thousands)
NAIC
RATINGS MOODY'S EQUUIVALENT DESCRIPTION FAIR VALUE PERCENT TO TOTAL
- ------- ------------------------------- ---------- ----------------
1 Aaa/Aa/A $ 91,328 96.8%
2 Baa 2,985 3.2
---------- -----------
$ 94,313 100.0%
========== ===========
At December 31, 1998 and 1997, $30.4 million and $31.9 million,
respectively, of the fixed income securities portfolio was invested in
mortgage-backed securities ("MBS"). At December 31, 1998, all of the MBS are
investment grade and have underlying collateral that is guaranteed by U.S.
government entities; thus credit risk is minimal.
MBS, however, are subject to interest rate risk as the duration and
ultimate realized yield are affected by the rate of repayment of the underlying
mortgages. The Company attempts to limit interest rate risk by purchasing MBS
where cost does not significantly exceed par value, and with repayment
protection to provide more certain cash flow to the Company. At December 31,
1998, the amortized cost of the MBS portfolio was below par value by $259
thousand and over 32% of the MBS portfolio was invested in planned amortization
class bonds. This type of MBS is purchased to provide additional protection
against declining interest rates.
The Company closely monitors its fixed income securities portfolio for
declines in value that are other than temporary. Securities are placed on
non-accrual status when they are in default or when the receipt of interest
payments is in doubt.
SHORT TERM INVESTMENTS The Company's short-term investment portfolio was $4.7
million and $4.2 million at December 31, 1998 and 1997, respectively. The
Company invests available cash balances primarily in taxable short-term
securities having a final maturity date or redemption date of one year or less.
CONTRACTHOLDER FUNDS AND REINSURANCE RECOVERABLE FROM ALIC During 1998,
contractholder funds and amounts recoverable from ALIC under the reinsurance
agreements increased by $475.3 million. The increases resulted from sales of the
Company's fixed annuity contracts and interest credited to contractholders which
were partially offset by surrenders, withdrawals and benefits paid. Reinsurance
recoverable from ALIC relates to contract benefit obligations ceded to ALIC.
SEPARATE ACCOUNTS Separate Account assets and liabilities increased 60.1% to
$993.6 million in 1998. The increases were primarily attributable to increased
sales of flexible premium deferred variable annuity contracts and favorable
investment performance of the Separate Accounts investment portfolios, partially
offset by variable annuity surrenders and withdrawals.
8
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.
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 way to quantify this exposure is duration. Duration measures the
sensitivity of the fair value of assets to changes in interest rates. For
example, if interest rates increase 1%, the fair value of an asset with a
duration of 5 years is expected to decrease in value by approximately 5%. At
December 31, 1998, the Company's asset duration was approximately 4.6 years, a
slight decrease from the 5.3 years reported for December 31, 1997.
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, 1998,
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 above by approximately $4.3 million, an amount essentially unchanged
from the amount reported for December 31, 1997. The selection of a 100 basis
point immediate rate shock should not be construed as a prediction by the
Company's management of future market events; but rather, to illustrate the
potential impact of such an event.
To the extent that actual results differ from the assumptions utilized,
the Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes that the current relationship
between short-term and long-term interest rates (the term structure of interest
rates) will remain constant over time. As a result, these calculations may not
fully capture the impact of non-parallel changes in the term structure of
interest rates and/or large changes in interest rates.
EQUITY PRICE RISK Equity price risk is the risk that the Company will incur
economic losses due to adverse changes in equity prices. At December 31, 1998
the Company had variable annuity and variable life funds with balances totaling
$993.6 million. 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 $1.3 million
less in annualized fee income which would be ceded to ALIC.
CORPORATE OVERSIGHT In formulating and implementing policies for investing new
and existing funds, AIC, an indirect parent of the Company, administers and
oversees investment risk management processes primarily through three oversight
bodies: the Boards of Directors and Investment Committees of its operating
subsidiaries, and the Credit and Risk Management Committee ("CRMC"). The Boards
of Directors and Investment Committees provide executive oversight of investment
activities. The CRMC is a senior management committee consisting of the Chief
Investment Officer, the Investment Risk Manager, and other investment officers
who are responsible for the day-to-day management of market risk. The CRMC meets
at least monthly to provide detailed oversight of investment risk, including
market risk.
9
AIC has investment guidelines that define the overall framework for
managing market and other investment risks, including the accountabilities and
controls over these activities. In addition, AIC has specific investment
policies for each of its affiliates, including the Company, that delineate the
investment limits and strategies that are appropriate for the Company's
liquidity, surplus, product and regulatory requirements.
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 dependant 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, 1998.
In January 1997, a $20.0 million capital contribution was received from
ALIC.
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, 1998, the Moody's and Standard and Poor's financial
strength 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 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, 1998, RBC
for the Company was significantly above a level that would require regulatory
action.
YEAR 2000
The Company is dependent upon certain services 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.
The Corporation is heavily dependent upon complex computer systems for all
phases of its operations, including customer service, insurance processing,
underwriting, loss reserving, investments and other enterprise systems. Since
many of the Corporation's older computer software programs recognize only the
last two digits of the year in any date, some software may fail to operate
properly in or after the year 1999, if the software is not reprogrammed,
remediated, or replaced ("Year 2000"). Also, non-IT often contain embedded
hardware or software that may have a Year 2000 sensitive component. The
Corporation believes that many of its counterparties and suppliers also have
Year 2000 issues and non-IT issues which could affect the Corporation.
10
In 1995, the Corporation commenced a plan consisting of four phases which
are intended to mitigate and/or prevent the adverse affects of the Year 2000
issues on its systems: 1) inventory and assessment of affected systems and
equipment, 2) remediation and compliance of systems and equipment through
strategies that include the replacement or enhancement of existing systems,
upgrades to operating systems already covered by maintenance agreements and
modifications to existing systems to make them Year 2000 compliant, 3) testing
of systems using clock-forward testing for both current and future dates and for
dates which trigger specific processing, and 4) contingency planning which will
address possible adverse scenarios and the potential financial impact to the
Corporation's results of operations, liquidity or financial position.
The Corporation believes that the first three steps of this plan,
assessment, remediation and testing, including clock-forward testing which is
being performed on the Corporation's systems and non-IT, are mostly complete for
the Corporation's critical systems. In April 1998, the Corporation announced its
main premium application system, ALERT, which manages more than 20 million auto
and homeowners policies, is Year 2000 compliant. The Corporation is relying on
other remediation techniques for its midrange and personal computer
environments, and certain mainframe applications.
Certain investment processing systems, midrange computers and personal
computer enviornments are planned to be remediated by the middle of 1999, and
some systems and non-IT related to discontinued or non-critical functions of the
Corporation are planned to be abandoned by the end of 1999.
The Corporation is currently in the process of identifying key processes
and developing contingency plans in the event that the systems supporting these
key processes are not Year 2000 compliant at the end of 1999. Management
believes these contingency plans should be completed by mid-1999. Until these
plans are complete, management is unable to determine an estimate of the most
reasonably possible worst case scenario due to issues relating to the Year 2000.
In addition, the Corporation is actively working with its major external
counterparties and suppliers to assess their compliance efforts and the
Corporation's exposure to both their Year 2000 issues and non-IT issues. This
assessment has included the solicitation of external counterparties and
suppliers, evaluating responses received and testing third party interfaces and
interactions to determine compliance. Currently the Corporation has solicited
approximately 1,500, and has received responses from approximately 75% of its
counterparties and suppliers. The Corporation will continue its efforts to
solicit responses on Year 2000 compliance from these parties. The majority of
these responses have stated that the counterparties and suppliers believe that
they will be Year 2000 compliant and that no transactions will be affected.
However, some key vendors have not provided affirmative responses to date. The
Corporation has also decided to test certain interfaces and interactions to gain
additional assurance on third party compliance. If key vendors are unable to
meet the Year 2000 requirement, the Corporation is preparing contingency plans
that will allow the Corporation to continue to sell its products and to service
its customers. Management believes these contingency plans should be completed
by mid-1999. The Corporation currently does not have sufficient information to
determine whether or not all of its external counterparties and suppliers will
be Year 2000 ready.
The Corporation is currently assessing the level of Year 2000 risk
associated with certain personal lines policies that have been issued. To date,
no changes have been made in the coverages provided by the Corporation's
personal auto and homeowners lines policies to specifically exclude coverage for
Year 2000 related claims. This does not mean that all losses, or any particular
type of loss, that might be related to Year 2000 will be covered. Rather, all
claims will continue to be evaluated on a case-by-case basis to determine
whether coverage is available for a particular loss in accordance with the
applicable terms and conditions of the policy in force.
11
The Corporation also has investments which have been publicly and privately
placed. The Corporation may be exposed to the risk that the issuers of these
investments will be adversely impacted by Year 2000 issues. The Corporation
assesses the impact which Year 2000 issues have on the Corporation's investments
as part of due diligence for proposed new investments, and in its ongoing review
of all current portfolio holdings. Any recommended actions with respect to
individual investments are determined by taking into account the potential
impact of Year 2000 on the issuer. Contingency plans are being created for any
securities held whose issuer is determined to not be Year 2000 compliant.
The Corporation presently believes that it will resolve the Year 2000 issue
in a timely manner. Year 2000 costs are expensed as incurred, therefore the
majority of the expenses related to this project have been incurred as of
December 31, 1998. The Corporation estimates that approximately $125 million in
costs will be incurred between the years of 1995 and 2000. These amounts include
costs directly related to fixing Year 2000 issues, such as modifying software
and hiring Year 2000 solution providers. These amounts also include costs
incurred to replace certain non-compliant systems which would not have been
otherwise replaced. A portion of these costs will be incurred by the Company on
a pro rata basis of usage of the computer-related systems and non-IT, as
compared to the usage of all entities which share these services with the
Corporation. These amounts are not expected to be material to the results of
operations of the Company.
PENDING ACCOUNTING STANDARDS
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP is required to be adopted in 1999. 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. The Company is currently evaluating the
effects of this SOP on its accounting for insurance-related assessments. Certain
information required for compliance is not currently available and therefore the
Company is studying alternatives for estimating the accrual. In addition,
industry groups are working to improve the information available. Adoption of
this standard is not expected to be material to the results of operations or
financial position 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.
12
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, 1998, together with the Report of Independent
Accountants are set forth on pages F-1 - F-16 of this report.
2. FINANCIAL STATEMENT SCHEDULES. The following are included in Part IV
of this report:
Schedule IV - Reinsurance page F-17
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, 1998.
(c) EXHIBITS
Exhibit No. Description
3(i) Amended and Restated Articles of Incorporation and Articles of
Redomestication of Glenbrook Life and Annuity Insurance Company
(filed herewith)
3(ii) Amended and Restated By-laws of Glenbrook Life and Annuity Company
(filed herewith)
27 Financial Data Schedule (filed herewith)
14
Financial Statements
INDEX
PAGE
Independent Auditors' Report................................................F-1
Financial Statements:
Statements of Financial Position
December 31, 1998 and 1997........................................F-2
Statements of Operations and Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996..................................F-3
Statements of Shareholder's Equity for the Years Ended
December 31, 1998, 1997 and 1996..................................F-4
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996..................................F-5
Notes to Financial Statements........................................F-6
Schedule IV - Reinsurance for the Years Ended
December 31, 1998, 1997 and 1996..................................F-17
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, 1998 and 1997, 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, 1998. 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, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998 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 19, 1999
F-1
F-2
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF FINANCIAL POSITION
December 31,
------------
($ in thousands) 1998 1997
---- ----
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $87,415 and $81,369) $ 94,313 $ 86,243
Short-term 4,663 4,231
---------- ----------
Total investments 98,976 90,474
Reinsurance recoverable from Allstate Life
Insurance Company 3,113,278 2,637,983
Other assets 2,590 2,549
Separate Accounts 993,622 620,535
---------- ----------
TOTAL ASSETS $4,208,466 $3,351,541
========== ==========
LIABILITIES
Contractholder funds 3,113,278 2,637,983
Current income taxes payable 2,181 609
Deferred income taxes 2,499 1,772
Payable to affiliates, net 3,583 2,698
Separate Accounts 993,622 620,535
---------- ----------
TOTAL LIABILITIES 4,115,163 3,263,597
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,100 2,100
Additional capital paid-in 69,641 69,641
Retained income 17,079 13,035
Accumulated other comprehensive income:
Unrealized net capital gains 4,483 3,168
---------- ----------
Total accumulated other comprehensive income 4,483 3,168
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 93,303 87,944
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,208,466 $3,351,541
========== ==========
See notes to financial statements.
F-3
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
REVENUES
Net investment income $ 6,231 $ 5,304 $ 3,774
Realized capital gains and losses (5) 3,460 --
------- ------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 6,226 8,764 3,774
Income tax expense 2,182 3,078 1,339
------- ------- -------
NET INCOME 4,044 5,686 2,435
------- ------- -------
OTHER COMPREHENSIVE INCOME, AFTER-TAX
Change in unrealized net capital
gains and losses 1,315 378 (567)
------- ------- -------
COMPREHENSIVE INCOME $ 5,359 $ 6,064 $ 1,868
======= ======= =======
See notes to financial statements.
F-4
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
December 31,
------------
($ in thousands) 1998 1997 1996
---- ---- ----
COMMON STOCK $ 2,100 $ 2,100 $ 2,100
-------- -------- --------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year 69,641 69,641 49,641
Capital contribution -- -- 20,000
-------- -------- --------
Balance, end of year 69,641 69,641 69,641
-------- -------- --------
RETAINED INCOME
Balance, beginning of year 13,035 7,349 4,914
Net income 4,044 5,686 2,435
-------- -------- --------
Balance, end of year 17,079 13,035 7,349
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year 3,168 2,790 3,357
Change in unrealized net capital gains
and losses 1,315 378 (567)
-------- -------- --------
Balance, end of year 4,483 3,168 2,790
-------- -------- --------
Total shareholder's equity $ 93,303 $ 87,944 $ 81,880
======== ======== ========
See notes to financial statements.
F-5
GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
($ in thousands) 1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,044 $ 5,686 $ 2,435
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization and other non-cash items (24) 29 --
Realized capital gains and losses 5 (3,460) --
Changes in:
Income taxes payable 1,590 240 (1,223)
Other operating assets and liabilities 915 961 717
-------- -------- --------
Net cash provided by operating activities 6,530 3,456 1,929
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,966 1,405 --
Investment collections 7,123 14,217 2,891
Investment purchases (15,250) (50,115) (5,667)
Participation in Separate Accounts -- 13,981 (232)
Change in short-term investments, net (369) (2,944) 815
-------- -------- --------
Net cash used in investing activities (6,530) (23,456) (2,193)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution -- 20,000 --
-------- -------- --------
Net cash provided by financing activities -- 20,000 --
-------- -------- --------
NET DECREASE IN CASH -- -- (264)
CASH AT THE BEGINNING OF YEAR -- -- 264
-------- -------- --------
CASH AT END OF YEAR $ -- $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash financing activity:
Capital contribution receivable from
Allstate Life Insurance Company $ -- $ -- $ 20,000
======== ======== ========
See notes to financial statements.
F-6
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
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.
To conform with the 1998 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
NATURE OF OPERATIONS
The Company markets savings products and life insurance through banks, direct
marketing and broker-dealers. Savings products include deferred annuities, such
as variable annuities and fixed rate single and flexible premium annuities. Life
insurance includes universal life and variable life products. The Company has
entered into exclusive distribution arrangements with management investment
companies to market its variable annuity contracts. In 1998, substantially all
of the Company's statutory premiums and deposits were from annuities. The
Company re-domesticated its operations from Illinois to Arizona in 1998.
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. There continues to be proposed federal and
state regulation and legislation that, if passed, would allow banks greater
participation in securities and insurance businesses, which would present an
increased level of competition, as well as opportunities, for sales of the
Company's life and savings products. Furthermore, the market for deferred
annuities and interest-sensitive life insurance is enhanced by the tax
incentives available under current law. Any legislative changes which lessen
these incentives are likely to negatively impact the demand for these products.
Although the Company currently benefits from agreements with financial services
entities who market and distribute its products, change in control of these
non-affiliated entities with which the Company has alliances could have a
detrimental effect on the Company's sales.
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.
F-7
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 are Florida, Pennsylvania,
Texas, California and Tennessee for the year ended December 31, 1998. 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.
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 dividends on short-term
investments. 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
The Company has reinsurance agreements whereby substantially all premiums,
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. The amounts shown in the
Company's statements of operations and comprehensive income relate to the
investment of those assets of the Company that are not transferred under
reinsurance agreements. Reinsurance recoverable and the related contractholder
funds are reported separately in the statements of financial position. The
Company continues to have primary liability as the direct insurer for risks
reinsured.
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES
Revenues on universal life-type contracts are comprised of contract charges and
fees, and are recognized when assessed against the policyholder account balance.
Revenues on investment contracts include contract charges and fees for contract
administration and surrenders. These revenues are recognized when levied against
the contract balance. All premium revenues and contract charges are primarily
reinsured with ALIC.
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.
F-8
Deferred income taxes arise 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 flexible premium deferred variable annuity and variable life
policies, the assets and liabilities of which are legally segregated and
reflected in the accompanying statements of financial position as assets and
liabilities of the Separate Accounts. The Company's Separate Accounts consist
of: Glenbrook Life and Annuity Company Separate Account A, Glenbrook Life and
Annuity Company Variable Annuity Account, Glenbrook Life Variable Life Separate
Account A, Glenbrook Life Scudder Variable Account (A), Glenbrook Life
Multi-Manager Variable Account, Glenbrook Life AIM Variable Life Separate
Account A and Glenbrook Life Variable Life Separate Account B. Each of the
Separate Accounts are unit investment trusts registered with the Securities and
Exchange Commission.
The assets of the Separate Accounts are carried at fair value. 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 fees, administration fees,
mortality and expense risk charges and cost of insurance charges, all of which
are reinsured with ALIC.
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.
CONTRACTHOLDER FUNDS
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most fixed annuities
and universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. During 1998, credited interest rates on
contractholder funds ranged from 3.46% to 11.00% for those contracts with fixed
interest rates and from 3.75% to 10.00% for those with flexible rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-9
NEW ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive income is a
measurement of certain changes in shareholder's equity that result from
transactions and other economic events other than transactions with
shareholders. For the Company, these consist of changes in unrealized gains and
losses on the investment portfolio (See Note 8).
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 redefines how segments are
determined and requires additional segment disclosures for both annual and
interim financial reporting. The Company has identified itself as a single
operating segment.
PENDING ACCOUNTING STANDARDS
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-related Assessments." The SOP is required to be adopted in 1999. 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. The Company is currently evaluating the
effects of this SOP on its accounting for insurance-related assessments. Certain
information required for compliance is not currently available and therefore the
Company is studying alternatives for estimating the accrual. In addition,
industry groups are working to improve the information available. Adoption of
this standard is not expected to be material to the results of operations or
financial position of the Company.
3. RELATED PARTY TRANSACTIONS
REINSURANCE
The Company has reinsurance agreements whereby substantially all premiums,
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. The amounts shown in the Company's
statements of operations and comprehensive income relate to the investment of
those assets of the Company that are not transferred under reinsurance
agreements. Reinsurance recoverable and the related contracholder funds are
reported separately in the statements of financial position. The Company
continues to have primary liability as the direct insurer for risks reinsured.
F-10
Investment income earned on the assets which support contractholder funds is not
included in the Company's financial statements as those assets are owned and
managed under terms of reinsurance agreements. The following amounts were ceded
to ALIC under reinsurance agreements.
YEAR ENDED DECEMBER 31,
-----------------------
($ in thousands) 1998 1997 1996
-------- -------- --------
Contract charges $ 19,009 $ 11,641 $ 4,254
Credited interest, policy benefits, and
certain expenses 218,008 179,954 113,703
BUSINESS OPERATIONS
The Company utilizes services provided 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 cost to the Company is determined by various allocation methods
and is primarily related to the level of services provided. Operating expenses,
including compensation and retirement and other benefit programs, allocated to
the Company were $15,949, $19,243 and $4,804 in 1998, 1997 and 1996,
respectively. Of these costs, the Company retains investment related expenses.
All other costs are ceded to ALIC under reinsurance agreements.
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
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
======= ======= ======= =======
AT DECEMBER 31, 1997
U.S. government and agencies $24,419 $ 2,961 $ -- $27,380
Municipal 656 17 -- 673
Corporate 25,476 840 -- 26,316
Mortgage-backed securities 30,818 1,056 -- 31,874
------- ------- ------- -------
Total fixed income securities $81,369 $ 4,874 $ -- $86,243
======= ======= ======= =======
F-11
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at December
31, 1998:
AMORTIZED FAIR
COST VALUE
---- -----
Due in one year or less $ 400 $ 400
Due after one year through five years 8,711 8,943
Due after five years through ten years 36,027 39,009
Due after ten years 12,877 15,531
------- -------
58,015 63,883
Mortgage-backed securities 29,400 30,430
------- -------
Total $87,415 $94,313
======= =======
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
NET INVESTMENT INCOME
YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
Fixed income securities $ 6,151 $ 5,014 $ 3,478
Short-term investments 183 231 126
Participation in Separate Accounts -- 161 232
------- ------- -------
Investment income, before expense 6,334 5,406 3,836
Investment expense 103 102 62
------- ------- -------
Net investment income $ 6,231 $ 5,304 $ 3,774
======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES
YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
Fixed income securities $ (5) $ (61) $ --
Short-term investments -- 6 --
Participation in Separate Accounts -- 3,515 --
------- ------- -------
Realized capital gains and losses (5) 3,460 --
Income taxes 2 (1,211) --
------- ------- -------
Realized capital gains and losses,
after tax $ (3) $ 2,249 $ --
======= ======= =======
Excluding calls and prepayments, gross losses of $5 and $61 were realized on
sales of fixed income securities during 1998 and 1997, respectively. There were
no gains or losses, excluding calls and prepayments during 1996.
F-12
UNREALIZED NET CAPITAL GAINS
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1998 are as follows:
COST/
AMORTIZED FAIR GROSS UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES NET GAINS
---- ----- ----- ------ ---------
Fixed income securities $ 87,415 $ 94,313 $ 6,954 $ (56) $ 6,898
======== ======== ======== ========
Deferred income taxes (2,415)
--------
Unrealized net capital gains $ 4,483
========
CHANGE IN UNREALIZED NET CAPITAL GAINS
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
Fixed income securities $ 2,024 $ 2,410 $(2,239)
Participation in Separate Accounts -- (1,829) 1,368
Deferred income taxes (709) (203) 304
------- ------- -------
Increase (decrease) in unrealized
net capital gains $ 1,315 $ 378 $ (567)
======= ======= =======
SECURITIES ON DEPOSIT
At December 31, 1998, fixed income securities with a carrying value of $11,416
were on deposit with regulatory authorities as required by law.
5. FINANCIAL INSTRUMENTS
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including universal
life-type insurance reserves and deferred income taxes) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income,
are generally of a short-term nature. Their carrying values are assumed to
approximate fair value.
F-13
FINANCIAL ASSETS
The carrying value and fair value of financial assets at December 31, are as
follows:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Fixed income securities $ 94,313 $ 94,313 $ 86,243 $ 86,243
Short-term investments 4,663 4,663 4,231 4,231
Separate Accounts 993,622 993,622 620,535 620,535
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
approximates 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:
1998 1997
---- ----
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Contractholder funds on
investment contracts $3,130,228 $2,967,101 $2,636,331 $2,492,095
Separate Accounts 993,622 993,622 620,535 620,535
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.
6. 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.
F-14
Prior to Sears, Roebuck and Co.'s ("Sears") distribution ("Sears distribution")
on June 30, 1995 of its 80.3% ownership in the Corporation to Sears
shareholders, the Allstate Group joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Tax Sharing Agreement"). Under the Tax Sharing
Agreement, the Company, through the Corporation, paid to or received from the
Sears Group the amount, if any, by which the Sears Tax Group's federal income
tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return.
As a result of the Sears distribution, the Allstate Group was no longer included
in the Sears Tax Group, and the Tax Sharing Agreement was terminated.
Accordingly, the Allstate Group and Sears Group entered into a new tax sharing
agreement, which adopts many of the principles of the Tax Sharing Agreement and
governs their respective rights and obligations with respect to federal income
taxes for all periods prior to the Sears distribution, 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 liability at December 31, are as
follows:
1998 1997
------- -------
Unrealized net capital gains $(2,415) $(1,706)
Difference in tax bases of investments (84) (66)
------- -------
Total deferred liability $(2,499) $(1,772)
======= =======
The components of income tax expense for the year ended December 31, are as
follows:
1998 1997 1996
------ ------ ------
Current $2,164 $3,037 $1,335
Deferred 18 41 4
------ ------ ------
Total income tax expense $2,182 $3,078 $1,339
====== ====== ======
The Company paid income taxes of $592, $2,839 and $2,446 in 1998, 1997 and 1996,
respectively. The Company had a current income tax liability of $2,181 and $609
at December 31, 1998 and 1997, respectively.
F-15
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:
1998 1997 1996
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Other -- .1 .5
------ ------ ------
Effective income tax rate 35.0% 35.1% 35.5%
====== ====== ======
7. STATUTORY FINANCIAL INFORMATION
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory financial statements in accordance with
accounting principles and 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 revised
statutory accounting principles. While the NAIC has approved a January 1, 2001
implementation date for the newly developed guidance, companies must adhere to
the implementation date adopted by their state of domicile. The Company's state
of domicile, Arizona, is continuing its comparison of codification and current
statutory accounting requirements to determine necessary revisions to existing
state laws and regulations. The 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 months. The maximum amount of dividends that the Company can distribute
during 1999 without prior approval of the Arizona Department of Insurance is
$4,698.
F-16
8. 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:
1998 1997 1996
----------------------------- ---------------------------- -----------------------------
After- After- After-
Pretax Tax tax Pretax Tax tax Pretax Tax tax
------ --- --- ------ --- --- ------ --- ---
Unrealized capital gains
and losses:
- --------------------------
Unrealized holding gains
(losses) arising during
the period $ 2,019 $ (707) $ 1,312 $ 4,034 $(1,412) $ 2,622 $ (871) $ 304 $ (567)
Less: reclassification
adjustment for realized
net capital gains
included in net income (5) 2 (3) 3,453 (1,209) 2,244 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Unrealized net capital
gains (losses) $ 2,024 $ (709) $ 1,315 $ 581 $ (203) $ 378 $ (871) $ 304 $ (567)
------- ------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
income $ 2,024 $ (709) $ 1,315 $ 581 $ (203) $ 378 $ (871) $ 304 $ (567)
======= ======= ======= ======= ======= ======= ======= ======= =======
9. 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
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
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 $ --
========= ========= =======
GROSS NET
YEAR ENDED DECEMBER 31, 1996 AMOUNT CEDED AMOUNT
--------- --------- -------
Life insurance in force $ 2,436 $ 2,436 $ --
========= ========= =======
Premiums and contract charges:
Life and annuities $ 4,254 $ 4,254 $ --
========= ========= =======
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/ LOUIS G. LOWER, II
----------------------
Louis G. Lower, II
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
Date March 3, 1999
--------------------
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/ LOUIS G. LOWER, II
----------------------
Louis G. Lower, II
Chairman of the Board, Chief Executive Officer
and Director
(Principal Executive Officer)
Date March 3, 1999
---------------------
By /s/ PETER H. HECKMAN
---------------------
Peter H. Heckman
President, Chief Operating Officer and Director
Date March 4, 1999
---------------------
By /s/ MICHAEL J. VELOTTA
----------------------
Michael J. Velotta
Vice President, Secretary,
General Counsel and Director
Date March 4, 1999
---------------------
By /s/ KEVIN R. SLAWIN
---------------------
Kevin R. Slawin
Vice President and Director
Date March 1, 1999
---------------------
By /s/ KEITH A. HAUSCHILDT
-----------------------
Keith A. Hauschildt
Assistant Vice President and Controller
(Chief Accounting Officer)
Date March 4, 1999
---------------------
By /s/ SARAH R. DONAHUE
--------------------
Sarah R. Donahue
Assistant Vice President and Director
Date March 8, 1999
-----------------
16
By /s/ BRENT H. HAMANN
-------------------
Brent H. Hamann
Vice President and Director
Date March 5, 1999
-----------------
By /s/ JOHN R. HUNTER
------------------
John R. Hunter
Assistant Vice President and Director
Date March 4, 1999
-----------------
By /s/ TIMOTHY N. VANDER PAS
-------------------------
Timothy N. Vander Pas
Assistant Vice President and Director
Date March 3, 1999
-----------------
By /s/ G. CRAIG WHITEHEAD
----------------------
G. Craig Whitehead
Assistant Vice President and Director
Date March 4, 1999
-----------------
By /s/ THOMAS J. WILSON, II
------------------------
Thomas J. Wilson, II
Vice Chairman and Director
Date March 5, 1999
-----------------
17
EXHIBIT INDEX
The Glenbrook Life and Annuity Company
Form 10-K for the year ended December 31, 1998
Exhibit No. Description
3(i) Amended and Restated Articles of Incorporation and Articles of
Redomestication of Glenbrook Life and Annuity Insurance Company
(filed herewith)
3(ii) Amended and Restated By-laws of Glenbrook Life and Annuity
Company (filed herewith)
27 Financial Data Schedule (filed herewith)
E-1