GLENBROOK LIFE & ANNUITY CO VARIABLE ANNUITY ACCOUNT - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

- --------------------------------------------------------------------------------
FORM 10-K

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.

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 of Incorporation) (I.R.S. Employer Identification No.)

3100 SANDERS ROAD
NORTHBROOK, ILLINOIS 60062
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: 847-402-5000

Securities registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934: 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, 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 the 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/

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes / / No /X/

As of March 15, 2003, the Registrant had 5,000 common shares, $500 par value,
outstanding, all of which are held by Allstate Life Insurance Company.

TABLE OF CONTENTS

* Item prepared in accordance with General Instruction I(2) of
Form 10-K
** Omitted pursuant to General Instruction I(2) of Form 10-K

PART I

ITEM 1. BUSINESS

Glenbrook Life and Annuity Company ("Glenbrook Life" or the "Company")
is a stock life insurance company originally organized under the laws of the
State of Indiana in 1965. From 1965 to 1983, the Company was known as "United
Standard Life Assurance Company" and from 1983 to 1992, the Company was known
as "William Penn Life Assurance Company of America." In 1992, the Company was
purchased by Allstate Life Insurance Company ("ALIC") and renamed Glenbrook
Life and redomesticated to Illinois. In 1998, the Company was redomesticated
to Arizona.

Glenbrook Life is a wholly owned subsidiary of ALIC, a stock life
insurance company incorporated under the laws of the State of Illinois. ALIC
is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a
property-liability insurance company incorporated under the laws of the State
of Illinois. All of the outstanding capital stock of AIC is owned by The
Allstate Corporation (the "Corporation"), a Delaware company which has
several different classes of securities, including common stock, registered
with the Securities and Exchange Commission ("SEC").

Glenbrook Life is authorized to conduct life insurance and annuity business
in the District of Columbia, Puerto Rico and all states except New York.

Glenbrook Life, a single segment entity, markets a diversified group of
products to meet customers' lifetime needs in the areas of financial protection
and retirement solutions through financial services firms. These products
include interest-sensitive life insurance, including single premium life
insurance and variable life insurance; fixed annuities, including market value
adjusted annuities and equity-indexed annuities; and variable annuities. ALFS,
Inc. ("ALFS") is the principal underwriter for certain Glenbrook Life products,
such as variable annuities, variable life insurance and market value adjusted
annuities. ALFS is a wholly owned subsidiary of ALIC and a registered
broker-dealer under the Securities Exchange Act of 1934.

Under the Company's reinsurance agreements with ALIC, the Company
reinsures substantially all general account liabilities to ALIC via a 100%
coinsurance agreement. Assets which support these liabilities are owned and
managed by ALIC. Under the coinsurance agreement, contract charges, interest
credited to contractholder funds, contract benefits and certain expenses
under all general account contracts are reinsured with ALIC. Separate
Accounts liabilities related to variable annuity and life contracts are ceded
to ALIC via a 100% modified coinsurance agreement whereby assets are
maintained in the Company's legally segregated unitized Separate Accounts.
Contract charges assessed against the Separate Accounts assets and contract
benefits are reinsured to ALIC. The obligations of ALIC under the reinsurance
agreements are to the Company. The Company continues to have primary
liability as the direct insurer for risks reinsured.

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.

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 life insurance and annuities. As of December
2001, the last year for which current information is available, there were
approximately 1,225 stock, mutual and other types of insurers in business in the
United States.

The Company is subject to changing social, economic and regulatory
conditions. State and federal regulatory initiatives have varied and have
included efforts to remove barriers preventing banks from engaging in the
securities and insurance businesses, to change tax laws affecting the taxation
of insurance companies and the tax treatment of insurance products which may
impact the relative desirability of various personal investment

2

products and to expand overall regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.

Glenbrook Life is the issuer of certain market value adjusted annuities
registered with the SEC. Glenbrook Life also is the depositor of certain
Separate Accounts that are registered with the SEC as unit investment trusts and
through which it offers variable annuity or variable life insurance contracts
that are registered with the SEC.

ITEM 2. PROPERTIES

Glenbrook Life occupies office space provided by AIC, in Northbrook,
Illinois. Expenses associated with these offices are allocated to Glenbrook Life
through a service and expense agreement with AIC.

ITEM 3. LEGAL PROCEEDINGS

Incorporated in this Item 3 by reference to the discussion under the
heading "Regulation and legal proceedings" in Note 8 to the Company's financial
statements in Item 8 of this Form 10-K.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no public trading market for the Company's common stock. All of
its outstanding common stock is owned by its parent, ALIC. All of ALIC's
outstanding common stock is owned by AIC. All of the outstanding common stock of
AIC is owned by the Corporation.

From January 1, 2001 through March 15, 2003, the Company paid no dividends
on its common stock to ALIC.

Within the past three years, no equity securities were sold by the Company
that were not registered under the Securities Act of 1933.

For additional information on dividends, including restrictions on the
payment of dividends by the Company, see the "Liquidity" subsection of the
"Capital Resources and Liquidity" section of our "Management's Discussion and
Analysis of Financial Condition and Results of Operations", which items are
incorporated herein by reference.

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 financial position of the Company. It should be read in
conjunction with the financial statements and related notes. To conform with the
2002 presentation, certain prior year amounts have been reclassified.

OVERVIEW

The Company, a wholly owned subsidiary of ALIC, which is a wholly owned
subsidiary of AIC, a wholly owned subsidiary of the Corporation, markets a
diversified group of products to meet customers' needs in the areas of financial
protection and retirement solutions through financial services firms. These
products include interest-sensitive life insurance, including single premium
life insurance and variable life insurance; fixed annuities including market
value adjusted annuities and equity-indexed annuities; and variable annuities.

Management has identified the Company as a single segment entity.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company has identified two of its accounting policies that, due to
their nature, have required management to make assumptions and estimates that
are significant to the financial statements at December 31,

3

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

2002. It is reasonably likely that changes in these assumptions and estimates
could occur from period to period, and have a material impact on the Company's
financial statements.

A brief summary of each of these critical accounting policies follows. For
a more complete discussion of the judgments and other factors affecting the
measurement of these policies, see the referenced sections of the Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A"). There is also a complete summary of the Company's significant
accounting policies in Note 2 of the financial statements.

INVESTMENTS - Fixed income securities include bonds, mortgage-backed and
asset-backed securities. All fixed income securities are carried at fair value
and are classified as available for sale. The fair value of publicly traded
fixed income securities is based on independent market quotations. The fair
value of non-publicly traded securities, primarily privately placed corporate
obligations, is based on either widely accepted pricing valuation models which
utilize internally developed ratings and independent third party data (e.g.,
term structures and current publicly traded bond prices) as inputs or
independent third party pricing sources. The valuation models use indicative
information such as ratings, industry, coupon, and maturity along with related
third party data and publicly traded bond prices to determine security specific
spreads. These spreads are then adjusted for illiquidity based on historical
analysis and broker surveys. Periodic changes in fair values are reported as a
component of Accumulated other comprehensive income on the Statements of
Financial Position and are reclassified to Net income only when supported by the
consummation of a transaction with an unrelated third party, or when declines in
fair values are deemed other than temporary.

The Company writes down to fair value any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired. The assessment of other than
temporary impairment is performed on a case-by-case basis considering a wide
range of factors. Inherent in the Company's evaluation of a particular
security are assumptions and estimates about the operations of the issuer and
its future earnings potential. Some of the factors considered in evaluating
whether a decline in fair value is other than temporary are:

- The Company's ability and intent to retain the investment
for a period of time sufficient to allow for an anticipated
recovery in value;
- The recoverability of principal and interest;
- The duration and extent to which the fair value has been
less than amortized cost for fixed income securities;
- The financial condition, near-term and long-term prospects
of the issuer, including relevant industry conditions and
trends, and implications of rating agency actions and
offering prices; and
- The specific reasons that a security is in a significant
unrealized loss position, including market conditions which
could affect liquidity.

There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if impairment is other than temporary.
These risks and uncertainties include the risks that:

- The economic outlook is worse than anticipated and has a
greater adverse impact on a particular issuer than
anticipated;
- The Company's assessment of a particular issuer's ability to
meet all of its contractual obligations changes based on
changes in the facts and circumstances related to that
issuer; and
- New information is obtained or facts and circumstances
change that cause a change in the Company's ability or
intent to hold a security to maturity or until it recovers
in value.

These risks and uncertainties could result in a charge to earnings in
future periods to the extent that losses are realized. The charge to earnings,
while potentially significant to Net income, would not have a significant impact
on Shareholder's equity since the portfolio is held at fair value and as a
result, the related unrealized gain (loss), net of tax, would already be
reflected as Accumulated other comprehensive income in Shareholder's equity. For
a further discussion of these policies, and quantification of the impact of
these estimates and assumptions, see the Investments, Market Risk and
Forward-looking Statements and Risk Factors sections of the MD&A.

4

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

LIFE INSURANCE RESERVES - Reserves for life-contingent contract benefits,
which relate to payout annuities with life contingencies, are computed on the
basis of long-term actuarial assumptions of future investment yields, mortality,
morbidity, contract terminations and expenses. These assumptions include
provisions for adverse deviation and generally vary by such characteristics as
type of coverage, year of issue and contract duration. Mortality, morbidity and
contract termination assumptions are based on Company and industry experience
prevailing at the time of issue. Expense assumptions include the estimated
effects of inflation and expenses to be incurred beyond the premium paying
period. Future investment yield assumptions are determined at the time of issue
based upon prevailing investment yields as well as forecasted reinvestment
yields. For further discussion of these policies, see the Forward-looking
statements and risk factors section of the MD&A.

RESULTS OF OPERATIONS

The Company has reinsurance agreements whereby contract charges, interest
credited to contractholder funds, contract benefits and certain expenses are
ceded to ALIC and reflected net of such reinsurance in the Statements of
Operations and Comprehensive Income. 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 $1.8 million to $5.5 million in 2002 from $7.3 million
in 2001 due to an increase in realized capital losses and a decrease in net
investment income. Net income of $7.3 million in 2001 was comparable to net
income in 2000.

Pretax net investment income decreased 3.7% to $10.3 million in 2002
from $10.7 million in 2001. The decrease in pretax net investment income is
due to lower investment yields resulting from funds from operations and
reinvestments being invested at current market rates which were lower than
the average portfolio yields. The Company expects to experience lower
investment yields due, in part, to the reinvestment of proceeds from security
prepayments, calls and maturities, and the investment of positive cash flows
from operations, in securities yielding less than the average portfolio rate.
At December 31, 2002, portfolio balances, excluding assets held in Separate
Accounts and unrealized capital gains and losses on fixed income securities,
were comparable to December 31, 2001. Pretax net investment income in 2001
was comparable to 2000 as the effect of higher portfolio balances was more
than offset by lower investment yields as well as increased investment
expenses during the year.

Realized capital losses were $2.0 million in 2002, compared to realized
capital gains of $435 thousand in 2001. The losses are primarily the result of
$1.9 million of write-downs on fixed income securities. In 2001 and 2000,
realized capital gains resulted 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 the
portfolio, assessments of individual securities, overall market conditions and
write-downs when an assessment is made by the Company that a decline in value of
a security is other than temporary.

5

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

FINANCIAL POSITION

(IN THOUSANDS)

(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $159.0 million and $154.2 million at December 31, 2002 and
2001, respectively.

Total investments were $176.4 million at December 31, 2002 compared to
$167.6 million at December 31, 2001. The increase was due to positive cash flows
generated from operations and increased unrealized gains on fixed income
securities. At December 31, 2002, unrealized gains on fixed income securities
were $14.6 million compared to $6.8 million at December 31, 2001. The increase
was a result of lower interest rates at December 31, 2002.

The fair value of publicly traded marketable investment securities is based
on independent market quotations. The fair value of the Company's non-publicly
traded investment securities is based on either independent third party pricing
sources or widely accepted pricing valuation models which utilize internally
developed ratings and independent third party data as inputs. Periodic changes
in the fair values are reported as a component of Accumulated other
comprehensive income.

The following table presents the amortized cost, gross unrealized gains and
losses and fair value for fixed income securities.

6

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

FIXED INCOME SECURITIES

The Company's fixed income securities include publicly traded corporate
bonds, U.S. government bonds, mortgage-backed securities, asset-backed
securities and tax-exempt municipal bonds. All fixed income securities are
carried at fair value and are classified as available for sale. Periodic
changes in fair values are reported as a component of Accumulated other
comprehensive income, net of deferred taxes, and are reclassified to Net
income only when supported by the consummation of a transaction with an
unrelated third party or when declines in fair values are deemed other than
temporary. As of December 31, 2002, approximately 99.7% of the fixed income
securities portfolio was invested in taxable securities.

At December 31, 2002, the fixed income securities portfolio contained $3.7
million of privately placed corporate obligations compared with $3.6 million at
December 31, 2001. The benefits of privately placed securities as compared to
public securities are generally higher yields, improved cash flow predictability
through pro-rata sinking funds on many bonds, and a combination of covenant and
call protection features designed to better protect the holder against losses
resulting from credit deterioration, reinvestment risk and fluctuations in
interest rates. A relative disadvantage of privately placed securities when
compared to public securities is reduced liquidity. At December 31, 2002, all of
the privately placed securities were rated as investment grade by either the
National Association of Insurance Commissioners ("NAIC") or the Company's
internal ratings. The Company determines the fair value of privately placed
fixed income securities based on discounted cash flows using current interest
rates for similar securities.

At December 31, 2002 and 2001, $33.0 million and $33.5 million,
respectively, of the fixed income securities portfolio was invested in
mortgage-backed securities ("MBS"). The MBS portfolio consists primarily of
securities that were issued by, or have underlying collateral that is guaranteed
by, U.S. government agencies or sponsored entities. Therefore, the MBS portfolio
has relatively low credit risk.

The MBS portfolio is subject to interest rate risk since the price
volatility and ultimate realized yield are affected by the rate of repayment of
the underlying mortgages. The Company attempts to limit interest rate risk on
these securities by investing a portion of the portfolio in securities that
provide prepayment protection. At December 31, 2002, 33.5% of the MBS portfolio
was invested in planned amortization class bonds.

At December 31, 2002, approximately 97.6% 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 NAIC of 1 or 2, a Moody's rating
of Aaa, Aa, A or Baa, or a comparable Company internal rating.

The following table summarizes the credit quality of the fixed income
securities portfolio.

At December 31, 2002, all of the securities with an NAIC rating of 6 and
certain securities with an NAIC rating of 2 and 3 are included in the Company's
list of problem and potential problem securities. For further discussion of
securities categorized as problem, see page 9.

FIXED INCOME PORTFOLIO MONITORING

The Company writes down to fair value any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired. Inherent in the Company's
evaluation of a particular security are assumptions and estimates about the
operations of the issuer and its future

7

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

earnings potential. Some of the factors considered in evaluating whether a
decline in fair value is other than temporary are:

- The Company's ability and intent to retain the investment
for a period of time sufficient to allow for an anticipated
recovery in value;
- The recoverability of principal and interest;
- The duration and extent to which the fair value has been
less than amortized cost for fixed income securities;
- The financial condition, near-term and long-term prospects
of the issuer, including relevant industry conditions and
trends, and implications of rating agency actions and
offering prices; and
- The specific reasons that a security is in a significant
unrealized loss position, including market conditions which
could affect liquidity.

There are a number of risks and uncertainties inherent in the process of
monitoring impairments and determining if an impairment is other than temporary.
These risks and uncertainties include the risks that:

- The economic outlook is worse than anticipated and has a
greater adverse impact on a particular issuer than
anticipated;
- The Company's assessment of a particular issuer's ability to
meet all of its contractual obligations changes based on
changes in the facts and circumstances related to that
issuer; and
- New information is obtained or facts and circumstances
change that cause a change in the Company's ability or
intent to hold a security to maturity or until it recovers
in value.

These risks and uncertainties could result in a charge to earnings in
future periods to the extent that losses are realized. The charge to earnings,
while potentially significant to Net income, would not have a significant impact
on Shareholder's equity since the portfolio is held at fair value and as a
result, the related unrealized gain (loss), net of tax, would already be
currently reflected as Accumulated other comprehensive income in Shareholder's
equity.

The Company has an extensive monitoring process to identify fixed income
securities whose carrying value may be other than temporarily impaired. This
process includes a quarterly review of all securities using a screening process
to identify those securities whose fair value compared to amortized cost for
fixed income securities is below established thresholds and time periods, or
which are identified through other monitoring criteria such as ratings
downgrades or payment defaults. Securities with an unrealized loss of greater
than 20% of their amortized cost for fixed income securities for a period of six
months or more, are identified through this process. The securities identified,
in addition to other securities for which the Company may have concern, are
evaluated based on facts and circumstances for inclusion on a watch list.
Securities on the watch list are reviewed in detail to determine whether any
other than temporary impairment exists.

The Company monitors the quality of its fixed income portfolio, in part, by
categorizing certain investments as problem, restructured or potential problem.
Problem fixed income securities are securities in default with respect to
principal and/or interest and/or securities issued by companies that have gone
into bankruptcy subsequent to the Company's acquisition of the security.
Restructured fixed income securities have modified terms and conditions that
were not at current market rates or terms at the time of the restructuring.
Potential problem fixed income securities are current with respect to
contractual principal and/or interest, but because of other facts and
circumstances, management has serious concerns regarding the borrower's ability
to pay future principal and interest, which causes management to believe these
securities may be classified as problem or restructured in the future.

8

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The following table summarizes the problem and potential problem
securities at December 31, 2002.

The Company has experienced an increase in its balance of fixed income
securities categorized as problem or potential problem as of December 31,
2002 compared to December 31, 2001. The Company did not have any fixed income
securities categorized as restructured at December 31, 2002. At December 31,
2001, the Company had no securities categorized as problem, restructured or
potential problem. The increases in problem and potential problem assets
primarily resulted from poor operating fundamentals as well as liquidity
constraints affecting two securities in the utilities and energy sectors of
the market in 2002. The Company expects eventual recovery in these sectors
but evaluated each fixed income security in these sectors through its watch
list process at December 31, 2002 and recorded write-downs when appropriate.
Approximately $513 thousand of unrealized losses at December 31, 2002 are
related to securities that the Company has included in the problem or
potential problem categories. These securities represent 1.1% of the fixed
income portfolio. The Company concluded, through its watch list monitoring
process that these unrealized losses were temporary in nature. While it is
possible for these balances to increase in the future if economic conditions
continue to be unfavorable, the total amount of securities in these
categories is expected to remain a relatively low percentage of the total
fixed income securities portfolio.

The following table describes the components of pre-tax realized capital
gains and losses.

The Company recorded losses on fixed income securities of $2.0 million
for the year ended December 31, 2002, which was primarily driven by write
downs of $1.9 million. In the fourth quarter, there was a write-down of $904
thousand of a major international energy and utility company. The write-down
was taken when the parent company withdrew financial support from one of its
European subsidiaries, resulting in the subsidiary filing for Administration
in the United Kingdom. The credit profile of the company and other
subsidiaries has since stabilized due to several initiatives taken by
management to improve liquidity. In the third quarter, a security issued by a
global energy and utility company which had missed coupon payments due to
severely constrained liquidity was written down in the amount of $1.0
million. Some sectors of the utility industry are under severe fundamental
and technical pressure and the Company is monitoring the industry very
closely.

SHORT-TERM INVESTMENTS

The Company's short-term investment portfolio was $2.8 million and $6.6
million at December 31, 2002 and 2001, 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.

REINSURANCE RECOVERABLE FROM ALIC, CONTRACTHOLDER FUNDS AND RESERVE FOR
LIFE-CONTINGENT CONTRACT BENEFITS

Under accounting principles generally accepted in the United States of
America ("GAAP"), when reinsurance contracts do not relieve the ceding company
of legal liability to contractholders, the ceding company is required to report
reinsurance recoverables arising from these contracts separately as assets. The
liabilities for the contracts are reported as Contractholder funds, Reserves for
life-contingent contract benefits or Separate Accounts

9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

liabilities depending on the characteristics of the contracts. The Company
reinsures all reserve liabilities with ALIC. Reinsurance recoverable and the
related Reserve for life-contingent contract benefits and Contractholder funds
are reported separately in the Statements of Financial Position, while the
assets which support the Separate Account liabilities are reflected as Separate
Accounts assets.

At December 31, 2002, Contractholder funds increased to $6.20 billion
from $5.37 billion at December 31, 2001 as a result of additional deposits
from fixed annuities and interest credited to contractholder funds partially
offset by surrenders and withdrawals. Reserves for life-contingent contract
benefits increased $306 thousand to $7.9 million at December 31, 2002 due to
sales of payout annuity contracts with life-contingencies. Reinsurance
recoverable from ALIC increased correspondingly by $825.5 million due to the
increase in contractholder obligations discussed above. Under the reinsurance
agreements with ALIC, all contractholder obligations are reinsured to ALIC.

SEPARATE ACCOUNTS

At December 31, 2002, Separate Accounts assets and liabilities decreased
25.4% to $1.16 billion compared to the December 31, 2001 balance. The decrease
was primarily attributable to declines in the fair value of the Separate
Accounts investment portfolios due to equity market conditions, surrenders and
withdrawals and expense charges, partially offset by sales of variable annuity
contracts and transfers from the fixed account contract option to variable
Separate Accounts funds.

The assets 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 Statements of Operations and Comprehensive Income. Revenues to the
Company from the Separate Accounts consist of contract charges related to
maintenance and administration, mortality, early surrender and expenses, 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 insurance contractholders bear the investment risk that the
underlying mutual funds of the Separate Accounts may not meet their stated
investment objectives. The risk and associated cost of these contract guarantees
are ceded to ALIC in accordance with the reinsurance agreements.

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 in its equity indexed
annuities and Separate Accounts liabilities; this risk is transferred to ALIC
in accordance with the reinsurance agreements.

CORPORATE OVERSIGHT

The Company administers and oversees the investment risk management
processes primarily through its Board of Directors and the Credit and Risk
Management Committee ("CRMC"). The Board of Directors provides executive
oversight of investment activities. The CRMC is a senior investment
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 investment risk. The CRMC meets at least
monthly to provide detailed oversight of investment risk, including market
risk.

The Company 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, the Company has a specific Board of
Directors-approved investment policy delineating the investment limits and
strategies that are appropriate for the Company's liquidity, surplus, product
and regulatory requirements.

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

The day-to-day management of market risk within defined tolerance ranges
occurs as portfolio managers buy and sell within their respective markets based
upon the acceptable boundaries established by the investment policy. The Company
has implemented a comprehensive daily measurement process, administered by the
Investment Risk Manager, for monitoring compliance with limits established by
the investment policy.

INTEREST RATE RISK

Interest rate risk is the risk that the Company will incur economic losses
due to adverse changes in interest rates, as the Company invests substantial
funds in interest-sensitive assets.

One of the measures used to quantify this exposure is duration. Duration
measures the sensitivity of the fair value of assets to changes in interest
rates. For example, if interest rates increase by 1%, the fair value of an asset
with a duration of 5 is expected to decrease in value by approximately 5%. At
December 31, 2002 and 2001, the Company's asset duration was approximately 4.3.

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 alternative
levels of interest rates, and determining the percentage change in fair value
from the base case. The projections include assumptions (based upon
historical market experience and Company specific experience) reflecting the
impact of changing interest rates on the prepayment, lapse, leverage 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, 2002, 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 $7.4 million versus $7.0 million at December 31, 2001. The
selection of a 100 basis point immediate parallel increase in interest rates
should not be construed as a prediction by the Company's management of future
market events, but only as an illustration of the potential impact of such an
event.

To the extent that conditions differ from the assumptions used, the
Company's duration and rate shock measures could be significantly impacted.
Additionally, the Company's calculation assumes that the current relationship
between short-term and long-term interest rates (the term structure of interest
rates) will remain constant over time. As a result, these calculations may not
fully capture the impact of non-parallel changes in the term structure of
interest rates and/or large changes in interest rates.

EQUITY PRICE RISK

Equity price risk is the risk that the Company will incur economic losses
due to adverse changes in a mutual fund or stock index.

At December 31, 2002 and 2001, the Company had Separate Accounts assets
totaling $1.16 billion and $1.55 billion, respectively. The Company earns
contract charges as a percentage of account values. In the event of an immediate
decline of 10% in the account values due to equity market declines, the Company
would earn approximately $1.9 million less in annualized fee income at December
31, 2002, which would be ceded to ALIC. This is a decrease from the $2.4 million
amount determined at December 31, 2001.

Generally at the time of purchase, the contractholders of variable
annuity contracts receive a guaranteed minimum death benefit ("GMDB") and,
for certain contracts, may elect to purchase an enhanced GMDB or guaranteed
minimum income benefit ("GMIB"). The Company charges a fee for these
guarantees that is generally calculated as a percentage of the account value.
Both types of guarantees subject the Company to additional equity risk as the
beneficiary or contractholder may receive a benefit for an amount greater
than the account value under contractually defined circumstances and terms,
which would be ceded to ALIC. GMDBs may be payable upon death, while GMIBs
may be payable on or after the ten-year anniversary of the contract if the
contractholder elects to receive a defined stream of payments ("annuitize").
All variable annuity contract charges and fees, liabilities and benefits,

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

including the GMDBs and GMIBs are ceded to ALIC in accordance with the
reinsurance agreement, thereby limiting the Company's equity risk exposure.

CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES

The Company's capital resources consist of Shareholder's equity. The
following table summarizes the Company's capital resources at December 31:

SHAREHOLDER'S EQUITY

Shareholder's equity increased $10.6 million during the year ended
December 31, 2002 when compared to December 31, 2001, due to Net income of
$5.5 million and an increase in Unrealized net capital gains resulting in
other comprehensive income of $5.1 million. Shareholder's equity increased
during 2001 as well as 2000, due to Net income of $7.3 million in both years
and an increase in Unrealized net capital gains of $1.6 million and $3.6
million, respectively.

FINANCIAL RATINGS AND STRENGTH

The Company shares the insurance financial strength ratings of its parent,
ALIC, because all business is reinsured to ALIC. The Company's insurance
financial strength was rated Aa2, AA+, and A+(r) by Moody's, Standard & Poor's
and A.M. Best, respectively, at December 31, 2002.

None of these ratings were changed during 2002. The Company's and ALIC's
insurance financial strength ratings have remained at the same consistently
high levels for the last five years (Aa2 "excellent" by Moody's, AA and AA+
"very strong" by Standard & Poor's and A+ "superior" by A.M. Best). On a
relative basis, these rating positions have improved in light of the
significant volume of rating downgrades of other companies in the industry
during 2002. Since February 2002, Standard & Poor's rating outlook for ALIC
and its rated subsidiaries and affiliates, including the Company, has been
"negative". In November 2002, Standard & Poor's reaffirmed the AA+ rating of
the Company and ALIC, but left the outlook unchanged. In January 2003, A.M.
Best Company newly assigned a "positive" rating outlook for the Company and
ALIC.

The Company's ratings are influenced by many factors including operating
and financial performance, asset quality, asset/liability management, overall
portfolio mix, the amount of financial leverage (i.e., debt), exposure to
risks, as well as the current level of operating leverage.

The NAIC has a standard for assessing the solvency of insurance companies,
which is referred to as risk-based capital ("RBC"). The standard is based on 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
establishes capital requirements relating to insurance, business, asset and
interest rate risks. At December 31, 2002, RBC for the Company was significantly
above levels that would require regulatory actions.

The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or actions from insurance regulatory
authorities. The NAIC analyzes data provided by insurance companies using
prescribed financial data ratios each with defined "usual ranges." Generally,
regulators will begin to monitor an insurance company if its ratios fall outside
the usual ranges for four or more of the ratios. If an insurance company has
insufficient capital, regulators may act to

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

reduce the amount of insurance it can issue. The Company is currently not under
regulatory scrutiny based on these ratios.

LIQUIDITY

The principal, potential sources of funds for the Company include the following
activities:

Premiums and deposits
Reinsurance recoveries
Receipts of principal, interest and dividends on investments
Sales of investments
Intercompany loans
Capital contributions from ALIC

The principal, potential uses of funds for the Company include the following
activities:

Payment of contract benefits, maturities, surrenders and withdrawals
Reinsurance cessions and payments
Operating costs and expenses
Purchase of investments
Repayment of intercompany loans
Dividends to ALIC

Under the terms of reinsurance agreements, all premiums and deposits,
excluding those relating to variable contracts, are transferred to ALIC,
which maintains the investment portfolios supporting the Company's products.
Payments of contractholder claims, benefits (including GMDBs and GMIBs),
contract maturities, contract surrenders and withdrawals and certain
operating costs (excluding investment-related expenses), are also reimbursed
by ALIC, under the terms of the reinsurance agreements. The Company continues
to have primary liability as a direct insurer for risks reinsured. The
Company's ability to meet liquidity demands is dependent on ALIC's ability to
meet those obligations under the reinsurance program.

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 by Arizona law to formula amounts
based on statutory surplus and statutory net gain from operations, 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 2003 without
prior approval of the Arizona Department of Insurance is $6.9 million.

The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds 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 intercompany loan
agreement at December 31, 2002 or 2001, respectively. The Corporation uses
commercial paper borrowings and bank lines of credit to fund intercompany
borrowings.

REGULATIONS AND LEGAL PROCEEDINGS

The Company is subject to changing social, economic and regulatory
conditions. State and federal regulatory initiatives and proceedings have varied
and have included efforts to remove barriers preventing banks from engaging in
the securities and insurance businesses, to change tax laws affecting the
taxation of insurance companies and the tax treatment of insurance products
which may impact the relative desirability of various personal investment
products and to expand overall regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.

Various 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 potential target of an increasing
number of class action lawsuits and other types of litigation, some of which
involve claims for

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

substantial and/or indeterminate amounts (including punitive and treble damages)
and the outcomes of which are unpredictable. This litigation is based on a
variety of issues including insurance and claim settlement practices. However,
at this time, based on their present status and the existence of the reinsurance
agreement with ALIC, 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.

STATE INSURANCE REGULATION

State insurance authorities have broad administrative powers with respect
to all aspects of the life insurance business including:

- - Licensing to transact business
- - Licensing agents
- - Admittance of assets to support statutory surplus
- - Approving policy forms
- - Regulating unfair trade and claims practices
- - Establishing reserve requirements and solvency standards
- - Regulating the type, amounts and valuations of investments permitted and
other matters

State insurance laws require the Company to file statutory-basis financial
statements with insurance departments in all states in which the Company does
business. The operations of the Company and the accounts are subject to
examination by those departments at any time. The Company prepares
statutory-basis financial statements in accordance with accounting practices and
procedures prescribed or permitted by the State of Arizona.

State insurance departments conduct periodic examinations of the books and
records, financial reporting, policy filings and market conduct of insurance
companies domiciled in their states, generally once every three to five years.
Examinations are generally carried out in cooperation with the insurance
departments of other states under guidelines promulgated by the NAIC.

MARKET CONDUCT REGULATION

State insurance laws and regulations include numerous provisions governing
the marketplace activities of insurers, including provisions governing the form
and content of disclosure to customers, illustrations, advertising, sales
practices and complaint handling. State regulatory authorities generally enforce
these provisions through periodic market conduct examinations.

FEDERAL REGULATION AND SECURITIES OPERATIONS

The Company's variable annuity and variable life insurance products
generally are considered securities within the meaning of federal and state
securities laws and are registered under the Securities Act of 1933 and are
subject to regulation by the SEC, the National Association of Securities Dealers
("NASD") and state securities regulations. The Company's Separate Accounts are
registered as investment companies under the Investment Company Act of 1940.

GUARANTY FUNDS

Under state insurance guaranty fund laws, insurers doing business in a
state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to contractholders and claimants. Amounts assessed
to each company are typically related to its proportion of business written in a
particular state. The Company's expenses related to these funds are immaterial
and are ceded to ALIC under reinsurance agreements.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

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 did not have a material impact on the Company. The Company has
analyzed the unamortized goodwill balance as of December 31, 2002 for impairment
using the fair value impairment approach prescribed by SFAS No. 142 and has
determined that the balance is fully recoverable.

PENDING ACCOUNTING STANDARDS

On July 31, 2002, the American Institute of Certified Public Accountants
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 for fiscal years beginning after
December 15, 2003, with earlier adoption encouraged. If adopted early, the
provisions of the SOP must be applied as of the beginning of the fiscal year.
Accordingly, if the SOP were adopted during an interim period of 2003, prior
interim periods would be restated. A provision of the proposed SOP requires the
establishment of a liability in addition to the account balance for contracts
and contract features that provide guaranteed death or other insurance benefits.
The finalized SOP may also require a liability for guaranteed income benefits.
These liabilities are not currently recognized by the Company, and their
establishment may have a material impact on the amounts ceded to and reinsurance
recoverable from ALIC depending on the market conditions at the time of
adoption, but are not expected to have a material impact on the Company's
Statements of Financial Position.

The FASB has exposed guidance that addresses the accounting for certain
modified coinsurance agreements. The guidance has been exposed as FASB
Interpretation of Statement 133 Implementation Issue No. B36, "Embedded
Derivatives: Bifurcation of a Debt Instrument That Incorporates Both Interest
Rate Risk and Credit Risk Exposures That Are Unrelated or Only Partially Related
to the Creditworthiness of the Issuer of That Instrument." The proposed guidance
requires recognizing an embedded derivative in certain reinsurance agreements
when certain conditions are met. The initial impact of adopting the proposed
guidance would be recorded as a cumulative adjustment to Net Income in the first
fiscal quarter beginning after June 15, 2003. The provisions of the proposed
guidance, as currently drafted and interpreted, would not have a material impact
on the Company's reinsurance balances that would be subject to the proposed
guidance. Accordingly, the potential impact of recognizing embedded derivatives
pursuant to the requirements of the proposed guidance is expected to be
immaterial to both the Company's Statements of Financial Position and Statements
of Operations and Comprehensive Income.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

This document contains "forward-looking statements" that anticipate results
based on management's estimates, assumptions and 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. The Company assumes no
obligation to update any forward-looking statements as a result of new
information or future events or developments.

These 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, the Company's strategy for growth, product development, regulatory
approvals, market position, expenses, financial results and reserves. Management
believes that these statements are based on reasonable estimates, assumptions
and plans. However, if the estimates, assumptions or plans underlying the
forward-looking statements prove inaccurate or if other 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 and

15

uncertainties, including those listed below which apply to it as an insurance
business and a provider of other financial services.

- - The Corporation is continuing to examine the potential exposure of its
operations to acts of terrorism and to evaluate methods of addressing
this exposure in the best interests of the shareholders,
contractholders, the lending community and regulators. In the event that
a terrorist act occurs, the Corporation may be adversely impacted,
depending on the nature of the event. The Corporation is also evaluating
the impact of the federal Terrorism Risk Insurance Act of 2002 (the
"Act") on the nature, availability and affordability of commercial
insurance coverage for terrorism and the consequent impact on the
Company's investments portfolio, particularly in sectors such as
airlines and real estate. The Act established a temporary federal
program providing for a system of shared public and private compensation
for certain insured commercial property and casualty losses resulting
from acts of terrorism, as defined by the Act.

- - 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 the fair values of fixed income securities.
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 from maturities, calls and prepayments of
investments into new investments that could yield less than the
portfolio's average rate.

- - A declining market could negatively impact the credit quality of the
Company's investment portfolio as adverse equity markets also affect
issuers of securities held by the Company. Declines in the quality of the
portfolio could cause additional realized losses on securities.

- - Changes in interest rates could also reduce the profitability of the
Company's spread-based products, particularly interest-sensitive life
insurance and investment products, as the difference between the amount
that the Company is required to pay on such products and the rate of return
earned on the related investments could be reduced. 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 for these products. The
Company's products generally have the flexibility to adjust crediting rates
to reflect higher or lower investment returns. However, this flexibility is
limited by contractual minimum crediting rates. Additionally, unanticipated
surrenders could cause acceleration of amortization of deferred policy
acquisition costs ("DAC") or impact the recoverability of DAC and thereby
increase expenses ceded to ALIC and reduce current period profitability of
ALIC. ALIC seeks to limit its exposure to this risk by regularly monitoring
DAC recoverability. In addition, the Company offers a diverse group of
products, periodically reviews and revises crediting rates and provides for
surrender charges in the event of early withdrawal.

- - The Company amortizes DAC related to interest-sensitive life insurance,
variable annuities and investment contracts in proportion to estimated
future gross profits ("EGP") over the estimated lives of the contracts.
Periodically, the Company updates the assumptions underlying EGP, which
include margins from mortality, including guaranteed minimum death and
income benefits, investment margin, including realized capital gains and
losses, contract administration, surrender and other contract charges,
less maintenance expenses, in order to reflect actual and expected
experience and its potential impact to the valuation of DAC. Updates to
these assumptions could result in adjustment to the cumulative
amortization of DAC ceded to ALIC. For example, reduced EGP resulting
from declines in contract charges assessed against declining Separate
Accounts' balances resulting from poor equity market performance, could
result in accelerated amortization of DAC. An adjustment, if any, may
have a material effect on the results of operations ceded to ALIC.

- - The impact of decreasing Separate Accounts balances resulting from
volatile equity market conditions, underlying fund performance and the
performance of distributors could cause contract charges earned by the
Company and ceded to ALIC to decrease and lead to an increase in
exposure of the Company to pay GMDBs and GMIBs. Poor fund performance
could also result in higher partial withdrawals of account value, which,
for some contracts, do not reduce the GMDB in a proportional amount. In
addition, it is possible that the assumptions and

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

projections used by the Company in establishing prices for the GMDBs and
GMIBs, particularly assumptions and projections about investment
performance, do not accurately anticipate the level of costs the Company
will ultimately incur and cede to ALIC in providing those benefits,
resulting in adverse mortality margin trends that may have a material
effect on ALIC's results of operations. These factors may result in
accelerated DAC amortization ceded to ALIC and require increases in
statutory reserves which reduce ALIC's statutory capital and surplus.

- - 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 rising over an extended
period of time and decrease when stock markets are falling over an extended
period of time.

- - In order to manage interest rate risk, from time to time the Company
manages the effective duration of assets in the investment portfolio.
Adjustments made to modify durations may have an impact on the value of the
investment portfolio and on investment income.

- - 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 be made until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums to be 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 premiums received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
the results of operations ceded to ALIC.

- - State and federal laws and regulations affect the taxation of insurance
companies and life insurance and annuity products. From time to time,
Congress has considered proposals that, if enacted, could impose a
greater tax burden on the Company or could have an adverse impact on the
federal income tax treatment of some insurance products offered by the
Company, including the favorable policyholder tax treatment currently
applicable to deferred and payout annuities, and life insurance,
including interest-sensitive life insurance. Such proposals have
included legislation relating to the deferral of taxation on the
accretion of value within certain annuities and life insurance products.
Recent proposals to eliminate the double taxation of dividends and to
permit the establishment of tax-free lifetime savings and retirement
savings accounts could substantially reduce the tax-advantaged nature of
many insurance products. If such proposals were to be adopted, they
could have a material adverse effect on the Company's financial position
or the Company's ability to sell such products and could result in the
surrender of some existing contracts and policies. In addition, recent
changes in the federal estate tax laws have negatively affected the
demand for the types of life insurance used in estate planning.

- - 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.

- - 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 SEC, the NASD 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 ALIC has in place various legal and compliance
personnel, procedures and systems designed to reasonably assure compliance
with these requirements.

- - 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, or multiple catastrophes, which result in
extraordinary losses, a downgrade of the Corporation's 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 of AIC's
insurance financial strength rating from Aa2, AA and A+ (from Moody's,

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

Standard & Poor's and A.M. Best, respectively) to below Baa/BBB/B+, or a
downgrade in ALIC's or the Company's insurance 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 or AIC's rating, ALIC and its subsidiaries including the
Company, could also experience a similar downgrade.

- - 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.

- - Insurance financial strength ratings are an 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 liabilities for variable
contracts due to additional GMDB and GMIB exposure resulting from market
declines. A multiple level downgrade of the Corporation, AIC, ALIC or
the Company, while not expected, could have a material adverse affect 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 ceded to ALIC. 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.

- - State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures generally require the Company to maintain insurance
financial strength ratings. These restrictions affect the Company's ability
to pay shareholder dividends to ALIC and to use its capital in other ways.

- - An exposure draft SOP entitled "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" applies to several of the Company's products and
product features. A provision requires the establishment of a liability
in addition to the account balance for contracts and contract features
that provide guaranteed death or other insurance benefits. The Company
does not currently hold liabilities for GMDB features covered by the SOP
or GMIBs. If the SOP is adopted, the Company's establishment of these
liabilities could have a material impact on the amounts ceded to and
reinsurance recoverable from ALIC depending on the market conditions at
the time of adoption.

- - In recent years the state insurance regulatory framework has come under
increased federal scrutiny and legislation that would provide for optional
federal chartering of insurance companies has been introduced in Congress.
In addition, state legislators and insurance regulators continue to examine
the appropriate nature and scope of state insurance regulation. The Company
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 effect any such measures would have on the Company.

- - 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 of 1999, 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 of 1999, bank holding companies may acquire insurers
and insurance holding companies may acquire banks. In addition,
grandfathered unitary thrift holding companies, including the Corporation,
may engage in activities that are not financial in nature. The ability of
banks to

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

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.

- - Like other members of the insurance industry, the Company is the potential
target of an increasing number of class action lawsuits and other types of
litigation, some of which involve claims for substantial and/or
indeterminate amounts (including punitive and treble damages) and the
outcomes of which are unpredictable. GAAP prescribes when the Company has a
contingent liability and may reserve for particular risks, including
litigation exposures. Therefore, results ceded to ALIC for a given period
could be significantly adversely affected when a reserve is established for
litigation.

- - The design of any system of controls and procedures, including internal
controls and disclosure controls and procedures, is based in part upon
assumptions about the likelihood of future events. Therefore, there can be
no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.

- - The impact of The Sarbanes-Oxley Act of 2002 on the business of the Company
is being evaluated but cannot be completely determined at this time.

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 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.

PART III

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this report and under
the supervision and with the participation of the Company's management,
including the principal executive officer and principal financial officer, the
Company evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures with respect to its annual reports on Form
10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K to
be filed with the SEC. Based upon that evaluation, the principal executive
officer and the principal financial officer concluded that these disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be included in the Company's
annual reports on Form 10-K, its quarterly reports on Form 10-Q and its current
reports on Form 8-K. "Disclosure controls and procedures" are those controls and
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. They include controls and
procedures designed to ensure that information required to be disclosed by the
Company in reports that it files or submits under that Act is accumulated and
communicated to the Company's management, including the principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.

In addition, there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their evaluation.

19

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of This Report

1. Financial Statements. The Registrant's financial statements, for the
years ended December 31, 2002, 2001 and 2000, together with the Independent
Auditors' Report are set forth on pages F-1 to F-17 of this report.

2. Financial Statement Schedules. The following are included in Part IV of
this report:

Schedule IV - Reinsurance page F-18

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 15(c).

(b) Reports On Form 8-K

No reports on Form 8-K were filed for the quarter ended December 31, 2002.

(c) Exhibits

20

10.6 Coinsurance Agreement between Glenbrook Life and Annuity
Company and Allstate Life Insurance Company effective
December 31, 2001.

10.7 Modified Coinsurance Agreement between Glenbrook Life and
Annuity Company and Allstate Life Insurance Company
effective December 31, 2001.

23 Independent Auditors' Consent

21

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
(Registrant)

March 24, 2003 /s/ Samuel H. Pilch
-------------------
By: Samuel H. Pilch
-------------------
(chief accounting officer and duly
authorized officer of the registrant)

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.

SIGNATURE TITLE DATE
- --------- ----- ----

/s/ Casey J. Sylla President, Chief Executive March 24, 2003
- ------------------ Officer and a Director
Casey J. Sylla (Principal Executive Officer)

/s/ Steven E. Shebik Vice President, Chief Financial March 24, 2003
- -------------------- Officer and a Director
Steven E. Shebik (Principal Financial Officer)

/s/ Margaret G. Dyer Director March 19, 2003
- --------------------
Margaret G. Dyer

/s/ Marla G. Friedman Director March 19, 2003
- ---------------------
Marla G. Friedman

/s/ John C. Lounds Director March 19, 2003
- ------------------
John C. Lounds

/s/ J. Kevin McCarthy Director March 19, 2003
- ---------------------
J. Kevin McCarthy

/s/ Michael J. Velotta Director March 19, 2003
- ----------------------
Michael J. Velotta

22

CERTIFICATIONS

I, Casey J. Sylla, certify that:

1. I have reviewed this annual report on Form 10-K of Glenbrook Life and Annuity
Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

/s/ Casey J. Sylla
------------------
Casey J. Sylla
President and
Chief Executive Officer

23

I, Steven E. Shebik, certify that:

1. I have reviewed this annual report on Form 10-K of Glenbrook Life and Annuity
Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 24, 2003

/s/ Steven E. Shebik
--------------------
Steven E. Shebik
Vice President and
Chief Financial Officer

24

CERTIFICATIONS
PURSUANT TO 18 UNITED STATES CODE Section 1350

Each of the undersigned hereby certifies that to his knowledge the annual
report on Form 10-K for the fiscal year ended December 31, 2002 of Glenbrook
Life and Annuity Company (the "Company") filed with the Securities and Exchange
Commission fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in such
report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This certification accompanies this annual
report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and shall not, except to the extent required by such Act, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.

Date: March 24, 2003

/s/ Casey J. Sylla
-------------------
Casey J. Sylla
President and Chief Executive Officer

/s/ Steven E. Shebik
---------------------
Steven E. Shebik
Vice President and Chief Financial Officer

25

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

All of the outstanding common stock of the Company is owned by ALIC. The
Company has not provided any of the following items to security holders:

(1) annual reports to security holders covering the registrant's last
fiscal year; or
(2) proxy statements, forms of proxy or other proxy soliciting
materials.

26

FINANCIAL STATEMENTS

INDEX

27

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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and
2001, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. 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 5, 2003

F-1

GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See notes to financial statements.

F-2

GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF FINANCIAL POSITION

See notes to financial statements.

F-3

GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY

See notes to financial statements.

F-4

GLENBROOK LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS

See notes to financial statements.

F-5

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 ("Glenbrook Life" or 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 accounting principles generally accepted in the United States
of America ("GAAP").

To conform with the 2002 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.

NATURE OF OPERATIONS

Glenbrook Life, a single segment entity, markets a diversified group of
products to meet customers' lifetime needs in the areas of financial protection
and retirement solutions through financial services firms. These products
include interest-sensitive life insurance, including single premium life
insurance and variable life insurance; fixed annuities including market value
adjusted annuities and equity-indexed annuities; and variable annuities. ALFS,
Inc. ("ALFS") is the principal underwriter for certain Glenbrook Life products,
such as variable annuities, variable life insurance and market value adjusted
annuities. ALFS is a wholly owned subsidiary of ALIC and a registered
broker-dealer under the Securities Exchange Act of 1934.

The Company is authorized to sell life insurance and annuity products in
all states except New York, as well as in the District of Columbia and Puerto
Rico. The top geographic locations for premiums and deposits for the Company
were California, Texas, Pennsylvania, Florida, Illinois, New Jersey, and
Michigan for the year ended December 31, 2002. No other jurisdiction accounted
for more than 5% of premiums and deposits. All premiums and deposits are ceded
to ALIC under reinsurance agreements.

The Company monitors economic and regulatory developments that have the
potential to impact its business. Federal legislation has allowed banks and
other financial organizations to have greater participation in the securities
and insurance businesses. This legislation may present an increased level of
competition for sales of the Company's products. Furthermore, state and
federal laws and regulations affect the taxation of insurance companies and
life insurance and annuity products. From time to time, Congress has
considered proposals that, if enacted, could impose a greater tax burden on
the Company or could have an adverse impact on the federal income tax
treatment of some insurance products offered by the Company, including
favorable policyholder tax treatment currently applicable to deferred annuities
and life insurance, including interest-sensitive life insurance. Recent
proposals to eliminate the double taxation of dividends and to permit the
establishment of tax-free lifetime savings and retirement savings accounts
could substantially reduce the tax-advantaged nature of many insurance
products. If such proposals were to be adopted, they could have a material
adverse effect on the Company's financial position or ability to sell such
products and could result in the surrender of some existing contracts and
policies. In addition, recent changes in the federal estate tax laws have
negatively affected the demand for the types of life insurance used in estate
planning.

Although the Company currently benefits from agreements with financial
services entities that market and distribute its products, change in control or
other factors affecting these non-affiliated entities with which the Company has
distribution agreements could negatively impact the Company's sales.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed income securities include bonds, asset-backed 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 fair value
of publicly traded fixed income securities is based on independent market
quotations. The fair value of non-publicly traded securities, primarily
privately placed corporate obligations, is based on either widely accepted
pricing valuation models which utilize internally developed ratings and
independent third party data (e.g., term structures and current publicly traded
bond prices) as inputs or independent third party pricing sources. The valuation
models use indicative information such as ratings, industry, coupon and maturity
along with related third party data and publicly traded bond prices to determine
security specific spreads. These spreads are then adjusted for illiquidity based
on historical analysis and broker surveys. The difference between amortized cost
and fair value, net of

F-6

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

deferred income taxes, is reflected as a component of Accumulated other
comprehensive income. Short-term investments are carried at cost or amortized
cost, which approximates fair value.

Investment income consists primarily of interest. Interest is recognized on
an accrual basis. Interest income on mortgage-backed and asset-backed securities
is determined using the effective yield method, based on 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. They include gains and losses on security dispositions
and write-downs in value due to other than temporary declines in fair value.

The Company writes down to fair value any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired. Inherent in the Company's
evaluation of a particular security are assumptions and estimates about the
operations of the issuer and its future earnings potential. Some of the
factors considered in evaluating whether a decline in fair value is other
than temporary are: 1) the Company's ability and intent to retain the
investment for a period of time sufficient to allow for an anticipated
recovery in value; 2) the recoverability of principal and interest; 3) the
duration and extent to which the fair value has been less than amortized cost
for fixed income securities; 4) the financial condition, near-term and
long-term prospects of the issuer, including relevant industry conditions and
trends, and implications of rating agency actions and offering prices; and 5)
the specific reasons that a security is in a significant unrealized loss
position, including market conditions which could affect access to liquidity.

RECOGNITION OF INSURANCE REVENUE AND RELATED BENEFITS AND INTEREST CREDITED

Payout annuities with life contingencies provide insurance protection over
a period that extends beyond the period during which premiums are collected.
Gross premiums in excess of the net premium on payout annuities with life
contingencies are deferred and recognized over the contract period. Contract
benefits are recognized in relation to such revenues so as to result in the
recognition of profits over the life of the contract.

Interest-sensitive life insurance contracts are insurance contracts
whose terms are not fixed and guaranteed. The terms that may be changed
include premiums paid by the contractholder, interest credited to the
contractholder account balance and any amounts assessed against the
contractholder account balance. Premiums from these contracts are reported as
deposits to Contractholder funds. Contract charges consist of fees assessed
against the contractholder account balance for cost of insurance (mortality
risk), contract administration and early surrender. These revenues are
recognized when levied against the contractholder account balance. Contract
benefits include life-contingent benefit payments in excess of the
contractholder account balance.

Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed annuities,
market value adjusted annuities, equity-indexed annuities and payout annuities
without life contingencies are considered investment contracts. Deposits
received for such contracts are reported as additions to Contractholder funds.
Contract charges for investment contracts consist of fees assessed against the
contractholder account balance for contract administration and early surrender.
These revenues are recognized when levied against the contractholder account
balance.

Interest credited to contractholder funds represents interest accrued or
paid for interest-sensitive life insurance contracts and investment
contracts. Crediting rates for fixed rate annuities and interest-sensitive
life insurance contracts are adjusted periodically by the Company to reflect
current market conditions subject to contractually guaranteed rates.
Crediting rates for indexed annuities are based on an interest rate index,
such as LIBOR or an equity index, such as the S&P 500.

Separate Accounts products include variable annuities and variable life
insurance. The assets supporting these products are legally segregated and
available only to settle Separate Accounts contract obligations. Deposits
received are reported as Separate Accounts liabilities. Contract charges for
these products consist of fees assessed against the Separate Accounts account
values for contract maintenance, administration, mortality, expense and

F-7

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

early surrender. Contract benefits incurred include guaranteed minimum death
benefits paid on variable annuity contracts.

REINSURANCE RECOVERABLE

The Company has reinsurance agreements whereby substantially all
contract charges, contract benefits, interest credited to contractholder
funds and certain expenses are ceded to ALIC (see Note 3). These amounts are
reflected net of such reinsurance in the Statements of Operations and
Comprehensive Income. Reinsurance recoverable and the related Reserve for
life-contingent contract benefits and Contractholder funds are reported
separately in the Statements of Financial Position. The Company continues to
have primary liability as the direct insurer for risks reinsured.

Investment income earned on the assets which support Contractholder funds
and the Reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed by ALIC
under terms of reinsurance agreements.

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. The principal assets and liabilities
giving rise to such differences are unrealized capital gains and losses on
certain investments and differences in the tax bases of investments. A deferred
tax asset valuation allowance is established when there is uncertainty that such
assets would be realized.

SEPARATE ACCOUNTS

The Company issues variable annuities and variable life insurance
contracts, the assets and liabilities of which are legally segregated and
recorded as assets and liabilities of the 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 Statements of Operations and
Comprehensive Income. Revenues to the Company from the Separate Accounts consist
of contract charges for maintenance and administration services, mortality,
early surrender and expenses, 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 insurance contractholders bear the investment risk that the
underlying mutual funds of the Separate Accounts may not meet their stated
investment objectives. The risk and associated cost of these contract guarantees
are ceded to ALIC in accordance with the reinsurance agreements.

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS

The Reserve for life-contingent contract benefits, which relates to payout
annuities with life contingencies, is computed on the basis of long-term
actuarial assumptions as to future investment yields, mortality, morbidity,
terminations and expenses. These assumptions include provisions for adverse
deviation and generally vary by such characteristics as type of coverage, year
of issue and contract duration. Detailed reserve assumptions and reserve
interest rates are outlined in Note 6.

CONTRACTHOLDER FUNDS

Contractholder funds arise from the issuance of interest-sensitive life
insurance policies and investment contracts. Deposits received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received and interest credited to the benefit of the contractholder less
surrenders and withdrawals, and contract charges for mortality and
administrative expenses. Detailed information on crediting rates and
surrender and withdrawal provisions on contractholder funds are outlined in
Note 6.

F-8

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

NEW ACCOUNTING 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 did not have a material impact on the Company. The Company has
analyzed the unamortized goodwill balance as of December 31, 2002 for impairment
using the fair value impairment approach prescribed by SFAS No. 142 and has
determined that the balance is fully recoverable.

PENDING ACCOUNTING STANDARDS

On July 31, 2002, the American Institute of Certified Public Accountants
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 for fiscal
years beginning after December 15, 2003, with earlier adoption encouraged. If
adopted early, the provisions of the SOP must be applied as of the beginning
of the fiscal year. Accordingly, if the SOP were adopted during an interim
period of 2003, prior interim periods would be restated. A provision of the
proposed SOP requires the establishment of a liability in addition to the
account balance for contracts and contract features that provide guaranteed
minimum death benefits or other insurance benefits. The finalized SOP may
also require a liability for guaranteed minimum income benefits. These
liabilities are not currently recognized by the Company, and their
establishment may have a material impact on the amounts ceded to and
reinsurance recoverable from ALIC depending on the market conditions at the
time of adoption, but are not expected to have a material impact on the
Company's Statements of Financial Position.

The FASB has exposed guidance that addresses the accounting for certain
modified coinsurance agreements. The guidance has been exposed as FASB
Interpretation of Statement 133 Implementation Issue No. B36, "Embedded
Derivatives: Bifurcation of a Debt Instrument That Incorporates Both Interest
Rate Risk and Credit Risk Exposures That Are Unrelated or Only Partially Related
to the Creditworthiness of the Issuer of That Instrument." The proposed guidance
requires recognizing an embedded derivative in certain reinsurance agreements
when certain conditions are met. The initial impact of adopting the proposed
guidance would be recorded as a cumulative adjustment to Net Income in the first
fiscal quarter beginning after June 15, 2003. The provisions of the proposed
guidance, as currently drafted and interpreted, would not have a material impact
on the Company's reinsurance balances that would be subject to the proposed
guidance. Accordingly, the potential impact of recognizing embedded derivatives
pursuant to the requirements of that the proposed guidance is expected to be
immaterial to both the Company's Statements of Financial Position and Statements
of Operations and Comprehensive Income.

3. RELATED PARTY TRANSACTIONS

REINSURANCE

The Company has reinsurance agreements whereby substantially all
contract charges, interest credited to contractholder funds, contract
benefits and certain expenses are ceded to ALIC and reflected net of such
reinsurance in the Statements of Operations and Comprehensive Income.
Reinsurance recoverable and the related Reserve for life-contingent contract
benefits and Contractholder funds are reported separately in the Statements
of Financial Position. The Company continues to have primary liability as the
direct insurer for risks reinsured.

F-9

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

Investment income earned on the assets which support Contractholder funds
and the Reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed under terms
of reinsurance agreements.

The following table summarizes amounts that were ceded to ALIC under
reinsurance agreements:

BUSINESS OPERATIONS

The Company utilizes services performed by its affiliates, AIC, ALIC and
Allstate Investments LLC and business facilities owned or leased, and
operated by AIC in conducting its business activities. In addition, the
Company shares the services of employees with AIC. The Company reimburses its
affiliates for the operating expenses incurred on behalf of the Company. The
Company is charged for the cost of these operating expenses based on the
level of services provided. Operating expenses, including compensation and
retirement and other benefit programs, allocated to the Company were $38.8
million, $48.6 million and $48.6 million in 2002, 2001 and 2000,
respectively. Of these costs, the Company retains investment related expenses
on the invested assets of the Company. All other costs are ceded to ALIC
under reinsurance agreements.

INCOME TAXES

The Company is a party to a federal income tax allocation agreement with
the Corporation (Note 9).

DEBT

The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds available to the Company at a given point in
time is dependent upon the debt position of the Corporation. There was no
outstanding balance at December 31, 2002 or 2001.

4. INVESTMENTS

FAIR VALUES

The amortized cost, gross unrealized gains and losses, and fair value for
fixed income securities are as follows:

F-10

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

SCHEDULED MATURITIES

The scheduled maturities for fixed income securities are as follows at
December 31, 2002:

Actual maturities may differ from those scheduled as a result of
prepayments by the issuers. Because of the potential for prepayment, mortgage
and asset-backed securities have not been reflected based on their contractual
maturities.

NET INVESTMENT INCOME

REALIZED CAPITAL GAINS AND LOSSES, AFTER TAX

Realized capital gains and losses by security type, for the year ended
December 31, are as follows:

F-11

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

Realized capital gains and losses by transaction type, for the year ended
December 31, are as follows:

Excluding calls and prepayments, gross gains of $54 thousand, $636 thousand
and $807 thousand were realized on sales of fixed income securities during 2002,
2001 and 2000, respectively, and gross losses of $134 thousand, $201 thousand,
and $388 thousand were realized on sales of fixed income securities during 2002,
2001 and 2000, respectively.

UNREALIZED NET CAPITAL GAINS AND LOSSES

Unrealized net capital gains and losses on fixed income securities included
in Accumulated other comprehensive income at December 31, 2002 are as follows:

CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES

SECURITIES ON DEPOSIT

At December 31, 2002, fixed income securities with a carrying value of
$10.2 million 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, net) and liabilities (including Reserve for
life-contingent contract benefits 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
and Cash, are generally of a short-term nature. Their carrying values are deemed
to approximate fair value.

F-12

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

FINANCIAL ASSETS

The carrying value and fair value of financial assets at December 31, are
as follows:

The fair value of publicly traded fixed income securities is based upon
quoted market prices or dealer quotes. The fair value of non-publicly traded
securities, primarily privately placed corporate obligations, is based on either
widely accepted pricing valuation models which utilized internally developed
ratings and independent third party data (e.g., term structures and current
publicly traded bond prices) as inputs or independent third party pricing
sources. Short-term investments are highly liquid investments with maturities of
less than one year whose carrying values are deemed to approximate fair value.
Separate Accounts assets are carried in the Statements of Financial Position at
fair value based on quoted market prices.

FINANCIAL LIABILITIES

The carrying value and fair value of financial liabilities at December 31,
are as follows:

Contractholder funds include interest-sensitive life insurance contracts
and investment contracts. Interest-sensitive life insurance contracts and
certain other contractholder liabilities are not considered financial
instruments subject to fair value disclosure requirements. The fair value of
investment contracts is based on the terms of the underlying contracts. Fixed
annuities are valued at the account balance less surrender charges. Market
value adjusted annuities' fair value is estimated to be the market adjusted
surrender value. Equity indexed annuity contracts' fair value approximates
carrying value since the embedded equity options are carried at market value
in the financial statements. Separate Accounts liabilities are carried at the
fair value of the underlying assets.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

There were no off-balance-sheet financial instruments at December 31,
2002 or 2001.

6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS

Reserves for life-contingent contract benefits consist of payout annuities
with life contingencies. The reserve calculation equals the present value of
contractually fixed future benefits based on mortality and interest assumptions.
The assumptions utilized for mortality generally include industry standard
tables, such as the 1983 group annuity mortality table, and tables based on
historical company experience. Interest rate assumptions vary from 2.4% to 7.7%.

At December 31, Contractholder funds consists of the following:

F-13

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

The following table highlights the key contract provisions relating to
Contractholder funds:

Contractholder fund activity for the year ended December 31, was as
follows:

7. 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. All administrative fees earned and administrative expenses
incurred are ceded to ALIC in accordance with reinsurance agreements.

8. COMMITMENTS AND CONTINGENT LIABILITIES

REGULATION AND LEGAL PROCEEDINGS

The Company is subject to changing social, economic and regulatory
conditions. State and federal regulatory initiatives and proceedings have varied
and have included efforts to remove barriers preventing banks from engaging in
the securities and insurance businesses, to change tax laws affecting the
taxation of insurance companies and the tax treatment of insurance products
which may impact the relative desirability of various personal investment
products and to expand overall regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.

Various 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 potential target of an increasing
number of class action lawsuits and other types of litigation, some of which
involve claims for substantial and/or indeterminate amounts (including punitive
and treble damages) and the outcomes of which are unpredictable. This litigation
is based on a variety of issues including insurance and claim settlement
practices. However, at this time, based on their present status and the
existence of the reinsurance agreement with ALIC, it is the opinion of
management that the ultimate liability, if any, in one or more of these other
actions in excess of

F-14

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

amounts currently reserved is not expected to have a material effect on the
results of operations, liquidity or financial position of the Company.

GUARANTY FUNDS

Under state insurance guaranty fund laws, insurers doing business in a
state can be assessed, up to prescribed limits, for certain obligations of
insolvent insurance companies to contractholders and claimants. Amounts assessed
to each company are typically related to its proportion of business written in a
particular state. The Company's expenses related to these funds have been
immaterial and are ceded to ALIC under reinsurance agreements.

9. 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. The
Company has also entered into a supplemental tax sharing agreement with respect
to reinsurance ceded to ALIC to allocate the tax benefits and detriments related
to such reinsurance. Effectively, these agreements result in the Company's
annual income tax provision being computed as if the Company filed a separate
return, adjusted for the reinsurance ceded to ALIC.

The Internal Revenue Service ("IRS") has completed its review of the
Company's federal income tax returns through the 1996 tax year. Any adjustments
that may result from IRS examinations of tax returns are not expected to have a
material impact on the financial position, liquidity or result of operations of
the Company.

The components of the deferred income tax assets and liabilities at
December 31, are as follows:

Although realization is not assured, management believes it is more likely
than not that the deferred tax assets will be realized based on the assumption
that certain levels of income will be achieved.

The components of income tax expense for the year ended December 31, are as
follows:

The Company paid income taxes of $7.4 million, $3.9 million and $2.4
million in 2002, 2001 and 2000, respectively.

F-15

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

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:

10. STATUTORY FINANCIAL INFORMATION

The following table reconciles Net income for the year ended December 31,
and Shareholder's equity at December 31, as reported herein in conformity with
GAAP with total statutory net income and capital and surplus of the Company,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities:

The Company prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the State of Arizona.
Effective January 1, 2001, the State of Arizona required insurance companies
domiciled in its state to prepare statutory-basis financial statements in
accordance with the National Association of Insurance Commissioners ("NAIC")
Accounting Practices and Procedures Manual ("Codification") subject to any
deviations prescribed or permitted by the State of Arizona insurance
commissioner.

Accounting changes adopted to conform to the provisions of Codification are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. The cumulative
effect is the difference between the amount of capital and surplus at the
beginning of the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods. The Company reported a decrease to surplus
of $463 thousand effective January 1, 2001 as a result of recognizing a net
deferred tax liability.

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 amount of dividends that can be paid to the shareholder, without approval by
the state insurance regulator is limited by specific surplus and net income
criteria as provided in the dividend restriction provision of the Arizona
Insurance Holding Company System laws. The maximum amount of dividends that the
Company can distribute during 2003 without prior approval of the Arizona
Department of Insurance is $6.9 million.

F-16

GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS

RISK-BASED CAPITAL

The NAIC has a standard for assessing the solvency of insurance
companies, which is referred to as risk-based capital ("RBC"). The
requirement consists of a formula for determining each insurer's RBC and a
model law specifying regulatory actions if an insurer's RBC falls below
specified levels. At December 31, 2002, RBC for the Company was significantly
above levels that would require regulatory action.

11. 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:

(IN THOUSANDS)
UNREALIZED CAPITAL GAINS AND LOSSES:

F-17

GLENBROOK LIFE AND ANNUITY COMPANY
SCHEDULE IV--REINSURANCE

(IN THOUSANDS)

F-18