UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
The registrant meets the conditions set forth in
General Instruction H(1)(a) and (b) of Form 10-Q and
is therefore filing this Form with the reduced
disclosure
format.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-82906
GLENBROOK LIFE AND ANNUITY COMPANY
(Exact name of registrant as specified in its charter)
ARIZONA 35-1113325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 Sanders Road
Northbrook, Illinois 60062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including are code: 847/402-5000
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No
As of April 30, 2002, Registrant had 5,000 shares of common capital stock
outstanding, par value $500 per share all of which shares are held by Allstate
Life Insurance Company.
GLENBROOK LIFE AND ANNUITY COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2002
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations for the Three Month Periods
Ended March 31, 2002 and 2001 (unaudited) 3
Condensed Statements of Financial Position as of March 31, 2002
(unaudited) and December 31, 2001 4
Condensed Statements of Cash Flows for the Three Month Periods
Ended March 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
GLENBROOK LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
2002 2001
---- ----
(IN THOUSANDS) (unaudited)
REVENUES
Net investment income $ 2,573 $ 2,737
Realized capital gains and losses 54 (46)
Administration fees - 29
------- -------
2,627 2,720
COSTS AND EXPENSES
Administration expenses - 21
------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 2,627 2,699
Income tax expense 918 943
------- -------
NET INCOME $ 1,709 $ 1,756
======= =======
See notes to condensed financial statements.
3
GLENBROOK LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
MARCH 31, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS, EXCEPT PAR VALUE DATA) (unaudited)
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $147,581 and $154,154) $ 152,500 $ 160,974
Short-term 15,435 6,592
----------- -----------
Total investments 167,935 167,566
Cash 16,346 -
Reinsurance recoverable from Allstate Life Insurance Company, net 5,535,666 5,378,036
Other assets 3,775 3,404
Separate Accounts 1,536,439 1,547,953
----------- -----------
TOTAL ASSETS $ 7,260,161 $ 7,096,959
=========== ===========
LIABILITIES
Contractholder funds $ 5,528,949 $ 5,370,475
Reserve for life-contingent contract benefits 6,717 7,561
Current income taxes payable 5,054 3,844
Deferred income taxes 1,653 2,610
Other liabilities and accrued expenses 3,517 -
Payable to affiliates, net 15,041 2,198
Separate Accounts 1,536,439 1,547,953
----------- -----------
TOTAL LIABILITIES 7,097,370 6,934,641
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 5)
SHAREHOLDER'S EQUITY
Common stock, $500 par value, 10,000 shares authorized, 5,000 shares issued and
outstanding 2,500 2,500
Additional capital paid-in 119,241 119,241
Retained income 37,853 36,144
Accumulated other comprehensive income:
Unrealized net capital gains and losses 3,197 4,433
---------- ----------
Total accumulated other comprehensive income 3,197 4,433
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 162,791 162,318
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,260,161 $ 7,096,959
=========== ===========
See notes to condensed financial statements.
4
GLENBROOK LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------
2002 2001
---- ----
(IN THOUSANDS) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,709 $ 1,756
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and other non-cash items 4 (24)
Realized capital gains and losses (54) 46
Changes in:
Income taxes payable 919 944
Payable to affiliates, net 12,843 2,100
Other operating assets and liabilities 3,146 (2,713)
------- -------
Net cash provided by operating activities 18,567 2,109
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 2,063 1,251
Investment collections 4,559 1,283
Investments purchases - (5,518)
Change in short-term investments, net (8,843) (9,949)
------- ------
Net cash used in investing activities (2,221) (12,933)
------- ------
NET INCREASE (DECREASE) IN CASH 16,346 (10,824)
CASH AT BEGINNING OF PERIOD - 13,500
------- -------
CASH AT END OF PERIOD $ 16,346 $ 2,676
======== =======
See notes to condensed financial statements.
5
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the
accounts of Glenbrook Life and Annuity Company (the "Company"), a wholly
owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is
wholly owned by Allstate Insurance Company ("AIC"), a wholly owned
subsidiary of The Allstate Corporation (the "Corporation").
The condensed financial statements and notes as of March 31, 2002
and for the three month periods ended March 31, 2002 and 2001 are
unaudited. The condensed financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods.
These condensed financial statements and notes should be read in
conjunction with the financial statements and notes thereto included in
the Glenbrook Life and Annuity Company Annual Report on Form 10-K for
the year ended December 31, 2001. The results of operations for the
interim periods should not be considered indicative of results to be
expected for the full year. To conform with the 2002 presentation,
certain prior year amounts have been reclassified.
2. NEW ACCOUNTING STANDARDS
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 as opposed to an undiscounted basis.
With respect to goodwill amortization the Company adopted SFAS No. 142
effective January 1, 2002. The result of the application of the
non-amortization provisions of SFAS 142 for goodwill is not material for
the three months ended March 31, 2002. At March 31, 2002, the Company
had goodwill of $1.2 million. Pursuant to transition provisions of SFAS
No. 142, the Company will complete its test for goodwill impairment
during the second quarter of 2002 and, if impairment is indicated,
record such impairment as a cumulative effect of accounting change
effective January 1, 2002. The cumulative effect of accounting change
recorded is not expected to be material to the results of operations or
financial position of the Company.
3. REINSURANCE
The Company has reinsurance agreements whereby all contract
charges, credited interest, policy benefits and certain expenses are
ceded to ALIC and reflected net of such reinsurance in the condensed
statements of operations. Reinsurance recoverable and the related
reserve for life-contingent contract benefits and contractholder funds
are reported separately in the condensed statements of financial
position. The Company continues to have primary liability as the direct
insurer for risks reinsured.
Investment income earned on the assets which support
contractholder funds and the reserve for life-contingent contract
benefits is not included in the Company's condensed financial statements
as those assets are owned and managed by ALIC under the terms of
reinsurance agreements.
The following table summarizes amounts ceded to ALIC under
reinsurance agreements.
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(IN THOUSANDS) 2002 2001
------------------ ----------------
Contract charges $ 7,296 $ 8,615
Credited interest, policy benefits and certain expenses 86,627 92,003
6
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and
after-tax basis are as follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
-------------------------------- ------------------------------------
After- After-
Pretax Tax tax Pretax Tax tax
------ --- ------ ------ --- ------
UNREALIZED CAPITAL GAINS AND LOSSES:
Unrealized holding (losses) gains
arising during the period $ (1,847) $ 646 $ (1,201) $ 2,099 $ (735) $ 1,364
Less: reclassification adjustments 54 (19) 35 (46) 16 (30)
-------- ----- -------- ------- ------- -------
Unrealized net capital (losses) gains (1,901) 665 (1,236) 2,145 (751) 1,394
-------- ----- -------- ------- ------ -------
Other comprehensive (loss) income $ (1,901) $ 665 (1,236) $ 2,145 $ (751) 1,394
======== ===== ======= ======
Net income 1,709 1,756
-------- -------
Comprehensive income $ 473 $ 3,150
======== =======
5. REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing
social, economic and regulatory environment. State and federal regulatory
initiatives have varied and have included employee benefit regulations,
removal of barriers preventing banks from engaging in the securities and
insurance businesses, tax law changes affecting the taxation of insurance
companies, the tax treatment of insurance products and its impact on the
relative desirability of various personal investment vehicles, and the
overall expansion of regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
From time to time, the Company is involved in pending and
threatened litigation in the normal course of business in which claims
for monetary damages are asserted. In the opinion of management, the
ultimate liability, if any, in one or more of these 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.
7
GLENBROOK LIFE AND ANNUITY COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. THIRD PARTY ADMINISTRATION AGREEMENT
On July 18, 2001, the Company entered into an administrative
services agreement with American Maturity Life Insurance Company
("American Maturity"), which was effective as of January 2, 2001, to
administer certain blocks of annuities that American Maturity reinsures
to ALIC. Pursuant to the terms of the agreement, the Company is to
provide insurance contract administration and financial services for all
contracts covered under the reinsurance agreement. The administrative
services agreement can be terminated by either the Company or American
Maturity upon mutual consent or as otherwise provided for in the terms
of the agreement. Beginning in the 4th quarter of 2001, all
administrative fees earned and administrative expenses incurred are
ceded to ALIC in accordance with reinsurance agreements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Glenbrook Life
and Annuity Company (the "Company"). It should be read in conjunction with
the condensed financial statements and related notes thereto found under
Part I Item 1 contained herein and with the discussion, analysis, financial
statements and notes thereto in Part 1 Item 1 and Part II Items 7 and 8 of
the Glenbrook Life and Annuity Company Annual Report on Form 10-K for the
year ended December 31, 2001. To conform with the 2002 presentation,
certain prior year amounts have been reclassified.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance
Company ("ALIC"), which is a wholly owned subsidiary of Allstate Insurance
Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets a diversified group of products to meet consumers'
lifetime needs in the areas of protection and retirement solutions through
financial services firms. These products include interest-sensitive life,
including single premium life and variable life; fixed annuities, including
market value adjusted annuities and equity-indexed annuities; immediate
annuities; and variable annuities.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable contracts are
legally segregated and reflected as Separate Accounts. The assets of the
Separate Accounts are carried at fair value. Separate Accounts liabilities
represent the contractholders' claims to the related assets and are carried
at the fair value of the assets. Investment income and realized capital
gains and losses of the Separate Accounts accrue directly to the
contractholders and therefore, are not included in the Company's condensed
statements of operations. Revenues to the Company from the Separate
Accounts consist of contract maintenance and administration fees and
mortality, surrender and expense charges all of which are ceded to ALIC.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable
annuity and variable life contractholders bear the investment risk that the
Separate Accounts' funds may not meet their stated objectives.
RESULTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
---------------------------
2002 2001
---- ----
Net investment income $ 2,573 $ 2,737
Realized capital gains and losses 54 (46)
Administration fees - 29
Administration expenses - 21
Income tax expense 918 943
------- -------
Net income $ 1,709 $ 1,756
======= =======
The Company has reinsurance agreements under which all contract and
policy related liabilities are transferred to ALIC. The Company's results
of operations include net investment income and realized capital gains and
losses earned on the assets of the Company that are not transferred under
the reinsurance agreements.
Net income for the first three months of 2002 decreased 2.7% to $1.7
million compared to the same period last year, due to decreased net
investment income partially offset by realized capital gains.
Net investment income for the first three months of 2002 decreased
6.0% to $2.6 million, compared to the same period last year, due to lower
yields partially offset by increased investment balances. Investments at
March 31, 2002, excluding Separate Accounts and unrealized gains and losses
on fixed income securities, grew 4.6% as compared to March 31, 2001. This
increase was due to positive cash flows generated from operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
Realized capital gains, after-tax, were $35 thousand for the first
three months of 2002 compared to realized capital losses of $30 thousand,
after-tax, for the same period last year. Realized capital gains and losses
result from the sale of fixed income securities. Period to period
fluctuations in realized capital gains and losses are the result of timing
of sales decisions reflecting management's decision on positioning 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.
FINANCIAL POSITION
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Fixed income securities (1) $ 152,500 $ 160,974
Short-term 15,435 6,592
------------ -------------
Total investments $ 167,935 $ 167,566
============ =============
Cash $ 16,346 $ -
============ =============
Reinsurance recoverable from ALIC, net $ 5,535,666 $ 5,378,036
============ =============
Contractholder funds $ 5,528,949 $ 5,370,475
============ =============
Reserve for life-contingent contract benefits $ 6,717 $ 7,561
============ == ==========
Separate Accounts assets and liabilities $ 1,536,439 $ 1,547,953
============ =============
(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $147.6 million and $154.2 million at March 31, 2002
and December 31, 2001, respectively.
Total investments were $167.9 million at March 31, 2002 compared to
$167.6 million at December 31, 2001. The increase was primarily due to
positive cash flows generated from operations offset in part by lower
unrealized gains on fixed income securities. Unrealized net capital gains
on fixed income securities were $4.9 million at March 31, 2002 compared to
$6.8 million at December 31, 2001. Investments at March 31, 2002, excluding
unrealized gains on fixed income securities, grew 1.4% from December 31,
2001.
At March 31, 2002, 97.0% of the Company's fixed income securities
portfolio is rated investment grade, which is defined by the Company as a
security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable
Company internal rating.
At March 31, 2002, cash was $16.3 million compared to none at December
31, 2001. Cash increased due to a change in the settlement process for
intercompany balances.
During the three months ended March 31, 2002, Contractholder funds
increased $158.5 million to $5.53 billion from $5.37 billion at December
31, 2001 as the result of additional deposits from fixed annuities and
credited interest that were partially offset by surrenders and withdrawals.
Reinsurance recoverable from ALIC increased correspondingly by $157.6
million due to the increase in contractholder funds.
Separate Accounts assets and liabilities decreased 1.0% to $1.54
billion at March 31, 2002 compared to the December 31, 2001 balance. The
decreases were primarily attributable to surrenders and withdrawals and
unrealized losses in the Separate Accounts investment portfolios that were
only partially offset by sales of variable annuity contracts and transfers
from the fixed account contract option to variable Separate Accounts funds.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
The company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources.
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2002 2001
---- ----
Common stock and retained income $ 159,594 $ 157,885
Other comprehensive income 3,197 4,433
----------- -----------
Total shareholder's equity $ 162,791 $ 162,318
=========== ===========
SHAREHOLDER'S EQUITY
Shareholder's equity increased for March 31, 2002 due to net income
partially offset by a decrease in unrealized net capital gains and losses.
DEBT
The Company had no outstanding debt at March 31, 2002 and December 31,
2001. 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 under the
intercompany loan agreement at March 31, 2002 and December 31, 2001. The
Corporation uses commercial paper borrowings and can use bank lines of
credit to fund intercompany borrowings.
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important
factor in establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
sales. On an ongoing basis, rating agencies review the financial
performance and condition of insurers. A multiple level downgrade, while
not expected, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company shares
its financial strength ratings with its parent, ALIC, due to the 100%
reinsurance agreements. The Company's current financial strength ratings
are listed below:
RATING AGENCY RATING RATING STRUCTURE
------------- ------ ----------------
Moody's Investors Service, Inc. Aa2 Second highest of nine ratings
("Excellent") categories and mid-range within the
category based on modifiers (e.g.,
Aa1, Aa2 and Aa3 are "Excellent")
Standard & Poor's Ratings Services AA+ Second highest of nine ratings
("Very Strong") categories and highest within the
category based on modifiers (e.g.,
AA+, AA and AA- are "Very Strong")
A.M. Best Company, Inc. A+ Highest of nine ratings categories
("Superior") and second highest within the
category based on modifiers (e.g.,
A++ and A+ are "Superior" while A
and A- are "Excellent")
In February 2002, Standard & Poor's affirmed its December 31, 2001
ratings. Standard & Poor's revised its outlook for ALIC and its rated
subsidiaries and affiliates to "negative" from "stable". This revision is
part of an ongoing life insurance industry review recently initiated by
Standard & Poor's. Moody's and A.M. Best reaffirmed their ratings and
outlook for the Company and ALIC.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
LIQUIDITY
Under the terms of reinsurance agreements, substantially all premiums
and deposits, excluding those relating to Separate Accounts, are
transferred to ALIC, which maintains the investment portfolios supporting
the Company's products. Substantially all payments of policyholder claims,
benefits, contract maturities, contract surrenders and withdrawals and
certain operating costs, excluding those relating to Separate Accounts, are
also reimbursed by ALIC under the terms of the reinsurance agreements. The
Company continues to have primary liability as a direct insurer for risks
reinsured. The Company's ability to meet liquidity demands is dependent on
ALIC's ability to meet its obligations under the reinsurance agreements.
ALIC's financial strength was rated Aa2, AA+, and A+ by Moody's, Standard &
Poor's and A.M. Best, respectively, at March 31, 2002.
The primary sources for the remainder of the Company's funds are
collection of principal and interest from the investment portfolio and
capital contributions from ALIC and intercompany loans from the
Corporation. The primary uses for the remainder of the Company's funds are
to purchase investments and pay costs associated with the maintenance of
the Company's investment portfolio, income taxes, dividends to ALIC and the
repayment of intercompany loans from the Corporation.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate
results based on management's plans that are subject to uncertainty. These
statements are made subject to the safe-harbor provisions of the Private
Securities Litigation Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or
current facts and may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "estimates," "intends," "believes,"
"likely," and other words with similar meanings. These statements may
address, among other things, our strategy for growth, product development,
regulatory approvals, market position, expenses, financial results and
reserves. Forward-looking statements are based on management's current
expectations of future events. We cannot guarantee that any forward-looking
statement will be accurate. However, we believe that our forward-looking
statements are based on reasonable, current expectations and assumptions.
We assume no obligation to update any forward-looking statements as a
result of new information or future events or developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual
results could differ materially from those communicated in these
forward-looking statements. In addition to the normal risks of business,
the Company is subject to significant risk factors, including those listed
below which apply to it as an insurance business and a provider of other
financial services.
o Currently, the Corporation is examining the potential exposure, if any, of
its insurance operations from acts of terrorism. The Corporation is also
examining how best to address this exposure, if any, considering the
interests of policyholders, shareholders, the lending community, regulators
and others. The Company generally does not have exclusions for terrorist
events included in its life insurance policies. In the event that a
terrorist act occurs, the Company may be adversely impacted, depending on
the nature of the event. With respect to the Company's investment
portfolio, in the event that commercial insurance coverage for terrorism
becomes unavailable or very expensive, there could be significant adverse
impacts on some portion of the Company's portfolio, particularly in sectors
such as airlines and real estate. For example, certain debt obligations
might be adversely affected due to the inability to obtain coverage to
restore the related real estate or other property, thereby creating the
potential for increased default risk.
o Changes in market interest rates can have adverse effects on the Company's
investment portfolio and investment income. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
In addition, increases in market interest rates as compared to rates
offered on some of the Company's products could make those products less
attractive and lead to lower sales and/or increase the level of surrenders
on these products. Declining market interest rates could have an adverse
impact on the Company's investment income as the Company reinvests proceeds
from positive cash flows from operations and proceeds from maturing and
called investments into new investments that could be yielding less than
the portfolio's average rate.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o The impact of decreasing Separate Accounts balances resulting from volatile
market conditions, underlying fund performance and sales management
performance could cause contract charges realized by the Company, as well
as ALIC, to decrease and lead to an increase of exposure to pay guaranteed
minimum income and death benefits.
o The Company amortizes deferred policy acquisition costs ("DAC") related to
contractholder funds in proportion to gross profits over the estimated
lives of the contract periods. Periodically, the Company updates the
assumptions underlying the gross profits, which include estimated future
fees, investment margins and expenses, in order to reflect actual
experience. Updates to these assumptions result in adjustments to the
cumulative amortization of DAC. These adjustments may have a material
effect on results of operations. DAC and any related adjustments are ceded
to ALIC.
o In order to manage interest rate risk, from time to time the Company
adjusts the effective duration of assets in the investment portfolio. Those
adjustments may have an impact on the value of the investment portfolio and
on investment income.
o It is possible that the assumptions and projections used by the Company in
establishing prices for the guaranteed minimum death benefits and
guaranteed minimum income benefits on variable annuities, particularly
assumptions and projections about investment performance, do not accurately
anticipate the level of costs that the Company will ultimately incur and
cede to ALIC in providing those benefits.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not occur until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations ceded to ALIC.
o Under current U.S. tax law and regulations, deferred and immediate
annuities and life insurance, including interest-sensitive products,
receive favorable policyholder tax treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance used
in estate planning.
o The Company 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 the enactment of the
Gramm-Leach-Bliley Act of 1999, which eliminated many federal and state law
barriers to affiliations among banks, securities firms, insurers and other
financial service providers.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophe which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade in AIC's financial strength rating
from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best,
respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard &
Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a
downgrade of the Corporation's ratings, ALIC and its rated subsidiaries
could also experience a similar downgrade.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o The events of September 11 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.
However, if an event of similar or greater magnitude occured in the future
and if the weaknesses in the physical and operational infrastructure of the
U.S. and worldwide financial systems are not remedied, the Company could
encounter significant difficulties in transferring funds, buying and
selling securities and engaging in other financial transactions that
support its liquidity.
o Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers. A multiple level downgrade of either
the Company or ALIC, while not expected, could have a material adverse
effect on the Company's sales, including the competitiveness of the
Company's product offerings, its ability to market products, and its
financial condition and results of operations.
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends to ALIC and use its capital in other ways.
o Following enactment of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the United States insurance business in an effort to determine the
proper role of state insurance regulation in the U. S. financial services
industry. We cannot predict whether any state or federal measures will be
adopted to change the nature or scope of the regulation of the insurance
business or what affect any such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition, grand-fathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
14
PART II - Other Information
Item 1. Legal Proceedings
The discussion "Regulation and Legal Proceedings" in Part I, Item 1,
Note 5 of this Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
(b) Reports on Form 8-K
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 13, 2002. GLENBROOK LIFE AND ANNUITY COMPANY
-------------------------------------------
(Registrant)
/s/THOMAS J. WILSON, II
Thomas J. Wilson, II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(Authorized Officer of Registrant)
/s/SAMUEL H. PILCH
Samuel H. Pilch
GROUP VICE PRESIDENT AND CONTROLLER
(Chief Accounting Officer)
16
Exhibit Index
Exhibit No. Description
3(i)(A) Articles of Amendment to the Amended and Restated
Articles of Incorporation and Articles of
Redomestication of Glenbrook Life and
Annuity Company dated October 20, 1999.
3(i)(B) Amended and Restated Articles of Incorporation and
Articles of Redomestication of Glenbrook Life and
Annuity Company. Incorporated herein by reference to
Exhibit 3(i) to Glenbrook Life and Annuity Company's
Annual Report on Form 10-K for the year ended December
31, 1998.
3(ii) Amended and Restated Bylaws of Glenbrook Life and
Annuity Company. Incorporated herein by reference to
Exhibit 3(ii) to Glenbrook Life and Annuity Company's
Annual Report on Form 10-K for the year ended December
31, 1998.
10.1 Service and Expense Agreement among Allstate Insurance
Company and The Allstate Corporation and Certain
Insurance Subsidiaries dated January 1, 1999.
Incorporated herein by reference to Exhibit 10.2 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.2 Investment Management Agreement and Amendment to
Certain Service and Expense Agreements Among
Allstate Investments, LLC and Allstate Insurance
Company and The Allstate Corporation and Certain
Affiliates effective as of January 1, 2002.
Incorporated herein by reference to Exhibit 10.3 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.3 Tax Sharing Agreement dated as November 12, 1996 among
The Allstate Corporation and certain affiliates.
Incorporated herein by reference to Exhibit 10.4 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
E-1