10-Q 1 nlic2qdoc.txt NLIC 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 333-58520 NORTHBROOK LIFE INSURANCE COMPANY (Exact Name of Registrant as Specified in Its Charter) ARIZONA 36-3001527 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3100 Sanders Road 60062 Northbrook, Illinois 60062 (Zip Code) Bruce A. Teichner, Esq. (Address of principal executive offices) Registrant's telephone number, including area code: 847-402-5000 Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 August 6, 2001, Registrant had 25,000 shares of common stock outstanding, par value $100 per share, all of which shares are held by Allstate Life Insurance Company. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Statements of Operations for the Three Month and Six Month Periods Ended June 30, 2001 and 2000 (unaudited).............................................. 3 Statements of Financial Position as of June 30, 2001 (unaudited) and December 31, 2000............... 4 Statements of Cash Flows for the Six Month Periods Ended June 30, 2001 and 2000 (unaudited).............................................. 5 Notes to Financial Statements (unaudited)..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 9 Item 3. Quantitative and Qualitative Disclosure about Market Risk* N/A PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds* N/A Item 3. Defaults Upon Senior Securities* N/A Item 4. Submission of Matters to a Vote of Security Holders* N/A Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signature Page 15 *Omitted pursuant to General Instruction H(2)of Form 10-Q. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS

See notes to financial statements. 3 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION

See notes to financial statements. 4 NORTHBROOK LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS

See notes to financial statements. 5 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying financial statements include the accounts of Northbrook Life Insurance 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 financial statements and notes as of June 30, 2001, and for the three month and six month periods ended June 30, 2001 and 2000, are unaudited. The 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. The financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Northbrook Life Insurance Company Annual Report on Form 10-K for 2000. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. 2. Reinsurance The Company has reinsurance agreements whereby substantially all premiums, contract charges, credited interest, policy benefits and certain expenses are ceded to ALIC and reflected net of such reinsurance in the statements of operations. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the statements of financial position. The Company continues to have primary liability as the direct insurer for risks reinsured. Investment income earned on the assets which support contractholder funds and the reserve for life-contingent contract benefits is not included in the Company's financial statements as those assets are owned and managed under the terms of reinsurance agreements. The following table summarizes amounts which were ceded to ALIC under reinsurance agreements.

6 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited)

7 NORTHBROOK LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 4. Regulation and Legal Proceedings The Company's business is subject to the effects of a changing social, economic and regulatory environment. Recent 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 business, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles, and the overall expansion of regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. In the normal course of its business, the Company is involved from time to time in pending and threatened litigation and regulatory actions in which claims for monetary damages are asserted. Regulatory actions include, but are not limited to, market conduct and compliance issues. At this time, based on the present status of such litigation and regulatory actions, it is in the opinion of management that the ultimate liability, if any, in one or more of these matters in excess of amounts currently reserved is not expected to have a material adverse effect on the results of operations, liquidity or financial position of the Company. 8 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 The following discussion highlights significant factors influencing results of operations and changes in financial position of Northbrook Life Insurance Company (the "Company"). It should be read in conjunction with the financial statements and related notes thereto found under Part I Item 1 contained herein and with the discussion, analysis, financial statements and notes thereto in Part I Item 1 and Part II Items 7 and 8 of the Northbrook Life Insurance Company Annual Report on Form 10-K for the year ended December 31, 2000. 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 investment and life insurance products through Morgan Stanley DW, Inc., formerly Dean Witter Reynolds Inc., a wholly owned subsidiary of Morgan Stanley Dean Witter & Co. Investment products include deferred annuities and immediate annuities without life contingencies. Deferred annuities include fixed rate, market value adjusted, and variable annuities. Life insurance consists of interest-sensitive life, immediate annuities with life contingencies, and variable life insurance. The Company has identified itself as a single segment entity. The assets and liabilities related to variable annuity and variable life contracts are legally segregated and reflected as Separate Accounts. The assets of the Separate Accounts are carried at fair value. Separate Accounts liabilities represent the contractholders' claim to the related assets and are carried at the fair value of the assets. In the event that the asset value of certain contractholder accounts are projected to be below the value guaranteed by the Company, a liability is established through a charge to earnings. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contractholders and therefore, are not included in the Company's statements of operations.

The Company has reinsurance agreements under which substantially all contract and policy related transactions are transferred to ALIC. The Company's results of operations include only net investment income and realized capital gains and losses earned on the assets of the Company that are not transferred under the reinsurance agreements. 9 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 Net income decreased 20.9% to $936 thousand during the second quarter of 2001 compared to $1.2 million for the second quarter of 2000. The decrease in net income is a result of lower net investment income and realized capital losses during the second quarter of 2001. Net income for the first six months ending June 30, 2001 decreased 3.7% to $2.0 million from $2.1 million in the same period of 2000. The decrease in net income during the first six months of 2001 was a result of lower net investment income. Net investment income decreased 18.6% to $1.5 million during the second quarter and decreased 10.6% to $3.1 million during the six months ending June 30, 2001. The decrease in net investment income is due to lower asset balances. Investment balances decreased 2.9% to $92.9 million at June 30, 2001 from $95.7 million at June 30, 2000. There were realized capital losses, after tax, of $43 thousand for the second quarter of 2001, compared to none in the same period last year. For the six months ending June 30, 2001 there were no capital losses or gains, compared to a loss of $239 thousand during the six months ended June 30, 2000. Period to period fluctuations in realized capital gains and losses are largely the result of timing of sales decisions reflecting management's decision on positioning the portfolio, as well as assessments of individual securities and overall market conditions. FINANCIAL POSTION (in thousands) June 30, 2001 --------------- Fixed income securities (1) $ 88,996 Short-term 6,140 --------------- Total investments $ 95,136 =============== Reinsurance recoverable from ALIC $ 1,967,828 =============== Separate Account assets and liabilities $ 6,817,953 =============== Contractholder funds $ 1,819,199 =============== (1) Fixed income securities are carried at fair value. Amortized cost for these securities was $86,772 at June 30, 2001. Total investments were $95.1 million at June 30, 2001 compared to $96.9 million at December 31, 2000. The decrease in total investments was due to a decrease in operating assets and liabilities. Investment balances at June 30, 2001, excluding unrealized gains and losses on fixed income securities, decreased 2.2% from December 31, 2000. At June 30, 2001, all of the Company's fixed income securities portfolio was rated investment grade, which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2, a Moody's rating of Aaa, A, Aa, Baa or comparable Company internal rating. During the six months ended June 30, 2001, reserve for life-contingent contract benefits, contractholder funds and amounts recoverable from ALIC decreased by $454 thousand, $6.9 million and $7.3 million, respectively as compared to December 31, 2000 balances. These decreases can be attributed to sales of fixed annuities being more than offset by surrenders and withdrawals and transfers to variable annuity funds. As the Company's interest-sensitive life policies and annuity contracts in-force grow and age, the dollar amount of surrenders and withdrawals may increase in the future. A significant increase in the level of surrenders relative to total contractholder account balances is not anticipated. Reinsurance recoverable from ALIC relates to reserves for life-contingent contract benefits of contractholder funds ceded to ALIC. 10 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 Separate Accounts assets and liabilities decreased $796.7 million or 10.5% to $6.8 billion at June 30, 2001 compared to the December 31, 2000 balance. The decrease was primarily attributable to decreased sales of variable annuity contracts and volatility in the stock market. LIQUIDITY AND CAPITAL RESOURCES Under the terms of reinsurance agreements, substantially all premiums and deposits, excluding those relating to Separate Accounts, are transferred to ALIC, which maintains the investment portfolios supporting the Company's products. Substantially all payments of policyholder claims, benefits, contract maturities, contract surrenders and withdrawals and certain operating costs are also reimbursed by ALIC, under the terms of the reinsurance agreements. The Company continues to have primary liability as a direct insurer for risks reinsured. The Company's ability to meet liquidity demands is dependent on ALIC's ability to meet those demands. ALIC's claims-paying ability was rated Aa2, AA+ and A+ by Moody's, Standard and Poor's and A.M. Best, respectively, at June 30, 2001. The primary sources for the remainder of the Company's funds are collection of principal and interest from the investment portfolio and capital contributions from ALIC. The primary uses for the remainder of the Company's funds are to purchase investments, pay costs associated with the maintenance of the Company's investment portfolio and pay shareholder dividends. At June 30, 2001, the Moody's, Standard and Poor's, and A.M. Best claims-paying ratings for the Company were Aa2, AA+, and A+, respectively. FORWARD-LOOKING STATEMENTS 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, the Company's 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. The Company cannot guarantee that any forward-looking statement will be accurate. However, management believes 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 the 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. o Changes in market interest rates can have adverse effects on the Company's investment portfolio, investment income, product sales and results of operations. 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, or otherwise. 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 maturing and called investments into new investments that could be yielding less than the portfolio's average rate. Changes in market rates of interest 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. This could lead to lower sales and/or changes in the level of surrenders on these products. The Company seeks to limit its exposure in this area by offering a diverse group of products, periodically reviewing and revising crediting rates and providing for surrender charges in the event of early withdrawal. 11 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 o The impact of decreasing Separate Accounts balances as a result of fluctuating market conditions could cause contract charges ceded by the Company to decrease. o In order to manage interest rate risk, from time to time the effective duration of the assets of the investment portfolio is adjusted. Those adjustments may have an impact on the value of the investment portfolio and on investment income. o Management believes the reserves for life-contingent contract benefits are adequate to cover ultimate policy benefits, despite the underlying risks and uncertainties associated with their determination when payments will not occur until well into the future. 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 Deferred annuities and interest-sensitive life insurance products receive favorable policyholder taxation under current tax laws and regulations. Any legislative or regulatory changes that adversely alter this treatment are likely to negatively affect the demand for these products. Additionally, the demand for life insurance products which are used to address a customer's estate planning needs may be impacted to the extent any legislative changes to the current estate tax laws occur. o The Company distributes its products under an agreement with another financial services entity. Termination of such an agreement due to changes in control of this non-affiliated entity or other factors 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 eliminates many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers. 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 sales. On an ongoing basis, rating agencies review the financial performance and condition of insurers. A downgrade, while not expected, could have a material adverse effect on the Company's or ALIC's business, 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 and use its capital in other ways. o A number of enacted and pending legislative measures may lead to increased consolidation and increased competition in the financial services industry. - At the federal level, these measures include the recently enacted Gramm-Leach-Bliley Act of 1999, which eliminates many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers. - At the state level, these measures include legislation to permit mutual insurance companies to convert to a hybrid structure known as a mutual holding company, thereby allowing 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, several large mutual life insurers have used or are expected to use existing state laws and regulations governing the conversion of mutual insurance companies into stock insurance companies (demutualization). - In addition, state insurance regulators are reexamining the regulatory framework that currently governs the United States insurance business. They are engaged in an effort to determine the proper role of state insurance regulation in the United States financial services industry following the enactment of the Gramm-Leach-Bliley Act. 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 affect any such measures would have on the Company. 12 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Registrant and its Board of Directors know of no material pending legal proceedings, other than ordinary routine litigation, to which Registrant is a party or which would materially affect Registrant. Registrant is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from such pending or threatened litigation would have a material adverse effect on the financial condition of Registrant. Item 5. OTHER INFORMATION Not applicable. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K. (2) None (3)(i) Amended and Restated Articles of Incorporation and Articles of Redomestication of Northbrook Life Insurance Company (incorporated herein by reference to the Company's Form 10-K Annual Report for the year ended December 31, 1998). (3)(ii) Amended and Restated By-laws of Northbrook Life Insurance Company (incorporated herein by reference to the Company's Form 10-K Annual Report for the year ended December 31, 1998). (4) None (10)(a) Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated October 20, 1997 (incorporated herein by reference to the Company's Post-Effective Amendment No. 3 to Form S-1 Registration Statement (File No. 033-84480) dated April 1, 1997). (10)(b) Amendment No. 1 to the Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated June 6, 1991 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(c) Amendment No. 2 to the Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated September 28, 1993 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(d) Amendment No. 3 to the Reinsurance Agreement between Northbrook Life Insurance Company and allstate Life Insurance Company, dated February 23, 1995 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(e) Amendment No. 4 to the Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated June 12, 1995 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(f) Amendment No. 5 to the Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated January 26, 1996 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(g) Amendment No. 6 to the Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated January 15, 1997 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(h) Amendment No. 7 to the Reinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated October 22, 1998 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). 13 (10)(i) Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated October 20, 1987 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(j) Amendment No. 1 to the Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated June 6, 1991 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(k) Amendment No. 2 to the Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated June 8, 1995 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(l) Amendment No. 3 to the Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated February 23, 1995 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(m) Amendment No. 4 to the Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, January 26, 1996 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(n) Amendment No. 5 to the Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated January 15, 1997 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (10)(o) Amendment No. 6 to the Modified Coinsurance Agreement between Northbrook Life Insurance Company and Allstate Life Insurance Company, dated October 22, 1998 (incorporated herein by reference to the Company's Form 10-Q dated May 14, 1999). (11) Not Required (15) Not Required (18) None (19) None (22) None (23) Not Required (24) None (b) Reports on 8-K No reports on Form 8-K were filed during the second quarter of 2001. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated August 14, 2001 NORTHBROOK LIFE INSURANCE COMPANY --------------------------------- (Registrant) /s/THOMAS J. WILSON, II PRESIDENT AND CHIEF EXECUTIVE OFFICER ------------------------ (Authorized Officer of Registrant) THOMAS J. WILSON, II /s/SAMUEL H. PILCH CONTROLLER ------------------------ (Chief Accounting Officer) SAMUEL H. PILCH 15

NORTHBROOK LIFE INSURANCE CO 10-Q