10-Q 1 glac1qdoc.txt GLAC 10Q 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 333-52806 GLENBROOK LIFE AND ANNUITY COMPANY (Exact name of registrant as specified in its charter) ILLINOIS 35-1113325 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3100 Sanders Road Northbrook, Illinois 60062 (Address of principal executive offices)(Zip Code) 847/402-2400 (Registrant's telephone number, including area code) 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 Indicate the number of shares of each of the issuer's classes of common stock, as of March 31, 2001; there were 5,000 shares of common capital stock outstanding, par value $500 per share all of which shares are held by Allstate Life Insurance Company. PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Statements of Operations Three Months Ended March 31, 2001 and March 31, 2000 (Unaudited)....................................... 3 Statements of Financial Position March 31, 2001(Unaudited) and December 31, 2000.................. 4 Statements of Cash Flows Three Months Ended March 31, 2001 and March 31, 2000 (Unaudited)................................. 5 Notes to Financial Statements.................................... 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..................................................14 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..................................................14 Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................14 SIGNATURE PAGE ..............................................................16 *Omitted pursuant to General Instruction H(2) of Form 10-Q. 2 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF OPERATIONS

See notes to financial statements. 3

See notes to financial statements. 4 GLENBROOK LIFE AND ANNUITY COMPANY STATEMENTS OF CASH FLOWS

See notes to financial statements. 5 GLENBROOK LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying financial statements include the accounts of Glenbrook Life and Annuity Company (the "Company"), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"). The financial statements and notes as of March 31, 2001 and for the three month periods ended March 31, 2001 and 2000 are unaudited. The interim 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 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 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 all 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 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 ceded to ALIC under reinsurance agreements.

6 GLENBROOK LIFE AND ANNUITY 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, proposed legislation to prohibit the use of gender in determining insurance rates and benefits 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. 7 GLENBROOK LIFE AND ANNUITY COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 5. Third Party Administration Agreement On January 2, 2001, the Company entered into an administrative services agreement with American Maturity Life Insurance Company ("American Maturity") 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, effective January 15, 2001, for all contracts covered under the reinsurance agreement. The Company utilizes services performed by AIC and ALIC and business facilities owned or leased, and operated by AIC in conducting these activities. 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. During the first three months of 2001, the Company earned administration fees of $29 thousand and incurred $21 thousand in related expenses. 8 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 The following discussion highlights significant factors influencing results of operations and changes in financial position of Glenbrook Life and Annuity Company (the "Company"). It should be read in conjunction with the financial statements and related notes 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 Glenbrook Life and Annuity Company Annual Report on Form 10-K for the year ended December 31, 2000. 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 investment and life insurance products through banks and securities firms. Investment products include deferred annuities and immediate annuities without life contingencies. Deferred annuities include fixed rate, market value adjusted, indexed and variable annuities. Life insurance consists of interest-sensitive life 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 all contract and policy related transactions 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. Also included in the results of operations are Administration fees earned and expenses incurred resulting from the third party administration agreement, as described in Note 5. 9 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 Net income for the first quarter of 2001 increased 3.0% to $1.8 million, due to increased net investment income partially offset by realized capital losses. Net investment income for the three month period ended March 31, 2001 increased 7.1% to $2.7 million attributable to higher investment balances while yields were comparable in both periods. Investments at March 31, 2001, excluding unrealized gains and losses on fixed income securities, grew 4.6% as compared to March 31, 2000. Realized capital losses, after-tax, were $30 thousand for the three month periods ended March 31, 2001 compared to realized capital gains of $43 thousand, after-tax, for the same period last year. Period to period fluctuations in realized capital gains and losses are largely the result of the timing of sales decisions reflecting management's decisions on positioning the portfolio, as well as valuation assessments of individual securities and overall market conditions.

(1) Fixed income securities are carried at fair value. Amortized cost for these securities was $142,790 and $139,819 at March 31, 2001 and December 31, 2000, respectively. Total investments were $162.3 million at March 31, 2001 compared to $147.2 million at December 31, 2000. The increase was primarily due to investment of cash on hand as well as positive cash flows generated from operations and higher unrealized net capital gains on fixed income securities. Investments at March 31, 2001, excluding unrealized gains on fixed income securities, and cash grew 1.3% from December 31, 2000. At March 31, 2001, substantially all 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. During the three months ended March 31, 2001, Contractholder funds and Reinsurance recoverable from ALIC increased by $201.9 million and $202.2 million, respectively. The increase resulted from sales of the Company's fixed rate annuity contracts, partially offset by surrenders and withdrawals on fixed rate annuity contracts. Reinsurance recoverable from ALIC relates to contract benefit obligations ceded to ALIC. Separate Account assets and liabilities decreased 12.6% to $1.52 billion at March 31, 2001. The decreases were primarily attributable to unrealized losses in the Separate Accounts investment portfolios and surrenders and withdrawals, 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 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 CAPITAL RESOURCES AND 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 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 and Poor's and A.M. Best, respectively, at March 31, 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 and pay costs associated with the maintenance of the Company's investment portfolio and pay dividends to ALIC. At March 31, 2001, the Moody's, Standard and Poor's and A.M. Best financial strength ratings for the Company were Aa2, AA+ and A+, respectively. 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 our 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 There is uncertainty involved in estimating the availability of reinsurance and the collectibility of reinsurance recoverables. This uncertainty arises from a number of factors, including the restructuring by reinsurers of their capital structures and segregation by the industry generally of reinsurance exposure into separate legal entities with dedicated capital. 11 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000 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 by decreasing unrealized capital gains on 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 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 surrender charges in the event of early withdrawal. 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 and liabilities 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. 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 some of 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 changes in control or other factors of any of these entities could have a detrimental effect on the Company's sales. This risk may be exacerbated by 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 use its capital. 12 o A number of enacted and pending legislative measures could lead to increased consolidation and increased competition for business and for capital in the financial services industry. o 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. o 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). o 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 the state insurance regulation in the United States financial services industry following the enactment of the Graham-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 effect any such measures would have on the Company. 13 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company and its Board of Directors know of no material legal proceedings pending to which the Company is a party or which would materially affect the Company. The Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate the ultimate liability arising from such pending or threatened litigation to have a material effect on the financial condition of the Company. 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 Glenbrook Life and Annuity Company (Incorporated herein by reference to the Company's Form 10-K Annual Report for the year ended December 31, 1998, dated March 30, 1999) (3)(ii) Amended and Restated By-laws of Glenbrook Life and Annuity Company (Incorporated herein by reference to the Company's Form 10-K Annual Report for the year ended December 31, 1998, dated March 30, 1999) (4) None (10)(a) Reinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company effective June 5, 1992 along with Amendment No. 1 thereto, dated June 8, 1995 and Amendment No. 2 thereto, dated November 3, 1995 (Incorporated herein by reference to the Company's Initial filing of Form S-1 Registration Statement (File No. 333-67275) (10)(b )Amendment No. 1 to the Reinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, dated June 8, 1995 (Incorporated herein by reference to the initial filing of the Company's Form S-1 Registration Statement (File No 333-07275) dated June 28, 1996) (10)(c) Amendment No. 2 to the Reinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, dated November 3, 1995 (Incorporated herein by reference to the initial filing of the Company's Form S-1 Registration Statement (File No 333-07275) dated June 28, 1996) (10)(d) Amendment No. 3 to the Reinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, dated October 28, 1998 (10)(e) Modified Coinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, effective September 1, 1993 (10)(f) Amendment No. 1 to the Modified Coinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, dated June 28, 1995 (10)(g) Amendment No. 2 to the Modified Coinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, dated November 3, 1995 (10)(h) Amendment No. 3 to the Modified Coinsurance Agreement between Glenbrook Life and Annuity Company and Allstate Life Insurance Company, dated October 28, 1998 (11) Not Required (15) None (18) None (19) None 14 (22) None (23) Not required (24) None (b) Reports on 8-K No reports on Form 8-K were filed during the first quarter of 2001. 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, on the 14th day of May 2001. GLENBROOK LIFE AND ANNUITY 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 16

GLENBROOK LIFE & ANNUITY CO 10-Q