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.
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-111553
LINCOLN BENEFIT LIFE COMPANY
(Exact name of registrant as specified in its charter)
Nebraska |
| 47-0221457 |
(State of Incorporation) |
| (I.R.S. Employer Identification No.) |
|
|
|
2940 South 84th Street |
| 68506 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: 800/525-9287
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 ý |
| No o |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o |
| No ý |
As of July 29, 2005, the registrant had 25,000 common shares, $100 par value, outstanding, all of which are held by Allstate Life Insurance Company
LINCOLN BENEFIT LIFE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2005
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| Page |
PART I. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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| Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2005 and 2004 (unaudited) | 3 |
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| Condensed Statements of Financial Position as of June 30, 2005 (unaudited) and December 31, 2004 | 4 |
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| Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2005 and 2004 (unaudited) | 5 |
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| Notes to Condensed Financial Statements (unaudited) | 6 |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
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Item 4. | Controls and Procedures | 15 |
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PART II. | OTHER INFORMATION |
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Item 1. | Legal Proceedings | 15 |
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Item 6. | Exhibits | 15 |
2
ITEM 1. FINANCIAL STATEMENTS
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (unaudited) |
| (unaudited ) |
| ||||||||
Revenues |
|
|
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|
|
|
|
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| ||||
Net investment income |
| $ | 3,429 |
| $ | 2,791 |
| $ | 6,790 |
| $ | 5,565 |
|
Realized capital gains and losses |
| (22 | ) | — |
| (117 | ) | — |
| ||||
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| ||||
Income from operations before income tax expense |
| 3,407 |
| 2,791 |
| 6,673 |
| 5,565 |
| ||||
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| ||||
Income tax expense |
| 1,191 |
| 975 |
| 2,331 |
| 1,943 |
| ||||
Net income |
| $ | 2,216 |
| $ | 1,816 |
| $ | 4,342 |
| $ | 3,622 |
|
See notes to condensed financial statements.
3
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
|
| June 30, |
| December 31, |
| ||
(in thousands, except par value data) |
| 2005 |
| 2004 |
| ||
|
| (Unaudited) |
|
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| ||
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| ||
Assets |
|
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Investments |
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| ||
Fixed income securities, at fair value (amortized cost $258,826 and $234,371) |
| $ | 267,818 |
| $ | 242,799 |
|
Short-term |
| 4,553 |
| 30,408 |
| ||
Total investments |
| 272,371 |
| 273,207 |
| ||
|
|
|
|
|
| ||
Cash |
| 21,126 |
| 10,532 |
| ||
Reinsurance recoverable from Allstate Life Insurance Company |
| 17,865,257 |
| 17,083,056 |
| ||
Reinsurance recoverable from non-affiliates |
| 919,413 |
| 839,738 |
| ||
Receivable from affiliates |
| 7,706 |
| 27,449 |
| ||
Current income taxes receivable |
| — |
| 38 |
| ||
Other assets |
| 83,303 |
| 83,853 |
| ||
Separate Accounts |
| 2,455,496 |
| 2,368,312 |
| ||
Total assets |
| $ | 21,624,672 |
| $ | 20,686,185 |
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| ||
Liabilities |
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| ||
Contractholder funds |
| $ | 17,002,871 |
| $ | 16,231,489 |
|
Reserve for life-contingent contract benefits |
| 1,763,049 |
| 1,671,729 |
| ||
Current income taxes payable |
| 2,293 |
| — |
| ||
Unearned premiums |
| 24,679 |
| 23,362 |
| ||
Deferred income taxes |
| 3,455 |
| 3,257 |
| ||
Other liabilities and accrued expenses |
| 102,884 |
| 122,800 |
| ||
Separate Accounts |
| 2,455,496 |
| 2,368,312 |
| ||
Total liabilities |
| 21,354,727 |
| 20,420,949 |
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Commitments and Contingent Liabilities (Note 3) |
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Shareholder’s equity |
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| ||
Common stock, $100 par value, 30 thousand shares authorized, 25 thousand shares issued and outstanding |
| 2,500 |
| 2,500 |
| ||
Additional capital paid-in |
| 180,000 |
| 180,000 |
| ||
Retained income |
| 81,599 |
| 77,257 |
| ||
Accumulated other comprehensive income: |
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|
|
|
| ||
Unrealized net capital gains and losses |
| 5,846 |
| 5,479 |
| ||
Total accumulated other comprehensive income |
| 5,846 |
| 5,479 |
| ||
Total shareholder’s equity |
| 269,945 |
| 265,236 |
| ||
Total liabilities and shareholder’s equity |
| $ | 21,624,672 |
| $ | 20,686,185 |
|
See notes to condensed financial statements.
4
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
|
| Six Months Ended |
| ||||
(in thousands) |
| 2005 |
| 2004 |
| ||
|
| (Unaudited) |
| ||||
|
|
|
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|
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Cash flows from operating activities |
|
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|
| ||
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| ||
Net income |
| $ | 4,342 |
| $ | 3,622 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Amortization and other non-cash items |
| 225 |
| 140 |
| ||
Realized capital gains and losses |
| 117 |
| — |
| ||
Changes in: |
|
|
|
|
| ||
Reserve for life-contingent contract benefits and contractholder funds, net of reinsurance recoverables |
| 826 |
| (1,605 | ) | ||
Income taxes payable |
| 2,331 |
| 33 |
| ||
Receivable/payable to affiliates, net |
| 19,743 |
| 5,859 |
| ||
Other operating assets and liabilities |
| (10,449 | ) | 13,931 |
| ||
Net cash provided by operating activities |
| 17,135 |
| 21,980 |
| ||
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Cash flows from investing activities |
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Fixed income securities |
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|
| ||
Proceeds from sales |
| 3,099 |
| — |
| ||
Investment collections |
| 7,793 |
| 8,993 |
| ||
Investment purchases |
| (43,288 | ) | (13,542 | ) | ||
Change in short-term investments |
| 25,855 |
| 694 |
| ||
Net cash used in investing activities |
| (6,541 | ) | (3,855 | ) | ||
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|
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|
|
| ||
Net increase in cash |
| 10,594 |
| 18,125 |
| ||
Cash at beginning of period |
| 10,532 |
| 23,456 |
| ||
Cash at end of period |
| $ | 21,126 |
| $ | 41,581 |
|
See notes to condensed financial statements.
5
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying condensed financial statements include the accounts of Lincoln Benefit Life 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 June 30, 2005, and for the three-month and six-month periods ended June 30, 2005 and 2004, 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2004. 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 entered into reinsurance agreements under which it reinsures all of its business to ALIC or other non-affiliated reinsurers. Under the agreements, premiums, contract charges, interest credited to contractholder funds, contract benefits and certain expenses are reinsured. 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 condensed financial statements as those assets are owned and managed by ALIC or third party reinsurers under terms of the reinsurance agreements.
The effects of reinsurance on premiums and contract charges are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
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(in thousands) |
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Premiums and contract charges |
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Direct |
| $ | 203,888 |
| $ | 179,650 |
| $ | 401,596 |
| $ | 347,955 |
|
Assumed-non-affiliate |
| 1,477 |
| 1,045 |
| 2,603 |
| 1,695 |
| ||||
Ceded |
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Affiliate |
| (105,622 | ) | (99,871 | ) | (222,455 | ) | (189,277 | ) | ||||
Non-affiliate |
| (99,743 | ) | (80,824 | ) | (181,744 | ) | (160,373 | ) | ||||
Premiums and contract charges, net of reinsurance |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
6
The effects of reinsurance on interest credited to contractholder funds, contract benefits and certain other expenses are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
(in thousands) |
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Interest credited to contractholder funds, contract benefits and certain other expenses |
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Direct |
| $ | 451,593 |
| $ | 393,195 |
| $ | 1,036,412 |
| $ | 807,647 |
|
Assumed-non-affiliate |
| 1,698 |
| 1,802 |
| 3,118 |
| 2,263 |
| ||||
Ceded |
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|
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Affiliate |
| (343,655 | ) | (305,238 | ) | (797,967 | ) | (636,660 | ) | ||||
Non-affiliate |
| (109,636 | ) | (89,759 | ) | (241,563 | ) | (173,250 | ) | ||||
Interest credited to contractholder funds, contract benefits and certain other expenses, net of reinsurance |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Effective January 1, 2004, the Company adopted Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (“SOP 03-1”) and, in connection therewith, recorded a cumulative effect of change in accounting principle of $26.9 million, after-tax ($41.4 million, pre-tax) that was ceded to ALIC.
3. Guarantees and Contingent Liabilities
Guarantees
The Company has issued universal life insurance contracts to third parties who finance the premium payments on the universal life insurance contracts through a commercial paper program. The Company has issued a repayment guarantee on the outstanding commercial paper balance that is fully collateralized by the cash surrender value of the universal life insurance contracts. At June 30, 2005, the amount due under the commercial paper program is $301 million and the cash surrender value of the policies is $306 million. The repayment guarantee expires April 30, 2006. These contracts are ceded to ALIC under the terms of the reinsurance agreements.
In the normal course of business, the Company provides standard indemnifications to counterparties in contracts in connection with numerous transactions, including acquisitions and divestitures. The types of indemnifications typically provided include indemnifications for breaches of representations and warranties, taxes and certain other liabilities, such as third party lawsuits. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote. The terms of the indemnifications vary in duration and nature. In many cases, the maximum obligation is not explicitly stated and the contingencies triggering the obligation to indemnify have not occurred and are not expected to occur. Consequently, the maximum amount of the obligation under such indemnifications is not determinable. Historically, the Company has not made any material payments pursuant to these obligations.
The aggregate liability balance related to all guarantees was not material as of June 30, 2005.
Regulation
The Company is subject to changing social, economic and regulatory conditions. Recent state and federal regulatory initiatives and proceedings have included efforts to impose additional regulations regarding agent and broker compensation and otherwise expand overall regulation of insurance products and the insurance industry. The ultimate changes and eventual effects of these initiatives on the Company’s business, if any, are uncertain.
7
Legal and Regulatory Proceedings and Inquiries
Background
The Company and certain of its affiliates are named as defendants in a number of lawsuits and other legal proceedings arising out of various aspects of its business. In addition, from time to time regulatory examinations or inquiries are pending involving the Company. As background to the “Proceedings” sub-section below, please note the following:
• These matters raise difficult and complicated factual and legal issues and are subject to many uncertainties and complexities, including but not limited to, the underlying facts of each matter, novel legal issues, variations between jurisdictions in which matters are being litigated, differences in applicable laws and judicial interpretations, the length of time before many of these matters might be resolved by settlement or through litigation and, in some cases, the timing of their resolutions relative to other similar cases brought against other companies, the fact that some of these matters are putative class actions in which a class has not been certified and in which the purported class may not be clearly defined, the fact that some of these matters involve multi-state class actions in which the applicable law(s) for the claims at issue is in dispute and therefore unclear, and the current challenging legal environment faced by large corporations and insurance companies.
• In these matters, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages. In some cases, the monetary damages sought include punitive damages or are not specified. Often more specific information beyond the type of relief sought is not available because plaintiffs have not requested more specific relief in their court pleadings. In our experience, monetary demands in plaintiffs’ court pleadings bear little relation to the ultimate loss, if any, to the Company.
• For the reasons specified above, it is not possible to make meaningful estimates of the amount or range of loss that could result from these matters at this time. The Company reviews these matters on an on-going basis and follows the provisions of Statement of Financial Accounting Standard No. 5, “Accounting for Contingencies” when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on its assessment of the ultimate outcome following all appeals.
• In the opinion of the Company’s management, while the ultimate liability in some of these matters in excess of amounts currently reserved may be material to the Company’s operating results for any particular period if an unfavorable outcome results, none will have a material adverse effect on the financial condition of the Company.
Proceedings
Legal proceedings involving Allstate agencies and AIC may impact the Company, even when the Company is not directly involved, because the Company sells its products through a variety of distribution channels including Allstate agencies. Consequently, information about the more significant of these proceedings is provided in the following paragraph.
AIC is defending certain matters relating to its agency program reorganization announced in 1999. These matters include a lawsuit filed in December 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws, a class action filed in August 2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act, breach of contract and ERISA violations, and a lawsuit filed in October 2004 by the EEOC alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization. AIC is also defending another action, in which a class was certified, filed
8
by former employee agents who terminated their employment prior to the agency program reorganization. These plaintiffs have asserted breach of contract and ERISA claims and are seeking actual damages including benefits under Allstate employee benefit plans and payments provided in connection with the reorganization, as well as punitive damages. In late March 2004, in the first EEOC lawsuit and class action lawsuit, the trial court issued a memorandum and order that, among other things, certified classes of agents, including a mandatory class of agents who had signed a release, for purposes of effecting the court’s declaratory judgment that the release is voidable at the option of the release signer. The court also ordered that an agent who voids the release must return to AIC “any and all benefits received by the [agent] in exchange for signing the release.” The court also “concluded that, on the undisputed facts of record, there is no basis for claims of age discrimination.” The EEOC and plaintiffs have asked the court to clarify and/or reconsider its memorandum and order. The case otherwise remains pending. A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue. These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes. This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and has been reversed and remanded to the trial court in April 2005. In these matters, plaintiffs seek compensatory and punitive damages, and equitable relief. AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization. In addition, AIC has been defending certain matters relating to its life agency program reorganization announced in 2000. These matters have been the subject of an investigation by the EEOC with respect to allegations of age discrimination and retaliation and conciliation discussions between AIC and the EEOC. The outcome of these disputes is currently uncertain.
Other Matters
The Corporation and some of its subsidiaries, including the Company, have received interrogatories and demands for information from regulatory and enforcement authorities relating to various insurance products and practices. The areas of inquiry include variable annuity market timing and late trading. The Corporation and some of its subsidiaries, including the Company, have also received interrogatories and demands for information from authorities seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging. The Company believes that these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various authorities into the practices, policies and procedures relating to insurance and financial services products. The Corporation and its subsidiaries have responded and will continue to respond to these inquiries.
Various other 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 target of a number of lawsuits and proceedings, some of which involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and target a range of the Company’s practices. The outcome of these disputes is currently unpredictable.
However, at this time, based on their present status and the existence of the reinsurance agreements with ALIC related to policy liabilities, it is the opinion of management that the ultimate liability, if any, in one or more of the actions described in this “Other Matters” subsection in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial condition of the Company.
9
4. Other Comprehensive Income
The components of other comprehensive income on a pretax and after-tax basis are as follows:
|
| Three Months Ended June 30, |
| ||||||||||||||||
(in thousands) |
| 2005 |
| 2004 |
| ||||||||||||||
|
|
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|
|
| After- |
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|
|
|
| After- |
| ||||||
|
| Pretax |
| Tax |
| tax |
| Pretax |
| Tax |
| tax |
| ||||||
Unrealized holding gains (losses) arising during the period |
| $ | 5,995 |
| $ | (2,097 | ) | $ | 3,898 |
| $ | (9,923 | ) | $ | 3,473 |
| $ | (6,450 | ) |
Less: reclassification adjustments |
| (22 | ) | 8 |
| (14 | ) | — |
| — |
| — |
| ||||||
Other comprehensive income (loss) |
| $ | 6,017 |
| $ | (2,105 | ) | 3,912 |
| $ | (9,923 | ) | $ | 3,473 |
| (6,450 | ) | ||
|
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|
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|
| ||||||
Net income |
|
|
|
|
| 2,216 |
|
|
|
|
| 1,816 |
| ||||||
Comprehensive income (loss) |
|
|
|
|
| $ | 6,128 |
|
|
|
|
| $ | (4,634 | ) |
|
| Six Months Ended June 30, |
| ||||||||||||||||
(in thousands) |
| 2005 |
| 2004 |
| ||||||||||||||
|
|
|
|
|
| After- |
|
|
|
|
| After- |
| ||||||
|
| Pretax |
| Tax |
| Tax |
| Pretax |
| Tax |
| tax |
| ||||||
Unrealized holding gains (losses) arising during the period |
| $ | 447 |
| $ | (156 | ) | $ | 291 |
| $ | (6,181 | ) | $ | 2,163 |
| $ | (4,018 | ) |
Less: reclassification adjustments |
| (117 | ) | 41 |
| (76 | ) | — |
| — |
| — |
| ||||||
Other comprehensive income (loss) |
| $ | 564 |
| $ | (197 | ) | 367 |
| $ | (6,181 | ) | $ | 2,163 |
| (4,018 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
| 4,342 |
|
|
|
|
| 3,622 |
| ||||||
Comprehensive income (loss) |
|
|
|
|
| $ | 4,709 |
|
|
|
|
| $ | (396 | ) |
10
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
OVERVIEW
The following discussion highlights significant factors influencing the financial position and results of operations of Lincoln Benefit Life Company (referred to in this document as “we”, “our”, “us” or the “Company”). It should be read in conjunction with the condensed financial statements and 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. Item 7. and Item 8. of the Lincoln Benefit Life Company Annual Report on Form 10-K for 2004. We operate as a single segment entity, consistent with the way in which we use financial information to evaluate performance and to determine the allocation of resources.
OPERATIONS
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net investment income |
| $ | 3,429 |
| $ | 2,791 |
| $ | 6,790 |
| $ | 5,565 |
|
Realized capital gains and losses |
| (22 | ) | — |
| (117 | ) | — |
| ||||
Income tax expense |
| (1,191 | ) | (975 | ) | (2,331 | ) | (1,943 | ) | ||||
Net income |
| $ | 2,216 |
| $ | 1,816 |
| $ | 4,342 |
| $ | 3,622 |
|
We have reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and certain expenses are ceded to Allstate Life Insurance Company (“ALIC”) and certain non-affiliated reinsurers, and reflected net of such reinsurance in the Condensed Statements of Operations. Our results of operations include net investment income and realized capital gains and losses on our assets that are not transferred under the reinsurance agreements.
Net income increased 22.0% in the three months ended June 30, 2005 and 19.9% in the first six months of 2005 compared to the same periods in 2004. The increases were due to improved net investment income, partially offset by realized capital losses recorded in the current period.
Net investment income increased 22.9% in the three months ended June 30, 2005 and 22.0% in the first six months of 2005 compared to the same periods of 2004. The increases in both periods were primarily due to the effect of higher portfolio balances, partially offset by lower portfolio yields. Higher portfolio balances resulted from a capital contribution from ALIC in 2004 and the investment of cash flows from operating activities. Lower portfolio yields were due to purchases, including reinvestments, of fixed income securities with yields lower than the current portfolio average.
Realized capital losses of $22 thousand and $117 thousand were recorded in the second quarter and for the first six months of 2005, respectively, resulting from sales of fixed income securities.
11
FINANCIAL POSITION
(in thousands) |
| June 30, |
| December 31, |
| ||
|
| 2005 |
| 2004 |
| ||
Fixed income securities (1) |
| $ | 267,818 |
| $ | 242,799 |
|
Short-term |
| 4,553 |
| 30,408 |
| ||
Total investments |
| $ | 272,371 |
| $ | 273,207 |
|
|
|
|
|
|
| ||
Cash |
| $ | 21,126 |
| $ | 10,532 |
|
|
|
|
|
|
| ||
Reinsurance recoverable from ALIC |
| 17,865,257 |
| 17,083,056 |
| ||
|
|
|
|
|
| ||
Reinsurance recoverable from non-affiliates |
| 919,413 |
| 839,738 |
| ||
|
|
|
|
|
| ||
Contractholder funds |
| 17,002,871 |
| 16,231,489 |
| ||
|
|
|
|
|
| ||
Reserve for life-contingent contract benefits |
| 1,763,049 |
| 1,671,729 |
| ||
|
|
|
|
|
| ||
Separate Accounts assets and liabilities |
| 2,455,496 |
| 2,368,312 |
|
(1) Fixed income securities are carried at fair value. Amortized cost basis for these securities was $258.8 million and $234.4 million at June 30, 2005 and December 31, 2004, respectively.
Total investments of $272.4 million at June 30, 2005 were slightly down from $273.2 million at December 31, 2004 as cash inflows from operating activities were yet to be invested at June 30, 2005.
At June 30, 2005, 100% of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating from the National Association of Insurance Commissioners (“NAIC”) of 1 or 2, a Moody’s equivalent rating of Aaa, Aa, A or Baa; an S&P equivalent rating of AAA, AA, A or BBB; or a comparable internal rating when an external rating is not available.
The unrealized net capital gains on fixed income securities at June 30, 2005 were $9.0 million, an increase of $564 thousand or 6.7% since December 31, 2004. The net unrealized gain was comprised of $9.8 million of unrealized gains and $841 thousand of unrealized losses at June 30, 2005. This is compared to a net unrealized gain for the fixed income portfolio totaling $8.4 million at December 31, 2004, comprised of $9.7 million of unrealized gains and $1.3 million of unrealized losses. Of the gross unrealized losses in the fixed income portfolio, 56.2% were concentrated in the corporate fixed income portfolio. The losses were primarily comprised of securities in the capital goods, transportation and financial services sectors. The gross unrealized losses in these sectors were primarily interest rate related. While we expect eventual recovery of these securities and the related sectors, we included every security in our portfolio monitoring process.
Our portfolio monitoring process identifies and evaluates fixed income securities whose carrying value may be other than temporarily impaired. The 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 for certain time periods, or which are identified through other monitoring criteria such as ratings downgrades or payment defaults. We also recognize impairment on securities in an unrealized loss position for which we do not have the intent and ability to hold until recovery.
We also monitor the quality of our fixed income portfolio by categorizing certain investments as “problem”, “restructured” or “potential problem.” Problem fixed income securities are securities in default with respect to principal or interest and/or securities issued by companies that have gone into bankruptcy subsequent to our acquisition of the security. Restructured fixed income securities have rates and terms that are not consistent with market rates or terms prevailing 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, we have serious concerns regarding the borrower’s ability to pay future principal and interest, which causes us to believe these securities may be classified as problem or restructured in the future.
12
As of June 30, 2005 and December 31, 2004, we had no securities categorized as “problem”, “restructured” or “potential problem.”
While we may classify securities as “problem”, “restructured” or “potential problem” in the future, particularly if economic conditions are unfavorable, we expect that the total amount of securities in these categories would be low relative to the total fixed income securities portfolio.
Net Realized Capital Gains and Losses The following table presents the components of realized capital gains and losses and the related tax effect.
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
(in thousands) |
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Dispositions |
| $ | (22 | ) | $ | — |
| $ | (117 | ) | $ | — |
|
Realized capital gains and losses, pretax |
| (22 | ) | — |
| (117 | ) | — |
| ||||
Income tax benefit |
| 8 |
| — |
| 41 |
| — |
| ||||
Realized capital gains and losses, after-tax |
| $ | (14 | ) | $ | — |
| $ | (76 | ) | $ | — |
|
Dispositions in the above table include sales and other transactions such as calls and prepayments. We may sell securities during the period in which fair value has declined below amortized cost. Recognizing in certain situations new factors such as negative developments, subsequent credit deterioration, relative value opportunities, market liquidity concerns and portfolio reallocations, we can subsequently change our previous intent to continue holding a security.
Reinsurance recoverable, Contractholder funds and Reserve for life-contingent contract benefits
Contractholder funds increased $771.4 million to $17.0 billion at June 30, 2005, from $16.23 billion at December 31, 2004 as a result of deposits from fixed annuities and interest-sensitive life policies, and interest credited to contractholder funds, partially offset by surrenders, withdrawals, benefit payments and contract charges. The reserve for life-contingent contract benefits increased $91.3 million to $1.76 billion at June 30, 2005 resulting from sales of immediate annuities with life contingencies and traditional life products. Correspondingly, reinsurance recoverable from ALIC and reinsurance recoverable from non-affiliates increased by $782.2 million and $79.7 million, respectively, during the first six months of 2005 since all contractholder obligations are reinsured.
We purchase reinsurance after evaluating the financial condition of the reinsurer, as well as the terms and price of coverage. We reinsure certain of our risks to non-affiliated reinsurers under yearly renewable term and coinsurance agreements. Yearly renewable term and coinsurance agreements result in passing the agreed-upon portion of risk to the reinsurers in exchange for negotiated reinsurance premium payments.
13
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources consist of shareholder’s equity. The following table summarizes our capital resources:
(in thousands) |
| June 30, 2005 |
| December 31, 2004 |
| ||
Common stock, additional capital paid-in and retained income |
| $ | 264,099 |
| $ | 259,757 |
|
Accumulated other comprehensive income |
| 5,846 |
| 5,479 |
| ||
Total shareholder’s equity |
| $ | 269,945 |
| $ | 265,236 |
|
Shareholder’s equity increased for the first six months of 2005 when compared to December 31, 2004, due to net income and, to a much lesser extent, higher net unrealized capital gains.
Financial Ratings and Strength We share the insurance financial strength ratings of our parent, ALIC, as our business is reinsured to ALIC. ALIC’s ratings are influenced by many factors including operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage (i.e., debt), and exposure to risks such as the current level of operating leverage. There have been no changes in ALIC’s insurance financial strength ratings since December 31, 2004.
14
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. During the fiscal quarter ended June 30, 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Information required for this Part II, Item 1, is incorporated by reference to the discussion under the heading “Regulation” and under the heading “Legal and Regulatory Proceedings and Inquires” in Note 3 of the Company’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1.
15
SIGNATURE
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.
| Lincoln Benefit Life Company | ||
|
| ||
| (Registrant) | ||
August 8, 2005 |
| ||
|
| ||
| By | /s/ Samuel H. Pilch |
|
|
| ||
| Samuel H. Pilch | ||
| Controller | ||
| (chief accounting officer and duly authorized |
16
Exhibit No. |
| Description | |
|
|
| |
31.1 |
|
| Rule 15d-14(a) Certification of Principal Executive Officer |
|
|
|
|
31.2 |
|
| Rule 15d-14(a) Certification of Principal Financial Officer |
|
|
|
|
32 |
|
| Section 1350 Certifications |
E-1