As Filed with the Securities and Exchange Commission on March 27, 2012
File No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LINCOLN BENEFIT LIFE COMPANY
(Exact name of Registrant as Specified in its Charter)
Nebraska 6300 470221457
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2940 South 84th St., Lincoln, Nebraska 68506
1-800-525-9287
(Address of registrant's principal executive offices)
JAN FISCHER-WADE
LINCOLN BENEFIT LIFE COMPANY
2940 South 84th St.
LINCOLN, NE 68506
1-800-525-9287
(Name of agent for service)
Approximate date of commencement of proposed sale to the Public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
CALCULATION OF REGISTRATION FEE
Proposed maximum Proposed maximum
Title of securities Amount to be offering price aggregate offering Amount of
to be registered registered per unit (1) price registration fee
------------------- -------------- ---------------- ------------------ ------------------
Deferred annuity $ 2,000,000 $ 1.00 $ 2,000,000 $ 229.20
interests and
participating
interests therein
(1) The Contract does not provide for a predetermined amount or number of units.
This filing is being made under the Securities Act of 1933 to register
$2,000,000 of deferred annuity interests and participating interests therein.
Under rule 457(o) under the Securities Act of 1933, the filing fee set forth
above was calculated based on the maximum aggregate offering price of
$2,000,000. In addition to the new securities referenced above that we are
registering herewith, we are carrying over to this registration statement
$8,000,000 of unsold securities from registration #333-158180 filed on March 24,
2009, for which the filing fee of $446.00 previously was paid (originally filed
as an S-3 registration statement on March 24, 2009, and amended on June 18,
2009, to change to an S-1 registration statement). In accordance with Rule
415(a)(6), the offering of securities on the earlier registration statement will
be deemed terminated as of the effective date of this registration statement.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Neither the Securities and Exchange Commission nor any State securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
ALFS, Inc ("ALFS") merged into Allstate Distributors, LLC ("ADLLC"), effective
September 1, 2011. ALFS assigned its rights and delegated its duties as
principal underwriter to ADLLC. This change had no effect on Lincoln Benefit
Life Company's obligations under the Contract.
ADLLC serves as distributor of the securities registered herein. The securities
offered herein are sold on a continuous basis, and there is no specific end date
for the offering. ADLLC, an affiliate of Lincoln Benefit, is a wholly owned
subsidiary of Allstate Life Insurance Company. ADLLC is a registered broker
dealer under the Securities and Exchange Act of 1934, as amended, and is a
member of the Financial Industry Regulatory Authority. ADLLC is not required to
sell any specific number or dollar amount of securities, but will use its best
efforts to sell the securities offered. Commissions earned by ADLLC are
described in the notes to the insurer financial statements, under the heading
"Broker-Dealer Agreements." The prospectuses, dated as of the date indicated
therein, by which the securities registered in this Form S-1 are described, are
included in this registration statement.
LINCOLN BENEFIT LIFE COMPANY
Supplement Dated May 1, 2012
To the following Prospectuses, as supplemented
CONSULTANT SOLUTIONS (CLASSIC, PLUS, ELITE, SELECT) PROSPECTUS DATED MAY 1, 2012
CONSULTANT I PROSPECTUS DATED MAY 1, 2012
LBL ADVANTAGE PROSPECTUS DATED MAY 1, 2004
CONSULTANT II PROSPECTUS DATED MAY 1, 2004
PREMIER PLANNER PROSPECTUS DATED MAY 1, 2004
The following information supplements the prospectus for your variable annuity contract issued by Lincoln Benefit Life Company.
SUPPLEMENTAL INFORMATION
ABOUT LINCOLN BENEFIT LIFE COMPANY
| Page | ||||||
| Item 3(c) | 1 | |||||
| Item 11(a) | 8 | |||||
| Item 11(b) | 9 | |||||
| Item 11(c) | 9 | |||||
| Item 11(e) | 9 | |||||
| Item 11(f) | 41 | |||||
| Item 11(h) | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 41 | ||||
| Item 11(j) | 54 | |||||
| Item 11(k) | Directors, Executive Officers, Promoters and Control Persons | 54 | ||||
| Item 11(l) | 56 | |||||
| Item 11(m) | Security Ownership of Certain Beneficial Owners and Management | 80 | ||||
| Item 11(n) | Transactions with Related Persons, Promoters and Certain Control Persons | 81 | ||||
| 85 | ||||||
This document contains “forward-looking statements” that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments.
These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like “plans,” “seeks,” “expects,” “will,” “should,” “anticipates,” “estimates,” “intends,” “believes,” “likely,” “targets” and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements.
In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below, which apply to us as an insurer and a provider of other financial services. These risks
constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and historical trends. These cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this document, in our filings with the Securities and Exchange Commission (“SEC”) or in materials incorporated therein by reference.
Changes in underwriting and actual experience could materially affect profitability of business ceded to Allstate Life Insurance Company (“ALIC”)
Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business, which is ceded to ALIC. We establish target returns for each product based upon these factors and the average amount of capital that we and ALIC must hold to support in-force contracts taking into account rating agencies and regulatory requirements. We monitor and manage our pricing and overall sales mix to achieve target new business returns on a portfolio basis, which could result in the discontinuation or de-emphasis of products or distribution relationships and a decline in sales. Profitability from new business emerges over a period of years depending on the nature and life of the product and is subject to variability as actual results may differ from pricing assumptions. Additionally, many of our products have fixed or guaranteed terms that limit our ability to increase revenues or reduce benefits, including credited interest, once the product has been issued.
ALIC’s profitability depends on the adequacy of investment spreads, the management of market and credit risks associated with investments, the sufficiency of premiums and contract charges to cover mortality and morbidity benefits, the persistency of policies to ensure recovery of acquisition expenses, and the management of operating costs and expenses within anticipated pricing allowances. Legislation and regulation of the insurance marketplace and products could also affect the profitability of our business ceded to ALIC.
Changes in reserve estimates may adversely affect our operating results ceded to ALIC
The reserve for life-contingent contract benefits is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, persistency and expenses. We periodically review the adequacy of these reserves on an aggregate basis and if future experience differs significantly from assumptions, adjustments to reserves may be required which could have a material effect on our operating results ceded to ALIC.
Changes in market interest rates may lead to a significant decrease in the sales and profitability of spread-based products ceded to ALIC
Our ability to manage our fixed annuities is dependent upon maintaining profitable spreads between investment yields and interest crediting rates on business ceded to ALIC. When market interest rates decrease or remain at relatively low levels, proceeds from investments that have matured or have been prepaid or sold may be reinvested at lower yields, reducing investment spread. Lowering interest crediting rates on some products in such an environment can partially offset decreases in investment yield. However, these changes could be limited by market conditions, regulatory minimum rates or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in investment yields. Decreases in the interest crediting rates offered on products could make those products less attractive, leading to lower sales and/or changes in the level of policy loans, surrenders and withdrawals. Non-parallel shifts in interest rates, such as increases in short-term rates without accompanying increases in medium- and long-term rates, can influence customer demand for fixed annuities, which could impact the level and profitability of new customer deposits. Increases in market interest rates can also have negative effects on the business ceded to ALIC, for example by increasing the attractiveness of other investments to our customers, which can lead to increased surrenders at a time when ALIC’s fixed income investment asset values are lower as a result of the increase in interest rates. This could lead to the sale of fixed income securities at a loss. For certain products, principally fixed annuity and interest-sensitive life
2
products, the earned rate on assets could lag behind rising market yields. We may react to market conditions by increasing crediting rates, which could narrow spreads and reduce profitability on the business ceded to ALIC.
Changes in tax laws may decrease sales and profitability of products ceded to ALIC
Under current federal and state income tax law, certain products we offer, primarily life insurance and annuities, receive favorable tax treatment. This favorable treatment may give certain of our products a competitive advantage over noninsurance products. Congress and various state legislatures from time to time consider legislation that would reduce or eliminate the favorable policyholder tax treatment currently applicable to life insurance and annuities. Congress and various state legislatures also consider proposals to reduce the taxation of certain products or investments that may compete with life insurance or annuities. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of our products making them less competitive. Such proposals, if adopted, could have a material effect on ALIC’s profitability and financial condition or our ability to sell such products and could result in the surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning.
Risks Relating to Investments
We are subject to market risk and declines in credit quality which may adversely affect investment income, cause additional realized losses, and cause increased unrealized losses
We are subject to the risk that we will incur losses due to adverse changes in interest rates or credit spreads. Adverse changes to these rates and spreads may occur due to changes in fiscal policy and the economic climate, the liquidity of a market or market segment, insolvency or financial distress of key market makers or participants, or changes in market perceptions of credit worthiness and/or risk tolerance. We are subject to risks associated with potential declines in credit quality related to specific issuers or specific industries and a general weakening in the economy, which are typically reflected through credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. Credit spreads vary (i.e. increase or decrease) in response to the market’s perception of risk and liquidity in a specific issuer or specific sector and are influenced by the credit ratings, and the reliability of those ratings, published by external rating agencies. A decline in the quality of our investment portfolio as a result of adverse economic conditions or otherwise could cause additional realized and unrealized losses on securities.
A decline in market interest rates or credit spreads could have an adverse effect on our investment income as we invest cash in new investments that may earn less than the portfolio’s average yield. In a declining interest rate environment, borrowers may prepay or redeem securities more quickly than expected as they seek to refinance at lower rates. An increase in market interest rates or credit spreads could have an adverse effect on the value of our investment portfolio by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio.
Deteriorating financial performance impacting securities collateralized by residential and commercial mortgage loans may lead to write-downs and impact our results of operations and financial condition
Changes in residential or commercial mortgage delinquencies, loss severities or recovery rates, declining residential or commercial real estate prices and the quality of service provided by service providers on securities in our portfolio could lead us to determine that write-downs are necessary in the future.
Concentration of our investment portfolio in any particular segment of the economy may have adverse effects on our operating results and financial condition
The concentration of our investment portfolio in any particular industry, collateral type, group of related industries, geographic sector or risk type could have an adverse effect on our investment portfolio and
3
consequently on our results of operations and financial condition. Events or developments that have a negative impact on any particular industry, group of related industries or geographic region may have a greater adverse effect on the investment portfolio to the extent that the portfolio is concentrated rather than diversified.
The determination of the amount of realized capital losses recorded for impairments of our investments is subjective and could materially impact our operating results and financial condition
The determination of the amount of realized capital losses recorded for impairments vary by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in other-than-temporary impairments in our results of operations. The assessment of whether other-than-temporary impairments have occurred is based on our case-by-case evaluation of the underlying reasons for the decline in fair value. There can be no assurance that we have accurately assessed the level of or amounts recorded for other-than-temporary impairments taken in our financial statements. Furthermore, historical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future.
The determination of the fair value of our fixed income securities is subjective and could materially impact our operating results and financial condition
In determining fair values we generally utilize market transaction data for the same or similar instruments. The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information. The fair value of assets may differ from the actual amount received upon sale of an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the assets’ fair values. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of accumulated other comprehensive income in shareholder’s equity. Changing market conditions could materially affect the determination of the fair value of securities and unrealized net capital gains and losses could vary significantly. Determining fair value is subjective and could materially impact our operating results and financial condition.
Risks Relating to the Insurance Industry
Our future results are dependent in part on our ability to successfully operate in an insurance industry that is highly competitive
The insurance industry is highly competitive. Our competitors include other insurers and, because some of our products include a savings or investment component, securities firms, investment advisers, mutual funds, banks and other financial institutions. Many of our competitors have well-established national reputations and market similar products. Because of the competitive nature of the insurance industry, including competition for producers such as exclusive and independent agents, there can be no assurance that we will continue to effectively compete with our industry rivals, or that competitive pressures will not have a material effect on our business or operating results ceded to ALIC. Furthermore, certain competitors operate using a mutual insurance company structure and therefore may have dissimilar profitability and return targets. Our ability to successfully operate may also be impaired if we are not effective in filling critical leadership positions, in developing the talent and skills of our human resources, in assimilating new executive talent into our organization, or in deploying human resource talent consistently with our business goals.
Difficult conditions in the global capital markets and the economy generally could adversely affect our business and operating results and these conditions may not improve in the near future
As with most businesses, we believe difficult conditions in the global capital markets and economy, such as significant negative macroeconomic trends, including relatively high and sustained unemployment, reduced
4
consumer spending, lower home prices, substantial increases in delinquencies on consumer debt, including defaults on home mortgages, and the relatively low availability of credit could have an adverse effect on our business and operating results.
Stressed conditions, volatility and disruptions in global capital markets, particular markets or financial asset classes could adversely affect our investment portfolio. Disruptions in one market or asset class can also spread to other markets or asset classes. Although the disruption in the global financial markets has moderated, not all global financial markets are functioning normally, and the rate of recovery from the U.S. recession has been below historic averages. Several governments around the world have announced austerity actions to address their budget deficits that may lead to a decline in economic activity. Specifically, the global recession and disruption of the financial markets has led to concerns over capital markets access and the solvency of European Union member states.
General economic conditions could adversely affect us in the form of consumer behavior and pressure investment results. Consumer behavior changes could include decreased demand for our products. In addition, holders of some of our interest-sensitive life insurance and annuity products may engage in an elevated level of discretionary withdrawals of contractholder funds. Our investment results could be adversely affected as deteriorating financial and business conditions affect the issuers of the securities in our investment portfolio.
There can be no assurance that actions of the U.S. federal government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets and stimulating the economy will achieve the intended effect
In response to the financial crises affecting the banking system, the financial markets and the broader economy in recent years, the U.S. federal government, the Federal Reserve and other governmental and regulatory bodies have taken actions such as purchasing mortgage-backed and other securities from financial institutions, investing directly in banks, thrifts and bank and savings and loan holding companies and increasing federal spending to stimulate the economy. There can be no assurance as to the long term impact such actions will have on the financial markets or on economic conditions, including potential inflationary affects. Continued volatility and any further economic deterioration could materially and adversely affect our business, financial condition and results of operations.
Losses from legal and regulatory actions may be material to our operating results or cash flows ceded to ALIC
As is typical for a large company, our ultimate parent The Allstate Corporation and its subsidiaries are involved in various legal actions, including class action litigation challenging a range of company practices and coverage provided by our insurance products, some of which involve claims for substantial or indeterminate amounts. We are also involved in various regulatory actions and inquiries, including market conduct exams by state insurance regulatory agencies. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently accrued and may be material to our operating results or cash flows ceded to ALIC for a particular annual period.
We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs and limit our growth
As an insurance company with separate accounts that are regulated as investment companies, we are subject to extensive laws and regulations. These laws and regulations are complex and subject to change. Changes may sometimes lead to additional expenses, increased legal exposure or limit our ability to grow. Moreover, laws and regulations are administered and enforced by a number of different governmental authorities, each of which exercises a degree of interpretive latitude, including state insurance regulators; state securities administrators; state attorneys general; and federal agencies including the SEC, the FINRA and the U.S. Department of Justice. Consequently, we are subject to the risk that compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same
5
issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to our detriment, or that changes in the overall legal environment may, even absent any particular regulator’s or enforcement authority’s interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow or to improve the profitability of our business ceded to ALIC. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. For example, state insurance laws and regulations are generally intended to protect or benefit purchasers or users of insurance products. In many respects, these laws and regulations limit our ability to grow or to improve the profitability of our business ceded to ALIC.
Regulatory reforms, and the more stringent application of existing regulations, may make it more expensive for us to conduct our business
The federal government has enacted comprehensive regulatory reforms for financial services entities. As part of a larger effort to strengthen the regulation of the financial services market, certain reforms are applicable to the insurance industry, including the Federal Insurance Office (“FIO”) established within the Treasury Department.
In recent years, the state insurance regulatory framework has come under public scrutiny, members of Congress have discussed proposals to provide for federal chartering of insurance companies, and FIO and the Financial Stability Oversight Council (“FSOC”) were established. We can make no assurances regarding the potential impact of state or federal measures that may change the nature or scope of insurance and financial regulation.
These regulatory reforms and any additional legislative change or regulatory requirements imposed upon us in connection with the federal government’s regulatory reform of the financial services industry, and any more stringent enforcement of existing regulations by federal authorities, may make it more expensive for us to conduct our business, or limit our ability to grow.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business
Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as is currently available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, either ALIC would have to accept an increase in exposure risk, or we would have to reduce our insurance writings, or develop or seek other alternatives.
Reinsurance subjects us to the credit risk of our reinsurers and may not be adequate to protect us against losses arising from ceded insurance, which could have a material effect on our operating results ceded to ALIC
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Our inability to collect a material recovery from a reinsurer could have a material effect on operating results ceded to ALIC.
A large scale pandemic, the continued threat of terrorism or ongoing military actions may have an adverse effect on the level of claim losses we incur and cede to ALIC, the value of our investment portfolio, our competitive position, marketability of product offerings, liquidity and operating results
A large scale pandemic, the continued threat of terrorism, within the United States and abroad, or ongoing military and other actions, and heightened security measures in response to these types of threats, may cause
6
significant volatility and losses in our investment portfolio from declines in the equity markets and from interest rate changes in the United States, Europe and elsewhere, and result in loss of life, disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by reduced economic activity caused by a large scale pandemic or the continued threat of terrorism. Additionally, a large scale pandemic or terrorist act could have a material effect on the sales, profitability, competitiveness, marketability of product offerings, liquidity, and operating results.
A downgrade in ALIC’s financial strength ratings may have an adverse effect on our competitive position, the marketability of our product offerings, and our liquidity and operating results ceded to ALIC
Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company’s business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer’s ratings due to, for example, a change in an insurer’s statutory capital; a change in a rating agency’s determination of the amount of risk-adjusted capital required to maintain a particular rating; an increase in the perceived risk of an insurer’s investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be under the insurer’s control. The insurance financial strength ratings of ALIC from A.M. Best, Standard & Poor’s and Moody’s are subject to continuous review, and the retention of current ratings cannot be assured. A downgrade in any of these ratings could have a material effect on our sales, our competitiveness, the marketability of our product offerings, and our liquidity and operating results ceded to ALIC.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our results of operations and financial condition
Our financial statements are subject to the application of generally accepted accounting principles, which are periodically revised, interpreted and/or expanded. Accordingly, we are required to adopt new guidance or interpretations, or could be subject to existing guidance as we enter into new transactions, which may have a material effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected. For a description of changes in accounting standards that are currently pending and, if known, our estimates of their expected impact, see Note 2 of the financial statements.
The change in our unrecognized tax benefit during the next 12 months is subject to uncertainty
We have disclosed our estimate of net unrecognized tax benefits and the reasonably possible increase or decrease in its balance during the next 12 months in Note 10 of the financial statements. However, actual results may differ from our estimate for reasons such as changes in our position on specific issues, developments with respect to the governments’ interpretations of income tax laws or changes in judgment resulting from new information obtained in audits or the appeals process.
The occurrence of events unanticipated in our disaster recovery systems and management continuity planning or a support failure from external providers during a disaster could impair our ability to conduct business effectively
The occurrence of a disaster such as a natural catastrophe, an industrial accident, a terrorist attack or war, cyber attack, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations ceded to ALIC and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems. In the event that a significant number of our managers could be unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
7
Item 11(a). Description of Business
Lincoln Benefit Life Company (“Lincoln Benefit”) was incorporated under the laws of the State of Nebraska in 1938. Lincoln Benefit is a wholly owned subsidiary of Allstate Life Insurance Company (“ALIC”), a stock life insurance company incorporated under the laws of the State of Illinois. ALIC is a wholly owned subsidiary of Allstate Insurance Company (“AIC”), a stock property-liability insurance company organized under the laws of the State of Illinois. All of the outstanding stock of Allstate Insurance Company is owned by Allstate Insurance Holdings, LLC, which is wholly owned by The Allstate Corporation (the “Corporation” or “Allstate”), a publicly owned holding company incorporated under the laws of the State of Delaware. The Allstate Corporation is the largest publicly held personal lines insurer in the United States. Widely known through the “You’re In Good Hands With Allstate®” slogan, Allstate is reinventing protection and retirement to help individuals in approximately 16 million households protect what they have today and better prepare for tomorrow. Customers can access Allstate products and services such as auto insurance and homeowners insurance through nearly 12,000 exclusive Allstate agencies and financial representatives in the United States and Canada. Allstate is the 2nd largest personal property and casualty insurer in the United States on the basis of 2010 statutory direct premiums earned. In addition, according to A.M. Best, it is the nation’s 16th largest issuer of life insurance business on the basis of 2010 ordinary life insurance in force and 21st largest on the basis of 2010 statutory admitted assets.
In our reports, we occasionally refer to statutory financial information. All domestic United States insurance companies are required to prepare statutory-basis financial statements. As a result, industry data is available that enables comparisons between insurance companies, including competitors that are not subject to the requirement to prepare financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We frequently use industry publications containing statutory financial information to assess our competitive position.
We provide life insurance, retirement and investment products. Our principal products are interest-sensitive, traditional and variable life insurance, and fixed annuities including deferred and immediate. We sell products through multiple intermediary distribution channels, including Allstate exclusive agencies and exclusive financial specialists, independent agents (including master brokerage agencies) and directly through call centers and the internet.
We compete on a wide variety of factors, including the scope of our distribution systems, the type of our product offerings, the recognition of our brands, our financial strength and ratings, our differentiated product features and prices, and the level of customer service that we provide.
The market for life insurance, retirement and investment products continues to be highly fragmented and competitive. As of December 31, 2011, there were approximately 450 groups of life insurance companies in the United States, most of which offered one or more similar products. In addition, because many of these products include a savings or investment component, our competition includes domestic and foreign securities firms, investment advisors, mutual funds, banks and other financial institutions. Competitive pressure continues to grow due to several factors, including cross marketing alliances between unaffiliated businesses, as well as consolidation activity in the financial services industry.
We have reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are ceded to ALIC and non-affiliated reinsurers. Assets that support general account product liabilities are owned and managed by ALIC under the terms of the reinsurance agreements.
Lincoln Benefit is subject to extensive regulation, primarily at the state level. The method, extent and substance of such regulation varies by state but generally has its source in statutes that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to a state agency. In
8
general, such regulation is intended for the protection of those who purchase or use insurance products. These rules have a substantial effect on our business and relate to a wide variety of matters, including insurer solvency, reserve adequacy, insurance company licensing and examination, agent licensing, policy forms, price setting, the nature and amount of investments, claims practices, participation in guaranty funds, transactions with affiliates, the payment of dividends, underwriting standards, statutory accounting methods, trade practices, and corporate governance. For a discussion of statutory financial information, see Note 11 of the financial statements. For a discussion of regulatory contingencies, see Note 9 of the financial statements. Notes 9 and 11 are incorporated in this Item 11(a) by reference.
For the fiscal year ended December 31, 2011
In recent years, the state insurance regulatory framework has come under increased federal scrutiny. As part of an effort to strengthen the regulation of the financial services market, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was enacted in 2010. Hundreds of regulations must still be promulgated and implemented pursuant to this new law, and we cannot predict what the final regulations will require but do not expect a material impact on Lincoln Benefit’s operations. The new law also created the FIO within the Treasury Department. The FIO will monitor the insurance industry, provide advice to the new FSOC, represent the U.S. on international insurance matters and study the current regulatory system and submit a report to Congress in 2012. In addition, state legislators and insurance regulators continue to examine the appropriate nature and scope of state insurance regulation. We cannot predict whether any specific state or federal measures will be adopted to change the nature or scope of the regulation of insurance or what effect any such measures would have on Lincoln Benefit.
Item 11(b). Description of Property
Lincoln Benefit occupies office space in Lincoln, Nebraska and Northbrook, Illinois that is owned by Allstate Insurance Company. Expenses associated with these facilities are allocated to us on a direct basis.
Information required for Item 11(c) is incorporated by reference to the discussion under the heading “Regulation and Compliance” in Note 9 of the financial statements.
Item 11(e). Financial Statements and Notes to Financial Statements
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Revenues | ||||||||||||
Net investment income | $ | 11,836 | $ | 12,067 | $ | 11,783 | ||||||
Realized capital gains and losses | 2,075 | 694 | 1,480 | |||||||||
|
|
|
|
|
| |||||||
Income from operations before income tax expense | 13,911 | 12,761 | 13,263 | |||||||||
Income tax expense | 4,861 | 4,451 | 4,634 | |||||||||
|
|
|
|
|
| |||||||
Net income | 9,050 | 8,310 | 8,629 | |||||||||
|
|
|
|
|
| |||||||
Other comprehensive income, after-tax | ||||||||||||
Change in unrealized net capital gains and losses | 3,411 | 4,584 | 5,783 | |||||||||
|
|
|
|
|
| |||||||
Comprehensive income | $ | 12,461 | $ | 12,894 | $ | 14,412 | ||||||
|
|
|
|
|
| |||||||
See notes to financial statements.
9
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF FINANCIAL POSITION
| December 31, | ||||||||
| ($ in thousands, except par value data) | 2011 | 2010 | ||||||
Assets | ||||||||
Investments | ||||||||
Fixed income securities, at fair value (amortized cost $312,785 and $304,848) | $ | 333,640 | $ | 320,456 | ||||
Short-term, at fair value (amortized cost $12,974 and $11,593) | 12,974 | 11,593 | ||||||
|
|
|
| |||||
Total investments | 346,614 | 332,049 | ||||||
Cash | 6,006 | 3,550 | ||||||
Reinsurance recoverable from Allstate Life Insurance Company | 16,680,950 | 18,365,058 | ||||||
Reinsurance recoverable from non-affiliates | 2,043,480 | 1,906,574 | ||||||
Receivable from affiliates, net | 8,563 | — | ||||||
Other assets | 95,826 | 105,159 | ||||||
Separate Accounts | 1,682,128 | 2,017,185 | ||||||
|
|
|
| |||||
Total assets | $ | 20,863,567 | $ | 22,729,575 | ||||
|
|
|
| |||||
Liabilities | ||||||||
Contractholder funds | $ | 15,489,624 | $ | 17,247,071 | ||||
Reserve for life-contingent contract benefits | 3,199,490 | 3,011,317 | ||||||
Unearned premiums | 16,200 | 19,478 | ||||||
Deferred income taxes | 7,729 | 5,833 | ||||||
Payable to affiliates, net | — | 4,931 | ||||||
Current income taxes payable | 4,802 | 4,386 | ||||||
Other liabilities and accrued expenses | 125,266 | 93,507 | ||||||
Separate Accounts | 1,682,128 | 2,017,185 | ||||||
|
|
|
| |||||
Total liabilities | 20,525,239 | 22,403,708 | ||||||
|
|
|
| |||||
Commitments and Contingent Liabilities (Note 9) | ||||||||
Shareholder’s Equity | ||||||||
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 | 142,272 | 133,222 | ||||||
Accumulated other comprehensive income: | ||||||||
Unrealized net capital gains and losses | 13,556 | 10,145 | ||||||
|
|
|
| |||||
Total accumulated other comprehensive income | 13,556 | 10,145 | ||||||
|
|
|
| |||||
Total shareholder’s equity | 338,328 | 325,867 | ||||||
|
|
|
| |||||
Total liabilities and shareholder’s equity | $ | 20,863,567 | $ | 22,729,575 | ||||
|
|
|
| |||||
See notes to financial statements.
10
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF SHAREHOLDER’S EQUITY
| Year Ended December 31, | ||||||||||||
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Common stock | $ | 2,500 | $ | 2,500 | $ | 2,500 | ||||||
|
|
|
|
|
| |||||||
Additional capital paid-in | 180,000 | 180,000 | 180,000 | |||||||||
|
|
|
|
|
| |||||||
Retained income | ||||||||||||
Balance, beginning of year | 133,222 | 124,912 | 116,283 | |||||||||
Net income | 9,050 | 8,310 | 8,629 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of year | 142,272 | 133,222 | 124,912 | |||||||||
|
|
|
|
|
| |||||||
Accumulated other comprehensive income | ||||||||||||
Balance, beginning of year | 10,145 | 5,561 | (222 | ) | ||||||||
Change in unrealized net capital gains and losses | 3,411 | 4,584 | 5,783 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of year | 13,556 | 10,145 | 5,561 | |||||||||
|
|
|
|
|
| |||||||
Total shareholder’s equity | $ | 338,328 | $ | 325,867 | $ | 312,973 | ||||||
|
|
|
|
|
| |||||||
See notes to financial statements.
11
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 9,050 | $ | 8,310 | $ | 8,629 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Amortization and other non-cash items | 1,175 | 1,241 | 932 | |||||||||
Realized capital gains and losses | (2,075 | ) | (694 | ) | (1,480 | ) | ||||||
Changes in: | ||||||||||||
Policy benefit and other insurance reserves | (22,072 | ) | 4,240 | 19,349 | ||||||||
Income taxes | 476 | (205 | ) | (2,174 | ) | |||||||
Receivable/payable to affiliates, net | (13,494 | ) | (9,818 | ) | (21,280 | ) | ||||||
Other operating assets and liabilities | 37,802 | (943 | ) | 369 | ||||||||
|
|
|
|
|
| |||||||
Net cash provided by operating activities | 10,862 | 2,131 | 4,345 | |||||||||
|
|
|
|
|
| |||||||
Cash flows from investing activities | ||||||||||||
Proceeds from sales of fixed income securities | 44,880 | 27,166 | 46,330 | |||||||||
Collections on fixed income securities | 25,268 | 38,691 | 35,334 | |||||||||
Purchases of fixed income securities | (77,175 | ) | (71,478 | ) | (151,234 | ) | ||||||
Change in short-term investments, net | (1,379 | ) | (3,023 | ) | 72,143 | |||||||
|
|
|
|
|
| |||||||
Net cash (used in) provided by investing activities | (8,406 | ) | (8,644 | ) | 2,573 | |||||||
|
|
|
|
|
| |||||||
Net increase (decrease) in cash | 2,456 | (6,513 | ) | 6,918 | ||||||||
Cash at beginning of year | 3,550 | 10,063 | 3,145 | |||||||||
|
|
|
|
|
| |||||||
Cash at end of year | $ | 6,006 | $ | 3,550 | $ | 10,063 | ||||||
|
|
|
|
|
| |||||||
See notes to financial statements.
12
NOTES TO FINANCIAL STATEMENTS
1. General
Basis of presentation
The accompanying 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”). All of the outstanding common stock of AIC is owned by Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate Corporation (the “Corporation”). These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Nature of operations
The Company sells life insurance, retirement and investment products. The principal products are interest-sensitive, traditional and variable life insurance, and fixed annuities including deferred and immediate.
The Company is authorized to sell life insurance and retirement products in all states except New York, as well as in the District of Columbia, the U.S. Virgin Islands and Guam. For 2011, the top geographic locations for statutory premiums and annuity considerations were California, Texas and Florida. No other jurisdiction accounted for more than 5% of statutory premiums and annuity considerations. All statutory premiums and annuity considerations are ceded under reinsurance agreements. The Company distributes its products through multiple distribution channels, including Allstate exclusive agencies and exclusive financial specialists, independent agents (including master brokerage agencies) and directly through call centers and the internet.
The Company has exposure to market risk as a result of its investment portfolio. Market risk is the risk that the Company will incur realized and unrealized net capital losses due to adverse changes in interest rates and credit spreads. The Company also has certain exposures to changes in equity prices in its equity-indexed annuities and separate accounts liabilities, which are transferred to ALIC in accordance with reinsurance agreements. Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of its interest bearing assets. This risk arises from the Company’s investment in interest-sensitive assets. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields. Credit spread risk is the risk that the Company will incur a loss due to adverse changes in credit spreads. This risk arises from the Company’s investment in spread-sensitive fixed income assets.
The Company monitors economic and regulatory developments that have the potential to impact its business. Federal and state laws and regulations affect the taxation of insurance companies and life insurance and annuity products. Congress and various state legislatures from time to time consider legislation that would reduce or eliminate the favorable policyholder tax treatment currently applicable to life insurance and annuities. Congress and various state legislatures also consider proposals to reduce the taxation of certain products or investments that may compete with life insurance or annuities. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of the Company’s products making them less competitive. Such proposals, if adopted, could have an adverse effect on the Company’s and ALIC’s financial position or ability to sell such products and could result in the surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning.
13
NOTES TO FINANCIAL STATEMENTS—(Continued)
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset-backed securities (“ABS”). Fixed income securities, which may be sold prior to their contractual maturity, are designated as available for sale and are carried at fair value. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of accumulated other comprehensive income. Cash received from calls, principal payments and make-whole payments is reflected as a component of proceeds from sales and cash received from maturities and pay-downs, including prepayments, is reflected as a component of investment collections within the Statements of Cash Flows.
Short-term investments, including money market funds and other short-term investments, are carried at fair value.
Investment income primarily consists of interest and is recognized on an accrual basis using the effective yield method. Interest income for certain RMBS, CMBS and ABS is determined considering estimated pay-downs, including prepayments, obtained from third party data sources and internal estimates. Actual prepayment experience is periodically reviewed and effective yields are recalculated on a retrospective basis when differences arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. For other-than-temporarily impaired fixed income securities, the effective yield method utilizes the difference between the amortized cost basis at impairment and the cash flows expected to be collected. Accrual of income is suspended for other-than-temporarily impaired fixed income securities when the timing and amount of cash flows expected to be received is not reasonably estimable.
Realized capital gains and losses include gains and losses on investment sales and write-downs in value due to other-than-temporary declines in fair value. Realized capital gains and losses on investment sales, including calls and principal payments, are determined on a specific identification basis.
The Company recognizes other-than-temporary impairment losses on fixed income securities in earnings when a security’s fair value is less than its amortized cost and the Company has made the decision to sell or it is more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis. Additionally, if the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income (“OCI”).
Recognition of premium revenues and contract charges, and related benefits and interest credited
The Company has reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are ceded to ALIC and non-affiliated reinsurers (see Notes 3 and 8). Amounts reflected in the Statements of Operations and Comprehensive Income are presented net of reinsurance.
Traditional life insurance products consist principally of products with fixed and guaranteed premiums and benefits, primarily term and whole life insurance products. Premiums from these products are recognized as revenue when due from policyholders. Benefits are reflected in contract benefits and recognized in relation to premiums, so that profits are recognized over the life of the policy.
Immediate annuities with life contingencies provide insurance protection over a period that extends beyond the period during which premiums are collected. Premiums from these products are recognized as revenue when
14
NOTES TO FINANCIAL STATEMENTS—(Continued)
received at the inception of the contract. Benefits and expenses are recognized in relation to premiums. Profits from these policies come from investment income, which is recognized over the life of the contract.
Interest-sensitive life contracts, such as universal life and single premium life, are insurance contracts whose terms are not fixed and guaranteed. The terms that may be changed include premiums paid by the contractholder, interest credited to the contractholder account balance and contract charges assessed against the contractholder account balance. Premiums from these contracts are reported as contractholder fund deposits. Contract charges consist of fees assessed against the contractholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the contract prior to contractually specified dates. These contract charges are recognized as revenue when assessed against the contractholder account balance. Contract benefits include life-contingent benefit payments in excess of the contractholder account balance.
Contracts that do not subject the Company to significant risk arising from mortality or morbidity are referred to as investment contracts. Fixed annuities, including market value adjusted annuities, equity-indexed annuities and immediate annuities without life contingencies, are considered investment contracts. Consideration received for such contracts is reported as contractholder fund deposits. Contract charges for investment contracts consist of fees assessed against the contractholder account balance for maintenance, administration and surrender of the contract prior to contractually specified dates, and are recognized when assessed against the contractholder account balance.
Interest credited to contractholder funds represents interest accrued or paid on interest-sensitive life contracts and investment contracts. Crediting rates for certain fixed annuities and interest-sensitive life contracts are adjusted periodically by the Company to reflect current market conditions subject to contractually guaranteed minimum rates. Crediting rates for indexed life and annuities are generally based on an equity index, such as the Standard & Poor’s (“S&P”) 500 Index.
Contract charges for variable life and variable annuity products consist of fees assessed against the contractholder account balances for contract maintenance, administration, mortality, expense and surrender of the contract prior to contractually specified dates. Contract benefits incurred for variable annuity products include guaranteed minimum death, income, withdrawal and accumulation benefits.
Reinsurance
The Company has reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are ceded to ALIC and non-affiliated reinsurers (see Notes 3 and 8). Reinsurance recoverables and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the Statements of Financial Position. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers and establishes allowances for uncollectible reinsurance as appropriate.
Investment income earned on the assets that support contractholder funds and the reserve for life-contingent contract benefits is not included in the Company’s financial statements as those assets are owned and managed by ALIC under the terms of the reinsurance agreements.
Income taxes
The income tax provision is calculated under the liability method. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are unrealized capital gains and losses on investments. A deferred tax asset valuation allowance is established when there is uncertainty that such assets will be realized.
15
NOTES TO FINANCIAL STATEMENTS—(Continued)
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits payable under insurance policies, including traditional life insurance and life-contingent immediate annuities, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses. These assumptions, which for traditional life insurance are applied using the net level premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration.
Contractholder funds
Contractholder funds represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities. Contractholder funds primarily comprise deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses. Contractholder funds also include reserves for secondary guarantees on interest-sensitive life insurance and certain fixed annuity contracts and reserves for certain guarantees on variable annuity contracts.
Separate accounts
Separate accounts assets are carried at fair value. The assets of the separate accounts are legally segregated and available only to settle separate account contract obligations. Separate accounts liabilities represent the contractholders’ claims to the related assets and are carried at an amount equal to the separate accounts assets. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and therefore are not included in the Company’s Statements of Operations and Comprehensive Income. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in cash flows.
Absent any contract provision wherein the Company provides a guarantee, variable annuity and variable life insurance contractholders bear the investment risk that the separate accounts’ funds may not meet their stated investment objectives. The risk and associated cost of these contract guarantees are ceded to ALIC in accordance with the reinsurance agreements.
Adopted accounting standard
Consolidation Analysis Considering Investments Held through Separate Accounts
In April 2010, the Financial Accounting Standards Board (“FASB”) issued guidance clarifying that an insurer is not required to combine interests in investments held in a qualifying separate account with its interests in the same investments held in the general account when performing a consolidation evaluation. The adoption of this guidance as of January 1, 2011 had no impact on the Company’s results of operations or financial position.
Pending accounting standards
Amendments to Fair Value Measurement and Disclosure Requirements
In May 2011, the FASB issued guidance that clarifies the application of existing fair value measurement and disclosure requirements and amends certain fair value measurement principles, requirements and disclosures. Changes were made to improve consistency in global application. The guidance is to be applied prospectively for reporting periods beginning after December 15, 2011. Early adoption is not permitted. The impact of adoption is not expected to be material to the Company’s results of operations or financial position.
16
NOTES TO FINANCIAL STATEMENTS—(Continued)
Presentation of Comprehensive Income
In June and December 2011, the FASB issued guidance amending the presentation of comprehensive income and its components. Under the new guidance, a reporting entity has the option to present comprehensive income in a single continuous statement or in two separate but consecutive statements. The guidance is effective for reporting periods beginning after December 15, 2011 and is to be applied retrospectively. The new guidance affects presentation only and will have no impact on the Company’s results of operations or financial position.
3. Related Party Transactions
Business operations
The Company uses services performed by its affiliates, AIC, ALIC and Allstate Investments LLC, and business facilities owned or leased and operated by AIC in conducting its business activities. In addition, the Company shares the services of employees with AIC. The Company reimburses its affiliates for the operating expenses incurred on behalf of the Company. The Company is charged for the cost of these operating expenses based on the level of services provided. Operating expenses, including compensation, retirement and other benefit programs, allocated to the Company were $204.8 million, $204.8 million and $202.9 million in 2011, 2010 and 2009, respectively. Of these costs, the Company retains investment related expenses on the invested assets that are not transferred under the reinsurance agreements. All other costs are ceded to ALIC under the reinsurance agreements.
Broker-Dealer
The Company has a service agreement with Allstate Distributors, LLC (“ADLLC”), a broker-dealer company owned by ALIC, whereby ADLLC promotes and markets products sold by the Company. In return for these services, the Company recorded expense of $7.2 million, $6.9 million and $4.6 million in 2011, 2010 and 2009, respectively, that was ceded to ALIC under the terms of the reinsurance agreements.
The Company receives distribution services from Allstate Financial Services, LLC (“AFS”), an affiliated broker-dealer company, for certain variable life insurance contracts sold by Allstate exclusive agencies. For these services, the Company incurred commission and other distribution expenses of $7.5 million, $8.5 million and $9.1 million in 2011, 2010 and 2009, respectively, that were ceded to ALIC.
Reinsurance
The following table summarizes amounts that were ceded to ALIC under the reinsurance agreements and reported net in the Statements of Operations and Comprehensive Income:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Premiums and contract charges | $ | 833,149 | $ | 782,113 | $ | 734,369 | ||||||
Interest credited to contractholder funds, contract benefits and expenses | 1,408,953 | 1,683,487 | 1,621,011 | |||||||||
Reinsurance recoverables due from ALIC totaled $16.68 billion and $18.37 billion as of December 31, 2011 and 2010, respectively.
Income taxes
The Company is a party to a federal income tax allocation agreement with the Corporation (see Note 10).
17
NOTES TO FINANCIAL STATEMENTS—(Continued)
Intercompany loan agreement
The Company has an intercompany loan agreement with the Corporation. The amount of intercompany loans 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 $1 billion. The Corporation may use commercial paper borrowings, bank lines of credit and securities lending to fund intercompany borrowings. The Company had no amounts outstanding under the intercompany loan agreement as of December 31, 2011 or 2010.
4. Investments
Fair values
The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
| Amortized cost | Gross unrealized | Fair value | ||||||||||||||
| ($ in thousands) | Gains | Losses | ||||||||||||||
December 31, 2011 | ||||||||||||||||
U.S. government and agencies | $ | 84,059 | $ | 5,943 | $ | — | $ | 90,002 | ||||||||
Municipal | 2,499 | 399 | — | 2,898 | ||||||||||||
Corporate | 169,820 | 12,105 | (99 | ) | 181,826 | |||||||||||
Foreign government | 4,998 | 239 | — | 5,237 | ||||||||||||
RMBS | 40,089 | 2,427 | (9 | ) | 42,507 | |||||||||||
CMBS | 8,514 | 360 | (518 | ) | 8,356 | |||||||||||
ABS | 2,806 | 8 | — | 2,814 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | $ | 312,785 | $ | 21,481 | $ | (626 | ) | $ | 333,640 | |||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2010 | ||||||||||||||||
U.S. government and agencies | $ | 70,426 | $ | 3,513 | $ | (383 | ) | $ | 73,556 | |||||||
Municipal | 2,999 | 177 | — | 3,176 | ||||||||||||
Corporate | 154,261 | 9,345 | (19 | ) | 163,587 | |||||||||||
Foreign government | 4,998 | 92 | — | 5,090 | ||||||||||||
RMBS | 55,376 | 2,429 | (3 | ) | 57,802 | |||||||||||
CMBS | 8,523 | 427 | (87 | ) | 8,863 | |||||||||||
ABS | 8,265 | 117 | — | 8,382 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | $ | 304,848 | $ | 16,100 | $ | (492 | ) | $ | 320,456 | |||||||
|
|
|
|
|
|
|
| |||||||||
Scheduled maturities
The scheduled maturities for fixed income securities are as follows as of December 31, 2011:
| ($ in thousands) | Amortized cost | Fair value | ||||||
Due in one year or less | $ | 14,017 | $ | 14,268 | ||||
Due after one year through five years | 166,125 | 175,871 | ||||||
Due after five years through ten years | 71,112 | 79,239 | ||||||
Due after ten years | 18,636 | 18,941 | ||||||
|
|
|
| |||||
| 269,890 | 288,319 | |||||||
RMBS and ABS | 42,895 | 45,321 | ||||||
|
|
|
| |||||
Total | $ | 312,785 | $ | 333,640 | ||||
|
|
|
| |||||
18
NOTES TO FINANCIAL STATEMENTS—(Continued)
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity. CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk.
Net investment income
Net investment income for the years ended December 31 is as follows:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Fixed income securities | $ | 12,133 | $ | 12,480 | $ | 12,098 | ||||||
Short-term and other investments | 11 | 21 | 107 | |||||||||
|
|
|
|
|
| |||||||
Investment income, before expense | 12,144 | 12,501 | 12,205 | |||||||||
Investment expense | (308 | ) | (434 | ) | (422 | ) | ||||||
|
|
|
|
|
| |||||||
Net investment income | $ | 11,836 | $ | 12,067 | $ | 11,783 | ||||||
|
|
|
|
|
| |||||||
Realized capital gains and losses
The Company recognized net realized capital gains of $2.1 million, $694 thousand and $1.5 million in 2011, 2010 and 2009, respectively. Realized capital gains and losses in 2011 included $12 thousand of other-than-temporary impairment losses related to RMBS, none of which were included in other comprehensive income. Realized capital gains and losses in 2010 and 2009 did not include any other-than-temporary impairment losses and therefore, none were included in other comprehensive income. No other-than-temporary impairment losses were included in accumulated other comprehensive income as of December 31, 2011 or 2010.
Gross gains of $1.9 million, $652 thousand and $1.5 million and gross losses of $3 thousand, zero, and $3 thousand were realized on sales of fixed income securities during 2011, 2010 and 2009, respectively.
Unrealized net capital gains and losses
Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
| ($ in thousands) | Fair value | Gross unrealized | Unrealized net gains (losses) | |||||||||||||
| Gains | Losses | |||||||||||||||
December 31, 2011 | ||||||||||||||||
Fixed income securities | $ | 333,640 | $ | 21,481 | $ | (626 | ) | $ | 20,855 | |||||||
Short-term investments | 12,974 | — | — | — | ||||||||||||
|
| |||||||||||||||
Unrealized net capital gains and losses, pre-tax | 20,855 | |||||||||||||||
Deferred income taxes | (7,299 | ) | ||||||||||||||
|
| |||||||||||||||
Unrealized net capital gains and losses, after-tax | $ | 13,556 | ||||||||||||||
|
| |||||||||||||||
| Fair value | Gross unrealized | Unrealized net gains (losses) | ||||||||||||||
| Gains | Losses | |||||||||||||||
December 31, 2010 | ||||||||||||||||
Fixed income securities | $ | 320,456 | $ | 16,100 | $ | (492 | ) | $ | 15,608 | |||||||
Short-term investments | 11,593 | — | — | — | ||||||||||||
|
| |||||||||||||||
Unrealized net capital gains and losses, pre-tax | 15,608 | |||||||||||||||
Deferred income taxes | (5,463 | ) | ||||||||||||||
|
| |||||||||||||||
Unrealized net capital gains and losses, after-tax | $ | 10,145 | ||||||||||||||
|
| |||||||||||||||
19
NOTES TO FINANCIAL STATEMENTS—(Continued)
Change in unrealized net capital gains and losses
The change in unrealized net capital gains and losses for the years ended December 31 is as follows:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Fixed income securities | $ | 5,247 | $ | 7,052 | $ | 8,895 | ||||||
Short-term investments | — | — | 2 | |||||||||
|
|
|
|
|
| |||||||
Total | 5,247 | 7,052 | 8,897 | |||||||||
Deferred income taxes | (1,836 | ) | (2,468 | ) | (3,114 | ) | ||||||
|
|
|
|
|
| |||||||
Increase in unrealized net capital gains and losses | $ | 3,411 | $ | 4,584 | $ | 5,783 | ||||||
|
|
|
|
|
| |||||||
Portfolio monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company assesses whether management with the appropriate authority has made the decision to sell or whether it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
The Company’s portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which the Company may have a concern, are evaluated for potential other-than-temporary impairment using all reasonably available information relevant to the collectability or recovery of the security. Inherent in the Company’s evaluation of other-than-temporary impairment for these fixed income securities are assumptions and estimates about the financial condition and future earnings potential of the issue or issuer. Some of the factors that may be considered in evaluating whether a decline in fair value is other than temporary are: 1) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry specific market conditions and trends, geographic location and implications of rating agency actions and offering prices; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost.
20
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table summarizes the gross unrealized losses and fair value of fixed income securities by the length of time that individual securities have been in a continuous unrealized loss position.
| ($ in thousands) | Less than 12 months | 12 months or more | Total unrealized losses | |||||||||||||||||||||||||
| Number of issues | Fair value | Unrealized losses | Number of issues | Fair value | Unrealized losses | |||||||||||||||||||||||
December 31, 2011 | ||||||||||||||||||||||||||||
Corporate | 1 | $ | 5,161 | $ | (99 | ) | — | $ | — | $ | — | $ | (99 | ) | ||||||||||||||
RMBS | 1 | 1,075 | (9 | ) | — | — | — | (9 | ) | |||||||||||||||||||
CMBS | 1 | 1,484 | (518 | ) | — | — | — | (518 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 3 | $ | 7,720 | $ | (626 | ) | — | $ | — | $ | — | $ | (626 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
December 31, 2010 | ||||||||||||||||||||||||||||
U.S. government and agencies | 1 | $ | 9,546 | $ | (383 | ) | — | $ | — | $ | — | $ | (383 | ) | ||||||||||||||
Corporate | 1 | 4,968 | (19 | ) | — | — | — | (19 | ) | |||||||||||||||||||
RMBS | 3 | 385 | (3 | ) | — | — | — | (3 | ) | |||||||||||||||||||
CMBS | — | — | — | 1 | 1,916 | (87 | ) | (87 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | 5 | $ | 14,899 | $ | (405 | ) | 1 | $ | 1,916 | $ | (87 | ) | $ | (492 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As of December 31, 2011, $108 thousand of unrealized losses are related to fixed income securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. All of these unrealized losses are related to investment grade fixed income securities. Investment grade is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available. Unrealized losses on investment grade securities are principally related to widening credit spreads or rising interest rates since the time of initial purchase.
As of December 31, 2011, the remaining $518 thousand of unrealized losses are related to one investment grade security in an unrealized loss position greater than 20% of amortized cost. The security was evaluated based on factors such as expected cash flows and the financial condition and near-term and long-term prospects of the issue or issuer and was determined to have adequate resources to fulfill contractual obligations.
As of December 31, 2011, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed income securities with unrealized losses before recovery of the amortized cost basis.
Municipal bonds
The principal geographic distribution of municipal bond issuers represented in the Company’s municipal bond portfolio was 100% in Washington as of December 31, 2011 and 84% and 16% in Washington and Puerto Rico, respectively, as of December 31, 2010.
Concentration of credit risk
As of December 31, 2011, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company’s shareholder’s equity.
Other investment information
As of December 31, 2011, fixed income securities and short-term investments with a carrying value of $10.3 million were on deposit with regulatory authorities as required by law.
21
NOTES TO FINANCIAL STATEMENTS—(Continued)
5. Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:
| Level 1: | Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access. |
| Level 2: | Assets and liabilities whose values are based on the following: |
| (a) | Quoted prices for similar assets or liabilities in active markets; |
| (b) | Quoted prices for identical or similar assets or liabilities in markets that are not active; or |
| (c) | Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. |
| Level 3: | Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities. |
The availability of observable inputs varies by instrument. In situations where fair value is based on internally developed pricing models or inputs that are unobservable in the market, the determination of fair value requires more judgment. The degree of judgment exercised by the Company in determining fair value is typically greatest for instruments categorized in Level 3. In many instances, valuation inputs used to measure fair value fall into different levels of the fair value hierarchy. The category level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.
The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources.
The second situation where the Company classifies securities in Level 3 is where specific inputs significant to the fair value estimation models are not market observable. This relates to the Company’s use of broker quotes to value certain securities where the inputs have not been corroborated to be market observable.
In determining fair value, the Company principally uses the market approach which generally utilizes market transaction data for the same or similar instruments. To a lesser extent, the Company uses the income approach which involves determining fair values from discounted cash flow methodologies. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used.
22
NOTES TO FINANCIAL STATEMENTS—(Continued)
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Level 1 measurements
| • | Fixed income securities: Comprise U.S. Treasuries. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access. |
| • | Short-term: Comprise actively traded money market funds that have daily quoted net asset values for identical assets that the Company can access. |
| • | Separate account assets: Comprise actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Net asset values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers. |
Level 2 measurements
| • | Fixed income securities: |
U.S. government and agencies: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Municipal: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
Corporate, including privately placed: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. Also included are privately placed securities valued using a discounted cash flow model that is widely accepted in the financial services industry and uses market observable inputs and inputs derived principally from, or corroborated by, observable market data. The primary inputs to the discounted cash flow model include an interest rate yield curve, as well as published credit spreads for similar assets in markets that are not active that incorporate the credit quality and industry sector of the issuer.
Foreign government:The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads.
RMBS and ABS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads.
CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads.
| • | Short-term: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value. |
Level 3 measurements
| • | Fixed income securities: |
Corporate: Valued based on models that are widely accepted in the financial services industry with certain inputs to the valuation model that are significant to the valuation, but are not market observable.
RMBS: Valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable.
23
NOTES TO FINANCIAL STATEMENTS—(Continued)
Contractholder funds: Derivatives embedded in certain life and annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for the embedded derivatives within a block of contractholder liabilities. The models primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2011:
| ($ in thousands) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Balance as of December 31, 2011 | ||||||||||||
Assets: | ||||||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. government and agencies | $ | 36,883 | $ | 53,119 | $ | — | $ | 90,002 | ||||||||
Municipal | — | 2,898 | — | 2,898 | ||||||||||||
Corporate | — | 181,228 | 598 | 181,826 | ||||||||||||
Foreign government | — | 5,237 | — | 5,237 | ||||||||||||
RMBS | — | 40,186 | 2,321 | 42,507 | ||||||||||||
CMBS | — | 8,356 | — | 8,356 | ||||||||||||
ABS | — | 2,814 | — | 2,814 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | 36,883 | 293,838 | 2,919 | 333,640 | ||||||||||||
Short-term investments | 1,925 | 11,049 | — | 12,974 | ||||||||||||
Separate account assets | 1,682,128 | — | — | 1,682,128 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total recurring basis assets | 1,720,936 | 304,887 | 2,919 | 2,028,742 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 1,720,936 | $ | 304,887 | $ | 2,919 | $ | 2,028,742 | ||||||||
|
|
|
|
|
|
|
| |||||||||
% of total assets at fair value | 84.8 | % | 15.0 | % | 0.2 | % | 100.0 | % | ||||||||
Liabilities: | ||||||||||||||||
Contractholder funds: | ||||||||||||||||
Derivatives embedded in life and annuity contracts | $ | — | $ | — | $ | (506,678 | ) | $ | (506,678 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities at fair value | $ | — | $ | — | $ | (506,678 | ) | $ | (506,678 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
% of total liabilities at fair value | — | % | — | % | 100.0 | % | 100.0 | % | ||||||||
24
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2010:
| ($ in thousands) | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Balance as of December 31, 2010 | ||||||||||||
Assets: | ||||||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. government and agencies | $ | 31,007 | $ | 42,549 | $ | — | $ | 73,556 | ||||||||
Municipal | — | 3,176 | — | 3,176 | ||||||||||||
Corporate | — | 162,735 | 852 | 163,587 | ||||||||||||
Foreign government | — | 5,090 | — | 5,090 | ||||||||||||
RMBS | — | 50,922 | 6,880 | 57,802 | ||||||||||||
CMBS | — | 6,947 | 1,916 | 8,863 | ||||||||||||
ABS | — | 8,382 | — | 8,382 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | 31,007 | 279,801 | 9,648 | 320,456 | ||||||||||||
Short-term investments | 11,543 | 50 | — | 11,593 | ||||||||||||
Separate account assets | 2,017,185 | — | — | 2,017,185 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total recurring basis assets | 2,059,735 | 279,851 | 9,648 | 2,349,234 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets at fair value | $ | 2,059,735 | $ | 279,851 | $ | 9,648 | $ | 2,349,234 | ||||||||
|
|
|
|
|
|
|
| |||||||||
% of total assets at fair value | 87.7 | % | 11.9 | % | 0.4 | % | 100.0 | % | ||||||||
Liabilities: | ||||||||||||||||
Contractholder funds: | ||||||||||||||||
Derivatives embedded in life and annuity contracts | $ | — | $ | — | $ | (494,149 | ) | $ | (494,149 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities at fair value | $ | — | $ | — | $ | (494,149 | ) | $ | (494,149 | ) | ||||||
|
|
|
|
|
|
|
| |||||||||
% of total liabilities at fair value | — | % | — | % | 100.0 | % | 100.0 | % | ||||||||
25
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2011.
| ($ in thousands) | Total realized and unrealized gains (losses) included in: | |||||||||||||||||||
| Balance as of December 31, 2010 | Net income(1) | OCI on Statement of Financial Position | Transfers into Level 3 | Transfers out of Level 3 | ||||||||||||||||
Assets | ||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||
Corporate | $ | 852 | $ | — | $ | 199 | $ | — | $ | (10,199 | ) | |||||||||
RMBS | 6,880 | (4 | ) | (108 | ) | — | (3,577 | ) | ||||||||||||
CMBS | 1,916 | — | (49 | ) | — | (1,867 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total recurring Level 3 assets | $ | 9,648 | $ | (4 | ) | $ | 42 | $ | — | $ | (15,643 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||||||
Contractholder funds: | ||||||||||||||||||||
Derivatives embedded in life and annuity contracts | $ | (494,149 | ) | $ | (110,951 | ) | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total recurring Level 3 liabilities | $ | (494,149 | ) | $ | (110,951 | ) | $ | — | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Purchases | Sales | Issuances | Settlements | Balance as of December 31, 2011 | ||||||||||||||||
Assets | ||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||
Corporate | $ | 10,000 | $ | — | $ | — | $ | (254 | ) | $ | 598 | |||||||||
RMBS | — | — | — | (870 | ) | 2,321 | ||||||||||||||
CMBS | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total recurring Level 3 assets | $ | 10,000 | $ | — | $ | — | $ | (1,124 | ) | $ | 2,919 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Liabilities | ||||||||||||||||||||
Contractholder funds: | ||||||||||||||||||||
Derivatives embedded in life and annuity contracts | $ | — | $ | — | $ | (55,559 | ) | $ | 153,981 | $ | (506,678 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total recurring Level 3 liabilities | $ | — | $ | — | $ | (55,559 | ) | $ | 153,981 | $ | (506,678 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| (1) | The amount above attributable to fixed income securities is reported in the Statements of Operations and Comprehensive Income as net investment income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as follows: $(106.6) million in interest credited to contractholder funds and $(4.3) million in contract benefits. These amounts are ceded in accordance with the Company’s reinsurance agreements. |
26
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2010.
| ($ in thousands) | Total realized and unrealized gains (losses) included in: | Purchases, sales, issuances and settlements, net | Transfers into Level 3 | Transfers out of Level 3 | Balance as of December 31, 2010 | |||||||||||||||||||||||
| Balance as of December 31, 2009 | Net income(1) | OCI on Statement of Financial Position | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||||||||||
Corporate | $ | 1,089 | $ | (1 | ) | $ | — | $ | 7,740 | $ | — | $ | (7,976 | ) | $ | 852 | ||||||||||||
RMBS | — | (17 | ) | 131 | 9,459 | — | (2,693 | ) | 6,880 | |||||||||||||||||||
CMBS | 1,158 | — | 758 | — | — | — | 1,916 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total recurring Level 3 assets | $ | 2,247 | $ | (18 | ) | $ | 889 | $ | 17,199 | $ | — | $ | (10,669 | ) | $ | 9,648 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Contractholder funds: | ||||||||||||||||||||||||||||
Derivatives embedded in life and annuity contracts | $ | (15,526 | ) | $ | (4,877 | ) | $ | — | $ | — | $ | (473,746 | ) | $ | — | $ | (494,149 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total recurring Level 3 liabilities | $ | (15,526 | ) | $ | (4,877 | ) | $ | — | $ | — | $ | (473,746 | ) | $ | — | $ | (494,149 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| (1) | The amount above attributable to fixed income securities is reported in the Statements of Operations and Comprehensive Income as net investment income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company’s reinsurance agreements. |
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during 2011 or 2010.
During 2011, certain RMBS and CMBS were transferred into Level 2 from Level 3 as a result of increased liquidity in the market and a sustained increase in market activity for these assets. When transferring these securities into Level 2, the Company did not change the source of fair value estimates or modify the estimates received from independent third-party valuation service providers or the internal valuation approach. Accordingly, for securities included within this group, there was no change in fair value in conjunction with the transfer resulting in a realized or unrealized gain or loss.
During 2011, a corporate fixed income security was transferred into Level 2 from Level 3 due to a change in the valuation model to use primarily market observable inputs. Transfers out of Level 3 during 2011 and 2010 also included situations where a broker quote was used in the prior period and a fair value quote became available from the Company’s independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant.
27
NOTES TO FINANCIAL STATEMENTS—(Continued)
Transfers into Level 3 during 2010 also included derivatives embedded in equity-indexed life and annuity contracts due to refinements in the valuation modeling resulting in an increase in significance of non-market observable inputs.
The following table provides the total gains and (losses) included in net income for Level 3 assets and liabilities still held as of December 31.
| ($ in thousands) | 2011 | 2010 | ||||||
Assets | ||||||||
Fixed income securities: | ||||||||
Corporate | $ | (2 | ) | $ | (2 | ) | ||
RMBS | (5 | ) | (11 | ) | ||||
CMBS | — | (1 | ) | |||||
|
|
|
| |||||
Total recurring Level 3 assets | $ | (7 | ) | $ | (14 | ) | ||
|
|
|
| |||||
Liabilities | ||||||||
Contractholder funds: | ||||||||
Derivatives embedded in life and annuity contracts | $ | (110,951 | ) | $ | (4,877 | ) | ||
|
|
|
| |||||
Total recurring Level 3 liabilities | $ | (110,951 | ) | $ | (4,877 | ) | ||
|
|
|
| |||||
The amounts in the table above represent losses included in net income during 2011 and 2010 for the period of time that the asset or liability was determined to be in Level 3. The amounts attributable to fixed income securities are reported in net investment income. The amount attributable to derivatives embedded in life and annuity contracts is reported as follows: $(106.6) million in interest credited to contractholder funds and $(4.3) million in contract benefits. These amounts are ceded in accordance with the Company’s reinsurance agreements.
28
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2009.
| Balance as of December 31, 2008 | Total realized and unrealized gains (losses) included in: | Purchases, sales, issuances and settlements, net | Net transfers in and/ or (out) of Level 3 | Balance as of December 31, 2009 | Total gains (losses) included in net income for financial instruments still held as of December 31, 2009(2) | |||||||||||||||||||||||
| ($ in thousands) | Net income(1) | OCI on Statement of Financial Position | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||||||||||
Corporate | $ | 1,307 | $ | (2 | ) | $ | 96 | $ | (216 | ) | $ | (96 | ) | $ | 1,089 | $ | (2 | ) | ||||||||||
CMBS | — | — | 535 | — | 623 | 1,158 | — | |||||||||||||||||||||
ABS | 6,002 | 288 | (19 | ) | (6,271 | ) | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total recurring | $ | 7,309 | $ | 286 | $ | 612 | $ | (6,487 | ) | $ | 527 | $ | 2,247 | $ | (2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Liabilities | ||||||||||||||||||||||||||||
Contractholder funds: | ||||||||||||||||||||||||||||
Derivatives embedded in life and annuity contracts | $ | (36,544 | ) | $ | 19,984 | $ | — | $ | 1,034 | $ | — | $ | (15,526 | ) | $ | 19,984 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total recurring | $ | (36,544 | ) | $ | 19,984 | $ | — | $ | 1,034 | $ | — | $ | (15,526 | ) | $ | 19,984 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| (1) | The amount above attributable to fixed income securities is reported in the Statements of Operations and Comprehensive Income as follows: $288 thousand in realized capital gains and losses and $(2) thousand in net investment income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company’s reinsurance agreements. |
| (2) | The amount above attributable to fixed income securities is reported as a component of net investment income in the Statements of Operations and Comprehensive Income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company’s reinsurance agreements. |
As of December 31, 2011 and 2010, financial instruments not carried at fair value included contractholder funds on investment contracts. The carrying value and fair value of contractholder funds on investment contracts were $10.66 billion and $10.33 billion, respectively, as of December 31, 2011 and were $12.69 billion and $11.66 billion, respectively, as of December 31, 2010.
The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for the Company’s own credit risk. Deferred annuities included in contractholder funds are valued using discounted cash flow models which incorporate market value margins, which are based on the cost of holding economic capital, and the Company’s own credit risk. Immediate annuities without life contingencies are valued at the present value of future benefits using market implied interest rates which include the Company’s own credit risk.
6.Derivative Financial Instruments
The Company has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value. The Company’s embedded derivatives are equity options in life and annuity product contracts, which provide equity returns to contractholders, and guaranteed minimum accumulation and withdrawal benefits in variable annuity contracts. The Company does not use derivatives for speculative purposes.
29
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table provides a summary of the volume and fair value positions of embedded derivative financial instruments as well as their reporting location in the Statement of Financial Position as of December 31, 2011. None of these derivatives are designated as accounting hedging instruments and all are gross liabilities.
| ($ in thousands) | Balance sheet location | Volume - Notional amount | Fair value | |||||||
Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | $ | 3,620,132 | $ | (481,930 | ) | ||||
Guaranteed accumulation benefits | Contractholder funds | 202,908 | (22,454 | ) | ||||||
Guaranteed withdrawal benefits | Contractholder funds | 27,740 | (2,294 | ) | ||||||
|
|
|
| |||||||
Total derivatives | $ | 3,850,780 | $ | (506,678 | ) | |||||
|
|
|
| |||||||
The following table provides a summary of the volume and fair value positions of embedded derivative financial instruments as well as their reporting location in the Statement of Financial Position as of December 31, 2010. None of these derivatives are designated as accounting hedging instruments and all are gross liabilities.
| ($ in thousands) | Balance sheet location | Volume - Notional amount | Fair value | |||||||
Equity-indexed and forward starting options in life and annuity product contracts | Contractholder funds | $ | 4,351,559 | $ | (473,746 | ) | ||||
Guaranteed accumulation benefits | Contractholder funds | 228,195 | (18,422 | ) | ||||||
Guaranteed withdrawal benefits | Contractholder funds | 32,473 | (1,981 | ) | ||||||
|
|
|
| |||||||
Total derivatives | $ | 4,612,227 | $ | (494,149 | ) | |||||
|
|
|
| |||||||
In 2011, gains and losses from valuation and settlements on embedded derivative financial instruments recorded in interest credited to contractholder funds and contract benefits were $(8.2) million and $(4.3) million, respectively, which in turn were ceded to ALIC. For the year ended December 31, 2010 gains and losses from valuation and settlements on embedded derivative financial instruments recorded in interest credited to contractholder funds and contract benefits were $31.0 million and $(4.9) million, respectively, which in turn were ceded to ALIC.
Off-balance-sheet financial instruments
There were no off-balance-sheet financial instruments as of December 31, 2011 or 2010.
7. Reserve for Life-Contingent Contract Benefits and Contractholder Funds
As of December 31, the reserve for life-contingent contract benefits consists of the following:
| ($ in thousands) | 2011 | 2010 | ||||||
Traditional life insurance | $ | 1,425,848 | $ | 1,363,098 | ||||
Immediate fixed annuities | 671,275 | 680,467 | ||||||
Accident and health insurance | 1,092,791 | 961,030 | ||||||
Other | 9,576 | 6,722 | ||||||
|
|
|
| |||||
Total reserve for life-contingent contract benefits | $ | 3,199,490 | $ | 3,011,317 | ||||
|
|
|
| |||||
30
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table highlights the key assumptions generally used in calculating the reserve for life-contingent contract benefits:
Product | Mortality | Interest rate | Estimation method | |||
| Traditional life insurance | Actual company experience plus loading | Interest rate assumptions range from 4.0% to 8.0% | Net level premium reserve method using the Company’s withdrawal experience rates; includes reserves for unpaid claims | |||
| Immediate fixed annuities | 1983 individual annuity mortality table with internal modifications; 1983 individual annuity mortality table; Annuity 2000 mortality table with internal modifications; 2001 Valuation Basic Table with internal modifications | Interest rate assumptions range from 1.2% to 8.8% | Present value of expected future benefits based on historical experience | |||
| Accident and health insurance | Actual company experience plus loading | Interest rate assumptions range from 4.0% to 5.3% | Unearned premium; additional contract reserves for mortality risk and unpaid claims | |||
Other:
Variable annuity guaranteed minimum death benefits |
100% of Annuity 2000 mortality table |
Interest rate |
Projected benefit ratio | |||
As of December 31, contractholder funds consist of the following:
| ($ in thousands) | 2011 | 2010 | ||||||
Interest-sensitive life insurance | $ | 4,556,892 | $ | 4,314,502 | ||||
Investment contracts: | ||||||||
Fixed annuities | 10,709,817 | 12,728,648 | ||||||
Other investment contracts | 222,915 | 203,921 | ||||||
|
|
|
| |||||
Total contractholder funds | $ | 15,489,624 | $ | 17,247,071 | ||||
|
|
|
| |||||
31
NOTES TO FINANCIAL STATEMENTS—(Continued)
The following table highlights the key contract provisions relating to contractholder funds:
Product | Interest rate | Withdrawal/surrender charges | ||
| Interest-sensitive life insurance | Interest rates credited range from 0% to 11.0% for equity-indexed life (whose returns are indexed to the S&P 500) and 2.0% to 6.0% for all other products | Either a percentage of account balance or dollar amount grading off generally over 20 years | ||
| Fixed annuities | Interest rates credited range from 0% to 8.8% for immediate annuities; 0% to 11.0% for equity-indexed annuities (whose returns are indexed to the S&P 500); and 1.0% to 6.6% for all other products | Either a declining or a level percentage charge generally over ten years or less. Additionally, approximately 18.9% of fixed annuities are subject to market value adjustment for discretionary withdrawals. | ||
Other investment contracts:
Guaranteed minimum income, accumulation and withdrawal benefits on variable and fixed annuities and secondary guarantees on interest-sensitive life insurance and fixed annuities |
Interest rates used in establishing reserves range from 1.8% to 10.3% |
Withdrawal and surrender | ||
Contractholder funds activity for the years ended December 31 is as follows:
| ($ in thousands) | 2011 | 2010 | ||||||
Balance, beginning of year | $ | 17,247,071 | $ | 17,633,027 | ||||
Deposits | 1,007,316 | 1,521,086 | ||||||
Interest credited | 576,331 | 743,075 | ||||||
Benefits | (459,991 | ) | (504,789 | ) | ||||
Surrenders and partial withdrawals | (2,412,295 | ) | (1,811,355 | ) | ||||
Contract charges | (513,068 | ) | (471,729 | ) | ||||
Net transfers from separate accounts | 18,935 | 18,788 | ||||||
Other adjustments | 25,325 | 118,968 | ||||||
|
|
|
| |||||
Balance, end of year | $ | 15,489,624 | $ | 17,247,071 | ||||
|
|
|
| |||||
32
NOTES TO FINANCIAL STATEMENTS—(Continued)
The table below presents information regarding the Company’s variable annuity contracts with guarantees. The Company’s variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts’ separate accounts with guarantees.
| December 31, | ||||||||
| ($ in millions) | 2011 | 2010 | ||||||
In the event of death | ||||||||
Separate account value | $ | 1,032.7 | $ | 1,318.1 | ||||
Net amount at risk(1) | $ | 149.5 | $ | 126.3 | ||||
Average attained age of contractholders | 58 years | 57 years | ||||||
At annuitization (includes income benefit guarantees) | ||||||||
Separate account value | $ | 184.9 | $ | 252.8 | ||||
Net amount at risk(2) | $ | 45.1 | $ | 40.9 | ||||
Weighted average waiting period until annuitization options available | 2 years | 3 years | ||||||
For cumulative periodic withdrawals | ||||||||
Separate account value | $ | 27.5 | $ | 33.1 | ||||
Net amount at risk(3) | $ | 0.4 | $ | 0.3 | ||||
Accumulation at specified dates | ||||||||
Separate account value | $ | 198.1 | $ | 233.7 | ||||
Net amount at risk(4) | $ | 21.5 | $ | 18.9 | ||||
Weighted average waiting period until guarantee date | 8 years | 9 years | ||||||
| (1) | Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of the balance sheet date. |
| (2) | Defined as the estimated present value of the guaranteed minimum annuity payments in excess of the current account balance. |
| (3) | Defined as the estimated current guaranteed minimum withdrawal balance (initial deposit) in excess of the current account balance as of the balance sheet date. |
| (4) | Defined as the estimated present value of the guaranteed minimum accumulation balance in excess of the current account balance. |
As of December 31, 2011, liabilities for guarantees included reserves for variable annuity death benefits of $9.6 million, variable annuity income benefits of $16.0 million, variable annuity accumulation benefits of $22.4 million, variable annuity withdrawal benefits of $2.3 million and interest-sensitive life and fixed annuity guarantees of $181.6 million. As of December 31, 2010, liabilities for guarantees included reserves for variable annuity death benefits of $6.7 million, variable annuity income benefits of $19.8 million, variable annuity accumulation benefits of $18.4 million, variable annuity withdrawal benefits of $2.0 million and interest-sensitive life and fixed annuity guarantees of $163.7 million.
8. Reinsurance
The Company has reinsurance agreements under which it reinsures all of its business to ALIC or non-affiliated reinsurers. Under the agreements, premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are reinsured. The Company purchases reinsurance to limit aggregate and single losses on large risks. The Company cedes a portion of the mortality risk on certain life policies under coinsurance agreements to a pool of twelve non-affiliated reinsurers.
33
NOTES TO FINANCIAL STATEMENTS—(Continued)
As of December 31, 2011, 89.1% of the total reinsurance recoverables were related to ALIC and 10.9% were related to non-affiliated reinsurers. As of December 31, 2011 and 2010, 98% and 97%, respectively, of the Company’s non-affiliated reinsurance recoverables are due from companies rated A- or better by S&P.
The effects of reinsurance on premiums and contract charges for the years ended December 31 are as follows:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Direct | $ | 1,266,264 | $ | 1,228,272 | $ | 1,194,526 | ||||||
Assumed | 7,057 | 7,465 | 7,849 | |||||||||
Ceded: | ||||||||||||
Affiliate | (833,149 | ) | (782,113 | ) | (734,369 | ) | ||||||
Non-affiliate | (440,172 | ) | (453,624 | ) | (468,006 | ) | ||||||
|
|
|
|
|
| |||||||
Premiums and contract charges, net of reinsurance | $ | — | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
The effects of reinsurance on interest credited to contractholder funds, contract benefits and expenses for the years ended December 31 are as follows:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Direct | $ | 1,893,124 | $ | 2,186,031 | $ | 2,159,262 | ||||||
Assumed | 7,337 | 8,153 | 11,101 | |||||||||
Ceded: | ||||||||||||
Affiliate | (1,408,953 | ) | (1,683,487 | ) | (1,621,011 | ) | ||||||
Non-affiliate | (491,508 | ) | (510,697 | ) | (549,352 | ) | ||||||
|
|
|
|
|
| |||||||
Interest credited to contractholder funds, contract benefits and expenses, net of reinsurance | $ | — | $ | — | $ | — | ||||||
|
|
|
|
|
| |||||||
9. Guarantees and Contingent Liabilities
Guarantees
In the normal course of business, the Company provides standard indemnifications to contractual counterparties 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 are 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 December 31, 2011.
Regulation and Compliance
The Company is subject to changing social, economic and regulatory conditions. From time to time, regulatory authorities or legislative bodies seek to impose additional regulations regarding agent and broker
34
NOTES TO FINANCIAL STATEMENTS—(Continued)
compensation, regulate the nature of and amount of investments, and otherwise expand overall regulation of insurance products and the insurance industry. The Company has established procedures and policies to facilitate compliance with laws and regulations, to foster prudent business operations, and to support financial reporting. The Company routinely reviews its practices to validate compliance with laws and regulations and with internal procedures and policies. As a result of these reviews, from time to time the Company may decide to modify some of its procedures and policies. Such modifications, and the reviews that led to them, may be accompanied by payments being made and costs being incurred. The ultimate changes and eventual effects of these actions on the Company’s business, if any, are uncertain.
The Company is currently being examined by certain states for compliance with unclaimed property laws. It is possible that this examination may result in additional payments of abandoned funds to states and to changes in the Company’s practices and procedures for the identification of escheatable funds, which could impact benefit payments and reserves, among other consequences; however, it is not likely to have a material effect on the financial statements of the Company.
10. Income Taxes
The Company joins the Corporation and its other subsidiaries (the “Allstate Group”) in the filing of a consolidated federal income tax return and is party to a federal income tax allocation agreement (the “Allstate Tax Sharing Agreement”). Under the Allstate Tax Sharing Agreement, the Company pays to or receives from the Corporation the amount, if any, by which the Allstate Group’s federal income tax liability is affected by virtue of inclusion of the Company in the consolidated federal income tax return. The Company also has a supplemental tax sharing agreement with respect to reinsurance ceded to ALIC to allocate the tax benefits and costs related to such reinsurance. Effectively, these agreements result in the Company’s annual income tax provision being computed, with adjustments, as if the Company filed a separate return, adjusted for the reinsurance ceded to ALIC.
The Internal Revenue Service (“IRS”) is currently examining the Allstate Group’s 2009 and 2010 federal income tax returns. The IRS has completed its examinations of the Allstate Group’s federal income tax returns for 2005-2006 and 2007-2008 and the cases are under consideration at the IRS Appeals Office. The Allstate Group’s tax years prior to 2005 have been examined by the IRS and the statute of limitations has expired on those years. Any adjustments that may result from IRS examinations of tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company.
The Company had no liability for unrecognized tax benefits as of December 31, 2011 or 2010, and believes it is reasonably possible that the liability balance will not significantly increase within the next twelve months. No amounts have been accrued for interest or penalties.
The components of the deferred income tax assets and liabilities as of December 31 are as follows:
| ($ in thousands) | 2011 | 2010 | ||||||
Deferred assets | ||||||||
Tax credit carryforwards | $ | 10 | $ | 7 | ||||
|
|
|
| |||||
Total deferred assets | 10 | 7 | ||||||
|
|
|
| |||||
Deferred liabilities | ||||||||
Unrealized net capital gains | (7,299 | ) | (5,463 | ) | ||||
Other liabilities | (440 | ) | (377 | ) | ||||
|
|
|
| |||||
Total deferred liabilities | (7,739 | ) | (5,840 | ) | ||||
|
|
|
| |||||
Net deferred liability | $ | (7,729 | ) | $ | (5,833 | ) | ||
|
|
|
| |||||
35
NOTES TO FINANCIAL STATEMENTS—(Continued)
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company’s assessment that the deductions ultimately recognized for tax purposes will be fully utilized.
The components of income tax expense for the years ended December 31 are as follows:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Current | $ | 4,802 | $ | 4,386 | $ | 4,447 | ||||||
Deferred | 59 | 65 | 187 | |||||||||
|
|
|
|
|
| |||||||
Total income tax expense | $ | 4,861 | $ | 4,451 | $ | 4,634 | ||||||
|
|
|
|
|
| |||||||
As of December 31, 2011, the Company has tax credit carryforwards of $10 thousand which will be available to offset future tax liabilities and expire at the end of 2029 through 2031.
The Company paid income taxes of $4.4 million, $4.7 million and $6.8 million in 2011, 2010 and 2009, respectively.
A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the years ended December 31 is as follows:
| 2011 | 2010 | 2009 | ||||||||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Other | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
|
|
|
|
|
| |||||||
Effective income tax rate | 34.9 | % | 34.9 | % | 34.9 | % | ||||||
|
|
|
|
|
| |||||||
11. Statutory Financial Information
The Company prepares its statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the State of Nebraska. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
The State of Nebraska requires insurance companies domiciled in its state to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the State of Nebraska Insurance Commissioner. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Statutory net income was $8.6 million, $8.7 million and $8.5 million in 2011, 2010, and 2009, respectively. Statutory capital and surplus was $319.5 million and $310.8 million as of December 31, 2011 and 2010, respectively.
Dividends
The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. The payment of shareholder dividends by the Company without the prior approval of the state insurance regulator is limited to formula amounts based on net income and capital and surplus, determined in conformity with statutory accounting practices, as well as the timing and
36
NOTES TO FINANCIAL STATEMENTS—(Continued)
amount of dividends paid in the preceding twelve months. The maximum amount of dividends that the Company can pay during 2012 without prior approval of the Nebraska Department of Insurance is $31.9 million. The Company did not pay any dividends in 2011.
12. Other Comprehensive Income
The components of other comprehensive income on a pre-tax and after-tax basis for the years ended December 31 are as follows:
| $10,135,0 | $10,135,0 | $10,135,0 | ||||||||||
| 2011 | ||||||||||||
| ($ in thousands) | Pre-tax | Tax | After-tax | |||||||||
Unrealized net holding gains arising during the period | $ | 7,322 | $ | (2,562 | ) | $ | 4,760 | |||||
Less: reclassification adjustment of realized capital gains and losses | 2,075 | (726 | ) | 1,349 | ||||||||
|
|
|
|
|
| |||||||
Unrealized net capital gains and losses | 5,247 | (1,836 | ) | 3,411 | ||||||||
|
|
|
|
|
| |||||||
Other comprehensive income | $ | 5,247 | $ | (1,836 | ) | $ | 3,411 | |||||
|
|
|
|
|
| |||||||
| 2010 | ||||||||||||
| Pre-tax | Tax | After-tax | ||||||||||
Unrealized net holding gains arising during the period | $ | 7,746 | $ | (2,711 | ) | $ | 5,035 | |||||
Less: reclassification adjustment of realized capital gains and losses | 694 | (243 | ) | 451 | ||||||||
|
|
|
|
|
| |||||||
Unrealized net capital gains and losses | 7,052 | (2,468 | ) | 4,584 | ||||||||
|
|
|
|
|
| |||||||
Other comprehensive income | $ | 7,052 | $ | (2,468 | ) | $ | 4,584 | |||||
|
|
|
|
|
| |||||||
| 2009 | ||||||||||||
| Pre-tax | Tax | After-tax | ||||||||||
Unrealized net holding losses arising during the period | $ | 10,135 | $ | (3,547 | ) | $ | 6,588 | |||||
Less: reclassification adjustment of realized capital gains and losses | 1,238 | (433 | ) | 805 | ||||||||
|
|
|
|
|
| |||||||
Unrealized net capital gains and losses | 8,897 | (3,114 | ) | 5,783 | ||||||||
|
|
|
|
|
| |||||||
Other comprehensive income | $ | 8,897 | $ | (3,114 | ) | $ | 5,783 | |||||
|
|
|
|
|
| |||||||
37
LINCOLN BENEFIT LIFE COMPANY
SCHEDULE I—SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2011
| which shown | which shown | which shown | ||||||||||
| ($ in thousands) | Amortized cost | Fair value | Amount at which shown in the Balance Sheet | |||||||||
Type of investment | ||||||||||||
Fixed maturities: | ||||||||||||
Bonds: | ||||||||||||
United States government, government agencies and authorities | $ | 84,059 | $ | 90,002 | $ | 90,002 | ||||||
States, municipalities and political subdivisions | 2,499 | 2,898 | 2,898 | |||||||||
Foreign governments | 4,998 | 5,237 | 5,237 | |||||||||
Public utilities | 16,982 | 18,889 | 18,889 | |||||||||
All other corporate bonds | 152,838 | 162,937 | 162,937 | |||||||||
Asset-backed securities | 2,806 | 2,814 | 2,814 | |||||||||
Residential mortgage-backed securities | 40,089 | 42,507 | 42,507 | |||||||||
Commercial mortgage-backed securities | 8,514 | 8,356 | 8,356 | |||||||||
|
|
|
|
|
| |||||||
Total fixed maturities | 312,785 | 333,640 | 333,640 | |||||||||
Short-term investments | 12,974 | 12,974 | 12,974 | |||||||||
|
|
|
|
|
| |||||||
Total investments | $ | 325,759 | $ | 346,614 | $ | 346,614 | ||||||
|
|
|
|
|
| |||||||
38
LINCOLN BENEFIT LIFE COMPANY
SCHEDULE IV—REINSURANCE
| $364,469,564 | $364,469,564 | $364,469,564 | $364,469,564 | $364,469,564 | ||||||||||||||||
| ($ in thousands) | Gross amount | Ceded to other companies(1) | Assumed from other companies | Net amount | Percentage of amount assumed to net | |||||||||||||||
Year ended December 31, 2011 | ||||||||||||||||||||
Life insurance in force | $ | 364,469,564 | $ | 370,439,179 | $ | 5,969,615 | $ | — | — | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Premiums and contract charges: | ||||||||||||||||||||
Life and annuities | $ | 1,156,434 | $ | 1,163,491 | $ | 7,057 | $ | — | — | % | ||||||||||
Accident and health insurance | 109,830 | 109,830 | — | — | — | % | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| $ | 1,266,264 | $ | 1,273,321 | $ | 7,057 | $ | — | — | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Year ended December 31, 2010 | ||||||||||||||||||||
Life insurance in force | $ | 358,242,997 | $ | 364,544,022 | $ | 6,301,025 | $ | — | — | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Premiums and contract charges: | ||||||||||||||||||||
Life and annuities | $ | 1,111,971 | $ | 1,119,436 | $ | 7,465 | $ | — | — | % | ||||||||||
Accident and health insurance | 116,301 | 116,301 | — | — | — | % | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| $ | 1,228,272 | $ | 1,235,737 | $ | 7,465 | $ | — | — | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Year ended December 31, 2009 | ||||||||||||||||||||
Life insurance in force | $ | 349,952,260 | $ | 356,581,252 | $ | 6,628,992 | $ | — | — | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Premiums and contract charges: | ||||||||||||||||||||
Life and annuities | $ | 1,072,840 | $ | 1,080,689 | $ | 7,849 | $ | — | — | % | ||||||||||
Accident and health insurance | 121,686 | 121,686 | — | — | — | % | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| $ | 1,194,526 | $ | 1,202,375 | $ | 7,849 | $ | — | — | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||||||
| (1) | No reinsurance or coinsurance income was netted against premiums ceded in 2011, 2010 and 2009. |
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Lincoln Benefit Life Company
Lincoln, NE
We have audited the accompanying Statements of Financial Position of Lincoln Benefit Life Company (the “Company”), an affiliate of The Allstate Corporation, as of December 31, 2011 and 2010, and the related Statements of Operations and Comprehensive Income, Shareholder’s Equity, and Cash Flows for each of the three years in the period ended December 31, 2011. Our audits also included Schedule I—Summary of Investments—Other than Investments in Related Parties and Schedule IV—Reinsurance. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Lincoln Benefit Life Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Schedule I—Summary of Investments—Other than Investments in Related Parties and Schedule IV—Reinsurance, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 8, 2012
40
| Item 11(f). | Selected Financial Data |
LINCOLN BENEFIT LIFE COMPANY
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
| ($ in thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Operating results | ||||||||||||||||||||
Net investment income | $ | 11,836 | $ | 12,067 | $ | 11,783 | $ | 13,940 | $ | 14,257 | ||||||||||
Realized capital gains and losses | 2,075 | 694 | 1,480 | 5,952 | (417 | ) | ||||||||||||||
Total revenues | 13,911 | 12,761 | 13,263 | 19,892 | 13,840 | |||||||||||||||
Net income | 9,050 | 8,310 | 8,629 | 12,974 | 9,005 | |||||||||||||||
Financial position | ||||||||||||||||||||
Investments | $ | 346,614 | $ | 332,049 | $ | 316,900 | $ | 310,031 | $ | 301,201 | ||||||||||
Total assets | 20,863,567 | 22,729,575 | 22,932,908 | 22,655,371 | 23,700,007 | |||||||||||||||
Reserve for life-contingent contract benefits and contractholder funds | 18,689,114 | 20,258,388 | 20,438,414 | 20,368,562 | 20,169,001 | |||||||||||||||
Shareholder’s equity | 338,328 | 325,867 | 312,973 | 298,561 | 289,938 | |||||||||||||||
| Item 11(h). | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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”, “Lincoln Benefit”, “our”, “us” or the “Company”). It should be read in conjunction with the financial statements and related notes found under Item 11(e) contained herein. We operate as a single segment entity, based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
The most important factors we monitor to evaluate the financial condition and performance of our company include:
| • | For operations: premiums and contract charges ceded to Allstate Life Insurance Company (“ALIC”), and invested assets; |
| • | For investments: credit quality/experience, investment income, cash flows, realized capital gains and losses, unrealized capital gains and losses, stability of long-term returns and asset duration; and |
| • | For financial condition: financial strength ratings and capital position. |
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the financial statements. The most critical estimates include those used in determining:
| • | Fair value of financial assets |
| • | Impairment of fixed income securities |
In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our business and operations. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our financial statements.
41
A brief summary of each of these critical accounting estimates follows. For a more detailed discussion of the effect of these estimates on our financial statements, and the judgments and assumptions related to these estimates, see the referenced sections of this document. For a complete summary of our significant accounting policies, see the notes to the financial statements.
Fair value of financial assetsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We categorize our financial assets measured at fair value into a three-level hierarchy based on the observability of inputs to the valuation techniques as follows:
| Level 1: | Financial asset values are based on unadjusted quoted prices for identical assets in an active market that we can access. |
| Level 2: | Financial asset values are based on the following: |
| (a) | Quoted prices for similar assets in active markets; |
| (b) | Quoted prices for identical or similar assets in markets that are not active; or |
| (c) | Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset. |
| Level 3: | Financial asset values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect our estimates of the assumptions that market participants would use in valuing the financial assets. |
Observable inputs are inputs that reflect the assumptions market participants would use in valuing financial assets that are developed based on market data obtained from independent sources. In the absence of sufficient observable inputs, unobservable inputs reflect our estimates of the assumptions market participants would use in valuing financial assets and are developed based on the best information available in the circumstances. The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information.
We are responsible for the determination of fair value of financial assets and the supporting assumptions and methodologies. We gain assurance on the overall reasonableness and consistent application of valuation input assumptions, valuation methodologies and compliance with accounting standards for fair value determination through the execution of various processes and controls designed to ensure that our financial assets are appropriately valued. We monitor fair values received from third parties and those derived internally on an ongoing basis.
We employ independent third-party valuation service providers, broker quotes and internal pricing methods to determine fair values. We obtain or calculate only one single quote or price for each financial instrument.
Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of proprietary models, produce valuation information in the form of a single fair value for individual securities for which a fair value has been requested under the terms of our agreements. For certain security types, fair values are derived from the valuation service providers’ proprietary valuation models. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, liquidity spreads, currency rates, and other information, as applicable. Credit and liquidity spreads are typically implied from completed transactions and transactions of comparable securities. Valuation service providers also use proprietary discounted cash flow models that are widely accepted in the financial services industry and similar to those used by other market participants to value the same financial instruments. The valuation models take into account, among other things, market observable information as of the measurement date, as described above, as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector, and where applicable, collateral quality and other issue or issuer
42
specific information. Executing valuation models effectively requires seasoned professional judgment and experience. In cases where market transactions or other market observable data is limited, the extent to which judgment is applied varies inversely with the availability of market observable information.
For certain of our financial assets measured at fair value, where our valuation service providers cannot provide fair value determinations, we obtain a single non-binding price quote from a broker familiar with the security who, similar to our valuation service providers, may consider transactions or activity in similar securities among other information. The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise regarding the security subject to valuation.
The fair value of certain financial assets, including privately placed corporate fixed income securities, for which our valuation service providers or brokers do not provide fair value determinations, is determined using valuation methods and models widely accepted in the financial services industry. Internally developed valuation models, which include inputs that may not be market observable and as such involve some degree of judgment, are considered appropriate for each class of security to which they are applied.
Our internal pricing methods are primarily based on models using discounted cash flow methodologies that develop a single best estimate of fair value. Our models generally incorporate inputs that we believe are representative of inputs other market participants would use to determine fair value of the same instruments, including yield curves, quoted market prices of comparable securities, published credit spreads, and other applicable market data. Additional inputs that are used include internally-derived assumptions such as liquidity premiums and credit ratings, as well as instrument-specific characteristics that include, but are not limited to, coupon rates, expected cash flows, sector of the issuer, and call provisions. Our internally assigned credit ratings are developed at a more detailed level than externally published ratings and allow for a more precise match of these ratings to other market observable valuation inputs, such as credit and sector spreads, when performing these valuations. Due to the existence of non-market observable inputs, such as liquidity premiums, judgment is required in developing these fair values. As a result, the fair value of these financial assets may differ from the amount actually received to sell an asset in an orderly transaction between market participants at the measurement date. Moreover, the use of different valuation assumptions may have a material effect on the financial assets’ fair values.
For the majority of our financial assets measured at fair value, all significant inputs are based on market observable data and significant management judgment does not affect the periodic determination of fair value. The determination of fair value using discounted cash flow models involves management judgment when significant model inputs are not based on market observable data. However, where market observable data is available, it takes precedence, and as a result, no range of reasonably likely inputs exists from which the basis of a sensitivity analysis could be constructed.
We believe our most significant exposure to changes in fair value is due to market risk. Our exposure to changes in market conditions is discussed fully in the Market Risk section of the MD&A.
We employ specific control processes to determine the reasonableness of the fair value of our financial assets. Our processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques utilized are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, we assess the reasonableness of individual security values that have stale prices or that exceed certain thresholds as compared to previous values received from those valuation service providers or derived from internal models. We perform procedures to understand and assess the methodologies, processes and controls of our valuation service providers. In addition, we may validate the reasonableness of fair value by comparing information obtained from our valuation service providers to other third party valuation sources for selected securities. We perform ongoing price validation procedures such as back-testing of actual sales, which
43
corroborate the various inputs used in internal pricing models to market observable data. When fair value determinations are expected to be more variable, we validate them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
We also perform an analysis to determine whether there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity, and if so, whether transactions may not be orderly. Among the indicators we consider in determining whether a significant decrease in the volume and level of market activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, level of credit spreads over historical levels, bid-ask spread, and price consensuses among market participants and sources. If evidence indicates that prices are based on transactions that are not orderly, we place little, if any, weight on the transaction price and will estimate fair value using an internal pricing model. As of December 31, 2011 and 2010, we did not alter fair values provided by our valuation service providers or brokers or substitute them with an internal pricing model for such securities.
The following table identifies fixed income securities and short-term investments as of December 31, 2011 by source of fair value determination:
| ($ in thousands) | Fair value | Percent to total | ||||||
Fair value based on internal sources | $ | 11,031 | 3.2 | % | ||||
Fair value based on external sources(1) | 335,583 | 96.8 | ||||||
|
|
|
| |||||
Total | $ | 346,614 | 100.0 | % | ||||
|
|
|
| |||||
| (1) | Includes $2.3 million that are valued using broker quotes. |
For more detailed information on our accounting policy for the fair value of financial assets and the financial assets by level in the fair value hierarchy, see Note 5 of the financial statements.
Impairment of fixed income securitiesFor fixed income securities classified as available for sale, the difference between fair value and amortized cost, net of deferred income taxes, is reported as a component of accumulated other comprehensive income on the Statements of Financial Position and is not reflected in the operating results of any period until reclassified to net income upon the consummation of a transaction with an unrelated third party or when a write-down is recorded due to an other-than-temporary decline in fair value. We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we assess whether management with the appropriate authority has made the decision to sell or whether it is more likely than not we will be required to sell the security before recovery of the amortized cost basis for reasons such as liquidity, contractual or regulatory purposes. If a security meets either of these criteria, the security’s decline in fair value is considered other than temporary and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is not more likely than not we will be required to sell the fixed income security before recovery of its amortized cost basis, we evaluate whether we expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. We use our best estimate of future cash flows expected to be collected from the fixed income security, discounted at the security’s original or current effective rate, as appropriate, to calculate a recovery value and determine whether a credit loss exists. The determination of cash flow estimates is inherently subjective and methodologies may vary depending on facts and circumstances specific to the security. All reasonably available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable assumptions and forecasts, are considered when developing the estimate of cash flows expected to be collected. That information generally includes, but is not limited to, the remaining payment terms of the security,
44
prepayment speeds, foreign exchange rates, the financial condition and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. Other information, such as industry analyst reports and forecasts, sector credit ratings, financial condition of the bond insurer for insured fixed income securities, and other market data relevant to the realizability of contractual cash flows, may also be considered. The estimated fair value of collateral will be used to estimate recovery value if we determine that the security is dependent on the liquidation of collateral for ultimate settlement. If the estimated recovery value is less than the amortized cost of the security, a credit loss exists and an other-than-temporary impairment for the difference between the estimated recovery value and amortized cost is recorded in earnings. The portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings.
Once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that a fixed income security is other-than-temporarily impaired, including: 1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or issuer’s ability to meet all of its contractual obligations; and 3) changes in facts and circumstances that result in changes to management’s intent to sell or result in our assessment that it is more likely than not we will be required to sell before recovery of the amortized cost basis. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on shareholder’s equity, since our securities are designated as available for sale and carried at fair value and as a result, any related unrealized loss, net of deferred income taxes, would already be reflected as a component of accumulated other comprehensive income in shareholder’s equity.
The determination of the amount of other-than-temporary impairment is an inherently subjective process based on periodic evaluation of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in other-than-temporary impairments in results of operations as such evaluations are revised. The use of different methodologies and assumptions in the determination of the amount of other-than-temporary impairments may have a material effect on the amounts presented within the financial statements.
For additional detail on investment impairments, see Note 4 of the financial statements.
OPERATIONS
Overview and strategy We provide life insurance, retirement and investment products. Our products include interest-sensitive, traditional and variable life insurance and fixed annuities such as deferred and immediate annuities. Our products are sold through multiple distribution channels including Allstate exclusive agencies and exclusive financial specialists, independent agents (including master brokerage agencies) and directly through call centers and the internet.
Net income Net income for the years ended December 31 is presented in the following table:
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Net investment income | $ | 11,836 | $ | 12,067 | $ | 11,783 | ||||||
Realized capital gains and losses | 2,075 | 694 | 1,480 | |||||||||
Income tax expense | (4,861 | ) | (4,451 | ) | (4,634 | ) | ||||||
|
|
|
|
|
| |||||||
Net income | $ | 9,050 | $ | 8,310 | $ | 8,629 | ||||||
|
|
|
|
|
| |||||||
45
We have reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are ceded to ALIC and other non-affiliated reinsurers, and are reflected net of such reinsurance in the Statements of Operations and Comprehensive Income. Our results of operations include net investment income and realized capital gains and losses recognized in connection with the assets that are not transferred under the reinsurance agreements.
Net income increased 8.9% in 2011 compared to 2010 due to higher net realized capital gains. Net income decreased 3.7% in 2010 compared to 2009 due to lower net realized capital gains.
Income tax expense increased 9.2% in 2011 compared to 2010 following a decrease of 3.9% in 2010 compared to 2009. These changes were due to the proportionate change in the income on which the income tax expense was determined.
Financial Position The financial position as of December 31 is presented in the following table:
| ($ in thousands) | 2011 | 2010 | ||||||
Fixed income securities(1) | $ | 333,640 | $ | 320,456 | ||||
Short-term(2) | 12,974 | 11,593 | ||||||
|
|
|
| |||||
Total investments | $ | 346,614 | $ | 332,049 | ||||
|
|
|
| |||||
Cash | $ | 6,006 | $ | 3,550 | ||||
Reinsurance recoverable from ALIC | 16,680,950 | 18,365,058 | ||||||
Reinsurance recoverable from non-affiliates | 2,043,480 | 1,906,574 | ||||||
Contractholder funds | 15,489,624 | 17,247,071 | ||||||
Reserve for life-contingent contract benefits | 3,199,490 | 3,011,317 | ||||||
Separate accounts assets and liabilities | 1,682,128 | 2,017,185 | ||||||
| (1) | Fixed income securities are carried at fair value. Amortized cost basis for these securities was $312.8 million and $304.8 million as of December 31, 2011 and 2010, respectively. |
| (2) | Short-term investments are carried at fair value. Amortized cost basis for these investments was $13.0 million and $11.6 million as of December 31, 2011 and 2010, respectively. |
Total investments increased to $346.6 million as of December 31, 2011 from $332.0 million as of December 31, 2010 primarily due to the investment of operating cash flows and increased net unrealized capital gains on fixed income securities.
Fixed income securitiesby type are listed in the table below.
| ($ in thousands) | Fair value as of December 31, 2011 | Percent to total investments | Fair value as of December 31, 2010 | Percent to total investments | ||||||||||||
U.S. government and agencies | $ | 90,002 | 26.0 | % | $ | 73,556 | 22.1 | % | ||||||||
Municipal | 2,898 | 0.8 | 3,176 | 1.0 | ||||||||||||
Corporate | 181,826 | 52.5 | 163,587 | 49.3 | ||||||||||||
Foreign government | 5,237 | 1.5 | 5,090 | 1.5 | ||||||||||||
Residential mortgage-backed securities (“RMBS”) | 42,507 | 12.3 | 57,802 | 17.4 | ||||||||||||
Commercial mortgage-backed securities (“CMBS”) | 8,356 | 2.4 | 8,863 | 2.7 | ||||||||||||
Asset-backed securities (“ABS”) | 2,814 | 0.8 | 8,382 | 2.5 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | $ | 333,640 | 96.3 | % | $ | 320,456 | 96.5 | % | ||||||||
|
|
|
|
|
|
|
| |||||||||
As of December 31, 2011, all of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody’s, a rating of AAA, AA, A or BBB from Standard & Poor’s (“S&P”), Fitch, Dominion, or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a
46
comparable internal rating if an externally provided rating is not available. All of our fixed income securities are rated by third party credit rating agencies, the National Association of Insurance Commissioners (“NAIC”), and/or internally rated. Our initial investment decisions and ongoing monitoring procedures for fixed income securities are based on a thorough due diligence process which includes, but is not limited to, an assessment of the credit quality, sector, structure, and liquidity risks of each issue.
The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of December 31, 2011.
| Aaa | Aa | A | ||||||||||||||||||||||
| ($ in thousands) | Fair value | Unrealized gain/(loss) | Fair value | Unrealized gain/(loss) | Fair value | Unrealized gain/(loss) | ||||||||||||||||||
U.S. government and agencies | $ | 90,002 | $ | 5,943 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Municipal | — | — | 2,898 | 399 | — | — | ||||||||||||||||||
Corporate | ||||||||||||||||||||||||
Public | 3,176 | 180 | 29,560 | 2,116 | 104,217 | 7,861 | ||||||||||||||||||
Privately placed | 20,636 | 378 | 4,131 | 138 | — | — | ||||||||||||||||||
Foreign government | — | — | 5,237 | 239 | — | — | ||||||||||||||||||
RMBS | ||||||||||||||||||||||||
U.S. government sponsored entities (“U.S. Agency”) | 35,150 | 2,303 | — | — | — | — | ||||||||||||||||||
Prime residential mortgage-backed securities (“Prime”) | 1,877 | 37 | — | — | 3,159 | 23 | ||||||||||||||||||
Alt-A residential mortgage-backed securities (“Alt-A”) | — | — | — | — | 2,321 | 55 | ||||||||||||||||||
CMBS | 6,872 | 361 | — | — | 1,484 | (519 | ) | |||||||||||||||||
ABS | 2,814 | 8 | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed income securities | $ | 160,527 | $ | 9,210 | $ | 41,826 | $ | 2,892 | $ | 111,181 | $ | 7,420 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Baa | Total | |||||||||||||||
| Fair value | Unrealized gain/(loss) | Fair value | Unrealized gain/(loss) | |||||||||||||
U.S. government and agencies | $ | — | $ | — | $ | 90,002 | $ | 5,943 | ||||||||
Municipal | — | — | 2,898 | 399 | ||||||||||||
Corporate | ||||||||||||||||
Public | 16,824 | 1,090 | 153,777 | 11,247 | ||||||||||||
Privately placed | 3,282 | 243 | 28,049 | 759 | ||||||||||||
Foreign government | — | — | 5,237 | 239 | ||||||||||||
RMBS | ||||||||||||||||
U.S. Agency | — | — | 35,150 | 2,303 | ||||||||||||
Prime | — | — | 5,036 | 60 | ||||||||||||
Alt-A | — | — | 2,321 | 55 | ||||||||||||
CMBS | — | — | 8,356 | (158 | ) | |||||||||||
ABS | — | — | 2,814 | 8 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed income securities | $ | 20,106 | $ | 1,333 | $ | 333,640 | $ | 20,855 | ||||||||
|
|
|
|
|
|
|
| |||||||||
47
RMBS, CMBS and ABS are structured securities that are primarily collateralized by residential and commercial real estate loans and other consumer or corporate borrowings. The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a “class”, qualifies for a specific original rating. For example, the “senior” portion or “top” of the capital structure, or rating class, which would originally qualify for a rating of Aaa typically has priority in receiving principal repayments on the underlying collateral and retains this priority until the class is paid in full. In a sequential structure, underlying collateral principal repayments are directed to the most senior rated Aaa class in the structure until paid in full, after which principal repayments are directed to the next most senior Aaa class in the structure until it is paid in full. Senior Aaa classes generally share any losses from the underlying collateral on a pro-rata basis after losses are absorbed by classes with lower original ratings. The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the structures. These securities continue to retain the payment priority features that existed at the origination of the securitization trust. Other forms of credit enhancement may include structural features embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance. The underlying collateral can have fixed interest rates, variable interest rates (such as adjustable rate mortgages) or may contain features of both fixed and variable rate mortgages.
RMBS, including U.S. Agency, Prime and Alt-A, totaled $42.5 million as of December 31, 2011, with an unrealized net capital gain of $2.4 million. The RMBS portfolio is subject to interest rate risk, but unlike other fixed income securities, is additionally subject to significant prepayment risk from the underlying residential mortgage loans. The credit risk associated with U.S. Agency portfolio is mitigated because they were issued by or have underlying collateral guaranteed by U.S. government agencies.
CMBS totaled $8.4 million as of December 31, 2011, with an unrealized net capital loss of $158 thousand. The CMBS portfolio is subject to credit risk, but unlike certain other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgage loans. All of the CMBS investments are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area.
ABS totaled $2.8 million as of December 31, 2011, with an unrealized net capital gain of $8 thousand. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance.
Short-term investmentsOur short-term investment portfolio was $13.0 million and $11.6 million as of December 31, 2011 and 2010, respectively.
Unrealized net capital gains totaled $20.9 million as of December 31, 2011 compared to $15.6 million as of December 31, 2010. The improvement since December 31, 2010 was due to declining risk-free interest rates, partially offset by widening credit spreads. The following table presents unrealized net capital gains and losses as of December 31.
| ($ in thousands) | 2011 | 2010 | ||||||
U.S. government and agencies | $ | 5,943 | $ | 3,130 | ||||
Municipal | 399 | 177 | ||||||
Corporate | 12,006 | 9,326 | ||||||
Foreign government | 239 | 92 | ||||||
RMBS | 2,418 | 2,426 | ||||||
CMBS | (158 | ) | 340 | |||||
ABS | 8 | 117 | ||||||
|
|
|
| |||||
Unrealized net capital gains and losses, pre-tax | $ | 20,855 | $ | 15,608 | ||||
|
|
|
| |||||
48
The unrealized net capital gains for the fixed income portfolio totaled $20.9 million and comprised $21.5 million of gross unrealized gains and $626 thousand of gross unrealized losses as of December 31, 2011. This is compared to unrealized net capital gains for the fixed income portfolio totaling $15.6 million, comprised of $16.1 million of gross unrealized gains and $492 thousand of gross unrealized losses as of December 31, 2010.
Gross unrealized gains and losses as of December 31, 2011 on fixed income securities by type and sector are provided in the table below.
| Par value | Amortized cost | Gross unrealized | Fair value | Amortized cost as a percent of par value | Fair value as a percent of par value | |||||||||||||||||||||||
| ($ in thousands) | Gains | Losses | ||||||||||||||||||||||||||
Corporate: | ||||||||||||||||||||||||||||
Consumer goods (cyclical and non-cyclical) | $ | 53,000 | $ | 53,112 | $ | 4,124 | $ | — | $ | 57,236 | 100.2 | % | 108.0 | % | ||||||||||||||
Banking | 16,000 | 16,269 | 439 | (99 | ) | 16,609 | 101.7 | 103.8 | ||||||||||||||||||||
Financial services | 12,000 | 11,992 | 901 | — | 12,893 | 99.9 | 107.4 | |||||||||||||||||||||
Energy | 13,500 | 13,590 | 1,024 | — | 14,614 | 100.7 | 108.3 | |||||||||||||||||||||
Utilities | 17,000 | 16,982 | 1,907 | — | 18,889 | 99.9 | 111.1 | |||||||||||||||||||||
Capital goods | 18,000 | 18,108 | 1,747 | — | 19,855 | 100.6 | 110.3 | |||||||||||||||||||||
Transportation | 6,597 | 6,754 | 417 | — | 7,171 | 102.4 | 108.7 | |||||||||||||||||||||
Basic industry | 12,000 | 12,062 | 776 | — | 12,838 | 100.5 | 107.0 | |||||||||||||||||||||
Technology | 11,000 | 10,951 | 337 | — | 11,288 | 99.6 | 102.6 | |||||||||||||||||||||
Other | 10,000 | 10,000 | 433 | — | 10,433 | 100.0 | 104.3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total corporate fixed income portfolio | 169,097 | 169,820 | 12,105 | (99 | ) | 181,826 | 100.4 | 107.5 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
U.S. government and agencies | 81,320 | 84,059 | 5,943 | — | 90,002 | 103.4 | 110.7 | |||||||||||||||||||||
Municipal | 2,500 | 2,499 | 399 | — | 2,898 | 100.0 | 115.9 | |||||||||||||||||||||
Foreign government | 5,000 | 4,998 | 239 | — | 5,237 | 100.0 | 104.7 | |||||||||||||||||||||
RMBS | 40,122 | 40,089 | 2,427 | (9 | ) | 42,507 | 99.9 | 105.9 | ||||||||||||||||||||
CMBS | 8,500 | 8,514 | 360 | (518 | ) | 8,356 | 100.2 | 98.3 | ||||||||||||||||||||
ABS | 2,796 | 2,806 | 8 | — | 2,814 | 100.4 | 100.6 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total fixed income securities | $ | 309,335 | $ | 312,785 | $ | 21,481 | $ | (626 | ) | $ | 333,640 | 101.1 | 107.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
The banking sector had the only gross unrealized losses in our corporate fixed income securities portfolio as of December 31, 2011. In general, credit spreads remain wider than at initial purchase for most of the securities with gross unrealized losses.
We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income security that may be other-than-temporarily impaired. The process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and payment defaults. The securities identified, in addition to other securities for which we may have a concern, are evaluated based on facts and circumstances for inclusion on our watch-list. All investments in an unrealized loss position as of December 31, 2011 were included in our portfolio monitoring process for determining whether declines in value were other than temporary.
The extent and duration of a decline in fair value for fixed income securities have become less indicative of actual credit deterioration with respect to an issue or issuer. While we continue to use declines in fair value and the length of time a security is in an unrealized loss position as indicators of potential credit deterioration, our
49
determination of whether a security’s decline in fair value is other than temporary has placed greater emphasis on our analysis of the underlying credit and collateral and related estimates of future cash flows.
As of December 31, 2011, we do not have the intent to sell and it is not more likely than not we will be required to sell our securities with unrealized losses before recovery of the amortized cost basis.
Net investment income The following table presents net investment income for the years ended December 31.
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Fixed income securities | $ | 12,133 | $ | 12,480 | $ | 12,098 | ||||||
Short-term and other investments | 11 | 21 | 107 | |||||||||
|
|
|
|
|
| |||||||
Investment income, before expense | 12,144 | 12,501 | 12,205 | |||||||||
Investment expense | (308 | ) | (434 | ) | (422 | ) | ||||||
|
|
|
|
|
| |||||||
Net investment income | $ | 11,836 | $ | 12,067 | $ | 11,783 | ||||||
|
|
|
|
|
| |||||||
Net investment income decreased 1.9% or $231 thousand in 2011 compared to 2010 due to lower yields. Net investment income increased 2.4% or $284 thousand in 2010 compared to 2009 due to higher average investment balances.
Realized capital gains and losses The following table presents realized capital gains and losses and the related tax effect for the years ended December 31.
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Realized capital gains and losses, pre-tax | $ | 2,075 | $ | 694 | $ | 1,480 | ||||||
Income tax expense | (726 | ) | (243 | ) | (518 | ) | ||||||
|
|
|
|
|
| |||||||
Realized capital gains and losses, after-tax | $ | 1,349 | $ | 451 | $ | 962 | ||||||
|
|
|
|
|
| |||||||
The net realized capital gains in 2011, 2010 and 2009 were related to sales of investments.
Cash As of December 31, 2011, our cash balance was $6.0 million compared to $3.6 million as of December 31, 2010. Fluctuations in our cash flows generally result from differences in the timing of reinsurance payments to and from ALIC.
Reinsurance recoverable, contractholder funds and reserve for life-contingent contract benefitsUnder GAAP, when reinsurance contracts do not relieve the ceding company of legal liability to contractholders, the ceding company is required to report reinsurance recoverables arising from these contracts separately as assets. The liabilities for the contracts are reported as contractholder funds, reserve for life-contingent contract benefits, or separate accounts liabilities depending on the characteristics of the contracts. We reinsure all reserve liabilities with ALIC or non-affiliated reinsurers. Reinsurance recoverables and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the Statements of Financial Position, while the assets which support the separate accounts liabilities are reflected as separate accounts assets.
As of December 31, 2011, contractholder funds decreased to $15.49 billion from $17.25 billion as of December 31, 2010 as a result of new and additional deposits on fixed annuities and interest-sensitive life policies and interest credited to contractholder funds being more than offset by surrenders, withdrawals, benefit payments and related contract charges. The reserve for life-contingent contract benefits increased to $3.20 billion as of December 31, 2011 from $3.01 billion as of December 31, 2010 due primarily to the aging of the in-force block of certain business and sales of traditional life insurance, partially offset by benefits paid and policy lapses. Reinsurance recoverables from ALIC decreased by $1.68 billion and reinsurance recoverables from non-affiliates increased $136.9 million.
50
We purchase reinsurance after evaluating the financial condition of the reinsurer, as well as the terms and price of coverage. As of December 31, 2011, 98% of reinsurance recoverables due from non-affiliated companies were reinsured under uncollateralized reinsurance agreements with companies that had a financial strength rating of A- or above, as measured by S&P. In certain cases, these ratings refer to the financial strength of the affiliated group or parent company of the reinsurer. We continuously monitor the creditworthiness of reinsurers in order to determine our risk of recoverability on an individual and aggregate basis, and a provision for uncollectible reinsurance is recorded if needed. No amounts have been deemed unrecoverable in the three years ended December 31, 2011.
MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in interest rates and credit spreads. We also have certain exposures to changes in equity prices in our equity-indexed annuities and separate accounts liabilities, which are transferred to ALIC in accordance with our reinsurance agreements.
Overview In formulating and implementing guidelines for investing funds, we seek to earn returns that contribute to attractive and stable profits and long-term capital growth.
We manage our exposure to market risk through the use of asset allocation, duration, and as appropriate, through the use of stress tests. We have asset allocation limits that place restrictions on the total funds that may be invested within an asset class. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies.
Interest rate riskis the risk that we will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of our interest bearing assets. This risk arises from our investment in interest-sensitive assets. Interest rate risk includes risks related to changes in U.S. Treasury yields and other key risk-free reference yields.
One of the measures used to quantify interest rate exposure is duration. Duration measures the price sensitivity of assets to changes in interest rates. For example, if interest rates increase 100 basis points, the fair value of an asset with a duration of 5 is expected to decrease in value by 5%. To calculate duration, we project asset cash flows and calculate their net present value using a risk-free market interest rate adjusted for credit quality, sector attributes, liquidity and other specific risks. Duration is calculated by revaluing these cash flows at alternative interest rates and determining the percentage change in aggregate fair value. The projections include assumptions (based upon historical market experience and our experience) that reflect the effect of changing interest rates on the prepayment, lapse, leverage and/or option features of instruments, where applicable. The preceding assumptions relate primarily to mortgage-backed securities, and municipal and corporate obligations. Our asset duration was 3.5 and 3.4 as of December 31, 2011 and 2010, respectively.
Based upon the information and assumptions used in the duration calculation, and interest rates in effect as of December 31, 2011, we estimate that a 100 basis point immediate, parallel increase in interest rates (“rate shock”) would decrease the net fair value of the assets by $11.6 million, compared to $11.3 million as of December 31, 2010. The selection of a 100 basis point immediate, parallel change in interest rates should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event.
To the extent that conditions differ from the assumptions we used in these calculations, duration and rate shock measures could be significantly impacted. Additionally, our calculations assume that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the effect of non-parallel changes in the term structure of interest rates and/or large changes in interest rates.
51
Credit spread riskis the risk that we will incur a loss due to adverse changes in credit spreads (“spreads”). This risk arises from our investment in spread-sensitive fixed income assets.
We manage the spread risk in our assets. One of the measures used to quantify this exposure is spread duration. Spread duration measures the price sensitivity of the assets to changes in spreads. For example, if spreads increase 100 basis points, the fair value of an asset exhibiting a spread duration of 5 is expected to decrease in value by 5%.
Spread duration is calculated similarly to interest rate duration. The spread duration of assets was 3.6 as of both December 31, 2011 and 2010. Based upon the information and assumptions we use in this spread duration calculation, and spreads in effect as of December 31, 2011, we estimate that a 100 basis point immediate, parallel increase in spreads across all asset classes, industry sectors and credit ratings (“spread shock”) would decrease the net fair value of the assets by $8.9 million, compared to $10.1 million as of December 31, 2010. The selection of a 100 basis point immediate parallel change in spreads should not be construed as our prediction of future market events, but only as an illustration of the potential effect of such an event.
Equity price risk is the risk that we will incur losses due to adverse changes in the general levels of the equity markets. As of December 31, 2011 and 2010, we had separate accounts assets related to variable annuity and variable life contracts with account values totaling $1.68 billion and $2.02 billion, respectively. Equity risk exists for contract charges based on separate account balances and guarantees for death and/or income benefits provided by our variable products. All variable life and annuity contract charges and fees, liabilities and benefits, including guarantees for death and/or income benefits, are ceded to ALIC in accordance with the reinsurance agreements, thereby limiting our equity risk exposure. In 2006, ALIC disposed of substantially all of its variable annuity business through reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc. and therefore mitigated this aspect of ALIC’s risk. The Company was not a direct participant of this agreement and its reinsurance agreements with ALIC remain unchanged.
As of December 31, 2011 and 2010 we had $3.53 billion and $4.38 billion, respectively, in equity-indexed annuity liabilities that provide customers with interest crediting rates based on the performance of the S&P 500. All contract charges and fees, and liabilities and benefits related to equity-indexed annuity liabilities are ceded to ALIC in accordance with the reinsurance agreements, thereby limiting our equity risk exposure.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources consist of shareholder’s equity. The following table summarizes our capital resources as of December 31.
| ($ in thousands) | 2011 | 2010 | 2009 | |||||||||
Common stock, retained income and additional capital paid-in | $ | 324,772 | $ | 315,722 | $ | 307,412 | ||||||
Accumulated other comprehensive income | 13,556 | 10,145 | 5,561 | |||||||||
|
|
|
|
|
| |||||||
Total shareholder’s equity | $ | 338,328 | $ | 325,867 | $ | 312,973 | ||||||
|
|
|
|
|
| |||||||
Shareholder’s equity increased in 2011 and 2010 due to net income and increased unrealized net capital gains.
52
Financial ratings and strengthWe share the insurance financial strength ratings of our parent, ALIC, as the majority of our business is reinsured to ALIC. The following table summarizes ALIC’s financial strength ratings as of December 31, 2011.
Rating Agency | Rating | |
A.M. Best Company, Inc. | A+ (“Superior”) | |
Standard & Poor’s Ratings Services | A+ (“Strong”) | |
Moody’s Investors Service, Inc. | A1 (“Good”) |
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), exposure to risks, the current level of operating leverage and Allstate Insurance Company’s ratings.
State laws specify regulatory actions if an insurer’s risk-based capital (“RBC”), a measure of an insurer’s solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest rate risks. As of December 31, 2011, our RBC was within the range that we target.
The NAIC has also developed a set of financial relationships or tests known as the Insurance Regulatory Information System to assist state regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or actions by insurance regulatory authorities. The NAIC analyzes financial data provided by insurance companies using prescribed ratios, each with defined “usual ranges”. Generally, regulators will begin to monitor an insurance company if its ratios fall outside the usual ranges for four or more of the ratios. If an insurance company has insufficient capital, regulators may act to reduce the amount of insurance it can issue. Our ratios are within these ranges.
Liquidity sources and uses Our potential sources of funds principally include the activities as follows.
| • | Receipt of insurance premiums |
| • | Contractholder fund deposits |
| • | Reinsurance recoveries |
| • | Receipts of principal and interest on investments |
| • | Sales of investments |
| • | Intercompany loans |
| • | Capital contributions from parent |
Our potential uses of funds principally include the activities as follows.
| • | Payment of contract benefits, surrenders and withdrawals |
| • | Reinsurance cessions and payments |
| • | Operating costs and expenses |
| • | Purchase of investments |
| • | Repayment of intercompany loans |
| • | Dividends to parent |
| • | Tax payments/settlements |
Cash flows As reflected in our Statements of Cash Flows, net cash provided by operating activities was $10.9 million, $2.1 million and $4.3 million in 2011, 2010 and 2009, respectively. Fluctuations in net cash
53
provided by operating activities primarily occur as a result of changes in net investment income and differences in the timing of reinsurance payments to and from ALIC.
Under the terms of reinsurance agreements, all premiums and deposits, excluding variable annuity and life contract deposits allocated to separate accounts and those reinsured to non-affiliated reinsurers, are transferred to ALIC, which maintains the investment portfolios supporting our products. Payments of contractholder claims, benefits, contract surrenders and withdrawals and certain operating costs (excluding investment-related expenses), are reimbursed by ALIC, under the terms of the reinsurance agreements. We continue to have primary liability as a direct insurer for risks reinsured. Our ability to meet liquidity demands is dependent on ALIC’s and other reinsurers’ ability to meet those obligations under the reinsurance programs.
Our ability to pay dividends is dependent on business conditions, income, cash requirements and other relevant factors. The payment of shareholder dividends without the prior approval of the state insurance regulator is limited by Nebraska law to formula amounts based on net income and capital and surplus, determined in conformity with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. The maximum amount of dividends that we can pay during 2012 without prior approval of the Nebraska Department of Insurance is $31.9 million.
Contractual obligations Due to the reinsurance agreements that we have in place, our contractual obligations are ceded to ALIC and non-affiliated reinsurers.
REGULATION AND LEGAL PROCEEDINGS
We are subject to extensive regulation and we are involved in various legal and regulatory actions, all of which have an effect on specific aspects of our business. For a detailed discussion of the legal and regulatory actions in which we are involved, see Note 9 of the financial statements.
PENDING ACCOUNTING STANDARDS
There are several pending accounting standards that we have not implemented either because the standard has not been finalized or the implementation date has not yet occurred. For a discussion of these pending standards, see Note 2 of the financial statements.
The effect of implementing certain accounting standards on our financial results and financial condition is often based in part on market conditions at the time of implementation of the standard and other factors we are unable to determine prior to implementation. For this reason, we are sometimes unable to estimate the effect of certain pending accounting standards until the relevant authoritative body finalizes these standards or until we implement them.
| Item 11(j). | Quantitative and Qualitative Disclosures About Market Risk |
Information required for Item 11(j) is incorporated by reference to the material under the caption “Market Risk” in Item 11(h) of this report.
| ITEM 11(k). | Directors, Executive Officers, Promoters and Control Persons. |
Identification of Directors and Executive Officers:
Directors are elected at each annual meeting of shareholders, for a term of one year. The biographies of each of the directors and executive officers serving at the end of the 2011 fiscal year below contains information regarding the person’s service as a director, business experience, director positions held currently or at any time during the last five years, and the experiences, qualifications, attributes or skills that caused the company management to determine that a director or executive officer should serve as such for Lincoln Benefit.
54
Anurag Chandra, 34, has been director and Senior Vice President since March 2011. Mr. Chandra is also an Executive Vice President of Allstate Insurance Company and Allstate Life Insurance Company. Mr. Chandra has broad responsibilities for driving long-term strategy and for improving the operational base for the Allstate Financial group of companies. More specifically, Mr. Chandra will have direct accountability for product development, underwriting, wholesaling and asset liability management. Prior to joining Allstate in January 2011, Mr. Chandra was an executive vice president and chief operating officer for HealthMarkets, Inc. Under his leadership, the company transformed from a niche individual health insurance manufacturer to one of the largest independent distributors in the United States. Prior to that role, Mr. Chandra was a principal at Aquiline Capital Partners, a global private equity firm that took advantage of market conditions to launch successful new insurance and financial services companies. Mr. Chandra has also held senior operating and strategic development roles at Nationwide Financial Services and Conseco/Bankers Life and Casualty. Currently, Mr. Chandra also serves as a director for Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Mr. Chandra has extensive experience with the day-to-day management of company operations.
Lawrence W. Dahl, 52, has been director since 1999 and President and Chief Operating Officer since November 2005. In his current role, Mr. Dahl manages the distribution relationships for Lincoln Benefit. Mr. Dahl is also a Vice President of Allstate Life Insurance Company. Mr. Dahl began his Allstate career in 1987 in the Tax Department before becoming the Executive Vice President of Administration for Lincoln Benefit, where he was responsible for Marketing, Field Technology, Compliance, Planning and Strategy. Mr. Dahl progressed through various other leadership positions, including Executive Vice President of Sales and President of Distribution before becoming the President and Chief Operating Officer. Mr. Dahl has also earned a JURIS DOCTOR degree and a Certified Public Account designation. Over the course of his career with Lincoln Benefit, Mr. Dahl has gained deep knowledge of the life insurance industry as well as extensive experience with distribution and sales.
Mark A. Green, 44, became director and Senior Vice President in March 2010. Mr. Green is also the Senior Vice President of Allstate Insurance Company. Mr. Green was director and Senior Vice President of National Sales for Allstate Life Insurance Company from February 2010 to December 2011. Previously, Mr. Green was the Assistant Field Vice President for Allstate Insurance Company in the Capital Region, where he had geographic responsibility for West Virginia, Delaware and Washington D.C. Before joining Allstate, Mr. Green was a founding equity partner and chief risk officer for AIX Group in Connecticut, where he was responsible for corporate development and overall risk and investment management. He has worked for Wells Fargo, Chubb Group and Swiss Reinsurance. Mr. Green has experience in optimizing insurance company operations to drive profitable growth.
Susan L. Lees, 54, has been director and Senior Vice President, General Counsel and Secretary since August 2008. Ms. Lees is also Senior Vice President, General Counsel and Secretary of Allstate Life Insurance Company. At Allstate for over 20 years, Ms. Lees progressed through various counsel positions throughout Allstate before become an assistant vice president in 1999. As the leader of the Corporate Law division of Allstate Law and Regulation, Ms. Lees gained extensive experience working with a number of the business areas throughout the enterprise, including Allstate Life Insurance Company. Currently, Ms. Lees serves as a director for Association of Life Insurance Counsel. She is also a director of Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Ms. Lees was on the Board of Director for Life Insurance Council of New York from November 2008 to December 2011. Ms. Lees has a deep understanding of insurance business generally, as well as applicable laws and regulations, including corporate and securities laws and corporate governance matters. In addition, Ms. Lees has extensive knowledge regarding Lincoln Benefit’s business, including its employees, products, agencies and customers.
John C. Pintozzi, 46, has been director, Senior Vice President and Chief Financial Officer since March 2005. Mr. Pintozzi also is Senior Vice President and Chief Financial Officer for Allstate Life Insurance Company. In these positions, Mr. Pintozzi is responsible for the planning and analysis, capital allocation, valuation and compliance functions as well as Allstate Federal Savings Bank. Prior to Allstate, Mr. Pintozzi was
55
an audit partner with Deloitte & Touche, specializing in the insurance and financial services industries. He is a Certified Public Accountant and holds memberships with the American Institute of Certified Public Accountants and the Illinois CPA Society. In addition, Mr. Pintozzi currently serves as a director for Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Mr. Pintozzi has extensive experience in corporate and insurance company finance and accounting.
Matthew E. Winter, 55, has been director since December 2009, Chief Executive Officer and Chairman of the Board since March 2010. Mr. Winter is also the President and Chief Executive Officer of Allstate Life Insurance Company and Senior Executive Vice President of Allstate Insurance Company, each a parent organization of Lincoln Benefit. Prior to Allstate, Mr. Winter was the Vice Chairman of American International Group, President and Chief Executive Officer of American General Life Companies, and Executive Vice President for MassMutual Financial Group. For a brief period in 2009, Mr. Winter served as a director of EP Global Communications, a magazine publication and distribution company. Currently, Mr. Winter also serves as a director for Allstate Insurance Company and Allstate Life Insurance Company, each of which is affiliated with Lincoln Benefit. Mr. Winter was also a former Chairman of the Houston Food Bank Board of Directors. Mr. Winter has extensive experience leading major life insurance and financial services providers, working with financial and estate planning products and overseeing the operations of insurance companies.
Involvement in Certain Legal Proceedings
No directors or executive officers have been involved in any legal proceedings that are material to an evaluation of the ability or integrity of any director or executive officer of Lincoln Benefit.
| Item 11(l). | Executive Compensation |
Compensation Discussion and Analysis (“CD&A”)
Executive officers of Lincoln Benefit also serve as officers of other subsidiaries of The Allstate Corporation (“Allstate”) and receive no compensation directly from Lincoln Benefit. They are employees of an Allstate subsidiary. Allocations have been made for each named executive based on the amount of the named executive’s compensation allocated to Lincoln Benefit under the Amended and Restated Service and Expense Agreement among Allstate Insurance Company, Allstate, and certain affiliates, as amended effective January 1, 2009, to which Lincoln Benefit is a party (the “Service and Expense Agreement”). Those allocations are reflected in the Summary Compensation Table set forth below and in this disclosure, except where noted. The named executives may have received additional compensation for services rendered to other Allstate subsidiaries, and those amounts are not reported.
Named Executives
This CD&A describes the executive compensation program at Allstate and specifically describes total 2011 compensation for the following named executives of Lincoln Benefit:
| • | Matthew E. Winter—Chairman of the Board and Chief Executive Officer (CEO) |
| • | John C. Pintozzi—Senior Vice President and Chief Financial Officer (CFO) |
| • | Anurag Chandra—Executive Vice President |
| • | Lawrence W. Dahl—President and Chief Operating Officer |
| • | Mark A. Green—Senior Vice President |
56
Elements of 2011 Executive Compensation Program
Allstate has made changes to its executive compensation program for 2012. The following table lists the elements of target direct compensation for Allstate’s 2011 executive compensation program. The design balances fixed and variable compensation elements and provides alignment with both short and long-term business goals through annual and long-term incentives. Allstate’s incentives are designed to drive overall corporate performance, specific business unit strategies, and individual performance using performance and operational measures that Allstate correlates to stockholder value, and these incentives align with Allstate’s strategic vision and operating priorities.
| Element | Key Characteristics | Why Allstate Pays This Element | How Allstate Determines Amount | |||||
| Fixed | Base salary | Fixed compensation component payable in cash. Reviewed annually and adjusted when appropriate. | Provide a base level of competitive cash compensation for executive talent. | Experience, job scope, market practice, individual performance. | ||||
| Variable | Annual incentive awards | Variable compensation component payable in cash based on performance against annually established goals and assessment of individual performance. | Motivate and reward executives for performance on key strategic, operational, and financial measures over the year. | Allstate performance on three measures: • Adjusted underlying operating income
• Book value per share
• Growth in policies in multi-category households
Individual contribution to performance. | ||||
| Restricted Stock Units | RSUs vest over four years; 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates. | Coupled with stock options, align the interests of executives with long-term shareholder value and retain executive talent. | Job scope, market practice, individual performance. | |||||
| Stock Options | Nonqualified stock options that expire in ten years and become exercisable over four years; 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates. | Coupled with RSUs, align the interests of executives with long-term shareholder value and retain executive talent. | Job scope, market practice, individual performance. | |||||
Compensation Practices
Allstate monitors performance toward goals throughout the year and reviews executive compensation program design and executive pay levels annually. As part of that evaluation, Allstate considers available data regarding compensation paid to similarly-situated executives at companies against which it competes for
57
executive talent. With respect to the compensation program for 2011, the Compensation and Succession Committee (the “Committee”) of the Allstate Board of Directors considered compensation data for the peer companies listed below for Mr. Winter, as well as compensation information from certain S&P 100 companies with fiscal 2010 revenue of between $15 billion and $60 billion with which Allstate competes for executive talent. Towers Watson, an independent compensation consultant, recommended no modifications to the peer group for 2011.
Peer Insurance Companies
| ACE Ltd. | Manulife Financial Corporation | |
| AFLAC Inc. | MetLife Inc. | |
| The Chubb Corporation | The Progressive Corporation | |
| The Hartford Financial Services Group, Inc. | Prudential Financial, Inc. | |
| Lincoln National Corporation | The Travelers Companies, Inc. |
With respect to the named executives other than Mr. Winter, Allstate management considered compensation surveys that provided information on companies of broadly similar size and business mix as Allstate, as well as companies with a broader market context. The compensation surveys considered include the Mercer 2010 US Property & Casualty Insurance Company Survey, the 2010 Towers Watson Diversified Insurance Survey, and the Towers Watson Compensation Data Bank. The weight given to information obtained from these sources varied depending on the position being evaluated. The Mercer 2010 US Property & Casualty Insurance Company Survey includes compensation data for 14 property and casualty insurance companies with at least $6 billion in direct written premiums. The 2010 Towers Watson Diversified Insurance Survey includes 18 insurance companies with assets greater than $100 billion. The Towers Watson Compensation Data Bank provides compensation data on 101 companies with revenues greater than $20 billion. In addition, in its executive pay and performance discussions, Allstate management considered information regarding other companies in the financial services industries.
Salary
Mr. Winter’s salary is set by the Allstate Board of Directors based on the Committee’s recommendation. The salaries of the other named executives are set by Allstate management. In recommending executive base salary levels, Allstate uses the 50th percentile of its peer insurance companies as a guideline for Mr. Winter and the 50th percentile of insurance and general industry data as a guideline for the other named executives, which allows Allstate to compete effectively for executive talent. Annual merit increases for the named executives are based on evaluations of their performance using the average enterprise-wide merit increase as a guideline.
| • | The average enterprise-wide merit and promotional increases are based on a combination of U.S. general and insurance industry market data and are set at levels intended to be competitive. |
| • | Annual merit increases for the named executives are based on evaluations of their performance using the average enterprise-wide merit increase as a guideline. |
| • | The base salaries for each named executive were reviewed in February of 2011. Allstate established a new base salary for each named executive based on individual performance and in line with the enterprise-wide merit increase. |
| • | The Committee approved an increase in Mr. Winter’s salary based on individual performance and market adjustments, effective February 27, 2011. Effective October 6, 2011, the Committee approved another increase to reflect Mr. Winter’s expanded job scope and responsibilities. |
Annual Cash Incentive Awards
In 2011 executives could earn an annual cash incentive award based on Allstate’s achievement of performance measures during the year and assessments of individual performance.
58
For Mr. Winter, the maximum award that could be earned was 20% of the Adjusted Underlying Operating Income pool (but in no event greater than the $8.5 million maximum set forth in the Annual Executive Incentive Plan). The Committee retained complete discretion to pay less than this maximum amount, with the actual award based on Mr. Winter’s target annual incentive award opportunity and the achievement of performance measures and assessments of individual performance as described below. None of the named executives other than Mr. Winter participate in the Operating Income Pool.
Long-term Equity Incentive Awards
Allstate grants equity awards to executives based on scope of responsibility, consistent with Allstate’s philosophy that a significant amount of executive compensation should be in the form of equity and that a greater percentage of compensation should be tied to performance for executives who bear higher levels of responsibility for Allstate’s performance. Additionally, from time to time, equity awards are also granted to attract new executives. Allstate annually reviews the mix of equity incentives provided to the named executives. For Mr. Winter, the mix has consisted of 65% stock options and 35% restricted stock units, because Allstate believes stock options are a form of performance-based incentive compensation, requiring growth in the stock price to deliver any value to an executive. The restricted stock units provide alignment with stockholder interests along with an effective retention incentive. Other employees eligible for equity incentive awards, including the named executives other than Mr. Winter, had the choice of receiving the value of their equity incentive awards in the following proportions between stock options and restricted stock units:
| • | 25% stock options and 75% restricted stock units; |
| • | 50% stock options and 50% restricted stock units; |
| • | 65% stock options and 35% restricted stock units; or |
| • | 75% stock options and 25% restricted stock units. |
The elections are reflected in the Grants of Plan-Based Awards at Fiscal Year-End 2011 table.
Timing of Equity Awards and Grant Practices
Typically, the Committee approves grants of equity awards on an annual basis during a meeting in the first quarter, after Allstate announces fourth quarter and full-year results. The timing allows the Committee to align direct compensation elements with Allstate’s performance and business goals. Throughout the year, the Committee grants equity incentive awards to newly hired or promoted executives, and in recognition of outstanding achievements. Equity incentive awards to employees other than Allstate executive officers also may be granted by an equity award committee which currently consists of Allstate’s chief executive officer. The equity award committee may grant restricted stock units and stock options to newly hired and promoted executives and in recognition of outstanding achievements. The grant date for these awards in 2011 was fixed as the first business day of a month following the later of committee action or the date of hire or promotion.
59
Performance Measures for 2011
For 2011 annual incentive awards, the Committee used a single enterprise-wide funding program based on three equally weighted performance measures. These measures are consistent with overall shareholder value creation, growth, and profitability, and encouraged success and collaboration across business units. The three measures also align with Allstate’s strategy and operating priorities for 2011 to improve overall returns, grow Allstate’s business profitably, and broaden customer relationships. The three measures are shown in the table below.
| 2011 Annual Cash Incentive Award Performance Measures | ||||||||||||||||||||
| Measure | Threshold | Target | Maximum | Actual Results | ||||||||||||||||
Book Value per Share | $31.50 | $37.40 | $40.75 | $36.41 | 91.6% | |||||||||||||||
Adjusted Underlying Operating Income (in millions) | $2,700 | $2,925 | $3,300 | $3,214 | 215.6% | |||||||||||||||
Growth in Policies in Multi-Category Households | 0 | 50,000 | 200,000 | -36,232 | 0% | |||||||||||||||
Payout* | 50 | % | 100 | % | 250 | % | 102.4% payout | |||||||||||||
| * | Actual performance below threshold results in a 0% payout. |
The ranges of performance for Book Value Per Share and Adjusted Underlying Operating Income were developed through statistical modeling and adjusted to reflect strategic priorities. Allstate’s models measured the variability of actual results so that the measures required superior performance to achieve maximum levels. The performance ranges were then calibrated against Allstate management expectations around business operations, risks and prospects, plans and budgets as well as industry and market trends.
The range of performance for the Growth in Policies in Multi-Category Households reflects Allstate’s strategic priority to grow the number of Allstate’s product lines represented in customer households. The threshold for this measure was aggressively set at zero despite the fact that actual results were a negative 200,000 in 2010. The focus on improving returns in the homeowners line made this goal unattainable despite dramatic improvements in geographies not burdened by this conflicting objective.
In calculating the overall funding of the plan, Allstate’s achievement with respect to each performance measure was expressed as a percentage of the target goal, with interpolation applied between the threshold and target goals and between the target and maximum goals. The overall funding pool was calculated using the aggregate base salaries of all participants in the plan, as adjusted by any merit and promotional increases granted during the year on a prorated basis. The overall funding pool is the sum of the amounts as calculated below and the pool was utilized in a zero sum scheme.
| Aggregate salaries** | X | Target award opportunity as a percentage of salary** | X | Actual performance interpolated relative to threshold and target on a range of 50% to 100% and relative to target and maximum on a range of 100% to 250%* | X | Weighting*** |
| * | Actual performance below threshold results in 0%. |
| ** | Salaries, as adjusted by any merit and promotional increases granted during the year on a prorated basis. |
| *** | All three measures were equally weighted, so that collectively their weights added to 100%. |
The Committee approved the annual incentive award performance measures and the threshold, target, and maximum ranges in the first quarter of 2011. After the end of the year, the Committee reviewed the extent to which Allstate had achieved the various performance measures. Based on a subjective evaluation of each
60
executive’s performance, individual adjustments were made to the formula-driven annual incentive amounts. The recommendations were considered and approved by the Committee for Mr. Winter and by Allstate management for the other named executives. Allstate paid the cash incentive awards in March.
Other Elements of Compensation
To remain competitive with other employers and to attract, retain, and motivate highly talented executives and other employees, Allstate provides the benefits listed in the following table.
| Benefit or Perquisite | Named Executives | Other and Certain Managers | All Full-time and Regular Part-time Employees | |||||||||
401(k)(1) and defined benefit pension | Ÿ | Ÿ | Ÿ | |||||||||
Supplemental retirement benefit | Ÿ | Ÿ | ||||||||||
Health and welfare benefits(2) | Ÿ | Ÿ | Ÿ | |||||||||
Supplemental long term disability and executive physical program | Ÿ | Ÿ | (3 | ) | ||||||||
Deferred compensation | Ÿ | Ÿ | ||||||||||
Tax preparation and financial planning services | Ÿ | Ÿ | (4 | ) | ||||||||
Mobile phones, ground transportation, and personal use of aircraft(5) | Ÿ | Ÿ | ||||||||||
| (1) | Allstate contributed $.40 for every dollar of basic pre-tax deposits made in 2011 (up to 5% of eligible pay). |
| (2) | Including medical, dental, vision, life, accidental death and dismemberment, long term disability, and group legal insurance. |
| (3) | An executive physical program is available to all officers. |
| (4) | All officers are eligible for tax preparation services. Financial planning services were provided to Mr. Winter only. |
| (5) | Ground transportation is available to Messrs. Winter and Chandra. In limited circumstances approved by Allstate’s CEO, Mr. Winter is permitted to use Allstate’s corporate aircraft for personal purposes. Mr. Winter did not use the corporate aircraft for personal purposes in 2011. Mobile phones are available to members of Allstate’s senior leadership team, other officers, certain managers, and certain employees depending on their job responsibilities. |
Retirement Benefits
Each named executive participates in two different defined benefit pension plans. The Allstate Retirement Plan (ARP) is a tax qualified defined benefit pension plan available to all of Allstate’s regular full-time and regular part-time employees who meet certain age and service requirements. The ARP provides an assured retirement income based on an employee’s level of compensation and length of service at no cost to the employee. As the ARP is a tax qualified plan, federal tax law limits (1) the amount of an individual’s compensation that can be used to calculate plan benefits and (2) the total amount of benefits payable to a plan participant on an annual basis. For certain employees, these limits may result in a lower benefit under the ARP than would have been payable otherwise. Therefore, the Supplemental Retirement Income Plan (SRIP) was formed to provide ARP-eligible employees whose compensation or benefit amount exceeds the federal limits with an additional defined benefit in an amount equal to what would have been payable under the ARP if the federal limits did not exist.
Change-in-Control and Post-Termination Benefits
Since a change-in-control or other triggering event may never occur, Allstate does not view change-in-control benefits or post-termination benefits as compensation. Consistent with Allstate’s compensation objectives, Allstate offers these benefits to attract, motivate, and retain highly talented executives. A change-in-control of Allstate could have a disruptive impact on both Allstate and its executives. Allstate’s change-in-control benefits and post-termination benefits are designed to mitigate that impact and to maintain alignment between the interests of Allstate’s executives and Allstate stockholders.
61
Allstate substantially reduced its change-in-control benefits in 2011. Mr. Winter had previously been party to a change-in-control agreement, and he agreed to become a participant in a new change-in-control severance plan (CIC Plan). Compared with the previous arrangements, the CIC Plan eliminates all excise tax gross ups; eliminates the lump sum cash pension enhancement based on additional years of age, service, and compensation; and reduces the amount of cash severance payable to Mr. Winter from three to two times the sum of base salary and target annual incentive. In order to receive the cash severance benefits under the CIC Plan following a change in control, a participant must have been terminated (other than for cause, death, or disability) or the participant must have terminated employment for good reason (such as adverse changes in the terms or conditions of employment, including a material reduction in base compensation, a material change in authority, duties, or responsibilities, or a material change in job location) within two years following a change in control. In addition, if a change in control occurs, long-term equity incentive awards granted after 2011 will vest on an accelerated basis only if either Allstate terminates the executive’s employment (other than for cause, death, or disability) or the executive terminates his or her employment for good reason within two years after the change in control (so-called “double-trigger” vesting).
Mr. Pintozzi is party to a change-in-control agreement. On December 31, 2012, this change-in-control agreement will terminate, and Mr. Pintozzi will become a participant in the CIC Plan. In the event of a change-in-control prior to December 31, 2012, Mr. Pintozzi’s long-term equity incentive awards will vest immediately, and he will be eligible for an excise tax gross-up and a lump sum cash pension enhancement based on additional years of age, service, and compensation.
The other named executives are not participants in the CIC Plan and are not party to change-in-control agreements.
The change-in-control and post-termination arrangements which are described in thePotential Payments as a Result of Termination or Change-in-Control section are not provided exclusively to the named executives. A larger group of management employees is eligible to receive many of the post-termination benefits described in that section.
Stock Ownership Guidelines
Because Allstate believes management’s interests must be linked with those of Allstate’s stockholders, Allstate instituted stock ownership guidelines in 1996 that require each of the named executives, other than Mr. Dahl, to own Allstate common stock worth a multiple of base salary. The Committee approved new guidelines effective February 20, 2012. The new guidelines provide that each named executive, other than Mr. Dahl, must hold 75% of net after-tax shares received as equity compensation until his or her salary multiple guideline is met. The chart below shows the salary multiple guidelines and the equity holdings that count towards the requirement.
| Name | Guideline | Status | ||
Mr. Winter | 3x salary | Must hold 75% of net after-tax shares until guideline is met | ||
Mr. Pintozzi | 2x salary | ü Meets guideline | ||
Mr. Chandra | 2x salary | Must hold 75% of net after-tax shares until guideline is met | ||
Mr. Dahl | — | — | ||
Mr. Green | 2x salary | Must hold 75% of net after-tax shares until guideline is met |
| What Counts Toward the Guideline | What Does not Count Toward the Guideline | |
• Allstate shares owned personally | • Unexercised stock options | |
• Shares held in the Allstate 401(k) Savings Plan | • Performance stock awards | |
• Restricted stock units | ||
62
Allstate also has a policy on insider trading that prohibits all officers, directors, and employees from engaging in transactions in securities issued by Allstate or any of its subsidiaries that might be considered speculative or hedging, such as selling short or buying or selling options.
Executive Compensation Tables
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation of the named executives for all services rendered to Lincoln Benefit for the last three fiscal years, allocated to Lincoln Benefit in a manner consistent with the allocation of compensation under the Service and Expense Agreement.
| NAME(1) | YEAR | SALARY ($)(2) | BONUS ($) | STOCK AWARDS ($)(3) | OPTION AWARDS ($)(4) | NON-EQUITY INCENTIVE PLAN COMPENSATION ($)(5) | CHANGE IN PENSION VALUE AND NONQUALIFIED DEFERRED COMPENSATION EARNINGS ($)(6) | ALL OTHER COMPENSATION ($)(7) | TOTAL ($) | |||||||||||||||||||||||||||
Matthew E. Winter | ||||||||||||||||||||||||||||||||||||
| (Chairman of the Board and Chief Executive Officer) |
| 2011 2010 |
|
| 168,792 172,200 |
|
| 198,661 210,943 |
|
| 368,935 391,756 |
|
| 258,000 347,930 |
|
| 12,410 1,100 | (10)
|
| 11,398 10,082 |
|
| 1,018,196 1,134,011 |
| ||||||||||||
John C. Pintozzi (Senior Vice President and Chief Financial Officer) |
| 2011 2010 2009 |
|
| 143,788 130,757 120,224 |
|
| 7,436 | (8) |
| 97,283 94,860 55,594 |
|
| 97,275 94,859 106,439 |
|
| 107,500 157,535 75,456 |
|
| 15,318 8,735 10,673 | (11)
|
| 7,164 7,528 9,053 |
|
| 468,328 494,274 384,875 |
| |||||||||
Anurag Chandra | ||||||||||||||||||||||||||||||||||||
(Executive Vice President) | 2011 | 178,615 | 53,750 | (9) | 135,435 | 251,552 | 161,250 | 0 | 13,740 | 794,342 | ||||||||||||||||||||||||||
Lawrence W. Dahl (President and Chief Operating Officer) |
| 2011 2010 2009 |
|
| 280,000 274,586 253,299 |
|
| 47,991 53,428 25,195 |
|
| 47,996 17,810 48,246 |
|
| 100,000 137,159 113,091 |
|
| 258,501 136,233 235,494 | (12)
|
| 15,100 36,639 97,306 |
|
| 749,588 655,855 772,631 |
| ||||||||||||
Mark A. Green | ||||||||||||||||||||||||||||||||||||
(Senior Vice President) | 2011 | 99,403 | 60,655 | 20,223 | 61,060 | 4,720 | (13) | 7,398 | 253,459 | |||||||||||||||||||||||||||
| (1) | Mr. Winter was not a named executive for 2009 and Messrs. Chandra and Green were not named executives for 2009 and 2010. |
| (2) | Reflects amounts for 2009 that were paid in 2009 but which included amounts earned in 2008, due to the timing of Allstate’s payroll cycle. |
| (3) | The aggregate grant date fair value of restricted stock unit awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 718 (ASC 718). The number of restricted stock units granted in 2011 to each named executive is provided in theGrants of Plan-Based Awards table on page 66. The fair value of restricted stock unit awards is based on the final closing price of Allstate’s stock as of the date of grant, which in part reflects the payment of expected future dividends. (See note 18 to Allstate’s audited financial statements for 2011.) This amount reflects an accounting expense and does not correspond to actual value that will be realized by the named executives. |
| (4) | The aggregate grant date fair value of option awards computed in accordance with FASB ASC 718. The fair value of each option award is estimated on the date of grant using a binomial lattice model and the assumptions as set forth in the following table: |
| 2011 | 2010 | 2009 | ||||
Weighted average expected term | 7.9 years | 7.8 years | 8.1 years | |||
Expected volatility | 22.1 – 53.9% | 23.7 – 52.3% | 26.3 – 79.2% | |||
Weighted average volatility | 35.1% | 35.1% | 38.3% | |||
Expected dividends | 2.5 – 3.7% | 2.4 – 2.8% | 2.6% | |||
Weighted average expected dividends | 2.7% | 2.6% | 2.6% | |||
Risk-free rate | 0.0 – 3.5% | 0.1 – 3.9% | 0.0 – 3.7% |
(See note 18 to Allstate’s audited financial statements for 2011.) The number of options granted in 2011 to each named executive is provided in theGrants of Plan-Based Awards table on page 66. This amount reflects an accounting expense and does not correspond to actual value that will be realized by the named executives.
63
| (5) | Amounts in this column for 2009 and 2010 include amounts earned under the annual executive incentive plan and the long-term executive incentive compensation plan. There was no 2011 payout from the long-term executive incentive compensation plan as it was discontinued; the last pay cycle was 2008-2010. Annual cash incentive awards are paid in the year following performance. The breakdown for each component is as follows: |
Annual Cash Incentive | Long-term Cash Incentive | |||||||||||||||
| Name | Year | Award Amount | Cycle | Award Amount | ||||||||||||
Mr. Winter | 2011 | $ | 258,000 | — | — | |||||||||||
| 2010 | $ | 347,930 | 2008-2010 | $0 | ||||||||||||
Mr. Pintozzi | 2011 | $ | 107,500 | — | — | |||||||||||
| 2010 | $ | 157,535 | 2008-2010 | $0 | ||||||||||||
| 2009 | $ | 54,970 | 2007-2009 | $ | 20,486 | |||||||||||
Mr. Chandra | 2011 | $ | 161,250 | — | — | |||||||||||
Mr. Dahl | 2011 | $ | 100,000 | — | — | |||||||||||
| 2010 | $ | 137,159 | 2008-2010 | $0 | ||||||||||||
| 2009 | $ | 50,748 | * | 2007-2009 | $0 | |||||||||||
Mr. Green | 2011 | $ | 61,060 | — | — | |||||||||||
| * | In 2009, as President and Chief Operating Officer of Lincoln Benefit, Mr. Dahl participated in a cash-based sales incentive plan (the “Sales Incentive Plan”) based on first year premiums for universal life and term policies as well as annuity deposits sold by one of Lincoln Benefit’s distribution channels. Payments related to the Sales Incentive Plan totaled $62,343 for 2009. Mr. Dahl did not participate in the Sales Incentive Plan in 2010 and 2011. No other named executive of Lincoln Benefit participated in the Sales Incentive Plan. |
| (6) | Amounts reflect the aggregate increase in actuarial value of the pension benefits as set forth in the Pension Benefits table, accrued during 2011, 2010, and 2009. These are benefits under the Allstate Retirement Plan (ARP) and the Supplemental Retirement Income Plan (SRIP). Non-qualified deferred compensation earnings are not reflected since Allstate’s Deferred Compensation Plan does not provide above-market earnings. The pension plan measurement date is December 31. (See note 17 to Allstate’s audited financial statements for 2011.) |
| (7) | TheAll Other Compensation for 2011—Supplemental Table provides details regarding the amounts for 2011 for this column. |
| (8) | Mr. Pintozzi received a bonus as a result of his outstanding individual performance in 2009. |
| (9) | As part of his sign-on bonus, Mr. Chandra received $107,500 in cash, $53,750 payable within 90 days of his start date and the remainder payable one year later, 15 months from his start date. Mr. Chandra’s start date was January 31, 2011. If Mr. Chandra voluntarily terminates his employment within 18 months of his hiring date, he must reimburse Allstate the pro-rated remaining portion of this bonus. |
| (10) | Reflects increases in the actuarial value of the benefits provided to Mr. Winter under the ARP and SRIP of $1,626 and $10,784, respectively. |
| (11) | Reflects increases in the actuarial value of the benefits provided to Mr. Pintozzi under the ARP and SRIP of $6,131 and $9,187, respectively. |
| (12) | Reflects increases in the actuarial value of the benefits provided to Mr. Dahl under the ARP and SRIP of $146,312 and $112,189, respectively. |
| (13) | Reflects increases in the actuarial value of the benefits provided to Mr. Green under the ARP and SRIP of $3,066 and $1,654, respectively. |
64
ALL OTHER COMPENSATION FOR 2011—SUPPLEMENTAL TABLE
(In dollars)
The following table describes the incremental cost of other benefits provided in 2011 that are included in the “All Other Compensation” column.
| Name | 401(k) Match(1) | Other(2) | Total All Other Compensation | |||||||||
Mr. Winter | 1,169 | 10,229 | 11,398 | |||||||||
Mr. Pintozzi | 2,107 | 5,057 | 7,164 | |||||||||
Mr. Chandra | 2,107 | 11,633 | 13,740 | |||||||||
Mr. Dahl | 4,900 | 10,200 | 15,100 | |||||||||
Mr. Green | 2,107 | 5,291 | 7,398 | |||||||||
| (1) | Each of the named executives participated in Allstate’s 401(k) plan during 2011. The amount shown is the amount allocated to their accounts as employer matching contributions. Messrs. Winter, Chandra, and Green will not be vested in the employer matching contribution until they have completed three years of vesting service. |
| (2) | “Other” consists of premiums for group life insurance and personal benefits and perquisites consisting of mobile phones, tax preparation services, financial planning, executive physicals, ground transportation, and supplemental long-term disability coverage, and for Messrs. Winter and Chandra, $2,482 and $1,964, respectively, for reimbursement of taxes related to relocation expenses. (Tax assistance for certain relocation benefits is a standard component of Allstate’s relocation program available to all employees.) Messrs. Winter and Chandra also received amounts for relocation that are not reflected in other compensation because they are part of the standard relocation package available to all employees. There was no incremental cost for the use of mobile phones. Allstate provides supplemental long-term disability coverage to all regular full-time and regular part-time employees who participate in the long term disability plan and whose annual earnings exceed the level which produces the maximum monthly benefit provided by the long term disability plan. This coverage is self-insured (funded and paid for by Allstate when obligations are incurred). No obligations for the named executives were incurred in 2011, and therefore, no incremental cost is reflected in the table. In limited circumstances approved by Allstate’s CEO, Mr. Winter is permitted to use Allstate’s corporate aircraft for personal purposes. Mr. Winter did not use the corporate aircraft for personal purposes in 2011. |
65
GRANTS OF PLAN-BASED AWARDS AT FISCAL YEAR-END 2011(1)
The following table provides information about non-equity incentive plan awards and equity awards granted to our named executives during fiscal year 2011 to the extent the expense was allocated to Lincoln Benefit under the Service and Expense Agreement.
Name | Grant | Plan Name | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(2) | All Other Stock Awards: Number of Shares of (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards ($/Shr)(3) | Grant Date Fair Value ($)(4) | |||||||||||||||||||||||||||||||
Threshold ($) | Target ($) | Maximum ($) | Stock Awards | Option Awards | ||||||||||||||||||||||||||||||||||
Mr. Winter | — | Annual cash incentive | 105,495 | 210,989 | 1,658,424 | |||||||||||||||||||||||||||||||||
| February 22, 2011 | Restricted stock units | 6,259 | 198,661 | |||||||||||||||||||||||||||||||||||
| February 22, 2011 | Stock options | 38,511 | 31.74 | 368,935 | ||||||||||||||||||||||||||||||||||
Mr. Pintozzi | — | Annual cash incentive | 43,136 | 86,273 | 215,682 | |||||||||||||||||||||||||||||||||
| February 22, 2011 | Restricted stock units | 3,065 | 97,283 | |||||||||||||||||||||||||||||||||||
| February 22, 2011 | Stock options | 10,154 | 31.74 | 97,275 | ||||||||||||||||||||||||||||||||||
Mr. Chandra | — | Annual cash incentive | 75,912 | 151,823 | 379,558 | |||||||||||||||||||||||||||||||||
| February 22, 2011 | Restricted stock units | 4,267 | 135,435 | |||||||||||||||||||||||||||||||||||
| February 22, 2011 | Stock options | 26,258 | 31.74 | 251,552 | ||||||||||||||||||||||||||||||||||
Mr. Dahl | — | Annual cash incentive | 49,000 | 98,000 | 245,000 | |||||||||||||||||||||||||||||||||
| February 22, 2011 | Restricted stock units | 1,512 | 47,991 | |||||||||||||||||||||||||||||||||||
| February 22, 2011 | Stock options | 5,010 | 31.74 | 47,996 | ||||||||||||||||||||||||||||||||||
Mr. Green | — | Annual cash incentive | 24,851 | 49,701 | 124,253 | |||||||||||||||||||||||||||||||||
| February 22, 2011 | Restricted stock units | 1,911 | 60,655 | |||||||||||||||||||||||||||||||||||
| February 22, 2011 | Stock options | 2,111 | 31.74 | 20,223 | ||||||||||||||||||||||||||||||||||
| (1) | Awards under the Annual Executive Incentive Plan and the 2009 Equity Incentive Plan. |
| (2) | The amounts in these columns consist of the threshold, target, and maximum annual cash incentive awards for the named executives. The threshold amount for each named executive is 50% of target, as the minimum amount payable if threshold performance is achieved. If threshold is not achieved, the payment to named executives would be zero. The target amount is based upon achievement of the performance measures listed in the2011 Annual Cash Incentive Award Performance Measurestable on page 60. The maximum amount payable to Mr. Winter is the lesser of a stockholder approved maximum of $8.5 million under the Annual Executive Incentive Plan or 20% of the award pool. The award pool is equal to 1.0% of Adjusted Underlying Operating Income. None of the other named executives participate in the adjusted underlying operating income pool. Adjusted Underlying Operating Income is defined on page 79. |
| (3) | The exercise price of each option is equal to the fair market value of Allstate’s common stock on the date of grant. Fair market value is equal to the closing sale price on the date of grant or, if there was no such sale on the date of grant, then on the last previous day on which there was a sale. |
| (4) | The aggregate grant date fair value of the February 22, 2011, restricted stock units was $31.74 and stock option awards was $9.58, computed in accordance with FASB ASC 718. The assumptions used in the valuation are discussed in footnotes 3 and 4 to theSummary Compensation Table on page 63. |
66
Stock options
Stock options represent an opportunity to buy shares of Allstate’s stock at a fixed exercise price at a future date. Allstate uses them to align the interests of Allstate’s executives with long-term stockholder value, as the stock price must appreciate from the date of grant for the executives to profit. Under Allstate’s stockholder-approved equity incentive plan, the exercise price cannot be less than the fair market value of a share on the date of grant. Stock option repricing is not permitted. In other words, without an event such as a stock split, if the Committee cancels an award and substitutes a new award, the exercise price of the new award cannot be less than the exercise price of the cancelled award. All stock option awards have been made in the form of nonqualified stock options. The options granted to the named executives in 2011 become exercisable over four years, 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates, and expire in ten years, except in certain change-in-control situations or under other special circumstances approved by the Committee.
Restricted stock units
Each restricted stock unit represents Allstate’s promise to transfer one fully vested share of stock in the future if and when the restrictions expire (when the unit “vests”). Because restricted stock units are based on and payable in stock, they reinforce the alignment of interests of Allstate’s executives and Allstate’s stockholders. In addition, restricted stock units provide a retention incentive because they have a real, current value that is forfeited in most circumstances if an executive terminates employment before the restricted stock units vest. Under the terms of the restricted stock unit awards, the executives have only the rights of general unsecured creditors of Allstate and no rights as stockholders until delivery of the underlying shares. The restricted stock units granted to the named executives in 2011 vest over four years: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates, except in certain change-in-control situations or under other special circumstances approved by the Committee. The restricted stock units granted to the named executives in 2011 include the right to receive previously accrued dividend equivalents when the underlying restricted stock unit vests.
Outstanding Equity Awards at Fiscal Year-End 2011
The following table summarizes the outstanding equity awards of the named executives as of December 31, 2011, allocated in a manner consistent with the allocation of compensation expenses to Lincoln Benefit under the Service and Expense Agreement for 2011. The percentage of each equity award actually allocated to Lincoln Benefit has varied over the years during which these awards were granted depending on the extent of services rendered by such executive to Lincoln Benefit and the arrangements in place at the time of such equity awards between Lincoln Benefit and the executive’s Allstate-affiliated employer. Because the aggregate amount of such equity awards attributable to services rendered to Lincoln Benefit by each named executive cannot be calculated without unreasonable effort, the allocated amount of each equity award provided for each named executive in the following table is the amount determined by multiplying each named executive’s equity award for services rendered to Allstate and all of its affiliates by the percentage used for allocating such named executive’s compensation to Lincoln Benefit in 2011 under the Service and Expense Agreement.
67
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2011
| Option Awards(1) | Stock Awards | |||||||||||||||||||||||
| Name | Option Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable(2) | Number of Securities Underlying Unexercised Options (#) Unexercisable(3) | Option Exercise Price | Option Expiration Date | Stock Award Grant Date | Number of Shares or Units of Stock That Have Not Vested (#)(4) | Market Value of Shares or Units of Stock That Have Not Vested(5) | ||||||||||||||||
Mr. Winter | Nov. 02, 2009 | 4,327 | 4,327 | $ | 29.64 | Nov. 02, 2019 | Nov. 02, 2009 | 1,523 | $41,752 | |||||||||||||||
| Feb. 22, 2010 | 0 | 35,573 | $ | 31.41 | Feb. 22, 2020 | Feb. 22, 2010 | 6,037 | $165,480 | ||||||||||||||||
| Feb. 22, 2011 | 0 | 38,511 | $ | 31.74 | Feb. 22, 2021 | Feb. 22, 2011 | 6,259 | $171,561 | ||||||||||||||||
| Aggregate Market Value | ||||||||||||||||||||||||
| $378,793 | ||||||||||||||||||||||||
Mr. Pintozzi | Sep. 30, 2002 | 538 | 0 | $ | 35.17 | Sep. 30, 2012 | ||||||||||||||||||
| Feb. 7, 2003 | 1,505 | 0 | $ | 31.78 | Feb. 7, 2013 | |||||||||||||||||||
| Feb. 6, 2004 | 2,141 | 0 | $ | 45.96 | Feb. 6, 2014 | |||||||||||||||||||
| Feb. 22, 2005 | 5,890 | 0 | $ | 52.57 | Feb. 22, 2015 | |||||||||||||||||||
| Feb. 21, 2006 | 5,833 | 0 | $ | 53.84 | Feb. 21, 2016 | |||||||||||||||||||
| Feb. 21, 2006 | 3,870 | 0 | $ | 53.84 | Feb. 21, 2016 | |||||||||||||||||||
| Feb. 20, 2007 | 5,725 | 0 | $ | 62.24 | Feb. 20, 2017 | |||||||||||||||||||
| Feb. 26, 2008 | 7,665 | 2,555 | $ | 48.82 | Feb. 26, 2018 | Feb. 26, 2008 | 1,109 | $30,397 | ||||||||||||||||
| Feb. 27, 2009 | 6,020 | 10,706 | $ | 16.83 | Feb. 27, 2019 | Feb. 27, 2009 | 3,768 | $103,271 | ||||||||||||||||
| Feb. 22, 2010 | 0 | 10,049 | $ | 31.41 | Feb. 22, 2020 | Feb. 22, 2010 | 3,167 | $86,818 | ||||||||||||||||
| Feb. 22, 2011 | 0 | 10,154 | $ | 31.74 | Feb. 22, 2021 | Feb. 22, 2011 | 3,065 | $84,013 | ||||||||||||||||
| Aggregate Market Value | ||||||||||||||||||||||||
| $304,499 | ||||||||||||||||||||||||
Mr. Chandra | Feb. 22, 2011 | 0 | 26,258 | (6) | $ | 31.74 | Feb. 22, 2021 | Feb. 22, 2011 | 4,267(6) | $116,967 | ||||||||||||||
| Aggregate Market Value | ||||||||||||||||||||||||
| $116,967 | ||||||||||||||||||||||||
Mr. Dahl | Feb. 7, 2002 | 5,868 | 0 | $ | 33.38 | Feb. 7, 2012 | ||||||||||||||||||
| Feb. 7, 2003 | 3,200 | 0 | $ | 31.78 | Feb. 7, 2013 | |||||||||||||||||||
| Feb. 6, 2004 | 3,333 | 0 | $ | 45.96 | Feb. 6, 2014 | |||||||||||||||||||
| Feb. 22, 2005 | 2,492 | 0 | $ | 52.57 | Feb. 22, 2015 | |||||||||||||||||||
| Feb. 21, 2006 | 3,418 | 0 | $ | 53.84 | Feb. 21, 2016 | |||||||||||||||||||
| Feb. 20, 2007 | 2,873 | 0 | $ | 62.24 | Feb. 20, 2017 | |||||||||||||||||||
| Feb. 26, 2008 | 4,120 | 1,374 | $ | 48.82 | Feb. 26, 2018 | Feb. 26, 2008 | 596 | $16,336 | ||||||||||||||||
| Feb. 27, 2009 | 3,254 | 4,255 | $ | 16.83 | Feb. 27, 2019 | Feb. 27, 2009 | 1,497 | $41,033 | ||||||||||||||||
| Feb. 22, 2010 | 0 | 1,799 | $ | 31.41 | Feb. 22, 2020 | Feb. 22, 2010 | 1,701 | $46,624 | ||||||||||||||||
| Feb. 22, 2011 | 0 | 5,010 | $ | 31.74 | Feb. 22, 2021 | Feb. 22, 2011 | 1,512 | $41,444 | ||||||||||||||||
| Aggregate Market Value | ||||||||||||||||||||||||
| $145,437 | ||||||||||||||||||||||||
Mr. Green | Mar. 16, 2009 | 1,031 | $28,263 | |||||||||||||||||||||
| Feb. 22, 2010 | 0 | 3,583 | $ | 31.41 | Feb. 22, 2020 | Feb. 22, 2010 | 1,130 | $30,963 | ||||||||||||||||
| Feb. 22, 2011 | 0 | 2,111 | $ | 31.74 | Feb. 22, 2021 | Feb. 22, 2011 | 1,911 | $52,390 | ||||||||||||||||
| Aggregate Market Value | ||||||||||||||||||||||||
| $111,616 | ||||||||||||||||||||||||
68
| (1) | The options granted in 2011 and 2010 vest over four years: 50% on the second anniversary date and 25% on each of the third and fourth anniversary dates. The other options vest in four installments of 25% on each of the first four anniversaries of the grant date. The exercise price of each option is equal to the fair market value of Allstate’s common stock on the date of grant. For options granted prior to 2007, fair market value is equal to the average of high and low sale prices on the date of grant. For options granted in 2007 and thereafter, fair market value is equal to the closing sale price on the date of grant. In each case, if there was no sale on the date of grant, fair market value is calculated as of the last previous day on which there was a sale. |
| (2) | The aggregate value and aggregate number of exercisable in-the-money options as of December 31, 2011, for each of the named executives is as follows: Mr. Winter $0 (0 aggregate number exercisable), Mr. Pintozzi $63,692 (6,020 aggregate number exercisable), Mr. Chandra $0 (0 aggregate number exercisable), Mr. Dahl $34,427 (3,254 aggregate number exercisable) and Mr. Green $0 (0 aggregate number exercisable). |
| (3) | The aggregate value and aggregate number of unexercisable in-the-money options as of December 31, 2011, for each of the named executives is as follows: Mr. Winter $0 (0 aggregate number unexercisable), Mr. Pintozzi $113,266 (10,706 aggregate number unexercisable), Mr. Chandra $0 (0 aggregate number unexercisable), Mr. Dahl $45,018 (4,255 aggregate number unexercisable) and Mr. Green $0 (0 aggregate number unexercisable). |
| (4) | The restricted stock unit awards granted in 2011 vest over four years: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates. The other restricted stock unit awards vest in one installment on the fourth anniversary of the grant date, unless otherwise noted. |
| (5) | Amount is based on the closing price of Allstate common stock of $27.41 on December 30, 2011. |
| (6) | Options and restricted stock units granted as a new hire award. These options and restricted stock units will vest over four years: 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates. |
Option Exercises and Stock Vested at Fiscal Year-End 2011
The following table summarizes the options exercised by the named executives during 2011 and the restricted stock unit awards that vested during 2011, allocated in a manner consistent with the allocation of compensation expenses to Lincoln Benefit under the Service and Expense Agreement for 2011.
OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2011
| Option Awards | Stock Awards | |||||||||||||||
| Name | Number of Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Acquired on Vesting (#) | Value Realized on Vesting ($) | ||||||||||||
Mr. Winter | 0 | 0 | 0 | 0 | ||||||||||||
Mr. Pintozzi | 1,999 | 30,740 | 789 | 25,350 | ||||||||||||
Mr. Chandra | 0 | 0 | 0 | 0 | ||||||||||||
Mr. Dahl | 0 | 0 | 397 | 12,748 | ||||||||||||
Mr. Green | 0 | 0 | 0 | 0 | ||||||||||||
Retirement Benefits
Each named executive participates in two different defined benefit pension plans. Pension expense for each named executive under these plans has been accrued annually over the course of the executive’s career with Allstate. The aggregate amount of the annual accrual specifically allocated to Lincoln Benefit over that period of time has varied depending on the extent of services rendered by such executive to Lincoln Benefit and the arrangements in place at the time of accrual between Lincoln Benefit and the executive’s Allstate affiliated employer. Because the aggregate amount of such annual accruals earned prior to 2011 attributable to services rendered to Lincoln Benefit by each named executive cannot be calculated without unreasonable effort, the present value of accumulated benefit provided for each named executive in the following table is the amount determined by multiplying the present value of such named executive’s accumulated pension benefit for services rendered to Allstate and all of its affiliates over the course of such named executive’s career with Allstate by the percentage used for allocating such named executive’s compensation to Lincoln Benefit under the Service and Expense Agreement in 2011.
69
PENSION BENEFITS
| NAME | PLAN NAME | NUMBER OF YEARS CREDITED SERVICE (#) | PRESENT VALUE OF ACCUMULATED BENEFIT(1)(2) ($) | PAYMENTS DURING LAST FISCAL YEAR ($) | ||||||||||
Mr. Winter(3) | Allstate Retirement Plan | 2.2 | 1,625 | 0 | ||||||||||
| Supplemental Retirement Income Plan | 2.2 | 11,773 | 0 | |||||||||||
Mr. Pintozzi | Allstate Retirement Plan | 9.3 | 27,042 | 0 | ||||||||||
| Supplemental Retirement Income Plan | 9.3 | 30,743 | 0 | |||||||||||
Mr. Chandra(3) | Allstate Retirement Plan | 1.0 | 0 | 0 | ||||||||||
| Supplemental Retirement Income Plan | 1.0 | 0 | 0 | |||||||||||
Mr. Dahl | Allstate Retirement Plan | 24.9 | 668,467 | 0 | ||||||||||
| Supplemental Retirement Income Plan | 24.9 | 549,547 | 0 | |||||||||||
Mr. Green(3) | Allstate Retirement Plan | 2.8 | 5,473 | 0 | ||||||||||
| Supplemental Retirement Income Plan | 2.8 | 1,654 | 0 | |||||||||||
| (1) | These amounts are estimates and do not necessarily reflect the actual amounts that will be paid to the named executives, which will be known only at the time they become eligible for payment. Accrued benefits were calculated as of December 31, 2011, and used to calculate the present value of accumulated benefits at December 31, 2011. December 31 is the pension plan measurement date used for financial statement reporting purposes. |
The amounts listed in this column are based on the following assumptions:
| • | Discount rate of 5.25%, payment form assuming 80% paid as a lump sum and 20% paid as an annuity, lump-sum/annuity conversion segmented interest rates of 4.75% for the first five years, 6.25% for the next 15 years, and 6.75% for all years after 20 and the 2012 combined static Pension Protection Act funding mortality table with a blend of 50% males and 50% females (as required under the Internal Revenue Code), and post-retirement mortality for annuitants using the 2012 Internal Revenue Service mandated annuitant table; these are the same as those used for financial reporting year-end disclosure as described in the notes to Allstate’s consolidated financial statements. (See note 17 to Allstate’s audited financial statements for 2011.) |
| • | Based on guidance provided by the Securities and Exchange Commission, we have assumed a normal retirement age of 65 under both the ARP and SRIP, regardless of any announced or anticipated retirements. |
| • | No assumption for early termination, disability, or pre-retirement mortality. |
| (2) | The figures shown in the table above reflect the present value of the current accrued pension benefits calculated using the assumptions described in the preceding footnote. If the named executives’ employment terminated on December 31, 2011, the lump sum present value of the non-qualified pension benefits for each named executive earned through December 31, 2011, is shown in the following table: |
| NAME | PLAN NAME | LUMP SUM AMOUNT ($) | ||||
Mr. Winter | Supplemental Retirement Income Plan | $11,773 | ||||
Mr. Pintozzi | Supplemental Retirement Income Plan | $30,743 | ||||
Mr. Chandra | Supplemental Retirement Income Plan | $0 | ||||
Mr. Dahl | Supplemental Retirement Income Plan | $701,950 | ||||
Mr. Green | Supplemental Retirement Income Plan | $1,654 | ||||
The amount shown is based on the lump sum methodology (i.e., interest rate and mortality table) used by the Allstate pension plans in 2012, as required under the Pension Protection Act. Specifically, the interest rate for 2012 is based on 100% of the average corporate bond segmented yield curve from August of the prior year. The mortality table for 2012 is the 2012 combined static Pension Protection Act funding mortality table with a blend of 50% males and 50% females, as required under the Internal Revenue Code.
| (3) | Messrs. Winter, Chandra, and Green are not currently vested in the Allstate Retirement Plan or the Supplemental Retirement Income Plan. |
70
The benefits and value of benefits shown in thePension Benefits table are based on the following material factors:
Allstate Retirement Plan (ARP)
The ARP has two different types of benefit formulas (final average pay and cash balance) which apply to participants based on their date of hire or the individual choices they made before a cash balance plan was introduced on January 1, 2003. Of the named executives, Messrs. Winter, Pintozzi, Chandra, and Green are eligible to earn cash balance benefits. Benefits under the final average pay formula are earned and stated in the form of a straight life annuity payable at the normal retirement age 65. Participants who earn final average pay benefits may do so under one or more benefit formulas based on when they became ARP members and their years of service.
Mr. Dahl has earned ARP benefits under the post-1988 final average pay formula which is the sum of the Base Benefit and the Additional Benefit, as defined as follows:
| • | Base Benefit =1.55% of the participant’s average annual compensation, multiplied by credited service after 1988 (limited to 28 years of credited service) |
| • | Additional Benefit =0.65% of the amount, if any, of the participant’s average annual compensation that exceeds the participant’s covered compensation (the average of the maximum annual salary taxable for Social Security over the 35-year period ending the year the participant would reach Social Security retirement age) multiplied by credited service after 1988 (limited to 28 years of credited service) |
Since Mr. Dahl earned benefits between January 1, 1978, and December 31, 1988, one component of his ARP benefit will be based on the following benefit formula:
| 1. | Multiply years of credited service from 1978 through 1988 by 2 1/8%. |
| 2. | Then, multiply the percentage from step (1) by |
| a. | Average annual compensation (five-year average) at December 31, 1988, and by |
| b. | Estimated Social Security at December 31, 1988. |
| 3. | Then, subtract 2(b) from 2(a). The result is the normal retirement allowance for service from January 1, 1978, through December 31, 1988. |
| 4. | The normal retirement allowance is indexed for final average pay. In addition, there is an adjustment of 18% of the normal retirement allowance as of December 31, 1988, to reflect a conversion to a single life annuity. |
For participants eligible to earn cash balance benefits, pay credits are added to the cash balance account on a quarterly basis as a percent of compensation and based on the participant’s years of vesting service as follows:
Cash Balance Plan Pay Credits
| Vesting Service | Pay Credit % | |||
Less than 1 year | 0% | |||
1 year, but less than 5 years | 2.5% | |||
5 years, but less than 10 years | 3% | |||
10 years, but less than 15 years | 4% | |||
15 years, but less than 20 years | 5% | |||
20 years, but less than 25 years | 6% | |||
25 years or more | 7% | |||
71
Supplemental Retirement Income Plan (“SRIP”)
SRIP benefits are generally determined using a two-step process: (1) determine the amount that would be payable under the ARP formula specified above if the federal limits described above did not apply, then (2) reduce the amount described in (1) by the amount actually payable under the ARP formula. The normal retirement date under the SRIP is age 65. If eligible for early retirement under the ARP, the employee also is eligible for early retirement under the SRIP.
Credited Service; Other Aspects of the Pension Plans
As has generally been Allstate’s practice, no additional service credit beyond service with Allstate or its predecessors is granted under the ARP or the SRIP.
For the ARP and SRIP, eligible compensation consists of salary, annual cash incentive awards, pre-tax employee deposits made to Allstate’s 401(k) plan and Allstate’s cafeteria plan, holiday pay, and vacation pay. Eligible compensation also includes overtime pay, payment for temporary military service, and payments for short term disability, but does not include long-term cash incentive awards or income related to equity awards. Compensation used to determine benefits under the ARP is limited in accordance with the Internal Revenue Code. For final average pay benefits, average annual compensation is the average compensation of the five highest consecutive calendar years within the last ten consecutive calendar years preceding the actual retirement or termination date.
Payment options under the ARP include a lump sum, straight life annuity, and various survivor annuity options. The lump sum under the final average pay benefit is calculated in accordance with the applicable interest rate and mortality as required under the Internal Revenue Code. The lump sum payment under the cash balance benefit is generally equal to a participant’s cash balance account balance. Payments from the SRIP are paid in the form of a lump sum using the same interest rate and mortality assumptions used under the ARP.
Timing of Payments
Age 65 is the earliest retirement age that a named executive may retire with full retirement benefits under the ARP and SRIP. However, a participant earning final average pay benefits is entitled to an early retirement benefit on or after age 55 if he or she terminates employment after completing 20 or more years of service. A participant earning cash balance benefits who terminates employment with at least three years of vesting service is entitled to a lump sum benefit equal to his or her cash balance account balance. Currently, none of the named executives are eligible for an early retirement benefit.
As defined in the SRIP, SRIP benefits earned through December 31, 2004 (Pre 409A SRIP Benefits) are generally payable at the normal retirement age of 65. Pre 409A SRIP Benefits may be payable at age 50 or later if disabled, following early retirement at age 55 or older with 20 years of service, or following death in accordance with the terms of the SRIP. SRIP benefits earned after December 31, 2004 (Post 409A SRIP Benefits) are paid on the January 1 following termination of employment after reaching age 55 (a minimum six month deferral period applies), or following death in accordance with the terms of the SRIP.
Eligible employees are vested in the normal ARP and SRIP retirement benefit on the earlier of the completion of five years of service or upon reaching age 65 (for participants with final average pay benefits) or the completion of three years of service or upon reaching age 65 (for participants whose benefits are calculated under the cash balance formula).
| • | Mr. Winter’s SRIP benefit is not currently vested but would become payable following death. Mr. Winter will turn 65 on January 22, 2022. |
| • | Mr. Pintozzi’s Pre 409A SRIP Benefit would become payable as early as January 1, 2012, or following death. Mr. Pintozzi’s Post 409A SRIP Benefit would be paid on January 1, 2021, or following death. Mr. Pintozzi will turn 65 on May 18, 2030. |
72
| • | Mr. Chandra’s SRIP benefit is not currently vested but would become payable following death. Mr. Chandra will turn 65 on October 2, 2042. |
| • | Mr. Dahl’s Pre 409A SRIP Benefit would become payable as early as January 1, 2015, or following death or disability. Mr. Dahl’s Post 409A SRIP Benefit would be paid on January 1, 2015, or following death. Mr. Dahl will turn 65 on August 2, 2024. |
| • | Mr. Green’s SRIP benefit is not currently vested but would become payable following death. Mr. Green will turn 65 on July 29, 2032. |
Non-Qualified Deferred Compensation
The following table summarizes the non-qualified deferred compensation contributions, earnings, and account balances of our named executives in 2011. All amounts relate to The Allstate Corporation Deferred Compensation Plan.
The aggregate amount of the annual accrual specifically allocated to Lincoln Benefit over each named executive’s career with Allstate has varied depending on the extent of services rendered by such executive to Lincoln Benefit and the arrangements in place at the time of accrual between Lincoln Benefit and the executive’s Allstate affiliated employer. Because the aggregate earnings and balance attributable to services rendered to Lincoln Benefit by each named executive cannot be calculated without unreasonable effort, the aggregate earnings and aggregate balance provided for each named executive in the following table is the amount determined by multiplying the value of such named executive’s non-qualified deferred compensation benefit for services rendered to Allstate and all of its affiliates over the course of such named executive’s career with Allstate by the percentage used for allocating such named executive’s compensation to Lincoln Benefit under the Service and Expense Agreement in 2011.
NON-QUALIFIED DEFERRED COMPENSATION AT FISCAL YEAR-END 2011
| Name | Executive Contributions in Last FY ($) | Registrant Contributions ($) | Aggregate in Last FY ($)(1) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance at Last FYE ($)(2) | |||||||||||||||
Mr. Winter | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Mr. Pintozzi | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Mr. Chandra | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Mr. Dahl | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Mr. Green | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| (1) | Aggregate earnings were not included in the named executive’s compensation in the last completed fiscal year in theSummary Compensation Table. |
| (2) | There are no amounts reported in theAggregate Balance at Last FYE column that previously were reported as compensation in theSummary Compensation Table. |
In order to remain competitive with other employers, Allstate allows employees, including the named executives, whose annual compensation exceeds the amount specified in the Internal Revenue Code ($245,000 in 2011), to defer up to 80% of their salary and/or up to 100% of their annual cash incentive award that exceeds that amount under the Deferred Compensation Plan. Allstate does not match participant deferrals and does not guarantee a stated rate of return.
Deferrals under the Deferred Compensation Plan are credited with earnings or debited for losses based on the results of the investment option or options selected by the participants. The investment options available in 2011 under the Deferred Compensation Plan are: Stable Value, S&P 500, International Equity, Russell 2000,
73
Mid-Cap, and Bond Funds. Under the Deferred Compensation Plan, deferrals are not actually invested in these funds, but instead are credited with earnings or debited for losses based on the funds’ investment returns net of administration and investment expenses. Because the rate of return is based on actual investment measures in Allstate’s 401(k) plan, no above market earnings are paid. Allstate’s Deferred Compensation Plan and 401(k) plan allow participants to change their investment elections daily. Investment changes are effective the next business day. The Deferred Compensation Plan is unfunded; participants have only the rights of general unsecured creditors.
Deferrals under the Deferred Compensation Plan are segregated into Pre 409A balances and Post 409A balances. A named executive may elect to begin receiving a distribution of a Pre 409A balance immediately upon separation from service or in one of the first through fifth years after separation from service. The named executive may elect to receive payment of a Pre 409A balance in a lump sum or in annual cash installment payments over a period of two to ten years. An irrevocable distribution election is required before making any Post 409A deferrals into the plan. The distribution options available to the Post 409A balances are similar to those available to the Pre 409A balances, except the earliest distribution date is six months following separation from service. Upon proof of unforeseen emergency, a plan participant may be allowed to access certain funds in a deferred compensation account earlier than the dates specified above.
74
Potential Payments as a Result of Termination or Change-in-Control (CIC)
The following table lists the compensation and benefits that Allstate would provide to the named executives in various scenarios involving a termination of employment, other than compensation and benefits generally available to all salaried employees.
| Compensation Elements | ||||||||||||||||
| Termination Scenarios | Base Salary | Severance Pay | Annual Incentive | Stock Options | Restricted Stock Units | Non- Pension Benefits(1) | Deferred Compensation(2) | Health, Welfare and Other | ||||||||
Termination(3) | Ceases immediately | None | Forfeited unless terminated on last day of fiscal year | Unvested are forfeited, vested expire at the earlier of three months or normal expiration | Forfeited | Distributions commence per plan | Distributions commence per participant election | None | ||||||||
Retirement(4) | Ceases Immediately | None | Pro rated for the year based on actual performance for the year with any discretionary adjustments | Awards granted more than 12 months before, and pro rata portion of award granted within 12 months of, normal retirement continue to vest; pro rata portion continue to vest upon early retirement. All expire at earlier of five years or normal expiration.(5) | Awards granted more than 12 months before, and pro rata portion of award granted within 12 months of, normal retirement continue to vest; pro rata portion continue to vest upon early retirement.(6) | Distributions commence per plan | Distributions commence per participant election | None | ||||||||
Termination due to | Ceases Immediately | Lump sum equal to two times salary and annual incentive at target(8) | Pro rated at target (reduced by any actually paid) | Awards granted prior to 2012 vest immediately upon a CIC. After 2011 vest upon qualifying termination after a CIC.(9) | Awards granted prior to 2012 vest immediately upon a CIC. After 2011 vest upon qualifying termination after a CIC.(9) | Immediately payable upon a CIC, except for participants not previously covered by a CIC agreement | Immediately payable upon a CIC, except for participants not previously covered by a CIC agreement | Outplacement services provided; lump sum payment equal to additional cost of continuation coverage(10) | ||||||||
Death | One month salary paid upon death | None | Pro rated for year based on actual performance for the year with any discretionary adjustments | Vest immediately and expire at earlier of two years or normal expiration | Vest immediately | Distributions commence per plan | Payable within 90 days | None | ||||||||
Disability | Ceases Immediately | None | Pro rated for year based on actual performance for the year with any discretionary adjustments | Vest immediately and expire at earlier of two years or normal expiration | Vest immediately(11) | Participant may request payment if age 50 or older | Distributions commence per participant election | Supplemental long term disability benefits if enrolled in long term disability plan | ||||||||
75
| (1) | See theRetirement Benefits section for further detail on non-qualified pension benefits and timing of payments. |
| (2) | See theNon-Qualified Deferred Compensation section for additional information on the Deferred Compensation Plan and distribution options available. |
| (3) | Includes both voluntary and involuntary termination. Examples of involuntary termination independent of a change-in-control include performance-related terminations; terminations for employee dishonesty and violation of Allstate rules, regulations, or policies; and terminations resulting from lack of work, rearrangement of work, or reduction in force. |
| (4) | Retirement for purposes of the annual cash incentive plan is defined as voluntary termination on or after the date the named executive attains age 55 with at least 20 years of service. The normal retirement date under the equity awards is the date on or after the date the named executive attains age 60 with at least one year of service. For awards granted before February 22, 2011, the early retirement date is the date the named executive attains age 55 with 20 years of service. For awards granted on or after February 22, 2011, the “early retirement date” is the date the named executive attains age 55 with ten years of service. |
| (5) | Stock options granted prior to February 22, 2011, continue to vest upon a normal or health retirement and expire at the earlier of five years from the date of retirement or the expiration date of the option. Unvested stock options are forfeited upon early retirement. |
| (6) | Restricted stock units granted prior to February 22, 2011, continue to vest upon a normal retirement and are forfeited upon an early retirement. |
| (7) | Mr. Winter had previously been party to a change-in-control agreement, and in 2011 he agreed to become a participant in a new change-in-control severance plan (CIC Plan). Mr. Pintozzi is party to a change-in-control agreement. On December 31, 2012, Mr. Pintozzi’s change-in-control agreement will terminate, and Mr. Pintozzi will become a participant in the CIC Plan. No other named executive is a party to a change-in-control agreement or a participant in the CIC Plan. In general, a change-in-control is one or more of the following events: (1) any person acquires 30% or more of the combined voting power of Allstate common stock within a 12-month period; (2) any person acquires more than 50% of the combined voting power of Allstate common stock; (3) certain changes are made to the composition of the Board; or (4) the consummation of a merger, reorganization, or similar transaction. These triggers were selected because any of these could cause a substantial change in management in a widely held company the size of Allstate. Effective upon a change-in-control, Mr. Winter and Mr. Pintozzi become subject to covenants prohibiting solicitation of employees, customers, and suppliers at any time until one year after termination of employment. If Mr. Winter or Mr. Pintozzi incurs legal fees or other expenses in an effort to enforce the change-in-control arrangements, Allstate will reimburse him for these expenses unless it is established by a court that he had no reasonable basis for the claim or acted in bad faith. |
| (8) | For those named executives subject to either the change-in-control plan or a change-in-control agreement, severance benefits would be payable if a named executive’s employment is terminated either by Allstate without cause or by the executive for good reason as defined in the plan or agreement during the two years following the change-in-control. Cause means the named executive has been convicted of a felony or other crime involving fraud or dishonesty, has willfully or intentionally breached the restrictive covenants in the plan or agreement, has habitually neglected his or her duties, or has engaged in willful or reckless material misconduct in the performance of his or her duties. Good reason includes a material diminution in a named executive’s base compensation, authority, duties, or responsibilities, a material change in the geographic location where the named executive performs services, or, under Mr. Pintozzi’s agreement, a material breach of the agreement by Allstate. |
| Under Mr. Pintozzi’s change-in-control agreement which will terminate on December 31, 2012, a pension enhancement would be payable. The pension enhancement is a lump sum payment equal to the positive difference, if any, between (a) the sum of the lump-sum values of each maximum annuity that would be payable to the named executive under any defined benefit plan (whether or not qualified under Section 401(a) of the Internal Revenue Code) if the named executive had (i) become fully vested in all such benefits, (ii) attained as of the named executive’s termination date an age that is two years greater than the named executive’s actual age, (iii) accrued a number of years of service that is two years greater than the number of years of service actually accrued by the named executive as of the named executive’s termination date, and (iv) received a lump-sum severance benefit consisting of two times base salary, two times annual incentive cash compensation calculated at target, plus the 2011 annual incentive cash award as covered compensation in equal monthly installments during the two-year period following the named executive’s termination date, and (b) the lump-sum values of the maximum annuity benefits vested and payable to the named executive under each defined benefit plan that is qualified under Section 401(a) of the Internal Revenue Code plus the aggregate amounts simultaneously or previously paid to the named executive under the defined benefit plans (whether or not qualified under Section 401(a)). The calculation of the lump sum amounts payable under this formula does not impact the benefits payable under the ARP or the SRIP. |
| (9) | However, under Mr. Pintozzi’s change-in-control agreement which will terminate on December 31, 2012, equity awards vest immediately upon a change-in-control. |
| (10) | If a named executive’s employment is terminated by reason of death during the two years after the date of a change in control, the named executive’s estate or beneficiary will be entitled to survivor and other benefits, including retiree medical coverage, if eligible, that are not less favorable than the most favorable benefits available to the estates or surviving families of peer executives of Allstate. In the event of termination by reason of disability, Allstate will pay disability and other benefits, including supplemental long-term disability benefits and retiree medical coverage, if eligible, that are not less favorable than the most favorable benefits available to disabled peer executives. Until December 31, 2012, Mr. Pintozzi is eligible for subsidized continuation coverage, not a lump sum payment. |
| (11) | If a named executive’s employment is terminated due to disability, restricted stock units granted prior to February 22, 2011, are forfeited. |
76
ESTIMATE OF POTENTIAL PAYMENTS UPON TERMINATION(1)
The table below describes the value of compensation and benefits to each named executive upon termination, calculated in a manner consistent with the allocation of compensation expenses to Lincoln Benefit under the Service and Expense Agreement for 2011, that would exceed the compensation or benefits generally available to all salaried employees in each termination scenario. The total column in the following table does not reflect compensation or benefits previously accrued or earned by the named executives such as deferred compensation and non-qualified pension benefits. The payment of the 2011 annual cash incentive award and any 2011 salary earned but not paid in 2011 due to Allstate’s payroll cycle are not included in these tables because these are payable regardless of termination, death, or disability. Benefits and payments are calculated assuming a December 31, 2011, employment termination date.
| Name | Severance ($) | Stock Unvested and Accelerated ($) | Restricted Unvested and Accelerated ($) | Welfare Benefits and Outplacement Services ($) | Total ($) | |||||||||||||||
Mr. Winter | ||||||||||||||||||||
Termination/Retirement(2) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Termination due to Change-in-Control(3) | 732,567 | (4) | 0 | 378,793 | 9,767 | (5) | 1,121,127 | |||||||||||||
Death | 0 | 0 | 378,793 | 0 | 378,793 | |||||||||||||||
Disability | 0 | 0 | 171,561 | 1,622,367 | (6) | 1,793,928 | ||||||||||||||
Mr. Pintozzi | ||||||||||||||||||||
Termination/Retirement(2) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Termination due to Change-in-Control(3) | 488,547 | 113,266 | 304,499 | 6,008 | (5) | 912,320 | ||||||||||||||
Death | 0 | 113,266 | 304,499 | 0 | 417,765 | |||||||||||||||
Disability | 0 | 113,266 | 84,013 | 0 | (6) | 197,279 | ||||||||||||||
Mr. Chandra | ||||||||||||||||||||
Termination/Retirement(2) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Termination due to Change-in-Control(3) | 0 | 0 | (7) | 116,967 | (7) | 0 | 116,967 | |||||||||||||
Death | 0 | 0 | 116,967 | 0 | 116,967 | |||||||||||||||
Disability | 0 | 0 | 116,967 | 0 | (6) | 116,967 | ||||||||||||||
Mr. Dahl | ||||||||||||||||||||
Termination/Retirement(2) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Termination due to Change-in-Control(3) | 0 | 45,018 | (7) | 145,437 | (7) | 0 | 190,455 | |||||||||||||
Death | 0 | 45,018 | 145,437 | 0 | 190,455 | |||||||||||||||
Disability | 0 | 45,018 | 41,444 | 1,034,980 | (6) | 1,121,442 | ||||||||||||||
Mr. Green | ||||||||||||||||||||
Termination/Retirement(2) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Termination due to Change-in-Control(3) | 0 | 0 | (7) | 111,616 | (7) | 0 | 111,616 | |||||||||||||
Death | 0 | 0 | 111,616 | 0 | 111,616 | |||||||||||||||
Disability | 0 | 0 | 52,390 | 549,321 | (6) | 601,711 | ||||||||||||||
| (1) | A “0” indicates either that there is no amount payable to the named executive, or the amount payable is the same for both the named executives and all salaried employees. |
| (2) | As of December 31, 2011, none of the named executives are eligible to retire in accordance with Allstate’s policy and the terms of its equity incentive compensation and benefit plans. |
| (3) | The values in this change-in-control row represent amounts paid if both the change-in-control and qualifying termination occur on December 31, 2011. Equity awards granted prior to 2012 immediately vest upon a change-in-control; the amounts payable to each named executive would be as follows: |
| Name | Stock Options— Unvested and Accelerated ($) | Restricted stock units— Unvested and Accelerated ($) | Total— Unvested and Accelerated ($) | |||||||||
Mr. Winter | 0 | 378,793 | 378,793 | |||||||||
Mr. Pintozzi | 113,266 | 304,499 | 417,765 | |||||||||
Mr. Chandra | 0 | 116,967 | 116,967 | |||||||||
Mr. Dahl | 45,018 | 145,437 | 190,455 | |||||||||
Mr. Green | 0 | 111,616 | 111,616 | |||||||||
77
| Beginning with awards granted in 2012, equity awards will not accelerate in the event of a change-in-control unless also accompanied by a qualifying termination of employment. A change-in-control also would accelerate the distribution of each named executive’s non-qualified deferred compensation and SRIP benefits. Please see theNon-Qualified Deferred Compensation at Fiscal Year End 2011table and footnote 2 to thePension Benefits table in theRetirement Benefits section for details regarding the applicable amounts for each named executive. |
| (4) | Under the change-in-control plan, Mr. Winter’s allocated severance benefit was reduced by $80,133 to avoid the imposition of excise taxes and maximize the severance benefit available under the plan. |
| (5) | The Welfare Benefits and Outplacement Services amount for Mr. Pintozzi includes the cost to provide certain welfare benefits to him and his family during the period he is eligible for continuation coverage under applicable law. The amount shown reflects Allstate’s costs for these benefits or programs assuming an 18-month continuation period. The allocated value of outplacement services is $5,160 for Mr. Winter and $3,300 for Mr. Pintozzi. |
| (6) | The named executives who participate in the long term disability plan are eligible to participate in Allstate’s supplemental long-term disability plan for employees whose annual earnings exceed the level which produces the maximum monthly benefit provided by the long term disability plan. The benefit is equal to 50% of the named executive’s qualified annual earnings divided by twelve and rounded to the nearest one hundred dollars, reduced by $7,500, which is the maximum monthly benefit payment that can be received under the Basic Plan. The amount reflected assumes the named executive remains totally disabled until age 65 and represents the present value of the monthly benefit payable until age 65. Messrs. Pintozzi and Chandra do not participate in the long term disability plan. |
| (7) | Messrs. Chandra, Dahl, and Green did not have a change-in-control agreement in place. However, pursuant to the terms of their equity awards, unvested stock options and restricted stock units would vest immediately upon a change-in-control. |
Risk Management and Compensation
Allstate management has reviewed its compensation policies and practices and believes that they are appropriately structured, that they are consistent with its key operating priority of keeping Allstate financially strong, and that they avoid providing incentives for employees to engage in unnecessary and excessive risk taking. Allstate believes that executive compensation has to be examined in the larger context of an effective risk management framework and strong internal controls. The Allstate Board and its Audit Committee both play an important role in risk management oversight, including reviewing how management measures, evaluates, and manages the corporation’s exposure to risks posed by a wide variety of events and conditions. In addition, the Compensation and Succession Committee of Allstate employs an independent executive compensation consultant each year to assess Allstate’s executive pay levels, practices, and overall program design.
A review and assessment of potential compensation-related risks was conducted by Allstate management and reviewed by the chief risk officer. Performance-related incentive plans were analyzed using a process developed in conjunction with the independent executive compensation consultant.
The 2011 risk assessment specifically noted that Allstate’s compensation programs:
| • | Provide a balanced mix of cash and equity through annual and long-term incentives to align with short-term and long-term business goals. |
| • | Utilize a full range of performance measures that Allstate believes correlate to long-term Allstate shareholder value creation. |
| • | Incorporate strong governance practices, including paying cash incentive awards only after a review of executive and corporate performance. |
| • | Enable the use of negative discretion to adjust annual incentive compensation payments when formulaic payouts are not warranted due to other circumstances. |
| • | Limit annual incentive payouts by containing a maximum payout level. |
Furthermore, to ensure Allstate’s compensation programs do not motivate imprudent risk taking, awards to Allstate executive officers, including Mr. Winter, made after May 19, 2009, under the 2009 Equity Incentive Plan and awards made under the Annual Executive Incentive Plan are subject to clawback in the event of certain financial restatements.
78
Performance Measures for 2011 Annual Cash Incentive Awards
Information regarding Allstate’s performance measures is disclosed in the limited context of Allstate’s annual cash incentive awards and should not be understood to be statements of management’s expectations or estimates of results or other guidance. We specifically caution investors not to apply these statements to other contexts.
The following are descriptions of the performance measures used for Allstate’s annual cash incentive awards for 2011, which may be applied to compensation of Lincoln Benefit’s named executives. These measures are not GAAP measures. They were developed uniquely for incentive compensation purposes and are not reported items in Allstate’s financial statements. Some of these measures use non-GAAP measures and operating measures. The Committee has approved the use of non-GAAP and operating measures when appropriate to drive executive focus on particular strategic, operational, or financial factors or to exclude factors over which Allstate executives have little influence or control, such as capital market conditions.
Adjusted Underlying Operating Income: This measure is used to assess financial performance. This measure is equal to net income adjusted to exclude the after tax effects of the items listed below:
| • | Realized capital gains and losses (which includes the related effect on the amortization of deferred acquisition and deferred sales inducement costs) except for periodic settlements and accruals on certain non-hedge derivative instruments. |
| • | Valuation changes on embedded derivatives that are not hedged. |
| • | Business combination expenses and the amortization of purchased intangible assets. |
| • | Gains and losses on disposed operations. |
| • | Adjustments for other significant non-recurring, infrequent, or unusual items, when (a) the nature of the charge or gain is such that it is reasonably unlikely to recur within two years or (b) there has been no similar charge or gain within the prior two years. |
| • | Restructuring or related charges. |
| • | Underwriting results of the Discontinued Lines and Coverages segment. |
| • | Any settlement, awards, or claims paid as a result of lawsuits and other proceedings brought against Allstate subsidiaries regarding the scope and nature of coverage provided under insurance policies issued by such companies. |
| • | The after tax effects of catastrophe losses. Catastrophes are defined and reported in The Allstate Corporation 10-K. |
Book Value Per Share:This measure is used to assess financial performance. The measure is equal to book value per diluted share adjusted to exclude the effects of 2011 share repurchases. The numerator, shareholders’ equity at December 31, 2011, is increased to exclude the cost of shares acquired in 2011 under approved share repurchase programs. The denominator, total shares outstanding plus dilutive potential shares outstanding at December 31, 2011, is increased to exclude the number of shares acquired in 2011 under approved share repurchase programs. Other effects resulting from approved share repurchase programs, such as the impacts on net investment income of using funds to purchase shares, are not adjusted.
Growth in Policies in Multi-Category Households:This measure is used by management to assess the execution of its strategy to broaden customer relationships. This measure represents the increase from December 31, 2010, to December 31, 2011, in the number of policies within households that have policies in multiple product categories. Product categories are defined as Auto, Property, or Allstate Financial. The measure
79
includes Encompass brand package policies, but not their existence in any cross-branded relationships. It excludes Allstate Workplace Division, Allstate Roadside Services, Allstate Dealer Services, Allstate Business Insurance, and Expanded Markets products.
| Item 11(m). | Security Ownership of Certain Beneficial Owners and Management. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table shows the number of Lincoln Benefit shares owned by any beneficial owner who owns more than five percent of any class of Lincoln Benefit’s voting securities.
Title of Class (a) | Name and Address of Beneficial Owner (b) | Amount and Nature of Beneficial Ownership (c) | Percent of Class (d) | |||
Capital Stock | Allstate Life Insurance Company 3100 Sanders Road, Northbrook, IL 60062 | 25,000 | 100% | |||
N/A | Allstate Insurance Company 2775 Sanders Road, Northbrook, IL 60062 | Indirect voting and investment power of shares owned by Allstate Life Insurance Company | N/A | |||
N/A | Allstate Insurance Holdings, LLC 2775 Sanders Road, Northbrook, IL 60062 | Indirect voting and investment power of shares owned by Allstate Life Insurance Company | N/A | |||
N/A | The Allstate Corporation 2775 Sanders Road, Northbrook, IL 60062 | Indirect voting and investment power of shares owned by Allstate Life Insurance Company | N/A | |||
80
Security Ownership of Directors and Executive Officers
The following table shows the number of shares of Allstate common stock beneficially owned by each director and named executive officer of Lincoln Benefit individually, and by all executive officers and directors of Lincoln Benefit as a group. Shares reported as beneficially owned include shares held indirectly through the Allstate 401(k) Savings Plan and other shares held indirectly, as well as shares subject to stock options exercisable on or prior to May 9, 2012 and restricted stock units for which restrictions expire on or prior to May 9, 2012. The percentage of Allstate shares of common stock beneficially owned by any Lincoln Benefit director, named executive officer or by all directors and executive officers of Lincoln Benefit as a group does not exceed 1%. The following share amounts are as of March 12, 2012. As of March 12, 2012, none of these shares were pledged as security.
Name of Beneficial Owner | Amount and Nature of Beneficial Ownership of Allstate Common Stock (a) | Common Stock Subject to Options Exercisable and Restricted Stock units for which to May 9, 2012 – Included in Column (a) (b) | ||
Robert K. Becker | 18,748 | 18,494 | ||
Anurag Chandra | 0 | 0 | ||
Lawrence W. Dahl | 35,585 | 35,404 | ||
Mark A. Green | 7,339 | 5,479 | ||
Susan L. Lees | 53,309 | 44,246 | ||
John C. Pintozzi | 131,850 | 127,466 | ||
Matthew E. Winter | 98,258 | 97,409 | ||
All directors and executive officers as a group | 345,089 | 328,498 |
| Item 11(n) | Transactions with Related Persons, Promoters and Certain Control Persons. |
Transactions with Related Persons.
This table describes certain intercompany agreements involving Lincoln Benefit and the following companies:
| • | Allstate Life Insurance Company (“ALIC”), the direct parent of Lincoln Benefit; |
| • | Allstate Insurance Company (“AIC”), an indirect parent of Lincoln Benefit; and |
| • | The Allstate Corporation (“AllCorp”), the ultimate indirect parent of Lincoln Benefit. |
81
Transaction Description | Approximate dollar value of the amount involved in the transaction, per fiscal year | Related Person(s) involved in the transaction1 and the approximate dollar value of the amount of the Related Person’s interest in the transaction ($) | ||||||||||||||||||
| ($) | ALIC | AIC | AllCorp | |||||||||||||||||
| Investment Management Agreement among Allstate Investments, LLC, Allstate Insurance Company, The Allstate Corporation and certain affiliates effective January 1, 2007. |
| 2009
2010
2011 |
|
| 142,073,012
130,793,008
133,073,456 |
2 |
| 76,392,634
73,282,918
71,775,550 | 2
2
2 |
| 54,248,353
47,445,127
52,773,567 |
2 |
| 1,151,990
687,957
1,475,458 |
2 | |||||
| Tax Sharing Agreement among The Allstate Corporation and certain affiliates dated as of November 12, 1996, as supplemented by Supplemental Intercompany Tax Sharing Agreement between Allstate Life Insurance Company and Lincoln Benefit Life Company effective December 21, 2000. |
| 2009
2010
2011 |
|
| (1,173,212,154
(113,770,599
2,845,812 | )3
)3
3, 4 |
| (534,572,879
(621,234,096
71,718,284 | )
)
|
| (467,570,173
647,559,256
42,900,789 | )
|
| (121,813,486
(146,676,325
(142,533,135 | )
)
) | |||||
| Cash Management Services Master Agreement between Allstate Insurance Company, Allstate Bank (aka Allstate Federal Savings Bank), and certain affiliates dated March 16, 1999, as amended by Amendment No.1 effective January 5, 2001, and Amendment No. 2 entered into November 8, 2002, between Allstate Insurance Company, Allstate Bank and Allstate Motor Club, Inc., and as supplemented by the Premium Depository Service Supplement dated as of September 30, 2005, the Variable Annuity Service Supplement dated November 10, 2005, and the Sweep Agreement Service Supplement dated as of October 11, 2006. |
| 2009
2010
2011 |
|
| 1,527,072
967,620
240,284 | 4
4
4 |
| 158,312
76,166
17,229 | 5
5
5 |
| 1,052,781
694,117
174,548 | 5
5
5 | N/A | |||||||
| 1 | Each identified Related Person is a Party to the transaction. |
| 2 | Gross amount of expense received under the transaction. |
| 3 | Total amounts paid to Internal Revenue Service. |
| 4 | Total fees collected for all bank accounts covered under the transaction. |
| 5 | Fees paid under the transaction. |
82
Transaction Description | Approximate dollar value of the amount involved in the transaction, per fiscal year | Related Person(s) involved in the transaction1 and the approximate dollar value of the amount of the Related Person’s interest in the transaction ($) | ||||||||||||||||||
| ($) | ALIC | AIC | AllCorp | |||||||||||||||||
| Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation and certain affiliates effective January 1, 2004, as amended by Amendment No. 1 effective January 1, 2009, and as supplemented by New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and Intramerica Life Insurance Company, effective March 5, 2005. |
| 2009
2010
2011 |
|
| 3,451,765,246
3,619,106,706
3,618,090,094 |
2 |
| 180,154,068
175,950,701
171,247,884 | 2
2
2 |
| 1,937,571,496
1,823,391,816
1,706,778,729 | 2
2
2 |
| 2,510,800
4,191,150
7,255,192 | 2
2
2 | |||||
| Reinsurance Agreements between Lincoln Benefit Life Company and Allstate Life Insurance Company: Coinsurance Agreement effective December 31, 2001; Modified Coinsurance Agreement effective December 31, 2001; Modified Coinsurance Agreement effective December 31, 2001. |
| 2009
2010
2011 |
|
| 873,759,209
888,764,276
562,439,149 | 6
6
|
| 873,759,209
888,764,276
562,439,149 | 6
6
| N/A | N/A | |||||||||
| Intercompany Loan Agreement among The Allstate Corporation, Allstate Life Insurance Company, Lincoln Benefit Life Company and other certain subsidiaries of The Allstate Corporation dated February 1, 1996. |
| 2009
2010
2011 |
|
| 86,111,674
149,971,764
399,830,632 |
7 |
| 0
149,971,764
0 | 8
8 |
| 86,111,674
149,971,764
399,830,632 |
7 |
| 86,111,674
149,971,764
399,830,632 |
7 | |||||
| Agreement for the Settlement of State and Local Tax Credits among Allstate Insurance Company and certain affiliates effective January 1, 2007. |
| 2009
2010
2011 |
|
| 941,379
835,435
1,391,107 |
|
| 193,504
236,540
205,904 | 9
8
9 |
| 441,024
474,132
1,095,601 |
9 | N/A | |||||||
| Assignment & Delegation of Administrative Services Agreements, Underwriting Agreements, and Selling Agreements entered into as of September 1, 2011 between ALFS, Inc., Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Allstate Distributors, LLC, Charter National Life Insurance Company, Intramerica Life Insurance Company, Allstate Financial Services, LLC, and Lincoln Benefit Life Company. |
| 2009
2010
2011 |
|
| 9,722,930
10,459,692
14,875,149 | 2
2
2 |
| 239,393
1,658,404
7,085,880 | 2
2
2 |
| 0
0
0 | 2
2
2 |
| 0
0
0 | 2
2
2 | |||||
83
Transaction Description | Approximate dollar value of the amount involved in the transaction, per fiscal year | Related Person(s) involved in the transaction1 and the approximate dollar value of the amount of the Related Person’s interest in the transaction ($) | ||||||||||||||||||
| ($) | ALIC | AIC | AllCorp | |||||||||||||||||
| Investment Advisory Agreement and Amendment to Service Agreement as of January 1, 2002 between Allstate Insurance Company, Allstate Investments, LLC and Allstate Life Insurance Company of New York. |
| 2009
2010
2011 |
|
| 8,902,079
9,670,558
9,850,648 | 2
2
2 |
| 0
0
0 | 2
2
2 |
| 0
0
0 | 2
2
2 |
| 0
0
0 | 2
2
2 | |||||
| 6 | Net reinsurance income. |
| 7 | Amounts loaned and repaid. |
| 8 | No loans outstanding at year end. |
| 9 | Value of transfer transactions. |
84
Review and Approval of Intercompany Agreements
All intercompany agreements to which Lincoln Benefit is a party are approved by Lincoln Benefit’s Board of Directors as well as by the board of any other affiliate of The Allstate Corporation which is a party to the agreement. Intercompany agreements are also submitted for approval to the Nebraska Department of Insurance, Lincoln Benefit’s domestic regulator, and any additional states in which Lincoln Benefit might be commercially domiciled pursuant to the applicable state’s insurance holding company systems act. This process is documented in an internal procedure that captures the review and approval process of all intercompany agreements. All approvals are maintained in Lincoln Benefit’s corporate records.
While there is no formal process for the review and approval of related person transactions between unaffiliated entities specific to Lincoln Benefit, all directors and executive officers of Lincoln Benefit are subject to the Allstate Code of Ethics (“Code”). The Code includes a written conflict of interest policy that was adopted by the Board of Directors of the Allstate Corporation, the ultimate parent company of Lincoln Benefit. Any potential relationship or activity that could impair independent thinking and judgment, including holding a financial interest in a business venture that is similar to Allstate, or in a business that has a relationship with Allstate, must be disclosed to Human Resources. Human Resources will work with representatives from the Law Department, including Enterprise Business Conduct, to determine whether an actual conflict of interest exists. Each director and executive officer must sign a Code of Ethics certification annually.
Independence Standards For Directors
Although not subject to the independence standards of the New York Stock Exchange, for purposes of this S-1 registration statement, Lincoln Benefit has applied the independence standards required for listed companies of the New York Stock Exchange to the Board of Directors. Applying these standards, Lincoln Benefit has been determined that none of the directors are considered to be independent.
Compensation Committee Interlocks and Insider Participation
The Board of Directors of Lincoln Benefit does not have a compensation committee. All compensation decisions are made by The Allstate Corporation, as the ultimate parent company of Lincoln Benefit. No executive officer of Lincoln Benefit served as a member of the compensation committee of another entity for which any executive officer served as a director for Lincoln Benefit.
A section entitled “Experts” is added to your prospectus as follows:
Experts
The financial statements and the related financial statement schedules included herein have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements and financial statement schedules are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
Principal Underwriter
ALFS, Inc (“ALFS”) merged into Allstate Distributors, LLC (“ADLLC”), effective September 1, 2011. ALFS assigned its rights and delegated its duties as principal underwriter to ADLLC. This change had no effect on Lincoln Benefit Life Company’s obligations under the Contract.
ADLLC serves as distributor of the securities registered herein. The securities offered herein are sold on a continuous basis, and there is no specific end date for the offering. ADLLC, an affiliate of Lincoln Benefit, is a
85
wholly owned subsidiary of Allstate Life Insurance Company. ADLLC is a registered broker dealer under the Securities and Exchange Act of 1934, as amended, and is a member of the Financial Industry Regulatory Authority. ADLLC is not required to sell any specific number or dollar amount of securities, but will use its best efforts to sell the securities offered.
Administration
We have primary responsibility for all administration of the Contracts and the Variable Account. We entered into an administrative services agreement with The Prudential Insurance Company of America (“PICA”) whereby, PICA or an affiliate provides administrative services to the Variable Account and the Contracts on our behalf. In addition, PICA entered into a master services agreement with se2, inc., of 5801 SW 6th Avenue, Topeka, Kansas 66636, whereby se2, inc. provides certain business process outsourcing services with respect to the Contracts. se2, inc. may engage other service providers to provide certain administrative functions. These service providers may change over time, and as of December 31, 2011, consisted of the following: Keane BPO, LLC (administrative services) located at 100 City Square, Boston, MA 02129; RR Donnelly Global Investment Markets (compliance printing and mailing) located at 111 South Wacker Drive, Chicago, IL 60606; Jayhawk File Express, LLC (file storage and document destruction) located at 601 E. 5th Street, Topeka, KS 66601-2596; Co-Sentry.net, LLC (back-up printing and disaster recovery) located at 9394 West Dodge Rd, Suite 100, Omaha, NE 68114; Convey Compliance Systems, Inc. (withholding calculations and tax statement mailing) located at 3650 Annapolis Lane, Suite 190, Plymouth, MN 55447; Spangler Graphics, LLC (compliance mailings) located at 29305 44th Street, Kansas City, KS 66106; Veritas Document Solutions, LLC (compliance mailings) located at 913 Commerce Ct, Buffalo Grove, IL 60089; Records Center of Topeka, a division of Underground Vaults & Storage, Inc. (back-up tapes storage) located at 1540 NW Gage Blvd. #6, Topeka, KS 66618; EquiSearch Services, Inc. (lost shareholder search) located at 11 Martime Avenue, Suite 665, White Plains, NY 10606; ZixCorp Systems, Inc. (email encryption) located at 2711 N. Haskell Ave., Suite 2300, Dallas, TX 75204; DST Systems, Inc. (FAN mail, positions, prices) located at 333 West 11 Street, 5th Floor, Kansas City, MO 64105.
In administering the Contracts, the following services are provided, among others:
| • | maintenance of Contract Owner records; |
| • | Contract Owner services; |
| • | calculation of unit values; |
| • | maintenance of the Variable Account; and |
| • | preparation of Contract Owner reports. |
86
SUPPLEMENT, DATED JULY 6, 2011,
TO THE PROSPECTUS FOR YOUR VARIABLE ANNUITY
ISSUED BY
ALLSTATE LIFE INSURANCE COMPANY
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
LINCOLN BENEFIT LIFE COMPANY
This supplement amends the prospectus for your Variable Annuity contract issued
by Allstate Life Insurance Company or Allstate Life Insurance Company of
New York or Lincoln Benefit Life Company, as applicable.
Effective as of August 19, 2011 (the Closure Date), the following variable
sub-accounts available in your Variable Annuity will be closed to all contract
owners except those contract owners who have contract value invested in the
variable sub-accounts as of the Closure Date:
Invesco V.I. Basic Value Fund--Series I
Invesco V.I. Basic Value Fund--Series II
Contract owners who have contract value invested in these variable sub-accounts
as of the Closure Date may continue to submit additional investments into the
variable sub-accounts thereafter, although they will not be permitted to
invest in the variable sub-accounts if they withdraw or otherwise transfer their
entire contract value from the variable sub-accounts following the Closure Date.
Contract owners who do not have contract value invested in the variable
sub-accounts as of the Closure Date will not be permitted to invest in these
variable sub-accounts thereafter.
Dollar cost averaging and/or auto-rebalancing, if elected by a contract owner,
will not be affected by the closure.
If you have any questions, please contact your financial representative or our
Variable Annuity Service Center at (800) 457-7617. Our representatives are
available to assist you from 7:30 a.m. to 5 p.m. Central time.
Please read the prospectus supplement carefully and then file it with your
important papers. No other action is required of you.
Supplement, dated October 18, 2010,
to the Prospectus for your Variable Annuity
Issued by
ALLSTATE LIFE INSURANCE COMPANY
ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK
LINCOLN BENEFIT LIFE COMPANY
This supplement amends the prospectus for your Variable Annuity contract issued
by Allstate Life Insurance Company or Allstate Life Insurance Company of New
York or Lincoln Benefit Life Company, as applicable.
Effective as of November 19, 2010 (the Closure Date), the following variable
sub-accounts available in the above-referenced Variable Annuities will be closed
to all contract owners except those contract owners who have contract value
invested in the variable sub-accounts as of the Closure Date:
Invesco V.I. Capital Appreciation Fund--Series I
Invesco V.I. Capital Appreciation Fund--Series II
Contract owners who have contract value invested in these variable sub-accounts
as of the Closure Date may continue to submit additional investments into the
variable sub-accounts thereafter, although they will not be permitted to invest
in the variable sub-accounts if they withdraw or otherwise transfer their entire
contract value from the variable sub-accounts following the Closure Date.
Contract owners who do not have contract value invested in the variable
sub-accounts as of the Closure Date will not be permitted to invest in these
variable sub-accounts thereafter.
Dollar cost averaging and/or auto-rebalancing, if elected by a contract owner,
will not be affected by the closure.
If you have any questions, please contact your financial representative or our
Variable Annuity Service Center at (800) 457-7617. Our representatives are
available to assist you from 7:30 a.m. to 5 p.m. Central time.
Please read the prospectus supplement carefully and then file it with your
important papers. No other action is required of you.
Supplement Dated December 31, 2009
To the Prospectus for Your Variable Annuity
Issued By
Allstate Life Insurance Company
Allstate Life Insurance Company of New York
Lincoln Benefit Life Company
This supplement amends the prospectus for your variable annuity contract issued
by Allstate Life Insurance Company, Allstate Life Insurance Company of New York,
or Lincoln Benefit Life Company.
The following provision is added to your prospectus:
WRITTEN REQUESTS AND FORMS IN GOOD ORDER. Written requests must include
sufficient information and/or documentation, and be sufficiently clear, to
enable us to complete your request without the need to exercise discretion on
our part to carry it out. You may contact our Customer Service Center to learn
what information we require for your particular request to be in "good order."
Additionally, we may require that you submit your request on our form. We
reserve the right to determine whether any particular request is in good order,
and to change or waive any good order requirements at any time.
If you have any questions, please contact your financial representative or call
our Customer Service Center at 1-800-457-7617. If you own a Putnam contract,
please call 1-800-390-1277.
For future reference, please keep this supplement together with your prospectus.
Lincoln Benefit Life Company
Supplement dated August 14, 2009
To the following Prospectuses, as supplemented:
Consultant Solutions, Prospectus Dated May 1, 2009
Consultant I, Prospectus Dated May 1, 2009
LBL Advantage, Prospectus Dated May 1, 2004
Consultant II, Prospectus Dated May 1, 2004
Premier Planner, Prospectus Dated May 1, 2004
This prospectus supplement amends certain disclosure contained in the
prospectuses referenced above for your variable annuity contract issued by
Lincoln Benefit Life Company ("Lincoln Benefit").
The "Annual Reports and Other Documents" section is deleted and replaced with
the following:
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission ("SEC") recently adopted rule 12h-7 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule 12h-7
exempts an insurance company from filing reports under the Exchange Act when the
insurance company issues certain types of insurance products that are registered
under the Securities Act of 1933 and such products are regulated under state
law. Each of the variable annuities described in the prospectuses referenced
above fall within the exemption provided under rule 12h-7. Lincoln Benefit is
hereby providing notice that it is electing to rely on the exemption provided
under rule 12h-7 effective as of the date of this prospectus supplement or as
soon as possible thereafter, and will be suspending filing reports under the
Exchange Act.
The SEC allows us to "incorporate by reference" information that we file with
the SEC into this prospectus supplement which means that incorporated documents
are considered part of this prospectus supplement. We can disclose important
information to you by referring you to those documents. This prospectus
supplement incorporates by reference our Annual Report on Form 10-K for the year
ended December 31, 2008, filed with the SEC on March 18, 2009, and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on
May 12, 2009.
Lincoln Benefit will provide to each person, including any beneficial owner, to
whom a prospectus is delivered, a copy of any or all of the information that has
been incorporated by reference into the prospectus but not delivered with the
prospectus. Such information will be provided upon written or oral request at no
cost to the requester by writing to Lincoln Benefit, P.O. Box 758565, Topeka, KS
66675-8565 or by calling 1-800- 457- 7617. The public may read and copy any
materials that Lincoln Benefit files with the SEC at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy,
and information statements, and other information regarding issuers that file
electronically with the SEC (see http://www.sec.gov).
Lincoln Benefit Life Company
LBL Advantage
Consultant II
Premier Planner
Supplement, dated May 1, 2009
This supplement amends certain disclosure contained in the prospectus for
certain annuity contracts issued by Lincoln Benefit Life Company.
Under the "More Information" section, the subsection entitled "Legal Matters" is
deleted and replaced with the following:
LEGAL MATTERS
Certain matters of state law pertaining to the Contracts, including the validity
of the Contracts and Lincoln Benefit Life Company's right to issue such
Contracts under applicable state insurance law, have been passed upon by Susan
L. Lees, General Counsel of Lincoln Benefit Life Company.
The "Annual Reports and Other Documents" section is deleted and replaced with
the following:
ANNUAL REPORTS AND OTHER DOCUMENTS
Lincoln Benefit Life Company ("Lincoln Benefit") incorporates by reference into
the prospectus its latest annual report on Form 10-K filed pursuant to Section
13(a) or Section 15(d) of the Exchange Act since the end of the fiscal year
covered by its latest annual report, including filings made on Form 10-Q and
Form 8-K. In addition, all documents subsequently filed by Lincoln Benefit
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act also are
incorporated into the prospectus by reference. Lincoln Benefit will provide to
each person, including any beneficial owner, to whom a prospectus is delivered,
a copy of any or all of the information that has been incorporated by reference
into the prospectus but not delivered with the prospectus. Such information will
be provided upon written or oral request at no cost to the requester by writing
to Lincoln Benefit, P.O. Box 758565, Topeka, KS 66675-8565 or by calling 1-800-
457-7617. Lincoln Benefit files periodic reports as required under the
Securities Exchange Act of 1934. The public may read and copy any materials that
Lincoln Benefit files with the SEC at the SEC's Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy, and information
statements, and other information regarding issuers that file electronically
with the SEC (see http://www.sec.gov).
Lincoln Benefit Life Company
Lincoln Benefit Life Variable Annuity Account
Supplement, dated March 31, 2008, to
the LBL Advantage Variable Annuity Prospectus
and the LBL Premier Planner Variable Annuity Prospectus
This supplement amends certain disclosure contained in the above-referenced
prospectus for certain variable annuity contracts issued by Lincoln Benefit Life
Company.
We have received notice that the Board of Trustees of the Rydex Variable Trust
has approved the following fund name change:
Effective April 1, 2008, the name of the Rydex VT OTC Fund will be changed
to the Rydex VT NASDAQ-100 (R) Fund.
Due to this name change, the corresponding Rydex VT OTC Sub-Account available
for your product will change its name to the Rydex VT NASDAQ-100 (R) Sub-Account
effective April 1, 2008.
The name change does not in any way affect the investment objective of the Fund,
which remains unchanged, or the manner in which the investment advisor manages
the fund.
Please keep this supplement for future reference together with your prospectus.
Lincoln Benefit Life Company
Lincoln Benefit Life Variable Annuity Account
Supplement, dated February 26, 2007 to
The LBL Advantage Variable Annuity Prospectus dated May 1, 2004
The Premier Planner Variable Annuity Prospectus dated May 1, 2004
This supplement amends certain disclosures contained in the above-referenced
prospectuses for certain variable annuity contracts issued by Lincoln Benefit
Life Company.
We have received notice that the Board of Trustees ("Board") of the Legg Mason
Variable Portfolios has approved the reorganization, on or about April 27, 2007
("Conversion Date"), of the Legg Mason Partners Variable All Cap Portfolio -
Class II into the Legg Mason Partners Variable Fundamental Value Portfolio -
Class I, which will be added as an investment choice to your contract as of
April 27, 2007.
To reflect the change in the underlying Portfolio, we will transfer any Contract
Value you have in the Legg Mason Partners Variable All Cap Portfolio - Class II
Sub-Account ("All Cap Sub-Account) into the Legg Mason Partners Variable
Fundamental Value Portfolio - Class I Sub-Account ("Fundamental Value
Sub-Account"). Contract owners will receive a confirmation of the transaction
reflecting this change.
Salomon Brothers Asset Management Inc. is the investment advisor for the Legg
Mason Partners Variable Fundamental Value Portfolio - Class I. The investment
objective for this Portfolio is: Long-term capital growth with current income as
a secondary consideration.
If you currently have allocations made to the All Cap Sub-Account through
automatic additions, automatic portfolio rebalancing, dollar cost averaging or
systematic withdrawal programs, any future allocations will be made to the
Fundamental Value Sub-Account as of the Conversion Date.
For additional information on how to transfer to another investment alternative,
or how to make a change to your current allocation(s), please contact your
financial representative or call our Customer Service Center at 1-800-865-5237.
Please keep this supplement for future reference together with your
prospectuses.
Lincoln Benefit Life Company
Lincoln Benefit Life Variable Annuity Account
Supplement, dated January 14, 2005,
to
The LBL Advantage Variable Annuity Prospectus
dated May 1, 2004
This supplement amends certain disclosure contained in the above-referenced
prospectus for certain variable annuity contracts issued by Lincoln Benefit Life
Company.
We have received notice that the Board of Trustees ("Board") of PIMCO Advisors
VIT has approved the liquidation, on or about April 29, 2005 (the "Closing
Date"), of the PEA Science and Technology Portfolio (the "PEA Portfolio").
The Board based its decision, in part, upon the fact that the PEA Portfolio is
relatively small in asset size and has failed to garner significant exposure in
the variable contract market. In addition, the Board believes the outlook for
future growth of the PEA Portfolio is not encouraging.
Due to the liquidation of the PEA Portfolio, we will no longer accept new
premiums for investment in, nor will we permit transfers to, the PEA Science and
Technology Portfolio Sub-Account ("PEA Sub-Account") on or after April 29, 2005.
Because the PEA Sub-Account will no longer be offered as an investment
alternative as of the Closing Date, you may wish to transfer, prior to April 29,
2005, some or all of your interest in the PEA Sub-Account to the other
investment alternatives currently offered by your Contract. Any value remaining
in the PEA Sub-Account will be transferred automatically, as of the Closing
Date, to the PIMCO VIT Money Market Sub-Account, an investment alternative
already available under your Contract. These transfers are not subject to a
transfer fee.
If you currently have allocations made to the PEA Sub-Account through automatic
additions, automatic portfolio rebalancing, dollar cost averaging or systematic
withdrawal programs, your allocation in the PEA Sub-Account will also need to be
changed in these programs. If you do not change this allocation to other
investment alternatives currently available under your Policy, any allocation to
the PEA Sub-Account will be automatically allocated, as of the Closing Date, to
the PIMCO VIT Money Market Sub-Account.
If your interest in the PEA Sub-Account is transferred automatically on the
Closing Date to the PIMCO VIT Money Market Sub-Account, for 60 days following
the Closing Date, you may transfer your interest in the PIMCO VIT Money Market
Sub-Account to any other investment alternative(s) available under your
Contract. This transfer is not subject to a transfer fee.
We will send you a confirmation that shows the amount that we credited to the
PIMCO VIT Money Market Sub-Account or to the investment alternative that you
chose and the date of the transaction. For additional information on how to
transfer to another investment alternative, or how to make a change to your
current allocation(s), please contact your financial representative or call our
Customer Service Center at the number listed below.
Attached, as Appendix A, is a list of the Portfolios and Fixed Account
Investment Alternatives currently available under your Contract.
Please keep this supplement for future reference together with your
prospectuses.
Number for Customer Service Center: 1-800-865-5237
Appendix A
The LBL Advantage Variable Annuity contract offers a variety of Investment
Alternatives that encompass investment choices ranging from aggressive to
conservative. Below is a listing of the Portfolios and Fixed Account Investment
Alternatives currently available. Also included is the investment objective for
each Portfolio.
For more complete information about each Portfolio, including expenses and risks
associated with the Portfolio, please refer to the relevant prospectus for the
Portfolio.
PORTFOLIOS
AIM V.I. Basic Value Fund - Series I Seeks long-term growth of capital.
AIM V.I. Dent Demographics Trends Fund - Series I Seeks long-term growth of
capital.
Alger American Growth Portfolio - Class S Seeks long-term capital appreciation.
Fidelity VIP Equity-Income Portfolio - Service Class 2 Seeks reasonable income. Fidelity VIP Growth Portfolio - Service Class 2 Seeks capital appreciation. Fidelity VIP Investment Grade Bond Portfolio - Service Class 2 Seeks as high a level of current income as is consistent with the preservation of capital. Fidelity VIP Overseas Portfolio - Service Class 2 Seeks long-term growth of capital. Janus Aspen Series Capital Appreciation Portfolio: Institutional Shares Seeks long-term growth of capital. Janus Aspen Series Foreign Stock Portfolio: Service Shares Seeks long-term growth of capital. Janus Aspen Series Worldwide Growth Portfolio: Service Shares Seeks long-term growth of capital in a manner consistent with the preservation of capital. Lazard Emerging Markets Portfolio Seeks long-term capital appreciation MFS New Discovery Series - Service Class Seeks capital appreciation. MFS Utilities Series - Service Class Seeks capital growth and current income. Oppenheimer Main Street Small Cap Fund/VA - Service Shares Seeks capital appreciation. Oppenheimer International Growth Fund/VA - Service Shares Seeks capital appreciation. PAVIT OpCap Balanced Portfolio Seeks growth of capital and investment income. PAVIT OpCap Small Cap Portfolio Seeks capital appreciation. PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares Seeks to maximize total return, consistent with preservation of capital and prudent investment management. PIMCO VIT Money Market Portfolio - Administrative Shares Seeks to obtain maximum current income consistent with preservation of capital and daily liquidity. PIMCO VIT Real Return Portfolio - Administrative Shares Seeks maximum real return, consistent with preservation of real capital and prudent investment management. PIMCO VIT Total Return Portfolio - Administrative Shares Seeks to maximize total return, consistent with preservation of capital and prudent investment management. Putnam VT High Yield Fund - Class IB Seeks high current income. Capital growth is a secondary goal when consistent with achieving high current income. The fund seeks its goal by investing at least 80% in U.S. corporate rated below investment grade (junk bonds) and that have intermediate to long-term maturities (three years or longer.) Putnam VT International Growth and Income Fund - Class IB Seeks capital growth. Current income is a secondary objective. Rydex VT OTC Fund Seeks investment results that correspond to a benchmark for over-the-counter securities. The Portfolio's current benchmark is the NASDAQ 100 Index. Rydex VT Sector Rotation Fund Seeks long-term capital appreciation. Salomon Brothers Variable All Cap Fund - Class I Seeks capital appreciation. Salomon Brothers Variable Investors Fund - Class I Seeks long-term growth of capital with current income as a secondary objective. Scudder VIT EAFE Equity Index Fund - Class B Seeks to replicate as closely as possible before deduction of expenses, performance of the MSCI EAFE Index which emphasizes stocks of companies in major markets in Europe, Australia, and the Far East.
Scudder VIT Equity 500 Index Fund - Class B Seeks to replicate as closely as
possible before deduction of expenses, performance of the S&P 500 Index which
emphasizes stocks of large U.S. companies.
Scudder VIT Small Cap Index Fund - Class B Seeks to replicate as closely as
possible before deduction of expenses, the performance of the Russell 2000 Index
which emphasizes stocks of small U.S. companies.
Van Kampen UIF Equity Growth Portfolio, Class I Seeks long-term capital
appreciation by investing primarily in growth-oriented equity securities of
large capitalization companies.
Van Kampen UIF High Yield Portfolio, Class I Seeks above-average total return
over a market cycle of three to five years by investing primarily in high yield
securities (commonly referred to as "junk bonds").
Van Kampen UIF U.S. Mid Cap Value Portfolio, Class I Seeks above-average total
return over a market cycle of three to five years by investing in common stocks
and other equity securities.
Van Kampen UIF U.S. Real Estate Portfolio, Class II Seeks to provide
above-average current income and long-term capital appreciation by investing
primarily in equity securities of companies in the U.S. real estate industry,
including real estate investment trusts.
Van Kampen LIT Aggressive Growth Portfolio, Class II Seeks capital growth.
Van Kampen LIT Growth and Income Portfolio, Class II Seeks long-term growth of
capital and income.
Fixed Account Options
Standard Fixed Account
Guaranteed Maturity Fixed Account
THE LBL ADVANTAGE VARIABLE ANNUITY
Prospectus dated May 1, 2004
Lincoln Benefit Life Company ("LINCOLN BENEFIT" "WE", OR "US") is offering the
LBL Advantage Variable Annuity, a group and individual flexible premium deferred
variable annuity contract ("CONTRACT"). This prospectus contains information
about the Contract that you should know before investing. Please keep it for
future reference.
The Contract currently offers 40 "INVESTMENT ALTERNATIVES" The investment
alternatives include 3 fixed account options ("FIXED ACCOUNT OPTIONS") and 37
variable subaccounts ("VARIABLE SUBACCOUNTS") of the Lincoln Benefit Life
Variable Annuity Account ("VARIABLE ACCOUNT"). Each Variable Subaccount invests
exclusively in shares of the portfolios ("PORTFOLIOS") of the following
underlying funds ("FUNDS"):
AIM VARIABLE INSURANCE FUNDS PIMCO ADVISERS VIT
THE ALGER AMERICAN FUND PIMCO VARIABLE INSURANCE TRUST
FIDELITY(R) VARIABLE INSURANCE PUTNAM VARIABLE TRUST
PRODUCTS THE RYDEX VARIABLE TRUST
JANUS ASPEN SERIES SALOMON BROTHERS VARIABLE SERIES FUNDS
LAZARD RETIREMENT SERIES, INC. INC
MFS(R) VARIABLE INSURANCE TRUST(SM) SCUDDER INVESTMENTS VIT FUNDS
OPPENHEIMER VARIABLE ACCOUNT FUNDS THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
PANORAMA SERIES FUND, INC. VAN KAMPEN LIFE INVESTMENT TRUST
Each Fund has multiple Portfolios. Not all of the Funds and/or Portfolios,
however, may be available with your Contract. You should check with your
representative for further information on the availability of Funds and/or
Portfolios. Your annuity application will list all available Portfolios.
Lincoln Benefit has filed a Statement of Additional Information, dated May 1,
2004, with the Securities and Exchange Commission ("SEC"). It contains more
information about the Contract and is incorporated herein by reference, which
means it is legally a part of this prospectus. Its table of contents appears on
page 58 of this prospectus. For a free copy, please write or call us at the
address or telephone number above, or go to the SEC's Web site
(http://www.sec.gov). You can find other information and documents about us,
including documents that are legally part of this prospectus, at the SEC's Web
site.
EFFECTIVE MAY 1, 2004, THIS CONTRACT IS NO LONGER BEING OFFERED FOR SALE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT
PASSED ON THE ACCURACY OR THE ADEQUACY OF THIS PROSPECTUS. ANYONE
IMPORTANT WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME.
NOTICES THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS THAT HAVE
RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY
EMPLOYEES OF SUCH BANKS. HOWEVER, THE CONTRACTS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL
REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THE CONTRACTS ARE NOT FDIC INSURED.
1 PROSPECTUS
TABLE OF CONTENTS
PAGE
----
OVERVIEW
Important Terms 3
The Contract At A Glance 4
How the Contract Works 5
Expense Table 6
Financial Information 9
CONTRACT FEATURES
The Contract 10
Purchases 11
Contract Value 12
Investment Alternatives
The Variable Subaccounts 14
The Fixed Account Options 15
Transfers 18
Expenses 20
Access To Your Money 22
Contract Loans for 403(b) Contracts 23
Income Payments 24
PAGE
----
Death Benefits 27
Other Information
More Information: 31
Lincoln Benefit Life Company 31
The Variable Account 31
The Portfolios 32
The Contract 32
Non-Qualified Annuities Held Within A Qualified Plan 33
Legal Matters 33
Taxes 34
Annual Reports and Other Documents 40
APPENDIX A - ACCUMULATION UNIT VALUES 41
APPENDIX B - MARKET VALUE ADJUSTMENT EXAMPLE 49
APPENDIX C - CALCULATION OF ENHANCED EARNINGS DEATH BENEFIT AMOUNT 51
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 53
2 PROSPECTUS
IMPORTANT TERMS
This prospectus uses a number of important terms that you may not be familiar
with. The index below identifies the page that describes each term. The first
use of each term in this prospectus appears in highlights.
PAGE
----
Accumulation Phase 7
Accumulation Unit 14
Accumulation Unit Value 14
Anniversary Values 33
Annuitant 12
Automatic Additions Program 13
Automatic Portfolio Rebalancing Program 23
Beneficiary 12
Cancellation Period 14
Contingent Beneficiary 12
*Contract 12
Contract Anniversary 6
Contract Owner ("You") 12
Contract Value 6
Contract Year 4
Death Benefit Anniversary 31
Dollar Cost Averaging Program 23
Due Proof of Death 31
Enhanced Earnings Death Benefit Rider 32
Enhanced Death Benefit Rider 32
Fixed Account Options 19
Free Withdrawal Amount 24
Funds 1
Guarantee Periods 20
Guaranteed Income Benefit 29
PAGE
----
Guaranteed Maturity Fixed Account 19
Income Base 30
Income Benefit Rider 29
Income Plan 28
In-Force Premium 33
Investment Alternatives 16
Issue Date 7
Lincoln Benefit ("We" or "Us") 1
Loan Account 27
Market Value Adjustment 21
Payout Phase 7
Payout Start Date 28
Portfolios 36
Primary Beneficiary 12
Rider Date 32
SEC 1
Settlement Value 31
Systematic Withdrawal Program 26
Tax Qualified Contracts 41
Valuation Date 14
Variable Account 35
Variable Subaccount 16
* In certain states the Contract is available only as a group Contract. If
you purchase a group Contract, we will issue you a certificate that
represents your ownership and that summarizes the provisions of the group
Contract. References to "Contract" in this prospectus include certificates,
unless the context requires otherwise.
3 PROSPECTUS
THE CONTRACT AT A GLANCE
The following is a snapshot of the Contracts. Please read the remainder of this
prospectus for more information.
FLEXIBLE PAYMENTS You can purchase a Contract with as little as
$10,000. You can add to your Contract as often
and as much as you like, but each payment must
be at least $100 unless you enroll in an
automatic payment plan, in which case each
payment must be at least $50.
--------------------------------------------------------------------------------
RIGHT TO CANCEL You may cancel your Contract within 20 days of
receipt or any longer period as your state may
require ("CANCELLATION PERIOD"). Upon
cancellation, we will return your purchase
payments adjusted, to the extent federal or
state law permits, to reflect the investment
experience of any amounts allocated to the
Variable Account. If your Contract is qualified
under Section 408 of the Internal Revenue Code,
we will refund the greater of any purchase
payments or the Contract Value.
--------------------------------------------------------------------------------
EXPENSES You will bear the following expenses:
. Total Variable Account annual fees equal to
1.35% of average daily net assets (1.60% if
you select the ENHANCED DEATH BENEFIT
RIDER, 1.55% if you elect the INCOME
BENEFIT RIDER, and 1.80% if you select both
the Enhanced Death Benefit and the Income
Benefit Riders).
. If you select the ENHANCED EARNINGS DEATH
BENEFIT RIDER, you would pay an additional
annual fee of up to 0.35% of average daily
net assets (depending on the oldest
Contract owner's age on the date we issue
the Rider). For more information about
Variable Account expenses, see "EXPENSES"
below.
. Withdrawal charges ranging from 0% to 8% of
purchase payment withdrawn (with certain
exceptions)
. Transfer fee of up to 0.50% of the transfer
amount, but not less than $25, after 12th
transfer in any CONTRACT YEAR (fee
currently waived)
. State premium tax (if your state imposes
one). In addition, each Portfolio pays
expenses that you will bear indirectly if
you invest in a Variable Subaccount.
--------------------------------------------------------------------------------
INVESTMENT The Contract offers 40 Investment Alternatives
ALTERNATIVES including:
. 3 Fixed Account Options (which credit
interest at rates we guarantee)
. 37 Variable Subaccounts investing in
Portfolios offering professional money
management by these investment advisers:
. A I M Advisors, Inc.
. Deutsche Asset Management Inc.
. Fred Alger Management, Inc.
. Fidelity Management & Research Company
. Janus Capital Management LLC
. Lazard Asset Management LLC
. MFS(TM) Investment Management
. OpCap Advisors LLC
. OppenheimerFunds, Inc.
. Pacific Investment Management Company
LLC
. Putnam Investment Management, LLC
. Rydex Investments
. Salomon Brothers Asset Management Inc
. Van Kampen*
. Van Kampen Asset Management
To find out current rates being paid on the
fixed account options or how the Variable
Subaccounts have performed, call us at
1-800-865-5237.
* Morgan Stanley Invesement Management Inc.,
the adviser to the UIF Portfolios, does
business in certain instances as Van
Kampen.
--------------------------------------------------------------------------------
SPECIAL SERVICES For your convenience, we offer these special
services:
. AUTOMATIC PORTFOLIO REBALANCING PROGRAM
. AUTOMATIC ADDITIONS PROGRAM
. DOLLAR COST AVERAGING PROGRAM
. SYSTEMATIC WITHDRAWAL PROGRAM
--------------------------------------------------------------------------------
INCOME PAYMENTS You can choose fixed income payments, variable
income payments, or a combination of the two.
You can receive your income payments in one of
the following ways:
. life income with guaranteed payments
. a "joint and survivor" life income with
guaranteed payments
. guaranteed payments for a specified period
(5 to 30 years)
We offer an optional Income Benefit Rider.
--------------------------------------------------------------------------------
DEATH BENEFITS If you or the ANNUITANT (if the Contract Owner
is a non-living person) die before the PAYOUT
START DATE, we will pay the death benefit
described in the Contract. We offer an Enhanced
Death Benefit Rider and Enhanced Earnings Death
Benefit Rider. The Enhanced Earnings Death
Benefit Rider is not available for purchase
with any IRA at this time.
--------------------------------------------------------------------------------
TRANSFERS Before the Payout Start Date, you may transfer
your Contract value ("CONTRACT VALUE") among
the investment alternatives, with certain
restrictions. We do not currently impose a fee
upon transfers. However, we reserve the right
to charge up to 0.50% of the transfer amount,
but not less than $25 per transfer after the
12th transfer in each "Contract Year", which we
measure from the date we issue your Contract or
a Contract anniversary ("CONTRACT
ANNIVERSARY"), which is the anniversary of your
Contract's Issue Date.
--------------------------------------------------------------------------------
WITHDRAWALS You may withdraw some or all of your Contract
Value at any time prior to the Payout Start
Date. In general, you must withdraw at least
$50 at a time. Full or partial withdrawals are
available under limited circumstances on or
after the Payout Start Date. Withdrawals of
earnings are taxed as ordinary income and, if
taken prior to age 59 1/2, may be subject to an
additional 10% federal tax penalty. A
withdrawal charge and a MARKET VALUE ADJUSTMENT
also may apply.
4 PROSPECTUS
HOW THE CONTRACT WORKS
The Contract basically works in two ways.
First, the Contract can help you (we assume you are the CONTRACT OWNER) save for
retirement because you can invest in up to 40 investment alternatives and
generally pay no federal income taxes on any earnings until you withdraw them.
The income on qualified plan and IRA investments is tax deferred and variable
annuities held by such plans do not receive any additional tax deferral. See
"TAX QUALIFIED CONTRACTS" on page 41. You do this during what we call the
"ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date
we issue your Contract (we call that date the "ISSUE DATE") and continues until
the Payout Start Date, which is the date we apply your money to provide income
payments. During the Accumulation Phase, you may allocate your purchase payments
to any combination of the Variable Subaccounts and/or Fixed Account Options. If
you invest in any of the three Fixed Account Options, you will earn a fixed rate
of interest that we declare periodically. If you invest in any of the Variable
Subaccounts, your investment return will vary up or down depending on the
performance of the corresponding Portfolios.
Second, the Contract can help you plan for retirement because you can use it to
receive retirement income for life and/ or for a pre-set number of years, by
selecting one of the income payment options (we call these "INCOME PLANS")
described on page 28. You receive income payments during what we call the
"PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and
continues until we make the last payment required by the Income Plan you select.
During the Payout Phase, if you select a fixed income payment option, we
guarantee the amount of your payments, which will remain fixed. If you select a
variable income payment option, based on one or more of the Variable
Subaccounts, the amount of your payments will vary up or down depending on the
performance of the corresponding Portfolios. The amount of money you accumulate
under your Contract during the Accumulation Phase and apply to an Income Plan
will determine the amount of your income payments during the Payout Phase.
The timeline below illustrates how you might use your Contract.
Issue Payout Start
Date Accumulation Phase Date Payout Phase
--------------------------------------------------------------------------------------------------
You buy You save for retirement You elect to receive You can receive Or you can receive
a Contract income payments or income payments income payments
receive a lump sum for a set period for life
payment
As the Contract Owner, you exercise all of the rights and privileges provided by
the Contract. If you die, any surviving Contract Owner or, if none, the
BENEFICIARY will exercise the rights and privileges provided by the Contract.
SEE"The Contract." In addition, if you die before the Payout Start Date, we will
pay a death benefit to any surviving Contract Owner, or if there is none, to
your Beneficiary. SEE "Death Benefits."
Please call us at 1-800-865-5237 if you have any questions about how the
Contract works.
5 PROSPECTUS
EXPENSE TABLE
THE FOLLOWING TABLES LIST THE EXPENSES AND FEES THAT YOU WILL BEAR DIRECTLY OR
INDIRECTLY WHEN YOU BUY, OWN, OR SURRENDER A CONTRACT. THE FIRST TABLE DESCRIBES
THE FEES AND EXPENSES THAT YOU WILL PAY AT THE TIME THAT YOU BUY THE CONTRACT,
SURRENDER THE CONTRACT, OR TRANSFER CASH VALUE BETWEEN PORTFOLIOS. THE TABLES
AND THE EXAMPLES THAT FOLLOW DO NOT REFLECT PREMIUM TAXES THAT MAY BE IMPOSED BY
THE STATE WHERE YOU RESIDE. FOR MORE INFORMATION ABOUT VARIABLE ACCOUNT
EXPENSES, SEE "EXPENSES," BELOW. FOR MORE INFORMATION ABOUT PORTFOLIO EXPENSES,
PLEASE REFER TO THE ACCOMPANYING PROSPECTUSES FOR THE FUNDS.
CONTRACT OWNER TRANSACTION EXPENSES
Withdrawal Charge (as a percentage of purchase payments)*
Number of Complete Years Since We Received the Purchase Payment Being Withdrawn:
--------------------------------------------------------------------------------------------------------
Contract: 0 1 2 3 4 5 6 7 8+
Applicable Charge: 8% 7% 7% 6% 6% 5% 4% 3% 0%
All Contracts:
--------------------------------------------------------------------------------------------------------
Transfer Fee up to 0.50% of the amount transferred**
* Each Contract Year, you may withdraw the greater of earnings not previously
withdrawn or 15% of your New Purchase Payments (as defined in "Withdrawal
Charge" below) without incurring a withdrawal charge. You may withdraw any
Purchase Payment made more than 8 years before the withdrawal, which have
not been previously withdrawn, without paying the charge.
** Applies solely to the thirteenth and subsequent transfers within a Contract
Year, excluding transfers due to dollar cost averaging and automatic
portfolio rebalancing. We are currently waiving the transfer fee.
THE TABLE BELOW DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY PERIODICALLY
DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING PORTFOLIO FEES AND
EXPENSES.
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE
SUBACCOUNT)
Mortality and Expense Risk Administrative Total Variable Account
Charge Expense Charge* Annual Expense
-----------------------------------------------------------------------------------------------
Without the Enhanced
Death Benefit or Income 1.25% 0.10% 1.35%
Benefit Riders
-----------------------------------------------------------------------------------------------
With the Enhanced Death 1.50% 0.10% 1.60%
Benefit Rider
-----------------------------------------------------------------------------------------------
With the Income Benefit 1.45% 0.10% 1.55%
Rider
-----------------------------------------------------------------------------------------------
With the Income Benefit
and Enhanced Death 1.70% 0.10% 1.80%
Benefit Riders
-----------------------------------------------------------------------------------------------
If you elect the Enhanced Earnings Death Benefit Rider, your Total Variable
Account Annual Expenses will be increased, based on the oldest Contract Owner's
age on the date we issue the Rider, as follows:
Age Annual Charge
---------------------
0-55 0.15%
---------------------
56-65 0.25%
---------------------
66-75 0.35%
---------------------
THE TABLE BELOW SHOWS THE MINIMUM AND MAXIMUM TOTAL OPERATING EXPENSES CHARGED
BY THE PORTFOLIOS THAT YOU MAY PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE
CONTRACT. ADVISERS AND/OR OTHER SERVICE PROVIDERS OF CERTAIN PORTFOLIOS MAY HAVE
AGREED TO WAIVE THEIR FEES AND/OR REIMBURSE PORTFOLIO EXPENSES IN ORDER TO KEEP
THE PORTFOLIOS' EXPENSES BELOW SPECIFIED LIMITS. THE RANGE OF EXPENSES SHOWN IN
THIS TABLE DOES NOT SHOW THE EFFECT
6 PROSPECTUS
OF ANY SUCH FEE WAIVER OR EXPENSE REIMBURSEMENT. MORE DETAIL CONCERNING EACH
PORTFOLIO'S FEES AND EXPENSES APPEARS IN THE PROSPECTUS FOR EACH PORTFOLIO.
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES
----------------------------------------------------------------------------
Minimum Maximum
----------------------------------------------------------------------------
Total Annual Portfolio Operating Expenses/(1)/ (expenses
that are deducted from Portfolio assets, including any
management fees, distribution and/or
service (12b-1) fees, and other expenses) 0.50% 4.31%
----------------------------------------------------------------------------
(1) EXPENSES ARE SHOWN AS A PERCENTAGE OF PORTFOLIO AVERAGE DAILY NET ASSETS,
BEFORE ANY WAIVER OR REIMBURSEMENT, AS OF DECEMBER 31, 2003.
EXAMPLES
EXAMPLE 1
This Example is intended to help you compare the cost of investing in the
Contracts with the cost of investing in other variable annuity contracts. These
costs include Contract owner transaction expenses, Contract fees, Variable
Account annual expenses, and Portfolio fees and expenses and assume no transfers
or exchanges were made. The Example shows the dollar amount of expenses that you
would bear directly or indirectly if you:
.. invested $10,000 in the Contract for the time periods indicated,
.. earned a 5% annual return on your investment, and
.. surrendered your Contract, or you began receiving income payments for a
specified period of less than 120 months, at the end of each time period,
and
.. elected the Income Benefit, Enhanced Death Benefit, and Enhanced Earnings
Death Benefit Riders (assuming Contract Owner is age 66-75 on rider issue
date and with total Variable Account expenses of 2.15%.)
THE EXAMPLE DOES NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO
PAY IF YOU SURRENDER YOUR CONTRACT.
The first line of the Example assumes that the maximum fees and expenses of any
of the Portfolios are charged. The second line of the Example assumes that the
minimum fees and expenses of any of the Portfolios are charged. Your actual
expenses may be higher or lower than those shown below.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------------------
Costs Based on Maximum Annual Portfolio Expenses $1,257 $2,464 $3,629 $6,157
----------------------------------------------------------------------------------------
Costs Based on Minimum Annual Portfolio Expenses $ 867 $1,343 $1,846 $3,012
----------------------------------------------------------------------------------------
7 PROSPECTUS
EXAMPLE 2
This Example uses the same assumptions as Example 1 above, except that it
assumes you decided not to surrender your Contract, or you began receiving
income payments for a specified period of at least 120 months, at the end of
each time period.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------------------
Costs Based on Maximum Annual Portfolio Expenses $662 $1,954 $3,204 $6,157
----------------------------------------------------------------------------------------
Costs Based on Minimum Annual Portfolio Expenses $272 $ 833 $1,421 $3,012
----------------------------------------------------------------------------------------
EXPLANATION OF EXPENSE EXAMPLES
PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF
PAST OR FUTURE EXPENSES. YOUR RATE OF RETURN MAY BE HIGHER OR LOWER THAN 5%,
WHICH IS NOT GUARANTEED. THE EXAMPLES DO NOT ASSUME THAT ANY PORTFOLIO EXPENSE
WAIVERS OR REIMBURSEMENT ARRANGEMENTS ARE IN EFFECT FOR THE PERIODS PRESENTED.
EXAMPLES 1 AND 2 ASSUME THE ELECTION OF THE INCOME BENEFIT AND ENHANCED DEATH
BENEFIT RIDERS (TOTAL VARIABLE ACCOUNT EXPENSES OF 2.15%).IF THESE RIDERS WERE
NOT ELECTED, THE EXPENSE FIGURES SHOWN ABOVE WOULD BE SLIGHTLY LOWER.
The Examples reflect the Free Withdrawal Amounts, if applicable.
8 PROSPECTUS
FINANCIAL INFORMATION
To measure the value of your investment in the Variable Subaccounts during the
Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT".
Each Variable Subaccount has a separate value for its Accumulation Units which
we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but
not the same as, the share price of a mutual fund.
Because we deduct Rider charges directly from the Variable Subaccounts, we
calculate separate Accumulation Unit Values for the base Contract and for
Contracts issued with various combinations of optional Riders.
Accumulation Unit Values for the lowest and highest charges available are shown
in Appendix A to this prospectus. The Statement of Additional Information
contains the Accumulation Unit Values for all other available combinations of
charges. Please contact us to obtain a copy of the Statement of Additional
Information.
To obtain a fuller picture of each Variable Subaccount's finances, please refer
to the Variable Account's financial statements contained in the Statement of
Additional Information. The financial statements of Lincoln Benefit also appear
in the Statement of Additional Information.
9 PROSPECTUS
THE CONTRACT
CONTRACT OWNER
The LBL Advantage Variable Annuity is a contract between you, the Contract
Owner, and Lincoln Benefit, a life insurance company. As the Contract Owner, you
may exercise all of the rights and privileges provided to you by the Contract.
That means it is up to you to select or change (to the extent permitted):
.. the investment alternatives during the Accumulation and Payout Phases,
.. the amount and timing of your purchase payments and withdrawals,
.. the programs you want to use to invest or withdraw money,
.. the income payment plan you want to use to receive retirement income,
.. the Annuitant (either yourself or someone else) on whose life the income
payments will be based,
.. the Beneficiary or Beneficiaries who will receive the benefits that the
Contract provides when the last surviving Contract Owner dies, and
.. any other rights that the Contract provides.
If you die, any surviving Contract Owner, or, if none, the Beneficiary, may
exercise the rights and privileges provided to them by the Contract.
The Contract cannot be jointly owned by both a non-living person and a living
person. If the Contract Owner is a grantor trust, the Contract Owner will be
considered a non-living person for purposes of this section and the Death
Benefits section. The maximum age of the oldest Contract Owner and Annuitant
cannot exceed 90 as of the date we receive the completed application.
You may change the Contract Owner at any time. We will provide a change of
ownership form to be signed by you and filed with us. After we accept the form,
the change of ownership will be effective as of the date you signed the form.
Until we receive your written notice to change the Contract Owner, we are
entitled to rely on the most recent ownership information in our files. We will
not be liable as to any payment or settlement made prior to receiving the
written notice. Accordingly, if you wish to change the Contract Owner, you
should deliver your written notice to us promptly. Each change is subject to any
payment made by us or any other action we take before we accept the change.
Changing ownership of this Contract may cause adverse tax consequences and may
not be allowed under qualified plans. Please consult with a competent tax
advisor prior to making a request for a change of Contract Owner. The Income
Benefit Rider terminates upon changes of the Annuitant. The Enhanced Earnings
Death Benefit Rider terminates upon changes of the Owner or, if the Owner is a
non-living person, the Annuitant.
The Contract can also be purchased as an IRA or TSA (also known as a 403(b)).
The endorsements required to qualify these annuities under the Code may limit or
modify your rights and privileges under the Contract. Qualified plans may limit
or modify your rights and privileges under the Contract. Variable Annuities held
by Qualified Plans do not receive any additional tax deferral.
ANNUITANT
The Annuitant is the individual whose life determines the amount and duration of
income payments (other than under Income Plans with guaranteed payments for a
specified period). You initially designate an Annuitant in your application. You
may change the Annuitant at any time prior to the Payout Start Date (only if the
Contract Owner is a living person). Once we accept a change, it takes effect as
of the date you signed the request. Each change is subject to any payment we
make or other action we take before we accept it.
If the Contract is a non-qualified Contract, you may designate a joint
Annuitant, who is a second person on whose life income payments depend. We
permit joint Annuitants only during the Payout Phase. If the sole surviving
Annuitant dies prior to the Payout Start Date, the new Annuitant will be:
(i) the youngest Contract Owner; otherwise,
(ii) the youngest Beneficiary.
BENEFICIARY
The Beneficiary is the person who may elect to receive the death benefit or
become the new Contract owner subject to the Death of Owner provision if the
sole surviving Contract owner dies before the Payout Start Date. If the sole
surviving Contract Owner dies after the Payout Start Date, the PRIMARY
BENEFICIARY, or if none surviving, the CONTINGENT BENEFICIARY, will receive any
guaranteed income payments scheduled to continue.
You may name one or more primary Beneficiaries when you apply for a Contract.
The primary Beneficiary is the person who may elect to receive the death benefit
or become the new Contract Owner if the sole surviving Contract Owner dies
before the Payout Start Date. You may also name one or more Contingent
Beneficiaries who will receive any Death Benefit or Guaranteed Income Benefit if
no Beneficiary survives the sole surviving Contract Owner.
You may change or add Beneficiaries at any time, unless you have designated an
irrevocable Beneficiary. We will provide a change of Beneficiary form to be
signed by you and filed with us. After we accept the form, the change of
Beneficiary will be effective as of the date you signed the form. Until we
receive your written notice to change a Beneficiary, we are entitled to rely on
the most recent Beneficiary information in our files. We will not be liable
10 PROSPECTUS
as to any payment or settlement made prior to receiving the written notice.
Accordingly, if you wish to change your Beneficiary, you should deliver your
written notice to us promptly. Each change is subject to any payment made by us
or any other action we take before we accept the change.
Unless you have provided directions to the contrary, the Beneficiaries will take
equal shares. If there is more than one Beneficiary in a class and one of the
Beneficiaries predeceases the Contract Owner or Annuitant, the remaining
Beneficiaries in that class will divide the deceased Beneficiary's share in
proportion to the original shares of the remaining Beneficiaries.
If more than one Beneficiary shares in the Death Proceeds, each Beneficiary will
be treated as a separate and independent owner of his or her respective share.
Each Beneficiary will exercise all rights related to his or her share, including
the sole right to select a payout option, subject to any restrictions previously
placed upon the Beneficiary. Each Beneficiary may designate a Beneficiary(ies)
for his or her respective share, but that designated Beneficiary(ies) will be
restricted to the payout option chosen by the original Beneficiary.
If there is more than one Beneficiary and one of the Beneficiaries is a
corporation or other type of non-living person, all beneficiaires will be
considered to be non-living persons.
You may specify that the Death Benefit be paid under a specific Income Plan by
submitting a written request to our Service Center. If you so request, your
Beneficiary may not change to a different Income Plan or lump sum. Once we
accept the written requst, the change or restriction wll take effect as of the
date you signed the request. Any change is subject to any payment we make or
other action we take before we accept the changes.
Different rules may apply to Contracts issued in connection with Qualified
Plans.
If you did not name a Beneficiary or, unless otherwise provided in the
Beneficiary designation, if a named Beneficiary is no longer living and there
are no other surviving Beneficiaries or Contingent Beneficiaries, the new
Beneficiary will be:
.. your spouse or, if he or she is no longer alive,
.. your surviving children equally, or if you have no surviving children,
.. your estate.
If one or more Beneficiaries survive you (or survives the Annuitant, if the
Contract Owner is not a living person), we will divide the death benefit among
the surviving Beneficiaries according to your most recent written instructions.
If you have not given us written instructions, we will pay the death benefit in
equal amounts to the surviving Beneficiaries.
MODIFICATION OF THE CONTRACT
Only a Lincoln Benefit officer may approve a change in or waive any provision of
the Contract. Any change or waiver must be in writing. None of our agents has
the authority to change or waive the provisions of the Contract. We may not
change the terms of the Contract without your consent, except to conform the
Contract to applicable law or changes in the law. If a provision of the Contract
is inconsistent with state law, we will follow state law.
ASSIGNMENT
We will honor an assignment of an interest in a Contract as collateral or
security for a loan. No Beneficiary may assign benefits under the Contract until
they are payable to the Beneficiary. We will not be bound by any assignment
until the assignor signs it and files it with us. We are not responsible for the
validity of any assignment. Federal law prohibits or restricts the assignment of
benefits under many types of Qualified Plans and other types of retirement plans
and the terms of such plans may themselves contain restrictions on assignments.
An assignment may also result in taxes or tax penalties. YOU SHOULD CONSULT AN
ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT.
PURCHASES
MINIMUM PURCHASE PAYMENTS
Your initial purchase payment must be at least $10,000. All subsequent purchase
payments must be $100 or more unless part of an automatic additions program.
Each purchase payment made to the Dollar Cost Averaging Fixed Account must be at
least $1,200. If we receive purchase payments designated for the Dollar Cost
Averaging Fixed Account that are lower than the required minimum of $1,200, or
purchase payments designated for a Guarantee Period that are lower than $500,
such amounts will be allocated to the PIMCO Money Market Portfolio. You may make
purchase payments at any time prior to the Payout Start Date. We reserve the
right to limit the maximum amount of purchase payments we will accept. The most
we will accept without our prior approval is $1,000,000. We also reserve the
right to reject any application.
AUTOMATIC ADDITIONS PROGRAM
You may make subsequent purchase payments of $50 or more by automatically
transferring money from your bank account. Consult your representative for more
detailed information.
ALLOCATION OF PURCHASE PAYMENTS
At the time you apply for a Contract, you must decide how to allocate your
purchase payments among the investment alternatives. The allocation you specify
on
11 PROSPECTUS
your application will be effective immediately. All allocations must be in whole
percents that total 100% or in whole dollars. You can change your allocations by
notifying us in writing.
We will allocate your purchase payments to the investment alternatives according
to your most recent instructions on file with us. Unless you notify us in
writing otherwise, we will allocate subsequent purchase payments according to
the allocation for the previous purchase payment. We will effect any change in
allocation instructions at the time we receive written notice of the change in
good order.
We will credit the initial purchase payment that accompanies your completed
application to your Contract within 2 business days after we receive the payment
at our home office. If your application is incomplete, we will ask you to
complete your application within 5 business days. If you do so, we will credit
your initial purchase payment to your Contract within that 5 business day
period. If you do not, we will return your purchase payment at the end of the 5
business day period unless you expressly allow us to hold it until you complete
the application. We will credit subsequent purchase payments to the Contract at
the close of the business day on which we receive the purchase payment at our
home office.
We are open for business each day Monday through Friday that the New York Stock
Exchange is open for business, except for certain days immediately preceding or
following certain national holidays when the New York Stock Exchange is open for
business. Each day that the New York Stock Exchange is open for business is
referred to as a VALUATION DATE. We determine the number of Accumulation Units
for each Variable Subaccount to allocate to your contract by dividing that
portion of your Purchase Payment allocated to a Variable Subaccount by that
Variable Subaccount's Accumulation Unit Value on the Valuation Date when the
allocation occurs. Our business day closes when the New York Stock Exchange
closes, usually 4 p.m. Eastern Time (3 p.m. Central Time). If we receive your
purchase payment after 3 p.m. Central Time on any Valuation Date, we will credit
your purchase payment using the Accumulation Unit Values computed on the next
Valuation Date.
RIGHT TO CANCEL
You may cancel the Contract by returning it to us within the Cancellation
Period, which is the 20 day period after you receive the Contract, or a longer
period should your state require it. You may return it by delivering it or
mailing it to us. If you exercise this "RIGHT TO CANCEL," the Contract
terminates and we will pay you the full amount of your purchase payments
allocated to the Fixed Account. We also will return your purchase payments
allocated to the Variable Account adjusted, to the extent federal or state law
permits, to reflect investment gain or loss that occurred from the date of
allocation through the date of cancellation. Some states may require us to
return a greater amount to you. If your Contract is qualified under Section 408
of the Internal Revenue Code, we will refund the greater of any purchase
payments or the Contract Value.
In states where we are required to refund purchase payments, we reserve the
right during the Cancellation Period to invest any purchase payments you
allocated to a Variable Subaccount to the Money Market Variable Subaccount
available under the Contract. We will notify you if we do so. At the end of the
Cancellation Period, we will allocate the amount in the Money Market Variable
Subaccount to the Variable Subaccount as you originally designated.
CONTRACT VALUE
Your Contract Value at any time during the Accumulation Phase is equal to the
sum of the value of your Accumulation Units in the Variable Subaccounts you have
selected, plus the value of your investment in the Fixed Account Options.
ACCUMULATION UNITS
To determine the number of Accumulation Units of each Variable Subaccount to
credit to your Contract, we divide (i) the amount of the purchase payment or
transfer you have allocated to a Variable Subaccount by (ii) the Accumulation
Unit Value of that Variable Subaccount next computed after we receive your
payment or transfer. For example, if we receive a $10,000 purchase payment
allocated to a Variable Subaccount when the Accumulation Unit Value for the
Subaccount is $10, we would credit 1,000 Accumulation Units of that Variable
Subaccount to your Contract. Withdrawals and transfers from a Variable
Subaccount would, of course, reduce the number of Accumulation Units of that
Subaccount allocated to your Contract.
ACCUMULATION UNIT VALUE
As a general matter, the Accumulation Unit Value for each Variable Subaccount
will rise or fall to reflect:
.. changes in the share price of the Portfolio in which the Variable
Subaccount invests, and
.. the deduction of amounts reflecting the mortality and expense risk charge
administrative expense charge, and any provision for taxes that have
accrued since we last calculated the Accumulation Unit Value.
We determine withdrawal charges, and transfer fees (currently waived) separately
for each Contract. They do not affect Accumulation Unit Value. Instead, we
obtain payment of those charges and fees by redeeming Accumulation Units. For
details on how we calculate
12 PROSPECTUS
Accumulation Unit Value, please refer to the Statement of Additional
Information.
We determine a separate Accumulation Unit Value for each Variable Subaccount on
each Valuation Date. We also determine a separate set of Accumulation Unit
Values reflecting the cost of the Enhanced Death Benefit Rider, the Income
Benefit Rider, the Enhanced Death Benefit Rider with the Income Benefit Rider,
and the Enhanced Earnings Death Benefit Rider.
YOU SHOULD REFER TO THE PROSPECTUSES FOR THE FUNDS THAT ACCOMPANY THIS
PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH PORTFOLIO ARE VALUED,
SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE
CORRESPONDING VARIABLE SUBACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE.
13 PROSPECTUS
INVESTMENT ALTERNATIVES: THE VARIABLE SUBACCOUNTS
You may allocate your purchase payments to up to 37 Variable Subaccounts. Each
Variable Subaccount invests in the shares of a corresponding Portfolio. Each
Portfolio has its own investment objective(s) and policies. We briefly describe
the Portfolios below.
For more complete information about each Portfolio, including expenses and risks
associated with the Portfolio, please refer to the accompanying prospectuses for
the Funds. You should carefully review the Fund prospectuses before allocating
amounts to the Variable Subaccounts.
PORTFOLIO PORTFOLIO OBJECTIVE INVESTMENT ADVISOR
--------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS (8)
--------------------------------------------------------------------------------
AIM V.I. Basic Value Long-term growth of capital A I M ADVISORS, INC.
Fund - Series I (1)
--------------------------------------------------------
AIM V.I. Dent Long-term growth of capital
Demographic Trends
Fund - Series I
--------------------------------------------------------------------------------
THE ALGER AMERICAN FUND
--------------------------------------------------------------------------------
Alger American Growth Long-term capital FRED ALGER
Portfolio - Class S appreciation MANAGEMENT, INC.
--------------------------------------------------------------------------------
FIDELITY(R) VARIABLE INSURANCE PRODUCTS
--------------------------------------------------------------------------------
Fidelity VIP Reasonable income FIDELITY MANAGEMENT &
Equity-Income RESEARCH COMPANY
Portfolio - Service
Class 2
--------------------------------------------------------
Fidelity VIP Growth Capital appreciation
Portfolio - Service
Class 2
--------------------------------------------------------
Fidelity VIP Investment As high a level of current
Grade Bond Portfolio - income as is consistent
Service Class 2 with the preservation of
capital
--------------------------------------------------------
Fidelity VIP Overseas Long-term growth of capital.
Portfolio - Service
Class 2
--------------------------------------------------------------------------------
JANUS ASPEN SERIES
--------------------------------------------------------------------------------
Janus Aspen Series Long-term growth of capital JANUS CAPITAL
Capital Appreciation MANAGEMENT LLC
Portfolio:
Institutional Shares
(2)
--------------------------------------------------------
Janus Aspen Series Long-term growth of capital
Foreign Stock
Portfolio: Service
Shares (3)
--------------------------------------------------------
Janus Aspen Series Long-term growth of capital
Worldwide Growth in a manner consistent with
Portfolio: Service the preservation of
Shares capital.
--------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES, INC.
--------------------------------------------------------------------------------
Lazard Emerging Markets Long-term capital LAZARD ASSET
Portfolio appreciation MANAGEMENT LLC
--------------------------------------------------------------------------------
MFS(R) VARIABLE INSURANCE TRUST(SM)
--------------------------------------------------------------------------------
MFS New Discovery Capital appreciation MFS(TM) INVESTMENT
Series - Service Class MANAGEMENT
--------------------------------------------------------
MFS Utilities Series - Capital growth and current
Service Class income
--------------------------------------------------------------------------------
OPPENHEIMER VARIABLE ACCOUNT FUNDS
--------------------------------------------------------------------------------
Oppenheimer Main Street Capital appreciation OPPENHEIMERFUNDS,
Small Cap Fund/VA - INC.
Service Shares
--------------------------------------------------------------------------------
PANORAMA SERIES FUND, INC.
--------------------------------------------------------------------------------
Oppenheimer Capital appreciation OPPENHEIMERFUNDS,
International Growth INC.
Fund/VA - Service
Shares
--------------------------------------------------------------------------------
PIMCO ADVISERS VIT
--------------------------------------------------------------------------------
PAVIT OpCap Balanced Growth of capital and OPCAP ADVISORS LLC
Portfolio (1) investment income
--------------------------------------------------------
PAVIT PEA Science and Capital appreciation
Technology Portfolio
--------------------------------------------------------
PAVIT OpCap Small Cap Capital appreciation
Portfolio
--------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------------
PIMCO Foreign Bond To maximize total return, PACIFIC INVESTMENT
Portfolio (U.S. consistent with MANAGEMENT COMPANY
Dollar-Hedged) - preservation of capital and LLC
Administrative Shares prudent investment
management
--------------------------------------------------------
PIMCO Money Market To obtain maximum current
Portfolio - income consistent with
Administrative Shares preservation of capital and
daily liquidity.
--------------------------------------------------------
PIMCO Real Return Seeks maximum real return,
Portfolio - consistent with
Administrative Shares preservation of real
capital and prudent
investment management.
--------------------------------------------------------
PIMCO Total Return To maximize total return,
Portfolio - consistent with
Administrative Shares preservation of capital and
prudent investment
management.
--------------------------------------------------------------------------------
PUTNAM VARIABLE TRUST
--------------------------------------------------------------------------------
Putnam VT High Yield High current income. Capital PUTNAM INVESTMENT
Fund - Class IB growth is a secondary goal MANAGEMENT, LLC
when consistent with
achieving high current
income. The fund seeks its
goal by investing at least
80% in U.S. corporate rated
below investment grade
(junk bonds) and that have
intermediate to long-term
maturities (three years or
longer.)
--------------------------------------------------------
Putnam VT International Capital growth. Current
Growth and Income Fund income is a secondary
- Class IB objective.
--------------------------------------------------------------------------------
THE RYDEX VARIABLE TRUST
--------------------------------------------------------------------------------
Rydex VT OTC Fund Investment results that RYDEX INVESTMENTS
correspond to a benchmark
for over-the-counter
securities. The Portfolio's
current benchmark is the
NASDAQ 100 Index.
--------------------------------------------------------
Rydex VT Sector Long-term capital
Rotation Fund appraciation.
--------------------------------------------------------------------------------
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
--------------------------------------------------------------------------------
Salomon Brothers Capital appreciation SALOMON BROTHERS
Variable All Cap Fund ASSET MANAGEMENT INC
- Class I (formerly
Capital Fund) Class I
--------------------------------------------------------
Salomon Brothers Long-term growth of capital
Variable Investors with current income as a
Fund - Class I (1) secondary objective
--------------------------------------------------------------------------------
SCUDDER INVESTMENTS VIT FUNDS
--------------------------------------------------------------------------------
Scudder VIT EAFE Equity To replicate as closely as DEUTSCHE ASSET
Index Fund - Class B possible before deduction MANAGEMENT, INC.
of expenses, performance of
the MSCI EAFE Index which
emphasizes stocks of companies
in major markets in Europe,
Australia, and the Far East.
--------------------------------------------------------
Scudder VIT Equity 500 To replicate as closely as
Index Fund - Class B possible before deduction of
expenses, performance of
the S&P 500 Index which
emphasizes stocks of large
U.S. companies.
--------------------------------------------------------
Scudder VIT Small Cap To replicate as closely as
Index Fund - Class B possible before deduction
of expenses, the
performance of the Russell
2000 Index which emphasizes
stocks of small U.S.
companies.
--------------------------------------------------------------------------------
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
--------------------------------------------------------------------------------
Van Kampen UIF Seeks long-term capital VAN KAMPEN (6)
Equity Growth appreciation by investing
Portfolio, Class I (4) primarily in
growth-oriented equity
securities of large
capitalization companies.
--------------------------------------------------------
Van Kampen UIF Above-average total return
High Yield Portfolio, over a market cycle of
Class I three to five years by
investing primarily in high
yield securities (commonly
referred to as "junk
bonds").
--------------------------------------------------------
Van Kampen UIF Seeks above-average total
U.S. Mid Cap Value return over a market cycle
Portfolio, Class I (5) of three to five years by
investing in common stocks
and other equity
securities.
--------------------------------------------------------
Van Kampen UIF Seeks to provide
U.S. Real Estate above-average current
Portfolio, Class II income and long-term
capital appreciation by
investing primarily in
equity securities of
com[panies in the U.S. real
estate industry, including
real estate investment
trusts.
--------------------------------------------------------------------------------
VAN KAMPEN LIFE INVESTMENT TRUST
--------------------------------------------------------------------------------
Van Kampen LIT Capital Growth VAN KAMPEN ASSET
Aggressive Growth MANAGEMENT
Portfolio, Class II (7)
--------------------------------------------------------
Van Kampen LIT Long-term growth of capital
Growth & Income and income
Portfolio, Class II
--------------------------------------------------------------------------------
(1) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value
Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I.
Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund -
Class I, respectively.
(2) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the
Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares.
(3) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service
Shares changed its name to the Janus Aspen Foreign Stock Portfolio -
Service Shares.
(4) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA
Capital Growth Fund were merged into the Van Kampen UIF Equity Growth
Portfolio, Class I.
(5) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap
Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value
Portfolio, Class I.
(6) Morgan Stanley Investment Management Inc., the investment adviser to the
UIF Portfolios, does business in certain instances as Van Kampen.
(7) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth
Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio,
Class II.
(8) A Fund's objective may be changed by the Fund's Board of Trustees without
shareholder approval.
SOME OF THE PORTFOLIOS HAVE NAMES SIMILAR TO RETAIL MUTUAL FUNDS. HOWEVER, THE
PORTFOLIOS MAY BE MANAGED BY A DIFFERENT PORTFOLIO MANAGER. MOREOVER, THE
PORTFOLIOS ARE LIKELY TO DIFFER FROM RETAIL MUTUAL FUNDS IN ASSETS, CASH FLOW,
AND TAX MATTERS. ACCORDINGLY, A PORTFOLIO'S SECURITY HOLDINGS MAY DIFFER FROM
THOSE OF A SIMILARLY NAMED RETAIL MUTUAL FUND, AND INVESTMENT RESULTS OF A
PORTFOLIO CAN BE EXPECTED TO BE HIGHER OR LOWER THAN THE INVESTMENT RESULTS OF
SIMILARLY NAMED RETAIL MUTUAL FUNDS.
14 PROSPECTUS
INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT OPTIONS
You may allocate all or a portion of your purchase payments to the Fixed
Account. You may choose from among 3 Fixed Account Options, including 2 dollar
cost averaging options and the option to invest in one or more GUARANTEE PERIODS
included in the GUARANTEED MATURITY FIXED ACCOUNT. We may offer additional Fixed
Account options in the future. We will credit a minimum annual interest rate of
3% to money you allocate to any of the Dollar Cost Averaging Fixed Account
Options. The Fixed Account Options may not be available in all states. Please
consult with your representative for current information. The Fixed Account
supports our insurance and annuity obligations. The Fixed Account consists of
our general account assets other than those in segregated asset accounts. We
have sole discretion to invest the assets of the Fixed Account, subject to
applicable law. Any money you allocate to a Fixed Account Option does not
entitle you to share in the investment experience of the Fixed Account. Loan
Payments may not be allocated to the Fixed Account(s).
DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS
SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. You may establish a Short
Term Dollar Cost Averaging Program by allocating purchase payments to THE SHORT
TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION ("SHORT TERM DCA FIXED ACCOUNT
OPTION"). Each purchase payment allocated to the Short Term DCA Fixed Account
Option must be at least $1,200. We will credit interest to purchase payments you
allocate to this Option for up to six months at the current rate in effect at
the time of allocation. We will credit interest daily at a rate that will
compound at the annual interest rate we guaranteed at the time of allocation.
We will follow your instructions in transferring amounts monthly from the Short
Term DCA Fixed Account Option. However, you may not choose less than 3 or more
than 6 equal monthly installments. Further, you must transfer each purchase
payment and all its earnings out of this Option by means of dollar cost
averaging within 6 months. If you discontinue the Dollar Cost Averaging Program
before the end of the transfer period, we will transfer the remaining balance in
this Option to the Money Market Variable Subaccount unless you request a
different investment alternative. At the end of the transfer period, any
residual amount will be transferred to the Money Market Variable Subaccount. No
transfers are permitted into the Short Term DCA Fixed Account.
For each purchase payment allocated to this Option, your first monthly transfer
will occur 25 days after such purchase payment. If we do not receive an
allocation from you within 25 days of the date of payment, we will transfer the
payment plus associated interest to the Money Market Variable Subaccount in
equal monthly installments.
EXTENDED SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. You may
establish an Extended Short Term Dollar Cost Averaging Program by allocating
purchase payments to THE EXTENDED SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT
OPTION ("EXTENDED SHORT TERM DCA FIXED ACCOUNT OPTION"). Each purchase payment
allocated to the Extended Short Term DCA Fixed Account Option must be at least
$1,200. We will credit interest to purchase payments you allocate to this Option
for up to twelve months at the current rate in effect at the time of allocation.
We will credit interest daily at a rate that will compound at the annual
interest rate we guaranteed at the time of allocation.
We will follow your instructions in transferring amounts monthly from the
Extended Short Term DCA Fixed Account Option. However, you may not choose less
than 7 or more than 12 equal monthly installments. Further, you must transfer
each purchase payment and all its earnings out of this Option by means of dollar
cost averaging within 12 months. If you discontinue the Dollar Cost Averaging
Program before the end of the transfer period, we will transfer the remaining
balance in this Option to the Money Market Variable Subaccount unless you
request a different investment alternative. At the end of the transfer period,
any residual amount will be transferred to the Money Market Variable Subaccount.
No transfers are permitted into the Extended Short Term DCA Fixed Account.
For each purchase payment allocated to this Option, your first monthly transfer
will occur 25 days after such purchase payment. If we do not receive an
allocation from you within 25 days of the date of payment, we will transfer the
payment plus associated interest to the Money Market Variable Subaccount in
equal monthly installments.
INVESTMENT RISK
We bear the investment risk for all amounts allocated to the Short Term DCA
Fixed Account Option and the Extended Short Term DCA Fixed Account Option. That
is because we guarantee the current rates we credit to the amounts you allocate
to either of these Options, which will never be less than the minimum guaranteed
rate in the Contract. We determine, in our sole discretion, the amount of
interest credited in excess of the guaranteed rate.
We may declare more than one interest rate for different monies based upon the
date of allocation to the Short Term DCA Fixed Account Option and the Extended
Short Term DCA Fixed Account Option. For current interest rate information,
please contact your representative or our customer support unit at
1-800-865-5237.
15 PROSPECTUS
GUARANTEE PERIODS
Each payment or transfer allocated to a Guarantee Period earns interest at a
specified rate that we guarantee for a period of years. Guarantee Periods may
range from 1 to 10 years. We are currently offering Guarantee Periods of 1, 3,
5, 7, and 10 years in length. In the future we may offer Guarantee Periods of
different lengths or stop offering some Guarantee Periods.
You select the Guarantee Period for each payment or transfer. If you do not
select a Guarantee Period, we will assign the same period(s) you selected for
your most recent purchase payment(s).
Each payment or transfer allocated to a Guarantee Period must be at least $500.
We reserve the right to limit the number of additional purchase payments that
you may allocate to this Option.
INTEREST RATES. We will tell you what interest rates and Guarantee Periods we
are offering at a particular time. We will not change the interest rate that we
credit to a particular allocation until the end of the relevant Guarantee
Period. We may declare different interest rates for Guarantee Periods of the
same length that begin at different times.
We have no specific formula for determining the rate of interest that we will
declare initially or in the future. We will set those interest rates based on
investment returns available at the time of the determination. In addition, we
may consider various other factors in determining interest rates including
regulatory and tax requirements, our sales commission and administrative
expenses, general economic trends, and competitive factors. WE DETERMINE THE
INTEREST RATES TO BE DECLARED IN OUR SOLE DISCRETION. WE CAN NEITHER PREDICT NOR
GUARANTEE WHAT THOSE RATES WILL BE IN THE FUTURE. For current interest rate
information, please contact your representative or Lincoln Benefit at
1-800-865-5237.
HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated
to a Guarantee Period at a rate that compounds to the annual interest rate that
we declared at the beginning of the applicable Guarantee Period. The following
example illustrates how a purchase payment allocated to a Guaranteed Period
would grow, given an assumed Guarantee Period and annual interest rate:
Purchase Payment......................... $10,000
Guarantee Period......................... 5 years
Annual Interest Rate..................... 4.50%
END OF CONTRACT YEAR
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------- ---------- ---------- ---------- ----------
Beginning Contract
Value................ $10,000.00
x (1 + Annual Interest Rate) 1.045
----------
$10,450.00
Contract Value at end
of Contract Year..... $10,450.00
x (1 + Annual Interest Rate) 1.045
----------
$10,920.25
Contract Value at end
of Contract Year..... $10,920.25
x (1 + Annual Interest Rate) 1.045
----------
$11,411.66
Contract Value at end
of Contract Year..... $11,411.66
x (1 + Annual Interest Rate) 1.045
----------
$11,925.19
Contract Value at end
of Contract Year..... $11,925.19
x (1 + Annual Interest Rate) 1.045
----------
$12,461.82
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,461.82 ($12,461.82 -
$10,000.00)
This example assumes no withdrawals during the entire 5-year Guarantee Period.
If you were to make a withdrawal, you may be required to pay a withdrawal
charge. In addition, the amount withdrawn may be increased or decreased by a
Market Value Adjustment that reflects changes in interest rates since the time
you invested the amount withdrawn. The hypothetical interest rate is for
illustrative purposes only and is not intended to predict future interest rates
to be declared under the Contract. Actual interest rates declared for any given
Guarantee Period may be more or less than shown above.
RENEWALS. Prior to the end of each Guarantee Period, we will mail you a notice
asking you what to do with your money, including the accrued interest. During
the 30-day period after the end of the Guarantee Period, you may:
16 PROSPECTUS
1. Take no action. We will automatically apply your money to a new Guarantee
Period of the same length as the expiring Guarantee Period. The new
Guarantee Period will begin on the day the previous Guarantee Period ends.
The new interest rate will be our current declared rate for a Guarantee
Period of that length; or
2. Instruct us to apply your money to one or more new Guarantee Periods of
your choice. The new Guarantee Period(s) will begin on the day the previous
Guarantee Period ends. The new interest rate will be our then current
declared rate for those Guarantee Periods; or
3. Instruct us to transfer all or a portion of your money to one or more
Variable Subaccounts of the Variable Account. We will effect the transfer
on the day we receive your instructions. We will not adjust the amount
transferred to include a Market Value Adjustment; or
4. Withdraw all or a portion of your money. You may be required to pay a
withdrawal charge, but we will not adjust the amount withdrawn to include a
Market Value Adjustment. You may also be required to pay premium taxes and
income tax withholding, if applicable. We will pay interest from the day
the Guarantee Period expired until the date of withdrawal. The interest
will be the rate for the shortest Guarantee Period then being offered.
Amounts not withdrawn will be applied to a new Guarantee Period of the same
length as the previous Guarantee Period. The new Guarantee Period will
begin on the day the previous Guarantee Period ends.
MARKET VALUE ADJUSTMENT. All withdrawals and transfers from a Guarantee Period,
other than those taken during the 30-day period after such Guarantee Period
expires, are subject to a Market Value Adjustment. A Market Value Adjustment
also may apply upon payment of a death benefit and when you apply amounts
currently invested in a Guarantee Period to an Income Plan (unless paid or
applied during the 30-day period after such Guarantee Period expires). We also
will not apply a Market Value Adjustment to a withdrawal you make:
.. that qualifies for one of the waivers as described on pages 25,
.. to satisfy the IRS minimum distribution rules for the Contract, or
.. a single withdrawal made by a surviving spouse made within one year after
continuing the Contract.
We apply the Market Value Adjustment to reflect changes in interest rates from
the time you first allocate money to a Guarantee Period to the time you remove
it from that Guarantee Period. We calculate the Market Value Adjustment by
comparing the TREASURY RATE for a maturity equal to the Guarantee Period at its
inception to the Treasury Rate for a maturity equal to the Guarantee Period when
you remove your money. "Treasury Rate" means the U.S. Treasury Note Constant
Maturity Yield as reported in Federal Reserve Bulletin Release H.15.
The Market Value Adjustment may be positive or negative, depending on changes in
interest rates. As such, you bear the investment risk associated with changes in
interest rates. If interest rates increase significantly, the Market Value
Adjustment and any withdrawal charge, premium taxes, and income tax withholding
(if applicable) could reduce the amount you receive upon full withdrawal from a
Guaranteed Period to an amount that is less than the purchase payment applied to
that period plus interest earned under the Contract.
Generally, if the original Treasury Rate at the time you allocate money to a
Guarantee Period is higher than the applicable current Treasury Rate for a
period equal to the Guarantee Period, then the Market Value Adjustment will
result in a higher amount payable to you, transferred or applied to an Income
Plan. Conversely, if the Treasury Rate at the time you allocate money to a
Guarantee Period is lower than the applicable Treasury Rate for a period equal
to the Guarantee Period, then the Market Value Adjustment will result in a lower
amount payable to you, transferred or applied to an Income Plan.
For example, assume that you purchase a Contract and you select an initial
Guarantee Period of 5 years and the 5-year Treasury Rate for that duration is
4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at
that later time, the current 5-year Treasury Rate is 4.20%, then the Market
Value Adjustment will be positive, which will result in an increase in the
amount payable to you. Conversely, if the current 5-year Treasury Rate is 4.80%,
then the Market Value Adjustment will be negative, which will result in a
decrease in the amount payable to you.
The formula for calculating Market Value Adjustments is set forth in Appendix B
to this prospectus, which also contains additional examples of the application
of the Market Value Adjustment.
17 PROSPECTUS
INVESTMENT ALTERNATIVES: TRANSFERS
TRANSFERS DURING THE ACCUMULATION PHASE
During the Accumulation Phase, you may transfer Contract Value among the
investment alternatives. You may not transfer Contract Value to either the Short
Term Dollar Cost Averaging Fixed Account or the Extended Short Term Dollar Cost
Averaging Fixed Account Options. You may request transfers in writing on a form
that we provided or by telephone according to the procedure described below. The
minimum amount that you may transfer into a Guarantee Period is $500. We
currently do not assess, but reserve the right to assess, a charge of.50% of the
transfer amount but not less than $25, on each transfer in excess of 12 per
Contract Year. All transfers to or from more than one Portfolio on any given day
counts as one transfer.
As a general rule, we only make transfers on days when the NYSE is open for
business. If we receive your request on one of those days, we will make the
transfer that day. The Contract permits us to defer transfers from the Fixed
Account for up to six months from the date we receive your request. If we decide
to postpone transfers for 30 days or more, we will pay interest as required by
applicable law. Any interest would be payable from the date we receive the
transfer request to the date we make the transfer.
If you transfer an amount from a Guarantee Period other than during the 30-day
period after such Guarantee Period expires, we will increase or decrease the
amount by a Market Value Adjustment.
We reserve the right to waive any transfer restrictions.
TRANSFERS DURING THE PAYOUT PHASE
During the Payout Phase, you may make transfers among the Variable Subaccounts
so as to change the relative weighting of the Variable Subaccounts on which your
variable income payments will be based. You may make up to 12 transfers per
Contract Year. You may not convert any portion of your fixed income payments
into variable income payments. After 6 months from the Payout Start Date, you
may make transfers from the Variable Subaccounts to increase the proportion of
your income payments consisting of fixed income payments.
TELEPHONE TRANSFERS
You may make transfers by telephone. To give a third party authorization, you
must first send us a completed authorization form. The cut off time for
telephone transfer requests is 3:00 p.m. Central Time. Calls completed before
3:00 p.m. will be effected on that day at that day's price. Calls completed
after 3:00 p.m. will be effected on the next day on which the NYSE is open for
business, at that day's price.
At any time, without notice, we may suspend, modify or terminate your privilege
to make transfers via the telephone, or via other electronic or automated means
previously approved by the Company, including, but not limited to, automated
telephone services, facsimile machine, e-mail and electronic services via online
access. Among other things, we reserve the right to limit the number of such
transfers among the Variable Subaccounts in any Contract year, or to refuse any
Variable Subaccount transfer request. We also reserve the right to restrict such
transfers in any manner reasonably designed to prevent transfers that we
consider disadvantageous to other Contract owners.
We use procedures that we believe provide reasonable assurance that the
telephone transfers are genuine. For example, we tape telephone conversations
with persons purporting to authorize transfers and request identifying
information. Accordingly, we disclaim any liability for losses resulting from
allegedly unauthorized telephone transfers. However, if we do not take
reasonable steps to help ensure that a telephone authorization is valid, we may
be liable for such losses.
MARKET TIMING & EXCESSIVE TRADING. The Contracts are intended for long-term
investment. Market timing and excessive trading can potentially dilute the value
of Variable Subaccounts and can disrupt management of a Portfolio and raise its
expenses, which can impair Portfolio performance. Our policy is not to accept
knowingly any money intended for the purpose of market timing or excessive
trading. Accordingly, you should not invest in the Contract if your purpose is
to engage in market timing or excessive trading, and you should refrain from
such practices if you currently own a Contract.
We seek to detect market timing or excessive trading activity by reviewing
trading activities. Portfolios also may report suspected market-timing or
excessive trading activity to us. If we identify a pattern of market-timing or
excessive trading activity, we will make further inquiry and may, depending on
the circumstances, impose trading limitations as described below under "Trading
Limitations" consistent with applicable law and the Contract. Because there is
no universally accepted definition of what constitutes market timing or
excessive trading, we will use our reasonable judgment based on all of the
circumstances.
While we seek to deter market timing and excessive trading in Variable
Subaccounts, not all market timing or excessive trading is identifiable or
preventable. Therefore, we cannot guarantee that we can prevent such trading
activity in all cases or before it occurs.
TRADING LIMITATIONS. We reserve the right to limit transfers among the
investment alternatives in any Contract Year, or to refuse any transfer request,
if:
18 PROSPECTUS
.. we believe. in our sole discretion, that certain trading practices, such as
excessive trading or market timing ("Prohibited Trading Practices"), by, or
on behalf of one or more Contract Owners, or a specific transfer request or
group of transfer requests, may have a detrimental effect on the
Accumulation Unit Values of any Variable Subaccount or on the share prices
of the corresponding Portfolio or otherwise would be to the disadvantage of
other Contract Owners; or
.. we are informed by one or more of the Portfolios that they intend to
restrict the purchase, exchange, or redemption of Portfolio shares because
of Prohibited Trading Practices or because they believe that a specific
transfer or group of transfers would have a detrimental effect on the
prices of Portfolio shares.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract Owners.
DOLLAR COST AVERAGING PROGRAM
Through our Dollar Cost Averaging Program, you may automatically transfer a
fixed dollar amount every month from any Variable Subaccount, the Short Term
Dollar Cost Averaging Fixed Account, or the Extended Short Term Dollar Cost
Averaging Fixed Account, to any of the other Variable Subaccounts or the
Guarantee Periods. You may not use the Dollar Cost Averaging Program to transfer
amounts from the Guarantee Periods. This program is available only during the
Accumulation Phase.
We will not charge a transfer fee for transfers made under this Program, nor
will such transfers count against the 12 transfers you can make each Contract
Year without paying a transfer fee.
The theory of Dollar Cost Averaging is that if purchases of equal dollar amounts
are made at fluctuating prices, the aggregate average cost per unit will be less
than the average of the unit prices on the same purchase dates. However,
participation in this Program does not assure you of a greater profit from your
purchases under the Program nor will it prevent or necessarily reduce losses in
a declining market. You may not use Dollar Cost Averaging and Portfolio
Rebalancing at the same time. Call or write us for instructions on how to
enroll.
AUTOMATIC PORTFOLIO REBALANCING PROGRAM
Once you have allocated your money among the Variable Subaccounts, the
performance of each Subaccount may cause a shift in the percentage you allocated
to each Subaccount. If you select our Automatic Portfolio Rebalancing Program,
we will automatically rebalance the Contract Value in each Variable Subaccount
and return it to the desired percentage allocations. We will not include money
you allocate to the Fixed Account Options in the Automatic Portfolio Rebalancing
Program.
We will rebalance your account monthly, quarterly, semi-annually, or annually,
depending on your instructions. We will transfer amounts among the Variable
Subaccounts to achieve the percentage allocations you specify. You can change
your allocations at any time by contacting us in writing or by telephone. The
new allocation will be effective with the first rebalancing that occurs after we
receive your request. We are not responsible for rebalancing that occurs prior
to receipt of your request.
Example:
Assume that you want your initial purchase payment split among 2 Variable
Subaccounts. You want 40% to be in the Fidelity Growth Portfolio Variable
Subaccount and 60% to be in the OpCap Balanced portfolio Variable Subaccount.
Over the next 2 months the bond market does very well while the stock market
performs poorly. At the end of the first quarter, the Fidelity Growth Portfolio
Variable Subaccount now represents 50% of your holdings because of its increase
in value. If you choose to have your holdings rebalanced quarterly, on the first
day of the next quarter, we would sell some of your units in the Fidelity Growth
Portfolio Variable Subaccount and use the money to buy more units in the OpCap
Balanced portfolio Variable Subaccount so that the percentage allocations would
again be 40% and 60% respectively.
The Automatic Portfolio Rebalancing Program is available only during the
Accumulation Phase. The transfers made under the Program do not count towards
the 12 transfers you can make without paying a transfer fee, and are not subject
to a transfer fee. A one-time request to rebalance the amounts allocated to the
Subaccounts is not part of a Portfolio Rebalancing program and is subject to all
of the requirements that are applicable to transfers made during the
Accumulation Phase. We will automatically terminate this program if you request
any transfer outside the Automatic Portfolio Rebalancing Program. Portfolio
rebalancing is consistent with maintaining your allocation of investments among
market segments, although it is accomplished by reducing your Contract Value
allocated to the better performing segments. You may not use Dollar Cost
Averaging and Portfolio Rebalancing at the same time.
19 PROSPECTUS
EXPENSES
As a Contract Owner, you will bear, directly or indirectly, the charges and
expenses described below.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense risk charge daily at an annual rate of 1.25%
of the average daily net assets you have invested in the Variable Subaccounts
(1.50% if you select the Enhanced Death Benefit Rider; 1.45% if you select the
Income Benefit Rider; and 1.70% if you select both the Enhanced Death Benefit
Rider and the Income Benefit Rider), and an additional charge ranging from 0.15%
to 0.35% for the Enhanced Earnings Death Benefit described below.
The mortality and expense risk charge is for the insurance benefits available
with your Contract (including our guarantee of annuity rates and the death
benefits), for certain expenses of the Contract, and for assuming the risk
(expense risk) that the current charges will be sufficient in the future to
cover the cost of administering the Contract. If the charges under the Contract
are not sufficient, then we will bear the loss. We charge an additional amount
for the Enhanced Death Benefit Rider, the Income Benefit Rider and the Enhanced
Earnings Death Benefit Rider compensate us for the additional risk that we
accept by providing these Riders.
We guarantee that we will not raise the mortality and expense risk charge. We
assess the mortality and expense risk charge during both the Accumulation Phase
and the Payout Phase. After the Payout Start Date, mortality and expense risk
charges for the Enhanced Death Benefit, the Income Benefit, and the Enhanced
Earnings Death Benefit will cease.
ENHANCED EARNINGS DEATH BENEFIT RIDER CHARGE
If you elect the Enhanced Earnings Death Benefit Rider, we will increase the
Mortality and Expense charge during the Accumulation Phase by the annual rates
shown below based on the oldest Contract Owner's age on the Rider Date.
AGE ANNUAL CHARGE
----- ------------
0-55 0.15%
56-65 0.25%
66-75
0.35%
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge daily at an annual rate of 0.10% of
the average daily net assets you have invested in the Variable Subaccounts. We
intend this charge to cover actual administrative expenses that exceed the
revenues from the contract maintenance charge. There is no necessary
relationship between the amount of administrative charge imposed on a given
Contract and the amount of expenses that may be attributed to that Contract. We
assess this charge each day during the Accumulation Phase and the Payout Phase.
We guarantee that we will not raise this charge.
TRANSFER FEE
We do not currently impose a fee upon transfers among the investment
alternatives. However, we reserve the right to charge up to 0.50% of the
transfer amount, but not less than $25, per transfer after the 12th transfer in
each Contract Year. We will not charge a transfer fee on transfers that are part
of a Dollar Cost Averaging or Automatic Portfolio Rebalancing Program.
WITHDRAWAL CHARGE
We may assess a withdrawal charge of up to 8% of the purchase payment(s) you
withdraw. The charge declines to 0% over an 8 year period that begins on the day
we receive your payment. A schedule showing how the charge declines is shown on
page 8. Beginning on January 1, 2004, if you make a withdrawal before the Payout
Start Date, we will apply the withdrawal charge percentage in effect on the date
of the withdrawal, or the withdrawal charge penalty in effect on the following
day, whichever is lower. Any Purchase Payments older than 8 years old, which
have not been previously withdrawn, may be withdrawn without paying the
withdrawal charge. During each Contract year, you can also withdraw the greater
of earnings not previously withdrawn or 15% of your New Purchase Payments
without paying the charge. New Purchase Payments are Purchase Payments received
by us less than 8 years prior to withdrawal. Unused portions of this "FREE
WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We will
deduct withdrawal charges, if applicable, from the amount paid.
For purposes of calculating the withdrawal charge, the Contract Value is deemed
to be withdrawn in the following order:
FIRST. Earnings - The amount of Contract Value in excess of all purchase
payments that have not previously been withdrawn;
SECOND. Old Purchase Payments - Purchase payments received by us more than eight
years prior to the date of withdrawal which have not been previously withdrawn;
THIRD. New Purchase Payments that are not subject to a withdrawal charge; and
FOURTH. New Purchase Payments that are subject to a withdrawal charge.
For federal income tax purposes, withdrawals are considered to have come first
from earnings, which means you pay taxes on the earnings portion of your
withdrawal. Free withdrawal amounts are not cumulative.
20 PROSPECTUS
We do not apply a withdrawal charge in the following situations:
.. on the Payout Start Date (a withdrawal charge may apply if you terminate
income payments to be received for a specified period);
.. withdrawals taken to satisfy IRS minimum distribution rules for the
Contract; or
.. withdrawals that qualify for one of the waivers as described below.
We use the amounts obtained from the withdrawal charge to pay sales commissions
and other promotional or distribution expenses associated with marketing the
Contracts. To the extent that the withdrawal charge does not cover all sales
commissions and other promotional or distribution expenses, we may use any of
our corporate assets, including potential profit which may arise from the
mortality and expense risk charge or any other charges or fee described above,
to make up any difference.
Withdrawals also may be subject to tax penalties or income tax and a Market
Value Adjustment. Withdrawals of earnings are taxed as ordinary income and, if
taken prior to age 59 1/2, may be subject to an additional 10% federal tax
penalty. You should consult your own tax counsel or other tax advisers regarding
any withdrawals.
CONFINEMENT WAIVER.We will waive the withdrawal charge and any Market Value
Adjustment on all withdrawals taken prior to the Payout Start Date under your
Contract if the following conditions are satisfied:
1. You or the Annuitant, if the Contract Owner is not a living person, are
confined to a long term care facility or a hospital for at least 90
consecutive days. You or the Annuitant must enter the long term care
facility or hospital at least 30 days after the Issue Date;
2. You request the withdrawal and provide written proof of the stay no later
than 90 days following the end of your or the Annuitant's stay at the long
term care facility or hospital; and
3. A physician must have prescribed the stay and the stay must be medically
necessary (as defined in the Contract).
You may not claim this benefit if you, the Annuitant, or a member of your or the
Annuitant's immediate family, is the physician prescribing your or the
Annuitant's stay in a long term care facility.
TERMINAL ILLNESS WAIVER. We will waive the withdrawal charge and any Market
Value Adjustment on all withdrawals taken prior to the Payout Start Date under
your Contract if:
1. you or the Annuitant (if the Contract Owner is not a living person) are
first diagnosed with a terminal illness at least 30 days after the Issue
Date; and
2. you claim this benefit and deliver adequate proof of diagnosis to us.
UNEMPLOYMENT WAIVER. We will waive the withdrawal charge and any Market Value
Adjustment on one partial or a full withdrawal taken prior to the Payout Start
Date under your Contract, if you meet the following requirements:
1. you or the Annuitant, if the Contract Owner is not a living person, become
unemployed at least one year after the Issue Date;
2. you or the Annuitant, if the Contract Owner is not a living person, receive
unemployment compensation as defined in the Contract for at least 30 days
as a result of that unemployment; and
3. you or the Annuitant, if the Contract Owner is not a living person, claim
this benefit within 180 days of your or the Annuitant's initial receipt of
unemployment compensation.
Please refer to your Contract for more detailed information about the terms and
conditions of these waivers.
The laws of your state may limit the availability of these waivers and may also
change certain terms and/or benefits available under the waivers. You should
consult your Contract for further details on these variations. Also, even if you
do not need to pay our withdrawal charge or a Market Value Adjustment because of
these waivers, you still may be required to pay taxes or tax penalties on the
amount withdrawn. You should consult your tax adviser to determine the effect of
a withdrawal on your taxes.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. We are responsible for paying these taxes and
will deduct them from your Contract Value. Some of these taxes are due when the
Contract is issued, others are due when income payments begin or upon surrender.
Our current practice is not to charge anyone for these taxes until income
payments begin or when a total withdrawal occurs, including payment upon death.
At our discretion, we may discontinue this practice and deduct premium taxes
from the purchase payments. Premium taxes generally range from 0% to 4%,
depending on the state.
At the Payout Start Date, if applicable, we deduct the charge for premium taxes
from each investment alternative in the proportion that the Contract Owner's
value in the investment alternative bears to the total Contract Value.
DEDUCTION FOR VARIABLE ACCOUNT INCOME TAXES
We are not currently maintaining a provision for taxes. In the future, however,
we may establish a provision for taxes if we determine, in our sole discretion,
that we will incur a tax as a result of the operation of the Variable Account.
We will deduct for any taxes we incur as a result of the operation of the
Variable Account, whether or not we previously made a provision for taxes and
whether or not
21 PROSPECTUS
it was sufficient. Our status under the Internal Revenue Code is briefly
described in the Statement of Additional Information.
OTHER EXPENSES
Each Portfolio deducts advisory fees and other expenses from its assets. You
indirectly bear the charges and expenses of the Portfolios whose shares are held
by the Variable Subaccounts. These fees and expenses are described in the
accompanying prospectuses for the Funds. For a summary of current estimates of
those charges and expenses, see page 9. We may receive compensation from the
investment advisers or administrators of the Portfolios in connection with the
administrative services we provide to the Portfolios.
ACCESS TO YOUR MONEY
You can withdraw some or all of your Contract Value at any time prior to the
Payout Start Date.
The amount payable upon withdrawal is the Contract Value (or portion thereof)
next computed after we receive the request for a withdrawal at our home office,
adjusted by any Market Value Adjustment less any withdrawal charges, income tax
withholding, and any premium taxes. We will pay withdrawals from the Variable
Account within 7 days of receipt of the request, subject to postponement in
certain circumstances.
You can withdraw money from the Variable Account or the Fixed Account Options.
To complete a partial withdrawal from the Variable Account, we will cancel
Accumulation Units in an amount equal to the withdrawal and any applicable
withdrawal charge and premium taxes.
You must name the investment alternative from which you are taking the
withdrawal. If none is specified, we will deduct your withdrawal pro-rata from
the Variable Subaccounts according to the value of your investments therein.
In general, you must withdraw at least $50 at a time. You also may withdraw a
lesser amount if you are withdrawing your entire investment in a Variable
Subaccount.
If you request a total withdrawal, we may require you to return your Contract to
us. Withdrawals of earnings are taxed as ordinary income and, if taken prior to
age 59 1/2, may be subject to an additional 10% federal tax penalty.
POSTPONEMENT OF PAYMENTS
We may postpone the payment of any amounts due from the Variable Account under
the Contract if:
1. The New York Stock Exchange is closed for other than usual weekends or
holidays, or trading on the Exchange is otherwise restricted;
2. An emergency exists as defined by the SEC; or
3. The SEC permits delay for your protection.
In addition, we may delay payments or transfers from the Fixed Account Options
for up to 6 months (or shorter period if required by law). If we delay payment
for 30 days or more, we will pay interest as required by law.
SYSTEMATIC WITHDRAWAL PROGRAM
If your Contract is a non-qualified contract or IRA, you may choose to receive
systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual
basis at any time prior to the Payout Start Date. The minimum amount of each
systematic withdrawal is $50. Systematic withdrawals will be deducted from the
Variable Subaccounts and Fixed Account balances, excluding the Dollar Cost
Averaging Fixed Account Options, on a pro rata basis. At our discretion,
systematic withdrawals may not be offered in conjunction with the Dollar Cost
Averaging Program or Automatic Portfolio Rebalancing Program.
Depending on fluctuations in the value of the Variable Subaccounts and the value
of the Fixed Account Options, systematic withdrawals may reduce or even exhaust
the Contract Value. For income tax purposes, withdrawals are generally made from
earnings first. Withdrawals of earnings are taxed as ordinary income and, if
taken prior to age 59 1/2, may be subject to an additional 10% federal tax
penalty. Please consult your tax advisor before taking any withdrawal.
We will make systematic withdrawal payments to you or your designated payee. At
our discretion, we may modify or suspend the Systematic Withdrawal Program and
charge a processing fee for the service. If we modify or suspend the Systematic
Withdrawal Program, existing systematic withdrawal payments will not be
affected.
MINIMUM CONTRACT VALUE
If your request for a partial withdrawal would reduce your Contract Value to
less than $2,000, we may treat it as a request to withdraw your entire Contract
Value. Your Contract will terminate if you withdraw all of your Contract Value.
We will, however, ask you to confirm your withdrawal request before terminating
your Contract. Before terminating any Contract whose value has been reduced by
withdrawals to less than $2,000, we will inform you in writing of our intention
to terminate your Contract and give you at least 30 days in which to make an
additional Purchase Payment to restore your Contract Value to the contractual
minimum of $2,000. If we terminate your Contract, we will distribute to you its
Contract Value, adjusted by any applicable Market Value Adjustment, less
withdrawal and other charges and applicable taxes.
22 PROSPECTUS
CONTRACT LOANS FOR 403(B) CONTRACTS
Subject to the restrictions described below, we will make loans to the Contract
Owner of a Contract used in connection with a Tax Sheltered Annuity Plan ("TSA
Plan") under Section 403(b) of the Internal Revenue Code. Such loans are not
available in Vermont. Loans are not available under non-qualified Contracts. We
will only make loans after the right to cancel period and before the Payout
Start Date. All loans are subject to the terms of the Contract, the relevant
qualified plan, and the Internal Revenue Code, which impose restrictions on
loans.
We will not make a loan to you if the total of the requested loan and your
unpaid outstanding loans will be greater than the amount available for full
withdrawal under your Contract on the date of the loan. In addition, you may not
borrow a loan if the total of the requested loan and all of your loans under TSA
plans is more than the lesser of (a) or (b) where:
(a) equals $50,000 minus the excess of the highest outstanding loan balance
during the prior 12 months over the current outstanding loan balance; and
(b) equals the greater of $10,000 or half of the amount available for full
withdrawal.
The minimum loan amount is $1,000.
To request a Contract loan, write to us at the address given on the first page
of the prospectus. You alone are responsible for ensuring that your loan and
repayments comply with tax requirements. Loans made before the Payout Start Date
are generally treated as distributions under the Contract, and may be subject to
withholding and tax penalties for early distributions. Some of these
requirements are stated in Section 72 of the Internal Revenue Code. Please seek
advice from your plan administrator or tax advisor.
When we make a loan, we will transfer an amount equal to the loan amount from
the Variable Account and/or the Fixed Account Options to the LOAN ACCOUNT as
collateral for the loan. The Loan Account is an account established for amounts
transferred from the Variable Subaccounts or Fixed Account as security for an
outstanding Contract loan. We will transfer to the Loan Account amounts from the
Variable Account in proportion to the assets in each Subaccount. If your loan
amount is greater than your Contract Value in the Subaccounts, we will transfer
the remaining required collateral from the Guaranteed Maturity Fixed Account
Options. If your loan amount is greater than your contract value in the
Subaccounts and the Guaranteed Maturity Fixed Account Options, we will transfer
the remaining required collateral from the Dollar Cost Averaging Fixed Account
Options.
We will not charge a Withdrawal Charge on the loan or on the transfer from the
Subaccounts or the Fixed Account. We may, however, apply a Market Value
Adjustment to a transfer from the Fixed Account to the Loan Account. If we do,
we will increase or decrease the amount remaining in the Fixed Account by the
amount of the Market Value Adjustment, so that the net amount transferred to the
Loan Account will equal the desired loan amount. We will charge a Withdrawal
Charge and apply a Market Value Adjustment, if applicable, on a distribution to
repay the loan in full, in the event of loan default.
We will credit interest to the amounts in the Loan Account. The annual interest
rate credited to the Loan Account will be the greater of: (a) 3%; or (b) the
loan interest rate minus 2.25%. The value of the amounts in the Loan Account are
not affected by the changes in the value of the Subaccounts.
When you take out a loan, we will set the loan interest rate. That rate will
apply to your loan until it is repaid. From time to time, we may change the loan
interest rate applicable to new loans. We also reserve the right to change the
terms of new loans.
We will subtract the outstanding Contract loan balance, including accrued but
unpaid interest, from:
(1) the Death Proceeds;
(2) full withdrawal proceeds;
(3) the amount available for partial withdrawal;
(4) the amount applied on the Payout Start Date to provide income payments.
Usually you must repay a Contract loan within five years of the date the loan is
made. Scheduled payments must be level, amortized over the repayment period, and
made at least quarterly. We may permit a repayment period of 15 or 30 years if
the loan proceeds are used to acquire your principal residence. We may also
permit other repayment periods.
You must mark your loan repayments as such. We will assume that any payment
received from you is a Purchase Payment, unless you tell us otherwise.
Generally, loan payments are allocated to the Subaccount(s) in the proportion
that you have selected for your most recent Purchase Payment. Allocations of
loan payments are not permitted to the Fixed Accounts (Guaranteed Maturity Fixed
Account and Dollar Cost Averaging Fixed Account Option). If your Purchase
Payment allocation includes any of the Fixed Accounts, the percentages allocated
to the Fixed Accounts will be allocated instead to the PIMCO Money Market
Subaccount.
If you do not make a loan payment when due, we will continue to charge interest
on your loan. We also will declare the entire loan in default. We will subtract
the defaulted loan balance plus accrued interest from any future distribution
under the Contract and keep it in
23 PROSPECTUS
payment of your loan. Any defaulted amount plus interest will be treated as a
distribution for tax purposes (as permitted by law). As a result, you may be
required to pay taxes on the defaulted amount, incur the early withdrawal tax
penalty. Until we are permitted by law to extinguish a defaulted loan, we will
continue to charge interest and add unpaid interest to your outstanding loan
balance.
If the total loan balance exceeds the amount available for full withdrawal, we
will mail written notice to your last known address. The notice will state the
amount needed to maintain the Contract in force. If we do not receive payment of
this amount within 31 days after we mail this notice, we will terminate your
Contract.
We may defer making any loan for 6 months after you ask us for a loan, unless
the loan is to pay a premium to us.
INCOME PAYMENTS
PAYOUT START DATE
You select the Payout Start Date in your application. The Payout Start Date is
the day that we apply your money to an Income Plan. The Payout Start Date must
be:
.. at least 30 days after the Issue Date; and
.. no later than the day the Annuitant reaches age 90, or the 10th Contract
Anniversary, if later.
You may change the Payout Start Date at any time by notifying us in writing of
the change at least 30 days before the scheduled Payout Start Date. Absent a
change, we will use the Payout Start Date stated in your Contract.
INCOME PLANS
An Income Plan is a series of scheduled payments to you or someone you
designate. You may choose and change your choice of Income Plan until 30 days
before the Payout Start Date. If you do not select an Income Plan, we will make
income payments in accordance with Income Plan 1 with guaranteed payments for 10
years.
Three Income Plans are available under the Contract. Each is available to
provide:
.. fixed income payments;
.. variable income payments; or
.. a combination of the two.
A portion of each payment will be considered taxable and the remaining portion
will be a non-taxable return of your investment in the Contract, which is also
called the "basis." Once the investment in the Contract is depleted, all
remaining payments will be fully taxable. If the Contract is tax-qualified,
generally, all payments will be fully taxable. Taxable payments taken prior to
age 59 1/2 may be subject to an additional 10% federal tax penalty.
The three Income Plans are:
INCOME PLAN 1 - LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make
periodic income payments for at least as long as the Annuitant lives. If the
Annuitant dies before we have made all of the guaranteed income payments, we
will continue to pay the remainder of the guaranteed income payments as required
by the Contract.
INCOME PLAN 2 - JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under
this plan, we make periodic income payments for at least as long as either the
Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint
Annuitant die before we have made all of the guaranteed income payments, we will
continue to pay the remainder of the guaranteed income payments as required by
the Contract.
INCOME PLAN 3 - GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD (5 YEARS TO 30
YEARS). Under this plan, we make periodic income payments for the period you
have chosen. These payments do not depend on the Annuitant's life. You may elect
to receive guaranteed payments for periods ranging from 5 to 30 years. Income
payments for less than 120 months may be subject to a withdrawal charge. We will
deduct the mortality and expense risk charge from the Variable Subaccount assets
that support variable income payments even though we may not bear any mortality
risk.
The length of any guaranteed payment period under your selected Income Plan
generally will affect the dollar amounts of each income payment. As a general
rule, longer guarantee periods result in lower income payments, all other things
being equal. For example, if you choose an Income Plan with payments that depend
on the life of the Annuitant but with no minimum specified period for guaranteed
payments, the income payments generally will be greater than the income payments
made under the same Income Plan with a minimum specified period for guaranteed
payments.
If you choose Income Plan 1 or 2, or, if available, another Income Plan with
payments that continue for the life of the Annuitant or joint Annuitant, we may
require proof of age and sex of the Annuitant or joint Annuitant before starting
income payments, and proof that the Annuitant or joint Annuitant are alive
before we make each payment. Please note that under such Income Plans, if you
elect to take no minimum guaranteed payments, it is possible that the payee
could receive only 1 income payment if the Annuitant and any joint Annuitant
both die before the second income payment, or only 2 income payments if they die
before the third income payment, and so on.
Generally, you may not make withdrawals after the Payout Start Date. One
exception to this rule applies if you are receiving income payments that do not
depend on the life of the Annuitant (such as under Income Plan 3).
24 PROSPECTUS
In that case you may terminate all or part of the income payments at any time
and withdraw their value, subject to withdrawal charges. For Variable Amount
Income Payments, the value you may withdraw is equal to the present value of the
Variable Amount Income Payments being terminated, calculated using a discount
rate equal to the assumed investment rate that was used in determining the
initial variable payment. For Fixed Amount Income Payments, the value you may
withdraw is equal to the present value of the Fixed Amount Income Payments being
terminated, calculated using a discount rate equal to the applicable current
interest rate. The applicable current interest rate is the rate we are using on
the date we receive your withdrawal request to determine income payments for a
new Income Plan with a payment period equal to the remaining payment period of
the income payments being terminated. The value you may withdraw may be higher
or lower than it would have been using the interest rate that was initially used
to calculate your Fixed Account Income Payments and your total payments
(withdrawal amount plus income payments already received) may be more or less
than the amount applied to your Income Plan. We deduct applicable premium taxes
from the Contract Value at the Payout Start Date.
We may make other Income Plans available.
You must apply at least the Contract Value in the Fixed Account on the Payout
Start Date to fixed income payments. If you wish to apply any portion of your
Fixed Account balance to provide variable income payments, you should plan ahead
and transfer that amount to the Variable Subaccounts prior to the Payout Start
Date. If you do not tell us how to allocate your Contract Value among fixed and
variable income payments, we will apply your Contract Value in the Variable
Account to variable income payments and your Contract Value in the Fixed Account
to fixed income payments.
We will apply your Contract Value, adjusted by any applicable Market Value
Adjustment, less applicable taxes to your Income Plan on the Payout Start Date.
If the amount available to apply under an Income Plan is less than $2,000, or
not enough to provide an initial payment of at least $50, and state law permits,
we may:
.. pay you the Contract Value, adjusted by any applicable Market Value
Adjustment and less any applicable taxes, in a lump sum instead of the
periodic payments you have chosen; or
.. reduce the frequency of your payments so that each payment will be at least
$50.
VARIABLE INCOME PAYMENTS
The amount of your variable income payments depends upon the investment results
of the Variable Subaccounts you select, the premium taxes you pay, the age and
sex of the Annuitant, and the Income Plan you choose. We guarantee that the
payments will not be affected by (a) actual mortality experience and (b) the
amount of our administration expenses.
We cannot predict the total amount of your variable income payments. Your
variable income payments may be more or less than your total purchase payments
because (a) variable income payments vary with the investment results of the
underlying Portfolios; and (b) the Annuitant could live longer or shorter than
we expect based on the tables we use.
In calculating the amount of the periodic payments in the annuity tables in the
Contract, we assumed an annual investment rate of 3%. If the actual net
investment return of the Variable Subaccounts you choose is less than this
assumed investment rate, then the dollar amount of your variable income payments
will decrease. The dollar amount of your variable income payments will increase,
however, if the actual net investment return exceeds the assumed investment
rate. The dollar amount of the variable income payments stays level if the net
investment return equals the assumed investment rate. Please refer to the
Statement of Additional Information for more detailed information as to how we
determine variable income payments.
FIXED INCOME PAYMENTS
We guarantee income payment amounts derived from any Fixed Account Option for
the duration of the Income Plan. We calculate the fixed income payments by:
1. adjusting the portion of the Contract Value in any Fixed Account Option on
the Payout Start Date by any applicable Market Value Adjustment;
2. deducting any applicable premium tax; and
3. applying the resulting amount to the greater of (a) the appropriate value
from the income payment table in your Contract or (b) such other value as
we are offering at that time.
We may defer making fixed income payments for a period of up to 6 months or any
shorter time state law may require. If we defer payments for 30 days or more, we
will pay interest as required by law from the date we receive the withdrawal
request to the date we make payment.
INCOME BENEFIT RIDER
The Income Benefit Rider is no longer available. For Contract Owners and
Annuitants up to and including age 75. This Rider guarantees that the amount of
income payments you receive will not be less than those determined by applying
the Income Base, less any applicable taxes, to the minimum guaranteed rate
(rather than to any current rates we may be offering) for the Income Plan you
select ("Guaranteed Income Benefit"). This Rider does not affect the amounts
paid as a death benefit, partial withdrawal or surrender. The Rider is optional,
has additional charges and may not be available in all states.
25 PROSPECTUS
QUALIFICATIONS. To qualify for the income benefit payments under this Rider, you
must meet the following requirements as of the Payout Start Date:
.. You must elect a Payout Start Date that is on or after the 10th anniversary
of the Rider Date;
.. The Payout Start Date must be prior to the oldest Annuitant's 90th
birthday;
.. The Payout Start Date must occur during the 30 day period following a
Contract Anniversary;
.. You must elect to receive fixed income payments, which will be calculated
using the guaranteed payout rates listed in your Contract; and
.. The Income Plan you selected must provide for payments guaranteed for
either a single life or joint lives with a specified period of at least:
.. 10 years, if the youngest Annuitant's age is 80 or less on the Payout Start
Date, or
.. 5 years, if the youngest Annuitant's age is greater than 80 on the Payout
Start Date.
.. Of course, if your Contract Value, applied to the then current payout rates
offered by Lincoln Benefit, generates higher income payments than those
provided under the Income Benefit Rider, you will receive the higher
payment amount. You may also elect to apply your Contract Value to any
other income plan that we offer at that time.
The Income Benefit Rider will no longer be in effect and the mortality and
expense charge for the Rider will end upon the change of the named Annuitant for
reasons other than death. We may discontinue offering these options at any time.
INCOME BASE
The Income Base is used solely for the purpose of calculating the GUARANTEED
INCOME BENEFIT under this Rider ("Guaranteed Income Benefit") and does not
provide a Contract Value or guarantee performance of any investment option.
On the date we issue the Rider ("Rider Date"), the Income Base is equal to the
Contract Value. After the Rider Date, the Income Base plus any subsequent
purchase payments and less a withdrawal adjustment (described below) for any
subsequent withdrawal will accumulate daily at a rate equivalent to 5% per year
until the earlier of the Payout Start Date, or the first day of the month after
the oldest Contract Owner's (or Annuitant's, if the Contract Owner is not a
living person) 85th birthday. The maximum Income Base is 200% of:
.. the Contract Value on the Rider Date; plus
.. any subsequent purchase payments; less
.. any subsequent withdrawal adjustments.
WITHDRAWAL ADJUSTMENT
The withdrawal adjustment is equal to (a) divided by (b), with the result
multiplied by (c) where:
(a) = the withdrawal amount
(b) = the Contract Value immediately prior to the withdrawal, and
(c) = the most recently calculated Income Base
The Guaranteed Income Benefit amount is determined by applying the Income Base
less any applicable taxes to the guaranteed rates for the Income Plan you elect.
The Income Plan you elect must satisfy the conditions described above.
On the Payout Start Date, the income payment will be the greater of the
guaranteed Income Benefit or the Income Payment provided in the Payout Phase
section.
CERTAIN EMPLOYEE BENEFIT PLANS
The Contracts offered by this prospectus contain income payment tables that
provide for different payments to men and women of the same age, except in
states that require unisex tables. We reserve the right to use income payment
tables that do not distinguish on the basis of sex to the extent permitted by
applicable law. In certain employment-related situations, employers are required
by law to use the same income payment tables for men and women. Accordingly, if
the Contract is to be used in connection with an employment-related retirement
or benefit plan and we do not offer unisex annuity tables in your state, you
should consult with legal counsel as to whether the purchase of a Contract is
appropriate.
26 PROSPECTUS
DEATH BENEFITS
WE WILL PAY A DEATH BENEFIT PRIOR TO THE PAYOUT START DATE ON:
1. the death of any Contract Owner or,
2. the death of the Annuitant, if the Contract Owner is not a living person.
We will pay the death benefit to the new Contract Owner as determined
immediately after the death. The new Contract Owner would be a surviving
Contract Owner or, if none, the Beneficiaries. If the Contract Owner is not a
living person, in the case of the death of the Annuitant, we will pay the death
benefit to the current Contract Owner.
A claim for a distribution on death must include DUE PROOF OF DEATH. Where there
are multiple Beneficiaries, we will value the Death Benefit at the time the
first Beneficiary submits a complete claim for payment of the Death Benefit. We
will accept the following documentation as "Due Proof of Death":
.. a certified copy of a death certificate,
.. a certified copy of a decree of a court of competent jurisdiction as to the
finding of death, or
.. any other proof acceptable to us.
Your beneficiary should submit a complete claim for payment of the Death Benefit
within 180 days of the relevant death in order to claim the standard or enhanced
Death Benefit. If your beneficiary does not submit a complete claim for payment
of the Death Benefit within 180 days of the relevant death, the beneficiary will
be paid the Contract Value which may be adjusted as described in "Death Benefit
Payments" on page 34. You may specify that the death benefit be paid under a
specific Income Plan by submitting a written request to our Service Center. If
you so request, your Beneficiary may not change to a different Income Plan or
lump sum. Once we accept the written request, the change or restriction will
take effect as of the date you signed the request.
DEATH BENEFIT AMOUNT
Prior to the Payout Start Date, if we receive a complete request for payment of
the Death Benefit within 180 days of the date of death, the standard Death
Benefit is equal to the greatest of:
.. the sum of all Purchase Payments reduced by withdrawal adjustments. The
withdrawal adjustment for Purchase Payments is equal to (a) divided by (b),
with the result multiplied by (c) where:
(a) is the withdrawal amount;
(b) is the Contract Value immediately prior to the withdrawal; and
(c) is the sum of all prior purchase payments adjusted by any prior
withdrawals; or
.. the Contract Value on the date we determine the Death Benefit, or
.. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of
Contract Value, i.e., the Contract Value adjusted by any market value
adjustment, less any applicable withdrawal charge or premium tax) on the
date we determine the Death Benefit, or
.. the Contract Value on each DEATH BENEFIT ANNIVERSARY prior to the date we
determine the Death Benefit, increased by any purchase payment made since
that Death Benefit Anniversary and reduced by an adjustment for any
withdrawals since that Death Benefit Anniversary.
In other words, for each Death Benefit Anniversary that occurs prior to the date
we determine the Death Benefit, we will calculate an amount equal to the
Contract Value on that Death Benefit Anniversary, plus any purchase payments
made since that Death Benefit Anniversary, and minus an adjustment for any
withdrawals made since that Death Benefit Anniversary. (The calculation of the
withdrawal adjustment is described on page 33.) If there are multiple Death
Benefit Anniversaries, we will make multiple calculations. The highest result
will be compared to the other three values listed above in order to determine
the Death Benefit.
"Death Benefit Anniversaries" occur every 7th Contract anniversary until the
oldest Contract Owner's 80th birthday, or the Annuitant's 80th birthday if the
Contract Owner is not a living person. The Contract Anniversary immediately
following the oldest Contract Owner's 80th birthday, or the Annuitant's 80th
birthday if the Contract Owner is not a living person, will also be a Death
Benefit Anniversary and is the final Death Benefit Anniversary.
The Death Benefit Anniversary withdrawal adjustment is equal to (a) divided by
(b), with the result multiplied by (c), where:
(a) is the withdrawal amount;
(b) is the Contract Value immediately prior to the withdrawal; and
(c) is the Contract Value on the Death Benefit Anniversary adjusted by any
prior purchase payments or withdrawals made since that Anniversary.
We will determine the value of the Death Benefit as of the end of the Valuation
Date on which we receive a complete request for payment of the death benefit. If
we receive a request after 3:00 p.m. Central Time on a Valuation Date, we will
process the request as of the end of the following Valuation Date.
27 PROSPECTUS
ENHANCED DEATH BENEFIT RIDER
The Enhanced Death Benefit Rider is an optional benefit that you may elect if
the Contract Owners and Annuitants are not older than age 80 on the date we
receive the application, or the date we receive the written request to add this
Rider, whichever is later. If the Contract Owner is a living individual, the
Enhanced Death Benefit applies only upon the death of the Contract Owner. If the
Contract Owner is not a living individual, the Enhanced Death Benefit applies
only upon the death of the Annuitant. For Contracts with the Enhanced Death
Benefit Rider, the death benefit will be the greatest of the standard death
benefit above, or the Enhanced Death Benefit. The Enhanced Death Benefit is
equal to the greater of Enhanced Death Benefit A or Enhanced Death Benefit B.
Enhanced Death Benefit A or B may not be available in all states. This rider
will automatically terminate on the Payout Start Date.
The Enhanced Death Benefit will never be greater than the maximum death benefit
allowed by any state nonforfeiture laws that govern the Contract. The Enhanced
Death Benefit Rider and the mortality and expense charge for the Rider will
terminate upon the change of Contract Owner (or the Annuitant if the Contract
Owner is not a living person) for reasons other than death.
ENHANCED DEATH BENEFIT A. On the date we issue the Rider ("RIDER DATE"),
Enhanced Death Benefit A is equal to the Contract Value on that date. After the
Rider Date, Enhanced Death Benefit A is the greatest of the ANNIVERSARY VALUES
as of the date we determine the death benefit. The "Anniversary Value" is equal
to the Contract Value on a Contract Anniversary, increased by purchase payments
made since that Anniversary and reduced by a withdrawal adjustment, as described
below, for any partial withdrawals since that Anniversary.
We will calculate Anniversary Values for each Contract Anniversary up until the
earlier of:
.. the date we determine the death benefit; or
.. the first Contract Anniversary following the oldest Contract Owner's or, if
the Contract Owner is not a living person, the Annuitant's 80th birthday,
or the first day of the 61st month following the Rider Date, whichever is
later.
After age 80, or the first day of the 61st month following the Rider Date,
whichever is later, we will recalculate the Enhanced Death Benefit A only for
purchase payments and withdrawals.
The withdrawal adjustment is equal to (a) divided by (b), and the result
multiplied by (c) where:
(a) = is the withdrawal amount,
(b) = is the Contract Value immediately prior to the withdrawal, and
(c) = the most recently calculated Enhanced Death Benefit A.
ENHANCED DEATH BENEFIT B. The Enhanced Death Benefit B on the Rider Date is
equal to the Contract Value on that date. After the Rider Date, the Enhanced
Death Benefit B, plus any subsequent purchase payments and less a withdrawal
adjustment, as described below, will accumulate daily at a rate equivalent to 5%
per year until the earlier of:
.. the date we determine the death benefit; or
.. the first day of the month following the oldest Contract Owner's or, if the
Contract Owner is not a living person, the Annuitant's 80th birthday, or
the first day of the 61st month following the Rider Date, whichever is
later.
After age 80, or the first day of the 61st month following the Rider Date,
whichever is later, we will recalculate the Enhanced Death Benefit B only for
purchase payments and withdrawals. The maximum amount of Enhanced Death Benefit
B is 200% of:
.. the Contract Value on the Rider Date; plus
.. any subsequent purchase payments; less
.. any subsequent withdrawal adjustments.
The withdrawal adjustment is equal to (a) divided by (b), and the result
multiplied by (c) where:
(a) = the withdrawal amount,
(b) = is the Contract Value immediately prior to the withdrawal, and
(c) = is the most recently calculated Enhanced Death Benefit B.
ENHANCED EARNINGS DEATH BENEFIT RIDER
For Contract Owners and Annuitants up to and including age 75, the Enhanced
Earnings Death Benefit Rider is an optional benefit that you may elect.
If the Contract Owner is a living person, the Enhanced Earnings Death Benefit
Rider applies only upon the death of the Contract Owner. If the Contract Owner
is not a living person, the Enhanced Earnings Death Benefit Rider applies only
upon the death of the Annuitant. The Enhanced Earnings Death Benefit Rider and
the annual charge for the Rider will terminate upon the change of Contract Owner
(or the Annuitant if the Contract Owner is not a living person) for reasons
other than death. The Rider may not be available in all states. We may
discontinue the offering of the Rider at any time. This rider will automatically
terminate on the Payout Start Date.
Under the Enhanced Earnings Death Benefit Rider, the Enhanced Earnings Death
Benefit is determined as follows:
If the oldest Contract Owner, or the Annuitant if the Contract Owner is not a
living person, is age 55 or younger on the date we receive the completed
application, or we receive written request to add this
28 PROSPECTUS
rider, whichever is later, the Enhanced Earnings Death Benefit will be:
.. the lesser of 100% of IN-FORCE PREMIUM (excluding purchase payments made
after the Rider Date and in the twelve month period immediately preceding
the death of the Contract Owner, or the Annuitant if the Contract Owner is
not a living person) or 50% of In-Force Earnings, calculated as of the date
we receive due proof of death.
If the oldest Contract Owner, or the Annuitant if the Contract Owner is not a
living person, is between the ages of 56 and 65 on the date we receive the
completed application or the date we receive the written request to add this
rider, whichever is later, the Enhanced Earnings Death Benefit will be:
.. the lesser of 80% of the In-Force Premium (excluding purchase payments made
after the Rider Date and in the twelve month period immediately preceding
the death of the Contract Owner, or the Annuitant if the Contract Owner is
not a living person) or 40% of In-Force Earning, calculated as of the date
we receive due proof of death.
If the oldest Contract Owner, or the Annuitant if the Contract Owner is not a
living person, is between the ages of 66 and 75 on the date we receive the
completed application or the date we receive the written request to add this
rider, whichever is later, the Enhanced Earnings Death Benefit will be:
.. the lesser of 50% of In-Force Premium (excluding purchase payments made
after the Rider Date and in the twelve month period immediately preceding
the death of the Contract Owner, or the Annuitant if the Contract Owner is
not a living person) or 25% of In-Force Earnings, calculated as of the date
we receive due proof of death.
For purpose of calculating the Enhanced Earnings Death Benefit, the following
definitions apply:
.. In-Force Earnings is the greater of (a) the current Contract Value less the
In-Force Premium; or (b) zero.
.. In-Force Premiums are defined as follows:
.. If the Rider Date is the same as the Issue Date of the Contract:
.. The sum of all the purchase payments less the sum of all the
Excess-of-Earnings Withdrawals.
.. If the Rider Date is later than the Contract issue date:
.. The Contract Value as of Rider Date plus all the purchase payments made
after the Rider Date less the sum of all the Excess-of-Earnings Withdrawals
after the Rider Date Excess-of-Earnings Withdrawals are defined as follows:
.. For each withdrawal, this amount is equal to the amount, if any, by which
the withdrawal exceeds the In-Force Earnings immediately prior to the
withdrawal.
We will calculate the Enhanced Earnings Death Benefit Rider as of the date we
receive Due Proof of Death. We will pay the Enhanced Earnings Death Benefit with
the death benefit as described under "Death Benefit Payments" below.
The value of the Enhanced Earnings Death Benefit largely depends on the amount
of earnings that accumulate under your Contract. If you expect to withdraw the
earnings from your Contract Value, electing the Enhanced Earnings Death Benefit
Rider may not be appropriate. For purposes of calculating the Enhanced Earnings
Death Benefit, earnings are considered to be withdrawn first before purchase
payments. Your financial advisor can help you decide if the Enhanced Earnings
Death Benefit Rider is right for you.
For examples of how the death benefit is calculated under the Enhanced Earnings
Death Benefit Rider, see Appendix C.
DEATH BENEFIT PAYMENTS
1. If the sole new Contract Owner is your spouse:
(a) Your spouse may elect, within 180 days of the date of your death, to
receive the Death Benefit described above in a lump sum.
(b) Your spouse may elect, within 180 days of the date of your death, to
receive an amount equal to the Death Benefit paid out through an Income
Plan. Payments from the Income Plan must begin within one year of your date
of death. The payments must be:
(i) over the life of your spouse; or
(ii) for a guaranteed number of payments from 5 to 30 years but not to exceed
the life expectancy of your spouse; or
(iii) over the life of your spouse with a guaranteed number of payments from 5
to 30 years but not to exceed the life expectancy of your spouse.
If your spouse chooses to continue the Contract or, does not elect one of the
options above within 180 days of your death, the Contract will continue in the
Accumulation Phase as if no death has occurred. If the Contract continues in the
Accumulation Phase, the following conditions apply:
(a) On the date the Contract is continued, the Contract Value will be the Death
Benefit as determined as of the Valuation Date on which we received due
proof of death (the next Valuation Date, if we receive due proof of death
after 3 p.m. Central Time). Unless otherwise instructed by the continuing
spouse, the excess, if any, of the Death Benefit amount over the Contract
Value will be allocated to the Subaccounts. This excess will be allocated
in proportion to your Contract Value in those Subaccounts as of the end of
the Valuation Period during which we receive the complete request for
payment of the
29 PROSPECTUS
Death Benefit, except that any portion of this excess attributable to the Fixed
Account Options will be allocated to the Money Market Subaccount. Within 30 days
of the date the Contract is continued, your surviving spouse may choose one of
the following transfers without incurring a transfer fee:
(i) transfer all or a portion of the excess among the Subaccounts;
(ii) transfer all or a portion of the excess into the Guaranteed Maturity Fixed
Account and begin a new Guarantee Period; or
(iii) transfer all or a portion of the excess into a combination of Subaccounts,
or the Guaranteed Maturity Fixed Account.
Any such transfer does not count as one of the free transfers allowed each
Contract Year and is subject to any minimum allocation amount specified in your
Contract. The surviving spouse may make a single withdrawal of any amount within
one year of the date of death without incurring a Withdrawal Charge or Market
Value Adjustment.
After the Contract is continued, prior to the Payout Start Date, the Death
Benefit of the continued Contract will be the greatest of:
(a) the sum of all purchase payments reduced by any withdrawal adjustments; or
(b) the Contract Value on the date we determine the Death Benefit; or
(c) the Settlement Value on the date we determine the Death Benefit; or
(d) the Contract Value on each Death Benefit Anniversary prior to the date we
determine the Death Benefit, increased by any Purchase Payments made since
that Death Benefit Anniversary and reduced by an adjustment for any
withdrawals, as defined in the Death Benefit provision.
Please see DEATH BENEFIT AMOUNT on page 32 for a detailed explanation of how
these amounts are calculated.
Only one spousal continuation is allowed under the Contract.
2. If the new Contract Owner is not your spouse but is a living person, the
new Contract Owner has the following options:
(a) The new Contract Owner may elect, within 180 days of the date of your
death, to receive the Death Benefit in a lump sum.
(b) The new Contract Owner may elect, within 180 days of the date of your
death, to receive an amount equal to the Death Benefit paid out through an
Income Plan. Payments from the annuity option must begin within one year of
your date of death. The Payments must be:
(i) over the life of the new Contract Owner, or for a guaranteed number of
payments from 5 to 30 years but not to exceed the life expectancy of the new
Contract Owner; or
(ii) over the life of the new Contract Owner with a guaranteed number of
payments from 5 to 30 years but not to exceed the life expectancy of the new
Contract Owner.
(c) If the New Owner does not elect one of the options above within 180 days of
death, then the New Owner must receive the Contract Value payable within 5
years of your date of death. Under this option, if the Settlement Value is
greater than the Contract Value as determined as of the Valuation Date on
which we received a complete request for settlement, which includes Due
Proof of Death (the next Valuation Date, if we receive Due Proof of Death
after 3:00 p.m. Central Time), we will allocate the excess to the Variable
Subaccount selected by the New Owner. In the absence of instructions, we
will allocate that amount to the Money Market Variable Subaccount. Until
the Contract Value is withdrawn, it will vary in accordance with the
investment options selected by the New Owner, and the New Owner may
exercise all rights as set forth in the TRANSFERS section during this
5-year period.
No additional purchase payments may be added to the Contract under this
election. Withdrawal Charges will be waived for any withdrawals made during this
5-year period.
If the New Owner dies prior to receiving all of the Contract Value, then the New
Owner's named beneficiary(ies) will receive the greater of the Settlement Value
or the remaining Contract Value. This amount must be received as a lump sum
within 5 years of the date of the original Owner's death.
3. If the new Contract Owner is a non-Living Person, the new Contract Owner
has the following options:
(a) The non-living Contract Owner may elect, within 180 days of your death, to
receive the Death Benefit in a lump sum.
(b) If the New Owner does not elect the option above, then the New Owner must
receive the Contract Value payable within 5 years of your date of death.
Under this option, if the Settlement Value is greater than the Contract
Value as determined as of the Valuation Date on which we received Due Proof
of Death (the next Valuation Date, if we receive Due Proof of Death after
3:00 pm Central Time), we will allocate the excess to the Variable
Subaccount selected by the New Owner. In the absence of instructions, we
will allocate that amount to the Money Market Variable Subaccount. Until
the Contract Value is withdrawn, it will vary in accordance with the
investment options selected by the New Owner, and the New Owner may
exercise all rights as set forth in the Transfers provision during this
5-year period.
No additional purchase payments may be added to the Contract under this
election. Withdrawal Charges will be waived during this 5-year period.
30 PROSPECTUS
We reserve the right to offer additional options upon Death of Owner. Under any
of these options, all ownership rights, subject to any restrictions previously
placed upon the Beneficiary, are available to the New Owner.
If any new Contract Owner is not a Living Person, all new Contract Owners will
be considered to be non-Living Persons for the above purposes.
We reserve the right to waive or extend the 180-day limit on a
non-discriminatory basis.
DEATH OF ANNUITANT
If the Annuitant who is not also the Contract Owner dies prior to the Payout
Start Date, the Contract Owner must elect one of the following options:
1. If the Contract Owner is a Living Person, the Contract will continue with a
new Annuitant as described on page 12.
2. If the Contract Owner is not a Living Person:
(a) The non-living Contract Owner may elect, within 180 days of the Annuitant's
date of death, to receive the Death Benefit in a lump sum; or
(b) If the Contract Owner does not elect the above option, then the Owner must
receive the Contract Value payable within 5 years of the Annuitant's date
of death. Under this option, if the Settlement Value is greater than the
Contract Value as determined as of the Valuation Date on which we received
Due Proof of Death (the next Valuation Date, if we receive Due Proof of
Death after 3:00 pm Central Time), we will allocate the excess to the
Variable Subaccount selected by the New Owner. In the absence of
instructions, we will allocate that amount to the Money Market Variable
Subaccount. Until the Contract Value is withdrawn, it will vary in
accordance with the investment options selected by the New Owner, and the
Contract Owner may then exercise all rights as set forth in the TRANSFERS
section during this 5-year period.
No additional purchase payments may be added to the Contract under this
election. Withdrawal Charges will be waived during this 5-year period.
If the non-living Contract Owner does not make one of the above described
elections, the Settlement Value must be withdrawn by a non-living Contract Owner
on or before the mandatory distribution date 5 years after the Annuitant's
death.
We reserve the right to waive or extend the 180-day limit on a
non-discriminatory basis.
MORE INFORMATION
LINCOLN BENEFIT LIFE COMPANY.
Lincoln Benefit Life Company is a stock life insurance company organized under
the laws of the state of Nebraska in 1938. Our legal domicile and principal
business address is 2940 South 84th Street, Lincoln, Nebraska, 68506-4142.
Lincoln Benefit is a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate Life" or "ALIC"), a stock life insurance company incorporated under
the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of
Allstate Insurance Company ("AIC"), a stock property-liability insurance company
incorporated under the laws of Illinois. All outstanding capital stock of
Allstate is owned by The Allstate Corporation ("Allstate").
We are authorized to conduct life insurance and annuity business in the District
of Columbia, Guam, U.S. Virgin Islands and all states except New York. We intend
to market the Contract everywhere we conduct variable annuity business. The
Contracts offered by this prospectus are issued by us and will be funded in the
Variable Account and/or the Fixed Account.
Under our reinsurance agreements with Allstate Life, substantially all contract
related transactions are transferred to Allstate Life and substantially all of
the assets backing our reinsured liabilities are owned by Allstate Life. These
assets represent our general account and are invested and managed by Allstate
Life. Accordingly, the results of operations with respect to applications
received and contracts issued by Lincoln Benefit are not reflected in our
financial statements. The amounts reflected in our financial statements relate
only to the investment of those assets of Lincoln Benefit that are not
transferred to Allstate Life under the reinsurance agreements. While the
reinsurance agreements provide us with financial backing from Allstate Life, it
does not create a direct contractual relationship between Allstate Life and you.
Under the Company's reinsurance agreements with ALIC, the Company reinsures all
reserve liabilities with ALIC except for variable contracts. The Company's
variable contract assets and liabilities are held in legally-segregated,
unitized Variable Accounts and are retained by the Company. However, the
transactions related to such variable contracts such as premiums, expenses and
benefits are transferred to ALIC.
THE VARIABLE ACCOUNT
Lincoln Benefit established the Lincoln Benefit Life Variable Annuity Account in
1992. We have registered the Variable Account with the SEC as a unit investment
trust. The SEC does not supervise the management of the Variable Account or
Lincoln Benefit.
We own the assets of the Variable Account. The Variable Account is a segregated
asset account under Nebraska law. That means we account for the Variable
Account's income, gains and losses separately from the results of our
31 PROSPECTUS
other operations. It also means that only the assets of the Variable Account
that are in excess of the reserves and other Contract liabilities with respect
to the Variable Account are subject to liabilities relating to our other
operations. Our obligations arising under the Contracts are general corporate
obligations of Lincoln Benefit.
The Variable Account consists of Variable Subaccounts. Each Variable Subaccount
invests in a corresponding Portfolio. We may add new Variable Subaccounts or
eliminate one or more of them, if we believe marketing, tax, or investment
conditions so warrant. We may also add other Variable Subaccounts that may be
available under other variable annuity contracts. We do not guarantee the
investment performance of the Variable Account, its Subaccounts or the
Portfolios. We may use the Variable Account to fund our other annuity contracts.
We will account separately for each type of annuity contract funded by the
Variable Account.
THE PORTFOLIOS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all
dividends and capital gains distributions from the Portfolios in shares of the
distributing Portfolio at their net asset value.
VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote
the shares of the Portfolios held by the Variable Subaccounts to which you have
allocated your Contract Value. Under current law, however, you are entitled to
give us instructions on how to vote those shares on certain matters. Based on
our present view of the law, we will vote the shares of the Portfolios that we
hold directly or indirectly through the Variable Account in accordance with
instructions that we receive from Contract Owners entitled to give such
instructions.
As a general rule, before the Payout Start Date, the Contract Owner or anyone
with a voting interest is the person entitled to give voting instructions. The
number of shares that a person has a right to instruct will be determined by
dividing the Contract Value allocated to the applicable Variable Subaccount by
the net asset value per share of the corresponding Portfolio as of the record
date of the meeting. After the Payout Start Date the person receiving income
payments has the voting interest. The payee's number of votes will be determined
by dividing the reserve for such Contract allocated to the applicable Variable
Subaccount by the net asset value per share of the corresponding Portfolio. The
votes decrease as income payments are made and as the reserves for the Contract
decrease.
We will vote shares attributable to Contracts for which we have not received
instructions, as well as shares attributable to us, in the same proportion as we
vote shares for which we have received instructions, unless we determine that we
may vote such shares in our own discretion. We will apply voting instructions to
abstain on any item to be voted upon on a pro-rata basis to reduce the votes
eligible to be cast.
We reserve the right to vote Portfolio shares as we see fit without regard to
voting instructions to the extent permitted by law. If we disregard voting
instructions, we will include a summary of that action and our reasons for that
action in the next semi-annual financial report we send to you.
CHANGES IN PORTFOLIOS. If the shares of any of the Portfolios are no longer
available for investment by the Variable Account or if, in our judgment, further
investment in such shares is no longer desirable in view of the purposes of the
Contract, we may eliminate that Portfolio and substitute shares of another
eligible investment fund. Any substitution of securities will comply with the
requirements of the Investment Company Act of 1940. We also may add new Variable
Subaccounts that invest in additional underlying funds. We will notify you in
advance of any change.
CONFLICTS OF INTEREST. Certain of the Portfolios sell their shares to separate
accounts underlying both variable life insurance and variable annuity contracts.
It is conceivable that in the future it may be unfavorable for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the same Portfolio. The boards of directors of these Portfolios monitor for
possible conflicts among separate accounts buying shares of the Portfolios.
Conflicts could develop for a variety of reasons. For example, differences in
treatment under tax and other laws or the failure by a separate account to
comply with such laws could cause a conflict. To eliminate a conflict, a
Portfolio's board of directors may require a separate account to withdraw its
participation in a Portfolio. A Portfolio's net asset value could decrease if it
had to sell investment securities to pay redemption proceeds to a separate
account withdrawing because of a conflict.
THE CONTRACT
DISTRIBUTION. The Contracts described in this prospectus are sold by registered
representatives of broker-dealers who are our licensed insurance agents, either
individually or through an incorporated insurance agency. Commissions paid to
broker-dealers may vary, but we estimate that the total commissions paid on all
Contract sales will not exceed 7.5% of all Purchase Payments (on a present value
basis). From time to time, we may offer additional sales incentives of up to
1.5% of Purchase Payments and other cash bonuses to broker-dealers who maintain
certain sales volume levels.
ALFS, Inc. ("ALFS") located at 3100 Sanders Road, Northbrook, IL 60062-7154
serves as distributor of the Contracts. ALFS, an affiliate of Lincoln Benefit,
is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a
registered broker dealer under the Securities and Exchange Act of 1934, as
amended, and is a member of the National Association of Securities Dealers, Inc.
Lincoln Benefit does not pay ALFS a commission for distribution of the
Contracts. The
32 PROSPECTUS
underwriting agreement with ALFS provides that we will reimburse ALFS for
expenses incurred in distributing the Contracts, including liability arising out
of services we provide on the Contracts.
ADMINISTRATION. We have primary responsibility for all administration of the
Contracts and the Variable Account. We provide the following administrative
services, among others:
.. issuance of the Contracts;
.. maintenance of Contract Owner records;
.. Contract Owner services;
.. calculation of unit values;
.. maintenance of the Variable Account; and
.. preparation of Contract Owner reports.
We will send you Contract statements and transaction confirmations at least
annually. You should notify us promptly in writing of any address change. You
should read your statements and confirmations carefully and verify their
accuracy. You should contact us promptly if you have a question about a periodic
statement. We will investigate all complaints and make any necessary adjustments
retroactively, but you must notify us of a potential error within a reasonable
time after the date of the questioned statement. If you wait too long, we
reserve the right to make the adjustment as of the date that we receive notice
of the potential error.
We also will provide you with additional periodic and other reports, information
and prospectuses as may be required by federal securities laws.
NON-QUALIFIED ANNUITIES HELD WITHIN A QUALIFIED PLAN
If you use the Contract within a employer sponsored qualified retirement plan,
the plan may impose different or additional conditions or limitations on
withdrawals, waivers of withdrawal charges, death benefits, Payout Start Dates,
income payments, and other Contract features. In addition, adverse tax
consequences may result if qualified plan limits on distributions and other
conditions are not met. Please consult your qualified plan administrator for
more information. Lincoln Benefit no longer issues deferred annuities to
employer sponsored qualified retirement plans.
LEGAL MATTERS
All matters of Nebraska law pertaining to the Contract, including the validity
of the Contract and our right to issue the Contract under Nebraska law, have
been passed upon by William F. Emmons, Vice President, Assistant General Counsel
and Assistant Secretary of Lincoln Benefit.
33 PROSPECTUS
TAXES
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. LINCOLN
BENEFIT MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT.
Federal, state, local and other tax consequences of ownership or receipt of
distributions under an annuity contract depend on your individual circumstances.
If you are concerned about any tax consequences with regard to your individual
circumstances, you should consult a competent tax adviser.
TAXATION OF LINCOLN BENEFIT LIFE COMPANY
Lincoln Benefit is taxed as a life insurance company under Part I of Subchapter
L of the Code. Since the Variable
Account is not an entity separate from Lincoln Benefit, and its operations form
a part of Lincoln Benefit, it will not be taxed separately. Investment income
and realized capital gains of the Variable Account are automatically applied to
increase reserves under the Contract. Under existing federal income tax law,
Lincoln Benefit believes that the Variable Account investment income and capital
gains will not be taxed to the extent that such income and gains are applied to
increase the reserves under the Contract. Accordingly, Lincoln Benefit does not
anticipate that it will incur any federal income tax liability attributable to
the Variable Account, and therefore Lincoln Benefit does not intend to make
provisions for any such taxes. If Lincoln Benefit is taxed on investment income
or capital gains of the Variable Account, then Lincoln Benefit may impose a
charge against the Variable
Account in order to make provision for such taxes.
TAXATION OF VARIABLE ANNUITIES IN GENERAL
TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value
until a distribution occurs. This rule applies only where:
.. the Contract Owner is a natural person,
.. the investments of the Variable Account are "adequately diversified"
according to Treasury Department regulations, and
.. Lincoln Benefit is considered the owner of the Variable Account assets for
federal income tax purposes.
NON-NATURAL OWNERS. Non-natural owners are also referred to as Non Living Owners
in this prospectus. As a general rule, annuity contracts owned by non-natural
persons such as corporations, trusts, or other entities are not treated as
annuity contracts for federal income tax purposes. The income on such contracts
does not enjoy tax deferral and is taxed as ordinary income received or accrued
by the non-natural owner during the taxable year.
EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the
general rule that annuity contracts held by a non-natural owner are not treated
as annuity contracts for federal income tax purposes. Contracts will generally
be treated as held by a natural person if the nominal owner is a trust or other
entity which holds the contract as agent for a natural person. However, this
special exception will not apply in the case of an employer who is the nominal
owner of an annuity contract under a non-Qualified deferred compensation
arrangement for its employees. Other exceptions to the non-natural owner rule
are: (1) contracts acquired by an estate of a decedent by reason of the death of
the decedent; (2) certain qualified contracts; (3) contracts purchased by
employers upon the termination of certain qualified plans; (4) certain contracts
used in connection with structured settlement agreements; and (5) immediate
annuity contracts, purchased with a single premium, when the annuity starting
date is no later than a year from purchase of the annuity and substantially
equal periodic payments are made, not less frequently than annually, during the
annuity period.
GRANTOR TRUST OWNED ANNUITY. Contracts owned by a grantor trust are considered
owned by a non-natural owner. Grantor trust owned contracts receive tax deferral
as described in the Exceptions to the Non-Natural Owner Rule section. In
accordance with the Code, upon the death of the annuitant, the death benefit
must be paid. According to your Contract, the Death Benefit is paid to the
surviving Contract Owner. Since the trust will be the surviving Contract Owner
in all cases, the Death Benefit will be payable to the trust notwithstanding any
beneficiary designation on the annuity contract. A trust, including a grantor
trust, has two options for receiving any death benefits: 1) a lump sum payment;
or 2) payment deferred up to five years from date of death.
DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for
federal income tax purposes, the investments in the Variable Account must be
"adequately diversified" consistent with standards under Treasury Department
regulations. If the investments in the Variable Account are not adequately
diversified, the Contract will not be treated as an annuity contract for federal
income tax purposes. As a result, the income on the Contract will be taxed as
ordinary income received or accrued by the Contract owner during the taxable
year. Although Lincoln Benefit does not have control over the Portfolios or
their investments, we expect the Portfolios to meet the diversification
requirements.
OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered
the owner of separate account assets if he possesses incidents of ownership in
those assets, such as the ability to exercise investment control over the
assets. At the time the diversification regulations were issued, the Treasury
Department
34 PROSPECTUS
announced that the regulations do not provide guidance concerning circumstances
in which investor control of the separate account investments may cause a
Contract owner to be treated as the owner of the separate account. The Treasury
Department also stated that future guidance would be issued regarding the extent
that owners could direct sub-account investments without being treated as owners
of the underlying assets of the separate account.
Your rights under the Contract are different than those described by the IRS in
private and published rulings in which it found that Contract owners were not
owners of separate account assets. For example, if your contract offers more
than twenty (20) investment alternatives you have the choice to allocate
premiums and contract values among a broader selection of investment
alternatives than described in such rulings. You may be able to transfer among
investment alternatives more frequently than in such rulings. These differences
could result in you being treated as the owner of the Variable Account. If this
occurs, income and gain from the Variable Account assets would be includible in
your gross income. Lincoln
Benefit does not know what standards will be set forth in any regulations or
rulings which the Treasury Department may issue. It is possible that future
standards announced by the Treasury Department could adversely affect the tax
treatment of your Contract. We reserve the right to modify the Contract as
necessary to attempt to prevent you from being considered the federal tax owner
of the assets of the Variable Account. However, we make no guarantee that such
modification to the Contract will be successful.
TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under
a Non-Qualified Contract, amounts received are taxable to the extent the
Contract Value, without regard to surrender charges, exceeds the investment in
the Contract. The investment in the Contract is the gross premium paid for the
contract minus any amounts previously received from the Contract if such amounts
were properly excluded from your gross income. If you make a full withdrawal
under a Non-Qualified Contract, the amount received will be taxable only to the
extent it exceeds the investment in the Contract.
TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity
payments received from a Non-Qualified Contract provides for the return of your
investment in the Contract in equal tax-free amounts over the payment period.
The balance of each payment received is taxable. For fixed annuity payments, the
amount excluded from income is determined by multiplying the payment by the
ratio of the investment in the Contract (adjusted for any refund feature or
period certain) to the total expected value of annuity payments for the term of
the Contract. If you elect variable annuity payments, the amount excluded from
taxable income is determined by dividing the investment in the Contract by the
total number of expected payments. The annuity payments will be fully taxable
after the total amount of the investment in the Contract is excluded using these
ratios. If any variable payment is less than the excludable amount you should
contact a competent tax advisor to determine how to report any unrecovered
investment. The federal tax treatment of annuity payments is unclear in some
respects. As a result, if the IRS should provide further guidance, it is
possible that the amount we calculate and report to the IRS as taxable could be
different. If you die, and annuity payments cease before the total amount of the
investment in the Contract is recovered, the unrecovered amount will be allowed
as a deduction for your last taxable year.
WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding
the taxation of any additional withdrawal received after the Payout Start Date.
It is possible that a greater or lesser portion of such a payment could be
taxable than the amount we determine.
DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for
federal income tax purposes, the Contract must provide:
.. if any Contract Owner dies on or after the Payout Start Date but before the
entire interest in the Contract has been distributed, the remaining portion
of such interest must be distributed at least as rapidly as under the
method of distribution being used as of the date of the Contract Owner's
death;
.. if any Contract Owner dies prior to the Payout Start Date, the entire
interest in the Contract will be distributed within 5 years after the date
of the Contract Owner's death. These requirements are satisfied if any
portion of the Contract Owner's interest that is payable to (or for the
benefit of) a designated Beneficiary is distributed over the life of such
Beneficiary (or over a period not extending beyond the life expectancy of
the Beneficiary) and the distributions begin within 1 year of the Contract
Owner's death. If the Contract Owner's designated Beneficiary is the
surviving spouse of the Contract Owner, the Contract may be continued with
the surviving spouse as the new Contract Owner.
.. if the Contract Owner is a non-natural person, then the Annuitant will be
treated as the Contract Owner for purposes of applying the distribution at
death rules. In addition, a change in the Annuitant on a Contract owned by
a non-natural person will be treated as the death of the Contract Owner.
TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income
as follows:
.. if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal, or
.. if distributed under an Income Plan, the amounts are taxed in the same
manner as annuity payments.
PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable
amount of any
35 PROSPECTUS
premature distribution from a non-Qualified Contract. The penalty tax generally
applies to any distribution made prior to the date you attain age 59 1/2.
However, no penalty tax is incurred on distributions:
.. made on or after the date the Contract Owner attains age 59 1/2,
.. made as a result of the Contract Owner's death or becoming totally
disabled,
.. made in substantially equal periodic payments over the Contract Owner's
life or life expectancy, or over the joint lives or joint life expectancies
of the Contract Owner and the Beneficiary,
.. made under an immediate annuity, or
.. attributable to investment in the Contract before August 14, 1982.
You should consult a competent tax advisor to determine how these exceptions may
apply to your situation.
SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts
using substantially equal periodic payments or immediate annuity payments as an
exception to the penalty tax on premature distributions, any additional
withdrawal or other material modification of the payment stream would violate
the requirement that payments must be substantially equal. Failure to meet this
requirement would mean that the income portion of each payment received prior to
the later of 5 years or the Contract Owner's attaining age 59 1/2 would be
subject to a 10% penalty tax unless another exception to the penalty tax
applied. The tax for the year of the modification is increased by the penalty
tax that would have been imposed without the exception, plus interest for the
years in which the exception was used. A material modification does not include
permitted changes described in published IRS rulings. You should consult a
competent tax advisor prior to creating or modifying a substantially equal
periodic payment stream.
TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is
a tax-free exchange of a non-qualified life insurance contract, endowment
contract or annuity contract into a non-Qualified annuity contract. The contract
owner(s) must be the same on the old and new contract. Basis from the old
contract carries over to the new contract so long as we receive that information
from the relinquishing company. If basis information is never received, we will
assume that all exchanged funds represent earnings and will allocate no cost
basis to them.
PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of
annuity contracts. Under this ruling, if you take a withdrawal from a receiving
or relinquishing annuity contract within 24 months of the partial exchange, then
special aggregation rules apply for purposes of determining the taxable amount
of a distribution. The IRS has issued limited guidance on how to aggregate and
report these distributions. The IRS is expected to provide further guidance, as
a result, it is possible that the amount we calculate and report to the IRS as
taxable could be different.
TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without
full and adequate consideration to a person other than your spouse (or to a
former spouse incident to a divorce), you will be taxed on the difference
between the Contract Value and the investment in the Contract at the time of
transfer. Any assignment or pledge (or agreement to assign or pledge) of the
Contract Value is taxed as a withdrawal of such amount or portion and may also
incur the 10% penalty tax.
AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified
deferred annuity contracts issued by Lincoln Benefit (or its affiliates) to the
same Contract Owner during any calendar year be aggregated and treated as one
annuity contract for purposes of determining the taxable amount of a
distribution.
INCOME TAX WITHHOLDING
Generally, Lincoln Benefit is required to withhold federal income tax at a rate
of 10% from all non-annuitized distributions. The customer may elect out of
withholding by completing and signing a withholding election form. If no
election is made, we will automatically withhold the required 10% of the taxable
amount. In certain states, if there is federal withholding, then state
withholding is also mandatory.
Lincoln Benefit is required to withhold federal income tax using the wage
withholding rates for all annuitized distributions. The customer may elect out
of withholding by completing and signing a withholding election form. If no
election is made, we will automatically withhold using married with three
exemptions as the default. If no U.S. taxpayer identification number is
provided, we will automatically withhold using single with zero exemptions as
the default. In certain states, if there is federal withholding, then state
withholding is also mandatory.
Election out of withholding is valid only if the customer provides a U.S.
residence address and taxpayer identification number.
Generally, Section 1441 of the Code provides that Lincoln Benefit as a
withholding agent must withhold 30% of the taxable amounts paid to a
non-resident alien. A non-resident alien is someone other than a U.S. citizen or
resident alien. Withholding may be reduced or eliminated if covered by an income
tax treaty between the U.S. and the non-resident alien's country of residence if
the payee provides a U.S. taxpayer identification number on a completed Form
W-8BEN. A U.S. taxpayer identification number is a social security number or an
individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS
to non-resident alien individuals who are not eligible to obtain a social
security number. The U.S. does not have a tax treaty with all
36 PROSPECTUS
countries nor do all tax treaties provide an exclusion or lower withholding rate
for annuities.
TAX QUALIFIED CONTRACTS
The income on tax sheltered annuity (TSA) and IRA investments is tax deferred,
and the income on variable annuities held by such plans does not receive any
additional tax deferral. You should review the annuity features, including all
benefits and expenses, prior to purchasing a variable annuity as a TSA or IRA.
Tax Qualified Contracts are contracts purchased as investments as:
.. Individual Retirement Annuities (IRAs) under Section 408(b) of the Code;
.. Roth IRAs under Section 408A of the Code;
.. Simplified Employee Pension (SEP IRA) under Section 408(k) of the Code;
.. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Section
408(p) of the Code; and
.. Tax Sheltered Annuities under Section 403(b) of the Code.
Lincoln Benefit reserves the right to limit the availability of the Contract for
use with any of the retirement plans listed above or to modify the Contract to
conform with tax requirements.
The tax rules applicable to participants with tax qualified annuities vary
according to the type of contract and the terms and conditions of the
endorsement. Adverse tax consequences may result from certain transactions such
as excess contributions, premature distributions, and, distributions that do not
conform to specified commencement and minimum distribution rules. Lincoln
Benefit can issue an individual retirement annuity on a rollover or transfer of
proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under
which the decedent's surviving spouse is the beneficiary. Lincoln Benefit does
not offer an individual retirement annuity that can accept a transfer of funds
for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer
sponsored retirement plan.
In the case of certain qualified plans, the terms of the plans may govern the
right to benefits, regardless of the terms of the Contract.
TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If
you make a partial withdrawal under a Tax Qualified Contract other than a Roth
IRA, the portion of the payment that bears the same ratio to the total payment
that the investment in the Contract (i.e., nondeductible IRA contributions)
bears to the Contract Value, is excluded from your income. We do not keep track
of nondeductible contributions, and all tax reporting of distributions from Tax
Qualified Contracts other than Roth IRAs will indicate that the distribution is
fully taxable.
"Qualified distributions" from Roth IRAs are not included in gross income.
"Qualified distributions" are any distributions made more than five taxable
years after the taxable year of the first contribution to any Roth IRA and which
are:
.. made on or after the date the Contract Owner attains age 59 1/2,
.. made to a beneficiary after the Contract Owner's death,
.. attributable to the Contract Owner being disabled, or
.. made for a first time home purchase (first time home purchases are subject
to a lifetime limit of $10,000).
"Nonqualified distributions" from Roth IRAs are treated as made from
contributions first and are included in gross income only to the extent that
distributions exceed contributions. All tax reporting of distributions from Roth
IRAs will indicate that the taxable amount is not determined.
REQUIRED MINIMUM DISTRIBUTIONS. Generally, IRAs (excluding Roth IRAs) and TSAs
require minimum distributions upon reaching age 70 1/2. Failure to withdraw the
required minimum distribution will result in a 50% tax penalty on the shortfall
not withdrawn from the Contract. Not all income plans offered under the Contract
satisfy the requirements for minimum distributions. Because these distributions
are required under the Code and the method of calculation is complex, please see
a competent tax advisor.
THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS
regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA)
may not invest in life insurance contracts. However, an IRA may provide a death
benefit that equals the greater of the purchase payments or the Contract Value.
The Contract offers a death benefit that in certain circumstances may exceed the
greater of the purchase payments or the Contract Value. We believe that the
Death Benefits offered by your Contract do not constitute life insurance under
these regulations.
It is also possible that certain death benefits that offer enhanced earnings
could be characterized as an incidental death benefit. If the death benefit were
so characterized, this could result in current taxable income to a Contract
Owner. In addition, there are limitations on the amount of incidental death
benefits that may be provided under qualified plans, such as in connection with
a 403(b) plan.
Lincoln Benefit reserves the right to limit the availability of the Contract for
use with any of the qualified plans listed above.
PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM TAX QUALIFIED CONTRACTS. A 10%
penalty tax applies to the taxable amount of any premature distribution from a
Tax Qualified Contract. The penalty tax generally applies to any distribution
made prior to the date you attain age
37 PROSPECTUS
59 1/2. However, no penalty tax is incurred on distributions:
.. made on or after the date the Contract Owner attains age 59 1/2,
.. made as a result of the Contract Owner's death or total disability,
.. made in substantially equal periodic payments over the Contract Owner's
life or life expectancy, or over the joint lives or joint life expectancies
of the Contract Owner and the Beneficiary,
.. made after separation from service after age 55 (applies only for IRAs),
.. made pursuant to an IRS levy,
.. made for certain medical expenses,
.. made to pay for health insurance premiums while unemployed (applies only
for IRAs),
.. made for qualified higher education expenses (applies only for IRAs), and
.. made for a first time home purchase (up to a $10,000 lifetime limit and
applies only for IRAs).
During the first 2 years of the individual's participation in a SIMPLE IRA,
distributions that are otherwise subject to the premature distribution penalty,
will be subject to a 25% penalty tax.
You should consult a competent tax advisor to determine how these exceptions may
apply to your situation.
SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect
to Tax Qualified Contracts using substantially equal periodic payments as an
exception to the penalty tax on premature distributions, any additional
withdrawal or other material modification of the payment stream would violate
the requirement that payments must be substantially equal. Failure to meet this
requirement would mean that the income portion of each payment received prior to
the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to
a 10% penalty tax unless another exception to the penalty tax applied. The tax
for the year of the modification is increased by the penalty tax that would have
been imposed without the exception, plus interest for the years in which the
exception was used. A material modification does not include permitted changes
described in published IRS rulings. You should consult a competent tax advisor
prior to creating or modifying a substantially equal periodic payment stream.
INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Lincoln Benefit is
required to withhold federal income tax at a rate of 10% from all non-annuitized
distributions that are not considered "eligible rollover distributions." The
customer may elect out of withholding by completing and signing a withholding
election form. If no election is made, we will automatically withhold the
required 10% from the taxable amount. In certain states, if there is federal
withholding, then state withholding is also mandatory. Lincoln Benefit is
required to withhold federal income tax at a rate of 20% on all "eligible
rollover distributions" unless you elect to make a "direct rollover" of such
amounts to an IRA or eligible retirement plan. Eligible rollover distributions
generally include all distributions from employer sponsored retirement plans,
including TSAs but excluding IRAs, with the exception of:
.. required minimum distributions, or,
.. a series of substantially equal periodic payments made over a period of at
least 10 years, or,
.. a series of substantially equal periodic payments made over the life (joint
lives) of the participant (and beneficiary), or,
.. hardship distributions.
For all annuitized distributions that are not subject to the 20% withholding
requirement, Lincoln Benefit is required to withhold federal income tax using
the wage withholding rates. The customer may elect out of withholding by
completing and signing a withholding election form. If no election is made, we
will automatically withhold using married with three exemptions as the default.
If no U.S. taxpayer identification number is provided, we will automatically
withhold using single with zero exemptions as the default. In certain states, if
there is federal withholding, then state withholding is also mandatory.
Election out of withholding is valid only if the customer provides a U.S.
residence address and taxpayer identification number.
Generally, Section 1441 of the Code provides that Lincoln Benefit as a
withholding agent must withhold 30% of the taxable amounts paid to a
non-resident alien. A non-resident alien is someone other than a U.S. citizen or
resident alien. Withholding may be reduced or eliminated if covered by an income
tax treaty between the U.S. and the non-resident alien's country of residence if
the payee provides a U.S. taxpayer identification number on a completed Form
W-8BEN. A U.S. taxpayer identification number is a social security number or an
individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS
to non-resident alien individuals who are not eligible to obtain a social
security number. The U.S. does not have a tax treaty with all countries nor do
all tax treaties provide an exclusion or lower withholding rate for annuities.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity (IRA). Individual Retirement Annuities are subject
to limitations on the amount that can be contributed and on the time when
distributions may commence. Certain distributions from other types of qualified
plans may be "rolled over" on a tax-deferred basis into an Individual Retirement
Annuity.
38 PROSPECTUS
ROTH INDIVIDUAL RETIREMENT ANNUITIES. Section 408A of the Code permits eligible
individuals to make nondeductible contributions to an individual retirement
program known as a Roth Individual Retirement Annuity. Roth Individual
Retirement Annuities are subject to limitations on the amount that can be
contributed and on the time when distributions may commence.
Subject to certain limitations, a traditional Individual Retirement Account or
Annuity may be converted or "rolled over" to a Roth Individual Retirement
Annuity. The income portion of a conversion or rollover distribution is taxable
currently, but is exempted from the 10% penalty tax on premature distributions.
ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL
IRAS)
Internal Revenue Code Section 408 permits a custodian or trustee of an
Individual Retirement Account to purchase an annuity as an investment of the
Individual Retirement Account. If an annuity is purchased inside of an
Individual Retirement Account, then the Annuitant must be the same person as the
beneficial owner of the Individual Retirement Account.
Generally, the death benefit of an annuity held in an Individual Retirement
Account must be paid upon the death of the Annuitant. However, in most states,
the Contract permits the custodian or trustee of the Individual Retirement
Account to continue the Contract in the accumulation phase, with the Annuitant's
surviving spouse as the new Annuitant, if the following conditions are met:
1) The custodian or trustee of the Individual Retirement Account is the owner
of the annuity and has the right to the death proceeds otherwise payable
under the annuity contract;
2) The deceased Annuitant was the beneficial owner of the Individual
Retirement Account;
3) We receive a complete request for settlement for the death of the
Annuitant; and
4) The custodian or trustee of the Individual Retirement Account provides us
with a signed certification of the following:
(a) The Annuitant's surviving spouse is the sole beneficiary of the Individual
Retirement Account;
(b) The Annuitant's surviving spouse has elected to continue the Individual
Retirement Account as his or her own Individual Retirement Account; and
(c) The custodian or trustee of the Individual Retirement Account has continued
the Individual Retirement Account pursuant to the surviving spouse's
election.
SIMPLIFIED EMPLOYEE PENSION IRA. Section 408(k) of the Code allows eligible
employers to establish simplified employee pension plans for their employees
using individual retirement annuities. These employers may, within specified
limits, make deductible contributions on behalf of the employees to the
individual retirement annuities. Employers intending to use the Contract in
connection with such plans should seek competent tax advice.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Section 408(p) of the
Code allow eligible employers with 100 or fewer employees to establish SIMPLE
retirement plans for their employees using individual retirement annuities. In
general, a SIMPLE IRA consists of a salary deferral program for eligible
employees and matching or nonelective contributions made by employers. Employers
intending to purchase the Contract as a SIMPLE IRA should seek competent tax and
legal advice.
TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS
(TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND
YOUR COMPETENT TAX ADVISOR.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code provides tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. Under Section 403(b), any contract used for a 403(b) plan must
provide that distributions attributable to salary reduction contributions made
after 12/31/88, and all earnings on salary reduction contributions, may be made
only on or after the date the employee:
.. attains age 59 1/2,
.. severs employment,
.. dies,
.. becomes disabled, or
.. incurs a hardship (earnings on salary reduction contributions may not be
distributed on account of hardship).
These limitations do not apply to withdrawals where Lincoln Benefit is directed
to transfer some or all of the Contract Value to another 403(b) plan. Generally,
we do not accept Employee Retirement Income Security Act of 1974 (ERISA) funds
in 403(b) contracts.
39 PROSPECTUS
ANNUAL REPORTS AND OTHER DOCUMENTS
Lincoln Benefit's annual report on Form 10-K for the year ended December 31,
2003, is incorporated herein by reference, which means that it is legally a part
of this prospectus.
After the date of this prospectus and before we terminate the offering of the
securities under this prospectus, all documents or reports we file with the SEC
under the Exchange Act of 1934 are also incorporated herein by reference, which
means that they also legally become a part of this prospectus.
Statements in this prospectus, or in documents that we file later with the SEC
and that legally become a part of this prospectus, may change or supersede
statements in other documents that are legally part of this prospectus.
We file our Exchange Act documents and reports, including our annual and
quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR"
system using the identifying number CIK No. 0000910739. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. the
address of the site is http:// www.sec.gov. You also can view these materials at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. For more information on the operations of SEC's Public Reference Room,
call 1-800-SEC-0330.
If you have received a copy of this prospectus, and would like a free copy of
any document incorporated herein by reference (other than exhibits not
specifically incorporated by reference into the text of such documents), please
write or call us at Lincoln Benefit Life Company, P.O. Box 80469, Lincoln,
Nebraska, 68501-0469 or 800-865-5237.
40 PROSPECTUS
APPENDIX A
ACCUMULATION UNIT VALUES
The Accumulation Unit Value is a unit of measure used to calculate the value of
a Contract Owner's interest in a Variable Subaccount for any Valuation Period.
An Accumulation Unit Value does not reflect deduction of certain charges under
the Contract that are deducted from your Contract Value, such as the
Administrative Expense Charge. The beginning value for 2001 reflects the
Accumulation Unit Value as of August 10, 2001, the effective date of the
Registration Statement for this Contract. We maintain different Accumulation
Unit Values for Base Contracts with different combinations of optional riders
because the charges deducted from the Subaccounts are different. This Appendix
includes Accumulation Unit Values reflecting the highest and lowest available
Contract charge combinations. The Statement of Additional Information, which is
available upon request without charge, contains the Accumulation Unit Values for
all the other available combinations of optional riders. A brief explanation of
how performance of the Subaccounts is calculated may also be found in the
Statement of Additional Information. Please contact us at 1-800-865-5237 to
obtain a copy of the Statement of Additional Information.
BASE POLICY WITH NO OPTIONAL RIDERS
Year ending December 31,
-----------------------------
2001 2002 2003
FUND
--------------------------------------------------------------------------
AIM Basic Value Fund (2)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
AIM Dent Demographics Trends Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.77 $ 6.537
Accumulation Unit Value Ending $ 9.77 $ 6.537 $ 8.865
Number of Units Outstanding at End of 6,717 37,747 49,569
Year
--------------------------------------------------------------------------
Alger American Growth
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 12.361
Number of Units Outstanding at End of -- -- 16,344
Year
--------------------------------------------------------------------------
Fidelity Equity-Income
Accumulation Unit Value Beginning $ 10.00 $ 9.63 $ 7.873
Accumulation Unit Value Ending $ 9.63 $ 7.873 $ 10.099
Number of Units Outstanding at End of 7,233 176,376 291,454
Year
--------------------------------------------------------------------------
Fidelity VIP Growth P
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 12.461
Number of Units Outstanding at End of -- -- 42,866
Year
--------------------------------------------------------------------------
Fidelity Investment Grade Bond
Accumulation Unit Value Beginning $ 10.00 $ 10.15 $ 11.021
Accumulation Unit Value Ending $ 10.15 $ 11.021 $ 11.409
Number of Units Outstanding at End of 10,192 204,156 340,857
Year
--------------------------------------------------------------------------
Fidelity Overseas
Accumulation Unit Value Beginning $ 10.00 $ 9.35 $ 7.339
Accumulation Unit Value Ending $ 9.35 $ 7.339 $ 10.356
Number of Units Outstanding at End of 110 2,203 46,826
Year
--------------------------------------------------------------------------
Janus Aspen Series Capital Appreciation P
(3)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
Janus Aspen Series Foreign Stock (4)
Accumulation Unit Value Beginning $ 10.00 $ 10.69 $ 9.136
Accumulation Unit Value Ending $ 10.69 $ 9.136 $ 12.021
Number of Units Outstanding at End of 391 14,107 26,635
Year
--------------------------------------------------------------------------
Janus Aspen Series Worldwide Growth
Accumulation Unit Value Beginning $ 10.00 $ 9.63 $ 7.060
Accumulation Unit Value Ending $ 9.63 $ 7.060 $ 8.614
Number of Units Outstanding at End of 3,165 97,061 77,756
Year
--------------------------------------------------------------------------
Lazard Retirement Emerging Markets
Accumulation Unit Value Beginning $ 10.00 $ 9.92 $ 9.639
Accumulation Unit Value Ending $ 9.92 $ 9.639 $ 14.544
Number of Units Outstanding at End of 0 4,579 9,947
Year
--------------------------------------------------------------------------
LSA Aggressive Growth Fund (7)
AAccumulation Unit Value Beginning $ 10.00 $ 9.41 $ 6.348
Accumulation Unit Value Ending $ 9.41 $ 6.348 $ 8.686
Number of Units Outstanding at End of 649 22,935 45,902
Year
--------------------------------------------------------------------------
41 PROSPECTUS
LSA Balanced Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.64 $ 7.768
Accumulation Unit Value Ending $ 9.64 $ 7.768 $ 9.902
Number of Units Outstanding at End of 18,088 152,064 238,048
Year
--------------------------------------------------------------------------
LSA Basic Value Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.60 $ 7.416
Accumulation Unit Value Ending $ 9.60 $ 7.416 $ 9.761
Number of Units Outstanding at End of 13,440 193,154 241,742
Year
--------------------------------------------------------------------------
LSA Blue Chip Fund (5)
Accumulation Unit Value Beginning $ 10.00 $ 9.76 $ 7.103
Accumulation Unit Value Ending $ 9.76 $ 7.103 $ 8.776
Number of Units Outstanding at End of 3,387 91,543 224,286
Year
--------------------------------------------------------------------------
LSA Capital Appreciation Fund (3)
Accumulation Unit Value Beginning $ 10.00 $ 10.03 $ 7.059
Accumulation Unit Value Ending $ 10.03 $ 7.059 $ 9.077
Number of Units Outstanding at End of 2,459 53,255 107,302
Year
--------------------------------------------------------------------------
LSA Disciplined Equity Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.59 --
Accumulation Unit Value Ending $ 9.59 $ 7.073 --
Number of Units Outstanding at End of 1,065 64,810 --
Year
--------------------------------------------------------------------------
LSA Diversified Mid Cap Fund (6)
Accumulation Unit Value Beginning $ 10.00 $ 10.00 $ 7.962
Accumulation Unit Value Ending $ 10.00 $ 7.962 $ 10.432
Number of Units Outstanding at End of 9,409 97,423 130,830
Year
--------------------------------------------------------------------------
LSA Emerging Growth Equity Fund (7)
Accumulation Unit Value Beginning $ 10.00 $ 10.06 $ 5.768
Accumulation Unit Value Ending $ 10.06 $ 5.768 $ 8.361
Number of Units Outstanding at End of 352 17,828 26,548
Year
--------------------------------------------------------------------------
LSA Equity Growth Fund (2) (3)
Accumulation Unit Value Beginning $ 10.00 $ 9.97 $ 6.901
Accumulation Unit Value Ending $ 9.97 $ 6.901 $ 8.405
Number of Units Outstanding at End of 1,703 27,593 109,311
Year
--------------------------------------------------------------------------
LSA Capital Growth Fund (3)
Accumulation Unit Value Beginning $ 10.00 $ 9.68 $ 7.225
Accumulation Unit Value Ending $ 9.68 $ 7.225 $ 8.806
Number of Units Outstanding at End of 856 31,959 53,695
Year
--------------------------------------------------------------------------
LSA Mid Cap Value Fund (6)
Accumulation Unit Value Beginning $ 10.00 $ 10.66 $ 9.731
Accumulation Unit Value Ending $ 10.66 $ 9.731 $ 13.418
Number of Units Outstanding at End of 7,420 82,491 122,723
Year
--------------------------------------------------------------------------
LSA Value Equity Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.62 $ 7.389
Accumulation Unit Value Ending $ 9.62 $ 7.389 $ 9.508
Number of Units Outstanding at End of 2,032 38,421 98,093
Year
--------------------------------------------------------------------------
MFS New Discovery Series
Accumulation Unit Value Beginning $ 10.00 $ 10.35 $ 6.963
Accumulation Unit Value Ending $ 10.35 $ 6.963 $ 9.166
Number of Units Outstanding at End of 1,040 63,132 81,084
Year
--------------------------------------------------------------------------
MFS Utilities Series
Accumulation Unit Value Beginning $ 10.00 $ 8.96 $ 6.813
Accumulation Unit Value Ending $ 8.96 $ 6.813 $ 9.112
Number of Units Outstanding at End of 12,557 38,681 50,267
Year
--------------------------------------------------------------------------
PAVIT OpCap Balanced (2)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
PAVIT PEA Science and Technology
Accumulation Unit Value Beginning $ 10.00 $ 9.59 $ 4.768
Accumulation Unit Value Ending $ 9.59 $ 4.768 $ 7.683
Number of Units Outstanding at End of 906 18,884 56,004
Year
--------------------------------------------------------------------------
PAVIT OpCap SmallCap
Accumulation Unit Value Beginning $ 10.00 $ 10.09 $ 7.802
Accumulation Unit Value Ending $ 10.09 $ 7.802 $ 10.980
Number of Units Outstanding at End of 536 34,675 59,114
Year
--------------------------------------------------------------------------
Oppenheimer International Growth
Accumulation Unit Value Beginning $ 10.00 $ 9.11 $ 6.781
Accumulation Unit Value Ending $ 9.11 $ 6.781 $ 9.735
Number of Units Outstanding at End of 1,054 23,843 23,597
Year
--------------------------------------------------------------------------
42 PROSPECTUS
Oppenheimer Main Street Small Cap Fund/VA
Accumulation Unit Value Beginning $ 10.00 $ 10.30 $ 8.545
Accumulation Unit Value Ending $ 10.30 $ 8.545 $ 12.160
Number of Units Outstanding at End of 2,185 52,157 87,171
Year
--------------------------------------------------------------------------
PIMCO Foreign Bond (U.S. Dollar-Hedged)
Accumulation Unit Value Beginning $ 10.00 $ 10.12 $ 10.806
Accumulation Unit Value Ending $ 10.12 $ 10.806 $ 10.901
Number of Units Outstanding at End of 575 49,021 71,226
Year
--------------------------------------------------------------------------
PIMCO Money Market
Accumulation Unit Value Beginning $ 10.00 $ 10.04 $ 10.048
Accumulation Unit Value Ending $ 10.04 $ 10.048 $ 9.983
Number of Units Outstanding at End of 23,597 289,545 388,312
Year
--------------------------------------------------------------------------
PIMCO Real Return (1)
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 10.482
Number of Units Outstanding at End of -- -- 22,724
Year
--------------------------------------------------------------------------
PIMCO Total Return
Accumulation Unit Value Beginning $ 10.00 $ 10.15 $ 10.919
Accumulation Unit Value Ending $ 10.15 $ 10.919 $ 11.314
Number of Units Outstanding at End of 22,113 370,770 504,244
Year
--------------------------------------------------------------------------
Putnam High Yield Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.89 $ 9.683
Accumulation Unit Value Ending $ 9.89 $ 9.683 $ 12.088
Number of Units Outstanding at End of 4,328 49,831 121,267
Year
--------------------------------------------------------------------------
Putnam International Growth and Income
Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.44 $ 8.034
Accumulation Unit Value Ending $ 9.44 $ 8.034 $ 10.925
Number of Units Outstanding at End of 935 19,992 36,251
Year
--------------------------------------------------------------------------
Rydex VT OTC Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.80 $ 5.913
Accumulation Unit Value Ending $ 9.80 $ 5.913 $ 8.483
Number of Units Outstanding at End of 577 23,308 31,257
Year
--------------------------------------------------------------------------
Rydex VT Sector Rotation Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 12.471
Number of Units Outstanding at End of -- -- 1,384
Year
--------------------------------------------------------------------------
Salomon Brothers Variable All Cap Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.68 $ 7.159
Accumulation Unit Value Ending $ 9.68 $ 7.159 $ 9.819
Number of Units Outstanding at End of 1,864 101,018 82,721
Year
--------------------------------------------------------------------------
Salomon Brothers Variable Investors Fund
(2)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
Scudder VIT EAFE Equity Index Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 13.170
Number of Units Outstanding at End of -- -- 1,561
Year
--------------------------------------------------------------------------
Scudder VIT Equity 500 Index Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 12.119
Number of Units Outstanding at End of -- -- 27,529
Year
--------------------------------------------------------------------------
Scudder VIT Small Cap Index Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 13.867
Number of Units Outstanding at End of -- -- 10,762
Year
--------------------------------------------------------------------------
Van Kampen UIF Equity Growth (5) (9)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
Van Kampen UIF High Yield (9)
Accumulation Unit Value Beginning $ 10.00 $ 9.49 $ 8.683
Accumulation Unit Value Ending $ 9.49 $ 8.683 $ 10.768
Number of Units Outstanding at End of 7,458 45,587 70,594
Year
--------------------------------------------------------------------------
43 PROSPECTUS
Van Kampen UIF U.S. Mid Cap Value (6) (9)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
Van Kampen LIT Aggressive Growth
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of -- -- --
Year
--------------------------------------------------------------------------
Van Kampen LIT Growth & Income (7)
Accumulation Unit Value Beginning $ 10.00 $ 9.64 $ 8.108
Accumulation Unit Value Ending $ 9.64 $ 8.108 $ 10.212
Number of Units Outstanding at End of 8,115 139,022 223,485
Year
--------------------------------------------------------------------------
Van Kampen UIF U.S. Real Estate (1) (9)
Accumulation Unit Value Beginning -- -- $ 10.000
Accumulation Unit Value Ending -- -- $ 12.780
Number of Units Outstanding at End of -- -- 9,773
Year
--------------------------------------------------------------------------
(1) First offered May 1, 2003.
(2) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value
Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I.
Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund -
Class I, respectively. Accordingly, on 4/30/04, we transferred the value of
the LSA Balanced Variable Sub-Account and the LSA Value Equity Variable
Sub-Account to the PAVIT OpCap Balanced Variable Sub-Account, AIM V.I.
Basic Value Variable Sub-Account and the Salomon Brothers Variable
Investors Variable Sub-Account, respectively.
44 PROSPECTUS
(3) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the
Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares.
Accordingly, on 4/30/04, we transferred the value of the LSA Capital
Appreciation Variable Sub-Account to the Janus Aspen Series Capital
Appreciation Variable Sub-Account.
(4) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service
Shares changed its name to the Janus Aspen Foreign Stock Portfolio -
Service Shares. We have made a corresponding change in the name of the
Variable Sub-Account that invests in this Portfolio.
(5) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA
Capital Growth Fund were merged into the Van Kampen UIF Equity Growth
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Blue Chip Variable Sub-Account, LSA Equity Growth Variable
Sub-Account and LSA Capital Growth Variable Sub-Account to the Van Kampen
UIF Equity Growth Variable Sub-Account.
(6) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap
Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Diversified Mid-Cap Growth Variable Sub-Account and the LSA MidCap
Value Variable Sub-Account to the Van Kampen UIF U.S. Mid Cap Value
Variable Sub-Account.
(7) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth
Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class
II. Accordingly, on 4/30/04, we transferred the value of the LSA Aggressive
Growth Variable Sub-Account and the LSA Emerging Growth Variable
Sub-Account to the Van Kampen LIT Aggressive Growth Variable Sub-Account.
(8) Effective 5/1/04, the PIMCO VIT Foreign Bond Portfolio - Administrative
Shares changed its name to PIMCO VIT Foreign Bond Portfolio (U.S.
Dollar-Hedged) - Administrative Shares
(9) Morgan Stanley Investment Management, Inc., the adviser to the UIF
Portfolios, does business in certain instances usingthe name Van Kampen.
BASE POLICY WITH ENHANCED DEATH BENEFIT RIDER, INCOME BENEFIT RIDER AND ENHANCED
EARNINGS DEATH BENEFIT RIDER (66-75)
Year ending December 31,
-----------------------------
2001 2002 2003
FUND
--------------------------------------------------------------------------
AIM Basic Value Fund (2)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
AIM Dent Demographics Trends Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.74 $ 6.464
Accumulation Unit Value Ending $ 9.74 $ 6.464 $ 8.695
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
Alger American Growth (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 12.294
Number of Units Outstanding at End of Year -- -- 2,501
--------------------------------------------------------------------------
Fidelity VIP Equity-Income
Accumulation Unit Value Beginning $ 10.00 $ 9.60 $ 7.786
Accumulation Unit Value Ending $ 9.60 $ 7.786 $ 9.906
Number of Units Outstanding at End of Year 0 4,628 5,624
--------------------------------------------------------------------------
Fidelity VIP Growth (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 12.394
Number of Units Outstanding at End of Year -- -- 1,046
--------------------------------------------------------------------------
Fidelity VIP Investment Grade Bond
Accumulation Unit Value Beginning $ 10.00 $ 10.12 $ 10.898
Accumulation Unit Value Ending $ 10.12 $ 10.898 $ 11.191
Number of Units Outstanding at End of Year 0 2,777 3,709
--------------------------------------------------------------------------
Fidelity VIP Overseas
Accumulation Unit Value Beginning $ 10.00 $ 9.32 $ 7.257
Accumulation Unit Value Ending $ 9.32 $ 7.257 $ 10.158
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
Janus Aspen Series Capital Appreciation (3)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
Janus Aspen Series Foreign Stock (4)
Accumulation Unit Value Beginning $ 10.00 $ 10.66 $ 9.034
Accumulation Unit Value Ending $ 10.66 $ 9.034 $ 11.791
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
Janus Aspen Series Worldwide Growth
Accumulation Unit Value Beginning $ 10.00 $ 9.60 $ 6.982
Accumulation Unit Value Ending $ 9.60 $ 6.982 $ 8.449
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
45 PROSPECTUS
Lazard Emerging Markets
Accumulation Unit Value Beginning $ 10.00 $ 9.89 $ 9.532
Accumulation Unit Value Ending $ 9.89 $ 9.532 $ 14.265
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Aggressive Growth Fund (7)
Accumulation Unit Value Beginning $ 10.00 $ 9.38 $ 6.277
Accumulation Unit Value Ending $ 9.38 $ 6.277 $ 8.519
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Balanced Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.61 $ 7.681
Accumulation Unit Value Ending $ 9.61 $ 7.681 $ 9.712
Number of Units Outstanding at End of Year 0 790 1,466
--------------------------------------------------------------------------
LSA Basic Value Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.57 $ 7.333
Accumulation Unit Value Ending $ 9.57 $ 7.333 $ 9.574
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Blue Chip Fund (5)
Accumulation Unit Value Beginning $ 10.00 $ 9.73 $ 7.024
Accumulation Unit Value Ending $ 9.73 $ 7.024 $ 8.608
Number of Units Outstanding at End of Year 0 0 756
--------------------------------------------------------------------------
LSA Capital Appreciation Fund (3)
Accumulation Unit Value Beginning $ 10.00 $ 10.00 $ 6.980
Accumulation Unit Value Ending $ 10.00 $ 6.980 $ 8.903
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Disciplined Equity Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.56 --
Accumulation Unit Value Ending $ 9.56 $ 6.961 --
Number of Units Outstanding at End of Year 0 0 --
--------------------------------------------------------------------------
LSA Diversified Mid Cap Fund (6)
Accumulation Unit Value Beginning $ 10.00 $ 9.96 $ 7.866
Accumulation Unit Value Ending $ 9.96 $ 7.866 $ 10.232
Number of Units Outstanding at End of Year 0 0 630
--------------------------------------------------------------------------
LSA Emerging Growth Equity Fund (7)
Accumulation Unit Value Beginning $ 10.00 $ 10.03 $ 5.704
Accumulation Unit Value Ending $ 10.03 $ 5.704 $ 8.201
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Equity Growth Fund (2) (3)
Accumulation Unit Value Beginning $ 10.00 $ 9.94 $ 6.824
Accumulation Unit Value Ending $ 9.94 $ 6.824 $ 8.244
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Capital Growth Fund (3)
Accumulation Unit Value Beginning $ 10.00 $ 9.66 $ 7.142
Accumulation Unit Value Ending $ 9.66 $ 7.142 $ 8.637
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Mid Cap Value Fund (6)
Accumulation Unit Value Beginning $ 10.00 $ 10.63 $ 9.602
Accumulation Unit Value Ending $ 10.63 $ 9.602 $ 13.162
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
LSA Value Equity Fund (2)
Accumulation Unit Value Beginning $ 10.00 $ 9.59 $ 7.306
Accumulation Unit Value Ending $ 9.59 $ 7.306 $ 9.326
Number of Units Outstanding at End of Year 0 0 1,401
--------------------------------------------------------------------------
MFS New Discovery Series
Accumulation Unit Value Beginning $ 10.00 $ 10.32 $ 6.886
Accumulation Unit Value Ending $ 10.32 $ 6.886 $ 8.990
Number of Units Outstanding at End of Year 0 0 370
--------------------------------------------------------------------------
MFS Utilities Series
Accumulation Unit Value Beginning $ 10.00 $ 8.93 $ 6.737
Accumulation Unit Value Ending $ 8.93 $ 6.737 $ 8.937
Number of Units Outstanding at End of Year 0 0 399
--------------------------------------------------------------------------
PAVIT OpCap Balanced (2)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
PAVIT PEA Science and Technology
Accumulation Unit Value Beginning $ 10.00 $ 9.56 $ 4.715
Accumulation Unit Value Ending $ 9.56 $ 4.715 $ 7.536
Number of Units Outstanding at End of Year 0 0 4,942
--------------------------------------------------------------------------
PAVIT OpCap SmallCap
Accumulation Unit Value Beginning $ 10.00 $ 10.06 $ 7.715
Accumulation Unit Value Ending $ 10.06 $ 7.715 $ 10.770
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
Oppenheimer International Growth
Accumulation Unit Value Beginning $ 10.00 $ 9.08 $ 6.705
Accumulation Unit Value Ending $ 9.08 $ 6.705 $ 9.549
Number of Units Outstanding at End of Year 0 0 387
--------------------------------------------------------------------------
Oppenheimer Main Street Small Cap Fund/VA
Accumulation Unit Value Beginning $ 10.00 $ 10.27 $ 8.450
Accumulation Unit Value Ending $ 10.27 $ 8.450 $ 11.927
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
46 PROSPECTUS
PIMCO Foreign Bond (U.S. Dollar-Hedged) (8)
Accumulation Unit Value Beginning $ 10.00 $ 10.09 $ 10.686
Accumulation Unit Value Ending $ 10.09 $ 10.686 $ 10.692
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
PIMCO Money Market
Accumulation Unit Value Beginning $ 10.00 $ 10.01 $ 9.936
Accumulation Unit Value Ending $ 10.01 $ 9.936 $ 9.792
Number of Units Outstanding at End of Year 0 0 1,275
--------------------------------------------------------------------------
PIMCO Real Return (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 10.425
Number of Units Outstanding at End of Year -- -- 1,193
--------------------------------------------------------------------------
PIMCO Total Return
Accumulation Unit Value Beginning $ 10.00 $ 10.12 $ 10.797
Accumulation Unit Value Ending $ 10.12 $ 10.797 $ 11.098
Number of Units Outstanding at End of Year 0 2,792 7,241
--------------------------------------------------------------------------
Putnam High Yield Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.86 $ 9.576
Accumulation Unit Value Ending $ 9.86 $ 9.576 $ 11.857
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
Putnam International Growth and Income Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.42 $ 7.944
Accumulation Unit Value Ending $ 9.42 $ 7.944 $ 10.716
Number of Units Outstanding at End of Year 0 0 0
--------------------------------------------------------------------------
Rydex OTC Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.77 $ 5.847
Accumulation Unit Value Ending $ 9.77 $ 5.847 $ 8.321
Number of Units Outstanding at End of Year 0 0 1,833
--------------------------------------------------------------------------
Rydex Sector Rotation Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 12.403
Number of Units Outstanding at End of Year -- -- 0
--------------------------------------------------------------------------
Salomon Brothers Variable All Cap Fund
Accumulation Unit Value Beginning $ 10.00 $ 9.65 $ 7.079
Accumulation Unit Value Ending $ 9.65 $ 7.079 $ 9.631
Number of Units Outstanding at End of Year 0 0 678
--------------------------------------------------------------------------
Salomon Brothers Variable Investors Fund (2)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
Scudder VIT EAFE Equity Index Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 13.099
Number of Units Outstanding at End of Year -- -- 0
--------------------------------------------------------------------------
Scudder VIT Equity 500 Index Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 12.053
Number of Units Outstanding at End of Year -- -- 0
--------------------------------------------------------------------------
Scudder VIT Small Cap Index Fund (1)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 13.792
Number of Units Outstanding at End of Year -- -- 0
--------------------------------------------------------------------------
Van Kampen LIT Aggressive Growth (7)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
Van Kampen LIT Growth & Income
Accumulation Unit Value Beginning $ 10.00 $ 9.61 $ 8.017
Accumulation Unit Value Ending $ 9.61 $ 8.017 $ 10.016
Number of Units Outstanding at End of Year 0 0 357
--------------------------------------------------------------------------
Van Kampen UIF Equity Growth (5) (9)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
Van Kampen UIF High Yield (9)
Accumulation Unit Value Beginning $ 10.00 $ 9.46 $ 8.556
Accumulation Unit Value Ending $ 9.46 $ 8.556 $ 10.562
Number of Units Outstanding at End of Year 0 0 3,961
--------------------------------------------------------------------------
Van Kampen UIF U.S. Mid Cap Value (6) (9)
Accumulation Unit Value Beginning -- -- --
Accumulation Unit Value Ending -- -- --
Number of Units Outstanding at End of Year -- -- --
--------------------------------------------------------------------------
Van Kampen UIF U.S. Real Estate (1) (9)
Accumulation Unit Value Beginning -- -- $ 10.00
Accumulation Unit Value Ending -- -- $ 12.711
Number of Units Outstanding at End of Year -- -- 0
--------------------------------------------------------------------------
(1) First offered May 1, 2003.
(2) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value
Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I.
Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund -
Class I, respectively. Accordingly, on 4/30/04,
47 PROSPECTUS
we transferred the value of the LSA Balanced Variable Sub-Account and the
LSA Value Equity Variable Sub-Account to the PAVIT OpCap Balanced Variable
Sub-Account, AIM V.I. Basic Value Variable Sub-Account and the Salomon
Brothers Variable Investors Variable Sub-Account, respectively.
(3) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the
Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares.
Accordingly, on 4/30/04, we transferred the value of the LSA Capital
Appreciation Variable Sub-Account to the Janus Aspen Series Capital
Appreciation Variable Sub-Account.
(4) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service
Shares changed its name to the Janus Aspen Foreign Stock Portfolio -
Service Shares. We have made a corresponding change in the name of the
Variable Sub-Account that invests in this Portfolio.
(5) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA
Capital Growth Fund were merged into the Van Kampen UIF Equity Growth
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Blue Chip Variable Sub-Account, LSA Equity Growth Variable
Sub-Account and LSA Capital Growth Variable Sub-Account to the Van Kampen
UIF Equity Growth Variable Sub-Account.
(6) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap
Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Diversified Mid-Cap Growth Variable Sub-Account and the LSA MidCap
Value Variable Sub-Account to the Van Kampen UIF U.S. Mid Cap Value
Variable Sub-Account.
(7) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth
Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class
II. Accordingly, on 4/30/04, we transferred the value of the LSA Aggressive
Growth Variable Sub-Account and the LSA Emerging Growth Variable
Sub-Account to the Van Kampen LIT Aggressive Growth Variable Sub-Account.
(8) Effective 5/1/04, the PIMCO VIT Foreign Bond Portfolio - Administrative
Shares changed its name to PIMCO VIT Foreign Bond Portfolio (U.S.
Dollar-Hedged) - Administrative Shares
(9) Morgan Stanley Investment Management, Inc., the adviser to the UIF
Portfolios, does business in certain instances usingthe name Van Kampen.
48 PROSPECTUS
APPENDIX B
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is based on the following:
I = the Treasury Rate for a maturity equal to the Guarantee Period for the
week preceding the establishment of the Guarantee Period;
J = the Treasury Rate for a maturity equal to the term length of the
Guarantee Period Account for the week preceding the date amounts are
transferred or withdrawn from the Guarantee Period Account, the date we
determine the Death Proceeds, or the Payout Start Date, as the case may be
("Market Value Adjustment Date").
N = the number of whole and partial years from the date we receive the
withdrawal, transfer, or death benefit request, or from the Payout State
Date to the end of the Guarantee Period.
Treasury Rate means the U.S. Treasury Note Constant Maturity yield as reported
in Federal Reserve Bulletin Release H.15.
The Market Value Adjustment factor is determined from the following formula:
..9 X [I-(J +.0025)] X N
To determine the Market Value Adjustment, we will multiply the Market Value
Adjustment factor by the amount transferred, withdrawn, paid as a death benefit,
or applied to an Income Plan from a Guarantee Period at any time other than
during the 30-day period after such Guarantee Period expires.
EXAMPLES OF MARKET VALUE ADJUSTMENT
Purchase Payment: $10,000 allocated to a Guarantee Period
Guarantee Period: 5 years
Interest Rate: 4.50%
Full Withdrawal: End of Contract Year 3
I (5-Year Treasury Rate): 4.50%
NOTE: These examples assume that premium taxes are not applicable and that
previous withdrawals have not been taken.
EXAMPLE 1: (ASSUMES DECLINING INTEREST RATES)
Step 1: Calculate Contract
Value at End of Contract
Year 3: = $10,000.00 X (1.045)/3/ = 11,411.66
Step 2: Calculate the Free
Withdrawal Amount: = .15 X ($10,000.00) = $1,500.00
(GREATER THAN $1,411.66 EARNINGS IN
THE CONTRACT)
Step 3: Calculate the
Withdrawal Charge:
Under the Contract, earnings
are deemed to be withdrawn
before Purchase
Payments. Accordingly, in this
example, the amount of the
Purchase Payment eligible for
free withdrawal would equal
the Free Withdrawal Amount
less the interest credited or
88.34 ( 1,500.00 - 1,411.66)
Therefore, the Withdrawal
Charge would be = .07 X ($10,000 - $88.34) = $693.82
Step 4: Calculate the Market
Value Adjustment: I = 4.50%
J = 4.20% (5-Year Treasury Rate at
time of withdrawal)
730 DAYS
N = --------- = 2
365 DAYS
Market Value Adjustment Factor:
.9 X [I - (J + .0025)] X N
=.9 X [.045 - (.042 +.0025)] X 2 =.0009
Market Value Adjustment = Market Value
Adjustment Factor X Amount Subject To
Market Value Adjustment:
= .0009 X $11,411.66 = $10.27
Step 5: Calculate the amount
received by Contract Owner as
a result of full withdrawal at
the end of Contract Year 3: = $11,411.66 - $693.82 + $10.27 = $10,728.11
49 PROSPECTUS
EXAMPLE 2: (ASSUMES RISING INTEREST RATES)
Step 1: Calculate Contract
Value at End of Contract
Year 3: = $10,000.00 X (1.045)/3/ = $11,411.66
Step 2: Calculate The Free
Withdrawal Amount: = .15 X ($10,000.00) = $1,500.00
(GREATER THAN $1,411.66 IN EARNINGS)
Step 3: Calculate the
Withdrawal Charge:
As above, in this example, the
amount of the Purchase Payment
eligible for free withdrawal
would equal the Free
Withdrawal Amount less the
interest credited or 88.34
(1,500 - 1,411.66). Therefore,
the Withdrawal Charge would be = .07 X ($10,000.00 - $88.34) = $693.82
Step 4: Calculate the Market
Value Adjustment:
(5-Year Treasury Rate at time
of withdrawal) J = 4.80%
730 DAYS
N = ---------- = 2
365 DAYS
MARKET VALUE ADJUSTMENT FACTOR:
.9 X [I - (J +.0025)] X N
=.9 X [(.045 - (.048 +.0025)] X (2) = -.0099
MARKET VALUE ADJUSTMENT = MARKET VALUE
ADJUSTMENT FACTOR X AMOUNT SUBJECT TO MARKET
VALUE ADJUSTMENT:
= -.0099 X $11,411.66 = -( $112.98)
Step 5: Calculate the amount
received by Contract Owner as
a result of full withdrawal at
the end of Contract Year 3: = $11,411.66 - $693.82 - $112.98 = $10,604.86
50 PROSPECTUS
APPENDIX C
CALCULATION OF ENHANCED EARNINGS DEATH BENEFIT AMOUNT
EXAMPLE 1: In this example, assume that the oldest Contract Owner is age 55 at
the time the Contract is issued and elects the Enhanced Earnings Death Benefit
Rider when the Contract is issued. The Contract Owner makes an initial purchase
payment of $100,000. After four years, the Contract Owner dies. On the date
Lincoln Benefit receives Due Proof Of Death, the Contract Value is $125,000.
Prior to his death, the Contract Owner did not make any additional purchase
payments or take any withdrawals.
Excess of Earnings Withdrawals = 0
Purchase Payments in the 12 months after the = 0
Rider Date and prior to Death
In-Force Premium = $100,000 ($100,000 + 0 - 0)
In-Force Earnings = $25,000 ($125,000 - $100,000)
ENHANCED EARNINGS PROTECTION DEATH BENEFIT = 50% * $25,000 = $12,500
Since 50% of In-Force Earnings is less than 100% of the In-Force Premium
(excluding purchase payments in the 12 months prior to death), the In-Force
Earnings are used to compute the Enhanced Earnings Death Benefit amount.
EXAMPLE 2: ELECTED WHEN CONTRACT WAS ISSUED WITH SUBSEQUENT WITHDRAWALS
In the second example, assume the same facts as above, except that the Contract
Owner has taken a withdrawal of $10,000 during the second year of the Contract.
At the time the withdrawal is taken, the Contract Value is $105,000. Here,
$5,000 of the withdrawal is in excess of the In-Force Earnings at the time of
the withdrawal. The Contract Value on the date Lincoln Benefit receives Due
Proof of Death will be assumed to be $114,000.
Excess-of-Earnings Withdrawals = $5,000 ($10,000 - $5,000)
Purchase payments in the 12 months after the = 0
Rider Date and prior to Death
In-Force Premium = $95,000 ($100,000 + 0 -$5,000)
In-Force Earnings = $19,000 ($114,000 - $95,000)
Enhanced Earnings Death Benefit = 50% x $19,000 = $9,500
Since 50% of In-Force Earnings is less than 100% of the In-Force Premium
(excluding purchase payments in the 12 months after the Rider Date and prior to
death), the In-Force Earnings are used to compute the Enhanced Earnings Death
Benefit amount.
EXAMPLE 3.
This third example is intended to illustrate the effect of adding the Enhanced
Earnings Death Benefit Rider after the Contract has been issued and the effect
of later purchase payments. In this example, assume that the oldest Contract
Owner is age 65 on the Rider Date. At the time the Contract is issued, the
Contract Owner makes a purchase payment of $100,000. After two years pass, the
Contract Owner elects to add the Enhanced Earnings Death Benefit Rider. On the
date this Rider is added, the Contract Value is $110,000. Two years later, the
Contract Owner withdraws $50,000. Immediately prior to the withdrawal, the
Contract Value is $130,000. Another two years later, the Contract Owner makes an
additional purchase payment of $40,000. Two years later, the Contract Owner dies
with a Contract Value of $140,000 on the date Lincoln Benefit receives Due Proof
of Death.
Excess-of-Earnings Withdrawals = $30,000 ($50,000 - $20,000)
Purchase payments in the 12 months
after the Rider Date and prior to
Death = 0
In-Force Premium = $120,000 ($110,000 + $40,000 - $30,000)
In-Force Earnings = $20,000 ($140,000 - $120,000)
Enhanced Earnings Death Benefit = 40% of $20,000 = $8,000
In this example, In-Force Premium is equal to the Contract Value on the date the
Rider was issued plus the additional purchase payment and minus the
Excess-of-Earnings Withdrawal.
51 PROSPECTUS
Since 40% of In-Force Earnings is less than 80% of the In-Force Premium
(excluding purchase payments in the 12 months after the Rider Date and prior to
death), the In-Force Earnings are used to compute the Enhanced Earnings Death
Benefit amount.
52 PROSPECTUS
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
DESCRIPTION
ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS
THE CONTRACT
Purchases of Contract
Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers)
Calculation of Accumulation Unit Values
Net Investment Factor
Calculation of Variable Income Payments
Calculation of Annuity Unit Values
GENERAL MATTERS
Incontestability
Settlements
Safekeeping of the Variable Account's Assets
Premium Taxes
Tax Reserves
EXPERTS
FINANCIAL STATEMENTS
APPENDIX A ACCUMULATION UNIT VALUES
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE
ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS
PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS.
53 PROSPECTUS
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registrant anticipates that it will incur the following approximate expenses in
connection with the issuance and distribution of the securities to be
registered:
Registration fees $ 229.20
Cost of printing and engraving $ 1,580.00
Legal fees $ 0
Accounting fees $ 6,600.00
Mailing fees $ 2,160.00
Item 14. Indemnification of Directors and Officers
The Articles of Incorporation of Lincoln Benefit Life Company (Registrant)
provide for the indemnification of its directors and officers against expenses,
judgments, fines and amounts paid in settlement as incurred by such person, so
long as such person shall not have been adjudged to be liable for negligence or
misconduct in the performance of a duty to the Company. This right of indemnity
is not exclusive of other rights to which a director or officer may otherwise be
entitled.
The By-Laws of Allstate Distributors, LLC (Distributor) provide that the
corporation will indemnify a director, officer, employee or agent of the
corporation to the full extent of Delaware law. In general, Delaware law
provides that a corporation may indemnify a director, officer, employee or agent
against expenses, judgments, fines and amounts paid in settlement if that
individual acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. No indemnification shall be made for expenses,
including attorney's fees, if the person shall have been judged to be liable to
the corporation unless a court determines such person is entitled to such
indemnity. Expenses incurred by such individual in defending any action or
proceeding may be advanced by the corporation so long as the individual agrees
to repay the corporation if it is later determined that he or she is not
entitled to such indemnification.
Under the terms of the form of Underwriting Agreement, the Registrant agrees to
indemnify the Distributor for any liability that the latter may incur to a
Contract owner or party-in-interest under a Contract, (a) arising out of any act
or omission in the course of or in connection with rendering services under such
Agreement, or (b) arising out of the purchase, retention or surrender of a
Contract; provided that the Registrant will not indemnify the Distributor for
any such liability that results from the latter's willful misfeasance, bad faith
or gross negligence, or from the reckless disregard by the latter of its duties
and obligations under the Underwriting Agreement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
16(a)
Exh. No. Description
1 Form of Principal Underwriting Agreement. Incorporated herein by reference
to Post-Effective Amendment No. 1 to the Registration Statement on Form
N-4 for Lincoln Benefit Life Variable Annuity Account (File No. 333-50545,
811-07924) filed January 28, 1999
3(i) Amended and Restated Articles of Incorporation of Lincoln Benefit Life
Company dated September 26, 2000. Incorporated herein by reference to
Exhibit 3(i) to Lincoln Benefit Life Company's Quarterly Report on
Form 10-Q for quarter ended March 31, 2002. (SEC File No. 333-111553)
3(ii) Amended and Restated By-Laws of Lincoln Benefit Life Company effective
March 10, 2006. Incorporated herein by reference to Exhibit 3.2 to
Lincoln Benefit Life Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006. (SEC File No. 333-111553)
4(a) Form of Variable Annuity Contract. Incorporated herein by reference to the
Registration Statement on Form N-4 for Lincoln Benefit Life Variable
Annuity Account (File No. 333-61146, 811-07924) filed May 17, 2001
4(b) Form of Application. Incorporated herein by reference to the Registration
Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account
(File No. 333-61146, 811-07924) filed May 17, 2001
5(a) Opinion and Consent of Counsel regarding legality. Incorporated herein by
reference to the Registration Statement on Form S-3 for Lincoln Benefit
Life Company (File No. 333-66452) filed August 1, 2001.
5(b) Opinion and Consent of Counsel regarding legality. Incorporated herein by
reference to Registrant's Form S-3 Registration Statement
(File No. 333-158180) dated March 24, 2009.
5(c) Opinion and Consent of Counsel regarding legality. Filed herewith.
8 None
9 None
10 Material Contracts
10.1 Form of Investment Management Agreement among Allstate Investments,
LLC, Allstate Insurance Company, The Allstate Corporation and certain
affiliates effective January 1, 2007. Incorporated herein by reference
to Exhibit 10.12 to Allstate Life Insurance Company's Annual Report on
Form 10-K for 2007. (SEC File No. 000-31248)
10.2 Form of Tax Sharing Agreement among The Allstate Corporation and
certain affiliates dated as of November 12, 1996. Incorporated herein
by reference to Exhibit 10.24 to Allstate Life Insurance Company's
Annual Report on Form 10-K for 2007. (SEC File No. 000-31248)
10.3 Supplemental Intercompany Tax Sharing Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company effective December
21, 2000. Incorporated herein by reference to Exhibit 10.3 to Lincoln
Benefit Life Company's Annual Report on Form 10-K for the year ended
December 31, 2009. (SEC File No. 333-111553)
10.4 Cash Management Services Master Agreement between Allstate Insurance
Company and Allstate Bank (aka Allstate Federal Savings Bank) dated
March 16, 1999. Incorporated herein by reference to Exhibit 10.4 to
Lincoln Benefit Life Company's Quarterly Report on Form 10-Q for
quarter ended March 31, 2002. (SEC File No. 333-111553)
10.5 Amendment No.1 to Cash Management Services Master Agreement effective
January 5, 2001. Incorporated herein by reference to Exhibit 10.5 to
Lincoln Benefit Life Company's Quarterly Report on Form 10-Q for
quarter ended March 31, 2002. (SEC File No. 333-111553)
10.6 Amendment No. 2 entered into November 8, 2002 to the Cash Management
Services Master Agreement between Allstate Insurance Company, Allstate
Bank and Allstate Motor Club, Inc. dated March 16, 1999. Incorporated
herein by reference to Exhibit 10.19 to Allstate Life Insurance
Company's Annual Report on Form 10-K filed for 2007. (SEC File No.
000-31248)
10.7 Premium Depository Service Supplement dated as of September 30, 2005
to Cash Management Services Master Agreement between Allstate
Insurance Company, Allstate Bank, Allstate Motor Club, Inc. and
certain other parties. Incorporated herein by reference to Exhibit
10.20 to Allstate Life Insurance Company's Annual Report on Form 10-K
filed for 2007. (SEC File No. 000-31248)
10.8 Variable Annuity Service Supplement dated November 10, 2005 to Cash
Management Services Agreement between Allstate Bank, Allstate Life
Insurance Company of New York and certain other parties. Incorporated
herein by reference to Exhibit 10.21 to Allstate Life Insurance
Company's Annual Report on Form 10-K filed for 2007. (SEC File No.
000-31248)
10.9 Sweep Agreement Service Supplement dated as of October 11, 2006 to
Cash Management Services Master Agreement between Allstate Life
Insurance Company, Allstate Bank, Allstate Motor Club, Inc. and
certain other companies. Incorporated herein by reference to Exhibit
10.22 to Allstate Life Insurance Company's Annual Report on Form 10-K
filed for 2007. (SEC File No. 000-31248)
10.10 Form of Amended and Restated Service and Expense Agreement between
Allstate Insurance Company, The Allstate Corporation and certain
affiliates effective January 1, 2004. Incorporated herein by reference
to Exhibit 10.1 to Allstate Life Insurance Company's Annual Report on
Form 10-K for 2007. (SEC File No. 000-31248)
10.11 Form of Amendment No. 1 to Amended and Restated Service and Expense
Agreement between Allstate Insurance Company, The Allstate Corporation
and certain affiliates effective January 1, 2009. Incorporated herein
by reference to Exhibit 10.1 to Allstate Life Insurance Company's Current
Report on Form 8-K filed February 17, 2010. (SEC File No. 000-31248)
10.12 Administrative Services Agreement between Lincoln Benefit Life Company
and Allstate Life Insurance Company effective June 1, 2006.
Incorporated herein by reference to Exhibit 10.1 to Lincoln Benefit
Life Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2006. (SEC File No. 333-111553)
10.13 Principal Underwriting Agreement by and among Lincoln Benefit Life Company
and Allstate Distributors, LLC (ALFS, Inc., merged with and into Allstate
Distributors, LLC effective September 1, 2011) effective November 25,
1998. (Variable Universal Life Account). Incorporated herein by reference
to Exhibit 10.6 to Lincoln Benefit Life Company's Quarterly Report on Form
10-Q for quarter ended June 30, 2002. (SEC File No. 333-111553)
10.14 Amended and Restated Principal Underwriting Agreement between Lincoln
Benefit Life Company and Allstate Distributors, LLC (ALFS, Inc. merged
with and into Allstate Distributors, LLC effective September 1, 2011)
effective June 1, 2006. Incorporated herein by reference to Exhibit 10.1
to Lincoln Benefit Life Company's Current Report on Form 8-K filed
December 20, 2007. (SEC File No. 333-111553)
10.15 Selling Agreement between Lincoln Benefit Life Company, Allstate
Distributors, LLC (ALFS, Inc., f/k/a Allstate Financial Services, Inc.,
merged with and into Allstate Distributors, LLC effective September 1,
2011) and Allstate Financial Services, LLC (f/k/a LSA Securities, Inc.)
effective August 2, 1999. Incorporated herein by reference to Exhibit 10.8
to Allstate Life Insurance Company's Annual Report on Form 10-K for 2003.
(SEC File No. 000-31248)
10.16 Coinsurance Agreement between Allstate Life Insurance Company and
Lincoln Benefit Life Company, effective December 31, 2001.
Incorporated herein by reference to Exhibit 10.11 to Lincoln Benefit
Life Company's Quarterly Report on Form 10-Q for quarter ended June
30, 2002. (SEC File No. 333-111553)
10.17 Modified Coinsurance Agreement between Allstate Life Insurance Company
and Lincoln Benefit Life Company, effective December 31, 2001.
Incorporated herein by reference to Exhibit 10.12 to Lincoln Benefit
Life Company's Quarterly Report on Form 10-Q for quarter ended June
30, 2002. (SEC File No. 333-111553)
10.18 Modified Coinsurance Agreement between Allstate Life Insurance Company
and Lincoln Benefit Life Company, effective December 31, 2001.
Incorporated herein by reference to Exhibit 10.13 to Lincoln Benefit
Life Company's Quarterly Report on Form 10-Q for quarter ended June
30, 2002. (SEC File No. 333-111553)
10.19 Intercompany Loan Agreement among The Allstate Corporation, Allstate
Life Insurance Company, Lincoln Benefit Life Company and other certain
subsidiaries of The Allstate Corporation dated February 1, 1996.
Incorporated herein by reference to Exhibit 10.24 of Allstate Life
Insurance Company's Annual Report on Form 10-K for 2006. (SEC File No.
000-31248)
10.20 Form of Service Agreement between Lincoln Benefit Life Company and
Allstate Assignment Company effective June 25, 2001. Incorporated
herein by reference to Exhibit 10.22 of Lincoln Benefit Life Company's
Annual Report on Form 10-K for 2007. (SEC File No. 333-111553)
10.21 First Amendment to Service Agreement between Lincoln Benefit Life
Company and Allstate Assignment Company effective December 1, 2007.
Incorporated herein by reference to Exhibit 10.23 of Lincoln Benefit
Life Company's Annual Report on Form 10-K for 2007.
(SEC File No. 333-111553)
10.22 Agreement for the Settlement of State and Local Tax Credits among
Allstate Insurance Company and certain affiliates effective January 1,
2007. Incorporated herein by reference to Exhibit 10.1 to Lincoln
Benefit Life Company's Current Report on Form 8-K filed February 21,
2008. (SEC File No. 333-111553)
10.23 Administrative Services Agreement between Allstate Distributors, LLC,
(ALFS, Inc., merged with and into Allstate Distributors, LLC effective
September 1, 2011) Allstate Life Insurance Company, Lincoln Benefit Life
Company and Charter National Life Insurance Company effective January 1,
2000. Incorporated herein by reference to Exhibit 10.22 to Lincoln Benefit
Life Company's Annual Report on Form 10-K for the year ended December 31,
2008. (SEC File No. 333-111553)
10.24 Form of Assignment & Delegation of Administrative Services Agreements,
Underwriting Agreements, and Selling Agreements between ALFS, Inc. and
Allstate Life Insurance Company, Allstate Life Insurance Company of New
York, Charter National Life Insurance Company, Intramerica Life Insurance
Company, Allstate Distributors, LLC & Lincoln Benefit Life Company.
Incorporated herein by reference to Exhibit 10.24 to the
Registration Statement on Form S-1 for Lincoln Benefit Life Company
(File No. 333-158180) filed on April 12, 2011.
10.25 Assignment & Delegation of Administrative Services Agreements,
Underwriting Agreements, and Selling Agreements between ALFS, Inc. and
Allstate Life Insurance Company, Allstate Life Insurance Company of New
York, Charter National Life Insurance Company, Intramerica Life Insurance
Company, Allstate Distributors, LLC, Allstate Financial Services, LLC &
Lincoln Benefit Life Company entered into on September 1, 2011.
Incorporated herein by reference to Exhibit 10.1 to Allstate Life
Insurance Company's Current Report on Form 8-K filed September 1, 2011.
(SEC File No. 000-31248)
11 None
12 None
15 Not applicable.
16 Letter re change in certifying accountant. Not applicable.
21 Subsidiaries of the registrant. Not applicable.
23 Consent of Independent Registered Public Accounting Firm. Filed herewith.
24 Powers of Attorney for Robert K. Becker, Anurag Chandra, Lawrence W. Dahl,
Susan L. Lees, Samuel H. Pilch, John C. Pintozzi, and Matthew E. Winter.
Filed herewith.
25 None
26 None
99 Experts. Filed herewith.
Exhibit List for XBRL Docs:
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
16(b) Financial statement schedules required by Regulation S-X (17 CFR Part 210) and Item 11(e) of Form S-1 are included in Part I. Item 17. Undertakings. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the determining of any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. (5) That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted in directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lincoln and State of
Nebraska on the 27th day of March, 2012.
LINCOLN BENEFIT LIFE COMPANY (Registrant)
By: /s/ Susan L. Lees
-------------------------------------
Susan L. Lees
Director, Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following directors and principal
officers of Lincoln Benefit Life Company in the capacities indicated on the
27th day of March, 2012.
(Signature) (Title)
------------------------------------ -----------------------------------
*/ Lawrence W. Dahl Director, President and Chief Operating
------------------------------------ Officer
Lawrence W. Dahl
*/ Robert K. Becker Director and Senior Vice President
------------------------------------
Robert K. Becker
/s/ Susan L. Lees Director, Senior Vice President,
------------------------------------ General Counsel and Secretary
Susan L. Lees
*/ Samuel H. Pilch Senior Group Vice President and
------------------------------------ Controller
Samuel H. Pilch
*/ John C. Pintozzi Director, Senior Vice President and
------------------------------------ Chief Financial Officer
John C. Pintozzi
*/ Matthew E. Winter Director, Chairman of the Board and
------------------------------------ Chief Executive Officer
Matthew E. Winter
*/ Anurag Chandra Director and Executive Vice President
------------------------------------
Anurag Chandra
* By Susan L. Lees, pursuant to Power of Attorney.
EXHIBITS
Exhibit No. Description
----------- -----------
5(c) Opinion and Consent of Counsel regarding legality.
23 Consent of Independent Registered Public Accounting Firm
24 Powers of Attorney for Robert K. Becker, Anurag Chandra,
Lawrence W. Dahl, Susan L. Lees, Samuel H. Pilch,
John C. Pintozzi, and Matthew E. Winter.
99 Experts.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase