As filed with the Securities and Exchange Commission on April 3, 2017
File No. 333-203371
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
POST-EFFECTIVE AMENDMENT NO. 2
to
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LINCOLN BENEFIT LIFE COMPANY
(Exact Name of Registrant)
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| Nebraska | | 6300 | | 470221457 |
(State or Other Jurisdiction of Organization) | | (Primary Standard Industrial Classification Code Number) | | (I.R.S. Employer Identification Number) |
1221 N Street, Suite 200, Lincoln, Nebraska 68508
(800) 525-9287
(Address and Phone Number of Registrant’s Principal Executive Office)
ROBYN WYATT
LINCOLN BENEFIT LIFE COMPANY
1221 N Street, Suite 200
Lincoln, NE 68508
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. ☒
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.
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| Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
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| Non-accelerated filer | | ☒ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
Table of Contents
CALCULATION OF REGISTRATION FEE
| | | | | | | | |
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| Title of securities being registered | | Amount to be
registered(1) | | Proposed maximum
offering price per
unit | | Proposed maximum
aggregate offering
price(1) | | Amount of
registration fee(2) |
Deferred annuity interests and participating interests therein | | $ N/A | | $(1) | | $ N/A | | $ N/A |
|
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| (1) | The Contract does not provide for a predetermined amount or number of units. |
| (2) | By filing dated April 13, 2015, Lincoln Benefit Life Company carried over $8,000,000 of unsold securities from registration #333-180375 filed on March 27, 2012 and registered $42,000,000 ($42 million) in market value adjusted annuity contract securities and paid a filing fee of $4,880 therefor. In this Registration Statement, Registrant continues that offering. |
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.
Allstate Distributors, L.L.C. (“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 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, 2017
To the following Prospectuses, as supplemented
CONSULTANT SOLUTIONS (CLASSIC, PLUS, ELITE, SELECT) PROSPECTUS DATED MAY 1, 2017
CONSULTANT I PROSPECTUS DATED MAY 1, 2017
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
INDEX
LINCOLN BENEFIT LIFE RISK FACTORS
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, 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.
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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. 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 SEC or in materials incorporated therein by reference.
Changes in actual experience could materially affect the profitability of our business.
Our liability pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of our business. We establish target returns based upon these factors and the average amount of capital that we must hold to supportin-force contracts taking into account rating agencies and regulatory requirements. Profitability 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.
Our 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, and the management of operating costs and expenses within anticipated pricing allowances. For example, continued activity in the viatical, stranger-owned, and/or life settlement industry could cause the Company’s level of lapses to differ from its assumptions about persistency and lapses, which could negatively impact the Company’s performance. Assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revisions over time. Accordingly, the Company’s results may be affected, positively or negatively, from time to time, by actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing new systems and procedures that facilitate the calculation of more precise estimates. Legislation and regulation of the insurance marketplace and products could also affect the profitability of our business.
Changes in reserve estimates may adversely affect our operating results.
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.
Changes in market interest rates and/or credit spreads may lead to a significant decrease in the profitability of our spread-based products and may adversely impact investment income.
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
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economic conditions or otherwise could cause additional realized and unrealized losses on securities. Similarly, a ratings downgrade affecting a security we hold could indicate the credit quality of that security has deteriorated and could increase the capital we must hold to support that security to maintain our risk-based capital levels. Levels of writedowns and impairments are impacted by intent to sell, or our assessment of the likelihood that we will be required to sell fixed maturity securities. Realized losses or impairments on these securities may have a material adverse effect on our net income in a particular period.
Our ability to manage our fixed annuities and interest-sensitive life products is dependent upon maintaining profitable spreads between investment yields and interest crediting rates. When market interest rates decrease or remain at relatively low levels, cash flows from renewal premium, 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 changes in the level of policy loans, surrenders and withdrawals. This process may lead to a flow of cash out of our business. These outflows may require investment assets to be sold at a time when the prices of those assets are lower because of the increase in market interest rates, which may result in realized investment losses. For certain products, principally fixed annuity and interest-sensitive life 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 our business. Additionally, 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.
Changes in estimates of profitability on interest-sensitive life, fixed annuities and other investment products may adversely affect our profitability and financial condition through the amortization of Value of Business Acquired (“VOBA”).
VOBA related to interest-sensitive life, fixed annuities and other investment contracts is amortized in proportion to actual historical gross profits and estimated future gross profits (“EGP”) over the estimated lives of the contracts. The principal assumptions for determining the amount of EGP are mortality, persistency, expenses, investment returns, including capital gains and losses on assets supporting contract liabilities, interest crediting rates to contractholders, and the effects of any hedges. Updates to these assumptions (commonly referred to as “VOBA unlocking”) could adversely affect our profitability and financial condition.
Guarantees within certain of our products may decrease our earnings, increase the volatility of our results, result in higher risk management costs and expose us to increased counterparty risk.
Certain of our products include guaranteed benefits. These guarantees are designed to protect contractholders against significant downturns in equity markets and interest rates. Any such periods of significant and sustained downturns in equity markets, increased equity volatility, or reduced interest rates could result in an increase in the valuation of our liabilities associated with those products. An increase in these liabilities would result in a decrease in our net income. We use hedging and risk management strategies to mitigate the liability exposure and the volatility of net income associated with these liabilities. These strategies involve the use of reinsurance and derivatives, which may not be completely effective. In addition, hedging instruments may not effectively offset the costs of guarantees or may otherwise be insufficient in relation to our obligations. Furthermore, we are subject to the risk that changes in contractholder behavior or mortality, combined with adverse market events, produce economic losses not addressed by the risk management techniques employed. These, individually or collectively, may have a material adverse effect on our results of operations, including net income, financial condition or liquidity.
We may not be able to mitigate the capital impact associated with statutory reinsurance reserving requirements, potentially adversely impacting the profitability of our business.
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To support statutory reserves for certain term and universal life insurance products with secondary guarantees, we currently utilize reinsurance and capital markets solutions for financing a portion of our statutory reserve requirements deemed to benon-economic. If we are not able to maintain sufficient financing as a result of market conditions or otherwise, this could potentially adversely impact the profitability of our business.
Changes in tax laws and interpretations may decrease the profitability of our products and could adversely affect the Company.
Changes to the Internal Revenue Code, the issuance of administrative rulings or court decisions could increase our effective tax rate, make our current contractholders’ products less desirable and lower our net income on both a statutory accounting and GAAP basis. For example, the Republican members of the House Ways and Means Committee released “A Better Way, Our Vision for a Confident America” on June 24, 2016, which provides an outline for comprehensive tax reform. While, at this point, we cannot predict the likelihood of tax reform occurring in 2017 or beyond, both President Trump and key members of Congress have indicated that comprehensive tax reform is a high priority for the new Administration. If comprehensive tax reform legislation moves forward, there may be an impact to the life insurance company tax regime.
Current discussions focus on three major changes: (i) lowering the corporate and individual tax rates and reducing the number of tax brackets, (ii) moving towards a cash-flow based system of taxation for corporations and other businesses and (iii) reforming the international tax regime by moving to a territorial system of international taxation. However, none of the proposals being discussed includes sufficient detail to understand their full effect. Based on the detail that has been provided, these proposals could, among other things, change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts used to support products, including variable life insurance and variable annuity contracts, that are eligible for the dividends-received deduction. The dividends-received deduction reduces the amount of dividend income significant component of the difference between our actual tax expense and expected amount determined using the federal statutory tax rate of 35%.
In addition, should the current proposals move forward, they could change the manner in which we deduct policy acquisition expenses, impose limitations on the deductibility of interest expense and the availability of net operating loss deductions and repeal the corporate Alternative Minimum Tax. These and other changes have been proposed in the context of tax simplification and as part of a plan to reduce the statutory corporate tax rate from a current rate of 35% to a rate of 20%. At this point, it is impossible to predict the enactment of any of the proposals, whether as part of a comprehensive tax reform act or as discrete legislative changes. We continue to closely monitor developments related to potential changes in the tax law and assess, when possible, the potential impact to both our earnings and our products in runoff.
Department of Labor (“DOL”) regulation defining fiduciary could cause some changes to the manner in which we deliver products and services, as well as changes in nature and amount of compensation and fees.
On April 8, 2016, the DOL released the DOL “Fiduciary Rule”, which, when effective, will substantially expand the range of activities that would be considered to be fiduciary investment advice under ERISA and the Internal Revenue Code. Under the DOL Fiduciary Rule, the investment-related information and support that our advisors and employees may provide to plan sponsors, participants and IRA holders on anon-fiduciary basis will be limited beyond what is allowed under the current law. As a result, changes to the methods that we use to deliver services may be required. As a closed block of annuity business, without a large concentration of qualified retirement plans, the Fiduciary Rule as currently drafted should not cause material changes to the manner in which we deliver products and services, or pay commissions and fees.
As of the date of this filing, President Trump directed the DOL to prepare an updated economic and legal analysis on whether the DOL Fiduciary Rule (i) has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information or related advice, (ii) has resulted in dislocations or disruptions within the retirement services
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industry that may adversely affect investors or retirees and (iii) is likely to cause an increase in litigation and an increase in prices that investors or retirees must pay to gain access to retirement services. This analysis may result in an implementation delay beyond the current implementation date.
The Company is dependent on the performance of others.
The Company’s results may be affected by the performance of others because the Company has entered into various arrangements in support of our business operations involving third parties. Certain of these third parties may act on behalf of the Company or represent the Company in various capacities including the administration of its contractholders’ activities or the management of its invested assets on aday-to-day basis. Additionally, the Company’s operations are dependent on various technologies, some of which are provided and/or maintained by third parties. Any of the third parties that the Company depends upon may default on their services or obligations to the Company due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud, or other reasons. Further, the Company may be held responsible for obligations that arise from the acts or omissions of these third parties. Such defaults could have a material adverse effect on the Company’s financial condition and results of operations.
If our internal controls are ineffective, our operating results could be adversely affected.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of investors, regulators and rating agencies.
Business combinations related to Lincoln Benefit could be disruptive to our operations.
Lincoln Benefit may be involved in a Resolution Life, Inc. acquisition, disposition, or combination with business from unrelated insurers. The risks and uncertainties related to these transactions include, but are not limited to:
| | • | | unanticipated difficulties and expenditures resulting from the transactions; |
| | • | | disruption of current plans and operations caused by the closing of the transactions and the transition to or integration with new management and service providers over time; |
| | • | | diversion of management time and focus from operating our business to addressing transaction integration challenges; and |
| | • | | the response of customers, agents, competitors and regulators to the closing of the transactions. |
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Lincoln Benefit’s failure to address these risks could cause us to incur unanticipated liabilities, impose harmful disruptions to our customer service operations and harm our business generally.
Risks Relating to Investments
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 principally use the market approach which utilizes 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 or cost and fair value, net of deferred income taxes, certain VOBA, and certain reserves for life-contingent contract benefits, 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.
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 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 varies by investment type and is based on our ongoing 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 ourcase-by-case evaluation of the underlying reasons for the decline in fair value. We define fair value generally as the price that would be received to sell an asset or paid to transfer a liability. Our conclusions on such assessments are judgmental and include assumptions and projections of future cash flows which may ultimately prove to be incorrect as assumptions, facts and circumstances change. Furthermore, historical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future.
Deteriorating financial performance impacting commercial mortgage loans, securities collateralized by residential and commercial mortgage loans, and collateralized corporate 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, corporate loan delinquencies or recovery rates, changes in credit or bond insurer strength ratings 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.
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Our investment strategies may be adversely affected by developments in the financial markets.
Our investment management strategies may be adversely affected by unexpected developments in the financial markets. Slowing of global growth, tightening monetary policy in the U.S. and increasing political uncertainty remain key challenges for markets. There may be a limited market for certain investments we hold in our investment portfolio, making them relatively illiquid. These include corporate bonds, privately-placed fixed maturity securities, mortgage loans and policy loans. If we were forced to sell certain of our investments during periods of market volatility or disruption, market prices may be lower than our carrying value in such investments. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.
Risks Relating to the Insurance Industry
Difficult conditions in the global economy and capital markets generally could adversely affect our business and operating results.
Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Stressed conditions, volatility and disruptions in global capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and certain of our insurance liabilities are sensitive to changing market factors. Market factors, including interest rates, credit spreads, equity prices, real estate markets, consumer spending, business investment, government spending, the volatility and strength of the capital markets, deflation and inflation, all affect the business and economic environment and, ultimately, the amount and profitability of our business. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals in the financial markets can also affect our business through their effects on general levels of economic activity, employment and customer behavior. Financial markets have also been affected periodically by concerns over U.S. fiscal policy. These issues could, on their own, or combined with the possible slowing of the global economy generally, have severe repercussions to the U.S. and global credit and financial markets, further exacerbate concerns over sovereign debt of other countries and disrupt economic activity in the U.S. and elsewhere.
General economic conditions could adversely affect us in the form of consumer behavior and pressure investment results. 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 contractholders may choose to defer paying insurance premium or stop paying insurance premiums altogether. Our investment results could be adversely affected as deteriorating financial and business conditions affect the issuers of the securities in our investment portfolio.
Losses from legal and regulatory actions may be material to our operating results or cash flows and may result in harm to our reputation.
We are involved in various legal actions, some of which involve claims for substantial amounts. We are also subject to various regulatory actions and inquiries, such as information requests, market conduct examinations, books and record examinations, from state and federal regulators and other authorities. A substantial legal liability or significant regulatory action against us, as well as regulatory inquiries or investigations could harm our reputation, result in material fines or penalties, result in significant legal costs and otherwise have a material adverse effect on our business, financial condition and results of operations. Even if we ultimately prevail in the litigation, regulatory actions or investigation, our ability to retain our current contractholders and recruit and retain employees could be materially and adversely impacted.
We are subject to extensive regulation and potential further restrictive regulation may increase our operating costs.
As an insurance company, we are subject to extensive laws and regulations. In some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of
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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 can limit our ability to maintain the profitability of our business.
The extent of regulation varies, but generally the Company is governed by state statutes. These statutes delegate regulatory, supervisory and administrative authority to state insurance departments. This system of supervision and regulation covers, among other things, standards of minimum capital requirements and solvency, including risk-based capital measurements, restrictions on certain transactions, licensing status, reserving, payment of policy benefits, etc. State insurance regulators and the NAIC regularlyre-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, sometimes lead to additional expense for the insurer and, thus, could have a material adverse effect on our financial condition and results of operations.
Although we endeavor to maintain all required licenses and approvals, we may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations, which may change from time to time. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or impose substantial fines. Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision, which permit such authorities to supervise the business and operations of an insurance company. As of December 31, 2016, no state insurance regulatory authority had imposed on us any material fines or revoked or suspended any licenses to conduct insurance business in any state or issued an order of supervision with respect to the Company, which would have a material adverse effect on our results of operations or financial condition.
As an insurance company with separate accounts that are regulated as investment companies, we are also subject to laws and regulations 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 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, impact the profitability of our business.
Regulatory reforms, and the more stringent application of existing regulations, may make it more expensive for us to conduct our business and increase our capital requirements.
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 the FIO and Financial Stability Oversight Council 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.
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The Company is subject to insurance guaranty fund laws, rules and regulations that could adversely affect the Company’s financial condition or results of operations.
Under insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for contractholder losses incurred by insolvent companies. From time to time, companies may be asked to contribute amounts beyond prescribed limits. It is possible that the Company could be assessed with respect to product lines not offered by the Company. In addition, legislation may be introduced in various states with respect to guaranty fund assessment laws related to insurance products, including long term care insurance and other specialty products, that alters future premium tax offsets received in connection with guaranty fund assessments. The Company cannot predict the amount, nature or timing of any future assessments or legislation, any of which could have a material and adverse impact on the Company’s financial condition or results of operations.
Reinsurance may be unavailable at current levels and prices.
Market conditions beyond our control impact the availability and cost of the reinsurance. 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. We review retention limits for continued appropriateness and they may be changed in the future. Prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs or, ultimately, reinsurers unwilling to offer coverage. If we were unable to renew or purchase reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, we may have to accept an increase in risk exposure, seek other alternatives, or accept reduced profitability.
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.
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 ceded insurance risks include all new business sold in the Allstate exclusive agency channel following the closing of our acquisition by Resolution Life, Inc., which business will be entirely ceded to Allstate Life Insurance Company. Our inability to collect a material recovery from a reinsurer could have a material effect on our operating results.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs or our ability to obtain credit on acceptable terms.
In periods of extreme volatility and disruption in the capital and credit markets, liquidity and credit capacity may be severely restricted. In such circumstances, our ability to obtain capital to fund operating expenses, financing costs, satisfy statutory capital requirements and meet liquidity needs may be limited. Our access to additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to our industry, our credit ratings and credit capacity, as well as lenders’ perception of our long- or short-term financial prospects. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. If a combination of these factors were to occur, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms. Our results of operations, financial condition, cash flows and statutory capital position could be materially adversely affected by disruptions in the capital markets.
A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and materially affect our financial condition and results of operations.
Financial strength ratings are published by various Nationally Recognized Statistical Rating Organizations (“NRSRO”) and similar entities not formally recognized as NRSROs. They indicate the NRSROs’ opinion regarding an insurance company’s ability to meet contractholder obligations, and are important to maintaining public confidence in our products and our competitive position.
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In view of the difficulties experienced by many financial institutions as a result of the financial crisis and ensuing global recession, including our competitors in the insurance industry, NRSROs continue to implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings. Our ratings could be downgraded at any time and without notice by any NRSRO. In addition, these regulatory reforms may also increase our minimum capital requirements.
Downgrades in our financial strength ratings could have a material adverse effect on our financial condition and results of operations in many ways, including materially increasing the number or amount of policy surrenders and withdrawals by contractholders and adversely affecting our ability to obtain reinsurance at reasonable prices or at all.
A large scale pandemic, the continued threat of terrorism or military actions may have an adverse effect on the level of claim losses we incur, the value of our investment portfolio, our competitive position, liquidity, operating results and attractiveness of product offering.
A large scale pandemic, the continued threat of terrorism, within the United States and abroad, or military and other actions, and heightened security measures in response to these types of threats, may cause significant volatility and losses in our investment portfolio from interest rate changes, 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 renewal premium, profitability, competitiveness, liquidity, operating results and attractiveness of product offering.
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.
Specifically, the FASB is working on a project that could result in significant changes to how we account for and report our insurance contracts and VOBA. Depending on the magnitude of the changes ultimately adopted by the FASB, the proposed changes to generally accepted accounting principles may impose special demands on issuers in the areas of employee training, internal controls and disclosure and may affect how we manage our business. The effective dates and transition methods are not known; however, issuers may be required to or may choose to adopt the new standards retrospectively. In this case, the issuer will report results under the new accounting method as of the effective date, as well as for all periods presented.
As an insurance company, we are also subject to statutory accounting principles (“SAP”). Any changes in the method of calculating reserves for our life insurance and annuity products under SAP may result in increased or decreased reserve requirements. The NAIC has announced focused industry inquiries on certain matters that could have an impact on the Company’s financial condition and results of operations. Such inquiries concern, for example, examination of statutory accounting disclosures for separate accounts, insurer use of captive reinsurance companies, variable annuity reserves and capital treatment, reinsurance, cybersecurity practices, and risk-based capital calculations. In addition, the NAIC continues to consider various initiatives to change and modernize its financial and solvency requirements and regulations. It has adopted principles-based reserving methodologies for life insurance and annuity reserves, but additional formulas and/or guidance relevant to the new standard are being developed. The NAIC is also considering changes to accounting regulations, governance practices of insurers, collateral pledged to support FHLB advances, and other items. The Company cannot currently estimate what impact these more focused inquiries or proposed changes, if they occur, will have on reserve and capital requirements, financial condition or results of operations.
10
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 failure in cyber or other information security systems, as well as the occurrence of events unanticipated in our disaster recovery systems, management continuity planning or a support failure from external providers, could result in a loss or disclosure of confidential information, damage to our reputation and impairment of our ability to conduct business effectively.
We depend heavily upon computer systems to perform necessary business functions. We rely on these systems throughout our business for a variety of functions, including processing claims and applications, providing information to customers and distributors, performing actuarial analyses and maintaining financial records. We also retain confidential and proprietary information on our computer systems and we rely on sophisticated technologies and our third party vendors to maintain the security of that information. Our computer systems have been, and will likely continue to be, subject to computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. While, to date, we have not experienced a material breach of cybersecurity, administrative and technical controls and other preventive actions we take to reduce the risk of cyber-incidents and protect our information technology may be insufficient to prevent physical and electronicbreak-ins, cyber-attacks or other security breaches to our computer systems. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
The occurrence of a disaster such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, 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 and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our third party service providers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised. These interruptions also may interfere with our third party service providers to provide services and our employees’ ability to perform their job responsibilities.
The failure of our computer systems and/or our disaster recovery plans for any reason could cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions and legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results.
Although we conduct due diligence, negotiate contractual provisions and, in many cases, conduct periodic reviews of our vendors, distributors, and other third parties that provide operational or information technology services to us to confirm compliance with the Company’s information security standards, the failure of such third parties’ computer systems and/or their disaster recovery plans for any reason might cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers. Such a failure could harm our reputation, subject us to regulatory sanctions and legal claims, lead to a loss of contractholders and revenues and otherwise adversely affect our business and financial results.
We are subject to data security and privacy risks that could negatively affect our results, operations or reputation.
Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to
11
anticipate and implement effective preventative or detective measures against security breaches of all types because the techniques used change frequently or are not recognized until launched and because cyber-attacks can originate from a wide variety of sources or parties. Those parties may also attempt to fraudulently induce employees, contractholders or other users of our system to deliberately or inadvertently disclose sensitive information in order to gain access to our data or that of our contractholders. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers’ or employees’ personal information or a disruption of our business, which could give rise to unwanted media attention, materially damage our customer relationships and reputation and result in lost sales, fines or lawsuits.
In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data. Cyber threats and related legal and regulatory standards applicable to our business are rapidly evolving and may subject the Company to heightened legal standards, new theories of liability and material claims and penalties that we cannot currently predict or anticipate. As cyber threats and applicable legal standards continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance our protective measures and computer systems, and to investigate and remediate any information security vulnerabilities. If the Company experiences security events or other technological failures, it may be subject to regulatory inquiries or proceedings, litigation or reputational damage or be required to pay claims, fines or penalties.
Loss of key vendor relationships or failure of a vendor to protect personal information of our customers, claimants or employees could affect our operations.
We rely on services and products provided by many vendors in the United States and abroad, specifically third party administrators of our policies, our invested assets, and vendors of computer hardware and software. In the event that one or more of our vendors suffers a bankruptcy or otherwise becomes unable to continue to provide products or services, or fails to protect personal information of our customers, claimants or employees, we may suffer operational impairments and financial losses.
We may not be able to protect our intellectual property and may be subject to infringement claims.
We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our intellectual property and to determine its scope, validity or enforceability, which could divert significant resources and prove unsuccessful. An inability to protect our intellectual property could have a material effect on our business.
We may be subject to claims by third parties for patent, trademark or copyright infringement or breach of usage rights. Any such claims and any resulting litigation could result in significant expense and liability. If our third party providers or we are found to have infringed a third-party intellectual property right, either of us could be enjoined from providing certain products or services or from utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly work around. Any of these scenarios could have a material effect on our business and results of our operations.
Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could negatively affect our business.
We have devoted significant resources to develop and periodically update our risk management policies and procedures to reflect ongoing review of our risks and expect to continue to do so in the future. Nonetheless, our policies and procedures may not be comprehensive and may not identify every risk to which we are exposed. Many of our methods for managing risk and exposures are based upon the use of observed historical
12
market behavior or statistics based on historical models. As a result, these methods may not fully predict future exposures, which can be significantly greater than our historical measures indicate. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us. This information may not always be accurate, complete,up-to-date or properly evaluated. In addition, more extensive and perhaps different risk management policies and procedures might have to be implemented under pending regulations.
Our associates may take risks not in accordance with our risk management policies which could negatively affect our financial condition and business.
As an insurance enterprise, we are in the business of accepting certain risks. The associates who conduct our business, including executive officers and other members of management, investment professionals, sales agents, and other associates, do so in part by making decisions and choices that involve exposing us to risk. These include decisions such as pricing, determining what assets to purchase for investment and when to sell them, which business opportunities to pursue, and other decisions. We endeavor, in the design and implementation of our compensation programs and practices, to avoid giving our associates incentives to take excessive risks; however, associates may take such risks regardless of the structure of our compensation programs and practices. Similarly, although we employ controls and procedures designed to monitor associates’ business decisions and prevent us from taking excessive risks, and to prevent employee misconduct, these controls and procedures may not be effective. In such instances, the impact of those risks could harm our reputation and have a material adverse effect on our financial condition and business operations.
We may be unable to retain our highly qualified employees.
Resolution Life, Inc. is the employer of all staff that oversee the Company. Resolution Life, Inc. must attract and retain employees to service our contractholders and manage and grow our business. We compete with other financial services companies for employees primarily on the basis of compensation and financial position. Our reputation, operations, and internal controls could be materially adversely affected if we are unsuccessful in retaining highly qualified employees. Resolution Life, Inc.’s inability to recruit or our failure to retain a sufficient number of qualified individuals in the future may impair our efficiency and effectiveness to service contractholders, meet regulatory deadlines, and our ability to pursue growth opportunities.
| Item 11(a). | Description of Business |
Lincoln Benefit Life Company (referred to in this document as “we,” “Lincoln Benefit,” “our,” “us” or the “Company”) was incorporated under the laws of the State of Nebraska in 1938. Lincoln Benefit is a wholly-owned subsidiary of Resolution Life, Inc., a Delaware corporation, which is a wholly-owned, indirect subsidiary of Resolution Life L.P. (the “Limited Partnership”), a Bermuda limited partnership, and Resolution Life (Parallel) Partnership, a Bermuda-based partnership.
On April 1, 2014, Resolution Life, Inc. acquired all the outstanding capital stock in Lincoln Benefit (the “Acquisition”) from Allstate Life Insurance Company (“ALIC”). Immediately prior to the closing of the transaction, Lincoln Benefit commuted certain business previously reinsured to ALIC, including (a) all of the fixed deferred annuity, value adjusted deferred annuity and indexed deferred annuity business written by the Company that was previously reinsured to ALIC, (b) all of the life insurance business written by the Company through independent producers that was previously reinsured to ALIC, other than certain specified life business, and (c) all of the net liability of the Company with respect to the accident and health and long-term care insurance business written by the Company that was previously reinsured to ALIC ((a), (b) and (c) collectively, the “Recaptured Business”). In connection with the closing, Lincoln Benefit and ALIC entered into an Amended and Restated Reinsurance Agreement (the “ARRA”), pursuant to which ALIC continues to reinsure business that was ceded by Lincoln Benefit to ALIC before the closing, with the exception of the Recaptured Business (the “ALIC Reinsured Business”). ALIC continues to provide certain services with respect to the Recaptured
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Business on a transitional basis, including services relating to processing of Life block commissions and agent licensing, 2015 agent bonus payments, and escheatment and unclaimed property processing.
ALIC continues to reinsure all life insurance business written by Lincoln Benefit through the Allstate Financial Sales channel, all immediate annuities written by Lincoln Benefit prior to closing of the Acquisition, and certain term life policies written by Lincoln Benefit. This business will continue to be administered by ALIC under an existing administrative services agreement between Lincoln Benefit and ALIC. The Allstate Financial sales channel will continue to sell Lincoln Benefit products until they are fully transitioned to a new Allstate company in 2017. As part of the Acquisition, ALIC has agreed to indemnify the Company for certain liabilities related to thepre-closing activities of the transferred business.
Lincoln Benefit’s variable annuity business is reinsured by ALIC under an existing reinsurance agreement between Lincoln Benefit and ALIC. 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 agreement with ALIC remains unchanged.
Prior to July 18, 2013, we sold interest-sensitive traditional and variable life insurance and fixed annuities, including deferred and immediate, through independent master brokerage agencies. Effective January 1, 2014, we no longer offer fixed annuities such as deferred and immediate annuities, however, we continue to accept deposits on existing policies.
We have reinsurance agreements whereby certain premiums, contract charges, interest credited to contractholder account balances, contract benefits and expenses are ceded to ALIC and othernon-affiliated reinsurers.
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. We frequently use industry publications containing statutory financial information to assess our competitive position.
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. 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, rate 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.
| Item 11(b). | Description of Property |
Lincoln Benefit occupies leased office space in Lincoln, Nebraska and Rosemont, Illinois.
| Item 11(c). | Legal Proceedings |
Lincoln Benefit is engaged in routine lawsuits, which, in management’s judgment, are not of material importance to its total assets or business prospects.
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| Item 11(e) | Financial Statements and Notes to Financial Statements |
Lincoln Benefit Life Company
(A Wholly-Owned subsidiary of Resolution Life, Inc.)
Index
December 31, 2016
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Lincoln Benefit Life Company
Lincoln, Nebraska
We have audited the accompanying Statements of Operations and Comprehensive Income and Cash Flows of Lincoln Benefit Life Company (the “Company”) for the period from January 1, 2014 through March 31, 2014 (Predecessor’s Basis). Our audit also included Schedule IV – Reinsurance for the period from January 1, 2014 through March 31, 2014 (Predecessor’s Basis). 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 audit.
We conducted our audit 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 results of operations and cash flows of Lincoln Benefit Life Company for the period from January 1, 2014 through March 31, 2014 (Predecessor’s Basis), in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Schedule IV – Reinsurance for the period from January 1, 2014 through March 31, 2014 (Predecessor’s Basis), when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche, LLP
Chicago, Illinois
April 13, 2015
16
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Lincoln Benefit Life Company
In our opinion, the accompanying consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations and comprehensive income, of shareholder’s equity and of cash flows for the years then ended and for the period from April 1, 2014 through December 31, 2014 present fairly, in all material respects, the financial position of Lincoln Benefit Life Company and its subsidiary (Successor) as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended and for the period from April 1, 2014 through December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, Schedule I - Summary of Investments - Other than Investments in Related Parties as of December 31, 2016 and Schedule IV - Reinsurance for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 of these financial statements 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. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 3, 2017
17
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Consolidated Balance Sheets
December 31, 2016 and December 31, 2015
($ in thousands, except par value data and share amounts)
| | | | | | | | |
| | | December 31,
2016 | | | December 31,
2015 | |
ASSETS | | | | | | | | |
Fixed maturities,available-for-sale, at fair value (amortized cost $8,299,496 and $8,274,194) | | $ | 8,212,740 | | | $ | 7,945,942 | |
Common stocks | | | 5,100 | | | | — | |
Commercial mortgage loans | | | 1,455,156 | | | | 1,509,132 | |
Policy loans | | | 178,890 | | | | 186,827 | |
Short-term investments | | | 129,660 | | | | 184,820 | |
Other invested assets | | | 19,406 | | | | 18,412 | |
| | | | | | | | |
Total Investments | | $ | 10,000,952 | | | $ | 9,845,133 | |
Cash | | | 3,388 | | | | 49,121 | |
Accrued investment income | | | 92,997 | | | | 91,214 | |
Reinsurance recoverables | | | 6,280,337 | | | | 5,984,458 | |
Valuation of business acquired | | | 186,701 | | | | 247,702 | |
Deposit receivable | | | 1,199,537 | | | | 1,250,328 | |
Other assets | | | 682,654 | | | | 633,091 | |
Current income tax | | | 2,051 | | | | 1,472 | |
Deferred tax asset, net | | | 3,686 | | | | 65,040 | |
Separate account assets | | | 1,342,220 | | | | 1,395,141 | |
| | | | | | | | |
Total Assets | | $ | 19,794,523 | | | $ | 19,562,700 | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
Future policy benefits and other policyholder liabilities | | | 5,111,791 | | | | 4,757,641 | |
Policyholders’ account balances | | | 10,935,372 | | | | 11,120,565 | |
Accrued expenses and other liabilities | | | 104,120 | | | | 95,826 | |
Modified coinsurance payable | | | 1,199,537 | | | | 1,250,328 | |
Other long-term debt — affiliate | | | 659,000 | | | | 608,700 | |
Separate account liabilities | | | 1,342,220 | | | | 1,395,141 | |
| | | | | | | | |
Total Liabilities | | $ | 19,352,040 | | | $ | 19,228,201 | |
| | | | | | | | |
SHAREHOLDER’S EQUITY | | | | | | | | |
Common stock, $100 par value, 30,000 shares authorized, 25,000 shares issued and outstanding | | | 2,500 | | | | 2,500 | |
Additionalpaid-in capital | | | 593,558 | | | | 593,558 | |
Accumulated other comprehensive income (loss) | | | (36,168 | ) | | | (154,699 | ) |
Retained earnings (deficit) | | | (117,407 | ) | | | (106,860 | ) |
| | | | | | | | |
Total Shareholder’s Equity | | $ | 442,483 | | | $ | 334,499 | |
| | | | | | | | |
Total Liabilities and Shareholder’s Equity | | $ | 19,794,523 | | | $ | 19,562,700 | |
| | | | | | | | |
See Notes to the Consolidated Financial Statements
18
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Consolidated Statements of Operations and Comprehensive Income (Loss) (Successor) and Statement of Operations and Comprehensive Income (Loss) (Predecessor)
For the Years Ended December 31, 2016 and 2015, the Period from April 1, 2014 through December 31, 2014, and the Period from January 1, 2014 through March 31, 2014
($ in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | | Predecessor | |
| | | For the Year
Ended December 31,
2016 | | | For the Year
Ended December 31,
2015 | | | For the Period from
April 1, 2014
through December 31,
2014 | | | | | | For the Period from
January 1, 2014
through
March 31, 2014 | |
Revenues | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 16,592 | | | $ | 8,841 | | | $ | 20,384 | | | | | | | $ | — | |
Fee income from policyholders | | | 346,027 | | | | 353,932 | | | | 259,169 | | | | | | | | — | |
Net investment income | | | 397,083 | | | | 398,931 | | | | 288,571 | | | | | | | | 2,350 | |
Realized investment gains, net | | | 73,720 | | | | 113,538 | | | | 46,092 | | | | | | | | 285 | |
| | | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 833,422 | | | $ | 875,242 | | | $ | 614,216 | | | | | | | $ | 2,635 | |
| | | | | | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Policyholders’ benefits | | | 449,118 | | | | 351,744 | | | | 216,543 | | | | | | | | — | |
Return credited to policyholders’ account balances | | | 269,488 | | | | 301,079 | | | | 256,703 | | | | | | | | — | |
Operating and acquisition expenses | | | 68,716 | | | | 93,671 | | | | 96,050 | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total expenses | | $ | 787,322 | | | $ | 746,494 | | | $ | 569,296 | | | | | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Income before federal income tax | | $ | 46,100 | | | $ | 128,748 | | | $ | 44,920 | | | | | | | $ | 2,635 | |
Federal income tax expense (benefit) | | | | | | | | | | | | | | | | | | | | |
Current | | | 17,121 | | | | 22,528 | | | | — | | | | | | | | 914 | |
Deferred | | | (2,474 | ) | | | 23,566 | | | | 14,234 | | | | | | | | 8 | |
| | | | | | | | | | | | | | | | | | | | |
Total income tax expense (benefit) | | | 14,647 | | | | 46,094 | | | | 14,234 | | | | | | | | 922 | |
| | | | | | | | | | | | | | | | | | | | |
NET INCOME | | $ | 31,453 | | | $ | 82,654 | | | $ | 30,686 | | | | | | | $ | 1,713 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income, before tax | | | | | | | | | | | | | | | | | | | | |
Net unrealized investment gains (losses): | | | | | | | | | | | | | | | | | | | | |
Unrealized investment gains (losses) for the period | | $ | 100,439 | | | $ | (290,511 | ) | | $ | 131,433 | | | | | | | $ | 2,364 | |
Reclassification adjustment for (gains) losses included in net income | | | (81,920 | ) | | | 79,023 | | | | — | | | | | | | | 285 | |
| | | | | | | | | | | | | | | | | | | | |
Net unrealized investment gains (losses) | | | 182,359 | | | | (369,534 | ) | | | 131,433 | | | | | | | | 2,079 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income, before tax | | | | | | | | | | | | | | | | | | | | |
Less: Income tax (benefit) related to: | | | | | | | | | | | | | | | | | | | | |
Unrealized investment gains (losses) for the period | | | 35,156 | | | | (101,679 | ) | | | 45,935 | | | | | | | | 828 | |
Reclassification adjustment for (gains) losses included in net income | | | 28,672 | | | | (27,658 | ) | | | — | | | | | | | | (100 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net unrealized investment gains (losses) | | | 63,828 | | | | (129,337 | ) | | | 45,935 | | | | | | | | 728 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income | | | 118,531 | | | | (240,197 | ) | | | 85,498 | | | | | | | | 1,351 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive (loss) income | | $ | 149,984 | | | $ | (157,543 | ) | | $ | 116,184 | | | | | | | $ | 3,064 | |
| | | | | | | | | | | | | | | | | | | | |
See Notes to the Consolidated Financial Statements
19
Lincoln Benefit Life Company
Consolidated Statements of Shareholder’s Equity (Successor) and Statement of Shareholder’s Equity (Predecessor)
For the Years Ended December 31, 2016 and 2015, the Period from April 1, 2014 through December 31, 2014 and the Period from January 1, 2014 through March 31, 2014
($ in thousands, except par value data and share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional
Paid-In
Capital | | | Retained
Earnings | | | Accumulated Other
Other Comprehensive
Income (Loss) | | | Total
Shareholder’s Equity | |
| | | | | | |
| | | | | | |
Predecessor | | Shares | | | Amount | | | | | |
Balance, December 31, 2013 | | | 25,000 | | | $ | 2,500 | | | $ | 180,000 | | | $ | 157,325 | | | $ | 3,870 | | | $ | 343,695 | |
Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | — | | | | — | | | | — | | | | 1,713 | | | | — | | | | 1,713 | |
Other comprehensive income (loss), net of tax | | | — | | | | — | | | | — | | | | — | | | | 1,351 | | | | 1,351 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 3,064 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2014 | | | 25,000 | | | $ | 2,500 | | | $ | 180,000 | | | $ | 159,038 | | | $ | 5,221 | | | $ | 346,759 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Successor | | | | | | | | | | | | | | | | | | |
Balance, April 1, 2014 | | | 25,000 | | | $ | 2,500 | | | $ | 593,308 | | | $ | — | | | $ | — | | | $ | 595,808 | |
Dividends to shareholder | | | — | | | | — | | | | — | | | | (33,200 | ) | | | — | | | | (33,200 | ) |
Capital contribution | | | — | | | | — | | | | 250 | | | | — | | | | — | | | | 250 | |
Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | — | | | | — | | | | — | | | | 30,686 | | | | — | | | | 30,686 | |
Other comprehensive income (loss), net of tax | | | — | | | | — | | | | — | | | | — | | | | 85,498 | | | | 85,498 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 116,184 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2014 | | | 25,000 | | | $ | 2,500 | | | $ | 593,558 | | | $ | (2,514 | ) | | $ | 85,498 | | | $ | 679,042 | |
Dividends to shareholder | | | — | | | | — | | | | — | | | | (187,000 | ) | | | — | | | | (187,000 | ) |
Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | — | | | | — | | | | — | | | | 82,654 | | | | — | | | | 82,654 | |
Other comprehensive income (loss), net of tax | | | — | | | | — | | | | — | | | | — | | | | (240,197 | ) | | | (240,197 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | (157,543 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2015 | | | 25,000 | | | $ | 2,500 | | | $ | 593,558 | | | $ | (106,860 | ) | | $ | (154,699 | ) | | $ | 334,499 | |
Dividends to shareholder | | | — | | | | — | | | | — | | | | (42,000 | ) | | | — | | | | (42,000 | ) |
Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | — | | | | — | | | | — | | | | 31,453 | | | | — | | | | 31,453 | |
Other comprehensive income (loss), net of tax | | | — | | | | — | | | | — | | | | — | | | | 118,531 | | | | 118,531 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | | | | 149,984 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2016 | | | 25,000 | | | $ | 2,500 | | | $ | 593,558 | | | $ | (117,407 | ) | | $ | (36,168 | ) | | $ | 442,483 | |
| | | | | | | | �� | | | | | | | | | | | | | | | | |
See Notes to the Consolidated Financial Statements
20
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Consolidated Statements of Cash Flows (Successor) and Statement of Cash Flows (Predecessor)
For the Years Ended December 31, 2016 and 2015, the Period from April 1, 2014 through December 31, 2014 and the Period from January 1, 2014 through March 31, 2014
($ in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | | Predecessor | |
| | | For the Year
Ended
December 31,
2016 | | | For the Year
Ended
December 31,
2015 | | | For the Period from
April 1, 2014 through
December 31, 2014 | | | | | | For the Period
from January 1, 2014
through
March 31, 2014 | |
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 31,453 | | | $ | 82,654 | | | $ | 30,686 | | | | | | | $ | 1,713 | |
Adjustments to reconcile net income (loss) to net cash: | | | | | | | | | | | | | | | | | | | | |
Policy charges and fee income | | | (346,027 | ) | | | (353,932 | ) | | | (259,169 | ) | | | | | | | — | |
Interest credited | | | 269,488 | | | | 301,079 | | | | 256,703 | | | | | | | | — | |
Investment gains, net | | | (73,720 | ) | | | (125,986 | ) | | | (46,092 | ) | | | | | | | (285 | ) |
Amortization/Accretion of bond premium, net | | | 59,337 | | | | 44,701 | | | | 44,112 | | | | | | | | 94 | |
Amortization of VOBA | | | 30,054 | | | | 40,880 | | | | 38,987 | | | | | | | | — | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | |
Decrease (increase) in insurance related liabilities and policy-related balances | | | 52,316 | | | | (24,884 | ) | | | (21,964 | ) | | | | | | | 6,402 | |
Decrease (increase) in receivable from/payable to affiliate | | | — | | | | — | | | | — | | | | | | | | 24,358 | |
Deferred income tax expense (benefit) | | | (2,474 | ) | | | 23,566 | | | | 14,234 | | | | | | | | 921 | |
Decrease (increase) in accrued investment income | | | (1,783 | ) | | | 5,194 | | | | 6,838 | | | | | | | | — | |
Decrease (increase) in other assets and liabilities | | | (3,961 | ) | | | (27,417 | ) | | | 31,780 | | | | | | | | (23,192 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | 14,683 | | | | (34,145 | ) | | | 96,115 | | | | | | | | 10,011 | |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, available for sale | | | | | | | | | | | | | | | | | | | | |
Proceeds from sales and maturities | | | 3,806,768 | | | | 4,739,792 | | | | 1,844,344 | | | | | | | | 21,341 | |
Purchases | | | (3,823,450 | ) | | | (3,703,237 | ) | | | (1,898,874 | ) | | | | | | | — | |
Commercial mortgage loans | | | | | | | | | | | | | | | | | | | | |
Proceeds from sales and paydowns | | | 265,414 | | | | 164,658 | | | | 150,849 | | | | | | | | — | |
Originations and purchases | | | (208,580 | ) | | | (559,110 | ) | | | — | | | | | | | | | |
Purchase of common stocks | | | (5,100 | ) | | | — | | | | — | | | | | | | | — | |
Net purchases, sales, maturities of derivatives | | | 2,642 | | | | (1,379 | ) | | | (8,636 | ) | | | | | | | — | |
Net purchases, sales, maturities of other investments | | | 63,097 | | | | 184,107 | | | | 620,425 | | | | | | | | 55,924 | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 100,791 | | | | 824,831 | | | | 708,108 | | | | | | | | 77,265 | |
| | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | |
Policyholders’ account deposits | | | 763,748 | | | | 356,916 | | | | 340,128 | | | | | | | | — | |
Policyholders’ account withdrawals | | | (905,014 | ) | | | (922,215 | ) | | | (1,141,289 | ) | | | | | | | — | |
Dividends paid to shareholder | | | (42,000 | ) | | | (187,000 | ) | | | (33,200 | ) | | | | | | | — | |
Change in overdrafts | | | 22,059 | | | | (38,996 | ) | | | 39,089 | | | | | | | | — | |
Capital contribution | | | — | | | | — | | | | 250 | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (161,207 | ) | | | (791,295 | ) | | | (795,022 | ) | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (45,733 | ) | | | (609 | ) | | | 9,201 | | | | | | | | 87,276 | |
Cash and cash equivalents, beginning of period | | | 49,121 | | | | 49,730 | | | | 40,529 | | | | | | | | 5,100 | |
| | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 3,388 | | | $ | 49,121 | | | $ | 49,730 | | | | | | | $ | 92,376 | |
| | | | | | | | | | | | | | | | | | | | |
Supplemental schedule of cash flow information: | | | | | | | | | | | | | | | | | | | | |
Cash paid during the year: | | | | | | | | | | | | | | | | | | | | |
Income taxes paid | | $ | 17,700 | | | $ | 24,000 | | | $ | — | | | | | | | $ | — | |
Interest paid | | $ | 7,328 | | | $ | 6,671 | | | $ | 4,585 | | | | | | | $ | — | |
Commutation Agreement proceeds (see Note 1): | | | | | | | | | | | | | | | | | | | | |
Cash received on April 1, 2014 | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 143,348 | |
Cash received subsequent to April 1, 2014 | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 5,946 | |
Invested assets transferred | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | 11,482,637 | |
Noncash activities | | | | | | | | | | | | | | | | | | | | |
Issuance of vehicle note | | $ | — | | | $ | — | | | $ | 513,000 | | | | | | | $ | — | |
Issuance of other long-term debt | | $ | — | | | $ | — | | | $ | 513,000 | | | | | | | $ | — | |
Interest income on vehicle note | | $ | 25,069 | | | $ | 22,880 | | | $ | 15,711 | | | | | | | $ | — | |
Interest expense on other long-term debt | | $ | 25,069 | | | $ | 22,880 | | | $ | 15,711 | | | | | | | $ | — | |
Increase in vehicle note and other long-term debt | | $ | 50,300 | | | $ | 57,100 | | | $ | 38,600 | | | | | | | $ | — | |
Change in modified coinsurance payable and deposit receivable | | $ | 50,791 | | | $ | 133,060 | | | $ | 166,963 | | | | | | | $ | — | |
Bond exchanges | | $ | 11,199 | | | | — | | | | — | | | | | | | | — | |
See Notes to the Consolidated Financial Statements
21
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Lincoln Benefit Life Company (the “Company” or “Lincoln Benefit”) is a stock insurance company domiciled in the State of Nebraska. It is a wholly owned subsidiary of Resolution Life, Inc. (“Resolution”), which in turn is a wholly owned subsidiary of Resolution Life Holdings, Inc. (“Holdings”). Resolution was formed on July 2, 2013 under the General Corporation Law of the State of Delaware.
On April 1, 2014, Lancaster Re Captive Insurance Company (“Lancaster Re”), a Nebraska domiciled captive insurance company, became a wholly owned subsidiary of Lincoln Benefit when it was contributed to Lincoln Benefit by Resolution.
The Company became a wholly owned subsidiary of Resolution on April 1, 2014 after receiving all required regulatory approvals. Prior to this date, it was a wholly owned subsidiary of Allstate Life Insurance Company (“ALIC”). On July 17, 2013, Holdings executed a Stock Purchase Agreement (the “Purchase Agreement”) to acquire 100% of the Company from ALIC (the “Acquisition”). In November 2013, Holdings assigned the right to acquire all of Lincoln Benefit’s outstanding capital stock to Resolution pursuant to an Assignment Agreement. The purchase price was $595.8 million.
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. Prior to July 18, 2013, the Company sold interest-sensitive, traditional and variable life insurance products through both exclusive agencies (“Allstate Financial Sales channel”) and independent master brokerage agencies. Effective July 17, 2013, sales through the independent master brokerage agencies ceased, and sales through the Allstate Financial Sales channel will continue for a period after the closing date of Acquisition. The Company operates 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.
On April 1, 2014, immediately prior to the Acquisition, the Company, pursuant to a Partial Commutation Agreement, recaptured all deferred annuity, long-term care, accident and health and life business sold through Lincoln Benefit’s independent master brokerage agencies, other than specified life business, previously reinsured by ALIC. The primary impacts of the Partial Commutation Agreement with ALIC were the receipt of investments, the reduction of the related reinsurance recoverable and the reestablishment of deferred acquisition costs. The Company’s assets and liabilities increased by $1.33 billion and $0.19 billion, respectively. Since the Partial Commutation Agreement occurred between entities under common control, the excess of assets received and liabilities assumed was recorded as a capital contribution through additionalpaid-in capital.
Additionally, Lincoln Benefit and ALIC entered into an Amended and Restated Reinsurance Agreement where ALIC continues to reinsure all life insurance business written by Lincoln Benefit through the Allstate Financial Sales channel, all immediate annuities written by Lincoln Benefit prior to closing of the Acquisition, and certain term life policies written by Lincoln Benefit. Lincoln Benefit’s variable annuity business will remain reinsured by ALIC under an existing reinsurance agreement between Lincoln Benefit and ALIC. This business will continue to be administered by ALIC under an existing administrative services agreement between Lincoln Benefit and ALIC.
As part of the Acquisition, ALIC has agreed to indemnify the Company for certain liabilities related topre-closing activities of the transferred business.
22
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Under the acquisition method of accounting, the assets acquired and liabilities assumed are recorded at fair value at the date of acquisition. The following table summarizes the fair values of assets acquired and liabilities assumed as of April 1, 2014:
| | | | |
($ in thousands) | |
Assets | | | | |
Fixed maturities | | $ | 9,194,903 | |
Commercial mortgage loans | | | 1,263,902 | |
Policy loans | | | 196,451 | |
Short-term investments | | | 979,728 | |
Other invested assets | | | 1,104 | |
Cash | | | 40,529 | |
Accrued investment income | | | 103,246 | |
Reinsurance recoverable | | | 5,606,879 | |
Value of business acquired | | | 290,795 | |
Deposit receivable | | | 1,550,351 | |
Intangibles | | | 5,200 | |
Other assets | | | 554,176 | |
Separate account assets | | | 1,661,007 | |
| | | | |
Total assets acquired | | | 21,448,271 | |
| | | | |
Liabilities | | | | |
Future policy benefits and other policyholder liabilities | | | 6,682,833 | |
Policyholders’ account balances | | | 10,367,246 | |
Accrued expenses and other liabilities | | | 78,026 | |
Modified coinsurance payable | | | 1,550,351 | |
Other long-term debt — affiliate | | | 513,000 | |
Separate account liabilities | | | 1,661,007 | |
| | | | |
Total liabilities assumed | | | 20,852,463 | |
| | | | |
Net assets acquired | | $ | 595,808 | |
| | | | |
Included in the assets acquired is the value of business acquired (“VOBA”), which reflects the estimated fair value ofin-force contracts acquired and represents the portion of the purchase price that is allocated to the future profits embedded in the acquired contracts at the acquisition date. See Note 11 for further explanation of VOBA. The assessment of fair value in accordance with ASC805-20-25 included the establishment of intangible assets for VOBA and various state licenses.
Basis of Presentation
The Company’s financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The financial statements are presented for Successor and Predecessor Periods, which relate to the accounting periods after and before April 1, 2014, respectively, the date of the closing of the Acquisition. For periods after April 1, 2014, the accompanying financial statements comprise the consolidated financial statements of the Company, which include the accounts of the Company and its subsidiary. Due to the Acquisition and the application of push-down accounting, different bases of accounting have been used to prepare the Predecessor and Successor financial statements. A black line separates the Predecessor and Successor financial statements to highlight the lack of comparability between these two periods. The principal accounting policies applied in the preparation of these financial statements are set out below and in Note 2.
23
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Consolidation
The accompanying consolidated financial statements of the Successor include the accounts of Lincoln Benefit and its subsidiary, Lancaster Re. All significant intercompany balances and transactions have been eliminated on consolidation.
Use of Estimates
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.
| 2. | Significant Accounting Policies |
Cash
Cash includes cash on hand, amounts due from banks, money market securities, highly liquid overnight deposits, discount notes and commercial paper held in the ordinary course of business and other debt instruments with maturities of three months or less when purchased. Cash equivalents mainly consist of government guaranteed money market mutual funds (“MMFs”) carried at amortized cost which approximates fair value.
Investments
Fixed maturities include bonds, asset-backed securities (“ABS”) residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”). Fixed maturities, which may be sold prior to their contractual maturity, are designated asavailable-for-sale (“AFS”) 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 and cash received from maturities andpay-downs are reflected as a component of proceeds from sales and maturities within the Consolidated Statement of Cash Flows — Successor and Statement of Cash Flows — Predecessor.
Common stocks are comprised of Federal Home Loan Bank of Chicago (“FHLB”) stock, which is carried at cost.
The Company recognizes other-than-temporary impairments (“OTTI”) for securities classified as AFS in accordance with ASC 320,Investments-Debt and Equity Securities. At least quarterly, management reviews impaired securities for OTTI. The Company considers several factors when determining if a security is OTTI, including but not limited to: its intent and ability to hold the impaired security until an anticipated recovery in value, the issuer’s ability to meet current and future principal and interest obligations for fixed maturity securities, the length and severity of the impairment, the financial condition and near term and long term prospects for the issuer. In making these evaluations, the Company exercises considerable judgment.
If the Company intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, then the Company recognizes a charge to earnings for the full amount of the impairment (the difference between the amortized cost and fair value of the security). For fixed maturity securities that are considered OTTI and that the Company does not intend to sell and will not be required to sell, the Company separates the impairment into two components: credit loss and noncredit loss. Credit losses are charged to net realized investment losses and noncredit losses are charged to other comprehensive income. The credit loss component is the difference between the security’s amortized cost and the present value of its
24
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
expected future cash flows discounted at the current effective rate. The remaining difference between the security’s fair value and the present value of its expected future cash flows is the noncredit loss. For corporate bonds, historical default (by rating) data is used as a proxy for the probability of default, and loss given default (by issuer) projections are applied to the par amount of the bond. Potential losses incurred on structured securities are based on expected loss models rather than incurred loss models. Expected cash flows include assumptions about key systematic risks (e.g., unemployment rates, housing prices) and loan-specific information (e.g., delinquency rates, loan-to-value ratios). Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties, along with assumptions and judgments about the future performance of the underlying collateral.
Commercial mortgage loans (“CMLs”) acquired at fair value are carried at amortized cost using the effective interest rate method. CMLs held by the Company are diversified by property type and geographic area throughout the U.S. CMLs are considered impaired when it is probable that the Company will not collect amounts due according to the terms of the original loan agreement. The Company assesses the impairment of loans individually for all loans in the portfolio. The Company estimates the fair value of the underlying collateral using internal valuations generally based on discounted cash flow analyses. The Company estimates an allowance for loan and lease losses (“ALLL”) representing potential credit losses embedded in the CML portfolio. The estimate is based on a consistently applied analysis of the loan portfolio and takes into consideration all available information, including industry, geographical, economic and political factors.
Policy loans represent loans the Company issues to policyholders. Policy loans are carried at unpaid principal balances. Interest income on such loans is recognized as earned using the contractually agreed upon interest rate and reflected in Net investment income in the Consolidated Statement of Operations and Comprehensive Income (Loss). Generally, interest is capitalized on the associated policy’s anniversary date.
Short-term investments include securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase and are stated at estimated fair value or amortized cost, which approximates fair value.
Derivatives
As part of the Company’s overall risk management policy, the Company uses listed equity index options and futures and interest rate swaps to economically hedge its obligation under certain fixed indexed annuity and universal life contracts. Derivatives are carried in the Company’s Consolidated Balance Sheet either as assets within Other invested assets or as liabilities within Accrued expenses and other liabilities at estimated fair value. The Company offsets the fair value amounts recognized for derivatives executed with the same counterparty under the same master netting agreement. Accruals on derivatives are generally recorded in accrued investment income or within other liabilities. However, accruals that are not scheduled to settle within one year are included with the derivatives carrying value in other invested assets or other liabilities. If a derivative is not designated as an accounting hedge or its use in managing risk does not qualify for hedge accounting, changes in the estimated fair value of the derivative are reported in Realized investment gains, net in the Consolidated Statement of Operations and Comprehensive Income (Loss). The notional amounts specified in the contracts are used to calculate contractual payments under the agreements and are generally not representative of the potential for gain or loss on these contracts.
Futures contracts are defined as commitments to buy or sell designated financial instruments based on specified prices, yields or indexes. Equity index futures contracts provide returns at specified or optional dates based upon a specified index or interest rate applied to a notional amount. The Company uses futures to hedge
25
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
exposures in indexed annuity and life contracts. Daily cash settlement of variation margins is required for futures contracts and is based on the changes in daily prices. The final settlement of futures contracts is in cash.
Index option contracts provide returns at specified or optional dates based on a specified equity index applied to the option’s notional amount. The Company purchases and writes (sells) option contracts primarily to reduce market risk associated with certain annuity and life contracts. When the Company purchases/sells option contracts at specific prices, it is required to pay/receive a premium to/from the counterparties. The amount of premium paid/received is based on the number of contracts purchased/sold, the specified price and the maturity date of the contract. The Company receives/pays cash equal to the premium of written/purchased options when the contract is established. Premiums paid are reported as a derivative asset and premiums received are reported as a derivative liability. If the option is exercised, the Company receives/pays cash equal to the product of the number of contracts and the specified price in the contract in exchange for the equity upon which the option is written/purchased. If the options are not exercised, then no additional cash is exchanged when the contract expires. Index option contracts are cash settled upon exercise and the gain or loss on the settlement is reported in Realized investment gains, net. If the option contract expires without being exercised, the premiums paid or received are reported as Realized investment gains, net and the corresponding asset or liability previously recorded is reversed. The change in the fair value of options contracts are reported in Realized investment gains, net, with an adjustment to a corresponding asset or liability.
The Company employs interest rate swaps to reduce interest rate risk associated with specific investments supporting certain annuity contracts. An interest rate swap is an agreement between two counterparties in which one stream of future interest payments is exchanged for another. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate. Swaps provide returns at the reset dates based on respective interest rates applied to the notional amount with the net difference in resulting interest payments settled between the counterparties. The change in the fair value of the swap is reported in Realized investment gains, net, with an adjustment to the corresponding asset or liability. Cash flows received/paid at the reset dates are reported in net investment income and consist of any differences in the amounts of contractual interest calculated due to the respective counterparties based on changes in interest rates. Swaps usually terminate upon expiration and the remaining book value is offset to Realized investment gains, net. If terminated through sale, the difference between consideration received or paid and the remaining book value is recorded to Realized investment gains, net.
The Company has derivatives embedded innon-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, guaranteed minimum accumulation and withdrawal benefits in variable annuity contracts. The Company has reinsurance agreements to transfer all the risk related to guarantee minimum income, accumulation and withdrawal benefits in variable annuity contracts to third party reinsurers. None of these derivatives are designated as accounting hedging instruments and all are gross liabilities reported in policyholder account balances or future policy benefits and other policyholder liabilities. The Company also has derivatives embedded in certain inverse floater bonds which are held at fair value option. The fair value option is used for valuing these securities given the complexity of bifurcating the economic components associated with the embedded derivatives.
Investment Income and Realized Gains and Losses
Investment income primarily consists of interest and is recognized on an accrual basis using the effective yield method. Interest income for RMBS and CMBS is determined considering estimatedpay-downs, including
26
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
prepayments, obtained from third party data sources and internal estimates. Actual prepayment experience is periodically reviewed and effective yields are recalculated when differences arise between the prepayments originally anticipated and the actual prepayments received. For RMBS and CMBS of high credit quality with fixed interest rates, the effective yield is recalculated on a retrospective basis. For all others, the effective yield is recalculated on a prospective basis. Accrual of income is suspended for other-than-temporarily impaired fixed maturities when the timing and amount of cash flows expected to be received is not reasonably estimable. It is the Company’s policy to cease to carry accrued interest on debt securities that are over 90 days delinquent or where collection of interest is improbable and commercial mortgage loans in default if deemed uncollectible or over 180 days past due. The Company held one commercial mortgage loan that was delinquent in 2016 and accruals suspended. The Company held no investments innon-accrual status as of December 31, 2015.
Realized investment gains and losses, net, 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 principal payments, are determined on a specific identification basis.
Recognition of Premium Revenues and Fees, and Related Policyholders’ Benefits and Interest Credited
Prior to April 1, 2014 (the “Predecessor Period”), the Company had reinsurance agreements whereby all premiums, fee income from policyholders and returns credited to policyholders, policyholder benefits and substantially all expenses were ceded to ALIC and other reinsurers. Amounts reflected in the Statements of Operations and Comprehensive Income (Loss) 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. Surrenders on traditional life and death benefits are reflected in policyholder benefits.
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 received at the inception of the contract. Benefits and expenses are recognized in relation to premiums. As of April 1, 2014, the Company has reinsurance agreements to transfer all the risk related to immediate annuities existing as of or prior to the Acquisition Date.
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 policyholder, interest credited to the policyholder account balance and contract charges assessed against the policyholder account balance. Premiums from these contracts are reported as policyholder account balances. Fee income from policyholders consist of fees assessed against the policyholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the policy prior to contractually specified dates. These charges are recognized as revenue when assessed against the policyholder account balance. Policyholder benefits include life-contingent benefit payments in excess of the policyholder 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 policyholder account balance deposits. Policy fees 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 policyholder account balance.
27
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Returns credited to policyholder funds represents interest accrued or paid on interest-sensitive life 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.
Policy charges for variable life and variable annuity products consist of fees assessed against the policyholder account balances for contract maintenance, administration, mortality, expense and surrender of the contract prior to contractually specified dates. Policy benefits incurred for variable life and variable annuity products include guaranteed minimum death, income, withdrawal and accumulation benefits.
The Company incurs costs in connection with renewal insurance business. All acquisition-related costs, including commissions, as well as all indirect costs, are expensed as incurred and reported in Other expenses on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014 (the “Successor Period”).
Reinsurance
Reinsurance accounting is applied for ceded and assumed transactions when the risk transfer provisions of ASC 944-40,Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, have been met. To meet risk transfer requirements, a long-duration reinsurance contract must transfer mortality or morbidity risks, and subject the reinsurer to a reasonable possibility of a significant loss. Those contracts that do not meet risk transfer requirements are accounted for using deposit accounting. For short duration contracts, to meet risk transfer requirements the reinsurer must assume significant insurance risk and have a reasonable possibility of experiencing significant loss.
With respect to ceded reinsurance, the Company values reinsurance recoverables on reported claims at the time the underlying claim is recognized in accordance with contract terms. For future policy benefits, the Company estimates the amount of reinsurance recoverables based on the terms of the reinsurance contracts and historical reinsurance recovery information. The reinsurance recoverables are based on what the Company believes are reasonable estimates and the balance is reported as an asset in the Consolidated Balance Sheets (Successor). However, the ultimate amount of the reinsurance recoverable is not known until all claims are settled. Reinsurance contracts do not relieve the Company from its obligations to policyholders, and failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible.
Prior to April 1, 2014, the Company had reinsurance agreements whereby all insurance risks represented by premiums, fee income from policyholders, returns credited to policyholder account balances, policyholder benefits and substantially all expenses were ceded to ALIC and other reinsurers. Additionally, investment income earned on the assets that supported policyholder account balances and future policy benefits and other policyholder funds were not included in the Company’s financial statements, as those assets were owned and managed by ALIC and other reinsurers under the terms of the reinsurance agreements.
Value of Business Acquired (“VOBA”)
For interest-sensitive life and annuity products, VOBA is amortized over the life of the policies in relation to the emergence of estimated gross profits (“EGPs”) from margins on mortality, interest, expenses, and surrenders, all of which are net of reinsurance and include actual realized gains and losses on investments. Fornon-interest
28
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
sensitive life products, such as term life insurance, VOBA is amortized in relation to premium. VOBA is reviewed periodically for loss recognition to ensure that the unamortized balance is recoverable from future earnings from the business.The carrying amount of VOBA is adjusted for the effects of realized and unrealized gains and losses on debt securities classified as AFS.
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 Consolidated Statement of Operations and Comprehensive Income (Successor) or Statements of Operations and Comprehensive Income (Predecessor). 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.
Future Policy Benefits and Other Policyholder Liabilities
Policy liabilities are established for future policy benefits on certain annuity, life, and long term care policies. Such liabilities are established in amounts adequate to meet the estimated future obligations of policiesin-force. Changes in policy and contract claims are recorded in policyholder benefits in the Consolidated Statement of Operations and Comprehensive Income (Loss).
For ASC944-20 products, benefit reserves are computed using the net level premium method for individual life, annuity and long-term care policies, and are based upon estimates as to future investment yield, mortality and lapse that include provisions for adverse deviation that were prevalent at the time the reserve was initially established. Mortality, morbidity and lapse assumptions for all policies are based on the Company’s own experience and industry standards.
Liabilities for outstanding claims and claims adjustment expenses are estimates of payments to be made on life and health insurance contracts for reported claims and claims adjustment expenses. A liability is also held for claims adjustment expenses incurred but not reported as of the balance sheet date. These liabilities are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all claims incurred but not paid. These estimates are continually reviewed and adjusted as necessary. Such adjustments are reflected in current operations.
Future policy benefit reserves for fixed indexed life and annuity policies with returns linked to the performance of a specified market index are equal to the excess of the sum of the fair value of the embedded derivatives and the host (or guaranteed) component over the policyholder account balance. The change in the fair value of the embedded derivative is linked to the performance of the equity option. The host value is established as of the date of acquisition and is equal to the account value, plus the value of the unexpired options at the date of acquisition, less the embedded derivative, and accreted over the policy’s life at a constant rate of interest.
The Company holds additional liabilities for its no lapse guarantees (associated with universal life) and guaranteed minimum withdrawal benefits (associated with fixed indexed annuities). These are accounted for in accordance with ASC944-20,Financial Services — Insurance Activities. Additional liabilities for no lapse
29
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
guarantees on universal life products are calculated based on the application of a benefit ratio (the present value of total expected benefit payments over the life of the contract divided by the present value of total expected assessments over the life of the contract). The level and direction of the change in reserves will vary over time based on the emergence of actual experience and revisions to future assumptions.
Policy liabilities and accruals are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that policy liabilities and accruals will be sufficient to meet future obligations of policiesin-force. The amount of liabilities and accruals, however, could be revised if the estimates discussed above are revised.
Policyholders’ Account Balances
Policyholder account balances represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities. Policyholder funds primarily comprise cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.
The Company holds additional liabilities for guaranteed minimum income benefits (“GMIB”) associated with variable annuities, which are accounted for in accordance with ASC944-20,Financial Services — Insurance Activities. The reserves for certain living benefit features, including guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”) are accounted for as embedded derivatives, with fair values calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. The Company’s GMIB, GMAB and GMWB reserves are ceded to external reinsurers. For additional information regarding the valuation of these optional living benefit features, see Note 10.
Income Taxes — Successor
Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial statement and income tax bases of assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets is assessed at each reporting date and a deferred tax asset valuation allowance is established when there is uncertainty that such assets will be realized. Tax positions are assessed under atwo-step approach, which requires the assessment of recognition and measurement. The Company reports interest expense related to income tax matters and tax penalties in other operating expenses in the Consolidated Statement of Operations and Comprehensive Income (Loss).
Income Taxes — Predecessor
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, accrued expenses and reinsurance recoverables. A deferred tax asset valuation allowance is established when there is uncertainty that such assets will be realized.
30
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Other Long-Term Debt
Effective April 1, 2014, and with Nebraska Department of Insurance (the “NE DOI” or the “Department of Insurance”) approval, Lancaster Re issued a variable funding Surplus Note (the “Surplus Note”) to its affiliate, Lanis, LLC. for $513.0 million and acquired from Lanis a Vehicle Note (the “Vehicle Note”) for $513.0 million. The Vehicle Note is held to support a portion of Lancaster Re’s reinsurance obligations and has been authorized as an acceptable form of reinsurance collateral pursuant to Nebraska Rev. Stat.§44-8216(8)(c)(i) which allows a special purpose financial captive insurer to establish any method of security that the Department of Insurance deems acceptable. The scheduled maturity date of the Vehicle Note is April 1, 2034, and the scheduled maturity date of the Surplus Note is April 1, 2039, although each may be cancelled earlier or extended under certain conditions. The Surplus Note does not repay principal prior to maturity and principal payment at maturity is subject to the prior approval of the Department of Insurance. Withpre-approval, the Surplus Note is increased each quarter with a corresponding increase in the Vehicle Note. With Department of Insurancepre-approval, interest on the Surplus Note for the prior quarter is paid on the first day of each subsequent quarter at a rate consistent with the rate received on the Vehicle Note of 4%. The Surplus Note and Vehicle Note increased by $50.3 million, $57.1 million and $38.6 million in the Successor Periods for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014, respectively. Interest expense of $25.1 million, $22.9 million and $15.7 million was recognized in the Successor Periods for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014, respectively. The Surplus Note is unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Lancaster Re.
Other Assets and Accrued Expenses and Other Liabilities
Other assets consist primarily of premiums due, intangible assets, the Vehicle Note and receivables resulting from sales of securities that had not yet settled at the balance sheet date. Other liabilities consist primarily of accrued expenses, technical overdrafts, derivatives, and payables resulting from purchases of securities that had not yet been settled at the balance sheet date.
Adoption of New Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to restricted cash (ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash). The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance specifies that restricted cash and cash equivalents are to be included with cash and cash equivalents in the Statement of Cash Flows. The Company will provide these additional disclosures in the Consolidated Statements of Cash Flows upon adoption date as applicable.
In June 2016, the FASB issued new guidance for recording credit losses (ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments). The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information. The revisions affect loans, debt securities, trade receivables, net investments in leases,off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. Credit losses onavailable-for-sale fixed maturities carried at fair value will continue to be measured as other-than-temporary impairments when incurred, however, the losses will be recognized through an allowance and no longer as an adjustment to cost
31
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
basis. The new guidance will also require purchased financial assets with a more-than-insignificant amount of credit deterioration since original issuance to be recorded based on the contractual amounts due and an initial allowance recorded at the date of purchase. The Company has not yet determined the timing for adoption or estimated the effect on the Company’s consolidated financial statements. Significant implementation matters yet to be addressed include estimating lifetime expected losses on debt instruments carried at other than fair value, determining the impact of valuation allowances on the effective interest method for recognizing interest income, and updating the investment accounting system functionality to adjust valuation allowances based on changes in fair value.
In February 2016, the FASB issued a new leasing standard (ASU2016-02, Leases (Topic 842)). The leasing standard will be effective for calendaryear-end public companies beginning after December 15, 2018. Early adoption is permitted. The core principle of the proposed requirements is that an entity should recognize assets and liabilities arising from a lease. In accordance with that principle, a lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and aright-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. The Company is currently identifying all leases that are within the scope of this standard, and is currently evaluating the impact of this guidance on its consolidated financial statements. The adoption of this new guidance is not expected to have a material impact on the Company’s recognition of lease expense.
In January 2016, the FASB issued new guidance on the recognition and measurement of financial instruments (ASU2016-01, Financial Instruments — Overall (Subtopic825-10); Recognition and Measurement of Financial Assets and Financial Liabilities). The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for the instrument-specific credit risk provision. The new guidance will require investments in equity securities to be measured at fair value with any changes valuation reported in net income, except for those equity securities that result in consolidation or are accounted for under the equity method of accounting. The new guidance will also require a deferred tax asset resulting from net unrealized losses onavailable-for-sale fixed maturities that are recognized in accumulated other comprehensive income (loss) to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Any difference in the evaluation of deferred tax assets may also affect stockholder’s equity. Cash flows will not be affected.
In May 2015, the FASB issued new guidance on short-duration insurance contracts (Accounting Standards Update (“ASU”)2015-09, Financial Services — Insurance (Topic 944)): Disclosures about Short-Duration Contracts). The amendments in this new guidance are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The new guidance should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The new guidance requires insurance entities to provide users of financial statements with more transparent information about initial claim estimates and subsequent adjustments to these estimates, including reconciling from the claim development table to the balance sheet liability; methodologies and judgments in estimating claims; and the timing, and frequency of claims. The new disclosure required by this guidance has been added to Note 8.
In May 2015, the FASB issued new guidance on fair value measurement (ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)), effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and which should be applied retrospectively to all periods presented. Earlier application is permitted. The new amendments in this ASU remove the requirement to categorize within the fair value
32
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
hierarchy all investments for which fair value is measured using the net asset value (“NAV”) per share practical expedient. In addition, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. The adoption of this guidance did not have a material impact to the Company’s consolidated financial statements.
In April 2015, the FASB issued new guidance on accounting for fees paid in a cloud computing arrangement (ASU2015-05, Intangibles — Goodwill and Other —Internal-Use Software (Subtopic350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement), effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the new guidance is permitted and an entity can elect to adopt the guidance either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The new guidance provides that all software licenses included in cloud computing arrangements be accounted for consistent with other licenses of intangible assets. However, if a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract, the accounting for which did not change. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Effective November 18, 2014, the Company adopted new guidance on when, if ever, the cost of acquiring an entity should be used to establish a new accounting basis (“pushdown”) in the acquired entity’s separate financial statements (ASU2014-17, Business Combinations (Topic 805): Pushdown Accounting). The guidance provides an acquired entity and its subsidiaries with an irrevocable option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. If a reporting entity elects to apply pushdown accounting, its stand-alone financial statements would reflect the acquirer’s new basis in the acquired entity’s assets and liabilities. The election to apply pushdown accounting should be determined by an acquired entity for each individualchange-in-control event in which an acquirer obtains control of the acquired entity; however, an entity that does not elect to apply pushdown accounting in the period of achange-in-control can later elect to retrospectively apply pushdown accounting to the most recentchange-in-control transaction as a change in accounting principle. The Company has applied pushdown accounting as a result of the Acquisition in the Successor Period, as disclosed in Note 1.
In May 2014, the FASB issued a comprehensive new revenue recognition standard (ASU2014-09, Revenue from Contracts with Customers (Topic 606)) effective for fiscal years beginning after December 15, 2016 and interim periods within those years and should be applied retrospectively. In August 2015, the FASB amended the guidance (ASU2015-14) to defer the effective date by one year, effective for the fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new guidance will supersede nearly all existing revenue recognition guidance under GAAP; however, it will not impact the accounting for insurance contracts, leases, financial instruments and guarantees. For those contracts that are impacted by the new guidance, the guidance will require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services. The adoption of this guidance will not have a material impact to the Company’s consolidated financial position, results of operations or financial statement disclosures.
33
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The amortized cost, gross unrealized gains and losses and fair value for fixed maturities as of December 31, 2016 and 2015 were as follows:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2016 — Successor ($ in thousands) | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Embedded
Derivatives(1) | | | Fair Value | |
Fixed maturities | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies, available for sale | | $ | 508,635 | | | $ | 7,681 | | | $ | (14,979 | ) | | $ | — | | | $ | 501,337 | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies, at fair value option | | | 15,348 | | | | — | | | | — | | | | (733 | ) | | | 14,615 | |
Obligations of U.S. States and Political Subdivisions | | | 702,415 | | | | 15,936 | | | | (8,614 | ) | | | — | | | | 709,737 | |
Foreign government | | | 31,009 | | | | 303 | | | | (3,257 | ) | | | — | | | | 28,055 | |
All other corporate securities | | | 5,963,354 | | | | 74,854 | | | | (151,382 | ) | | | — | | | | 5,886,826 | |
ABS | | | 512,486 | | | | 5,370 | | | | (10,093 | ) | | | — | | | | 507,763 | |
CMBS | | | 385,757 | | | | 1,283 | | | | (5,778 | ) | | | — | | | | 381,262 | |
RMBS | | | 180,492 | | | | 5,556 | | | | (2,903 | ) | | | — | | | | 183,145 | |
| | | | | | | | | | | | | | | | | | | | |
Total fixed maturities | | $ | 8,299,496 | | | $ | 110,983 | | | $ | (197,006 | ) | | $ | (733 | ) | | $ | 8,212,740 | |
Equity securities | | | 5,100 | | | | — | | | | — | | | | — | | | | 5,100 | |
| | | | | | | | | | | | | | | | | | | | |
Total fixed maturities and equity securities investments | | $ | 8,304,596 | | | $ | 110,983 | | | $ | (197,006 | ) | | $ | (733 | ) | | $ | 8,217,840 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
December 31, 2015 — Successor ($ in thousands) | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Embedded
Derivatives(1) | | | Fair Value | |
Fixed maturities | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies | | $ | 163,096 | | | $ | 5,563 | | | $ | (81 | ) | | $ | — | | | $ | 168,578 | |
Obligations of U.S. States and Political Subdivisions | | | 712,948 | | | | 14,827 | | | | (7,018 | ) | | | — | | | | 720,757 | |
Foreign government | | | 72,042 | | | | 202 | | | | (10,601 | ) | | | — | | | | 61,643 | |
All other corporate securities | | | 6,060,561 | | | | 31,263 | | | | (353,149 | ) | | | — | | | | 5,738,675 | |
ABS | | | 542,503 | | | | 2,517 | | | | (8,229 | ) | | | — | | | | 536,791 | |
CMBS | | | 513,316 | | | | 627 | | | | (7,244 | ) | | | — | | | | 506,699 | |
RMBS | | | 209,728 | | | | 4,600 | | | | (1,529 | ) | | | — | | | | 212,799 | |
| | | | | | | | | | | | | | | | | | | | |
Total fixed maturities | | $ | 8,274,194 | | | $ | 59,599 | | | $ | (387,851 | ) | | $ | — | | | $ | 7,945,942 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | Embedded derivatives within fixed maturity securities held at fair value option are reported with the host investment. The change in fair value of embedded derivatives are reported in Realized Investment Gains, net in the Consolidated Statement of Operations and Comprehensive Income (Loss). |
34
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Scheduled Maturities
The scheduled maturities for fixed maturities are as follows as of December 31, 2016:
| | | | | | | | |
($ in thousands) | | Amortized
Cost | | | Fair Value | |
Due in one year or less | | $ | 89,822 | | | $ | 90,008 | |
Due after one year through five years | | | 1,095,001 | | | | 1,111,271 | |
Due after five years through ten years | | | 1,443,613 | | | | 1,469,357 | |
Due after ten years | | | 4,176,392 | | | | 4,056,041 | |
| | | | | | | | |
Total before asset and mortgage-backed securities | | $ | 6,804,828 | | | $ | 6,726,677 | |
Asset and mortgage-backed securities | | | 1,494,668 | | | | 1,486,063 | |
| | | | | | | | |
Total fixed maturities | | $ | 8,299,496 | | | $ | 8,212,740 | |
| | | | | | | | |
Actual maturities may differ from those scheduled as a result of calls and make-whole payments by the issuers. Asset and mortgage-backed securities are shown separately because of the potential for prepayment of principal prior to contractual maturity dates.
35
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Commercial Mortgage Loans
The Company diversifies its commercial mortgage loan portfolio by geographical region to reduce concentration risk. The following table presents the Company’s commercial mortgage loan portfolio by geographical region as of December 31, 2016 and 2015:
| | | | | | | | |
($ in thousands) | | December 31,
2016 | | | December 31,
2015 | |
Alabama | | $ | 1,287 | | | $ | 1,508 | |
Arizona | | | 20,389 | | | | 34,911 | |
California | | | 255,023 | | | | 336,310 | |
Colorado | | | 57,269 | | | | 57,207 | |
Connecticut | | | 25,317 | | | | 25,374 | |
Florida | | | 123,194 | | | | 86,698 | |
Georgia | | | 65,414 | | | | 67,213 | |
Hawaii | | | 6,099 | | | | 7,134 | |
Illinois | | | 114,549 | | | | 92,813 | |
Iowa | | | 1,033 | | | | 1,266 | |
Kansas | | | 9,200 | | | | 9,200 | |
Kentucky | | | 7,154 | | | | 7,696 | |
Maine | | | 3,686 | | | | 3,905 | |
Maryland | | | 20,975 | | | | 33,844 | |
Massachusetts | | | 77,772 | | | | 90,897 | |
Minnesota | | | 132,395 | | | | 148,346 | |
Nevada | | | 84,721 | | | | 14,262 | |
New Jersey | | | 65,908 | | | | 68,720 | |
New York | | | 66,502 | | | | 94,985 | |
North Carolina | | | 55,851 | | | | 58,078 | |
Ohio | | | 38,611 | | | | 36,954 | |
Oklahoma | | | — | | | | 10,803 | |
Pennsylvania | | | 31,929 | | | | 41,975 | |
South Carolina | | | 1,948 | | | | 2,532 | |
Tennessee | | | 3,238 | | | | 5,278 | |
Texas | | | 133,020 | | | | 107,279 | |
Utah | | | 42,641 | | | | 44,366 | |
Virginia | | | 1,676 | | | | 2,353 | |
Washington | | | 3,681 | | | | 11,550 | |
Wisconsin | | | 4,674 | | | | 5,675 | |
General allowance for loan loss | | | — | | | | — | |
| | | | | | | | |
Total commercial mortgage loans | | $ | 1,455,156 | | | $ | 1,509,132 | |
| | | | | | | | |
36
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Credit Quality of Commercial Mortgage Loans
The credit quality of commercial mortgage loansheld-for-investment were as follows at December 31, 2016 and 2015:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Recorded Investment | | | | | | | |
| | | Debt Service Coverage Ratios | | | | | | | | | | | | | |
December 31, 2016 ($ in thousands) | | > 1.20x | | | 1.00x - 1.20x | | | < 1.00x | | | Total | | | % of Total | | | Estimated Fair
Value | | | % of Total | |
Loan-to-value ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less than 65% | | $ | 785,149 | | | $ | 36,743 | | | $ | 11,354 | | | $ | 833,246 | | | | 57.3 | % | | $ | 848,702 | | | | 57.9 | % |
65% to 75% | | | 581,188 | | | | 25,317 | | | | — | | | | 606,505 | | | | 41.7 | | | | 601,587 | | | | 41.1 | |
76% to 80% | | | 10,493 | | | | — | | | | — | | | | 10,493 | | | | 0.7 | | | | 10,494 | | | | 0.7 | |
Greater than 80% | | | 4,912 | | | | — | | | | — | | | | 4,912 | | | | 0.3 | | | | 4,330 | | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,381,742 | | | $ | 62,060 | | | $ | 11,354 | | | $ | 1,455,156 | | | | 100.0 | % | | $ | 1,465,113 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | Recorded Investment | | | | | | | |
| | | Debt Service Coverage Ratios | | | | | | | | | | | | | |
December 31, 2015 ($ in thousands) | | > 1.20x | | | 1.00x- 1.20x | | | < 1.00x | | | Total | | | % of Total | | | Estimated Fair
Value | | | % of Total | |
Loan-to-value ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less than 65% | | $ | 869,470 | | | $ | 85,869 | | | $ | 19,862 | | | $ | 975,201 | | | | 64.6 | % | | $ | 1,000,948 | | | | 65.1 | % |
65% to 75% | | | 508,557 | | | | 25,374 | | | | — | | | | 533,931 | | | | 35.4 | | | | 535,690 | | | | 34.9 | |
76% to 80% | | | — | | | | — | | | | — | | | | — | | | | 0.0 | | | | — | | | | 0.0 | |
Greater than 80% | | | — | | | | — | | | | — | | | | — | | | | 0.0 | | | | — | | | | 0.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,378,027 | | | $ | 111,243 | | | $ | 19,862 | | | $ | 1,509,132 | | | | 100.0 | % | | $ | 1,536,638 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2016 and 2015, the Company had no allowance for credit losses for commercial mortgage loans. As of December 31, 2016, $1,450.3 million of commercial mortgage and other loans were in current status and one commercial mortgage loan with book value of $4.9 million was between90-179 days past due. As of December 31, 2015, $1,509.1 million of commercial mortgage loans were in current status with no commercial mortgage or other loans classified as past due. The Company defines current in its aging of past due commercial mortgage and other loans as less than 30 days past due.
Impaired loans include those loans for which it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. During 2016 and 2015, the Company did not record any impairments related to commercial mortgage loans. For 2016, the fair value of the collateral less costs to sell the past due loan, described above, exceeded book value.
The Company’s commercial mortgages may occasionally be involved in a troubled debt restructuring. As of December 31, 2016 and 2015, the Company had no commitments to fund to borrowers that have been involved in a troubled debt restructuring. As of December 31, 2016 and 2015, the Company had no new troubled debt restructurings related to commercial mortgages and no payment defaults on commercial mortgages other than as described above.
37
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Other Invested Assets
The following table sets forth the composition of “Other invested assets” as of December 31, 2016 and 2015:
Amortized Cost
| | | | | | | | |
($ in thousands) | | December 31,
2016 | | | December 31,
2015 | |
Low income housing tax credit properties | | $ | 457 | | | $ | 677 | |
Derivatives | | | 18,949 | | | | 17,735 | |
| | | | | | | | |
| | $ | 19,406 | | | $ | 18,412 | |
| | | | | | | | |
Net Investment Income
Net investment income for Successor Periods for the years ended December 31, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014 and the Predecessor Period from January 1, 2014 through March 31, 2014 were as follows:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
($ in thousands) | | For the Year
Ended
December 31,
2016 | | | For the Year
Ended
December 31,
2015 | | | For the Period
from April 1, 2014
through
December 31,
2014 | | | For the Period
from January 1,
2014
through March 31,
2014 | |
Fixed maturities | | $ | 330,707 | | | $ | 334,931 | | | $ | 231,972 | | | $ | 2,461 | |
Commercial mortgage loans | | | 69,360 | | | | 63,028 | | | | 49,417 | | | | — | |
Cash, cash equivalents and short-term investments | | | 1,007 | | | | 511 | | | | 4,786 | | | | 16 | |
Other investment income | | | 8,845 | | | | 9,543 | | | | 7,353 | | | | — | |
| | | | | | | | | | | | | | | | |
Gross investment income | | $ | 409,919 | | | $ | 408,013 | | | $ | 293,528 | | | $ | 2,477 | |
Investment expenses | | | 12,836 | | | | 9,082 | | | | 4,957 | | | | 127 | |
| | | | | | | | | | | | | | | | |
Net investment income | | $ | 397,083 | | | $ | 398,931 | | | $ | 288,571 | | | $ | 2,350 | |
| | | | | | | | | | | | | | | | |
38
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Realized Investment Gains and Losses
Realized investment gains and losses for Successor Periods for the years ended December 31, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014 and the Predecessor Period from January 1, 2014 through March 31, 2014 were as follows:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
($ in thousands) | | For the Year
Ended
December 31,
2016 | | | For the Year
Ended
December 31,
2015 | | | For the Period
from April 1, 2014
through
December 31,
2014 | | | For the Period
from January 1,
2014
through March 31,
2014 | |
Realized investment gains, net | | | | | | | | | | | | | | | | |
Fixed maturities, available for sale | | $ | 66,560 | | | $ | 120,421 | | | $ | 25,795 | | | $ | 285 | |
Fixed maturities, at fair value option(1) | | | (733 | ) | | | — | | | | — | | | | — | |
Commercial mortgage loans | | | 4,037 | | | | 2,325 | | | | 2,880 | | | | — | |
Derivatives | | | 3,856 | | | | (9,208 | ) | | | 17,417 | | | | — | |
| | | | | | | | | | | | | | | | |
Net realized gains | | $ | 73,720 | | | $ | 113,538 | | | $ | 46,092 | | | $ | 285 | |
| | | | | | | | | | | | | | | | |
| (1) | Relates to embedded derivatives within fixed maturity securities that are held at fair value option. |
There were no other-than-temporary impairment losses recorded in the Successor Periods for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014.
There were no other-than-temporary impairment losses recorded in the Predecessor Period from January 1, 2014 through March 31, 2014. No other-than-temporary impairment losses were included in accumulated other comprehensive income as of December 31, 2016 or 2015.
Proceeds from sales of fixed maturities and gross realized investment gains and losses for Successor Periods for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014 and the Predecessor Period for the period from January 1, 2014 through March 31, 2014 were as follows:
| | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor | |
($ in thousands) | | For the Year
Ended
December 31,
2016 | | | For the Year
Ended
December 31,
2015 | | | For the Period
from April 1, 2014
through
December 31,
2014 | | | For the Period
from January 1,
2014
through March 31,
2014 | |
Fixed maturities,available-for-sale | | | | | | | | | | | | | | | | |
Proceeds from sales | | $ | 3,027,998 | | | $ | 3,864,356 | | | $ | 1,427,135 | | | $ | 5,277 | |
Gross investment gains from sales | | | 109,282 | | | | 142,534 | | | | 27,224 | | | | 317 | |
Gross investment losses from sales | | | (35,136 | ) | | | (16,348 | ) | | | (2,755 | ) | | | (32 | ) |
Proceeds from sales excludesnon-taxable exchanges of $11.1 million, $72.4 million and $3.0 million for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014, respectively.
39
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Unrealized Investment Gains and Losses — Successor
The following table summarizes the gross unrealized losses and fair value of fixed maturities by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2016 and 2015:
Fixed Maturities Available for Sale in a Loss Position
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | Greater than 12 months | | | | | | | |
December 31, 2016 ($ in thousands) | | Fair Value | | | Gross
Unrealized
Losses | | | Fair
Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies | | $ | 276,025 | | | $ | (14,951 | ) | | $ | 1,059 | | | $ | (28 | ) | | $ | 277,084 | | | $ | (14,979 | ) |
Obligations of U.S. States and Political Subdivisions | | | 206,090 | | | | (8,314 | ) | | | 5,274 | | | | (300 | ) | | | 211,364 | | | | (8,614 | ) |
Foreign government | | | 769 | | | | (34 | ) | | | 14,632 | | | | (3,223 | ) | | | 15,401 | | | | (3,257 | ) |
All other corporate securities | | | 2,385,689 | | | | (94,085 | ) | | | 512,710 | | | | (57,297 | ) | | | 2,898,399 | | | | (151,382 | ) |
ABS | | | 204,555 | | | | (8,456 | ) | | | 39,450 | | | | (1,637 | ) | | | 244,005 | | | | (10,093 | ) |
CMBS | | | 228,303 | | | | (5,231 | ) | | | 43,903 | | | | (547 | ) | | | 272,206 | | | | (5,778 | ) |
RMBS | | | 61,058 | | | | (1,659 | ) | | | 40,454 | | | | (1,244 | ) | | | 101,512 | | | | (2,903 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total fixed maturities | | $ | 3,362,489 | | | $ | (132,730 | ) | | $ | 657,482 | | | $ | (64,276 | ) | | $ | 4,019,971 | | | $ | (197,006 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | Less than 12 months | | | Greater than 12 months | | | | | | | |
December 31, 2015 ($ in thousands) | | Fair Value | | | Gross
Unrealized
Losses | | | Fair
Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies | | $ | 18,639 | | | $ | (77 | ) | | $ | 98 | | | $ | (4 | ) | | $ | 18,737 | | | $ | (81 | ) |
Obligations of U.S. States and Political Subdivisions | | | 207,889 | | | | (6,983 | ) | | | 4,030 | | | | (35 | ) | | | 211,919 | | | | (7,018 | ) |
Foreign government | | | 41,507 | | | | (8,665 | ) | | | 5,965 | | | | (1,936 | ) | | | 47,472 | | | | (10,601 | ) |
All other corporate securities | | | 3,523,371 | | | | (293,131 | ) | | | 209,474 | | | | (60,018 | ) | | | 3,732,845 | | | | (353,149 | ) |
ABS | | | 397,884 | | | | (7,031 | ) | | | 15,040 | | | | (1,198 | ) | | | 412,924 | | | | (8,229 | ) |
CMBS | | | 437,244 | | | | (7,164 | ) | | | 8,419 | | | | (80 | ) | | | 445,663 | | | | (7,244 | ) |
RMBS | | | 65,470 | | | | (776 | ) | | | 29,659 | | | | (753 | ) | | | 95,129 | | | | (1,529 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total fixed maturities | | $ | 4,692,004 | | | $ | (323,827 | ) | | $ | 272,685 | | | $ | (64,024 | ) | | $ | 4,964,689 | | | $ | (387,851 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Portfolio Monitoring
The Company has a comprehensive portfolio monitoring process to identify and evaluate each fixed maturity security whose carrying value may be other-than-temporarily impaired.
40
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
For each fixed maturity 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 maturity security and it is not more likely than not the Company will be required to sell the fixed maturity 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 maturity 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 maturity 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.
41
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Net Unrealized Investment Gains and Losses in AOCI
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) Predecessor | | Net Unrealized
Gain (Losses) on
Investments | | | VOBA | | | Future Policy
Benefits and
Policyholders’
Account Balances | | | Deferred
Income Tax
(Liability)
Benefit | | | Accumulated Other
Comprehensive
Income (Loss)
Related to Net
Unrealized
Investment Gains
(Losses) | |
Balance, December 31, 2013 | | $ | 5,954 | | | $ | — | | | $ | — | | | $ | (2,084 | ) | | $ | 3,870 | |
Net investment gains and losses on investments arising during the period | | | 2,364 | | | | — | | | | — | | | | (828 | ) | | | 1,536 | |
Reclassification adjustment for gains and losses included in net income | | | 285 | | | | — | | | | — | | | | (100 | ) | | | 185 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2014 | | $ | 8,033 | | | $ | — | | | $ | — | | | $ | (2,812 | ) | | $ | 5,221 | |
| | | | | |
| | | | | | | | | | | | | | | | |
| | | | | |
Successor | | | | | | | | | | | | | | | |
Balance, April 1, 2014 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Net investment gains and losses on investments arising during the period | | | 159,261 | | | | — | | | | — | | | | (55,675 | ) | | | 103,586 | |
Reclassification adjustment for gains and losses included in net income | | | — | | | | — | | | | — | | | | — | | | | — | |
Impact of net unrealized investment gains and losses on VOBA | | | — | | | | (20,287 | ) | | | — | | | | 7,100 | | | | (13,187 | ) |
Impact of net unrealized investment gains and losses on future policy benefits and policyholders’ account balances | | | — | | | | — | | | | (7,541 | ) | | | 2,640 | | | | (4,901 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2014 | | $ | 159,261 | | | $ | (20,287 | ) | | $ | (7,541 | ) | | $ | (45,935 | ) | | $ | 85,498 | |
Net investment gains and losses on investments arising during the period | | | (408,019 | ) | | | — | | | | — | | | | 142,807 | | | | (265,212 | ) |
Reclassification adjustment for gains and losses included in net income | | | 79,023 | | | | — | | | | — | | | | (27,658 | ) | | | 51,365 | |
Impact of net unrealized investment gains and losses on VOBA | | | — | | | | 57,061 | | | | — | | | | (19,971 | ) | | | 37,090 | |
Impact of net unrealized investment gains and losses on future policy benefits and policyholders’ account balances | | | — | | | | — | | | | 60,447 | | | | (21,157 | ) | | | 39,290 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2015 | | $ | (327,781 | ) | | $ | 36,774 | | | $ | 52,906 | | | $ | 83,402 | | | $ | (154,699 | ) |
Net investment gains and losses on investments arising during the period | | | 160,311 | | | | — | | | | — | | | | (56,111 | ) | | | 104,200 | |
Reclassification adjustment for gains and losses included in net income | | | (81,920 | ) | | | — | | | | — | | | | 28,672 | | | | (53,248 | ) |
Impact of net unrealized investment gains and losses on VOBA | | | — | | | | (30,948 | ) | | | — | | | | 10,832 | | | | (20,116 | ) |
Impact of net unrealized investment gains and losses on future policy benefits and policyholders’ account balances | | | — | | | | — | | | | (28,924 | ) | | | 10,123 | | | | (18,801 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2016 | | $ | (85,550 | ) | | $ | 5,826 | | | $ | 23,982 | | | $ | 19,574 | | | $ | (36,168 | ) |
| | | | | | | | | | | | | | | | | | | | |
42
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
| 4. | Derivative Financial Instruments |
See Note 2 for a description of the Company’s accounting policies for derivatives and Note 5 for information about the fair value hierarchy for derivatives.
The following table provides a summary of the notional and fair value positions of derivative financial instruments as of December 31, 2016 and 2015:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | December 31, 2016 | | | December 31, 2015 | |
| | | Notional | | | Gross Fair Value | | | Notional | | | Gross Fair Value | |
| | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | Assets | | | Liabilities | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity Options | | $ | 410,500 | | | $ | 419,225 | | | $ | 34,248 | | | $ | (15,158 | ) | | $ | 879,853 | | | $ | 839,994 | | | $ | 28,588 | | | $ | (10,961 | ) |
Futures | | | 16,913 | | | | — | | | | — | | | | (141 | ) | | | 15,373 | | | | — | | | | 108 | | | | — | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Policyholders account balances | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives embedded in life and annuity contracts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity-indexed annuity contracts(2) | | $ | — | | | $ | 1,281,993 | | | $ | — | | | $ | (55,871 | ) | | $ | — | | | $ | 1,494,084 | | | $ | — | | | $ | (64,138 | ) |
Equity-indexed life contracts | | | — | | | | 460,261 | | | | — | | | | (23,803 | ) | | | — | | | | 401,511 | | | | — | | | | (11,701 | ) |
Guaranteed accumulation benefits(1) | | | — | | | | 77,212 | | | | — | | | | (6,724 | ) | | | — | | | | 95,752 | | | | — | | | | (7,499 | ) |
Guaranteed withdrawal benefits(1) | | | — | | | | 11,064 | | | | — | | | | (111 | ) | | | — | | | | 13,264 | | | | — | | | | (315 | ) |
| (1) | As of April 1, 2014, these amounts were ceded in accordance with the Company’s reinsurance agreements |
| (2) | Notional amount represents account value of equity indexed contracts |
The standardized ISDA Master Agreement under which the Company’s derivative transactions are executed include provisions for payment netting. In the normal course of business activities, if there is more than one derivative transaction with a single counterparty, the Company willset-off the cash flows of those derivatives into a single amount to be exchanged in settlement of the resulting net payable or receivable with that counterparty. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related Credit Support Annex (“CSA”) have been executed. At December 31, 2016 and 2015, the Company held $0.9 million and $0.8 million in cash and securities collateral pledged to trade counterparties respectively. This cash collateral is reported in Cash on the Consolidated Balance Sheet.
43
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The following table presents the amount and location of gains (losses) recognized in income, net of reinsurance, for derivatives that were not designated or qualifying as hedging instruments for the Successor Period for the years ended December 31, 2016 and 2015, and for the period from April 1, 2014 through December 31, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended
December 31, 2016 | | | For the Year Ended
December 31, 2015 | | | For the Period from April 1, 2014
through December 31, 2014 | |
($ in thousands) | | Realized
Investment Gains
(Losses) | | | Policyholder
Benefits | | | Realized
Investment Gains
(Losses) | | | Policyholder
Benefits | | | Realized
Investment Gains
(Losses) | | | Policyholder
Benefits | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
Equity options | | $ | 2,472 | | | $ | — | | | $ | (7,557 | ) | | $ | — | | | $ | 15,230 | | | $ | — | |
Futures | | | 884 | | | | — | | | | (1,651 | ) | | | — | | | | 2,187 | | | | — | |
Interest rate swaps | | | 500 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Policyholders’ account balances | | | | | | | | | | | | | | | | | | | | | | | | |
Equity-indexed annuity contracts | | $ | — | | | $ | 8,267 | | | $ | — | | | $ | (478 | ) | | $ | — | | | $ | (5,622 | ) |
Equity-indexed life contracts | | | — | | | | (121 | ) | | | — | | | | 956 | | | | — | | | | 90 | |
The following table presents the amount and location of gains (losses) recognized in income for derivatives that were not designated or qualifying as hedging instruments for the Predecessor Period from January 1, 2014 through March 31, 2014:
| | | | | | | | |
| | | For the Period from January 1,
2014 through March 31, 2014 | |
($ in thousands) | | Interest Credited(1) | | | Policyholder
Benefits(1) | |
Liabilities | | | | | | | | |
Policyholders’ account balances | | | | | | | | |
Derivatives embedded in life and annuity contracts | | $ | 16,427 | | | $ | 946 | |
| (1) | Prior to April 1, 2014, these amounts were ceded in accordance with the Company’s reinsurance agreements. |
44
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
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 Consolidated Balance Sheets (Successor) 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 is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance that assets and liabilities are appropriately valued through the execution of various processes and controls designed to ensure the overall reasonableness and consistent application of valuation methodologies, including inputs and assumptions, and compliance with accounting standards. For fair values received from third parties or internally estimated, the Company’s processes and controls are designed to ensure that the valuation methodologies are appropriate and consistently applied, the inputs and assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities. The Company performs ongoing price validation procedures such as back-testing of actual sales, which corroborate the various inputs used in internal models to market observable data. When fair value determinations are expected to be more variable, the Company validates them through reviews by members of management who have relevant expertise and who are independent of those charged with executing investment transactions.
45
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Successor
There are no assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2016 or 2015. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015:
| | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | |
Description for Each Class of Asset or Liability ($ in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets at fair value | | | | | | | | | | | | | | | | |
Fixed maturities | | | | | | | | | | | | | | | | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies, available for sale | | $ | 97,836 | | | $ | 396,928 | | | $ | 6,573 | | | $ | 501,337 | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies, at fair value option(1) | | | — | | | | 14,615 | | | | — | | | | 14,615 | |
Obligations of U.S. States and Political Subdivisions | | | — | | | | 709,737 | | | | — | | | | 709,737 | |
Foreign government | | | — | | | | 28,055 | | | | — | | | | 28,055 | |
All other corporate securities | | | — | | | | 5,867,475 | | | | 19,351 | | | | 5,886,826 | |
ABS | | | — | | | | 481,628 | | | | 26,135 | | | | 507,763 | |
CMBS | | | — | | | | 381,262 | | | | — | | | | 381,262 | |
RMBS | | | — | | | | 183,145 | | | | — | | | | 183,145 | |
Equity securities | | | 5,100 | | | | — | | | | — | | | | 5,100 | |
Short term investments | | | 129,660 | | | | — | | | | — | | | | 129,660 | |
Other invested assets | | | | | | | | | | | | | | | | |
Equity options | | | 19,090 | | | | — | | | | — | | | | 19,090 | |
Futures | | | (141 | ) | | | — | | | | — | | | | (141 | ) |
Separate accounts assets | | | 1,342,220 | | | | — | | | | — | | | | 1,342,220 | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 1,593,765 | | | $ | 8,062,845 | | | $ | 52,059 | | | $ | 9,708,669 | |
| | | | | | | | | | | | | | | | |
Liabilities at fair value | | | | | | | | | | | | | | | | |
Policyholders’ account balances | | | | | | | | | | | | | | | | |
Equity indexed annuity contracts | | $ | — | | | $ | — | | | $ | (55,871 | ) | | $ | (55,871 | ) |
Equity indexed life contracts | | | — | | | | (23,803 | ) | | | — | | | | (23,803 | ) |
Guaranteed minimum accumulation benefits | | | — | | | | — | | | | (6,724 | ) | | | (6,724 | ) |
Guaranteed minimum withdrawal benefits | | | — | | | | — | | | | (111 | ) | | | (111 | ) |
Separate accounts liabilities | | | (1,342,220 | ) | | | — | | | | — | | | | (1,342,220 | ) |
| | | | | | | | | | | | | | | | |
Total liabilities at fair value | | $ | (1,342,220 | ) | | $ | (23,803 | ) | | $ | (62,706 | ) | | $ | (1,428,729 | ) |
| | | | | | | | | | | | | | | | |
| (1) | Embedded derivatives within fixed maturity securities held at fair value option are reported with the host investment. The change in fair value of embedded derivatives are reported in Realized Investment Gains, net in the Consolidated Statement of Operations and Comprehensive Income (Loss). |
46
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | |
| December 31, 2015 | | | | | | | | | | | | |
Description for Each Class of Asset or Liability ($ in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets at fair value | | | | | | | | | | | | | | | | |
Fixed maturities | | | | | | | | | | | | | | | | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies | | $ | 10,621 | | | $ | 157,957 | | | $ | — | | | $ | 168,578 | |
Obligations of U.S. States and Political Subdivisions | | | — | | | | 720,757 | | | | — | | | | 720,757 | |
Foreign government | | | — | | | | 61,643 | | | | — | | | | 61,643 | |
All other corporate securities | | | — | | | | 5,727,155 | | | | 11,520 | | | | 5,738,675 | |
ABS | | | — | | | | 522,531 | | | | 14,260 | | | | 536,791 | |
CMBS | | | — | | | | 506,699 | | | | — | | | | 506,699 | |
RMBS | | | — | | | | 212,799 | | | | — | | | | 212,799 | |
Short term investments | | | 166,358 | | | | 18,462 | | | | — | | | | 184,820 | |
Other invested assets | | | | | | | | | | | | | | | | |
Equity options | | | 17,627 | | | | — | | | | — | | | | 17,627 | |
Futures | | | 108 | | | | — | | | | — | | | | 108 | |
Separate accounts assets | | | 1,395,141 | | | | — | | | | — | | | | 1,395,141 | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 1,589,855 | | | $ | 7,928,003 | | | $ | 25,780 | | | $ | 9,543,638 | |
| | | | | | | | | | | | | | | | |
Liabilities at fair value | | | | | | | | | | | | | | | | |
Policyholders’ account balances | | | | | | | | | | | | | | | | |
Equity indexed annuity contracts | | $ | — | | | $ | — | | | $ | (64,138 | ) | | $ | (64,138 | ) |
Equity indexed life contracts | | | — | | | | (11,701 | ) | | | — | | | | (11,701 | ) |
Guaranteed minimum accumulation benefits | | | — | | | | — | | | | (7,499 | ) | | | (7,499 | ) |
Guaranteed minimum withdrawal benefits | | | — | | | | — | | | | (315 | ) | | | (315 | ) |
Separate accounts liabilities | | | (1,395,141 | ) | | | — | | | | — | | | | (1,395,141 | ) |
| | | | | | | | | | | | | | | | |
Total liabilities at fair value | | $ | (1,395,141 | ) | | $ | (11,701 | ) | | $ | (71,952 | ) | | $ | (1,478,794 | ) |
| | | | | | | | | | | | | | | | |
There were no transfers between Level 1 and Level 2 during 2016. In 2015, U.S. Treasury securities were transferred to Level 1 as those securities are traded in an active market.
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Fixed Maturities
The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent pricing services. Prices for each security are generally sourced from multiple pricing vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company ultimately uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. The pricing hierarchy is updated for new financial products and recent pricing experience with various vendors. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. U.S. Treasury securities are included within Level 1 due to the market activity. Typical inputs used by these pricing services include but are not limited to, reported trades,
47
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
benchmark yields, issuer spreads, bids, offers, and/or estimated cash flow, prepayment speeds, and default rates. If the pricing information received from third party pricing services is deemed not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service or classify the securities as Level 3. If the pricing service updates the price to be more consistent with the presented market observations, the security remains within Level 2.
Indicative broker quotes are also used to determine fair value in circumstances where vendor pricing is not available, or where the Company ultimately concludes that pricing information received from independent pricing services is not reflective of market activity. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information with an internally-developed valuation. Pricing service overrides, internally-developed valuations and indicative broker quotes are generally included in Level 3 in the fair value hierarchy.
The fair value of private fixed maturities, which are comprised of investments in private placement securities, are primarily determined using discounted cash flow models. These models primarily use observable inputs that include Treasury or similar base rates plus estimated credit spreads to value each security. The credit spreads are obtained through a survey of private market intermediaries who are active in both primary and secondary transactions, and consider, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Since most private placements are valued using standard market observable inputs and inputs derived from, or corroborated by, market observable data including observed prices and spreads for similar publicly traded or privately traded issues, they have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the price of a security, a Level 3 classification is made. No private placement securities were classified as Level 3 as of December 31, 2016 or 2015.
Short-term Investments
Short-term investments include money market instruments, highly liquid debt instruments and certain other investments. Certain money market instruments are valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The remaining instruments in this category are generally fair valued based on market observable inputs and these investments have primarily been classified within Level 2. Short-term investments classified within Level 3 primarily consist of commercial mortgage loans. The fair value of the commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans. No short-term investments were classified as Level 3 as of December 31, 2016 or 2015.
Other Invested Assets
The estimated fair value of derivatives is determined through the use of quoted market prices for exchange-traded derivatives.
48
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Separate Account Assets and Liabilities
Separate account assets and liabilities consist principally of investments in mutual fund shares. The fair values are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy.
Policyholders’ Account Balances
The liabilities for guarantees primarily associated with the optional living benefit features of certain variable annuity contracts and equity indexed annuity contracts are calculated as the present value of future expected benefit payments to contractholders less the present value of assessed rider fees attributable to the optional living benefit feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. Since there is no observable active market for the transfer of these obligations, the valuations are calculated using internally developed models with option pricing techniques. The models are based on a risk neutral valuation framework and incorporate premiums for risks inherent in valuation techniques, inputs, and the general uncertainty around the timing and amount of future cash flows. The determination of these risk premiums requires the use of management judgment.
The significant inputs to the valuation models for these embedded derivatives include capital market assumptions, such as interest rate levels and volatility assumptions, as well as actuarially determined assumptions, including contractholder behavior, such as lapse rates, benefit utilization rates, withdrawal rates, and mortality rates. Since many of these assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 in the fair value hierarchy.
Actuarial assumptions, including contractholder behavior and mortality, are reviewed at least annually, and updated based upon emerging experience, future expectations and other data, including any observable market data. These assumptions are generally updated annually unless a material change that the Company feels is indicative of a long term trend is observed in an interim period.
Level 3 Fair Value Measurements
The following table summarizes quantitative information about the significant unobservable inputs used in Level 3 fair value measurements as of December 31, 2016 and 2015:
| | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
($ in thousands) | | Fair
Value | | | Valuation
Technique | | Unobservable
Input | | Range | | Weighted
Average |
Equity indexed annuity contracts | | $ | (55,871 | ) | | Option Pricing Technique | | Projected Option Cost | | 1.40% - 1.84% | | 1.45% |
| | | | | |
| December 31, 2015 | | | | | | | | | | | |
($ in thousands) | | Fair
Value | | | Valuation
Technique | | Unobservable
Input | | Range | | Weighted
Average |
Equity indexed annuity contracts | | $ | (64,138 | ) | | Option Pricing Technique | | Projected Option Cost | | 1.40% - 2.11% | | 1.70% |
49
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Excluded from the table above at December 31, 2016 and 2015 are approximately $52 million and $26 million, respectively, Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not reasonably available. These investments primarily consist of certain public debt securities with limited trading activity, including asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service providers and indicative,non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in the Company’s reporting significantly higher or lower fair value measurements for these Level 3 investments.
The table above also excludes underlying quantitative inputs related to liabilities held for the Company’s guaranteed minimum accumulation benefits and guaranteed withdrawal benefits. These liabilities are not developed by the Company as they are 100% ceded to external reinsurers. The development of these liabilities generally involve actuarially determined models and could result in the Company reporting significantly higher or lower fair value measurements for these Level 3 investments.
50
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis for the years ended December 31, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ($ in thousands) | | Balance,
January 1,
2016 | | | Net
income
(loss) | | | OCI | | | Transfers
to Level 3 | | | Transfers
out of
Level 3 | | | Purchases | | | Sales | | | Issues | | | Settlements | | | Balance,
December 31,
2016 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed income maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S Treasury Securities and Obligations of U.S. Government Authority and Agencies, available for sale | | $ | — | | | $ | (491 | ) | | $ | 187 | | | $ | — | | | $ | — | | | $ | 6,877 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,573 | |
All other corporate securities | | | 11,520 | | | | (123 | ) | | | (246 | ) | | | 15,370 | | | | (4,483 | ) | | | — | | | | (955 | ) | | | — | | | | (1,732 | ) | | | 19,351 | |
ABS | | | 14,260 | | | | (53 | ) | | | 347 | | | | 3,093 | | | | — | | | | 11,165 | | | | — | | | | — | | | | (2,677 | ) | | | 26,135 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity indexed annuity contracts | | | (64,138 | ) | | | 8,267 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (55,871 | ) |
Guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits(1) | | | (7,814 | ) | | | 979 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,835 | ) |
| | | | | | | | | | |
| ($ in thousands) | | Balance,
January 1,
2015 | | | Net
income
(loss) | | | OCI | | | Transfers
to Level 3 | | | Transfers
out of
Level 3 | | | Purchases | | | Sales | | | Issues | | | Settlements | | | Balance,
December 31,
2015 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed income maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
All other corporate securities | | $ | 7,336 | | | $ | (282 | ) | | $ | 30 | | | $ | 13,255 | | | $ | (2,386 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | (6,433 | ) | | $ | 11,520 | |
ABS | | | 5,250 | | | | 134 | | | | (2,338 | ) | | | 17,191 | | | | — | | | | — | | | | (5,000 | ) | | | — | | | | (977 | ) | | | 14,260 | |
CMBS | | | 2,693 | | | | 23,506 | | | | 314 | | | | — | | | | — | | | | — | | | | (20,192 | ) | | | — | | | | (6,321 | ) | | | — | |
Short-term investments | | | 23,713 | | | | 14 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (23,727 | ) | | | — | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity indexed annuity contracts | | | (63,660 | ) | | | (478 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (64,138 | ) |
Guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits(1) | | | (6,733 | ) | | | (1,081 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (7,814 | ) |
| | | | | | | | | | |
| ($ in thousands) | | Balance,
April 1,
2014 | | | Net
income
(loss) | | | OCI | | | Transfers
to Level 3 | | | Transfers
out of
Level 3 | | | Purchases | | | Sales | | | Issues | | | Settlements | | | Balance,
December 31,
2014 | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed income maturities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
All other corporate securities | | $ | 396,694 | | | $ | 4,514 | | | $ | (7,472 | ) | | $ | — | | | $ | (289,172 | ) | | $ | — | | | $ | (97,228 | ) | | $ | — | | | $ | — | | | $ | 7,336 | |
ABS | | | 436 | | | | — | | | | (55 | ) | | | — | | | | — | | | | 4,930 | | | | — | | | | — | | | | (61 | ) | | | 5,250 | |
CMBS | | | 3,397 | | | | 2,179 | | | | (314 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,569 | ) | | | 2,693 | |
Short-term investments | | | 24,095 | | | | 29 | | | | — | | | | — | | | | — | | | | — | | | | (411 | ) | | | — | | | | — | | | | 23,713 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity indexed annuity contracts | | | (58,038 | ) | | | (5,622 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (63,660 | ) |
Guaranteed minimum accumulation benefits and guaranteed minimum withdrawal benefits(1) | | | (8,499 | ) | | | 1,766 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6,733 | ) |
| (1) | These amounts are 100% ceded in accordance with the Company’s reinsurance agreements. |
51
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Transfers into Level 3 are generally the result of unobservable inputs utilized within the valuation methodologies and the use of indicative broker quotes for assets that were previously valued using observable inputs. Transfers out of Level 3 are generally due to the use of observable inputs in valuation methodologies as well as the availability of pricing service information for certain assets that the Company is able to validate.
The following table presents the fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. However, in some cases, as described below, the carrying amount equals or approximates fair value as of December 31, 2016 and 2015:
| | | | | | | | | | | | | | | | |
December 31, 2016 ($ in thousands) | | | | | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets | | | | | | | | | | | | | | | | |
Commercial mortgage loans | | $ | — | | | $ | — | | | $ | 1,465,113 | | | $ | 1,465,113 | |
Policy loans | | | — | | | | — | | | | 178,890 | | | | 178,890 | |
Cash | | | 648 | | | | — | | | | — | | | | 648 | |
Vehicle note | | | — | | | | — | | | | 684,855 | | | | 684,855 | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 648 | | | $ | — | | | $ | 2,328,858 | | | $ | 2,329,506 | |
| | | | | | | | | | | | | | | | |
Liabilities at fair value | | | | | | | | | | | | | | | | |
Policyholders’ account balances — investment contracts | | $ | — | | | $ | — | | | $ | 5,418,188 | | | $ | 5,418,188 | |
Other long-term debt | | | — | | | | — | | | | 684,855 | | | | 684,855 | |
| | | | | | | | | | | | | | | | |
| | $ | — | | | $ | — | | | $ | 6,103,043 | | | $ | 6,103,043 | |
| | | | | | | | | | | | | | | | |
December 31, 2015 ($ in thousands) | | | | | | | | | | | | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets | | | | | | | | | | | | | | | | |
Commercial mortgage loans | | $ | — | | | $ | — | | | $ | 1,536,638 | | | $ | 1,536,638 | |
Policy loans | | | — | | | | — | | | | 186,827 | | | | 186,827 | |
Cash | | | 49,121 | | | | — | | | | — | | | | 49,121 | |
Vehicle note | | | — | | | | — | | | | 638,270 | | | | 638,270 | |
| | | | | | | | | | | | | | | | |
Total assets at fair value | | $ | 49,121 | | | $ | — | | | $ | 2,361,735 | | | $ | 2,410,856 | |
| | | | | | | | | | | | | | | | |
Liabilities at fair value | | | | | | | | | |
Policyholders’ account balances — investment contracts | | $ | — | | | $ | — | | | $ | 5,967,973 | | | $ | 5,967,973 | |
Other long-term debt | | | — | | | | — | | | | 638,270 | | | | 638,270 | |
| | | | | | | | | | | | | | | | |
| | $ | — | | | $ | — | | | $ | 6,606,243 | | | $ | 6,606,243 | |
| | | | | | | | | | | | | | | | |
The fair values presented above have been determined by using available market information and by applying market valuation methodologies, as described in more detail below.
Commercial Mortgage Loans
The fair value of most commercial mortgage loans is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate plus an appropriate credit spread for similar quality loans.
52
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Policy Loans
The fair value of policy loans was determined by discounting expected cash flows at the current loan coupon rate. As a result, the carrying value of the policy loans approximates the fair value.
Cash
The Company believes that due to the short-term nature of certain assets, the carrying value approximates fair value.
Vehicle Note and Other Long-Term Debt
The fair value of the Vehicle note and Other long-term debt is based upon the present value of the expected future cash flows discounted at the appropriate U.S. Treasury rate.
Policyholders’ Account Balances — Investment Contracts
Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table above. For fixed deferred annuities fair values are derived using discounted projected cash flows based on interest rates that are representative of the Company’s financial strength ratings, and hence reflect the Company’s own nonperformance risk. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is the amount estimated to be payable to the customer as of the reporting date, which is generally the carrying value.
Predecessor
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis
Level 1 Measurements
| | • | | Fixed maturities: Comprise certain 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 and obtained daily from the fund managers. |
Level 2 Measurements
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.
53
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
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: 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
| | • | | Policyholder account balances — Successor; contractholder funds Predecessor: 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 nonmarket observable inputs. |
54
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the period from January 1, 2014 through March 31, 2014:
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | | | Total gains (losses)
included in: | | | | | | | |
| | Balance as
of January 1,
2014 | | | Net
income(1) | | | OCI | | | Transfers
into
Level 3 | | | Transfers
out of
Level 3 | |
Liabilities | | | | | | | | | | | | |
Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | (267,859 | ) | | $ | 18,525 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Total recurring Level 3 liabilities | | $ | (267,859 | ) | | $ | 18,525 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
| | | Purchases | | | Sales | | | Issues | | | Settlements | | | Balance as
of March 31,
2014 | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Contractholder funds: Derivatives embedded in life and annuity contracts | | $ | — | | | $ | — | | | $ | (3,764 | ) | | $ | 2,612 | | | $ | (250,486 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recurring Level 3 liabilities | | $ | — | | | $ | — | | | $ | (3,764 | ) | | $ | 2,612 | | | $ | (250,486 | ) |
| | | | | | | | | | | | | | | | | | | | |
| (1) | The amount attributable to derivatives embedded in life and annuity contracts was reported as follows: $17.6 million in interest credited to contractholder funds and $946 thousand in contract benefits. These amounts were ceded in accordance with the Company’s reinsurance agreements. |
Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume orbid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote whose inputs have not been corroborated to be market observable, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which the transfer occurred. Therefore, for all transfers into Level 3, all realized and changes in unrealized gains and losses in the quarter of transfer are reflected in the Level 3 rollforward table.
There were no transfers between Level 1 and Level 2 during the period from January 1, 2014 through March 31, 2014.
The following table provides the change in unrealized gains and losses included in net income for Level 3 assets and liabilities:
| | | | |
($ in thousands) | | Period from
January 1,
2014 through
March 31,
2014 | |
Liabilities | | | | |
Policyholders’ account balances: | | | | |
Derivatives embedded in life and annuity contracts | | $ | 18,525 | |
| | | | |
Total recurring Level 3 liabilities | | $ | 18,525 | |
| | | | |
55
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The amounts in the table above represent the change in unrealized gains and losses included in net income for the period of time that the asset or liability was determined to be in Level 3. The amount attributable to derivatives embedded in life and annuity contracts is reported as follows: $17.6 million in interest credited to contractholder funds and $946 thousand in contract benefits in the period from January 1, 2014 through March 31, 2014. These amounts are ceded in accordance with the Company’s reinsurance agreements.
Successor
The Company has agreements that provide for reinsurance of certain policy-related risks. Under the agreements, premiums, contract charges, interest credited to policyholder funds, policy 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 and long-term care policies under coinsurance agreements and yearly renewable term agreements. As of December 31, 2016 and December 31, 2015, approximately 99.8% of the Company’s reinsurance recoverables are due from companies ratedA- or better by S&P. ALIC represents approximately 75% of the Company’s reinsurance recoverables as of December 31, 2016 and 2015, and is supported by comfort trust of approximately $5.9 billion and $5.3 billion as of December 31, 2016 and 2015, respectively.
On April 1, 2014, the Company entered into an experience rated modified coinsurance and monthly renewal term reinsurance arrangement with an external reinsurer under which risk on certain universal life and fixed annuity products is transferred. No portion of the assets constituting the consideration has been transferred to the reinsurer. This agreement was structured to finance reserves on certain universal life and fixed annuity products, in exchange for a fee based on those reserves. The profit to the reinsurer expected on the modified coinsurance and monthly renewable term portions is returned through an experience refund. The Company has determined that this agreement does not fulfill the requirements of risk transfer under generally accepted accounting principles and is accounted for on a deposit method of accounting. As of December 31, 2016 and 2015, the Company had a deposit receivable and a modified coinsurance payable of $1,200 million and $1,250 million, respectively, related to this agreement.
The effects of reinsurance on premiums earned and fee income from policyholders for the Successor Period for the years ended December 31, 2016 and 2015, and the period from April 1, 2014 through December 31, 2014 were as follows:
| | | | | | | | | | | | |
($ in thousands) | | For the Year
Ended
December 31, 2016 | | | For the Year
Ended
December 31, 2015 | | | For the Period from
April 1, 2014
Through December 31,
2014 | |
Direct | | $ | 1,328,917 | | | $ | 1,463,472 | | | $ | 921,444 | |
Assumed | | | 4,749 | | | | 5,939 | | | | 5,258 | |
Ceded | | | (971,047 | ) | | | (1,106,638 | ) | | | (702,833 | ) |
| | | | | | | | | | | | |
Premiums and fee income, net of reinsurance | | $ | 362,619 | | | $ | 362,773 | | | $ | 223,869 | |
| | | | | | | | | | | | |
56
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The effects of reinsurance on return credited to policyholders’ account balances and policyholder benefits for the years ended December 31, 2016 and 2015, and the period from April 1, 2014 through December 31, 2014 were as follows:
| | | | | | | | | | | | |
($ in thousands) | | For the Year
Ended
December 31, 2016 | | | For the Year
Ended
December 31, 2015 | | | For the Period from
April 1, 2014
Through December 31,
2014 | |
Direct | | $ | 1,643,710 | | | $ | 1,603,724 | | | $ | 1,104,420 | |
Assumed | | | 6,453 | | | | 6,743 | | | | 4,713 | |
Ceded | | | (931,557 | ) | | | (957,643 | ) | | | (635,887 | ) |
| | | | | | | | | | | | |
Return credited to policyholders’ account balances and policyholders’ benefits, net of reinsurance | | $ | 718,606 | | | $ | 652,824 | | | $ | 473,246 | |
| | | | | | | | | | | | |
Predecessor
Prior to April 1, 2014, the Company had reinsurance agreements under which it reinsured all of its business to ALIC, Lincoln Benefit Re (“LB Re”) ornon-affiliated reinsurers. Under the agreements, premiums, contract charges, interest credited to policyholders account balances, contract benefits and substantially all expenses were reinsured. The Company purchased reinsurance to limit aggregate and single losses on large risks. The Company ceded a portion of the mortality risk on certain life policies under coinsurance agreements to a pool of twelvenon-affiliated reinsurers.
The effects of reinsurance on premiums and contract charges are as follows:
| | | | |
($ in thousands) | | Period from January 1, 2014
through March 31, 2014 | |
Direct | | $ | 331,899 | |
Assumed | | | 1,581 | |
Ceded: | | | | |
Affiliate | | | (244,797 | ) |
Non-affiliate | | | (88,683 | ) |
| | | | |
Premiums and fee income, net of reinsurance | | $ | — | |
| | | | |
57
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The effects of reinsurance on return credited to policyholders’ account balances, policyholder benefits and other expenses are as follows:
| | | | |
($ in thousands) | | Period from January 1, 2014
through March 31, 2014 | |
Direct | | $ | 450,041 | |
Assumed | | | 2,606 | |
Ceded: | | | | |
Affiliate | | | (336,122 | ) |
Non-affiliate | | | (116,525 | ) |
| | | | |
Return credited to policyholders, contract benefits and expenses, net of reinsurance | | $ | — | |
| | | | |
Successor
In connection with the Acquisition as defined in Note 1, ALIC made an election under Treasury Regulation Section1.1502-36(d) for ALIC to eliminate tax basis in certain assets and tax attributes under the “unified loss rules”. As a result, the tax basis of certain of the Company’s assets was reduced immediately prior to the Acquisition. The reduced tax bases were used to determine the deferred tax impact under the acquisition method of accounting as discussed in Note 1.
The Company is party to a federal income tax allocation agreement (the “Tax Allocation Agreement”) with Lancaster Re. The Company and Lancaster Re file a separate life consolidated federal income tax return under Internal Revenue Code Section 1504 (c)(1).
Following the Acquisition, the Company exited The Allstate Corporation’s consolidated federal income tax return and is no longer a party to the tax allocation agreement with its former affiliates. Final tax settlements were agreed to with The Allstate Corporation and no future tax allocations are expected to occur with The Allstate Corporation.
As part of the Acquisition, although the Company remains jointly and severally liable for consolidated tax liabilities, the Company is held harmless by ALIC in accordance with the Acquisition agreement and believes that the possibility of a tax liability for thepre-sale tax years is remote. The Company does not believe it has any uncertain tax positions for its federal income tax return that would be material to its financial condition, results of income, or cash flows. Therefore, the Company did not record a liability for unrecognized tax contingencies/benefits at December 31, 2016 and 2015. As of December 31, 2016, there were no uncertain tax positions for which management believes it is reasonably possible that the total amounts of tax contingencies will significantly increase within 12 months of the reporting date. No amounts have been accrued for interest or penalties.
58
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The components of the deferred income tax assets and liabilities as of December 31, 2016 and 2015 are as follows:
| | | | | | | | |
($ in thousands) | | December 31, 2016 | | | December 31, 2015 | |
Deferred tax assets | | | | | | | | |
Policyholder reserves | | $ | 2,139,431 | | | $ | 2,058,446 | |
Deferred acquisition costs | | | 65,002 | | | | 41,664 | |
Deferred financing costs | | | 6,311 | | | | 8,707 | |
Investments | | | 29,721 | | | | 120,893 | |
Other assets | | | 5,137 | | | | 688 | |
| | | | | | | | |
Total deferred tax assets | | $ | 2,245,602 | | | $ | 2,230,398 | |
| | | | | | | | |
Deferred tax liabilities | | | | | | | | |
Value of business acquired | | $ | (65,345 | ) | | $ | (86,696 | ) |
Amounts recoverable from reinsurers | | | (2,172,500 | ) | | | (2,076,251 | ) |
Intangibles | | | (1,820 | ) | | | (1,820 | ) |
Other liabilities | | | (2,251 | ) | | | (591 | ) |
| | | | | | | | |
Total deferred tax liabilities | | $ | (2,241,916 | ) | | $ | (2,165,358 | ) |
| | | | | | | | |
Net deferred tax asset (liability) | | $ | 3,686 | | | $ | 65,040 | |
| | | | | | | | |
The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that any tax attribute carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) prudent and feasible tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. The Company had no valuation allowance as of December 31, 2016 or 2015. With respect to deferred tax assets associated with investments, the Company has the ability and intent to hold these securities until recovery. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.
At December 31, 2016 and 2015, the Company had no net operating loss carryforwards, no capital loss carryforwards, or tax credit carryforwards.
59
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
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, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014 were as follows:
| | | | | | | | | | | | |
($ in thousands) | | For the Year
Ended
December 31, 2016 | | | For the Year
Ended
December 31, 2015 | | | For the Period from
April 1, 2014
Through December 31,
2014 | |
Expected federal income tax expense | | $ | 16,135 | | | $ | 45,062 | | | $ | 15,722 | |
Dividends received deduction | | | (1,960 | ) | | | (2,443 | ) | | | (1,470 | ) |
Other | | | 472 | | | | 3,475 | | | | (18 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 14,647 | | | $ | 46,094 | | | $ | 14,234 | |
| | | | | | | | | | | | |
Other represents tax credits and the establishment of additional deferred tax assets and liabilities that existed at the time of Acquisition and identified during the completion of the 2015 and 2014 consolidated federal income tax returns.
The dividends received deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and is the primary component of thenon-taxable investment income, and, as such, is a significant component of the difference between the Company’s effective tax rate and the federal statutory tax rate of 35%. The actual current year DRD can vary from the estimate based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from mutual fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.
Tax reform has been identified by both President Trump and congressional leadership as an important priority. Both President Trump’s tax plan and the House of Representatives Republican “blueprint” for tax reform (released in June 2016) include high level tax reform proposals, but do not yet provide detailed tax provisions. While the timing, substance, and effective date of any new tax rules are unknown, they could result in the elimination of some, or all, of the separate account DRD tax benefit the Company ultimately receives and impact the Company’s financial position and results from operations.
Predecessor
Prior to April 1, 2014, the Company joined The Allstate Corporation and its other subsidiaries (the “Allstate Group”) in the filing of a consolidated federal income tax return and was party to a federal income tax allocation agreement (the “Allstate Tax Sharing Agreement”). Under the Allstate Tax Sharing Agreement, the Company paid to or received from The Allstate Corporation the amount, if any, by which the Allstate Group’s federal income tax liability was affected by virtue of inclusion of the Company in the consolidated federal income tax return. The Company also had 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 resulted 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 IRS is currently examining the Allstate Group’s 2013 and 2014 federal income tax returns. The Allstate Group’s tax years prior to 2013 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 the Allstate Group’s tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company.
60
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The components of income tax expense are as follows:
| | | | |
($ in thousands) | | Period from January 1, 2014
through March 31, 2014 | |
Current | | $ | 914 | |
Deferred | | | 8 | |
| | | | |
Total income tax expense | | $ | 922 | |
| | | | |
The Company paid no income taxes in the period from January 1, 2014 through March 31, 2014. A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations is as follows:
| | | | |
| | | Period from January 1, 2014
through March 31, 2014 | |
Statutory federal income tax rate | | | 35.0 | % |
Other | | | — | |
| | | | |
Effective income tax rate | | | 35.0 | % |
| | | | |
| 8. | Future Policy Benefits and Other Policyholder Liabilities — Successor |
Life insurance liabilities include reserves for death benefits and other policy benefits. As of December 31, 2016 and 2015, future policy benefits and other policyholder liabilities consisted of the following:
| | | | | | | | |
($ in thousands) | | December 31, 2016 | | | December 31, 2015 | |
Traditional life insurance | | $ | 1,598,071 | | | $ | 1,567,388 | |
Immediate fixed annuities | | | 520,380 | | | | 584,948 | |
Accident and health insurance | | | 1,693,598 | | | | 1,580,809 | |
Equity indexed annuities | | | 40,298 | | | | 38,739 | |
Other | | | 1,259,444 | | | | 985,757 | |
| | | | | | | | |
Total | | $ | 5,111,791 | | | $ | 4,757,641 | |
| | | | | | | | |
Future policy benefits are generally equal to the present value of future benefit payments and related expenses, less the present value of future net premiums. Assumptions as to mortality, morbidity and persistency are based on the Company’s experience, industry data, and/or other factors, when the basis of the reserve is established. Interest rates used in the determination of present values range from 2.5% to 6.0% for setting reserves.
Accident and health insurance future policy benefit reserves include gross unpaid claim reserves of $218.0 million and $191.0 million as of December 31, 2016 and 2015, respectively. These amounts are fully reinsured as of December 31, 2016 and 2015.
61
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
| 9. | Policyholder Account Balances — Successor |
As of December 31, 2016 and 2015, policyholders’ account balances consisted of the following:
| | | | | | | | |
($ in thousands) | | December 31, 2016 | | | December 31, 2015 | |
Interest-sensitive life contracts | | $ | 5,370,563 | | | $ | 5,210,152 | |
Individual annuities | | | 5,298,452 | | | | 5,896,019 | |
Funding agreements | | | 255,200 | | | | — | |
Other | | | 11,157 | | | | 14,394 | |
| | | | | | | | |
Total policyholders’ account balances | | $ | 10,935,372 | | | $ | 11,120,565 | |
| | | | | | | | |
Policyholders’ account balances represent an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges, if applicable. These policyholders’ account balances also include provisions for benefits undernon-life contingent payout annuities. Interest crediting rates range from 0.4% to 6.0% for interest sensitive contracts. Interest crediting rates for individual annuities range from 0.0% to 6.0%. Interest crediting rates for funding agreements range from 0.5% to 1.0%.
| 10. | Certain Nontraditional Long-Duration Contracts — Successor |
The Company offered traditional variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also offered variable annuity contracts with general and separate account options where the Company contractually guarantees to the contractholder a return of no less than total deposits made to the contract less any partial withdrawals (“return of net deposits”). In certain of these variable annuity contracts, the Company also contractually guarantees to the contractholder a return of no less than (1) total deposits made to the contract less any partial withdrawals plus a minimum return (“minimum return”); and/or (2) the highest contract value on a specified date adjusted for any withdrawals (“contract value”). These guarantees include benefits that are payable in the event of death, annuitization or at specified dates during the accumulation period and withdrawal and income benefits payable during specified periods. The Company also issued annuity contracts with and without market value adjusted investment options (“MVAs”), which provide for a return of principal plus a fixed rate of return if held to maturity, or, alternatively, a “market adjusted value” if surrendered prior to maturity or if funds are allocated to other investment options. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at surrender, as applicable. All of the risks associated with the Company’s variable annuity contracts are reinsured with external reinsurers.
In addition, the Company issues certain variable life, variable universal life and universal life contracts where the Company contractually guarantees to the contractholder a death benefit even when there is insufficient value to cover monthly mortality and expense charges, whereas otherwise the contract would typically lapse (“no lapse guarantee”). Variable life and variable universal life contracts are offered with general and separate account options similar to variable annuities.
The assets supporting the variable portion of both traditional variable annuities and certain variable contracts with guarantees are carried at fair value and reported as “Separate account assets” with an equivalent amount reported as “Separate account liabilities.” Amounts assessed against the contractholders for mortality, administration, and other services are included within revenue in fee income from policyholders and changes in liabilities for minimum guarantees are generally included in policyholder benefits in the Consolidated Statement of Operations and Comprehensive Income (Loss) (Successor) and Statements of Operations and Comprehensive Income (Predecessor).
62
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including fixed income and equity market returns, contract lapses and contractholder mortality.
For guarantees of benefits that are payable at annuitization, the net amount at risk is generally defined as the present value of the minimum guaranteed annuity payments available to the contractholder determined in accordance with the terms of the contract in excess of the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including fixed income and equity market returns, benefit utilization, timing of annuitization, contract lapses and contractholder mortality.
For guarantees of benefits that are payable at withdrawal, the net amount at risk is generally defined as the present value of the minimum guaranteed withdrawal payments available to the contractholder determined in accordance with the terms of the contract in excess of the currentaccount balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the guaranteed minimum accumulation balance minus the current account balance. The Company’s primary risk exposures for these contracts relates to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including equity market returns, interest rates, market volatility or contractholder behavior used in the original pricing of these products.
The Company’s contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed may not be mutually exclusive. The liabilities related to the net amount at risk are reflected within Future policy benefits and other policyholder liabilities or Policyholders’ account balances. As of December 31, 2016 and 2015, the Company had the following guarantees associated with these contracts, by product and guarantee type:
| | | | | | | | | | | | | | | | |
| | | December 31, 2016 | |
($ in millions) | | In the Event of
Death | | | At
Annuitization/
Accumulation | | | For Cumulative
Periodic Withdrawals | | | Accumulation
at Specified
Dates | |
Variable Annuity Contracts | | | | | | | | | | | | | | | | |
Separate account value | | $ | 543.1 | | | $ | 116.5 | | | $ | 10.9 | | | $ | 75.8 | |
Net amount at risk | | $ | 57.5 | | | $ | 15.8 | | | $ | 0.1 | | | $ | 6.2 | |
Average attained age of contractholders | | | 61 years | | | | N/A | | | | N/A | | | | N/A | |
Weighted average waiting period until guarantee date | | | N/A | | | | None | | | | N/A | | | | 5 years | |
Variable Life, Variable Universal Life and Universal Life Contracts | | | | | | | | | | | | | | | | |
No Lapse Guarantees | | | | | | | | | | | | | | | | |
Separate account value | | $ | 348.0 | | | | | | | | | | | | | |
General account value | | $ | 3,684.1 | | | | | | | | | | | | | |
Net amount at risk | | $ | 77,609.0 | | | | | | | | | | | | | |
Average attained age of contractholders | | | 49 years | | | | | | | | | | | | | |
63
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | |
| | | December 31, 2015 | |
($ in millions) | | In the Event of
Death | | | At
Annuitization/
Accumulation | | | For Cumulative
Periodic Withdrawals | | | Accumulation
at Specified
Dates | |
Variable Annuity Contracts | | | | | | | | | | | | | | | | |
Separate account value | | $ | 608.8 | | | $ | 127.4 | | | $ | 12.8 | | | $ | 91.6 | |
Net amount at risk | | $ | 66.3 | | | $ | 16.9 | | | $ | 0.1 | | | $ | 7.4 | |
Average attained age of contractholders | | | 61 years | | | | N/A | | | | N/A | | | | N/A | |
Weighted average waiting period until guarantee date | | | N/A | | | | None | | | | N/A | | | | 5 years | |
Variable Life, Variable Universal Life and Universal Life Contracts | | | | | | | | | | | | | | | | |
No Lapse Guarantees | | | | | | | | | | | | | | | | |
Separate account value | | $ | 307.3 | | | | | | | | | | | | | |
General account value | | $ | 3,639.6 | | | | | | | | | | | | | |
Net amount at risk | | $ | 84,370.9 | | | | | | | | | | | | | |
Average attained age of contractholders | | | 48 years | | | | | | | | | | | | | |
Liabilities for Guarantee Benefits
The liabilities for guaranteed minimum death benefits (“GMDB”) and secondary guarantees on interest-sensitive life and fixed annuities are included in Future policy benefits and other policyholder liabilities on the Consolidated Balance Sheet (Successor) and the related changes in the liabilities are included in Policyholder benefits in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the Successor Period for the years ended December 31, 2016 and 2015, for the period from April 1, 2014 through December 31, 2014, and for the Predecessor Period for the period from January 1, 2014 through March 31, 2014. Guaranteed minimum income benefits (“GMIB”), guaranteed minimum withdrawal benefits (“GMWB”) and guaranteed minimum accumulation benefits (“GMAB”) features are accounted for as bifurcated embedded derivatives and are recorded at fair value within Policyholders’ account balances on the Consolidated Balance Sheet (Successor). The table below summarizes the changes in general account liabilities for guarantees on variable contracts.
64
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | | GMDB | | | GMIB | | | GMWB/
GMAB | | | Secondary
Guarantees | | | | |
($ in thousands) | | Variable
Annuity | | | Variable
Annuity | | | Variable
Annuity | | | Interest-
Sensitive
Life and
Fixed
Annuities | | | Total | |
Predecessor | | | | | | | | | | | | | | | | | | | | |
Net balance as of December 31, 2013 | | | — | | | | — | | | | — | | | | — | | | | — | |
Plus reinsurance recoverable | | | 8,444 | | | | 8,743 | | | | 9,444 | | | | 281,771 | | | | 308,402 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2013 | | $ | 8,444 | | | $ | 8,743 | | | $ | 9,444 | | | $ | 281,771 | | | $ | 308,402 | |
| | | | | | | | | | | | | | | | | | | | |
Less: reinsurance recoverable | | | 8,444 | | | | 8,743 | | | | 9,444 | | | | 281,771 | | | | 308,402 | |
Net balance as of December 31, 2013 | | | — | | | | — | | | | — | | | | — | | | | — | |
Incurred guarantee benefits | | | — | | | | — | | | | — | | | | — | | | | — | |
Paid guarantee benefits | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net change | | | — | | | | — | | | | — | | | | — | | | | — | |
Net balance as of March 31, 2014 | | | — | | | | — | | | | — | | | | — | | | | — | |
Plus reinsurance recoverable | | | 8,057 | | | | 7,122 | | | | 8,499 | | | | 293,704 | | | | 317,382 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2014 | | $ | 8,057 | | | $ | 7,122 | | | $ | 8,499 | | | $ | 293,704 | | | $ | 317,382 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | |
Successor | | | | | | | | | | | | | | | | | | | | |
Balance as of April 1, 2014 | | $ | 8,057 | | | $ | 7,122 | | | $ | 8,499 | | | $ | 557,654 | | | $ | 581,332 | |
Less: reinsurance recoverable | | | 8,057 | | | | 7,122 | | | | 8,499 | | | | 67,288 | | | | 90,966 | |
| | | | | | | | | | | | | | | | | | | | |
Net balance as of April 1, 2014 | | | — | | | | — | | | | — | | | | 490,366 | | | | 490,366 | |
Incurred guarantee benefits | | | — | | | | — | | | | — | | | | 159,314 | | | | 159,314 | |
Paid guarantee benefits | | | — | | | | — | | | | — | | | | (108,252 | ) | | | (108,252 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net change | | | — | | | | — | | | | — | | | | 51,062 | | | | 51,062 | |
Net balance as of December 31, 2014 | | | — | | | | — | | | | — | | | | 541,428 | | | | 541,428 | |
Plus reinsurance recoverable | | | 8,358 | | | | 8,240 | | | | 6,733 | | | | 83,733 | | | | 107,064 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2014 | | $ | 8,358 | | | $ | 8,240 | | | $ | 6,733 | | | $ | 625,161 | | | $ | 648,492 | |
| | | | | | | | | | | | | | | | | | | | |
Less: reinsurance recoverable | | | 8,358 | | | | 8,240 | | | | 6,733 | | | | 83,733 | | | | 107,064 | |
| | | | | | | | | | | | | | | | | | | | |
Net balance as of April 1, 2014 | | | — | | | | — | | | | — | | | | 541,428 | | | | 541,428 | |
Incurred guarantee benefits | | | — | | | | — | | | | — | | | | 217,603 | | | | 217,603 | |
Paid guarantee benefits | | | — | | | | — | | | | — | | | | (118,063 | ) | | | (118,063 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net change | | | — | | | | — | | | | — | | | | 99,540 | | | | 99,540 | |
Net balance as of December 31, 2015 | | | — | | | | — | | | | — | | | | 640,968 | | | | 640,968 | |
Plus reinsurance recoverable | | | 8,844 | | | | 5,663 | | | | 7,814 | | | | 100,317 | | | | 122,638 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2015 | | $ | 8,844 | | | $ | 5,663 | | | $ | 7,814 | | | $ | 741,285 | | | $ | 763,606 | |
| | | | | | | | | | | | | | | | | | | | |
Less: reinsurance recoverable | | | 8,844 | | | | 5,663 | | | | 7,814 | | | | 100,317 | | | | 122,638 | |
| | | | | | | | | | | | | | | | | | | | |
Net balance as of December 31, 2015 | | | — | | | | — | | | | — | | | | 640,968 | | | | 640,968 | |
Incurred guarantee benefits | | | — | | | | — | | | | — | | | | 316,344 | | | | 316,344 | |
Paid guarantee benefits | | | — | | | | — | | | | — | | | | (156,067 | ) | | | (156,067 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net change | | | — | | | | — | | | | — | | | | 160,277 | | | | 160,277 | |
Net balance as of December 31, 2016 | | | — | | | | — | | | | — | | | | 801,245 | | | | 801,245 | |
Plus reinsurance recoverable | | | 8,626 | | | | 3,440 | | | | 6,835 | | | | 122,608 | | | | 141,509 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2016 | | $ | 8,626 | | | $ | 3,440 | | | $ | 6,835 | | | $ | 923,853 | | | $ | 942,754 | |
| | | | | | | | | | | | | | | | | | | | |
65
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
| 11. | Value of Business Acquired |
The following reflects the changes to the VOBA asset:
| | | | | | | | | | | | |
($ in thousands) | | For the Year
Ended
December 31, 2016 | | | For the Year
Ended
December 31, 2015 | | | For the Period from
April 1, 2014
Through December 31,
2014 | |
Balance at beginning of period | | $ | 247,702 | | | $ | 231,521 | | | $ | 290,795 | |
Business acquired | | | — | | | | — | | | | — | |
Amortized to expense during the year(1) | | | (30,053 | ) | | | (40,880 | ) | | | (38,987 | ) |
Adjustment for unrealized investment losses during the year | | | (30,948 | ) | | | 57,061 | | | | (20,287 | ) |
| | | | | | | | | | | | |
Balance at end of year | | $ | 186,701 | | | $ | 247,702 | | | $ | 231,521 | |
| | | | | | | | | | | | |
| (1) | Amount is included in Operating and acquisition expenses on the Consolidated Statements of Operations and Other Comprehensive Income (Loss) |
The following table provides estimated percentage of the VOBA balance to be amortized for the years indicated:
| | | | |
| | | VOBA
Amortization | |
2017 | | | 14 | % |
2018 | | | 11 | % |
2019 | | | 9 | % |
2020 | | | 8 | % |
2021 and thereafter | | | 58 | % |
| 12. | Commitments and Contingencies |
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 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, premium tax and market conduct compliance. It is possible that these examinations may result in additional payments to states and to changes in the Company’s practices and procedures, which could impact benefit payments, operating and acquisition expenses and reserves, among other consequences; however, it is not likely to have a material effect on the financial statements of the Company.
66
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
The Company is assessed amounts by the state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. At December 31, 2016, the Company accrued $3.6 million for guaranty fund assessments which is expected to be offset by estimated future premium tax deductions of $7.6 million. At December 31, 2015, the Company accrued $6.7 million for guaranty fund assessments.
Litigation
The Company is involved from time to time in judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its business. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the Company’s financial condition. Given the inherent difficulty of predicting the outcome of the Company’s litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, the Company cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. However, the Company believes that at the present time there are no pending or threatened lawsuits that are reasonably likely to have a material adverse effect on the consolidated financial position or results of operations.
In the normal course of its business, the Company has entered into agreements that include indemnities in favor of third parties, such as contracts with advisors and consultants, outsourcing agreements, information technology agreements and service agreements. The Company has also agreed to indemnify its directors, officers and employees in accordance with the Company’sby-laws. The Company believes any potential liability under these agreements is neither probable nor estimable. Therefore, the Company has not recorded any associated liability.
Pledged or Restricted Assets
The Company had the following restricted assets:
| | • | | Certain bonds were on deposit with governmental authorities as required by law with market values of $8.8 million and $8.4 million at December 31, 2016 and 2015, respectively. |
| | • | | Derivative cash collateral received was reported as cash equivalents of $0.9 million and $0.8 million at December 31, 2016 and 2015, respectively. |
| | • | | Funds pledged on certain mortgage loans held in the investment portfolio to finance property improvements on underlying real estate totaling $14.2 million and $18.4 million at December 31, 2016 and 2015, respectively. |
| | • | | The Company is a member of the FHLB and is required to pledge collateral to back funding agreements issued to the FHLB. As of December 31, 2016, assets with a market value of approximately $339.9 million were pledged as collateral to the FHLB. |
| 13. | Regulatory Capital and Dividends |
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.
67
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
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 establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments at amortized cost. Statutory accounting practices do not give recognition to purchase accounting adjustments.
Statutory net income was $52 million, $74 million and $226 million for the years ended December 31, 2016, December 31, 2015 and December 31, 2014, respectively. Statutory capital and surplus was $560 million and $555 million as of December 31, 2016 and December 31, 2015, respectively.
Dividend Limitations
The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements and other relevant factors. The payment of shareholder dividends by the Company without the prior approval of the Department of Insurance 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 amount of dividends paid in the preceding twelve months. In connection with the Acquisition, prior approval of the Nebraska Director of Insurance is required for the Company for any dividend or distribution for five years subsequent to the Acquisition. The Company paid dividends of $42.0 million, $187.0 million and $33.2 million during the years ended December 31, 2016 and 2015, and the period from April 1, 2014 through December 31, 2014, respectively.
Other
Without the prior approval of the Nebraska Director of Insurance, the Company may not:
| 1. | Acquire or enter into an agreement or understanding to acquire control of any insurer, assumptively acquire policies, or bulk reinsure business during the period of three years after the Acquisition. |
| 2. | Provide or propose to provide directly or indirectly any loans, advances, guarantees, pledges, or other financial assistance (excluding policy loans or investment portfolio transactions) during the period of three years after the Acquisition. |
| 3. | Engage in any material transaction during the period of three years after the Acquisition. “Material transaction” shall mean any transfer or encumbrance of assets that, together with all other transfers or encumbrances made within the preceding twelve months, exceeds in value the greater of five percent of Lincoln Benefit’s surplus as of the December 31st of the last preceding, or the net gain from operations of Lincoln Benefit for the twelve-month period ending the December 31st of the last preceding. For the purposes of this clause, “Material Transaction” shall exclude: (i) investment portfolio transactions; (ii) settlement of balances due to policyholders, agents or third party reinsurers under existing reinsurance agreements; or (iii) settlement of ordinary course payables including but not limited to taxes, third party administrators, suppliers or other ordinary course creditors, and intercompany payables arising under any approved intercompany services agreement. |
Under state insurance laws, insurance companies are required to maintain paid up capital of not less than the minimum capital requirement applicable to the types of insurance they are authorized to write. Insurance companies are also subject to risk-based capital (“RBC”) requirements adopted by state insurance regulators. A company’s “authorized control level RBC” is calculated using various factors applied to certain financial
68
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
balances and activity. Companies that do not maintain statutory capital and surplus at a level in excess of the company action level RBC, which is two times authorized control level RBC, are required to take specified actions. Company action level RBC is significantly in excess of the minimum capital requirements.
In December 2014, the Company entered into a lease agreement, effective February 2015, to lease office space under anon-cancellable operating lease agreement that expires in January 31, 2026. For the years ended December 31, 2016 and 2015, the Company made payments of $0.2 million and $0.1 million, respectively, pursuant to this operating lease. For the period from April 1, 2014 through December 31, 2014, and the period from January 1, 2014 through March 31, 2014, the Company made no payments pursuant to this operating lease.
The minimum aggregate rental commitments as of December 31, 2016 were as follows:
| | | | |
($ in thousands) | | | |
2017 | | $ | 194 | |
2018 | | | 207 | |
2019 | | | 212 | |
2020 | | | 217 | |
2021 | | | 222 | |
All future years | | | 1,489 | |
| | | | |
Aggregate total | | $ | 2,541 | |
| | | | |
Successor
On April 1, 2014, the Company entered into a management services agreement with Resolution. Under this agreement, Resolution and Lincoln Benefit provide services to each other including but not limited to compliance, legal, risk management, accounting and reporting, treasury, tax and other management related services. Services are provided at cost. Resolution provided $14.1 million, $13.9 million and $21.1 million in services to Lincoln Benefit for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014, respectively.
Effective April 1, 2014, the Company entered into a Fee Letter (the “Fee Letter”) with Lanis LLC (“Lanis”) pursuant to which the Company will pay Lanis the risk spread due on the Vehicle Note issued by Lanis to Lancaster Re. The total expense related to this risk spread for the years ended December 31, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014 was approximately $7.3 million, $6.7 million and $4.3 million, respectively.
The Company reported the following receivables/ (payables) to affiliates as of December 31, 2016 and 2015 ($ in thousands):
| | | | | | | | |
| | | December 31, 2016 | | | December 31, 2015 | |
Resolution | | $ | (2,795 | ) | | $ | (2,623 | ) |
Lanis | | $ | (1,898 | ) | | $ | (1,742 | ) |
69
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
Intercompany receivable and payable balances are evaluated on an individual company basis. Intercompany balances are generally settled quarterly.
The Company’s stock is pledged as collateral on Resolution’s term loan agreement with a syndicate of lenders (“Term Loan”). The maturity date of the Term Loan is June 15, 2018. The Term Loan was funded on April 1, 2014.
On April 1, 2014, the Company and RLI entered into a Letter Agreement whereby from and after the fifth anniversary of the date of the agreement, if the Company makes any payment pursuant to the Fee Letter, within ten Business Days of such payment by the Company, RLI shall reimburse the Company in cash in an amount equal to such payment by the Company.
Predecessor
All intercompany balances were settled prior to the Acquisition.
Business operations
Prior to April 1, 2014, the Company used services performed by its affiliates, Allstate Insurance Company (“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 shared the services of employees with AIC. The Company reimbursed its affiliates for the operating expenses incurred on behalf of the Company. The Company was charged for the cost of these operating expenses based on the level of services provided. Operating expenses allocated to the Company were $50.1 million in the period from January 1, 2014 through March 31, 2014. Of these costs, the Company retained investment related expenses on the invested assets that were not transferred under the reinsurance agreements. All other costs were ceded to ALIC under the reinsurance agreements.
Broker-Dealer agreements
Prior to April 1, 2014, the Company had a service agreement with Allstate Distributors, L.L.C. (“ADLLC”), a broker-dealer company owned by ALIC, whereby ADLLC promoted and marketed products sold by the Company. In return for these services, the Company recorded expense of $12 thousand in the period from January 1, 2014 through March 31, 2014 that was ceded to ALIC under the terms of the reinsurance agreements.
Prior to April 1, 2014, the Company received distribution services from Allstate Financial Services, LLC, an affiliated broker-dealer company, for certain annuity and variable life insurance contracts sold by Allstate exclusive agencies. For these services, the Company incurred commission and other distribution expenses of $2.2 million in the period from January 1, 2014 through March 31, 2014 that were ceded to ALIC under the terms of the reinsurance agreements.
Reinsurance
The following table summarizes amounts that were ceded to ALIC under reinsurance agreements and reported net in the Statements of Operations and Comprehensive Income:
| | | | |
($ in thousands) | | Period from January 1, 2014
through March 31, 2014 | |
Premiums and contract charges | | $ | 244,797 | |
Interest credited to contractholder funds, contract benefits and expenses | | | 336,122 | |
70
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Notes to Consolidated Financial Statements
In September 2012, the Company entered into a coinsurance reinsurance agreement with LB Re to cede certain interest-sensitive life insurance policies to LB Re.
Income taxes
Prior to April 1, 2014, the Company was a party to a federal income tax allocation agreement with The Allstate Corporation (see Note 7).
Intercompany loan agreement
Prior to April 1, 2014, the Company had an intercompany loan agreement with The Allstate Corporation.
71
Lincoln Benefit Life Company
(A Wholly Owned Subsidiary of Resolution Life, Inc.)
Schedule I Summary of Investments Other Than Investments in Related Parties
December 31, 2016
| | | | | | | | | | | | |
($ in thousands) | | Amortized
Cost | | | Fair Value | | | Amount at which
shown in the
Consolidated
Balance Sheet | |
Type of Investment | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies, available for sale | | $ | 508,635 | | | $ | 501,337 | | | $ | 501,337 | |
U.S. Treasury Securities and Obligations of U.S. Government Authority and Agencies, at fair value option | | | 15,348 | | | | 14,615 | | | | 14,615 | |
Obligations of U.S. States and Political Subdivisions | | | 702,415 | | | | 709,737 | | | | 709,737 | |
Foreign government | | | 31,009 | | | | 28,055 | | | | 28,055 | |
All other corporate bonds | | | 5,963,354 | | | | 5,886,826 | | | | 5,886,826 | |
ABS | | | 512,486 | | | | 507,763 | | | | 507,763 | |
CMBS | | | 385,757 | | | | 381,262 | | | | 381,262 | |
RMBS | | | 180,492 | | | | 183,145 | | | | 183,145 | |
| | | | | | | | | | | | |
Total fixed maturities | | $ | 8,299,496 | | | $ | 8,212,740 | | | $ | 8,212,740 | |
Other securities: | | | | | | | | | | | | |
Equity securities | | $ | 5,100 | | | $ | 5,100 | | | $ | 5,100 | |
Commercial mortgage loans | | | 1,455,156 | | | | | | | | 1,455,156 | |
Derivatives | | | 15,581 | | | | 18,949 | | | | 18,949 | |
Other long-term assets | | | 457 | | | | | | | | 457 | |
Policy loans | | | 178,890 | | | | | | | | 178,890 | |
Short-term investments | | | 129,660 | | | | | | | | 129,660 | |
| | | | | | | | | | | | |
Total other securities | | $ | 1,784,844 | | | $ | 24,049 | | | $ | 1,788,212 | |
| | | | | | | | | | | | |
Total investments | | $ | 10,084,340 | | | $ | 8,236,789 | | | $ | 10,000,952 | |
| | | | | | | | | | | | |
72
Lincoln Benefit Life Company
(A Wholly-Owned Subsidiary of Resolution Life, Inc.)
Schedule IV — Reinsurance
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Gross Amount | | | Ceded to Other
Companies | | | Assumed
from Other
Companies | | | Net Amount | | | Percentage of
Amount
Assumed to Net | |
Successor | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2016 | | | | | | | | | | | | | | | | | | | | |
Life insurance in force | | $ | 365,008,309 | | | $ | 359,316,014 | | | $ | 4,180,222 | | | $ | 9,872,517 | | | | 42.3 | % |
| | | | | | | | | | | | | | | | | | | | |
Premiums and contract charges: | | | | | | | | | | | | | | | | | | | | |
Life and annuities | | $ | 1,270,770 | | | $ | (918,414 | ) | | $ | 4,749 | | | $ | 357,105 | | | | 1.3 | % |
Accident and health insurance | | | 58,147 | | | | (52,633 | ) | | | — | | | | 5,514 | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,328,917 | | | $ | (971,047 | ) | | $ | 4,749 | | | $ | 362,619 | | | | 1.3 | % |
| | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2015 | | | | | | | | | | | | | | | | | | | | |
Life insurance in force | | $ | 390,226,197 | | | $ | 384,704,438 | | | $ | 4,601,282 | | | $ | 10,123,041 | | | | 45.5 | % |
| | | | | | | | | | | | | | | | | | | | |
Premiums and contract charges: | | | | | | | | | | | | | | | | | | | | |
Life and annuities | | $ | 1,405,005 | | | $ | (1,056,276 | ) | | $ | 5,939 | | | $ | 354,668 | | | | 1.7 | % |
Accident and health insurance | | | 58,467 | | | | (50,362 | ) | | | — | | | | 8,105 | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,463,472 | | | $ | (1,106,638 | ) | | $ | 5,939 | | | $ | 362,773 | | | | 1.6 | % |
| | | | | | | | | | | | | | | | | | | | |
Period from April 1, 2014 through December 31, 2014 | | | | | | | | | | | | | | | | | | | | |
Life insurance in force | | $ | 395,385,878 | | | $ | 388,790,881 | | | $ | 5,106,566 | | | $ | 11,701,563 | | | | 43.6 | % |
| | | | | | | | | | | | | | | | | | | | |
Premiums and contract charges: | | | | | | | | | | | | | | | | | | | | |
Life and annuities | | $ | 869,472 | | | $ | (669,382 | ) | | $ | 5,258 | | | $ | 205,348 | | | | 2.6 | % |
Accident and health insurance | | | 51,972 | | | | (33,451 | ) | | | — | | | | 18,521 | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 921,444 | | | $ | (702,833 | ) | | $ | 5,258 | | | $ | 223,869 | | | | 2.4 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | |
Predecessor | | | | | | | | | | | | | | | | | | | | |
Period from April 1, 2014 through December 31, 2014 | | | | | | | | | | | | | | | | | | | | |
Premiums and contract charges: | | | | | | | | | | | | | | | | | | | | |
Life and annuities | | $ | 313,410 | | | $ | (314,991 | ) | | $ | 1,581 | | | $ | — | | | | 0.0 | % |
Accident and health insurance | | | 18,489 | | | | (18,489 | ) | | | — | | | | — | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 331,899 | | | $ | (333,480 | ) | | $ | 1,581 | | | $ | — | | | | 0.0 | % |
| | | | | | | | | | | | | | | | | | | | |
No reinsurance or coinsurance income was netted against premiums ceded in the years ended December 31, 2016 and 2015, the period from April 1, 2014 through December 31, 2014, or the period from January 1, 2014 to March 31, 2014.
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| Item 11(f). | Selected Financial Data |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 5-YEAR SUMMARY OF SELECTED FINANCIAL DATA | |
| | | Successor Period | | | | | | Predecessor Period | |
($ in millions) | | 2016 | | | 2015 | | | For the period from
April 1, 2014
through
December 31, 2014 | | | | | | For the period from
January 1, 2014
through
March 31, 2014 | | | 2013 | | | 2012 | |
Operating results | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | $ | 397.1 | | | $ | 398.9 | | | $ | 288.6 | | | | | | | $ | 2.4 | | | $ | 10.9 | | | $ | 11.6 | |
Realized capital gains and (losses) | | | 73.7 | | | | 113.5 | | | | 46.1 | | | | | | | | 0.3 | | | | — | | | | 0.6 | |
Total Revenues | | | 833.4 | | | | 875.2 | | | | 614.2 | | | | | | | | 2.6 | | | | 10.9 | | | | 12.2 | |
Net income | | | 31.5 | | | | 82.7 | | | | 30.7 | | | | | | | | 1.7 | | | | 7.1 | | | | 7.9 | |
Financial position | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investments | | $ | 10,001.0 | | | $ | 9,845.1 | | | $ | 11,088.5 | | | | | | | $ | — | | | $ | 346.8 | | | $ | 354.8 | |
Total assets | | | 19,794.5 | | | | 19,562.7 | | | | 20,710.5 | | | | | | | | — | | | | 18,844.8 | | | | 19,782.0 | |
Future policy benefits, other policyholder liabilities and policyholders’ account balances | | | 16,047.2 | | | | 15,878.2 | | | | 16,293.2 | | | | | | | | — | | | | 16,681.5 | | | | 17,680.5 | |
Shareholder’s equity | | | 442.5 | | | | 334.5 | | | | 679.0 | | | | | | | | — | | | | 343.7 | | | | 346.5 | |
| 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. 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, benefits paid, contract charges, amounts ceded to reinsurers and return on investments including exposure to market risk, credit quality/experience, net investment income, cash flows, realized capital gains and losses, unrealized capital gains and losses, stability of long-term returns, and asset/liability duration (“asset duration”). |
| | • | | For financial condition: risk based capital ratios and stress testing of overall 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 the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Consolidated Financial Statements could change significantly.
Management believes the critical accounting policies relating to the following areas are most dependent on the application of estimates, assumptions and judgments:
| | • | | Future policy benefits and other policyholder liabilities |
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| | • | | Value of business acquired (“VOBA”) |
| | • | | Investments — Impairments and Fair Value Measurements |
| | • | | Reserves for Contingencies |
Future Policy Benefits and Other Policyholder Liabilities
Policy liabilities are established for future policy benefits on certain annuity, life, and long term care policies. Such liabilities are established in amounts adequate to meet the estimated future obligations of policiesin-force. Changes in policy and contract claims are recorded in policyholder benefits, in the Consolidated Statements of Operations and Comprehensive Income (Loss).
For ASC944-20 products, benefit reserves are computed using the net level premium method for individual life, annuity and long-term care policies, and are based upon estimates as to future investment yield, mortality and lapse that include provisions for adverse deviation that were prevalent at the time the reserve was initially established. Mortality, morbidity and lapse assumptions for all policies are based on the Company’s own experience and industry developments.
Liabilities for outstanding claims and claims adjustment expenses are estimates of payments to be made on life and health insurance contracts for reported claims and claims adjustment expenses. A liability is also held for claims adjustment expenses incurred but not reported as of the balance sheet date. These liabilities are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all claims incurred but not paid. These estimates are continually reviewed and adjusted as necessary; such adjustments are reflected in current operations.
Future policy benefit reserves for fixed indexed annuity policies with returns linked to the performance of a specified market index are equal to the excess of the sum of the fair value of the embedded derivative and the host (or guaranteed) component over the policyholder account balance. The change in the fair value of the embedded derivative is linked primarily to the performance of the equity option. The host value is established as of the date of acquisition and is equal to the total account value, plus the value of the unexpired options at the date of acquisition, less the embedded derivative, and accreted over the policy’s life at a constant rate of interest.
Future policy benefits reserves for the portion of fixed indexed annuities earning a fixed rate of interest and other deferred annuity products are computed under a retrospective deposit method and represent policyholders’ account balances before applicable surrender charges.
The Company holds additional liabilities for its no lapse guarantees (associated with universal life policies), its guaranteed minimum death benefits (“GMDB”) associated with its variable universal life business, and guaranteed minimum withdrawal benefits (“GMWB”) associated with fixed annuities, which are accounted for in accordance with ASC944-20, Financial Services — Insurance Activities. The Company’s reserves related to guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”), and GMWB associated with variable annuities are ceded to third party reinsurers with a small amount of retained GMWB coverage related to equity indexed annuities.
Policy liabilities and accruals are based on the various estimates discussed above. Although the adequacy of these amounts cannot be assured, the Company believes that policy liabilities and accruals will be sufficient to meet future obligations of policiesin-force. The amount of liabilities and accruals, however, could be revised if the estimates discussed above are revised.
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Sensitivity for Future Policy Benefit Reserves
The Company’s liability for future policy benefits also includes reserves based on the present value of estimated future payments to or on behalf of contractholders, where the timing and amount of payment depends on policyholder mortality. Expected mortality is generally based on the Company’s experience, industry data, and/or other factors. Interest rate assumptions are based on factors such as market conditions and expected investment returns. After the initial establishment of reserves, premium deficiency and loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums at an acquisition deal level are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any VOBA asset), any provisions for adverse deviation (“PAD”), if material, would be released, then VOBA would be written off, and then, if required, a premium deficiency reserve would be established by a charge to earnings.
Value of Business Acquired
In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is allocated to the right to receive future gross profits from the acquired insurance policies or investment contracts. This intangible asset, called value of business acquired (“VOBA”), represents the estimated present value of future profits from the acquired policies. The estimated present value of future cash flows is based on certain assumptions, including mortality, persistency, expenses, and interest rates that the Company expects to experience in future years. For interest sensitive products, VOBA is amortized over the life of the policies in relation to the emergence of estimated gross profits (“EGP”) from margins on mortality, interest, expenses, and surrenders, all of which are net of reinsurance and include actual realized gains and losses on investments. Fornon-interest sensitive products, such as term life insurance, VOBA is amortized in relation to premium. VOBA is reviewed periodically for loss recognition to ensure that the unamortized balance is recoverable from future earnings from the business. For certain contracts, this evaluation is performed as part of our premium deficiency testing. The carrying amount of VOBA is adjusted for the effects of realized and unrealized gains and losses on debt securities classified asavailable-for-sale.
Annual assumptions review and quarterly adjustments
Annually, we perform a comprehensive review of the assumptions used in estimating gross profits for future periods. We perform our annual review of assumptions during the third quarter.
Updates to assumptions may cause significant variability in amortization expense in the future. The impact on our results of operations of changes in lapse experience, mortality and revisions to expected future rates of return on investments can be offsetting and therefore we are unable to predict their movement or offsetting impact over time.
The quarterly adjustments for current period experience reflect the impact of differences between actual gross profits for a given period and the previously estimated EGPs for that period. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, we recognize a cumulative adjustment to all previous periods’ amortization, also referred to as an experiencetrue-up adjustment.
VOBA Sensitivities
For our equity-indexed annuity, variable life, and universal life policies, a significant portion of our gross profits is derived from interest and mortality margins. As a result, our estimates of future gross profits are significantly influenced by our interest and mortality assumptions. Our mortality assumptions are used to estimate future death claims over the life of these policies and may be developed based on Company experience, industry experience and other factors. Unless a material change in mortality experience that we feel is indicative of a long term trend
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is observed in an interim period, we generally update our mortality assumptions annually in the third quarter. Updates to our mortality assumptions in future periods could have a significant adverse or favorable effect on our results of operations.
The following table provides a demonstration of the sensitivity of the VOBA balance relative to our future interest and mortality assumptions by quantifying the adjustments that would be required, assuming both an increase and decrease in our future interest and mortality margin by 10%. The information below is for illustrative purposes only and reflects only the direct effect of changes in our interest and mortality margin on the VOBA balance as of December 31, 2016 and December 31, 2015, and net income for the years then ended:
| | | | | | | | |
($ in millions) | | December 31, 2016 | | | December 31, 2015 | |
| | | | |
Decrease in future interest and mortality margin by 10% | | $ | (5.2 | ) | | $ | (4.3 | ) |
Increase in future interest and mortality margin by 10% | | $ | 4.6 | | | $ | 3.8 | |
In addition to the impacts of interest and mortality experience relative to our assumptions, other factors may also drive variability in amortization expense, particularly when our annual assumption updates are performed. As noted above, however, the impact on our results of operations of changes in these assumptions can be offsetting and we are unable to predict their movement or offsetting impact over time.
Valuation of Investments, Including Derivatives, and the Recognition of Other-than-Temporary Impairments
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, other invested assets and derivative financial instruments. Derivatives are financial instruments whose values are derived from interest rates, financial indices or the values of securities. The derivative financial instruments we generally use are futures and options. Management believes the following accounting policies related to investments, including derivatives, are most dependent on the application of estimates and assumptions. Each of these policies is discussed further within other relevant disclosures related to the investments and derivatives, as referenced below:
| | • | | Valuation of investments, including derivatives; |
| | • | | Recognition of other-than-temporary impairments; and |
| | • | | Determination of the valuation allowance for losses on commercial mortgage and other loans. |
We present at fair value in the statements of financial position our investments classified asavailable-for-sale, including fixed maturities, derivatives, and embedded derivatives. For additional information regarding the key estimates and assumptions surrounding the determination of fair value of fixed maturity and equity securities, as well as derivative instruments, embedded derivatives and other investments, see Notes 2 and 5 to the Consolidated Financial Statements.
For our investments classified asavailable-for-sale, the impact of changes in fair value is recorded as an unrealized gain or loss in Accumulated other comprehensive income (loss), net (“AOCI”), a separate component of equity. For a discussion of our policies regarding other-than-temporary declines in investment value and the related methodology for recording other-than-temporary impairments of fixed maturity and equity securities, see Note 2 to the Consolidated Financial Statements.
Commercial mortgage loans (“CMLs”) are carried at amortized cost using the effective interest rate method. CMLs held by the Company are diversified by property type and geographic area throughout the U.S. CMLs are considered impaired when it is probable that the Company will not collect amounts due according to the terms of the original loan agreement. The Company assesses the impairment of loans individually for all loans in the portfolio. The Company estimates the fair value of the underlying collateral using internal valuations generally
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based on discounted cash flow analyses. The Company estimates an allowance for loan losses (“ALL”) representing potential credit losses embedded in the CML portfolio. The estimate is based on a consistently applied analysis of the loan portfolio and takes into consideration all available information, including industry, geographical, economic and political factors.
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The Company provides for Federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. The Company’s accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating the Company’s tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, the Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the Internal Revenue Service (“IRS”) or other taxing authorities. We do not anticipate any significant changes within the next 12 months to our total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.
Reserves for Contingencies
A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of future events. Under GAAP, reserves for contingencies are required to be established when the future event is probable and its impact can be reasonably estimated, such as in connection with an unresolved legal matter. The initial reserve reflects management’s best estimate of the probable cost of ultimate resolution of the matter and is revised accordingly as facts and circumstances change and, ultimately, when the matter is brought to closure.
OPERATIONS
Overview and strategy. Prior to July 18, 2013, we sold interest-sensitive, traditional and variable life insurance, and fixed annuities including deferred and immediate through independent master brokerage agencies. Effective January 1, 2014, we no longer offer fixed annuities such as deferred and immediate annuities, however we continue to receive deposits on existing policies.
On April 1, 2014, all of the capital stock in Lincoln Benefit was acquired by Resolution Life, Inc. Immediately prior to that closing, Lincoln Benefit signed a Partial Commutation Agreement with ALIC (the “Partial Commutation”), whereby we commuted certain business previously reinsured to ALIC, including: (a) all of the fixed deferred annuity, value adjusted deferred annuity and indexed deferred annuity business written by the Company that was previously reinsured to ALIC; (b) all of the life insurance business written by the
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Company through independent producers that was previously reinsured to ALIC, other than certain specified life business; and (c) all of the net liability of the Company with respect to the accident and health and long-term care insurance business written by the Company that was previously reinsured to ALIC.
Immediately after the announcement of the execution of the Purchase Agreement in July 2013, we ceased soliciting and selling new policies through our independent agent channel. We continued to sell new policies provided through the Allstate exclusive agency channel for a transitional period following the execution of the Purchase Agreement until they are transitioned to a new Allstate company.
In connection with the Acquisition, Resolution Life, Inc. and ALIC entered into a Transition Services Agreement (the “TSA”), pursuant to which ALIC continues to provide certain services for the Recaptured Business. In 2015, the administration of our deferred annuity and life business was outsourced to unaffiliated third-party service providers, SE2, LLC and Alliance–One Services, Inc. ALIC continues to administer the ALIC Reinsured Business pursuant to the ASA.
At the closing, Lincoln Benefit entered into two transactions with Hannover Re. The first transaction provided financing for a portion of our statutory reserves associated with our universal life business withno-lapse guarantees and our level premium term life business (the “AXXX/XXX Financing”). The second transaction involved a reinsurance agreement with Hannover Re, structured on a combined modified coinsurance and monthly renewable term reinsurance basis.
Our parent company, Resolution Life, Inc., is focused on the management ofin-force policies of life insurance companies. Lincoln Benefit may be involved in a Resolution Life, Inc. acquisition, disposition, or combination with business from unrelated insurers.
Presentation of Financial Information
The financial statements are presented for Successor and Predecessor Periods, which relate to the accounting periods after and before April 1, 2014, respectively, the date of the closing of the Acquisition. For periods after April 1, 2014, the accompanying financial statements comprise the consolidated financial statements of the Company, which include the accounts of the Company and its subsidiary. Due to the Acquisition and the application of push-down accounting, different bases of accounting have been used to prepare the Predecessor and Successor financial statements. A black line separates the Predecessor and Successor financial statements to highlight the lack of comparability between these two periods.
Diminished Comparability ofPre- and Post-Acquisition Financial Information
As a result of the Acquisition and Partial Commutation effective April 1, 2014, comparison of the results of operations for thepre- and post-acquisition periods is not meaningful. For purposes of the Management Discussion and Analysis, the Company has provided comparative analysis of the Balance Sheet as of December 31, 2016 compared to December 31, 2015. For the Results of Operations, the Company has provided summary level information for the Successor and Predecessor Periods, but has only provided more detailed analysis of the components of operations for the Successor Period.
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Financial Position
The following table outlines amounts reported in the Company’s Balance Sheet as of December 31, 2016 as compared to December 31, 2015:
| | | | | | | | |
($ in millions) | | December 31, 2016 | | | December 31, 2015 | |
Assets | | | | | | | | |
Cash and invested assets | | $ | 10,004.3 | | | $ | 9,894.2 | |
Reinsurance recoverables | | | 6,280.3 | | | | 5,984.5 | |
Valuation of business acquired (VOBA) | | | 186.7 | | | | 247.7 | |
Deposit receivable | | | 1,199.5 | | | | 1,250.3 | |
Other assets | | | 781.5 | | | | 790.9 | |
Separate account assets | | | 1,342.2 | | | | 1,395.1 | |
| | | | | | | | |
Total Assets | | $ | 19,794.5 | | | $ | 19,562.7 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Future policy benefits | | $ | 5,111.8 | | | $ | 4,757.7 | |
Policyholders’ account balances | | | 10,935.4 | | | | 11,120.6 | |
ModCo payable | | | 1,199.5 | | | | 1,250.3 | |
Long-term debt | | | 659.0 | | | | 608.7 | |
Other liabilities | | | 104.1 | | | | 95.8 | |
Separate account liabilities | | | 1,342.2 | | | | 1,395.1 | |
| | | | | | | | |
Total Liabilities | | $ | 19,352.0 | | | $ | 19,228.2 | |
| | | | | | | | |
Shareholder’s Equity | | | | | | | | |
Common stock | | $ | 2.5 | | | $ | 2.5 | |
Additionalpaid-in capital | | | 593.6 | | | | 593.6 | |
Accumulated other comprehensive income | | | (36.2 | ) | | | (154.7 | ) |
Retained earnings | | | (117.4 | ) | | | (106.9 | ) |
| | | | | | | | |
Total Shareholder’s Equity | | $ | 442.5 | | | $ | 334.5 | |
| | | | | | | | |
Total Liabilities and Shareholder’s Equity | | $ | 19,794.5 | | | $ | 19,562.7 | |
| | | | | | | | |
December 31, 2016 vs. December 31, 2015
Assets
Total assets increased by $231.8 million, from $19.6 billion at December 31, 2015 to $19.8 billion at December 31, 2016. The increase in total assets is primarily related to the Company’s membership in 2016 with the FHLB, which resulted from continued asset and liability management initiatives. Approximately $255.0 million of funding agreements were issued in 2016 and proceeds from these funding agreements were invested in the general account. The continued runoff of our closed block of business offset this increase in total assets as a result of continued surrenders, primarily our annuities and universal life blocks.
Significant variances are as follows:
Cash and invested assets increased by $0.1 billion from $9.9 billion at December 31, 2015 to $10.0 billion at December 31, 2016. The significant components of this balance and related increase are described below.
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The Company’s fixed maturities bond portfolio increased by $0.3 billion from $7.9 billion at December 31, 2015 to $8.2 billion at December 31, 2016. The increase is primarily due to the investment of funding agreements taken from the FHLB, offset by policy liability runoff. The fixed maturities bond portfolio is comprised of approximately 75% of publicly traded securities and approximately 25% in privately placed issuances.
Mortgage loans decreased by $53.9 million from $1.5 billion at December 31, 2015 to $1.45 billion at December 31, 2016. The decrease is related to maturing mortgage loans and paydowns.
Policy loans decreased by $7.9 million from $186.8 million at December 31, 2015 to $178.9 million at December 31, 2016. These balances are expected to continue to decline over time in conjunction with the runoff of the retained policies.
Derivatives increased by $1.2 million from $17.7 million at December 31, 2015 to $18.9 million at December 31, 2016. These balances are comprised primarily of options and futures that are used to economically hedge the market risk inherent in the Company’s equity-indexed products. These assets are carried at fair value with changes in fair value recognized as realized investment gains for GAAP reporting purposes. The increase in these balances is primarily related to the equity market movement in 2016.
Cash and short-term investments decreased by $100.9 million from $233.9 million at December 31, 2015 to $133.0 million at December 31, 2016. The amount invested in cash and short-term investments fluctuates based on liquidity needs and the timing of investment decisions. Overall, short-term investments and cash range from 1% to 3% of overall invested assets.
Reinsurance recoverables arise under GAAP because reinsurance contracts do not relieve the ceding company of legal liability to contractholders, and therefore the ceding company is required to report reinsurance recoverables arising from these contracts separately as an asset while the policyholder liabilities ceded under these contracts are reported as future policyholder benefits or policyholder account balances.
Reinsurance recoverables increased by $295.8 million from $6.0 billion at December 31, 2015 to $6.3 billion as of December 31, 2016. This increase is primarily related to growth in long-term care reserves and the increase in business written by and ceded to ALIC. In 2016, ALIC’s exclusive agency channel continued to write new business in Lincoln Benefit, however this business is 100% ceded to ALIC under the existing coinsurance agreement.
Additionally, the Company maintains reinsurance to limit aggregate and single losses on large risks. The Company cedes a portion of the mortality risk on certain life and long-term care policies under coinsurance and yearly renewable term agreements tonon-affiliated reinsurers.
Valuation of Business Acquired (“VOBA”) arises because at the Acquisition date, the assets acquired and liabilities assumed generally are required to be measured at fair value. Fair value for financial reporting purposes is defined in ASC 820(“Fair Value Measurements and Disclosures”). ASC 820 emphasizes that fair value is a market participant-based exit price measurement, and not an entity-specific measurement.
Once it has been determined that an asset exists, the VOBA as of the Acquisition date is a part of the business combination, and this asset is measured at fair value in accordance with ASC 820 (i.e., the price that would be received to sell the asset in an ordinary transaction between market participants).
The actuarial appraisal method was used to determine the VOBA by lines of business and resulted in a total VOBA of $290.8 million at the acquisition date. This was determined by projecting the present value of after tax statutory profits, discounted at a risk discount rate (“RDR”) of 12% and adjusted by projected cost of capital.
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This was compared to a fair deal RDR between 10% and 16% and determined to create a collar of reasonable values around this central value. This statutory value is then converted to VOBA by adjusting for GAAP to statutory accounting differences.
VOBA decreased by $61.0 million from $247.7 million at December 31, 2015 to $186.7 million at December 31, 2016. The decrease is primarily attributable to the decrease in the shadow adjustment resulting from the Company’s decrease in gross unrealized losses in 2016. VOBA balances before the impact of unrealized losses and gains were $210.9 million and $180.9 million at December 31, 2015 and December 31, 2016, respectively.
Deposit receivable and ModCo Payabledecreased by $50.8 million from $1.25 billion at December 31, 2015 to $1.2 billion at December 31, 2016. The deposit receivable and ModCo payable arise from the modified coinsurance/monthly renewable term reinsurance agreement entered into with Hannover Re. For GAAP reporting purposes, a reinsurance transaction must pass significant risk to the reinsurer for a company to record a credit for liabilities ceded. The Company has determined that the reinsurance transaction with Hannover Re does not pass GAAP risk transfer requirements and therefore must account for the transaction under deposit accounting principles. Under deposit accounting, the Company is required to establish a Deposit Receivable asset on the balance sheet that represents the reinsurance recoverable with an offsetting ModCo Liability for the same amount. The decrease in the balance is consistent with the runoff of the reinsured blocks of business. We will continue to see these balances decline as the annuity blocks run off.
Other assets decreased by $9.4 million from $790.9 million at December 31, 2015 to $781.5 million at December 31, 2016. The balance is primarily comprised of the net deferred tax asset and an intercompany note, or “Vehicle Note” that the Company entered into on April 1, 2014 with its affiliate Lanis LLC (“Lanis”) in the initial amount of $513.0 million. The net deferred tax asset declined $61.3 million from $65.0 million at December 31, 2015 to $3.7 million at December 31, 2016, resulting from the decline in gross unrealized losses in 2016. This decline in the net deferred tax asset was offset by the increase in the Vehicle Note balance. The Vehicle Note balance increased by $50.3 million from $608.7 million at December 31, 2015 to $659.0 million at December 31, 2016. Please see the discussion on the related Surplus Note in the Long Term Debt section below.
Separate Account assets and liabilities decreased by $52.9 million from $1,395.1 million at December 31, 2015 to $1,342.2 million at December 31, 2016. This decrease was primarily driven by variable annuity surrenders and benefits during the year offset by increased investment income related to the increase in the equity markets in 2016.
The assets of Separate Accounts are carried at fair value for GAAP. Separate Accounts liabilities represent the contractholders’ claims to the related assets and are carried at the fair value of the assets. In the event the asset values of certain contractholder accounts are projected to be below the value guaranteed by the Company, a liability is established through a charge to earnings.
Lincoln Benefit’s variable annuity business and a portion of the Variable Life business are reinsured by ALIC under an existing reinsurance agreement between Lincoln Benefit and ALIC. As of December 31, 2016 and 2015, all assets of the Separate Accounts that support the variable annuity and variable life business were legally insulated.
Liabilities
Total liabilities increased by $121.1 million, from $19.2 billion at December 31, 2015 to $19.3 billion at December 31, 2016. The increase consists of the following components:
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Future policy benefits increased by $354.1 million from $4.8 billion at December 31, 2015 to $5.1 billion at December 31, 2016. Such liabilities are established to meet the estimated future obligations of policiesin-force. The increase in these liabilities is primarily related to the increase in reserves established for secondary guarantees on universal life products, long-term care reserves, and for payout annuities due to new annuitizations. Also included here are the amounts ultimately ceded to ALIC and other third party reinsurers.
Policyholders’ Account Balancesdecreased by $185.2 million, from $11.1 billion at December 31, 2015 to $11.0 billion at December 31, 2016 as a result of policyholder maturities and surrenders offset by funding agreements issued to FHLB. Policyholders’ account balances represent interest-bearing liabilities arising from the sale of products such as interest-sensitive life insurance and fixed annuities, and are comprised of cumulative deposits received and interest credited to the contractholder less cumulative contract benefits, surrenders, withdrawals and contract charges for mortality or administrative expenses.
The Company holds additional liabilities for GMIB associated with variable annuities (and a small amount of GMDB associated with variable life business), which are accounted for in accordance with ASC944-20,Financial Services — Insurance Activities. The reserves for certain living benefit features, including GMAB and GMWB are accounted for as embedded derivatives, with fair values calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. This methodology could result in either a liability or contra-liability balance, given changing capital market conditions and various actuarial assumptions. The Company’s GMIB, GMAB and GMWB reserves are ceded to external reinsurers (with a small amount of retained GMWB coverage related to equity indexed annuities). For additional information regarding the valuation of these optional living benefit features, see Note 10 to the Consolidated Financial Statements.
Long-Term Debt increased by $50.3 million from $608.7 million at December 31, 2015 to $659.0 million at December 31, 2016. This balance represents a surplus note that was initially issued on April 1, 2014 in the amount of $513.0 million. With the Department of Insurance approval, Lancaster Re issued a variable funding Surplus Note (the “Surplus Note”) to its affiliate, Lanis, for $513.0 million and acquired from Lanis a Vehicle Note (the “Vehicle Note”) for $513.0 million. The Vehicle Note is held to support a portion of Lancaster Re’s reinsurance obligations and has been authorized as an acceptable form of reinsurance collateral pursuant to Nebraska Statutes.
With Department of Insurancepre-approval, (i) the Surplus Note is increased each quarter with a corresponding increase in the Vehicle Note, and (ii) interest on the Surplus Note for the prior quarter is paid on the first day of each subsequent quarter at a rate consistent with the rate received on the Vehicle Note of 4%. The Surplus Note and Vehicle Note increased by $50.3 million in 2016, primarily related to the increase in statutory universal life secondary guarantee reserves and term reserves. The Surplus Note is unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Lancaster Re.
Other liabilitiesincreased by $8.3 million from $95.8 million at December 31, 2015 to $104.1 million at December 31, 2016. This balance consists of various policyholder related liabilities, other liability balances related to general expenses, unsettled trades, etc. The increase in this balance is comprised of an increase in unsettled trades offset by a decrease in policyholder related liabilities.
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Results of Operations
The following table outlines amounts reported in Net Income for the Successor and Predecessor Periods (Successor and Predecessor Periods are not comparable):
| | | | | | | | | | | | | | | | |
| | | Successor Period | | | Predecessor Period | |
| ($ in millions) | | For the year ended
December 31, 2016 | | | For the year ended
December 31, 2015 | | | For the period from
April 1, 2014 through
December 31, 2014 | | | For the period from
January 1, 2014 through
March 31, 2014 | |
Income before federal income tax | | $ | 46.1 | | | $ | 128.7 | | | $ | 44.9 | | | $ | 2.6 | |
Federal income taxes | | | 14.6 | | | | 46.1 | | | | 14.2 | | | | 0.9 | |
| | | | | | | | | | | | | | | | |
Net Income | | $ | 31.5 | | | $ | 82.6 | | | $ | 30.7 | | | $ | 1.7 | |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss) (“OCI”) | | | 118.5 | | | | (240.2 | ) | | | 85.5 | | | | 1.4 | |
| | | | | | | | | | | | | | | | |
Comprehensive Income (Loss) | | $ | 150.0 | | | $ | (157.6 | ) | | $ | 116.2 | | | $ | 3.1 | |
| | | | | | | | | | | | | | | | |
Results of Operations — Successor Period
For the Year Ended December 31, 2016
Net income of $31.5 million was primarily derived from net realized capital gains and product margins. Net realized capital gains arose from strategic reinvestment and our continued investment portfolio resegmentation to better align asset and liability cash flows. Product margins include investment margins earned on annuity and life products, mortality margins earned on life products, and minimal surrender and expense margins associated with all products. In 2016, the mortality margin decreased due to higher policyholder benefits, as well as, changes to future assumptions.
Other comprehensive income of $118.5 million for year ended December 31, 2016 was primarily related to the decrease in net unrealized losses on fixed maturities of $242.2 million due to a decrease in spreads, particularly for corporates, partially offset by shadow adjustments related to VOBA and SOP03-01 liabilities of $59.9 million, and tax effect of $63.8 million.
For the Year Ended December 31, 2015
Net income of $82.6 million was primarily derived from net realized capital gains and product margins. Net realized capital gains arising from strategic reinvestment and our investment portfolio resegmentation in 2015 to better align our asset and liability cash flows. Product margins include investment margins earned on annuity and life products, mortality margins earned on life products, and minimal surrender and expense margins associated with all products. In 2015, the mortality margin improved due to lower policyholder benefits.
Other comprehensive loss of $240.2 million for year ended December 31, 2015 was primarily related to the increase in our net unrealized losses on fixed maturities of $487.0 million due to an increase in spreads on investments, partially offset by shadow adjustments related to VOBA and SOP03-01 liabilities of $117.0 million and tax effect of $129.8 million.
For the Period from April 1, 2014 to December 31, 2014
Net income of $30.7 million for nine months of the Successor Period from April 1, 2014 to December 31, 2014 was driven by realized capital gains, and product margins on annuity and life products. In 2014, the mortality margin was lower than expected due to higher policyholder benefits.
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Other comprehensive income for the nine months from April 1, 2014 to December 31, 2014 of $85.5 million was primarily driven by unrealized gains on fixed maturities of $159.2 million as interest rates declined, partially offset by shadow adjustments related to VOBA and SOP03-01 liabilities of $27.8 million, and tax effect of $46.0 million.
The significant components of income in the Successor Period are summarized below:
| | | | | | | | | | | | |
| | | Successor Period | |
| ($ in millions) | | For the year ended
December 31, 2016 | | | For the year ended
December 31, 2015 | | | For the period from
April 1, 2014 through
December 31, 2014 | |
Revenues | | | | | | | | | | | | |
Premiums earned | | $ | 16.6 | | | $ | 8.8 | | | $ | 20.4 | |
Fee income from policyholders | | | 346.0 | | | | 353.9 | | | | 259.2 | |
Net investment income | | | 397.1 | | | | 398.9 | | | | 288.6 | |
Realized investment gains, net | | | 73.7 | | | | 113.5 | | | | 46.0 | |
| | | | | | | | | | | | |
Total revenues | | $ | 833.4 | | | $ | 875.1 | | | $ | 614.2 | |
Expenses | | | | | | | | | | | | |
Policyholder benefits | | $ | 449.1 | | | $ | 351.7 | | | $ | 216.6 | |
Interest credited to policyholders | | | 269.5 | | | | 301.1 | | | | 256.7 | |
Other operating expenses | | | 38.6 | | | | 52.7 | | | | 57.0 | |
Amortization of VOBA | | | 30.1 | | | | 40.9 | | | | 39.0 | |
| | | | | | | | | | | | |
Total expenses | | $ | 787.3 | | | $ | 746.4 | | | $ | 569.3 | |
| | | | | | | | | | | | |
Net Income before Federal Income Taxes | | $ | 46.1 | | | $ | 128.7 | | | $ | 44.9 | |
| | | | | | | | | | | | |
Premiums Earned and Fee Income
Premiums earnedwere $16.6 million and $8.8 million for the years ended December 31, 2016 and 2015, respectively, and $20.4 million for the nine-month period from April 1, 2014 to December 31, 2014. These premiums relate primarily to traditional life and health insurance products and immediate annuities. Premiums from these products are recognized as revenue when received at the inception of the contract. Premiums earned are net of reinsurance premiums paid on the ceded business. Yearly Renewable Term (“YRT) reinsurance premiums ceded on universal life products are shown here, while Cost of Insurance charges are included in fee income from policyholders. Therefore, the YRT premiums largely offset the direct premium from traditional products. The increase in premium in 2016 is due to increased annuitizations, and reinsurance premium refunds from reinsurance recaptures resulting from a new reinsurance treaty entered into in the last quarter of 2016 on the Company’s life products.
Fee income from policyholders was $346.0 million and $353.9 million for the years ended December 31, 2016 and 2015, respectively, and $259.2 million for the nine-month period from April 1, 2014 to December 31, 2014. The fee income from policyholders consists of fees assessed against the policyholder account balance for the cost of insurance (mortality risk), contract administration and surrender of the policy prior to contractually specified dates. These charges are recognized as revenue when assessed against the policyholder account balance. Fee income has been consistent on a quarterly basis and will continue to decline as business lapses, and expense loads and surrender charges grade down with policy duration.
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Net investment incomewas $397.1 million and $398.9 million for the years ended December 31, 2016 and 2015, respectively, and $288.6 million for the nine-month period from April 1, 2014 to December 31, 2014. Net investment income was attributable to the following asset types:
| | | | | | | | | | | | |
| ($ in millions) | | For the year ended
December 31, 2016 | | | For the year ended
December 31, 2015 | | | For the period from
April 1, 2014 through
December 31, 2014 | |
Fixed maturities | | $ | 330.7 | | | $ | 334.9 | | | $ | 232.0 | |
Commercial mortgage loans | | | 69.4 | | | | 63.0 | | | | 49.4 | |
Cash & short-term investments | | | 1.0 | | | | 0.5 | | | | 4.8 | |
Other | | | 8.8 | | | | 9.6 | | | | 7.4 | |
| | | | | | | | | | | | |
Gross investment income | | $ | 409.9 | | | $ | 408.0 | | | $ | 293.6 | |
Investment expenses | | $ | 12.8 | | | $ | 9.1 | | | $ | 5.0 | |
| | | | | | | | | | | | |
Net investment income | | $ | 397.1 | | | $ | 398.9 | | | $ | 288.6 | |
| | | | | | | | | | | | |
Overall, net investment income in 2016 remained consistent with 2015, as a result of continued asset liability management initiatives. Investment income increased in 2015 primarily due to reinvestment efforts to better match asset and liability cash flows and to improve overall portfolio yield. Average yields also increased by asset type in 2015. The investment expense increase is related to a specific investment initiative, with corresponding higher returns.
Realized investment gainswere $73.7 million and $113.5 million for the years ended December 31, 2016 and 2015, respectively, and $46.0 million for the nine-month period from April 1, 2014 through December 31, 2014. The net realized gains in all years were related to asset liability management initiatives to improve yields and better match assets and liabilities.
Policyholder benefits were $449.1 million and $351.7 million for the years ended December 31, 2016 and 2015, respectively, and $216.6 million for the nine-month period from April 1, 2014 through December 31, 2014. Policyholder benefits include both incurred claims and the change in liability for future policy benefits. The increase in 2016 is primarily due to unfavorable mortality experience and annual updates to assumptions (including changes in economic environment, interest and mortality). A significant portion of the increase in reserves in 2016 is related to the recognition of realized capital gains of invested assets supporting the universal life secondary guarantee products reported in the net realized capital gains line discussed above.
Incurred claims decreased in 2015 compared to 2014 as mortality experience improved, but was offset by an increase in the change in the liability for future policy benefits related to universal life secondary guarantee products.
Interest credited to policyholders was $269.5 million and $301.1 million for the years ended December 31, 2016 and 2015, respectively, and $256.7 million for the nine-month period from April 1, 2014 to December 31, 2014. This line item represents interest credited to liabilities arising from interest-sensitive life insurance and annuity products. Interest credited to policyholders decreased in 2016 and 2015 due to lower account values resulting from runoff of business and lower amounts credited to the Company’s equity-indexed annuity products, resulting from equity market performance.
Operating and acquisition expenseswere $38.6 million and $52.7 million for the years ended December 31, 2016 and 2015, respectively, and $57.0 million for the nine-month period from April 1, 2014 to December 31, 2014. These expenses are comprised of general operating expenses, premium taxes, and other fees associated with reinsurance. Operating and acquisition expenses for the year ended December 31, 2015 and the nine-month period from April 1, 2014 through December 31, 2014 included initial separation and integration costs that were not incurred in subsequent periods.
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Amortization of VOBA was $30.1 million and $40.9 million for the years ended December 31, 2016 and 2015, respectively, and $39.0 million for the nine-month period from April 1, 2014 through December 31, 2014. VOBA amortization is expected to decline over time as the unamortized balance is amortized with expected gross profits on specific product lines. The amortization in 2016 was in line with expectations for the year, while 2015 amortization was higher than expected due to significant realized capital gains associated with those products lines.
Other Information Related to Successor Period
The following table presents surrender and withdrawal amounts and rates for major insurance product lines for the years ended December 31, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended
December 31, 2016 | | | For the year ended
December 31, 2015 | | | For the period from
April 1, 2014 through
December 31, 2014 | |
($ in millions) | | Amounts | | | Rate | | | Amounts | | | Rate | | | Amounts | | | Rate | |
Annuities | | $ | 605.2 | | | | 11.3 | % | | $ | 784.3 | | | | 13.2 | % | | $ | 866.2 | | | | 16.7 | % |
Variable and interest-senstive life | | $ | 88.7 | | | | 2.7 | % | | $ | 129.5 | | | | 3.8 | % | | $ | 112.0 | | | | 4.2 | % |
Surrender rates for Life business decreased in 2016 primarily due to lower surrender activity on universal life with secondary guarantee and on equity-indexed (“EIUL”) products (primarily related to one large surrender in EIUL in 2015). In 2015, surrenders were lower mostly due to the equity indexed annuity product. In 2015, higher surrenders were reported for products reaching the end of specific guarantee periods (e.g., expiry of market value adjustments).
General Account Investment Portfolio
The General Account Investment Assets (“GAIA”) portfolio consists of a well-diversified portfolio of public and private fixed maturities, commercial mortgages and other loans and other invested assets. The General Account portfolios and investment results primarily support the insurance liabilities of Lincoln Benefit’s business operations. The following table reconciles the balance sheet asset amounts to GAIA:
| | | | | | | | |
| ($ in millions) | | December 31,
2016 | | | December 31,
2015 | |
Fixed maturities,available-for-sale, at fair value | | $ | 8,212.7 | | | $ | 7,945.9 | |
Equity securities | | | 5.1 | | | | — | |
Commercial mortgage loans | | | 1,455.2 | | | | 1,509.1 | |
Policy loans | | | 178.9 | | | | 186.8 | |
Cash and short-term investments | | | 133.0 | | | | 233.9 | |
Other invested assets | | | 19.4 | | | | 18.4 | |
| | | | | | | | |
Total Cash and Invested Assets | | $ | 10,004.3 | | | $ | 9,894.1 | |
| | | | | | | | |
Assets listed in the “Other” category principally consist of derivative assets
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Investment Results of General Account Investment Assets
The following table summarizes investment results by asset category for the years ended December 31, 2016 and 2015 and for the period from April 1, 2014 through December 31, 2014:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended
December 31, 2016 | | | For the Year Ended
December 31, 2015 | | | For the Period from
April 1, 2014 through
December 31, 2014 | |
| ($ in millions) | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | | | Yield(1) | |
Fixed maturities | | $ | 330.7 | | | | 4.12 | % | | $ | 334.9 | | | | 3.88 | % | | $ | 232.0 | | | | 3.48 | % |
Commercial mortgage loans | | | 69.4 | | | | 3.50 | | | | 63.0 | | | | 3.66 | | | | 49.4 | | | | 3.14 | |
Cash, cash equivalents and short-term investments | | | 1.0 | | | | 0.43 | | | | 0.5 | | | | 0.28 | | | | 4.8 | | | | 0.36 | |
Other investment (loss) income | | | 8.8 | | | | | | | | 9.6 | | | | | | | | 7.4 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross investment income | | $ | 409.9 | | | | | | | $ | 408.0 | | | | | | | $ | 293.6 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment Expense | | | 12.8 | | | | | | | | 9.1 | | | | | | | | 5.0 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net Investment Income | | $ | 397.1 | | | | | | | $ | 398.9 | | | | | | | $ | 288.6 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Maturities
The fixed maturity portfolio consists largely of investment grade corporate debt securities and includes significant amounts of U.S. government and agency obligations. At December 31, 2016 and 2015, GAIA held CMBS with an amortized cost of $385.8 million and $513.3 million, respectively.
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Fixed Maturities by Industry
The General Account fixed maturities portfolios include publicly-traded and privately-placed corporate debt securities across an array of industry categories. The following tables set forth these fixed maturities by industry category as of December 31, 2016 and 2015 along with their associated gross unrealized gains and losses:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2016 ($ in millions) | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Embedded
Derivatives(1) | | | Fair Value | |
Fixed maturities | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and Obligations of U.S. Government Authority and Agencies, available for sale | | $ | 508.6 | | | $ | 7.7 | | | $ | (15.0 | ) | | $ | — | | | $ | 501.3 | |
U.S. Treasury securities and Obligations of U.S. Government Authority and Agencies, at fair value option | | | 15.3 | | | | — | | | | — | | | | (0.7 | ) | | | 14.6 | |
Obligations of U.S. States and Political subdivisions | | | 702.4 | | | | 15.9 | | | | (8.6 | ) | | | — | | | | 709.7 | |
Foreign Governments | | | 31.0 | | | | 0.4 | | | | (3.3 | ) | | | — | | | | 28.1 | |
Corporate securities | | | | | | | | | | | | | | | | | | | | |
Basic materials | | | 331.0 | | | | 10.5 | | | | (11.4 | ) | | | — | | | | 330.1 | |
Communications | | | 564.6 | | | | 6.0 | | | | (17.1 | ) | | | — | | | | 553.5 | |
Consumer, cyclical | | | 505.2 | | | | 7.4 | | | | (12.3 | ) | | | — | | | | 500.3 | |
Consumer,non-cyclical | | | 888.6 | | | | 9.0 | | | | (29.1 | ) | | | — | | | | 868.5 | |
Diversified | | | 1.6 | | | | — | | | | — | | | | — | | | | 1.6 | |
Energy | | | 651.3 | | | | 5.8 | | | | (23.9 | ) | | | — | | | | 633.2 | |
Financial | | | 1,579.6 | | | | 17.5 | | | | (24.5 | ) | | | — | | | | 1,572.6 | |
Industrial | | | 522.3 | | | | 7.7 | | | | (10.7 | ) | | | — | | | | 519.3 | |
Technology | | | 320.2 | | | | 3.5 | | | | (7.6 | ) | | | — | | | | 316.1 | |
Utilities | | | 599.0 | | | | 7.3 | | | | (14.7 | ) | | | — | | | | 591.6 | |
ABS | | | 512.5 | | | | 5.4 | | | | (10.1 | ) | | | — | | | | 507.8 | |
CMBS | | | 385.8 | | | | 1.3 | | | | (5.8 | ) | | | — | | | | 381.3 | |
RMBS | | | 180.5 | | | | 5.5 | | | | (2.9 | ) | | | — | | | | 183.1 | |
| | | | | | | | | | | | | | | | | | | | |
Total fixed maturities | | $ | 8,299.5 | | | $ | 110.9 | | | $ | (197.0 | ) | | $ | (0.7 | ) | | $ | 8,212.7 | |
Equity securities | | | 5.1 | | | | — | | | | — | | | | — | | | | 5.1 | |
| | | | | | | | | | | | | | | | | | | | |
Total fixed maturities and equity securities investments | | $ | 8,304.6 | | | $ | 110.9 | | | $ | (197.0 | ) | | $ | (0.7 | ) | | $ | 8,217.8 | |
| | | | | | | | | | | | | | | | | | | | |
| (1) | Embedded derivatives within fixed maturity securities held at fair value option are reported with the host investment. The change in fair value of embedded derivatives are reported in Realized Investment Gains, net in the Consolidated Statement of Operations and Comprehensive Income (Loss). |
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| | | | | | | | | | | | | | | | |
December 31, 2015 ($ in millions) | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair Value | |
U.S. Treasury securities and Obligations of U.S. Government Authority and Agencies | | $ | 163.1 | | | $ | 5.6 | | | $ | (0.1 | ) | | $ | 168.6 | |
Obligations of U.S. States and Political Subdivisions | | | 712.9 | | | | 14.8 | | | | (7.0 | ) | | | 720.7 | |
Foreign Governments | | | 72.0 | | | | 0.2 | | | | (10.6 | ) | | | 61.6 | |
Corporate securities | | | | | | | | | | | | | | | | |
Basic materials | | | 406.8 | | | | 0.9 | | | | (56.2 | ) | | | 351.5 | |
Communications | | | 556.1 | | | | 1.1 | | | | (37.2 | ) | | | 520.0 | |
Consumer, cyclical | | | 464.7 | | | | 2.9 | | | | (13.8 | ) | | | 453.8 | |
Consumer,non-cyclical | | | 825.1 | | | | 7.4 | | | | (21.8 | ) | | | 810.7 | |
Diversified | | | 19.2 | | | | 0.1 | | | | (0.1 | ) | | | 19.2 | |
Energy | | | 801.2 | | | | 0.3 | | | | (151.6 | ) | | | 649.9 | |
Financial | | | 1,287.8 | | | | 5.8 | | | | (36.5 | ) | | | 1,257.1 | |
Industrial | | | 1,063.4 | | | | 9.1 | | | | (15.2 | ) | | | 1,057.3 | |
Technology | | | 236.8 | | | | 1.7 | | | | (9.0 | ) | | | 229.5 | |
Utilities | | | 399.6 | | | | 2.0 | | | | (11.9 | ) | | | 389.7 | |
ABS | | | 542.5 | | | | 2.5 | | | | (8.2 | ) | | | 536.8 | |
CMBS | | | 513.3 | | | | 0.6 | | | | (7.2 | ) | | | 506.7 | |
RMBS | | | 209.7 | | | | 4.6 | | | | (1.5 | ) | | | 212.8 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities | | $ | 8,274.2 | | | $ | 59.6 | | | $ | (387.9 | ) | | $ | 7,945.9 | |
| | | | | | | | | | | | | | | | |
Gross unrealized losses decreased by $190.9 million from $387.9 million at December 31, 2015 to $197 million at December 31, 2016. The decrease in unrealized losses was primarily due to a decrease in spreads, particularly corporates in 2016. There was also an increase in gross unrealized gains of $51.3 million, for a net change in unrealized loss of $242.2 million.
Fixed Maturities by Credit Quality
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturity securities to one of six categories (“NAIC Designations”). NAIC designations of “1” or “2” include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s orBBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” are referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.
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The following table sets forth the General Accounts’ fixed maturities by NAIC rating at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 ($ in millions) | | | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Embedded
Derivatives(1) | | | Fair
Value | |
| NAIC Rating | | | | | | | | | | | | | | | | | | | | | | |
| 1 | | Aaa, Aa, A | | $ | 3,495.5 | | | $ | 40.6 | | | $ | (76.8 | ) | | $ | — | | | $ | 3,459.3 | |
| 2 | | Baa | | | 3,043.7 | | | | 47.9 | | | | (69.7 | ) | | | — | | | | 3,021.9 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Investment grade | | $ | 6,539.2 | | | $ | 88.5 | | | $ | (146.5 | ) | | $ | — | | | $ | 6,481.2 | |
| 3 | | Ba | | | 234.0 | | | | 2.8 | | | | (16.5 | ) | | | — | | | | 220.3 | |
| 4 | | B | | | 29.4 | | | | 0.2 | | | | (6.0 | ) | | | — | | | | 23.6 | |
| 5 | | C and lower | | | 2.2 | | | | — | | | | (0.7 | ) | | | — | | | | 1.5 | |
| 6 | | In or near default | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Below investment grade | | $ | 265.6 | | | $ | 3.0 | | | $ | (23.2 | ) | | $ | — | | | $ | 245.4 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Total before asset and mortgage-backed securities | | $ | 6,804.8 | | | $ | 91.5 | | | $ | (169.7 | ) | | $ | — | | | $ | 6,726.6 | |
| | Asset and mortgage-backed securities | | | 1,494.7 | | | | 19.4 | | | | (27.3 | ) | | | (0.7 | ) | | | 1,486.1 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Total fixed maturities | | $ | 8,299.5 | | | $ | 110.9 | | | $ | (197.0 | ) | | $ | (0.7 | ) | | $ | 8,212.7 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 ($ in millions) | | | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Embedded
Derivatives(1) | | | Fair
Value | |
| NAIC Rating | | | | | | | | | | | | | | | | | | | | | | |
| 1 | | Aaa, Aa, A | | $ | 3,170.2 | | | $ | 34.7 | | | $ | (65.6 | ) | | $ | — | | | $ | 3,139.3 | |
| 2 | | Baa | | | 3,430.2 | | | | 15.5 | | | | (268.7 | ) | | | — | | | | 3,177.0 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Investment grade | | $ | 6,600.4 | | | $ | 50.2 | | | $ | (334.3 | ) | | $ | — | | | $ | 6,316.3 | |
| 3 | | Ba | | | 391.7 | | | | 1.0 | | | | (33.8 | ) | | | — | | | | 358.9 | |
| 4 | | B | | | 16.6 | | | | 0.7 | | | | (2.8 | ) | | | — | | | | 14.5 | |
| 5 | | C and lower | | | — | | | | — | | | | — | | | | — | | | | — | |
| 6 | | In or near default | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Below investment grade | | $ | 408.3 | | | $ | 1.7 | | | $ | (36.6 | ) | | $ | — | | | $ | 373.4 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Total before asset and mortgage-backed securities | | $ | 7,008.7 | | | $ | 51.9 | | | $ | (370.9 | ) | | $ | — | | | $ | 6,689.7 | |
| | Asset and mortgage-backed securities | | | 1,265.5 | | | | 7.7 | | | | (17.0 | ) | | | — | | | | 1,256.2 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Total fixed maturities | | $ | 8,274.2 | | | $ | 59.6 | | | $ | (387.9 | ) | | $ | — | | | $ | 7,945.9 | |
| | | | | | | | | | | | | | | | | | | | | | |
| (1) | Embedded derivatives within fixed maturity securities held at fair value option are reported with the host investment. The change in fair value of embedded derivatives are reported in Realized investment gains, net in the Consolidated Statement of Operations and Comprehensive Income (Loss). |
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Below investment grade fixed maturities represented 11.8% and 9.4% of the gross unrealized losses at December 31, 2016 and 2015, respectively.
Equity Securities
The equity securities of $5.1 million are entirely related to the ownership of FHLB stock.
Commercial Mortgage Loans
At December 31, 2016 and 2015, approximately 14.6% and 15.3% of GAIA were in commercial mortgage loans, respectively. At December 31, 2016 and 2015, the carrying value of commercial mortgage loans was $1,455.2 million and $1,509.1 million, respectively.
The investment strategy for the mortgage loan portfolio emphasizes diversification by property type and geographic location with a primary focus on asset quality. The table below shows the breakdown of the amortized cost of the General Account’s investments in mortgage loans by geographic region as of December 31, 2016 and 2015:
| | | | | | | | |
| ($ in millions) | | December 31,
2016 | | | December 31,
2015 | |
Alabama | | $ | 1.3 | | | $ | 1.5 | |
Arizona | | | 20.4 | | | | 34.9 | |
California | | | 255.1 | | | | 336.3 | |
Colorado | | | 57.3 | | | | 57.2 | |
Connecticut | | | 25.3 | | | | 25.3 | |
Florida | | | 123.2 | | | | 86.7 | |
Georgia | | | 65.4 | | | | 67.2 | |
Hawaii | | | 6.1 | | | | 7.1 | |
Illinois | | | 114.5 | | | | 92.8 | |
Iowa | | | 1.0 | | | | 1.3 | |
Kansas | | | 9.2 | | | | 9.2 | |
Kentucky | | | 7.2 | | | | 7.7 | |
Maine | | | 3.7 | | | | 3.9 | |
Maryland | | | 21.0 | | | | 33.8 | |
Massachusetts | | | 77.8 | | | | 90.9 | |
Minnesota | | | 132.4 | | | | 148.3 | |
Nevada | | | 84.7 | | | | 14.3 | |
New Jersey | | | 65.9 | | | | 68.7 | |
New York | | | 66.5 | | | | 94.9 | |
North Carolina | | | 55.9 | | | | 58.1 | |
Ohio | | | 38.6 | | | | 37.0 | |
Oklahoma | | | — | | | | 10.8 | |
Pennsylvania | | | 31.9 | | | | 42.0 | |
South Carolina | | | 1.9 | | | | 2.5 | |
Tennessee | | | 3.2 | | | | 5.3 | |
Texas | | | 133.0 | | | | 107.3 | |
Utah | | | 42.6 | | | | 44.4 | |
Virginia | | | 1.7 | | | | 2.4 | |
Washington | | | 3.7 | | | | 11.6 | |
Wisconsin | | | 4.7 | | | | 5.7 | |
General allowance for loan loss | | | — | | | | — | |
| | | | | | | | |
Total commercial mortgage loans | | $ | 1,455.2 | | | $ | 1,509.1 | |
| | | | | | | | |
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Commercial Mortgage Loan by Credit Quality
The values used in these ratio calculations were developed as part of the periodic review of the commercial mortgage loan portfolio, which includes an evaluation of the underlying collateral value as of December 31, 2016 and 2015.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | Recorded Investment | | | | | | | |
| | | Debt Service Coverage Ratios | | | | | | | | | | | | | |
| ($ in millions) | | > 1.20x | | | 1.00x - 1.20x | | | < 1.00x | | | Total | | | % of Total | | | Estimated Fair Value | | | % of Total | |
Loan-to-value ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less than 65% | | $ | 785.1 | | | $ | 36.8 | | | $ | 11.4 | | | $ | 833.3 | | | | 57.3 | % | | $ | 848.7 | | | | 57.9 | % |
65% to 75% | | | 581.2 | | | | 25.3 | | | | — | | | | 606.5 | | | | 41.7 | | | | 601.6 | | | | 41.1 | |
76% to 80% | | | 10.5 | | | | — | | | | — | | | | 10.5 | | | | 0.7 | | | | 10.5 | | | | 0.7 | |
Greater than 80% | | | 4.9 | | | | — | | | | — | | | | 4.9 | | | | 0.3 | | | | 4.3 | | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,381.7 | | | $ | 62.1 | | | $ | 11.4 | | | $ | 1,455.2 | | | | 100.0 | % | | $ | 1,465.1 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | Recorded Investment | | | | | | | |
| | | Debt Service Coverage Ratios | | | | | | | | | | | | | |
| ($ in millions) | | > 1.20x | | | 1.00x - 1.20x | | | < 1.00x | | | Total | | | % of Total | | | Estimated Fair Value | | | % of Total | |
Loan-to-value ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Less than 65% | | $ | 869.5 | | | $ | 85.9 | | | $ | 19.8 | | | $ | 975.2 | | | | 64.6 | % | | $ | 1,000.9 | | | | 65.1 | % |
65% to 75% | | | 508.5 | | | | 25.4 | | | | — | | | | 533.9 | | | | 35.4 | | | | 535.7 | | | | 34.9 | |
76% to 80% | | | — | | | | — | | | | — | | | | — | | | | 0.0 | | | | — | | | | 0.0 | |
Greater than 80% | | | — | | | | — | | | | — | | | | — | | | | 0.0 | | | | — | | | | 0.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,378.0 | | | $ | 111.3 | | | $ | 19.8 | | | $ | 1,509.1 | | | | 100.0 | % | | $ | 1,536.6 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
All of our mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at December 31, 2016. At December 31, 2016, there was one mortgage loan that was not current in the amount of $4.9 million.
Results of Operations — Predecessor Period
Net income Net income for the period January 1, 2014 through March 31, 2014 is presented in the following table:
| | | | |
($ in thousands) | | For the
period
January 1,
2014
through
March 31,
2014 | |
Net investment income | | $ | 2,350 | |
Realized capital gains and losses | | | 285 | |
Income tax expense | | | (922 | ) |
| | | | |
Net income | | $ | 1,713 | |
| | | | |
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Under reinsurance agreements all premiums, contract charges, interest credited to policyholders’ account balances, contract benefits and substantially all expenses were ceded to ALIC, Lincoln Benefit Reinsurance Company (“LB Re”, an affiliate of Lincoln Benefit during the Predecessor Period) and othernon-affiliated reinsurers, and were reflected net of such reinsurance in the Statements of Operations and Comprehensive Income. Results of operations included net investment income and realized capital gains and losses recognized in connection with the assets that were not transferred under the reinsurance agreements.
Net incomein the ninety day period ended March 31, 2014 was $1.7 million including net investment income and realized capital gains.
Net investment incomeThe following table presents net investment income for the period January 1, 2014 through March 31, 2014:
| | | | |
($ in thousands) | | For the
period
January 1,
2014
through
March 31,
2014 | |
Fixed maturities | | $ | 2,461 | |
Short-term investments | | | 16 | |
| | | | |
Investment income, before expense | | $ | 2,477 | |
Investment expense | | | (127 | ) |
| | | | |
Net investment income | | $ | 2,350 | |
| | | | |
Net investment income was $2.4 million for theninety-day period and was impacted by lower yields.
Realized capital gains and losses were $0.3 million in theninety-day period, primarily related to sales of investments.
MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in interest rates or credit spreads. We also have certain exposures to changes in equity prices in our equity-indexed annuities and separate accounts liabilities.
Overview. In formulating and implementing guidelines for investing funds, we seek to earn returns that contribute to stable profits while also meeting the future cash flow requirements of our liabilities.
We use quantitative and qualitative market-based approaches to measure, monitor and manage market risk. We evaluate our exposure to market risk through the use of multiple measures including but not limited to duration, earnings- andcapital-at-risk, scenario analysis and sensitivity analysis. Duration measures the price sensitivity of assets or liabilities 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%. Earnings- andcapital-at-risk are estimates of the change in earnings or capital that might be expected to emerge over a given time horizon in various defined stress tests. Scenario analysis estimates the potential changes in the value of various financial parameters that could occur under different hypothetical market conditions defined by changes to the market risk factors of interest rates and credit spreads. Sensitivity analysis estimates the potential changes in the value of various financial parameters that could occur under different hypothetical shocks to a market risk factor. In general, we establish investment portfolio asset allocation and market risk limits based upon a
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combination of duration, earnings- andcapital-at-risk, scenario analysis and sensitivity analysis as well as a consideration of liquidity needs and prudent diversification. Our asset allocation limits place restrictions on the total funds that may be invested within an asset class. Comprehensiveday-to-day management of market risk within defined tolerance ranges occurs as our investment advisors buy and sell within their respective markets based upon the acceptable boundaries established by our investment and other risk policies, which are overseen by our board of directors, and our investment and asset-liability management team.
Interest rate riskis the risk that we will incur a loss due to adverse changes in interest rates. This risk arises when our investments are not fully matched to our liabilities, or when characteristics of the assets or liabilities change. 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. To estimate asset durations, 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 value. The asset projections include assumptions (based upon historical market experience and our experience) that are intended to reflect the effect of changing interest rates on the prepayment, 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 7.4 years and 6.2 years as of December 31, 2016 and December 31, 2015, respectively. The increase in asset duration year over year was due to a concerted extension effort throughout 2016 to decrease the duration gap inherited on April 1, 2014 and reduce our exposure to interest rate risk. However, given the duration of our assets remains shorter than the duration of our liabilities, lower interest rates will result in lower investment income on assets purchased in the future.
The difference between asset and liability duration is called the duration gap and is a measure of the mismatch between asset and liabilities. At the current time, because our asset durations are shorter than our liability durations, lower interest rate environments will in general result in more adverse financial outcomes than higher interest rate environments.
Based upon the information and assumptions used in the duration calculation, and interest rates in effect as of December 31, 2016, we estimate that a 100 basis point immediate, parallel fall in interest rates (“rate shock”) would increase the net fair value of the assets by $740 million, compared to $620 million as of December 31, 2015. The increase in net fair value was due to a concerted extension effort throughout 2016 to decrease the duration gap inherited on April 1, 2014 and reduce our exposure to interest rate risk. 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 ofnon-parallel changes in the term structure of interest rates and/or large changes in interest rates.
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 by monitoring our 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%. We manage this risk through a disciplined Asset-Liability Management process that endeavors to align expected liability cashflows
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with assets of a similar profile. Losses due to credit spread duration result only if there is a requirement to sell assets (for example, to pay claims) prior to maturity at a time when the fair market value of assets is low due to higher credit spreads.
Spread duration is calculated similarly to interest rate duration. For our portfolio, spread duration is close to the asset duration, and thus has a similar sensitivity. As of December 31, 2016, the spread duration of assets was 7.6 years, compared to 6.7 years as of December 31, 2015. Based upon the information and assumptions we use in this spread duration calculation, and spreads in effect as of December 31, 2016, 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 $760 million as of December 31, 2016 compared to $670 million as of December 31, 2015. The increase is due to a concerted duration extension effort throughout 2016 to reduce the duration gap inherited on April 1, 2014.
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.
Credit default risk is the risk that we will incur a loss due tonon-payment of principal or interest by a borrower on a specific financial instrument we own. This risk arises primarily from our investments in fixed income securities (for example, corporate bonds) and commercial mortgage loans.
We manage credit default risk through monitoring of the creditworthiness of the underlying borrowers of the securities and loans we are invested in. We use diversification to reduce credit default risk by spreading the risk across different borrowers, different industries, and different geographical locations. Furthermore, we constrain credit default risk through limits on the amount of securities and loans we own with specific credit ratings. Credit defaults may be recognized by the Company in income prior to an actual default by the underlying borrower.
A credit default loss of 1% on the portfolio would result in a loss of $100 million as of December 31, 2016, compared to $74 million as of December 31, 2015. The increase is due to an increase in long duration fixed income assets as part of the 2016 duration extension program. The selection of 1% should not be construed as our prediction of future market events, but as an illustration of the potential effect of such an event.
Equity price riskis the risk that we will incur losses due to adverse changes in the general levels of the equity markets. Equity risk exists for contract charges based on account balances as well as for guarantees for living, death and/or income benefits provided by our variable and equity indexed products.
Our variable life products are partially reinsured to ALIC. For the products that are retained, there is equity exposure to contract charges and fees that are based on separate account values, but there is only small exposure to guarantees. The present value of a 20% decrease in equity values would result in a decline of account values of approximately $6 million as of December 31, 2016, compared to a decline of $4 million as of December 31, 2015. The selection of 20% should not be construed as our prediction of future market events, but as an illustration of the potential effect of such an event.
All variable 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, 2016 and 2015, we had Separate Accounts assets related to variable annuity and variable life contracts totaling $1.3 billion and $1.4 billion, respectively.
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As of December 31, 2016 and 2015, we had $1.3 billion and $1.6 billion in equity-indexed life and annuity liabilities that were not reinsured that provide customers with interest crediting rates based on the performance of the S&P 500, respectively. We maintain a hedging program that aims to offset the impact of equity market performance on the value of these guarantees. As of December 31, 2016 and December 31, 2015, we had $18.9 million and $17.7 million in market value of S&P 500 options and futures under the hedging program, respectively.
Counterparty credit riskrelates to the Company’s potential loss if a counterpartyfails to perform under the terms of a contract. The Company manages its exposure to counterparty credit risk by utilizing highly rated counterparties, establishing risk control limits, executing legally enforceable master agreements and obtaining collateral where appropriate.
Lincoln Benefit’s counterparty risk consists of the following two types of exposures: (1) Derivative counterparty risk: The Company only holds future contracts and option contracts which are traded on organized exchanges, which require margin deposits and guarantee the execution of trades, thereby mitigating potential credit risk. Exchanges serve as a marketplace for the buyer and the seller. The associated clearing house sits between the two sides of the trade. The Company has not incurred any losses on derivative financial instruments due to counterparty nonperformance in 2016 or 2015; and (2) Reinsurance counterparty risk. The reinsurance counterparty risk is the risk of the reinsurance counterparty failing to pay reinsurance recoveries in full to Lincoln Benefit in a timely manner (i.e., unwillingness to pay, not paying them in full or inability to pay.) We attempt to mitigate this risk by diversifying the risk with multiple reinsurers and monitoring their credit ratings.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources consist of shareholder’s equity. The following table summarizes our capital resources as of December 31, 2016 and 2015:
| | | | | | | | |
($ in millions) | | 2016 | | | 2015 | |
Common stock, retained earnings and additionalpaid-in capital | | $ | 478.7 | | | $ | 489.2 | |
Accumulated other comprehensive income | | | (36.2 | ) | | | (154.7 | ) |
| | | | | | | | |
| | $ | 442.5 | | | $ | 334.5 | |
| | | | | | | | |
Shareholder’s equityincreased in 2016 primarily due to a decrease in unrealized capital losses due to lower interest rates and net income generated during the year, offset by the payment of dividends to our parent. Shareholder’s equity in 2015 decreased primarily due to the payment of dividends our parent and an increase in unrealized capital losses offset by net income.
Financial strength ratings. Our financial strength ratings as of December 31, 2016 and 2015, wereA- from A.M. Best Company, Inc. and BBB+ from Standard & Poor’s Ratings Services. In July 2016, both S&P and A.M. Best changed the outlook to ‘negative’ the ‘negative’ outlook relates primarily to uncertainty regarding Lincoln Benefits ability to grow its business through acquisition of other closed block transactions. Both S&P and A.M. Best affirmed that capital levels are supportive of the ratings. These ratings reflect the rating agencies’ opinions of our relative financial strength and are not a recommendation to buy or hold any investment. Ratings may be revised or revoked at any time at the sole discretion of the issuing rating agency.
The NAIC has 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 we have insufficient capital, our regulator may act to reduce the amount of or deny the payment of, dividends. Our ratios are within these ranges.
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Liquidity sources and uses. Our potential sources of funds principally include the following:
| | • | | Receipt of insurance premiums |
| | • | | Contractholder fund deposits |
| | • | | Receipts of principal and interest on investments |
| | • | | Maturity or sales of investments |
Our potential uses of funds principally include the following.
| | • | | Payment of contract benefits, surrenders and withdrawals |
| | • | | Reinsurance cessions and payments |
| | • | | Operating costs and expenses |
| | • | | Purchase of investments |
| | • | | Repayment of intercompany balances |
| | • | | Tax payments/settlements |
Cash flows. As reflected in our Statements of Cash Flows, net cash provided by/(used in) operating activities was $15 million, $(34) million, $96 million, and $10 million for the years ended December 31, 2016 and 2015, the nine-month period from April 1, 2014 to December 31, 2014, and the three months ended March 31, 2014, respectively. Fluctuations in net cash provided by operating activities primarily occur as a result of changes in net investment income, differences in the timing of reinsurance payments and other operating activities (e.g., tax payments, expenses, etc.) Prior to 2014, fluctuations in net cash provided by operating activities primarily occurred as a result of changes in net investment income and differences in the timing of reinsurance payments to and from ALIC and payments to Allstate affiliates.
Prior to our acquisition by Resolution Life, under the terms of reinsurance agreements, all premiums and deposits, excluding variable annuity and life contract deposits allocated to separate accounts and those reinsured tonon-affiliated reinsurers, were transferred to ALIC, which maintained the investment portfolios supporting our products. Payments of contractholder claims, benefits, contract surrenders and withdrawals and certain operating costs (excluding investment-related expenses), were reimbursed by ALIC, under the terms of the reinsurance agreements. Notwithstanding any reinsurance arrangements, we continue to have primary liability as a direct insurer for risks reinsured. Our ability to meet liquidity demands is dependent on 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. In addition, in connection with its approval of our acquisition by Resolution Life, the Department of Insurance order requires prior approval to pay any dividend for five years following the Acquisition. After receiving approval from the Department of Insurance, the Company paid dividends of $42.0 million, $187.0 million and $33.2 million in the years ended December 31, 2016 and 2015 and the period from April 1, 2014 through December 31, 2014, respectively. No dividends were paid in in the period from January 1, 2014 through March 31, 2014.
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Contractual obligations. Due to the reinsurance agreements that we have in place, certain contractual obligations are ceded to ALIC, Hannover and othernon-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 12 of the financial statements.
PENDING ACCOUNTING STANDARDS
There are pending accounting standards that we have not implemented because the implementation date has not yet occurred. For a discussion of these pending standards, see Note 2 in the consolidated 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(i). | Changes in or Disagreements with Accountants |
None.
| 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 and Executive Officers |
The biographies of each of the directors and executive officers as of April 1, 2016 are included below.
Clive Cowdery, 53, has been a director since April 2014. Mr. Cowdery is also a director of both Resolution Life Holdings, Inc. and Resolution Life, Inc. Mr. Cowdery was a director and President of Resolution Life GP Ltd. from December 2013 to September 2016, and a director of Resolution Life (Parallel) GP Ltd. from May 2014 to September 2016. Mr. Cowdery is the Founder and Chairman of The Resolution Group. Before founding Resolution in 2003, Mr. Cowdery served as Chairman and Chief Executive of GE Insurance Holdings. Mr. Cowdery currently serves as a director of Prospect Publishing Limited, and he is the Founder and Chairman of the Resolution Foundation, a charitable organization dedicated to improving living standards for the 15 million people in Britain on low and middle incomes.
Jon Hack, 49, has been a director since April 2014. Mr. Hack is also a director of Resolution Life Holdings, Inc. and a director of Resolution Life, Inc. He currently serves as the Managing Partner for The Resolution Group. Prior to joining Resolution in 2009, Mr. Hack was a Managing Director and Head of European Financial Institutions Group for Lazard. Mr. Hack qualified as a chartered accountant in 1992 and is a member of The Institute of Chartered Accountants in England & Wales.
Ann Frohman, 53, has been a director since April 2014. Ms. Frohman is also a director of Resolution Life Holdings, Inc. and a director of Resolution Life, Inc. Ms. Frohman is currently self-employed at Frohman Law Office LLC, a law and government relations firm. From December 2010 to March 2012, Ms. Frohman served as Senior Vice President, Government and Industry for Physicians Mutual and Physicians Life Insurance Companies. Prior to that, Ms. Frohman held a number of leadership positions with the Nebraska Department of
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Insurance, including Director. Ms. Frohman currently serves on the board of directors of Farmers Mutual of Nebraska. Ms. Frohman is a licensed attorney with the Nebraska State Bar Association. Ms. Frohman has advised Resolution on issues of Nebraska law from time to time and expects to do so in the future.
Robert Stein, 68, has been a director since April 2014. Mr. Stein is also a director of Resolution Life Holdings, Inc. and a director of Resolution Life, Inc. From November 1976 to September 2011, Mr. Stein held various positions at Ernst & Young, including Partner. He currently serves on the boards of directors of Assurant, Inc. and Aviva plc. Mr. Stein is an actuary and a Certified Public Accountant. He is a Fellow of the Society of Actuaries and a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants.
Grace Vandecruze, 53, has been a director since April 2014. Ms. Vandecruze is also a director of Resolution Life Holdings, Inc. and Resolution Life, Inc. Since 2006, Ms. Vandecruze has been employed with Grace Global Capital LLC, where she currently serves as Managing Director. Prior to that, she served as Managing Director atFox-Pitt, Kelton and Vice President at Head & Company LLC. Ms. Vandecruze is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
Richard Carbone, 69, has been a director since April 2014. Mr. Carbone is also a director of Resolution Life Holdings, Inc. and a director of Resolution Life, Inc. Prior to joining Lincoln Benefit, Mr. Carbone served as Executive Vice President and Chief Financial Officer at Prudential Financial, Inc. and The Prudential Insurance Company of America. He also served as Senior Vice President and Chief Financial Officer of Prudential Financial, Inc. from November 2001 to January 2008 and Senior Vice President and Chief Financial Officer of The Prudential Insurance Company of America from July 1997 to January 2008. Prior to that, Mr. Carbone held various leadership roles at Salomon, Inc., Bankers Trust New York Corporation and Bankers Trust Company. Mr. Carbone is a member of the board of directors for E*Trade Financial Corporation and is an advisor to Hudson Structured Capital Management. Mr. Carbone is a Certified Public Accountant (inactive).
Stephen Campbell, 50, has been a director since October 2015, and prior to that Mr. Campbell had been a director from May 2014 through May 2015. Mr. Campbell is also a director of Resolution Life Holdings, Inc. and a director of Resolution Life, Inc. From June 2015 through September 2015, Mr. Campbell was a counselor in the domestic finance office of the U.S. Department of Treasury. Since July 2013, except while he was at the U.S. Department of Treasury, Mr. Campbell has been self-employed as a consultant and investor. Prior to that, he was an Investment Banker with Lazard Freres & Co. from 2002 to July 2013. Mr. Campbell currently serves as a member of the board of directors for Hardscuffle, Inc. and American Life & Accident Insurance Company of Kentucky.
W. Weldon Wilson, 56, has been a director and Chief Executive Officer since April 2014. Mr. Wilson also serves as a director and Chief Executive Officer for Resolution Life Holdings, Inc. and Resolution Life, Inc. From 2010 to 2013, he was self-employed as a consultant. From July 1991 to December 2009, Mr. Wilson held various positions at Swiss Reinsurance Company, including Chief Executive Officer, President and Director of Swiss Re Life & Health America Inc. He is a licensed attorney with the State Bar of Texas.
Robyn Wyatt, 52, has been Executive Vice President, Chief Financial Officer and Treasurer since April 2014. Ms. Wyatt also serves as Executive Vice President, Chief Financial Officer and Treasurer of both Resolution Life Holdings, Inc. and Resolution Life, Inc. From March 2002 to September 2013, Ms. Wyatt held positions with various affiliates of Swiss Reinsurance Company, including Managing Director and Chief Financial Officer of Swiss Re Life & Health America Inc. Prior to that, she served as Vice President and Chief Accountant of Manulife Financial Corporation. Ms. Wyatt is a member of Chartered Accountants Australia and New Zealand and The Canadian Institute of Chartered Accountants.
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Keith Gubbay, 62, has been President and Chief Actuarial Officer since April 2014. Mr. Gubbay also serves as President and Chief Actuarial Officer of both Resolution Life Holdings, Inc. and Resolution Life, Inc. From 2004 until he joined Resolution Life, Mr. Gubbay held various leadership positions in Sun Life Financial U.S., including Senior Vice-President and Chief Financial Officer. Prior to that, he served in various senior executive roles at ING Americas. Mr. Gubbay is a Member of the American Academy of Actuaries and a Fellow in the Society of Actuaries.
Simon Packer, 52, has been Chief Transformation Officer since April 2014. Mr. Packer also serves as Chief Transformation Officer of both Resolution Life Holdings, Inc. and Resolution Life, Inc. Prior to joining the Resolution Group in May 2006, Mr. Packer held leadership positions at a variety of U.K. life insurance companies, including Programme Manager at Clerical Medical Investment Group from August 2003 to April 2006 and Programme Manager at AXA Tech Ltd from April 2002 to January 2003.
Leigh McKegney, 33, has been Chief Legal Officer, Vice President and Secretary since May 2014. Ms. McKegney also serves as Chief Legal Officer, Vice President and Secretary of Resolution Life Holdings, Inc. and Resolution Life, Inc. From November 2010 to April 2014, Ms. McKegney was a corporate associate at Debevoise & Plimpton LLP. Ms. McKegney is a licensed attorney in the State of New York and registered as authorized house counsel in the State of Connecticut.
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| Item 11(l). | Executive Compensation |
COMPENSATION DISCUSSIONAND ANALYSIS
Executive officers of Lincoln Benefit also serve as officers of Resolution and other subsidiaries of Resolution and these executive officers received no compensation directly from Lincoln Benefit. They were employees of Resolution or a subsidiary. Allocations of compensation were made for each named executive based on the amount of the named executive’s time allocated to Lincoln Benefit under the Services Agreement by and between Resolution Life and Lincoln Benefit, effective as of April 1, 2014 (the “Services Agreement”). Those allocations are reflected in theSummary Compensation Tableset forth below and in this Compensation Discussion and Analysis disclosure. The named executive officers may have received additional compensation for services rendered to Resolution or other Resolution subsidiaries, including Resolution Life, and those amounts are not reported.
Named Executives
This portion of the Compensation Discussion and Analysis describes Resolution’s executive compensation program and specifically describes, for the following named executive officers (“NEOs”) of Lincoln Benefit below, the total 2016 compensation attributable to services rendered to Lincoln Benefit:
W. Weldon Wilson —Chairman and Chief Executive Officer (“CEO”)
Robyn Wyatt —Chief Financial Officer (“CFO”), Executive Vice President and Treasurer
Keith Gubbay —President and Chief Actuary
Simon Packer —Chief Transformation Officer
Karl Chappell —Managing Director, Investments and Mergers and Acquisitions
2016 Compensation Philosophy
The objectives of Resolution’s executive compensation program for 2016 were to (i) create a link between pay and performance, (ii) attract, motivate and retain talented employees, (iii) align the interests of executives and other employees with the interests of Resolution’s shareholders and (iv) foster compliance and support sensible, but not excessive, risk taking. Resolution has designed the elements of its executive compensation program in order to meet these objectives.
Elements of the Compensation Program Design
All compensation and benefits paid to our officers is determined and paid or provided by Resolution. Resolution pays its executives, including the NEOs, base salary and bonus as set forth in each executive’s employment agreement. In addition, the executives, including NEOs, receive employee benefits on the same terms as other similarly situated executives of Resolution and its subsidiaries. The elements of compensation for the NEOs are determined pursuant to the terms of their individual employment agreements with Resolution. In 2015, Resolution established a compensation committee of its board of directors to oversee executive compensation matters, including advising on Resolution’s compensation policies and reviewing and approving the determination of annual bonus payments earned by the executives. Resolution reviewed data metrics from third party vendors, the Hay Group and DW Simpson, in order to benchmark, using the Hay Group, its employees’ compensation against a broad range of industries, and using DW Simpson, its actuaries’ compensation against other life insurance companies. Mr. Wilson assists the compensation committee in setting compensation for the other Resolution executives.
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Employment Agreements
Each of Messrs. Wilson, Gubbay, Packer and Chappell and Ms. Wyatt is party to an employment agreement with Resolution, the parent of Resolution Life. Resolution negotiated each employment agreement at the time the officer became employed by Resolution in 2013 or 2014, prior to its acquisition of Lincoln Benefit. The terms of each agreement, including salary and target bonus opportunities, were determined based on an evaluation of appropriate compensation levels in the insurance industry and the level of compensation, benefits and other entitlements that Resolution considered necessary to attract and retain the executives. The employment agreements set each executive’s base salary and provide for an annual bonus opportunity expressed as a percentage of base salary, and employee benefits on the same terms as similarly situated executives of Resolution. Mr. Wilson’s, Mr. Gubbay’s and Ms. Wyatt’s target annual bonus opportunity is 60%; and Mr. Chappell’s and Mr. Packer’s target annual bonus opportunity is 50%. The employment agreements of Messrs. Chappell and Packer also provided for reimbursement of certain relocation expenses incurred in 2014 or 2015. Mr. Gubbay’s and Ms. Wyatt’s employment agreement each provide for deferredsign-on bonuses payable in three equal amounts on the first through third anniversaries of the effective date of such employment agreement and such payments were completed during 2016. The amount of each of these elements of compensation that is attributable to Lincoln Benefit is as set forth in theSummary Compensation Table.
Base Salary
For 2016, each NEO received the base salary set forth in his or her individual employment agreement, as adjusted by prior compensation committee approvals. The amount of each such NEO’s base salary for 2016 that is attributable to Lincoln Benefit is as set forth in theSummary Compensation Table. No changes were made in 2016 to the salaries of each NEO.
Annual Bonus Payments
Variable cash compensation in the form of annual bonuses is provided to reward executives for results based on the past performance year. Each NEO’s employment agreement provides for an annual performance-based bonus opportunity, with the target annual bonus amount expressed as a percentage of such NEO’s base salary. The compensation committee of the board of directors of Resolution approved a revised annual bonus plan formula in 2016 for all employees, including NEOs, comprised of two parts: a financial corporate performance factor and an individual performance factor. The corporate performance factor is based on the financial performance of Lincoln Benefit compared to an annual financial and capital plan approved by the board of directors. The financial performance targets are the risk-based capital ratio at year end and the amount of dividends paid by Lincoln Benefit during the fiscal year. The individual performance factor is based on the achievement of individual performance objectives. Each NEO’s annual bonus based on a ratio of 75% from the corporate performance factor and 25% from individual performance. For 2016, the compensation committee determined that the NEOs had earned his or her annual performance-based bonus at 85% of the target performance level. The amount of each such NEO’s annual bonus that is attributable to Lincoln Benefit is as set forth in the Summary Compensation Table.
Long-Term Incentive Compensation
Each of Messrs. Wilson, Gubbay, Packer and Chappell and Ms. Wyatt participate in Resolution’s long- term incentive compensation program, but have not received any long-term or equity-based compensation for their services to Lincoln Benefit. Grants under Resolution’s long-term incentive compensation program were made to our NEOs prior to the acquisition of Lincoln Benefit, and are subject to satisfaction of vesting criteria based on continued service to Resolution. As such equity was awarded prior to the acquisition of Lincoln Benefit and no expense related to such equity is allocated to Lincoln Benefit under the Services Agreement, such compensation is not included in theSummary Compensation Tablesor other tables below.
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Other Benefits
The NEOs participate in the benefit programs available to other employees of Resolution Life. These benefits include health and welfare coverage and participation in a Resolution 401(k) plan. Resolution matches employee contributions up to 6% of eligible pay.
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Summary Compensation Table
The following table summarizes the compensation of our named executive officers for all services rendered to Lincoln Benefit for the last three fiscal years, in a manner consistent with the allocation of compensation under the Services Agreement or the Service and Expense Agreement, as applicable.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year(3) | | | Salary ($) | | | Bonus ($)(1) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
W. Weldon Wilson | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Chairman of the Board and | | | 2014 | | | | 487,500 | | | | 292,500 | | | | — | | | | — | | | | — | | | | — | | | | 5,850 | | | | 785,850 | |
Chief Executive Officer | | | 2015 | | | | 650,000 | | | | 351,000 | | | | — | | | | — | | | | — | | | | — | | | | 18,296 | | | | 1,019,296 | |
| | | | 2016 | | | | 429,000 | | | | 217,632 | | | | — | | | | — | | | | — | | | | — | | | | 11,380 | | | | 658,012 | |
Robyn Wyatt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Executive Vice President, | | | 2014 | | | | 270,000 | | | | 356,850 | | | | — | | | | — | | | | — | | | | — | | | | 7,020 | | | | 633,870 | |
Chief Financial Officer and | | | 2015 | | | | 420,000 | | | | 486,600 | | | | — | | | | — | | | | — | | | | — | | | | 21,576 | | | | 928,176 | |
Treasurer | | | 2016 | | | | 420,000 | | | | 472,866 | | | | — | | | | — | | | | — | | | | — | | | | 15,544 | | | | 908,410 | |
Keith Gubbay | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
President and Chief | | | 2014 | | | | 262,500 | | | | 357,375 | | | | — | | | | — | | | | — | | | | — | | | | 5,850 | | | | 625,725 | |
Actuary | | | 2015 | | | | 175,000 | | | | 227,750 | | | | — | | | | — | | | | — | | | | — | | | | 7,593 | | | | 410,343 | |
| | | | 2016 | | | | 140,000 | | | | 177,622 | | | | — | | | | — | | | | — | | | | — | | | | 8,291 | | | | 325,913 | |
Simon Packer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Chief Transformation | | | 2014 | | | | 297,000 | | | | 148,500 | | | | — | | | | — | | | | — | | | | — | | | | 43,277 | | | | 488,777 | |
Officer | | | 2015 | | | | 396,000 | | | | 198,000 | | | | — | | | | — | | | | — | | | | — | | | | 55,451 | (2) | | | 649,451 | |
| | | | 2016 | | | | 352,000 | | | | 148,808 | | | | — | | | | — | | | | — | | | | — | | | | 26,078 | | | | 526,886 | |
Karl Chappell | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Managing Director, | | | 2014 | | | | 240,165 | | | | 195,600 | | | | — | | | | — | | | | — | | | | — | | | | 4,629 | | | | 440,394 | |
Investments and Mergers | | | 2015 | | | | 320,000 | | | | 160,000 | | | | — | | | | — | | | | — | | | | — | | | | 11,680 | | | | 491,680 | |
and Acquisitions | | | 2016 | | | | 320,000 | | | | 135,280 | | | | — | | | | — | | | | — | | | | — | | | | 25,434 | | | | 480,714 | |
| (1) | Amounts in this column for each of Ms. Wyatt and Messrs. Wilson, Gubbay, Packer and Chappell represent the portion of the NEO’s annual performance-based bonus for 2016 that is attributable to services rendered to Lincoln Benefit, plus, in the case of Ms. Wyatt and Mr. Gubbay, the portion of the 2016 payment of the deferredsign-on bonus attributable to services rendered to Lincoln Benefit. |
| (2) | Includes $29,315 in relocation benefits and $18,270 in 401(k) matching contributions. |
| (3) | 2014 represents compensation for the period from April 1, 2014 to December 31, 2014. |
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Other Compensation Information
Potential Payments as a Result of Termination or Change in Control (“CIC”)
Each of the NEOs is party to an employment agreement with Resolution that provides for severance and/or other payments on certain terminations of employment. If Messrs. Gubbay’s, Packer’s or Chappell’s or Ms. Wyatt’s employment is terminated by mutual agreement between Resolution and the NEO, by Resolution without “cause” or by the NEO with “good reason” (such terminations, “qualifying terminations”), the NEO is entitled to the severance benefit described in the paragraph below; apro-rated bonus for the year of termination, based on actual Resolution performance; and continued medical coverage at the same premium rate paid by active employees for the period during which the NEO receives the severance benefit. If Mr. Wilson’s employment is terminated in a qualifying termination, he is entitled to apro-rated bonus for the year of termination and continued medical coverage for twelve months at the same premium rate paid by active employees. Mr. Wilson’s employment agreement does not provide for other severance payments.
On a qualifying termination of Ms. Wyatt’s or Mr. Gubbay’s employment, the NEO’s severance benefit is equal to one year of base salary plus target bonus. On a qualifying termination of Mr. Chappell’s or Mr. Packer’s employment, he is entitled to an amount equal toone-half of the sum his annual base salary plus target bonus.
For these purposes, “cause” means (i) fraudulent statements or acts of the NEO with respect to the performance of his or her duties under the employment agreement, (ii) the NEO’s conviction of, or plea of guilty or nolo contendere to, any crime that constitutes a felony or any crime that constitutes a misdemeanor involving moral turpitude, deceit, dishonesty or fraud and that results in material harm to Resolution, (iii) willful misconduct by the NEO with respect to Resolution or any of its subsidiaries, or (iv) a material breach by the NEO of his or her employment agreement. “Good reason” for these purposes means (a) a reduction in the NEO’s base salary, annual bonus percentage, long-term incentive compensation percentage, or Resolution’s refusal to pay the NEO any compensation or benefits due, (b) a material diminution in the NEO’s position, authority, duties or responsibilities, excluding any isolated, insubstantial and inadvertent action, (c) any willful breach by Resolution of a material term of the NEO’s employment agreement, (d) Resolution requiring the NEO to engage in any unlawful or criminal act or (e) the bankruptcy of Resolution. For Mr. Gubbay, “good reason” also includes a termination of employment by Mr. Gubbay if (X) Resolution requests that he relocate his residence from the Boston, Massachusetts area after the second anniversary of the effective date of his agreement, (Y) he declines such request to relocate and(Z) he continues to perform his duties from the Boston, Massachusetts area for six months following his decline of the request to relocate (or such shorter period as agreed by Resolution). In order to terminate his or her employment for “good reason,” an NEO must give Resolution written notice and Resolution shall have 30 days to cure.
An NEO’s severance payments are subject to such NEO signing a general release of claims. In addition, the NEOs are subject to covenants not to compete and not to solicit for one year following the date of termination (two years for Mr. Wilson), anon-disparagement covenant for three years following the date of termination, and an indefinitenon-disclosure covenant.
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Estimate of Potential Payments upon Termination of Employment or Change of Control
The following table summarizes estimated payments and benefits that would be provided to our NEOs pursuant to their employment agreements in connection with a termination of employment under various scenarios or a change in control and that are attributable to service to Lincoln Benefit and reimbursable under the Services Agreement, assuming such event occurred on December 31, 2016.
| | | | | | | | | | | | | | |
Name | | Event(1) | | Base Salary and
Bonus($)(2) | | | Health &
Welfare ($) | | | Total Payments
($) | |
W. Weldon Wilson | | Qualifying Termination | | | 257,400 | | | | 6,133 | | | | 263,533 | |
| | Death or Disability | | | 0 | | | | 0 | | | | 0 | |
| | Resignation | | | 0 | | | | 0 | | | | 0 | |
| | Change in Control | | | 0 | | | | 0 | | | | 0 | |
| | | | |
Robyn Wyatt | | Qualifying Termination | | | 924,000 | | | | 6,913 | | | | 930,913 | |
| | Death or Disability | | | 0 | | | | 0 | | | | 0 | |
| | Resignation | | | 0 | | | | 0 | | | | 0 | |
| | Change in Control | | | 0 | | | | 0 | | | | 0 | |
| | | | |
Keith Gubbay | | Qualifying Termination | | | 308,000 | | | | 5,111 | | | | 313,111 | |
| | Death or Disability | | | 0 | | | | 0 | | | | 0 | |
| | Resignation | | | 0 | | | | 0 | | | | 0 | |
| | Change in Control | | | 0 | | | | 0 | | | | 0 | |
| | | | |
Simon Packer | | Qualifying Termination | | | 440,000 | | | | 9,190 | | | | 449,190 | |
| | Death or Disability | | | 0 | | | | 0 | | | | 0 | |
| | Resignation | | | 0 | | | | 0 | | | | 0 | |
| | Change in Control | | | 0 | | | | 0 | | | | 0 | |
| | | | |
Karl Chappell | | Qualifying Termination | | | 400,000 | | | | 11,920 | | | | 411,920 | |
| | Death or Disability | | | 0 | | | | 0 | | | | 0 | |
| | Resignation | | | 0 | | | | 0 | | | | 0 | |
| | Change in Control | | | 0 | | | | 0 | | | | 0 | |
| (1) | For Messrs. Wilson, Gubbay, Packer and Chappell and Ms. Wyatt, a “qualifying termination” is a termination by mutual agreement between Resolution and the executive, by the executive with “good reason” or by Resolution without “cause.” The amount included in the table is calculated based on the percentage of the executive’s time that would be allocated to Lincoln Benefit under the Services Agreement in the event of a qualifying termination on December 31, 2016. |
| (2) | Because the termination of employment is deemed to occur on December 31, 2016, thepro-rated portion of any 2016 bonus payable as a result of termination would be 100%. |
Risk Management and Compensation
Resolution has performed a review of compensation policies and practices for all of its employees who provide services to Lincoln Benefit and has concluded that its compensation policies and practices are not reasonably likely to have a material adverse impact on Lincoln Benefit.
Director compensation
Our independent directors receive an annual cash retainer fee for their services on the boards of directors of Resolution and its subsidiaries, including Lincoln Benefit, a portion of which is allocated to Lincoln Benefit pursuant to the Services Agreement. The portion of the annual retainer allocated to Lincoln Benefit for 2016 is set forth in the table below. Anon-employee director may also elect to defer receipt of all or a portion of his or her annual retainer fee into a notional percentage equity interest in Resolution Life L.P. and Resolution Life
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(Parallel) Partnership (together, the “Partnerships”). The elected percentage of the Board retainer for a calendar year of service is converted into a notional percentage interest in the Partnerships when theyear-end valuation of the Partnerships for the immediately prior year is available. The notional interest will be unvested until December 31st of the relevant year of service, and, as a general rule, if the director’s Board service ends before December 31st, the unvested portion of the notional interest will be forfeited except that, in the case of a qualifying termination, a pro rata portion of the director’s unvested portion of the notional interest will vest. If the Partnerships pay a distribution to their partners, the electing director will be paid, on a current basis, a distribution in cash based on notional interest (both vested and unvested) held by such director as of the record date of the distribution. Vested portions of notional interests will be settled in cash on the first to occur of (1) a liquidity event of the Partnerships and (2) termination of the director’s board service, in which case settlement would occur in the year following the year in which the director’s board service ends.
The following table summarizes the allocation of compensation of each of Lincoln Benefit’s independent directors during 2016 for his or her services as a member of the Board of Directors of Lincoln Benefit and its committees in a manner consistent with the allocation of compensation under the Services Agreement. Directors who are officers or employees of Resolution and its subsidiaries and othernon-independent directors do not receive any additional compensation for their services as a director of Lincoln Benefit.
| | | | | | | | | | | | |
| Name ofNon-Employee Director | | Fees Earned
or Paid in Cash(1)
($) | | | All Other
Compensation(2)
($) | | | Total ($) | |
Stephen Campbell | | $ | 131,250 | | | | — | | | $ | 131,250 | |
Richard Carbone | | $ | 131,250 | | | $ | — | | | $ | 131,250 | |
Ann Frohman | | $ | 131,250 | | | $ | 20,625 | | | $ | 151,875 | |
Robert Stein | | $ | 131,250 | | | $ | — | | | $ | 131,250 | |
Grace Vandecruze | | $ | 131,250 | | | $ | — | | | $ | 131,250 | |
| | (1) | Includes the portion of the cash retainer paid in the form of a deferred notional interest in the Partnerships at the election of the director. The following table sets forth, by grant date, the allocation of the number of Resolution deferred notional interest of the Partnerships credited to each director, the grant date fair value of each award and the percentage of such notional interest held at December 31, 2016 with respect to service as a Lincoln Benefit director in 2016 in a manner consistent with the allocation of compensation under the Services Agreement. All deferred notional interests vested on December 31, 2016. |
| | (2) | Reflects for Ms. Frohman, the portion of a legal fee retainer for services as regulatory counsel with respect to Lincoln Benefit in 2016 in a manner consistent with the allocation of compensation under the Services Agreement. |
| | | | | | | | | | | | | | | | |
| | | Grant Date | | | Percentage of Notional Interest on each grant date | | | Grant Date Fair Value on each of January 1, 2016
and April 1, July 1 and October 1, 2016 | | | Percentage of Notional Interest Held at December 31, 2016 | |
Richard Carbone | |
| January 1, 2016
April 1, July 1, October 1, 2016 |
| |
| 0.0065
0.0048 | %
% | |
| 32,813
21,329 |
| | | 0.0646 | % |
Robert Stein | |
| January 1, 2016
April 1, July 1, October 1, 2016 |
| |
| 0.0065
0.0074 | %
% | |
| 32,813
32,813 |
| | | 0.0749 | % |
Grace Vandecruze | |
| January 1, 2016
April 1, July 1, October 1, 2016 |
| |
| 0.0016
0.0022 | %
% | |
| 8,203
9,844 |
| | | 0.0239 | % |
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Compensation Committee Interlocks and Insider Participation
In February 2015, the Board of Directors of Resolution Life Holdings, Inc. established a compensation committee, whose primary function is to assist the Board with its oversight role with respect to the compensation of Resolution Life Holdings, Inc.’s and its subsidiaries’ executive officers and other employees. No executive officer of Lincoln Benefit serves as a member of the compensation committee of another entity for which any executive officer served as a director for Lincoln Benefit.
| 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 | | Resolution Life, Inc. One Station Place Metro Center, 7thFl. Stamford, CT 06902 | | 25,000 | | | 100 | % |
| | | |
N/A | | Resolution Life Holdings, Inc. One Station Place Metro Center, 7thFl. Stamford, CT 06902 | | Indirect voting and investment power of shares owned by Resolution Life, Inc. | | | N/A | |
| | | |
N/A | | Resolution Life L.P. Canon’s Court 22 Victoria Street Hamilton, HM 12 Bermuda | | Indirect voting and investment power of shares owned by Resolution Life, Inc. | | | N/A | |
| | | |
N/A | | Resolution Life GP, Ltd. Canon’s Court 22 Victoria Street Hamilton, HM 12 Bermuda | | Indirect voting and investment power of shares owned by Resolution Life, Inc. | | | N/A | |
| | | |
N/A | | Resolution Capital Limited 2 Queen Anne’s Gate London SW1H 9AA United Kingdom | | Indirect voting and investment power of shares owned by Resolution Life, Inc. | | | N/A | |
| | | |
N/A | | Clive Cowdery 2 Queen Anne’s Gate London SW1H 9AA United Kingdom | | Indirect voting and investment power of shares owned by Resolution Life, Inc. | | | N/A | |
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Security Ownership of Directors and Executive Officers
The following table shows the number of shares of stock in Lincoln Benefit or its parents 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 certain shares held indirectly, as well as shares subject to stock options exercisable on or prior to March 31, 2017 and restricted stock units for which restrictions expire on or prior to March 31, 2017. The following share amounts are as of March 31, 2017.
| | | | | | |
Entity | | Title of Class of Equity
Securities | | Number of
Shares | | Statement Concerning Beneficial
Ownership |
| Lincoln Benefit, Resolution Life, | | n/a | | n/a | | Lincoln Benefit is an indirect |
| Inc., Resolution Life Holdings, Inc., | | | | | | wholly-owned subsidiary of (i) |
| Resolution Life L.P., Resolution | | | | | | Resolution Life L.P., which is |
| Life GP Ltd., Resolution Life | | | | | | controlled by its general partner |
| (Parallel) Partnership, Resolution | | | | | | Resolution Life GP Ltd. and (ii) |
| Life (Parallel) GP Ltd. | | | | | | Resolution Life (Parallel) |
| | | | | | Partnership, which is controlled by |
| | | | | | its managing partners, which |
| | | | | | includes Resolution Life (Parallel) |
| | | | | | GP Ltd. Resolution Life (Parallel) |
| | | | | | GP Ltd. is wholly-owned by |
| | | | | | Resolution Life GP Ltd. |
| | | | | | Resolution Life GP Ltd. is wholly- |
| | | | | | owned by Resolution Capital |
| | | | | | Limited, which is wholly-owned |
| | | | | | by Clive Cowdery. |
| | | |
| Resolution Life L.P. | | n/a | | n/a | | Clive Cowdery has indirectly |
| | | | | | invested $8.997 million in |
| | | | | | Resolution Life L.P., which currently |
| | | | | | accounts for 1.768% |
| | | | | | of the current total $509 million of |
| | | | | | aggregate investment in |
| | | | | | Resolution Life L.P. and |
| | | | | | Resolution Life (Parallel) |
| | | | | | Partnership. |
Changes in Control
On December 31, 2013, Resolution Life Holdings, Inc. and Resolution Life, Inc. entered into a Credit Agreement with Royal Bank of Canada (“RBC”), The Royal Bank of Scotland, PLC, RBC Capital Markets, RBS Securities Inc. and Lloyds Securities Inc. (the “Credit Agreement”). On April 1, 2014, Resolution Life Holdings, Inc. and Resolution Life, Inc. entered into a Guarantee and Collateral Agreement with Royal Bank of Canada (the “Guarantee and Collateral Agreement”). Pursuant to the Guarantee and Collateral Agreement, Resolution Life Holdings, Inc. pledged the securities of Resolution Life, Inc. to the Secured Parties (as defined in the Guarantee and Collateral Agreement) in order to secure a term loan to Resolution Life, Inc. for the acquisition of Lincoln Benefit. Pursuant to the Credit Agreement and the Guarantee and Collateral Agreement, Resolution Life, Inc. also pledged the securities of Lincoln Benefit to the Secured Parties (as defined in the Guarantee and Collateral Agreement).
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If Resolution Life, Inc. defaults on its obligations under the Credit Agreement, RBC (as collateral agent), will have the option to receive all of the Resolution Life, Inc. and Lincoln Benefit stock pledged under the Credit Agreement and Guarantee and Collateral Agreement, including all voting and corporate rights to such stock.
Item 11(n). Transactions with Related Persons, Promoters and Certain Control Persons
On April 1, 2014, all of the capital stock in Lincoln Benefit was acquired by Resolution Life, Inc. Prior to this transaction, Lincoln Benefit was a wholly-owned subsidiary of ALIC.
Transactions with Related Persons
Prior to the acquisition of Lincoln Benefit from ALIC by Resolution Life, Inc., Lincoln Benefit was a party to certain intercompany agreements involving amounts greater than $120,000 between Lincoln Benefit and the following companies:
| • | | Allstate Life Insurance Company (“ALIC”), the former direct parent of Lincoln Benefit; |
| • | | Allstate Insurance Company (“AIC”), a former indirect parent of Lincoln Benefit; |
| • | | Allstate Insurance Holdings, LLC (“AIH”), a former indirect parent of Lincoln Benefit; and |
| • | | The Allstate Corporation (“AllCorp”), the former ultimate indirect parent of Lincoln Benefit. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction Description | | Approximate dollar value of the amount involved in the transaction, per fiscal year1 | | | Related Person(s) involved in the transaction2 and the approximate dollar value of the Related Person’s interest in the transaction ($) | |
| | | | | | ($) | | | ALIC | | | AIC | | | AIH | | | AllCorp | |
| Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation and certain affiliates effective January 1, 2004, as amended by Amendment No. 1 effective January 1, 2009, and as supplemented by New York Insurer Supplement to Amended and Restated Service and Expense Agreement between Allstate Insurance Company, The Allstate Corporation, Allstate Life Insurance Company of New York and Intramerica Life Insurance Company, effective March 5, 2005. | | | 2014 | | | | 4,351,172,343 | 3 | | | 157,557,526 | 3 | | | 1,451,026,309 | 3 | | | 0 | | | | 10,193,363 | 3 |
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| | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction Description | | Approximate dollar value of the amount involved in the transaction, per fiscal year1 | | | Related Person(s) involved in the transaction2 and the approximate dollar value of the Related Person’s interest in the transaction ($) | |
| | | | | | ($) | | | ALIC | | | AIC | | | AIH | | | AllCorp | |
| 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. | | | 2014 | | | | 991,183,410 | 4 | | | (118,361,063 | ) | | | 822,197,758 | | | | 0 | | | | 16,223,615 | |
| Agreement for the Settlement of State and Local Tax Credits among Allstate Insurance Company and certain affiliates effective January 1, 2007. | | | 2014 | | | | 3,024,265 | 5 | | | 287,214 | 5 | | | 2,645,462 | 5 | | | N/A | | | | N/A | |
| Assignment and 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. | | | 2014 | | | | 4,119,257 | 6 | | | (140,501 | ) | | | N/A | | | | N/A | | | | N/A | |
| Investment Management Agreement among Allstate Investments, LLC, Allstate Insurance Company, The Allstate Corporation and certain affiliates effective January 1, 2007. | | | 2014 | | | | 129,435,627 | 3 | | | 49,913,891 | 3 | | | 68,450,895 | 3 | | | N/A | | | | 0 | |
| 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. | | | 2014 | | | | (97,926,475 | )7 | | | (97,926,475 | )7 | | | N/A | | | | N/A | | | | N/A | |
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| | | | | | | | | | | | | | | | | | | | | | |
| Transaction Description | | Approximate dollar value of the amount involved in the transaction, per fiscal year1 | | | Related Person(s) involved in the transaction2 and the approximate dollar value of the Related Person’s interest in the transaction ($) | |
| | | | | | ($) | | | ALIC | | | AIC | | | AIH | | AllCorp | |
| Reinsurance Agreement between Lincoln Benefit Life Company and Lincoln Benefit Reinsurance Company effective September 30, 2012. | | | 2014 | | | | (99,556 | )7 | | | N/A | | | | N/A | | | N/A | | | N/A | |
| Administrative Services Agreement by and between Lincoln Benefit Life Company and Allstate Life Insurance Company, dated April 1, 2014. | | | 2014 | | | | 8,459,377 | 8 | | | 8,459,377 | 8 | | | N/A | | | N/A | | | N/A | |
| Amended and Restated Reinsurance Agreement by and between Lincoln Benefit Life Company and Allstate Life Insurance Company, effective April 1, 2014. | | | 2014 | | | | 83,830,677 | 9 | | | 83,830,677 | 9 | | | N/A | | | N/A | | | N/A | |
| (1) | Amounts are not included for fiscal year 2015 and 2016 because ALIC, AIC, AIH and AllCorp were not related persons in 2015 or 2016. |
| (2) | Each identified Related Person is a Party to the transaction. |
| (3) | Gross amount of expense received under the transaction. |
| (4) | Total amounts paid to the Internal Revenue Service. |
| (5) | Value of transfer transactions. |
| (6) | Gross amount of the transaction. |
| (7) | Net reinsurance expense. |
| (8) | Gross amount of the transaction. |
| (9) | Net reinsurance income. |
After Lincoln Benefit was acquired by Resolution Life, Inc., Lincoln Benefit is a party to certain intercompany agreements involving amounts greater than $120,000 between Lincoln Benefit and the following companies:
| | • | | Resolution Life, Inc. (“RLI”), the direct parent of Lincoln Benefit. |
| | • | | Resolution Life Holdings, Inc. (“RLH”), an indirect parent of Lincoln Benefit. |
| | • | | Lancaster Re Captive Insurance Company (“Lancaster Re”), a direct subsidiary of Lincoln Benefit |
| | • | | Lanis LLC, an affiliate of Lincoln Benefit |
| | | | | | | | | | | | | | | | | | |
| Transaction Description | | Approximate dollar value of the amount involved in the transaction, per fiscal year | | | Approximate dollar value of the amount involved in the transaction, per fiscal year | |
| | | | | | ($) | | | RLH | | RLI | | | Lanis LLC | |
Services Agreement between Resolution Life, Inc. and Lincoln Benefit Life Company effective April 1, 2014 | |
| 2014
2015 2016 |
| |
| (21,087,752
(13,864,952 (14,147,918 | )¹
)¹ )¹ | | N/A
N/A N/A | |
| 21,087,752
13,864,952 14,147,918 | ¹
¹ ¹ | |
| N/A
N/A N/A |
|
| 1 | Total expense amount reimbursed / (paid) under the transaction |
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The agreements listed in the table immediately below relate to a transaction that Resolution Life, Inc., Resolution Life Holdings, Inc., Lancaster Re Captive Insurance Company, Lanis LLC and Lincoln Benefit Life Company have entered into with Hannover Life Reassurance Company of America, an unrelated party, in order to finance a portion of the insurance reserves held by Lincoln Benefit with respect to universal life insurance policies with secondary guarantees written by Lincoln Benefit.
| | | | | | | | | | | | | | | | | | |
| Transaction Description | | Approximate dollar value of the amount involved in the transaction, per fiscal year | | | Approximate dollar value of the amount involved in the transaction, per fiscal year | |
| | | | | | ($) | | | RLH | | RLI | | | Lanis LLC | |
| Surplus Note Purchase Agreement between Lancaster Re Captive Insurance Company and Lanis LLC effective April 1, 2014 | |
| 2014
2015 2016 |
| |
| (15,711,000
(22,880,000 (25,069,000 | )²
)² )² | | N/A
N/A N/A | |
| N/A
N/A N/A |
| |
| 15,711,000
22,880,000 25,069,000 | ²
² 2 |
| Vehicle Note Purchase Agreement between Lancaster Re Captive Insurance Company and Lanis LLC effective April 1, 2014 | |
| 2014
2015 2016 |
| |
| 15,711,000
22,880,000 25,069,000 | ²
² ² | | N/A
N/A N/A | |
| N/A
N/A N/A |
| |
| (15,711,000
(22,880,000 (25,069,000 | )²
)² )2 |
| Fee Letter between Lincoln Benefit Life Company and Lanis LLC effective April 1, 2014 | |
| 2014
2015 2016 |
| |
| (4,584,514
(6,670,882 (7,328,260 | )3
)3 )3 | | N/A
N/A N/A | |
| N/A
N/A N/A |
| |
| 4,584,514
6,670,882 7,328,260 | 3
3 3 |
| 2 | Surplus/Vehicle Note Interest received (paid) |
| 3 | Payment of risk spread fee |
Review and Approval of Related Person Transactions
For the Period Prior to April 1, 2014
Prior to the acquisition of Lincoln Benefit from ALIC by Resolution Life, Inc., all intercompany agreements to which Lincoln Benefit was a party were approved by Lincoln Benefit’s Board of Directors as well as by the board of any other affiliate of The Allstate Corporation that was a party to the agreement. When required, intercompany agreements were 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 was documented in an internal procedure that captured the review and approval process of all intercompany agreements. All approvals were maintained in Lincoln Benefit’s corporate records.
Prior to the transaction with Resolution, while there was 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 were subject to the Allstate Code of Ethics (“Allstate Code”). The Allstate Code includes a written conflict of interest policy that was adopted by the Board of Directors of the Allstate Corporation, the former 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, was required to be disclosed to Human Resources. Human Resources worked with representatives from the Law Department, including Enterprise Business Conduct, to determine whether an actual conflict of interest existed. Each director and executive officer was required to sign a Code of Ethics certification annually.
For the Period Beginning April 1, 2014
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 Lincoln Benefit that is a party to the agreement. When required, intercompany agreements are submitted for approval to the Nebraska Department of
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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.
Subsequent to the acquisition by Resolution Life, Inc., while there is no formal process for the review and approval of related person transactions between unaffiliated entities specific to Lincoln Benefit, all directors, officers and employees of Lincoln Benefit are subject to Resolution Life’s Code of Conduct and its Conflict of Interest Guideline. The Resolution Code of Conduct includes a written conflict of interest policy that was adopted by the Board of Directors of Resolution Life, the parent company of Lincoln Benefit, and the Board of Directors 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 Lincoln Benefit and/or Resolution Life, or in a business that has a relationship with either entity, is required to be disclosed to Human
Resources and Compliance. Human Resources works with representatives from the Law Department, including Compliance, and the Audit Committee, if necessary, to determine whether an actual conflict of interest existed. All directors, officers and employees are required to sign a Code of Conduct certification and complete a Conflict of Interest Questionnaire annually.
Independence Standards for Directors
Although not subject to the independence standards of the New York Stock Exchange, for purposes of this 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 determined that five of its directors are independent: Stephen Campbell, Richard Carbone, Ann Frohman, Robert Stein and Grace Vandecruze.
OTHER INFORMATION
A section entitled “Experts” is added to your prospectus as follows:
EXPERTS
The financial statements and related financial schedule of Lincoln Benefit Life Company for the period from January 1, 2014 through March 31, 2014 included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the Registration Statement. Such financial statements and financial statement schedule are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Lincoln Benefit Life Company as of December 31, 2016 and 2015 and for each of the years ended December 31, 2016 and 2015, and for the period from April 1, 2014 through December 31, 2014 included in this Prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
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The following change is made to the prospectuses for the LBL Advantage, Consultant II and Premier Planner:
Under the “More Information” section, the subsection entitled “Legal Matters” is deleted and replaced with the following:
LEGAL MATTERS
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 Lamson Dugan & Murray LLP, Omaha, Nebraska.
PRINCIPAL UNDERWRITER
Allstate Distributors, L.L.C. (“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 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 Allstate Life. Allstate Life entered into an administrative services agreement with The Prudential Insurance Company of America (“PICA”) pursuant to which 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, LLC, of 5801 SW 6th Avenue, Topeka, Kansas 66636, whereby se2, LLC provides certain business process outsourcing services with respect to the Contracts. se2, LLC may engage other service providers to provide certain administrative functions. These service providers may change over time, and as of December 31, 2016, consisted of the following: NTT DATA, Inc. (administrative services) located at 100 City Square, Boston, MA 02129; RR Donnelley Global Investment Markets, a division of RR Donnelley & Sons Company (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; Venio LLC, d/b/a Keane (lost shareholder search) located at PO Box 1508, Southeastern, PA 19399-1508; 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. |
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We will send you Contract statements at least annually. We will also send you transaction confirmations. 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 or a confirmation. 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 will make the adjustment as of the date that we receive notice of the potential error. Correspondence you send by regular mail to our service center should be sent to P.O. Box 758566, Topeka, KS 66675-8566. Your correspondence will be picked up at this address and then delivered to our service center. Your correspondence is not considered received by us until it is received at our service center. Where this prospectus refers to the day when we receive a purchase payment, request, election, notice, transfer or any other transaction request from you, we mean the day on which that item (or the last requirement needed for us to process that item) arrives in complete and proper form at our service center or via the appropriate telephone or fax number if the item is a type we accept by those means. There are two main exceptions: if the item arrives at our service center (1) on a day that is not a business day, or (2) after the close of a business day, then, in each case, we are deemed to have received that item on the next business day.
We will also provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws.
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CONSULTANT I VARIABLE ANNUITY PROSPECTUS
FLEXIBLE PREMIUM
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY
Lincoln Benefit Life Company
IN CONNECTION WITH
LINCOLN BENEFIT LIFE VARIABLE ANNUITY ACCOUNT
STREET ADDRESS: 5801 SW 6th Ave., Topeka, KS 66636
MAILING ADDRESS: P.O. Box 758561, Topeka, KS 66675-8561
Telephone Number:1-800-457-7617
Fax Number:1-785-228-4584
The Contract is a deferred annuity contract designed to aid you in long-term financial planning. You may purchase it on either a tax qualified ornon-tax qualified basis.Lincoln Benefit no longer offers this Contract. If you have already purchased the Contract you may continue to make purchase payments according to the Contract.
Because this is a flexible premium annuity contract, you may pay multiple premiums. We allocate your premium to the investment options under the Contract and our Fixed Account in the proportions that you choose. The Contract currently offers various options, each of which is aSub-Account of the Lincoln Benefit Life Variable Annuity Account (“Separate Account”). EachSub-Account invests exclusively in shares of Portfolios in one of the following underlying Funds:
| | |
AIM Variable Insurance Funds (Invesco Variable Insurance Funds) (Series I, II) The Alger Portfolios (Class1-2) Deutsche Variable Series I (Class A) Deutsche Variable Series II (Class A) Federated Insurance Series Fidelity® Variable Insurance Products (Initial Class) Janus Aspen Series (Institutional Shares and Service Shares) | | Legg Mason Partners Variable Equity Trust (Class I) MFS® Variable Insurance Trust(SM)(Initial Class) Oppenheimer Variable Account Funds (Class 2) PIMCO Variable Insurance Trust (Administrative Shares) Putnam Variable Trust (Class IB) T. Rowe Price Equity Series, Inc. (I) T. Rowe Price International Series, Inc. (I) Wells Fargo Variable Trust Funds |
The Securities and Exchange Commission has not Approved or Disapproved these Securities nor has it Passed on the Accuracy or the Adequacy of this Prospectus. Any Representation to the Contrary is a Criminal Offense.
The Contracts are not FDIC insured.
The Date of this Prospectus is May 1, 2017.
Some of the portfolios described in this prospectus may not be available in your Contract. We may make available other investment options in the future.
You may not purchase a Contract if either you or the Annuitant are older than 90 years before we receive your application.
Your Contract Value will vary daily as a function of the investment performance of theSub-Accounts to which you have allocated Purchase Payments and any interest credited to the Fixed Account. We do not guarantee any minimum Contract Value for amounts allocated to theSub-Accounts. Benefits provided by this Contract, when based on the Fixed Account, are subject to a Market Value Adjustment, which may result in an upwards or downwards adjustment in withdrawal benefits, death benefits, settlement values, transfers to theSub-Accounts.
In certain states the Contract may be offered as a group contract with individual ownership represented by Certificates. The discussion of Contracts in this prospectus applies equally to Certificates under group contracts, unless the content specifies otherwise.
This prospectus sets forth the information you ought to know about the Contract. You should read it before investing and keep it for future reference.
This prospectus is for informational or educational purposes. It is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In providing these materials, and other information concerning your contract throughout the year, Lincoln Benefit Life Company is not acting as a fiduciary as defined by any applicable laws and regulations. Lincoln Benefit Life Company is not in a position to provide you investment or retirement advice. Please consult with a qualified investment professional if you wish to obtain investment advice.
We have filed a Statement of Additional Information with the Securities and Exchange Commission (“SEC”). The current Statement of Additional Information is dated May 1, 2017. The information in the Statement of Additional Information is incorporated by reference in this prospectus. You can obtain a free copy by writing us or calling us at the telephone number given above. The contents of the Statement of Additional Information are described below – see Table of Contents.
At least once each year we will send you an annual statement. The annual statement details values and specific information for your Contract. It does not contain our financial statements. Our financial statements are set forth in the Statement of Additional Information. Lincoln Benefit will file financial reports and other information with the SEC on an annual basis. You may read and copy any reports, statements or other information we file at the SEC’s public reference room in Washington, D.C. You can obtain copies of these documents by writing to the SEC and paying a duplicating fee. Please call the SEC at1-202-551-8090 for further information as to the operation of the public reference room. Our SEC filings are also available to the public on the SEC Internet site (http://www.sec.gov).
Please read this prospectus carefully and retain it for your future reference.
Table of Contents
3
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.
4
Glossary of Terms
Please refer to this list for the meaning of the following terms:
Accumulation Period - The period, beginning on the Issue Date, during which Contract Value builds up under your Contract.
Accumulation Unit -A unit of measurement which we use to calculate Contract Value.
Annuitant- The living person on whose life the annuity benefits under your Contract are based. The Annuitant is the living person whose life span is used to determine annuity payments.
Annuitization - The process to begin annuity payments under the Contract. Upon Annuitization, we will pay you benefits under the Contract in the form of an annuity, either for the life of the Annuitant or for a fixed number of years.
Annuity Date- The date on which annuity payments are scheduled to begin
Annuity Period -The period during which annuity payments are paid. The Annuity Period begins on the Annuity Date.
Assignment- Before the Annuity Date, if the Annuitant is still alive, you may assign, in writing, an interest in the Contract if it is anon-qualified Contract.
Automatic Dollar Cost Averaging Program – A program that transfers a fixed dollar amount at fixed intervals from the Dollar Cost Averaging Fixed Account Option or aSub-Account of your choosing.
Automatic Payment Plan- An option that allows you to make scheduled Purchase Payments of $25 or more per month by automatic payment through your bank account.
Beneficiary(ies)- The person(s) or entity(ies) designated to receive any death benefits under the Contract.
Code -The Internal Revenue Code of 1986, as amended.
Company (“We,” “Us,” “Our,” “Lincoln Benefit”) - Lincoln Benefit Life Company.
Contract Anniversary - Each twelve-month period from the date of your contract’s Issue Date.
Contract Owner (“You,” “Your”) - The person(s) having the privileges of ownership defined in the Contract.
Contract Value - The sum of the values of your investment in theSub-Accounts of the Separate Account and the Fixed Account. The total value of your Contract at any time is equal to the sum of the value of your Accumulation Units in theSub-Accounts you have selected, plus the value of your investment in the Fixed Account.
Contract Year -Each twelve-month period beginning on the Issue Date and each Contract Anniversary.
Dollar Cost Averaging Fixed Account Option- An option that provides for the crediting of Purchase Payments allocated to this option for up to one year at the current rate that we declare when you make the allocation.
Due Proof of Death- Documentation needed when there is a request for payment of the death benefit. We will accept the following documentation as Due Proof of Death in Good Order: a certified original copy of the Death Certificate; a certified copy of a court decree as to the finding of death; or a written statement of a medical doctor who attended the deceased at the time of death. In addition, in our discretion we may accept other types of proof.
Fixed Account- The portion of the Contract Value allocated to our general account. You may allocate part or all of your Purchase Payments to the Fixed Account in states where it is available. Amounts allocated to the Fixed Account become part of the general assets of Lincoln Benefit.
Fixed Annuity Payments- Payments that are determined by applying the applicable Annuitized Value to the Annuity Option you have selected. As a general rule, subsequent Fixed Annuity payments will be equal in amount to the initial payment.
Free Look Period- The period of time during which you cancel the Contract by returning it to us within 10 days after you receive it, or after whatever longer period may be permitted by state law.
Guarantee Periods -A period of years for which we have guaranteed a specific effective annual interest rate on an amount allocated to the Fixed Account.
Issue Date - The date when the Annuity becomes effective.
Latest Annuity Date -The latest date by which you must begin annuity payments under the Contract.
Loan Account - An account established for amounts transferred from theSub-Accounts or the Fixed Account as security for outstanding Contract loans. The transfer of an amount equal to the loan amount from the Separate Account and/or the Fixed Account to the Loan Account as collateral for the loan.
5
Market Value Adjustment - An amount added to or subtracted from certain transactions involving your interest in the Fixed Account, to reflect the impact of changing interest rates.
Minimum Purchase Payment- The minimum initial Purchase Payment for a Contract is $1,200. You may pay it in a lump sum or in installments of your choice over the first Contract Year. You may not pay more than $1 million in Purchase Payments without our prior approval.
Non-Qualified Plan -A retirement plan which does not receive special tax treatment under Sections 401, 403(b), 408, 408A or 457 of the Code.
Portfolio(s)- The underlying funds in which theSub- Accounts invest. Each Portfolio is an investment company registered with the SEC or a separate investment series of a registered investment company.
Portfolio Rebalancing- A feature that allows you to maintain the percentage of your Contract Value allocated to eachSub-Account at apre-set level. Under the Portfolio Rebalancing feature, each period, if the allocations change from your desired percentages, we will automatically transfer your Contract Value, including new Purchase Payments (unless you specify otherwise), back to the percentages you specify.
Purchase Payments -Amounts paid to Us as premium for the Contract by you or on Your behalf.
Qualified Plan -A retirement plan which receives special tax treatment under Sections 401, 403(b), 408 or 408A of the Code or a deferred compensation plan for a state and local government or another tax exempt organization under Section 457 of the Code.
Separate Account – The Lincoln Benefit Life Variable Annuity Account, which is a segregated investment account of the Company.
Sub-account – A subdivision of the Separate Account, which invests wholly in one of the Portfolios.
Surrender Value – The amount paid upon complete surrender of the Contract, equal to the Contract Value, less any applicable premium taxes, Withdrawal Charge, and the contract maintenance charge and increased or decreased by any Market Value Adjustment.
Systematic Withdrawal Program- A program that allows you to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis. Systematic withdrawals will be deducted from yourSub-Account and Fixed Account balances, excluding the Dollar Cost Averaging Fixed Account, on a pro rata basis.
Treasury Rate – The U.S. Treasury Note Constant Maturity Yield for the preceding week as reported in Federal Reserve Bulletin Release H.15.
Valuation Date - Each day the New York Stock Exchange is open for business.
Valuation Period- The period of time over which we determine the change in the value of theSub-Accounts in order to price Accumulation Units and Annuity Units. Each Valuation Period begins at the close of normal trading on the New York Stock Exchange (“NYSE”) currently 4:00 p.m. Eastern time on each Valuation Date and ends at the close of the NYSE on the next Valuation Date.
Withdrawal Charge -The contingent deferred sales charge that may be required upon some withdrawals.
6
Fee Tables
The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the 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 investment options. State premium taxes may also be deducted.
Maximum Contingent Deferred Sales Charge - Withdrawal Charge (as a percentage of Purchase Payments) - 7%
| | |
| CONTRIBUTION YEAR | | APPLICABLE CHARGE |
1-2 | | 7% |
3-4 | | 6% |
5 | | 5% |
6 | | 4% |
7 | | 3% |
8 + | | 0% |
| | | | |
TRANSFER FEE (Applies solely to the second and subsequent transfers within a calendar month. We are currently waiving thetransfer fee) | | $ | 10.00 | |
The next table describes the fees and expenses that you will pay periodically during the time that you own the Contract, not including Portfolio fees and expenses.
| | |
Annual Contract Maintenance Charge | | $ 35.00 |
Separate Account Annual Expenses (as a percentage of daily net asset value deducted from each of theSub-Accounts of the Separate Account) | | |
Base Contract (without optional riders) | | |
Mortality and Expense Risk Charge | | 1.15 % |
Administrative Expense Charge | | 0.10 % |
| | |
| |
Total Separate Account Annual Expenses | | 1.25 % |
Base Contract (with Enhanced Death Benefit Rider) | | |
Mortality and Expense Risk Charge | | 1.35 % |
Administrative Expense Charge | | 0.10 % |
| | |
| |
Total Separate Account Annual Expenses | | 1.45 % |
Base Contract (with Enhanced Income Benefit Rider) | | |
Mortality and Expense Risk Charge | | 1.50 % |
Administrative Expense Charge | | 0.10 % |
| | |
| |
Total Separate Account Annual Expenses | | 1.60 % |
Base Contract (with Enhanced Death and Income Benefit Riders) | | |
Mortality and Expense Risk Charge | | 1.55 % |
Administrative Expense Charge | | 0.10 % |
| | |
| |
Total Separate Account Annual Expenses | | 1.65 % |
Base Contract (with Enhanced Death and Income Benefit Riders II) | | |
Mortality and Expense Risk Charge | | 1.70 % |
Administrative Expense Charge | | 0.10 % |
| | |
| |
Total Separate Account Annual Expenses | | 1.80 % |
The next table shows the minimum and maximum total annual 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 of any such fee waiver or expense reimbursement. More detail concerning each Portfolio’s fees and expenses is contained in the prospectus for each Portfolio.
| | | | | | | | |
| | | | Minimum | | | | Maximum | |
Total Annual Portfolio Operating Expenses (1) (expenses that are deducted from Portfolio assets, which may include management fees, distribution and/or service (12b-1) fees, and other expenses) (without waivers or reimbursements) | | | 0.10% | | | | 1.28% | |
| (1) | Expenses are shown as a percentage of Portfolio average daily net assets before any waiver or reimbursement as of December 31, 2016. |
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EXPENSE EXAMPLES
These examples are intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include Contract owner transaction expenses, Contract fees, Separate Account annual expenses, and Portfolio fees and expenses and assumes 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, |
| • | | allocate all of your Account Value to thesub-Account with the Maximum Total Annual Portfolio Operating Expenses as listed in the Expense Table, and these remain the same each year* |
| • | | elected the Enhanced Death and Income Benefit Riders II (with total Separate Account expenses of 1.80%). This is the combination of optional benefits with the maximum possible optional benefit charge. |
The examples also assume:
| • | | For each charge, we deduct the maximum charge rather than current charge. |
| • | | You make no transfers, or other transactions for which we charge a fee. |
Amounts shown in the examples are rounded to the nearest dollar.
* Note: Not all Portfolios offered asSub-accounts may be available depending on optional benefit selection, the applicable jurisdiction and selling firm.
THE EXAMPLES ARE ILLUSTRATIVE ONLY. THEY SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE UNDERLYING PORTFOLIOS. ACTUAL EXPENSES WILL BE LESS THAN THOSE SHOWN DEPENDING UPON WHICH OPTIONAL BENEFIT YOU ELECT OTHER THAN INDICATED IN THE EXAMPLES OR IF YOU ALLOCATE ACCOUNT VALUE TO ANY OTHER AVAILABLESUB-ACCOUNTS.
| | | | | | | | | | |
| | | | | Assuming Maximum Total Annual Portfolio Operating Expenses |
| | | 1 Year | | 3 Years | | 5 Years | | 10 Years |
| If you surrender your annuity at the end of the applicable time period: | | | | $1,049 | | $1,660 | | $2,290 | | $3,702 |
| If you annuitize your annuity at the end of the applicable time period: | | | | $349 | | $1,060 | | $1,790 | | $3,702 |
If you do not surrender your annuity: | | | | $349 | | $1,060 | | $1,790 | | $3,702 |
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Questions and Answers About Your Contract
The following are answers to some of the questions you may have about some of the more important features of the Contract. The Contract is more fully described in the rest of the prospectus. Please read the prospectus carefully.
1. What is the Contract?
The Contract is a flexible premium deferred variable annuity contract. It is designed fortax-deferred retirement investing. The Contract is available fornon- qualified or qualified retirement plans. The Contract, like all deferred annuity contracts, has two phases: the Accumulation Period and the Annuity Period. During the Accumulation Period, earnings accumulate on atax- deferred basis and are taxed as income when you make a withdrawal. The Annuity Period begins when you begin receiving payments under one of the annuity payment options described in the answer to Question 2. The amount of money accumulated under your Contract during the Accumulation Period will be used to determine the amount of your annuity payments during the Annuity Period.
Your premiums are invested in one or more of theSub- Accounts of the Separate Account or allocated to the Fixed Account, as you instruct us. You may allocate your Contract Value to up totwenty-one options under the Contract, counting eachSub-Account and the Fixed Account as one option. We will treat all of your Contract Value allocated to the Fixed Account as one option for purposes of this limit, even if you have chosen more than one Guarantee Period. The value of your Contract will depend on the investment performance of theSub- Accounts and the amount of interest we credit to the Fixed Account.
EachSub-Account will invest in a single investment portfolio (a “Portfolio”) of an underlying fund. The Portfolios offer a range of investment objectives, from conservative to aggressive. You bear the entire investment risk on amounts allocated to theSub-Accounts. The investment policies and risks of each Portfolio are described in the accompanying prospectuses for the Portfolios.
In some states, you may also allocate all or part of your Contract Value to the “Fixed Account”, as described in the answer to Question 5.
2. What Annuity Options does the Contract offer?
You may receive annuity payments on a fixed or a variable basis or a combination of the two. We offer a variety of annuity options including:
| • | | a life annuity with payments guaranteed for zero to thirty years; |
| • | | a joint and full survivorship annuity, with payments guaranteed for zero to thirty years; and |
| • | | fixed payments for a specified period of five to thirty years. |
Call us to inquire about other options.
You may change your annuity option at any time before annuitization. You may select the date to annuitize the Contract. The date you select, however, may be no later than the later of the tenth Contract Anniversary or the youngest Annuitant’s 90th birthday. If your Contract was issued in connection with a qualified plan, different deadlines may apply.
If you select annuity payments on a variable basis, the amount of our payments to you will be affected by the investment performance of theSub-Accounts you have selected. The fixed portion of your annuity payments, on the other hand, generally will be equal in amount to the initial payment we determine. As explained in more detail below, however, during the Annuity Period you will have a limited ability to change the relative weighting of theSub-Accounts on which your variable annuity payments are based or to increase the portion of your annuity payments consisting of Fixed Annuity payments.
3. How do I buy a Contract?
Please note that these Contracts are no longer available for new sales. The information provided in this section is for informational purposes only.
You can obtain a Contract application from your Lincoln Benefit agent. You must pay at least $1,200 in Purchase Payments during the first Contract Year. Purchase Payments must be at least $100, unless you enroll in an automatic payment plan. Your periodic payments in an automatic payment plan must be at least $25 per month. We may lower these minimums at our sole discretion. The maximum age of the oldest Contract Owner and Annuitant cannot exceed age 90 as of the date we receive the completed application.
4. What are my investment choices under the Contract?
You can allocate and reallocate your investment among theSub-Accounts, each of which in turn invests in a single Portfolio. Under the Contract, the Separate Account currently invests in the Portfolios described in “The Investment and Fixed Account Options: Separate Account Investments.”
Some of the Portfolios described in this prospectus may not be available in your Contract.
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Each Portfolio holds its assets separately from the assets of the other Portfolios. Each Portfolio has distinct investment objectives and policies which are described in the prospectuses for the Portfolios.
5. What is the Fixed Account option?
We offer two Fixed Account interest crediting options: The Guaranteed Maturity Fixed Account Option and the Dollar Cost Averaging Fixed Account Option.
You may allocate Purchase Payments to theSub- Account(s) and the Fixed Account(s). Loan payments may not be allocated to the Fixed Account(s). You may not transfer amounts into the DCA Fixed Account. The minimum amount that may be transferred into any one of the Guarantee Maturity Fixed Account Options is $500.
We will credit interest to amounts allocated to the Guaranteed Maturity Fixed Account Option at a specified rate for a specified Guarantee Period. You select the Guarantee Period for each amount that you allocate to the Guaranteed Maturity Fixed Account Option. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. At the end of each Guarantee Period, you may select a new Guarantee Period from among the choices we are then making available or transfer or withdraw the relevant amount from the Fixed Account without any Market Value Adjustment.
We may offer Guarantee Periods ranging from one to ten years in length. We are currently offering Guarantee Periods of one, three, five, seven, and ten years in length. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods.
We will not change the interest rate credited to a particular allocation until the end of the relevant Guarantee Period. From time to time, however, we may change the interest rate that we offer to credit to new allocations to the Guaranteed Maturity Fixed Account Option and to amounts rolled over in the Fixed Account for new Guarantee Periods.
In addition, if you participate in our dollar cost averaging program, you may designate amounts to be held in the Dollar Cost Averaging Fixed Account Option until they are transferred monthly to theSub-Accounts or Guarantee Periods of your choosing. When you make an allocation to the Fixed Account for this purpose, we will set an interest rate applicable to that amount. We will then credit interest at that rate to that amount until it has been entirely transferred to your chosenSub-Accounts or Guarantee Periods. We will complete the transfers within one year of the allocation. In our discretion we may change the rate that we set for new allocations to the Fixed Account for the dollar cost averaging program. We will never, however, set a rate less than an effective annual rate of 3%.
A Market Value Adjustment may increase or decrease the amount of certain transactions involving the Fixed Account, to reflect changes in interest rates. As a general rule, we will apply a Market Value Adjustment to the following transactions:
| 1) | when you withdraw funds from the Guaranteed Maturity Fixed Account Option in an amount greater than the Free Withdrawal Amount (which is described in the answer to Question 6); |
| 2) | when you transfer funds from the Guaranteed Maturity Fixed Account Option to theSub-Accounts; |
| 3) | when you allocate part of your balance in the Guaranteed Maturity Fixed Account Option to a new Guarantee Period before the end of the existing Guarantee Period; |
| 4) | when you annuitize your Contract; and |
| 5) | when we pay a death benefit. |
We will not apply a Market Value Adjustment to a transaction to the extent that:
| 1) | it occurs within 30 days after the end of a Guarantee Period applicable to the funds involved in the transaction; |
| 2) | it is necessary to meet IRS minimum withdrawal requirements; or |
| 3) | it is a transfer that is part of a Dollar Cost Averaging program. |
We determine the amount of a Market Value Adjustment using a formula that takes into consideration:
| 1) | whether current interest rates differ from interest rates at the beginning of the applicable Guarantee Period; and |
| 2) | how many years are left until the end of the Guarantee Period. |
As a general rule, if interest rates have dropped, the Market Value Adjustment will be an addition; if interest rates have risen, the Market Value Adjustment will be a deduction. It is therefore possible that if you withdraw an amount from the Fixed Account during a Guarantee Period, a Market Value Adjustment may cause you to receive less than you initially allocated to the Fixed Account.
6. What are my expenses under the Contract?
Contract Maintenance Charge.During the Accumulation Period, each year we subtract an annual contract maintenance charge of $35 from your Contract Value allocated to theSub-Accounts. We will waive this charge if you pay $50,000 or more in Purchase Payments or if you allocate all of your Contract Value to the Fixed Account.
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During the Annuity Period, we will subtract the annual contract maintenance charge in equal parts from your annuity payments. We waive this charge if on the Annuity Date your Contract Value is $50,000 or more or if all payments are Fixed Annuity payments.
Administrative Expense Charge and Mortality and Expense Risk Charge.We impose a mortality and expense risk charge at an annual rate of 1.15% of average daily net assets and an administrative expense charge at an annual rate of .10% of average daily net assets. If you select one of our optional enhanced benefit riders, however, we may charge you a higher mortality and expense risk charge. These charges are assessed each day during the Accumulation Period and the Annuity Period. We guarantee that we will not raise these charges.
Transfer Fee.Although we currently are not charging a transfer fee, the Contract permits us to charge you up to $10 per transfer for each transfer after the first transfer in each month.
Withdrawal Charge (Contingent Deferred Sales Charge). During the Accumulation Period, you may withdraw all or part of the value of your Contract before your death or, if the Contract is owned by a company or other legal entity, before the Annuitant’s death. Certain withdrawals may be made without payment of any Withdrawal Charge, which is a contingent deferred sales charge. Other withdrawals are subject to the Withdrawal Charge.
The Withdrawal Charge will vary depending on how many complete years have passed since you paid the Purchase Payment being withdrawn. The Withdrawal Charge applies to each Purchase Payment for seven complete years from the date of the Payment (each a “Contribution Year”) as follows:
| | |
Contribution Year | | Applicable Charge |
1-2 | | 7% |
3-4 | | 6% |
5 | | 5% |
6 | | 4% |
7 | | 3% |
8 + | | 0% |
In determining Withdrawal Charges, we will deem your Purchase Payments to be withdrawn on afirst-in, first- out basis.
Each year, free of Withdrawal Charges or any otherwise applicable Market Value Adjustment, you may withdraw the Free Withdrawal Amount, which equals:
| | (a) | the greater of: earnings not previously withdrawn; or 15% of your total Purchase Payments made in the most recent seven years; plus |
| | (b) | an amount equal to your total Purchase Payments made more than seven years ago, to the extent not previously withdrawn. |
In most states, we also may waive the Withdrawal Charge if you:
| 1) | require long-term medical or custodial care outside the home; |
| 3) | are diagnosed with a terminal illness. |
These provisions will apply to the Annuitant, if the Contract is owned by a company or other legal entity. Additional restrictions and costs may apply to Contracts issued in connection with qualified plans. Withdrawals of earnings are taxed as ordinary income and, if taken prior to age 591/2, may be subject to an additional 10% federal tax penalty. You should consult with your tax counselor to determine what effect a withdrawal might have on your tax liability. As described in the answer to Question 5, we may increase or decrease certain withdrawals by a Market Value Adjustment.
Premium Taxes. Certain states impose a premium tax on annuity purchase payments received by insurance companies. Any premium taxes relating to the Contract may be deducted from Purchase Payments or the Contract Value when the tax is incurred or at a later time. State premium taxes generally range from 0% to 3.5%.
Other Expenses. In addition to our charges under the Contract, each Portfolio deducts amounts from its assets to pay its investment advisory fees and other expenses.
7. How will my investment in the Contract be taxed?
You should consult a qualified tax adviser for personalized answers. Generally, earnings under variable annuities are not taxed until amounts are withdrawn or distributions are made. This deferral of taxes is designed to encourage long-term personal savings and supplemental retirement plans. 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.
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Special rules apply if the Contract is owned by a company or other legal entity. Generally, such an owner must include in income any increase in the excess of the Contract Value over the “investment in the contract” during the taxable year.
8. Do I have access to my money?
At any time during the Accumulation Period, we will pay you all or part of the value of your Contract, minus any applicable charge, if you surrender your Contract or request a partial withdrawal. Under some qualified plans, you may also take a loan against the value of your Contract. Generally, a partial withdrawal must equal at least $50, and after the withdrawal your remaining Contract Value must at least equal $500.
Although you have access to your money during the Accumulation Period, certain charges, such as the contract maintenance charge, the Withdrawal Charge, and premium tax charges, may be deducted on a surrender or withdrawal. You may also incur federal income tax liability or tax penalties. In addition, if you have allocated some of the value of your Contract to the Fixed Account, the amount of your surrender proceeds or withdrawal may be increased or decreased by a Market Value Adjustment.
After annuitization, under certain settlement options you may be entitled to withdraw the commuted value of the remaining payments.
9. What is the Death Benefit?
We will pay a death benefit while the Contract is in force and before the Annuity Date, if the Contract Owner dies, or if the Annuitant dies and the Contract Owner is not a living person. To obtain payment of the Death Benefit, the Beneficiary must submit to us a complete request for payment of the death benefit, which includes due proof of death as specified in the Contract.
The standard death benefit is the greatest of the following:
| 1) | your total Purchase Payments reduced by a withdrawal adjustment; |
| 3) | the amount you would have received by surrendering your Contract; or |
| 4) | your Contract Value on each Contract Anniversary which may be evenly divisible by seven increased by the total Purchase Payments since that anniversary and reduced by a withdrawal adjustment. |
We also offer an optional enhanced death benefit rider, which is described later in this prospectus.
We will determine the value of the death benefit on the day that we receive all of the information that we need to process the claim.
10. What else should I know?
Please note that these Contracts are no longer available for new sales. The information provided in this section is for informational purposes only.
Allocation of Purchase Payments. You allocate your initial Purchase Payment among theSub-Accounts and the Fixed Account in your Contract application. You may make your allocations in specific dollar amounts or percentages, which must be whole numbers that add up to 100%. When you make subsequent Purchase Payments, you may again specify how you want your payments allocated. If you do not, we will automatically allocate the payment based on your most recent instructions. You may not allocate Purchase Payments to the Fixed Account if it is not available in your state.
Transfers. During the Accumulation Period, you may transfer Contract Value among theSub-Accounts and from theSub-Accounts to the Fixed Account. You may not make a transfer, however, that would result in your allocating your Contract Value to more thantwenty-one options under the Contract. While you may also transfer amounts from the Fixed Account, a Market Value Adjustment may apply. You may instruct us to transfer Contract Value by writing or calling us.
You may also use our Automatic Dollar Cost Averaging or Portfolio Rebalancing programs. You may not use both programs at the same time.
Under the Dollar Cost Averaging program, amounts are automatically transferred at regular intervals from the Fixed Account or aSub-Account of your choosing, including otherSub-Accounts or the Fixed Account. Transfers from the Dollar Cost Averaging Fixed Account may be made monthly only. Transfers fromSub-Accounts may be made monthly, quarterly, or annually.
Under the Portfolio Rebalancing Program, you can maintain the percentage of your Contract Value allocated to eachSub-Account at apre-set level. Investment results will shift the balance of your Contract Value allocations. If you elect rebalancing, we will automatically transfer your Contract Value back to the specified percentages at the frequency (monthly, quarterly, semiannually, annually) that you specify. We will automatically terminate this program if you request a transfer outside of the program. You may not include the Fixed Account in a Portfolio Rebalancing Program. You also may not elect rebalancing after annuitization.
During the Annuity Period, you may not make any transfers for the first six months after the Annuity Date. Thereafter, you may make transfers among theSub- Accounts or from theSub-Accounts to increase your Fixed Annuity payments. Your transfers, however, must be at least six months apart. You may not, however, convert any portion of your right to receive Fixed Annuity payments into Variable Annuity payments.
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Free Look Period. You may cancel the Contract by returning it to us within 10 days after you receive it, or after whatever longer period may be permitted by state law. You may return it by delivering it or mailing it to us. If you return the Contract, the Contract terminates and, in most states, we will pay you an amount equal to the Contract Value on the date we receive the Contract from you. The Contract Value may be more or less than your Purchase Payments. In some states, we are required to send you the amount of your Purchase Payments. Since state laws differ as to the consequences of returning a Contract, you should refer to your Contract for specific information about your circumstances. If your Contract is qualified under Section 408 of the Code, we will refund the greater of any purchase payments or the Contract Value.
11. Who can I contact for more information?
You can write to us at Lincoln Benefit Life Company, P.O. Box 758565, Topeka, KS 66675-8565, or call us at(800) 457-7617.
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Financial Information
Attached as Appendix A is a table showing selected information concerning Accumulation Unit Values for eachSub-Account for 2006 through 2016. Accumulation Unit Value is the unit of measure that we use to calculate the value of your interest in aSub-Account. Accumulation Unit Value does not reflect the deduction of certain charges that are subtracted from your Contract Value, such as the Contract Administration Charge. The Separate Account’s financial statements, which are comprised of the financial statements of the underlyingsub-accounts, as of December 31, 2016, are included in the Statement of Additional Information. Lincoln Benefit’s financial statements as of December 31, 2016, are included in the Statement of Additional Information.
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Description of the Contracts
Summary. The Contract is a deferred annuity contract designed to aid you in long-term financial planning. You may add to the Contract Value by making additional Purchase Payments. In addition, the Contract Value will change to reflect the performance of theSub-Accounts to which you allocate your Purchase Payments and your Contract Value, as well as to reflect interest credited to amounts allocated to the Fixed Account. You may withdraw your Contract Value by making a partial withdrawal or by surrendering your Contract. Upon Annuitization, we will pay you benefits under the Contract in the form of an annuity, either for the life of the Annuitant or for a fixed number of years. All of these features are described in more detail below.
Contract Owner. As the Contract Owner, you are the person usually entitled to exercise all rights of ownership under the Contract. You usually are also the person entitled to receive benefits under the Contract or to choose someone else to receive benefits. 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. The maximum age of the oldest Contract Owner and Annuitant cannot exceed age 90 as of the date we receive the completed application. The Contract cannot be jointly owned by both anon-living person and a living person. 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. If the Contract Owner is a grantor trust, the Contract Owner will be considered anon-living person for purposes of this section and the Death Benefit section.
Annuitant.The Annuitant is the living person whose life span is used to determine annuity payments. You initially designate an Annuitant in your application. You may change the Annuitant at any time before annuity payments begin. If anon-Qualified contract is held by anon-living person, any change in the Annuitant will be treated as the death of the Annuitant and will activate the distribution requirements outlined in the Death Benefit section. If your Contract was issued under a plan qualified under Section 403(b), 408 or 408A of the Code, you must be the Annuitant. If the Contract is anon-qualified Contract, you may also designate a Joint Annuitant, who is a second person on whose life annuity payments depend. Additional restrictions may apply in the case of Qualified Plans. If you are not the Annuitant and the Annuitant dies before annuity payments begin, then either you become the new Annuitant or you must name another person as the new Annuitant. You must attest that the Annuitant is alive in order to annuitize your Contract.
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 are permitted to change the terms of the Contract if it is necessary to comply with changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law.
Assignment. Before the Annuity Date, if the Annuitant is still alive, you may assign an interest in the Contract if it is anon-qualified Contract. If a Contract is issued pursuant to a Qualified Plan, the law prohibits some types of assignments, pledges and transfers and imposes special conditions on others. An assignment may also result in taxes or tax penalties.
We will not be bound by any assignment until we receive written notice of it. Accordingly, until we receive written notice of an assignment, we will continue to act as though the assignment had not occurred. We are not responsible for the validity of any assignment.
Because of the potential tax consequences and ERISA issues arising from an assignment, you should consult with an attorney before trying to assign your Contract.
Free Look Period. You may cancel the Contract by returning it to us within 10 days after you receive it, or within whatever longer period may be permitted by state law. You may return it by delivering it to your agent or mailing it to us. If you return the Contract, the Contract terminates and, in most states, we will pay you an amount equal to the Contract Value on the date we receive the Contract from you. The Contract Value at that time may be more or less than your Purchase Payments.
In some states, if you exercise your “free look” rights, we are required to return the amount of your Purchase Payments. Currently, if you live in one of those states, on the Issue Date we will allocate your Purchase Payment to theSub-Accounts and the Fixed Account Options as you specified in your application. However, we reserve the right in the future to delay allocating your Purchase Payments to theSub-Accounts you have selected or to the Fixed Account until 20 days after the Issue Date or, if your state’s free look period is longer than ten days, for ten days plus the period required by state law. During that time, we will allocate your Purchase Payment to the Fidelity® VIP Government Money Market, InitialClass Sub-Account. Your Contract will contain specific information about your free-look rights in your state.
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Purchases and Contract Value
Please note that these Contracts are no longer available for new sales. The information provided in this section is for informational purposes only.
Minimum Purchase Payment. The minimum initial Purchase Payment for a Contract is $1,200. You may pay it in a lump sum or in installments of your choice over the first Contract Year. You may not pay more than $1 million in Purchase Payments without our prior approval. As a general rule, subsequent Purchase Payments may be made in amounts of $100 or more. Subsequent Purchase Payments made as part of an Automatic Payment Plan, however, may be as small as $25 per month. However, 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 the Guaranteed Maturity Fixed Account Option that are lower than $500, such amounts will be allocated to the Fidelity® VIP Government Money Market Portfolio, Initial Class. We may lower these minimums if we choose. We may refuse any Purchase Payment at any time. We may apply certain limitations, restrictions, and/or underwriting standards as a condition of acceptance of purchase payments.
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Automatic Payment Plan. You may make scheduled Purchase Payments of $25 or more per month by automatic payment through your bank account. Call or write us for an enrollment form.
Allocation of Purchase Payments. Your Purchase Payments are allocated to theSub-Account(s) and the Fixed Account in the proportions that you have selected. You must specify your allocation in your Contract application, either as percentages or specific dollar amounts. If you make your allocation in percentages, the total must equal 100%. We will allocate your subsequent Purchase Payments in those percentages, until you give us new allocation instructions. You may not allocate Purchase Payments to the Fixed Account if it is not available in your state.
You initially may allocate your Purchase Payments to up totwenty-one options, counting eachSub-Account and the Fixed Account as one option. For this purpose, we will treat all of your allocations to the Fixed Account as one option, even if you choose more than one Guarantee Period. You may add or deleteSub-Accounts and/or the Fixed Account from your allocation instructions, but we will not execute instructions that would cause you to have Contract Value in more thantwenty-one options. In the future, we may waive this limit.
If your application is complete, we will issue your Contract within two business days of its receipt at our P.O. Box shown on the first page of this prospectus. If your application for a Contract is incomplete, we will notify you and seek to complete the application within five business days. For example, if you do not fill in allocation percentages, we will contact you to obtain the missing percentages. If we cannot complete your application within five business days after we receive it, we will return your application and your Purchase Payment, unless you expressly permit us to take a longer time.
Usually, we will allocate your initial Purchase Payment to theSub-Accounts and the Fixed Account, as you have instructed us, on the Issue Date. We will allocate your subsequent Purchase Payments on the date that we receive them at the next computed Accumulation Unit Value.
There may be circumstances where the New York Stock Exchange is open, however, due to inclement weather, natural disaster or other circumstances beyond our control, our offices may be closed or our business processing capabilities may be restricted. Under those circumstances, your Contract Value may fluctuate based on changes in the Accumulation Unit Values, but you may not be able to transfer Contract Value, or make a purchase or redemption request.
With respect to any purchase payment that is pending investment in our Variable Account, we may hold the amount temporarily in a suspense account and may earn interest on amounts held in that suspense account. You will not be credited with any interest on amounts held in that suspense account.
In some states, however, we are required to return at least your Purchase Payment if you cancel your Contract during the “free-look” period. In those states, we currently will allocate your Purchase Payments on the Issue Date as you have instructed us, as described above. In the future, however, we reserve the right, if you live in one of those states, to allocate all Purchase Payments received during the “free-look period” to the Fidelity® VIP Government Money Market, InitialClass Sub-Account. If we exercise that right and your state’s free look period is ten days, we will transfer your Purchase Payments to your specifiedSub-Accounts or the Fixed Account 20 days after the Issue Date; if your state’s free look period is longer, we will transfer your Purchase Payment after ten days plus the period required by state law have passed.
We determine the number of Accumulation Units in eachSub-Account to allocate to your Contract by dividing that portion of your Purchase Payment allocated to aSub-Account by thatSub-Account’s Accumulation Unit Value on the Valuation Date when the allocation occurs.
Contract Value. We will establish an account for you and will maintain your account during the Accumulation Period. The total value of your Contract at any time is equal to the sum of the value of your Accumulation Units in theSub-Accounts you have selected, plus the value of your investment in the Fixed Account.
Separate Account Accumulation Unit Value. As a general matter, the Accumulation Unit Value for eachSub-Account will rise or fall to reflect changes in the share price of the Portfolio in which theSub-Account invests. In addition, we subtract from Accumulation Unit Value 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, transfer fees and contract maintenance charges separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units.
We determine a separate Accumulation Unit Value for eachSub-Account. We also determine a separate set of Accumulation Unit Values reflecting the cost of the enhanced benefit riders described in the “Other Contract Benefits” section of this prospectus. If we elect or are required to assess a charge for taxes, we may calculate a separate Accumulation Unit Value for Contracts issued in connection withNon-Qualified and Qualified Plans, respectively, within eachSub-Account. We determine the Accumulation Unit Value for eachSub-Account Monday through Friday on each day that the New York Stock Exchange is open for business.
You should refer to the prospectuses for the Portfolios for a description of how the assets of each Portfolio are valued, since that determination has a direct bearing on the Accumulation Unit Value of the correspondingSub- Account and, therefore, your Contract Value.
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TransferDuring Accumulation Period. During the Accumulation Period, you may transfer Contract Value among the Fixed Account and theSub-Accounts in writing or by telephone. Currently, there is no minimum transfer amount. The Contract permits us to set a minimum transfer amount in the future. You may not make a transfer that would result in your allocating your Contract Value to more thantwenty-one options under the Contract at one time.
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. Requests received before 4:00 p.m. will be effected on that day at that day’s price. Requests received after 4:00 p.m. will be effected on the next day on which the NYSE is open for business, at that day’s price. If you transfer an amount from the Fixed Account to aSub-Account before the end of the applicable Guarantee Period or you allocate an amount in the Fixed Account to a new Guarantee Period before the end of the existing Guarantee Period, we usually will increase or decrease the amount by a Market Value Adjustment. The calculation of the Market Value Adjustment is described in the “Market Value Adjustment” section of this prospectus.
Transfers within 30 days after the end of the applicable Guarantee Period are not subject to a Market Value Adjustment.
The Contract permits us to defer transfers from the Fixed Account for up to six months from the date you ask us.
You may not transfer Contract Value into the Dollar Cost Averaging Fixed Account Option. You may not transfer Contract Value out of the Dollar Cost Averaging Fixed Account Option except as part of a Dollar Cost Averaging program.
We may charge you the transfer fee described in the “Fee Tables” section of this prospectus, although we currently are waiving it. At any time, without notice, we may suspend, modify or terminate your privilege to make transfers via the phone, 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 VariableSub-Accounts in any Contract year, or to refuse any VariableSub-Account transfer request. We also reserve the right to restrict such transfers in any manner reasonably designed to prevent transfers that we consider disadvantageous to the Contract Owners.
We use procedures that we believe provide reasonable assurance that telephone authorized 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/Policies are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of VariableSub-Accounts and can disrupt management of a Portfolio and raise its expenses, which can impair Portfolio performance and adversely affect your Contract/Policy Value. 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/Policy 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/Policy.
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, in our judgment, we determine that the transfers are part of a market timing strategy or are otherwise harmful to the underlying Portfolio, we will impose the trading limitations as described below under “Trading Limitations.” 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 VariableSub-Accounts, because our procedures involve the exercise of reasonable judgment, we may not identify or prevent some market timing or excessive trading. Moreover, imposition of trading limitations is triggered by the detection of market timing or excessive trading activity, and the trading limitations are not applied prior to detection of such trading activity. Therefore, our policies and procedures do not prevent such trading activity before it is detected. As a result, some investors may be able to engage in market timing and excessive trading, while others are prohibited, and the Portfolio may experience the adverse effects of market timing and excessive trading described above.
TRADING LIMITATIONS
We reserve the right to limit transfers among the investment alternatives in any Contract/Policy year, require that all future transfer requests be submitted through U.S. Postal Service First Class Mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery, or to refuse any transfer request, if:
| • | | we believe, in our sole discretion, that certain trading practices, such as excessive trading, by, or on behalf of, one or more Contract/Policy Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any VariableSub-Account or on the share prices of the corresponding Portfolio or otherwise would be to the disadvantage of other Contract/Policy Owners; or |
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| • | | 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 excessive trading or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Portfolio shares. |
In making the determination that trading activity constitutes market timing or excessive trading, we will consider, among other things:
| • | | the total dollar amount being transferred, both in the aggregate and in the transfer request; |
| • | | the number of transfers you make over a period of time and/or the period of time between transfers (note: one set of transfers to and from a VariableSub-Account in a short period of time can constitute market timing); |
| • | | whether your transfers follow a pattern that appears designed to take advantage of short term market fluctuations, particularly within certain VariableSub-Account underlying Portfolios that we have identified as being susceptible to market timing activities (e.g., International, High Yield, and Small Cap VariableSub-Accounts); |
| • | | whether the manager of the underlying Portfolio has indicated that the transfers interfere with Portfolio management or otherwise adversely impact the Portfolio; and |
| • | | the investment objectives and/or size of the VariableSub-Account underlying Portfolio. |
We seek to apply these trading limitations uniformly. However, because these determinations involve the exercise of discretion, it is possible that we may not detect some market timing or excessive trading activity. As a result, it is possible that some investors may be able to engage in market timing or excessive trading activity, while others are prohibited, and the Portfolio may experience the adverse effects of market timing and excessive trading described above.
If we determine that a Contract/Policy Owner has engaged in market timing or excessive trading activity, we will require that all future transfer requests be submitted through U.S. Postal Service First Class Mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery. If we determine that a Contract/Policy Owner continues to engage in a pattern of market timing or excessive trading activity we will restrict that Contract/Policy Owner from making future additions or transfers into the impacted VariableSub-Account(s) or will restrict that Contract/Policy Owner from making future additions or transfers into the class of VariableSub-Account(s) if the VariableSub-Accounts(s) involved are vulnerable to arbitrage market timing trading activity (e.g., International, High Yield, and Small Cap VariableSub-Accounts).
In our sole discretion, we may revise our Trading Limitations at any time as necessary to better deter or minimize market timing and excessive trading or to comply with regulatory requirements.
SHORT TERM TRADING FEES
The underlying Portfolios are authorized by SEC regulation to adopt and impose redemption fees if a Portfolio’s Board of Directors determines that such fees are necessary to minimize or eliminate short-term transfer activity that can reduce or dilute the value of outstanding shares issued by the Portfolio. The Portfolio will set the parameters relating to the redemption fee and such parameters may vary by Portfolio. If a Portfolio elects to adopt and charge redemption fees, these fees will be passed on to the Contract/Policy Owner(s) responsible for the short-term transfer activity generating the fee.
We will administer and collect redemption fees in connection with transfers between the VariableSub- Accounts and forward these fees to the Portfolio. Please consult the Portfolio’s prospectus for more complete information regarding the fees and charges associated with each Portfolio.
Automatic Dollar Cost Averaging Program. Under our Automatic Dollar Cost Averaging program, you may authorize us to transfer a fixed dollar amount at fixed intervals from the Dollar Cost Averaging Fixed Account Option or aSub-Account of your choosing. The interval between transfers from the Dollar Cost Averaging Fixed Account may be monthly only. The interval between transfers fromSub-Accounts may be monthly, quarterly, or annually, at your option. The transfers will be made at the Accumulation Unit Value on the date of the transfer. The transfers will continue until you instruct us otherwise, or until your chosen source of transfer payments is exhausted. Currently, the minimum transfer amount is $100 per transfer. However, if you wish to Dollar Cost Average to a Guaranteed Maturity Fixed Account Option, the minimum amount that must be transferred into any one Option is $500. We may change this minimum or grant exceptions. 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 purchase payment, we will transfer the payment plus associated interest to the Fidelity® VIP Government Money Market, Initial Class VariableSub-Account in equal monthly payments. You may not use the Dollar Cost Averaging program to transfer amounts from the Guaranteed Maturity Fixed Account Option.
Your request to participate in this program will be effective when we receive your completed application at the P.O. Box given on the first page of this prospectus. Call or write us for a copy of the application. You may elect to increase, decrease or change the frequency or amount of transfers under a Dollar Cost Averaging program. We will not charge a transfer fee for Dollar Cost Averaging.
By investing amounts on a regular basis instead of investing the total amount at one time, Dollar Cost Averaging may decrease the effect of market fluctuations on the investment of your Purchase Payment. This may result in a lower average cost of units over time. However, there is no guarantee that Dollar Cost Averaging will result in a profit or protect against a loss in a declining market. We do not deduct a charge for participating in a Dollar Cost Averaging program.
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Portfolio Rebalancing. Portfolio Rebalancing allows you to maintain the percentage of your Contract Value allocated to eachSub-Account at apre-set level. Over time, the variations in eachSub-Account’s investment results will shift the balance of your Contract Value allocations. Under the Portfolio Rebalancing feature, each period, if the allocations change from your desired percentages, we will automatically transfer your Contract Value, including new Purchase Payments (unless you specify otherwise), back to the percentages you specify. 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 choose to have rebalances made monthly, quarterly, semi-annually, or annually. We will not charge a transfer fee for Portfolio Rebalancing. Aone-time request to rebalance the amounts allocated to theSub-Accounts is not part of a Portfolio Rebalancing program and is subject to all of the requirements that are applicable to transfers. We will automatically terminate this program if you request any transfers outside the Portfolio Rebalancing program. If you wish to resume Portfolio Rebalancing after it has been canceled, then you must complete a new Portfolio Rebalancing form and send it to our home office. You may not include the Fixed Account in a Portfolio Rebalancing program.
You may request Portfolio Rebalancing at any time by submitting a completed written request to us at the P.O. Box given on the first page of this prospectus. Please call or write us for a copy of the request form. If you stop Portfolio Rebalancing, you must wait 30 days to begin again. In your request, you may specify a date for your first rebalancing. If you specify a date fewer than 30 days after your Issue Date, your first rebalance will be delayed one month. If you request Portfolio Rebalancing in your Contract application and do not specify a date for your first rebalancing, your first rebalance will occur one period after the Issue Date. For example, if you specify quarterly rebalancing, your first rebalance will occur three months after your Issue Date. Otherwise, your first rebalancing will occur twenty-five days after we receive your completed request form. All subsequent rebalancing will occur at the intervals you have specified on the day of the month that coincides with the same day of the month as your Contract Anniversary Date.
Generally, you may change the allocation percentages, frequency, or choice ofSub-Accounts at any time. If your total Contract Value subject to rebalancing falls below any minimum value that we may establish, we may prohibit or limit your use of Portfolio Rebalancing. You may not use Dollar Cost Averaging and Portfolio Rebalancing at the same time. We may change, terminate, limit, or suspend Portfolio Rebalancing at any time.
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The Investment and Fixed Account Options:Separate Account Investments
The Portfolios.Each of theSub-Accounts of the Separate Account invests in the shares of one of the Portfolios. Each Portfolio is either anopen-end management investment company registered under the Investment Company Act of 1940 or a separate investment series of anopen-end management investment company. We have briefly described the Portfolios below. You should consult the current prospectuses for the Portfolios for more detailed and complete information concerning the Portfolios. If you do not have a prospectus for a Portfolio, contact us and we will send you a copy.
We do not promise that the Portfolios will meet their investment objectives. Amounts you have allocated toSub-Accounts may grow in value, decline in value, or grow less than you expect, depending on the investment performance of the Portfolios in which thoseSub-Accounts invest. You bear the investment risk that those Portfolios possibly will not meet their investment objectives. You should carefully review their prospectuses before allocating amounts to theSub-Accounts of the Separate Account.
The VariableSub-Accounts that you select are your choice - we do not provide investment advice, nor do we recommend any particular VariableSub-Account. Please consult with a qualified investment professional if you wish to obtain investment advice.
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Portfolio | | Each Portfolio Seeks | | Investment Adviser |
The Alger Portfolios |
Alger Large Cap Growth Portfolio - Class I-2 | | Long-term capital appreciation | | Fred Alger Management, Inc. |
Alger Growth & Income Portfolio - Class I-2 | | Capital appreciation and current income | |
Alger Capital Appreciation Portfolio - Class I-2 | | Long-term capital appreciation | |
Alger Mid Cap Growth Portfolio - Class I-2(4) | | Long-term capital appreciation | |
Alger Small Cap Growth Portfolio - Class I-2(6) | | Long-term capital appreciation | |
Deutsche Variable Series I |
Deutsche Bond VIP – Class A(3) | | To maximize total return consistent with preservation of capital and prudent investment management, by investing for both current income and capital appreciation | | Deutsche Investment Management Americas Inc. |
Deutsche Global Small Cap – Class A | | Above-average capital appreciation over the long term | |
Deutsche Core Equity VIP - Class A | | Long-term growth of capital, current income and growth of income | |
Deutsche CROCI® International VIP – Class A(7) | | Seeks long-term growth of capital | |
Deutsche Variable Series II |
Deutsche Global Income Builder VIP – Class A | | Maximize income while maintaining prospects for capital appreciation | | Deutsche Investment Management Americas Inc. |
Federated Insurance Series |
Federated Managed Volatility Fund II | | High current income and moderate capital appreciation | | Federated Equity Management Company of Pennsylvania |
Federated Fund for U.S. Government Securities II | | Current income | | Federated Investment Management Company |
Federated High Income Bond Fund II | | High current income | |
Fidelity® Variable Insurance Products |
Fidelity® VIP Asset Manager(SM) Portfolio - Initial Class | | High total return with reduced risk over the long term by allocating its assets among stocks, bonds, and short-term instruments. | | Fidelity® Management & Research Company (FMR) |
Fidelity® VIP Contrafund® Portfolio - Initial Class | | Long-term capital appreciation. | |
Fidelity® VIP Equity-Income Portfolio - Initial Class | | Reasonable Income. The fund will also consider the potential for capital appreciation. The fund’s goal is to achieve a yield which exceeds the composite yield on the securities comprising the Standard & Poor’s 500(SM) Index (S&P 500®). | |
Fidelity® VIP Growth Portfolio - Initial Class | | To achieve capital appreciation. | |
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Portfolio | | Each Portfolio Seeks | | Investment Adviser |
Fidelity® VIP Index 500 Portfolio - Initial Class | | Investment results that correspond to the total return of common stocks publicly traded in the United States, as represented by the Standard & Poor’s 500(SM) Index (S&P 500®). | | |
Fidelity® VIP Government Money Market Portfolio- Initial Class | | As high a level of current income as is consistent with preservation of capital and liquidity. | | |
Fidelity® VIP Overseas Portfolio - Initial Class | | Long-term growth of capital. | | |
AIM Variable Insurance Funds (Invesco Variable Insurance Funds) |
Invesco V.I. American Value Fund - Series I | | Above-average total return over a market cycle of three to five years by investing in common stocks and other equity securities. | | Invesco Advisers, Inc. |
Invesco V.I. Mid Cap Growth Fund, Series II | | To seek capital growth | |
Invesco V.I. Growth and Income Fund, Series II | | Long-term growth of capital and income. | |
Invesco V.I. Value Opportunities Fund - Series I(2) | | Long-term growth of capital | |
Janus Aspen Series |
Janus Aspen Series Balanced Portfolio - Institutional Shares(9) | | Long-term capital growth, consistent with preservation of capital and balanced by current income. | | Janus Capital Management LLC |
Janus Aspen Series Flexible Bond Portfolio- Institutional Shares(9) | | Maximum total return, consistent with preservation of capital. | |
Janus Aspen Series Overseas Portfolio - Service Shares (9) | | Long-term growth of capital. | |
Janus Aspen Series Enterprise Portfolio - Institutional Shares(9) | | Long-term growth of capital. | |
Janus Aspen Series Research Portfolio - Institutional Shares (9) (formerly, Janus Aspen Series Janus Portfolio-Institutional Shares) | | Long-term growth of capital. | |
Janus Aspen Series Global Research Portfolio- Institutional Shares(8) (9) | | Long-term growth of capital. | |
Legg Mason Partners Variable Equity Trust |
ClearBridge Variable Large Cap Value Portfolio - Class I | | Long-term growth of capital. Current income is a secondary objective | | Legg Mason Partners Fund Advisor, LLC, adviser; ClearBridge Investments, LLC, sub-adviser. (Western Asset Management Company manages the portion of the fund’s cash and short term investments allocated to it) |
| MFS® Variable Insurance Trust(SM) | | | | |
| MFS® Growth Series - Initial Class | | Capital appreciation | | MFS® Investment Management |
| MFS® Investors Trust Series - Initial Class | | Capital appreciation | |
| MFS® New Discovery Series - Initial Class | | Capital appreciation | |
| MFS® Research Series - Initial Class | | Capital appreciation | |
| MFS® Total Return Series - Initial Class | | Total return | |
| Oppenheimer Variable Account Funds | | | | |
Oppenheimer Main Street Small Cap Fund - Service Class | | Capital appreciation. | | Oppenheimer Funds, Inc. |
| PIMCO Variable Insurance Trust | | | | |
PIMCO Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares | | The portfolio seeks maximum total return, consistent with preservation of capital and prudent investment management. | | Pacific Investment Management Company LLC |
PIMCO Total Return Portfolio – Administrative Shares (5) | | The portfolio seeks maximum total return, consistent with preservation of capital and prudent investment management. | |
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Putnam Variable Trust | | | | |
| Putnam VT International Value Fund - Class IB | | Seeks capital growth. Current income is a secondary objective. | | Putnam Investment Management, LLC |
| T. Rowe Price Equity Series, Inc. | | | | |
| T. Rowe Price Equity Income Portfolio - I | | The fund seeks a high level of dividend income and long-term capital growth primarily through investments in stocks. | | T. Rowe Price Associates, Inc. |
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Portfolio | | Each Portfolio Seeks | | Investment Adviser |
| T. Rowe Price Mid-Cap Growth Portfolio - I (1) | | The fund seeks to provide long-term capital appreciation by investing in mid-cap stocks with potential for above-average earnings growth. | | |
| T. Rowe Price New America Growth Portfolio - I | | The fund seeks to provide long-term capital growth by investing primarily in the common stocks of growth companies | | |
| T. Rowe Price International Series, Inc. | | | | |
| T. Rowe Price International Stock Portfolio - I | | The fund seeks long-term growth of capital through investments primarily in the common stocks of established, non-U.S. companies. | | T. Rowe Price Associates, Inc./T. Rowe Price International Ltd |
| Wells Fargo Variable Trust Funds | | | | |
Wells Fargo VT Discovery Fund | | Long-term capital appreciation. | | Wells Fargo Funds Management, LLC Sub-advisor: Wells Capital Management Incorporated |
Wells Fargo VT Opportunity Fund(SM) - Class 2 | | Long-term capital appreciation. | |
(1) Effective May 1, 2004, the T. Rowe PriceMid-Cap Growth Portfolio - I is no longer available for new investments. If you are currently invested in the VariableSub-account that invests in this Portfolio you may continue your investment. If, prior to May 1, 2004, you enrolled in one of our automatic transaction programs, such as automatic additions, portfolio rebalancing, or dollar cost averaging, we will continue to effect automatic transactions into the VariableSub-Account in accordance with that program. Outside of these automatic transaction programs, additional allocations will not be allowed.
(2) Effective August 19, 2011, the Invesco V.I. Value Opportunities – Series ISub-Account closed to all Contract Owners except those Contract Owners who had contract value invested in the VariableSub-Account as of the closure date. Contract Owners who had contract value invested in the VariableSub-Account as of the closure date may continue to submit additional investments into the VariableSub-Account thereafter, although they will not be permitted to invest in the VariableSub-Account if they withdraw or otherwise transfer their entire contract value from the VariableSub-Account following the closure date. Contract Owners who did not have contract value invested in the VariableSub-Account as of the closure date may not invest in the VariableSub-Account.
(3) Effective as of January 27, 2012, the Deutsche: Bond VIP – Class A VariableSub-Account closed to all Contract Owners except those Contract Owners who had contract value invested in the VariableSub-Account as of the closure date.
Contract Owners who had contract value invested in this VariableSub-Account as of the closure date may continue to submit additional investments into the VariableSub-Account thereafter, although they will not be permitted to invest in the VariableSub-Account if they withdraw or otherwise transfer their entire contract value from the VariableSub-account following the closure date. Contract Owners who did not have contract value invested in this VariableSub-Account as of the specified closure date may not invest in the VariableSub-Account.
(4) Effective as of January 31, 2014, the AlgerMid-Cap Growth –Class I-2Sub-Account was closed to all Contract Owners except those Contract Owners who had contract value invested in the VariableSub-Account as of the closure date. Contract Owners who had contract value invested in the VariableSub-Account as of the closure date may continue to submit additional investments into the VariableSub-Account thereafter, although they will not be permitted to invest in the VariableSub-Account if they withdrew or otherwise transferred their entire contract value from the VariableSub-Account following the closure date. Contract Owners who did not have contract value invested in the VariableSub-Account as of the closure date will not be permitted to invest in the VariableSub-Account.
(5) Effective May 1, 2015, the PIMCO Total Return – Advisor Shares Sub Account is closed to all contract owners except those contract owners who have contract value invested in the variablesub-account as of the closure date. Contract owners who have contract value invested in the variablesub-account as of the closure date may continue to submit additional investments into the variablesub-account thereafter, although they will not be permitted to invest in the variablesub-account if they withdraw or otherwise transfer their entire contract value from the variablesub-account following the closure date. Contract owners who do not have contract value invested in the variablesub-account as of the closure date will not be permitted to invest in the variablesub-account thereafter. An application is pending with the Securities and Exchange Commission requesting an order to allow Lincoln Benefit to remove the PIMCO Total Return Portfolio – Administrative Shares as an investment option under your variable annuity contract and substitute a new investment option, the BlackRock Total Return V.I. Portfolio – Class I Shares. Lincoln Benefit anticipates that, if such order is granted, the proposed substitution will occur during the second quarter of 2017.
(6) Effective October 23, 2015, the Alger Small Cap Growth –Class I-2Sub-Account was closed to all Contract Owners except those Contract Owners who had contract value invested in the VariableSub-Account as of the closure date. Contract Owners who had contract value invested in the VariableSub-Account as of the closure date may continue to submit additional investments into the VariableSub-Account thereafter, although they will not be permitted to invest in the VariableSub-Account if they withdrew or otherwise transferred their entire contract value from the VariableSub-Account following the closure date. Contract Owners who did not have contract value invested in the VariableSub-Account as of the closure date will not be permitted to invest in the VariableSub-Account.
(7) Effective August 10, 2016, the Deutsche: CROCI® International VIP - Class ASub-Account was closed to all Contract Owners except those Contract Owners who had contract value invested in the VariableSub-Account as of the closure date. Contract Owners who had contract value invested in the VariableSub-Account as of the closure date may continue to submit additional investments into the VariableSub-Account thereafter, although they will not be permitted to invest in the VariableSub-Account if they withdrew or otherwise transferred their entire contract value from the VariableSub-Account following the closure date. Contract Owners who did not have contract value invested in the VariableSub-Account as of the closure date will not be permitted to invest in the VariableSub-Account.
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(8) Effective February 24, 2017, the Janus Aspen Series Global Research Portfolio - Institutional SharesSub-Account was closed to all Contract Owners except those Contract Owners who had contract value invested in the VariableSub-Account as of the closure date. Contract Owners who had contract value invested in the VariableSub-Account as of the closure date may continue to submit additional investments into the VariableSub-Account thereafter, although they will not be permitted to invest in the VariableSub-Account if they withdrew or otherwise transferred their entire contract value from the VariableSub-Account following the closure date. Contract Owners who did not have contract value invested in the VariableSub-Account as of the closure date will not be permitted to invest in the VariableSub-Account.
(9) On or about June 2, 2017 and subject to certain shareholder and regulatory approvals, references to “Janus Aspen Series” or “Janus Aspen Series Perkins” in the portfolios’ names will change to “Janus Henderson.”
Each Portfolio is subject to certain investment restrictions and policies which may not be changed without the approval of a majority of the shareholders of the Portfolio. See the accompanying Prospectuses of the Portfolios for further information.
We automatically reinvest all dividends and capital gains distributions from the Portfolios in shares of the distributing Portfolio at their net asset value. The income and realized and unrealized gains or losses on the assets of eachSub-Account are separate and are credited to or charged against the particularSub-Account without regard to income, gains or losses from any otherSub-Account or from any other part of our business. We will use the net Purchase Payments you allocate to aSub-Account to purchase shares in the corresponding Portfolio and will redeem shares in the Portfolios to meet Contract obligations or make adjustments in reserves. The Portfolios are required to redeem their shares at net asset value and to make payment within seven days.
Some of the Portfolios have been established by investment advisers which manage publicly traded mutual funds having similar names and investment objectives. While some of the Portfolios may be similar to, and may in fact be modeled after publicly traded mutual funds, you should understand that the Portfolios are not otherwise directly related to any publicly traded mutual fund. Consequently, the investment performance of publicly traded mutual funds and any similarly named Portfolio may differ substantially.
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. Although neither we nor any of the Portfolios currently foresees any such disadvantages either to variable life insurance or variable annuity contract owners, each Portfolio’s Board of Directors intends to monitor events in order to identify any material conflicts between variable life and variable annuity contract owners and to determine what action, if any, should be taken in response thereto. If a Board of Directors were to conclude that separate investment funds should be established for variable life and variable annuity separate accounts, Lincoln Benefit will bear the attendant expenses.
Voting Rights. As a general matter, you do not have a direct right to vote the shares of the Portfolios held by theSub-Accounts 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. We will notify you when your instructions are needed. We will also provide proxy materials or other information to assist you in understanding the matter at issue. We will determine the number of shares for which you may give voting instructions as of the record date set by the relevant Portfolio for the shareholder meeting at which the vote will occur.
As a general rule, before the Annuity Date, you are the person entitled to give voting instructions. After the Annuity Date, the payee is that person. Retirement plans, however, may have different rules for voting by plan participants.
If you send us written voting instructions, we will follow your instructions in voting the Portfolio shares attributable to your Contract. If you do not send us written instructions, we will vote the shares attributable to your Contract in the same proportions as we vote the shares for which we have received instructions from other Contract Owners. We will vote shares that we hold in the same proportions as we vote the shares for which we have received instructions from other Contract Owners.
We may, when required by state insurance regulatory authorities, disregard Contract Owner voting instructions if the instructions require that the shares be voted so as to cause a change in thesub-classification or investment objective of one or more of the Portfolios or to approve or disapprove an investment advisory contract for one or more of the Portfolios.
In addition, we may disregard voting instructions in favor of changes initiated by Contract Owners in the investment objectives or the investment adviser of the Portfolios if we reasonably disapprove of the proposed change. We would disapprove a proposed change only if the proposed change is contrary to state law or prohibited by state regulatory authorities or we reasonably conclude that the proposed change would not be consistent with the investment objectives of the Portfolio or would result in the purchase of securities for the Portfolio which vary from the general quality and nature of investments and investment techniques utilized by the Portfolio. 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 to you.
This description reflects our view of currently applicable law. If the law changes or our interpretation of the law changes, we may decide that we are permitted to vote the Portfolio shares without obtaining instructions from our Contract Owners, and we may choose to do so.
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Additions, Deletions, and Substitutions of Securities.If the shares of any of the Portfolios are no longer available for investment by the Separate Account or if, in the judgment of our Board of Directors, further investment in the shares of a Portfolio is no longer appropriate in view of the purposes of the Contract, we may add or substitute shares of another Portfolio or underlying fund for Portfolio shares already purchased or to be purchased in the future by Purchase Payments under the Contract. Any substitution of securities will comply with the requirements of the 1940 Act.
We also reserve the right to make the following changes in the operation of the Separate Account and theSub-Accounts:
| | (a) | to operate the Separate Account in any form permitted by law; |
| | (b) | to take any action necessary to comply with applicable law or obtain and continue any exemption from applicable laws; |
| | (c) | to transfer assets from oneSub-Account to another, or from anySub-Account to our general account; |
| | (d) | to add, combine, or removeSub-Accounts in the Separate Account; and |
| | (e) | to change the way in which we assess charges, as long as the total charges do not exceed the maximum amount that may be charged the Separate Account and the Portfolios in connection with the Contracts. |
If we take any of these actions, we will comply with the then applicable legal requirements.
The Fixed Account
General. You may allocate part or all of your Purchase Payments to the Fixed Account in states where it is available. Amounts allocated to the Fixed Account become part of the general assets of Lincoln Benefit. Loan payments may not be allocated to the Fixed Account(s). Lincoln Benefit invests the assets of the general account in accordance with applicable laws governing the investments of insurance company general accounts. Please contact us at1-800-457-7617 for current information.
Guaranteed Maturity Fixed Account Option. We will credit interest to each amount allocated to the Guaranteed Maturity Fixed Account Option at a specified rate for a specified Guarantee Period. You select the Guarantee Period for each amount that you allocate to this option. We will declare the interest rate that we will guarantee to credit to that amount for that Guarantee Period. Each amount allocated to a Guarantee Period under this option must be at least $500. We reserve the right to limit the number of additional Purchase Payments that may be allocated to this option.
We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We may offer Guarantee Periods ranging from one to ten years in length. We will decide in our discretion which Guarantee Periods to offer. Currently, we offer Guarantee Periods of one, three, five, seven and ten years. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods.
We will credit interest daily to each amount allocated to a Guarantee Period under this option at a rate which compounds to the effective annual interest rate that we declared at the beginning of the applicable Guarantee Period. We will not change the interest rate credited 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.
The following example illustrates how a Purchase Payment allocated to this option would grow, given an assumed Guarantee Period and effective annual interest rate:
| | | | |
Example | | | | |
Purchase Payment | | $ | 10,000 | |
Guarantee Period | | | 5 years | |
Effective Annual Rate | | | 4.50 % | |
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| | | | | | | | | | | | | | | | | | | | |
| | | End of Contract Year | |
| | | | Year 1 | | | | Year 2 | | | | Year 3 | | | | Year 4 | | | | Year 5 | |
Beginning Contract Value | | $ | 10,000.00 | | | | | | | | | | | | | | | | | |
× (1 + Effective Annual Rate) | | | × 1.045 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 10,450.00 | | | | | | | | | | | | | | | | | |
Contract Value at end of Contract Year | | | | | | $ | 10,450.00 | | | | | | | | | | | | | |
× (1 + Effective Annual Rate) | | | | | | | × 1.045 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | 10,920.25 | | | | | | | | | | | | | |
Contract Value at end of Contract Year | | | | | | | | | | $ | 10,920.25 | | | | | | | | | |
× (1 + Effective Annual Rate) | | | | | | | | | | | × 1.045 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | $ | 11,411.66 | | | | | | | | | |
Contract Value at end of Contract Year | | | | | | | | | | | | | | $ | 11,411.66 | | | | | |
× (1 + Effective Annual Rate) | | | | | | | | | | | | | | | × 1.045 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 11,925.19 | | | | | |
Contract Value at end of Contract Year | | | | | | | | | | | | | | | | | | $ | 11,925.19 | |
× (1 + Effective Annual Rate) | | | | | | | | | | | | | | | | | | | × 1.045 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | $ | 12,461.82 | |
Total Interest Credited During Guarantee Period = $2,461.82= ($12,461.82 - $10,000)
| Note: | This example assumes no withdrawals during the entire five-year Guarantee Period. If you were to make a partial withdrawal, you might be required to pay a Withdrawal Charge and the amount withdrawn might be increased or decreased by a Market Value Adjustment. The hypothetical interest rate is for illustrative purposes only and is not intended to predict future interest rates to be declared under the Contract. |
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 relevant factors such as then current interest rates, regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. For current interest rate information, please contact us at1-800-457-7617.
We will 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.
At the end of each Guarantee Period, we will mail you a notice asking you what to do with the relevant amount, including the accrued interest. During the30-day period after the end of the Guarantee Period, you may:
| | 1) | take no action. If so, we will automatically keep the relevant amount in the Guaranteed Maturity Fixed Account Option. The new Guarantee Period will be the same length as the expiring Guarantee Period and will begin on the day the previous Guarantee Period ends. The new interest rate will be our then current declared rate for Guarantee Periods of that length; or |
| | 2) | allocate the relevant Contract Value to one or more new Guarantee Periods of your choice in the Guaranteed Maturity Fixed Account Option. 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 the relevant amount to one or moreSub-Accounts. 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 the relevant amount through a partial withdrawal. You may be required to pay a Withdrawal Charge, but we will not adjust the amount withdrawn to include a Market Value Adjustment. The amount withdrawn will be deemed to have been withdrawn on the day the Guarantee Period ends. |
Under our Automatic Laddering Program, you may choose, in advance, to use Guarantee Periods of the same length for all renewals in the Guaranteed Maturity Fixed Account Option. You can select this program at any time during the Accumulation Period, including on the Issue Date. We will apply renewals to Guarantee Periods of the selected length until you direct us in writing to stop. We may stop offering this program at any time.
Market Value Adjustment. We may increase or decrease the amount of some transactions involving your investment in the Guaranteed Maturity Fixed Account Option to include a Market Value Adjustment. The formula for determining Market Value Adjustments reflects changes in interest rates since the beginning of the relevant Guarantee Period. As a result, you will bear some of the investment risk on amounts allocated to the Guaranteed Maturity Fixed Account Option.
As a general rule, we will apply a Market Value Adjustment to the following transactions involving your Fixed Account balance:
| | 1) | when you withdraw funds from the Guaranteed Maturity Fixed Account Option in an amount greater than the Free Withdrawal Amount, as described in the “Free Withdrawal” section of this prospectus; |
| | 2) | when you transfer funds from the Guaranteed Maturity Fixed Account Option to theSub-Accounts; |
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| | 3) | when you allocate part of your balance in the Guaranteed Maturity Fixed Account Option to a new Guarantee Period before the end of the existing Guarantee Period; |
| | 4) | when you annuitize your Contract; and |
| | 5) | when we pay a death benefit. |
We will not apply a Market Value Adjustment to a transaction, to the extent that:
| | 1) | it occurs within 30 days after the end of a Guarantee Period applicable to the funds involved in the transaction; |
| | 2) | you make a withdrawal to satisfy the IRS’ required minimum distribution rules for this Contract; or |
| | 3) | it is a transfer that is part of a Dollar Cost Averaging program. |
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. This formula primarily compares:
| | 1) | the Treasury Rate at the time of the relevant transaction for a maturity equal in length to the relevant Guarantee Period; and |
| | 2) | the Treasury Rate at the beginning of the Guarantee Period for a maturity equal in length to the Guarantee Period. |
Generally, if the Treasury Rate at the beginning of the Guarantee Period is higher than the corresponding current Treasury Rate, then the Market Value Adjustment will increase the amount payable to you or transferred. Similarly, if the Treasury Rate at the beginning of the Guarantee Period is lower than the corresponding current Treasury Rate, then the Market Value Adjustment will reduce the amount payable to you or transferred.
For example, assume that you purchased a Contract and selected an initial Guarantee Period of five years and the five-year Treasury Rate for that duration is 4.50%. Assume that at the end of three years, you make a partial withdrawal. If, at that later time, the current five-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. Similarly, if the current five-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.
Dollar Cost Averaging Fixed Account Option. You may also allocate Purchase Payments to the Dollar Cost Averaging Fixed Account Option. We will credit interest to Purchase Payments allocated to this option for up to one year at the current rate that we declare when you make the allocation. The effective annual rate will never be less than 3%. You may not transfer funds to this option from theSub-Accounts or the Guaranteed Maturity Fixed Account Option. We will follow your instructions in transferring amounts from this option to theSub-Accounts or the Guaranteed Maturity Fixed Account Option on a monthly basis only, as described in the “Automatic Dollar Cost Averaging Program” section of this prospectus.
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Annuity Benefits
Annuity Date.You may select the Annuity Date, which is the date on which annuity payments are to begin, in your application. The Annuity Date must always be the business day on or immediately following the tenth day of a calendar month.
The Annuity Date may be no later than the Latest Annuity Date. As a general rule, the Latest Annuity Date is on or immediately following the later of the 10th Contract Anniversary or the youngest Annuitant’s 90th birthday. If your Contract was issued pursuant to a Qualified Plan, however, the Code generally requires you to begin to take at least a minimum distribution by the later of:
| | • | | the year of your separation from service; or |
| | • | | April 1 of the calendar year following the calendar year in which you attain age 70 1/2. |
If your Contract is issued pursuant to Section 408 of the Code (traditional IRAs), you must begin taking minimum distributions by April 1 of the calendar year following the calendar year in which you reach age 70 1/2. No minimum distributions are required by the Code for Contracts issued pursuant to Section 408A (Roth IRAs).
If your Contract was purchased by a Qualified Plan, we may require you to annuitize by the date required by the Code.
If you do not select an Annuity Date, the Latest Annuity Date will automatically become the Annuity Date. You may change the Annuity Date by writing to us at the address given on the first page of the prospectus.
Annuity Options. You may elect an Annuity Option at any time before the Annuity Date. As part of your election, you may choose the length of the applicable guaranteed payment period within the limits available for your chosen Option. If you do not select an Annuity Option, we will pay monthly annuity payments in accordance with the applicable default Option. The default Options are:
| | • | | Option A with 10 years (120 months) guaranteed, if you have designated only one Annuitant; and |
| | • | | Option B with 10 years (120 months) guaranteed, if you have designated joint Annuitants. |
You may freely change your choice of Annuity Option, as long as you request the change at least thirty days before the Annuity Date.
Three Annuity Options are generally available under the Contract. Each is available in the form of:
| | • | | a combination of both Fixed and Variable Annuity. |
The three Annuity Options are:
Option A: 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 income payments to the Beneficiary until the guaranteed number of payments has been paid. The number of months guaranteed may be 0 months, or range from 60 to 360 months.
Option B: 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 income payments to the Beneficiary until the guaranteed number of payments has been paid. The number of months guaranteed may be 0 months, or range from 60 to 360 months.
Option C: Payments For A Specified Period Certain Of 5 Years To 30 Years. We make periodic payments for the period you have chosen. If the Annuitant dies before all of the guaranteed payments have been made, we will pay the remaining guaranteed payments to the Beneficiary. If you elect this option, and request Variable Annuity payments, you may at any time before the period expires request a lump sum payment. If you elected Variable Annuity payments, the lump sum payment will depend on:
| | • | | the investment results of theSub-Accounts you have selected, |
| | • | | the Contract Value at the time you elected annuitization, and |
| | • | | the length of the remaining period for which the payee would be entitled to payments. |
No lump sum payment is available if you request Fixed Annuity payments. If you purchased your Contract under a retirement plan, you may have a more limited selection of Annuity Options to choose from. You should consult your Plan documents to see what is available.
If you choose Income Plan A or B, 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.
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You may not “annuitize” your Contract for a lump sum payment. Instead, before the Annuity Date you may surrender your Contract for a lump sum. As described in the “Withdrawals (Redemptions)” section of this prospectus, however, we will subtract any applicable Withdrawal Charge and increase or decrease your surrender proceeds by any applicable Market Value Adjustment.
Other Options. We may have other Annuity Options available. You may obtain information about them by writing or calling us.
If your Contract is issued under Sections 401, 403(b), 408 or 408A of the Code, we will only make payments to you and/or your spouse.
Annuity Payments: General. On the Annuity Date, we will apply the Annuitized Value of your Contract to the Annuity Option you have chosen. Your annuity payments may consist of Variable Annuity payments or Fixed Annuity payments or a combination of the two. We will determine the amount of your annuity payments as described in the “Variable Annuity Payments” and “Fixed Annuity Payments” sections of this prospectus.
You must notify us in writing at least 30 days before the Annuity Date how you wish to allocate your Annuitized Value between Variable Annuity and Fixed Annuity payments. You must apply at least the Contract Value in the Fixed Account on the Annuity Date to Fixed Annuity payments. If you wish to apply any portion of your Fixed Account balance to your Variable Annuity payments, you should plan ahead and transfer that amount to theSub-Accounts prior to the Annuity Date. If you do not tell us how to allocate your Contract Value among Fixed and Variable Annuity payments, we will apply your Contract Value in the Separate Account to Variable Annuity payments and your Contract Value in the Fixed Account to Fixed Annuity payments.
Annuity payments begin on the Annuity Date. We make subsequent annuity payments on the tenth of the month or, if the NYSE is closed on that day, the next day on which the NYSE is open for business.
Annuity payments will be made in monthly, quarterly, semi-annual or annual installments as you select. If the amount available to apply under an Annuity Option is less than $5,000, however, and state law permits, we may pay you a lump sum instead of the periodic payments you have chosen. In addition, if the first annuity payment would be less than $50, and state law permits us, we may reduce the frequency of payments so that the initial payment will be at least $50.
We may defer for up to 15 days the payment of any amount attributable to a Purchase Payment made by check to allow the check reasonable time to clear.
You may not withdraw Contract Value during the Annuity Period, if we are making payments to you under any Annuity Option, such as Option A or B above, involving payment to the payee for life or any combination of payments for life and minimum guarantee period for a predetermined number of years.
Variable Annuity Payments.One basic objective of the Contract is to provide Variable Annuity Payments which will to some degree respond to changes in the economic environment. The amount of your Variable Annuity Payments will depend upon the investment results of theSub-Accounts you have selected, any premium taxes, the age and sex of the Annuitant, and the Annuity Option chosen. We guarantee that the Payments will not be affected by (1) actual mortality experience and (2) the amount of our administration expenses.
We cannot predict the total amount of your Variable Annuity payments. The Variable Annuity payments may be more or less than your total Purchase Payments because (a) Variable Annuity payments vary with the investment results of the underlying Portfolios; and (b) Annuitants may die before their actuarial life expectancy is achieved.
The length of any guaranteed payment period under your selected Annuity Option will affect the dollar amounts of each Variable Annuity payment. As a general rule, longer guarantee periods result in lower periodic payments, all other things being equal. For example, if a life Annuity Option with no minimum guaranteed payment period is chosen, the Variable Annuity payments will be greater than Variable Annuity payments under an Annuity Option for a minimum specified period and guaranteed thereafter for life.
The investment results of theSub-Accounts to which you have allocated your Contract Value will also affect the amount of your periodic payment. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3 1/2%. If the actual net investment return is less than the assumed investment rate, then the dollar amount of the Variable Annuity payments will decrease. The dollar amount of the Variable Annuity payments will stay level if the net investment return equals the assumed investment rate and the dollar amount of the Variable Annuity payments will increase if the net investment return exceeds the assumed investment rate. You should consult the Statement of Additional Information for more detailed information as to how we determine Variable Annuity Payments.
Fixed Annuity Payments. You may choose to apply a portion of your Annuitized Value to provide Fixed Annuity payments. We determine the Fixed Annuity payment amount by applying the applicable Annuitized Value to the Annuity Option you have selected.
As a general rule, subsequent Fixed Annuity payments will be equal in amount to the initial payment. However, as described in “Transfers During the Annuity Period” below, after the Annuity Date, you will have a limited ability to increase the amount of your Fixed Annuity payments by making transfers from theSub-Accounts.
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We may defer making Fixed Annuity payments for a period of up to six months or whatever shorter time state law may require. During the deferral period, we credit any applicable interest at a rate at least as high as state law requires.
TransfersDuring The Annuity Period.During the Annuity Period, you will have a limited ability to make transfers among theSub-Accounts so as to change the relative weighting of theSub-Accounts on which your Variable Annuity payments will be based. In addition, you will have a limited ability to make transfers from theSub-Accounts to increase the proportion of your annuity payments consisting of Fixed Annuity payments. You may not, however, convert any portion of your right to receive Fixed Annuity payments into Variable Annuity payments.
You may not make any transfers for the first six months after the Annuity Date. Thereafter, you may make transfers among theSub-Accounts or make transfers from theSub-Accounts to increase your Fixed Annuity payments. Your transfers must be at least six months apart.
Death BenefitDuring Annuity Period. If any Contract Owner dies after the Annuity Date, the successor Contract Owner will receive any guaranteed annuity payments scheduled to continue. If the successor Owner dies before all of the guaranteed payments have been made, we will continue the guaranteed payments to the Beneficiary(ies). After annuity payments begin, upon
the death of the Annuitant and any Joint Annuitant, we will make any remaining guaranteed payments to the Beneficiary. The amount and number of these guaranteed payments will depend on the Annuity Option in effect at the time of the Annuitant’s death. After the Annuitant’s death, any remaining guaranteed payments will be distributed at least as rapidly as under the method of distribution in effect at the Annuitant’s death.
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.
Other Contract Benefits
Death Benefit: General. We will pay a distribution on death, if:
| | 1) | the Contract is in force; |
| | 2) | annuity payments have not begun; and |
| | (b) | any Annuitant dies and the Owner is anon-living person. |
Due Proof of Death. A complete request for settlement of the Death Proceeds must be submitted before the Annuity Date. Where there are multiple Beneficiaries, we will value the Death Benefit at the time the first Beneficiary submits a complete request for settlement of the Death Proceeds. A complete request must include “Due Proof of Death”. We will accept the following documentation as Due Proof of Death:
| | • | | a certified original copy of the Death Certificate; |
| | • | | a certified copy of a court decree as to the finding of death; or |
| | • | | a written statement of a medical doctor who attended the deceased at the time of death. |
In addition, in our discretion we may accept other types of proof.
Death Proceeds. If we receive a complete request for settlement of the Death Proceeds within 180 days of the date of your death, the Death Proceeds are equal to the Death Benefit described below. Otherwise, the Death Proceeds are equal to the greater of the Contract Value or the Surrender Value. We reserve the right to waive or extend, on a nondiscriminatory basis, the180-day period in which the Death Proceeds will equal the Death Benefit as described below. This right applies only to the amount payable as Death Proceeds and in no way restricts when the claim may be filed.
Death Benefit Amount. The standard Death Benefit under the Contract is the greatest of the following:
| | 1) | the total Purchase Payments, less a withdrawal adjustment for any prior partial withdrawals; |
| | 2) | the Contract Value on the date as of which we calculate the Death Benefit. |
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| | 4) | the Contract Value on the seventh Contract Anniversary and each subsequent Contract Anniversary evenly divisible by seven, increased by the total Purchase Payments since that anniversary and reduced by a withdrawal adjustment for any partial withdrawals since that anniversary. |
The withdrawal adjustment for the Death Benefit will equal (a) divided by (b), with the result multiplied by (c), where:
(a) = the withdrawal amount;
(b) = the Contract Value immediately before the withdrawal; and
(c) = the value of the applicable Death Benefit immediately before the withdrawal.
As described below, you may add optional riders that in some circumstances may increase the Death Benefit under your contract.
Death Benefit Payments
1. If your spouse is the sole beneficiary:
| | (a) | Your spouse may elect to receive the Death Proceeds in a lump sum; or |
| | (b) | Your spouse may elect to receive the Death Proceeds paid out under one of the annuity options, subject to the following conditions: |
The Annuity Date must be within one year of your date of death. Annuity payments must be payable:
| | (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. |
| | (c) | If your spouse chooses to continue the Contract, or does not elect one of these options, then the Contract will continue in the Accumulation Period as if the death had not occurred. If the Contract is continued in the Accumulation Period, the following conditions apply. |
Unless otherwise instructed by the continuing spouse, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to theSub-Accounts. This excess will be allocated in proportion to your Contract Value in thoseSub-Accounts as of the end of the Valuation Period during which we receive the complete request for settlement of the Death Proceeds, except that any portion of this excess attributable to the fixed account options will be allocated to the Money MarketSub-Account. Within 30 days of the date the Contract is continued, your surviving spouse may choose one of the following transfer alternatives without incurring a transfer fee:
| | (i) | transfer all or a portion of the excess among theSub-Accounts; |
| | (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 ofSub-Accounts and the Guaranteed Maturity Fixed Account. |
Any such transfer does not count as the free transfer allowed each calendar month 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 your death without incurring a Withdrawal Charge or Market Value Adjustment.
Prior to the Annuity Date, the death benefit of the continued Contract will be as defined in the Death Benefit provision.
Only one spousal continuation is allowed under this Contract.
If there is no Annuitant at that time, the new Annuitant will be the surviving spouse. Note that if you elected to receive required minimum distributions under a Minimum Distribution Option, the program will be discontinued upon receipt of notification of death. The final required minimum distribution must be distributed prior to establishing a beneficiary payment option for the balance of the Contract.
2. If the Beneficiary is not your spouse but is a living person:
| | (a) | The Beneficiary may elect to receive the Death Proceeds in a lump sum; or |
| | (b) | The Beneficiary may elect to receive the Death Proceeds paid out under one of the annuity options, subject to the following conditions: |
The Annuity Date must be within one year of your date of death. Annuity payments must be payable:
| | (i) | over the life of the Beneficiary; or |
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| | (ii) | for a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the Beneficiary; or |
| | (iii) | over the life of the Beneficiary with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the Beneficiary. |
| | (c) | If the Beneficiary does not elect one of the options above, then the Beneficiary must receive the Contract Value payable within 5 years of your date of death. We will determine the Death Proceeds as of the date we receive the complete request for settlement of the Death Proceeds. Unless otherwise instructed by the Beneficiary, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the Money MarketSub-Account and the Contract Value will be adjusted accordingly. The Beneficiary may exercise all rights as set forth in the “Transfer During the Accumulation Period” and “Transfer Fees” sections of this prospectus during this5-year period. If we do not receive instructions on where to send the payment within 5 years of the date of death, the funds will be escheated. |
The Beneficiary may not pay additional purchase payments into the Contract under this election. Withdrawal Charges will be waived for any withdrawals made during this5-year period.
We reserve the right to offer additional options upon the death of the Contract Owner.
If the Beneficiary dies before the complete liquidation of the Contract Value, then the Beneficiary’s named Beneficiary(ies) will receive the greater of the Surrender Value or the remaining Contract Value. This amount must be liquidated as a lump sum within 5 years of the date of the original Contract Owner’s death.
3. If the Beneficiary is a corporation or other type ofnon-living person:
| | (a) | The Beneficiary may elect to receive the Death Proceeds in a lump sum; or |
| | (b) | If the Beneficiary does not elect to receive the option above, then the Beneficiary must receive the Contract Value payable within 5 years of your date of death. We will determine the Death Proceeds as of the date we receive the complete request for settlement of the Death Proceeds. Unless otherwise instructed by the Beneficiary, the excess, if any, of the Death Proceeds over the Contract Value will be allocated to the Money MarketSub-Account. The Beneficiary may exercise all rights as set forth in the “Transfer During the Accumulation Period” and “Transfer Fees” sections of this prospectus during this5-year period. |
The Beneficiary may not pay additional purchase payments into the contract under this election. Withdrawal charges will be waived during this5-year period.
We reserve the right to offer additional options upon Death of Owner.
If any Beneficiary is anon-living person, all Beneficiaries will be considered to benon-living persons for the above purposes.
Under any of these options, all contract rights, subject to any restrictions previously placed upon the Beneficiary, are available to the Beneficiary from the date of your death to the date on which the Death Proceeds are paid.
Different rules may apply to Contracts issued in connection with Qualified Plans.
We offer different optional riders under this Contract. If you elect an optional rider, we will charge you a higher mortality and expense charge. We may discontinue offering one or more Riders at any time. The benefits under the Riders are described below. The benefits in the riders discussed below may not be available in all states. For example, the Enhanced Death Benefit, Enhanced Income Benefit and all versions of the Enhanced Death and Income Benefit riders issued in Washington state do not contain the Enhanced Death Benefit B or Enhanced Income Benefit B provisions that are described below. Further they may be offered in certain states as a benefit of the base contract rather than as a separate rider. In those states, the expense charge will remain the same for the benefit.
Enhanced Death Benefit Rider: When you purchase your Contract, you may select the Enhanced Death Benefit Rider. This Rider is available if the oldest Owner or Annuitant is age 80 or less at issue. If you are not an individual, the Enhanced Death Benefit applies only to the Annuitant’s death. As described below, we will charge a higher mortality and expense risk charge if you select this Rider. If you select this Rider, the Death Benefit will be the greater of the value provided in your Contract or the Enhanced Death Benefit. The Enhanced Death Benefit will be the greater of the Enhanced Death Benefit A or Enhanced Death Benefit B, defined below.
Enhanced Income Benefit Rider: When you purchase your Contract you may select the Enhanced Income Benefit Rider if available in your state. Lincoln Benefit Life no longer offers this Rider in most states. This Rider is available if the oldest Owner or Annuitant is age 75 or less at issue. If you select this Rider, you may be able to receive higher annuity payments in certain circumstances. As described below, we will charge a higher mortality and expense risk charge if you select this Rider.
The Enhanced Income Benefit under this Rider is equal to the greater of Enhanced Income Benefit A or Enhanced Income Benefit B, defined below, on the Annuity Date. We will not increase or decrease the Enhanced Income Benefit amount by any Market Value Adjustment. To be eligible for the Enhanced Income Benefit, you must select an Annuity Date that is:
| | (a) | on or after the tenth Contract Anniversary; |
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| | (b) | before the Annuitant’s age 90; and |
| | (c) | within a30-day period on or following a Contract Anniversary. |
On the Annuity Date, you may apply the Enhanced Income Benefit to an Annuity Option that provides for fixed payments on the basis guaranteed in the Contract for either a single life with a period certain, or joint lives with a period certain of at least:
| | (a) | 10 years, if the youngest Annuitant’s age is 80 or less on the Annuity Date; or |
| | (b) | 5 years, if the youngest Annuitant’s age is greater than 80 on the Annuity Date. |
If you wish to select a different Annuity Option, you must apply the Annuitized Value and not the Enhanced Income Benefit.
The Enhanced Income Benefit under this Rider only applies to the determination of income payments under the income options described above. It is not a guarantee of Contract Value or performance. The benefit does not enhance the amounts paid in partial withdrawals, surrenders or death benefits. In addition, under some circumstances, you will receive higher initial income payments by applying your Contract Annuitized Value to one of the standard Annuity Options instead of utilizing this optional benefit. If you surrender your Contract, you will not receive any benefit under this Rider.
Enhanced Income Benefit A. At issue, the Enhanced Income Benefit A is equal to the initial purchase payment. After issue, Enhanced Income Benefit A is recalculated as follows:
| | • | | When you make a Purchase Payment, we will increase the Enhanced Income Benefit A by the amount of your Purchase Payment; |
| | • | | When you make a withdrawal, we will decrease Enhanced Income Benefit A by a withdrawal adjustment as defined below; |
| | • | | On each Contract Anniversary, the Enhanced Income Benefit A is equal to the greater of the Contract Value or the most recently calculated Enhanced Income Benefit A. |
If you do not make any additional Purchase Payments or withdrawals, the Enhanced Income Benefit A will be the greatest of all Contract Anniversary Contract Values prior to the date we calculate the Enhanced Income Benefit.
We will continuously adjust Enhanced Income Benefit A; as described above, until the oldest Contract Owner’s 85th birthday, or if the Contract Owner is not a living individual, the oldest Annuitant’s 85th birthday. Thereafter, we will adjust Enhanced Income Benefit A only for Purchase Payments and withdrawals.
Enhanced Income Benefit B. Enhanced Income Benefit B is equal to your total Purchase Payments reduced by any withdrawal adjustments, accumulated daily at an effective annual interest rate of 5% per year, until the earlier of:
| | (a) | the date we determine the income benefit; |
| | (b) | the first day of the month following the oldest Contract Owner’s 85th birthday, or the first day of the month following the oldest Annuitant’s 85th birthday, if the Contract Owner is not a living individual. |
The 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; |
| | (c) | is the most recently calculated Enhanced Income Benefit A or B, as applicable. |
Enhanced Death and Income Benefit Rider II: When you purchase your Contract and if available in your state, you may select the Enhanced Death and Income Benefit Rider II. Lincoln Benefit Life no longer offers this Rider in most states. This Rider is available if the oldest Owner or Annuitant is age 75 or less at issue. This Rider provides the same Enhanced Death Benefit as the Enhanced Death Benefit Rider. In addition, this Rider may enable you to receive higher annuity payments in certain circumstances. As described below, we will charge a higher mortality and expense risk charge if you select this Rider.
The Enhanced Income Benefit under this Rider is equal to the greater of Enhanced Death Benefit A or Enhanced Death Benefit B, defined below, on the Annuity Date. We will not increase or decrease the Enhanced Income Benefit amount by any Market Value Adjustment. To be eligible for the Enhanced Income Benefit, you must select an Annuity Date that is:
| | (a) | on or after the tenth Contract Anniversary; |
| | (b) | before the Annuitant’s age 90; and |
| | (c) | within a30-day period on or following a Contract Anniversary. |
On the Annuity Date, you may apply the Enhanced Income Benefit to an Annuity Option that provides for fixed payments on the basis guaranteed in the contract for either a single life with a period certain, or joint lives with a period certain of at least:
| | (a) | 10 years, if the youngest Annuitant’s age is 80 or less on the Annuity Date; or |
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| | (b) | 5 years, if the youngest Annuitant’s age is greater than 80 on the Annuity Date. |
If you wish to select a different Annuity Option, you must apply the Annuitized Value and not the Enhanced Income Benefit.
Enhanced Death and Income Benefit Rider. This Rider was previously available if the oldest Owner or Annuitant is age 75 or less at issue. This rider is no longer available. This Rider provides the same Enhanced Death Benefit as the Enhanced Death Benefit Rider. In addition, this Rider may enable you to receive higher annuity payments in certain circumstances. As described below, we will charge a higher mortality and expense risk charge if you select this Rider.
The Enhanced Income Benefit under this Rider is equal to the value of the Enhanced Death Benefit on the Annuity Date. We will not increase or decrease the Enhanced Income Benefit amount by any Market Value Adjustment. To be eligible for the Enhanced Income Benefit, you must select an Annuity Date that is on or after the tenth Contract Anniversary, but before the Annuitant’s age 90. On the Annuity Date, you may apply the Enhanced Income Benefit to an Annuity Option that provides for payments guaranteed for either a single life with a period certain or joint lives with a period certain of at least:
| | (a) | 10 years, if the youngest Annuitant’s age is 80 or less on the Annuity Date; or |
| | (b) | at least 5 years, if the youngest Annuitant’s age is greater than 80 on the Annuity Date. |
If you wish to select a different Annuity Option, you must apply the Annuitized Value and not the Enhanced Income Benefit.
Enhanced Death Benefit A. At issue, Enhanced Death Benefit A is equal to the initial Purchase Payment. After issue, Enhanced Death Benefit A is adjusted whenever you pay a Purchase Payment or make a withdrawal and on each Contract Anniversary as follows:
| | • | | When you pay a Purchase Payment, we will increase Enhanced Death Benefit A by the amount of the Purchase Payment; |
| | • | | When you make a withdrawal, we will decrease Enhanced Death Benefit A by a withdrawal adjustment, as described below; and |
| | • | | On each Contract Anniversary, we will set Enhanced Death Benefit A equal to the greater of the Contract Value on that Contract Anniversary or the most recently calculated Enhanced Death Benefit A. |
If you do not pay any additional purchase payments or make any withdrawals, Enhanced Death Benefit A will equal the greatest of the Contract Value on the Issue Date and all Contract Anniversaries prior to the date we calculate any death benefit.
We will continuously adjust Enhanced Death Benefit A as described above until the oldest Contract Owner’s 85th birthday or, if the Contract Owner is not a living individual, the Annuitant’s 85th birthday. Thereafter, we will adjust Enhanced Death Benefit A only for Purchase Payments and withdrawals.
Enhanced Death Benefit B. Enhanced Death Benefit B is equal to your total Purchase Payments, reduced by any withdrawal adjustments, accumulated daily at an effective annual rate of 5% per year, until the earlier of:
| | (a) | the date we determine the death benefit, |
| | (b) | the first day of the month following the oldest Contract Owner’s 85th birthday; or |
| | (c) | the first day of the month following the oldest Annuitant’s 85th birthday, if the Contract Owner is not a living individual. |
Thereafter, we will only adjust Enhanced Death Benefit B to reflect additional Purchase Payments and withdrawals. Enhanced Death Benefit B will never be greater than the maximum death benefit allowed by any nonforfeiture laws that govern the Contract.
The withdrawal adjustment for both Enhanced Death Benefit A and Enhanced Death Benefit B will equal (a) divided by (b), with the result multiplied by (c), where:
(a) = the withdrawal amount;
(b) = the Contract Value immediately before the withdrawal; and
(c) = the most recently calculated Enhanced Benefit A or B, as appropriate.
Beneficiary. You name the Beneficiary. You may name a Beneficiary in the application. You may also name one or more contingent Beneficiaries who are entitled to receive benefits under the contract if all primary Beneficiaries are deceased at the time a Contract Owner, or Annuitant if the Contract Owner is not a living person, dies. You may change the Beneficiary or add additional Beneficiaries at any time before the Annuity Date. We will provide a form to be signed and filed with us.
Your changes in Beneficiary take effect when we accept them, effective as of the date you signed the form. Until we accept your change instructions, we are entitled to rely on your most recent instructions in our files. We are not liable for making a payment to a Beneficiary shown in our files or treating that person in any other respect as the Beneficiary prior to accepting a change. Accordingly, if you wish to change your beneficiary, you should deliver your instructions to us promptly.
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If you did not name a Beneficiary or if the named Beneficiary is no longer living, the Beneficiary will be:
| | • | | your spouse if he or she is still alive; or, if he or she is no longer alive, |
| | • | | your surviving children equally; or if you have no surviving children, |
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 ofnon-living person, all beneficiaries will be considered to benon-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 request, the change or restriction will 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.
Contract LoansFor 403(b) Contracts.Subject to the restrictions described below, we will make loans to the Owner of a Contract used in connection with a Tax Sheltered Annuity Plan (“TSA Plan”) under Section 403(b) of the Code. Loans are not available underNon-Qualified Contracts. We will only make loans after the free look period and before annuitization. All loans are subject to the terms of the Contract, the relevant Plan, and the 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 Surrender Value of your Contract on the date of the loan. In addition, we will not make a loan to you if the total of the requested loan and all of the plan participant’s Contract 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 Surrender Value. |
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. Some of these requirements are stated in Section 72 of the 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 Separate Account and/or the Fixed Account to the Loan Account as collateral for the loan. We will transfer to the Loan Account amounts from the Separate Account in proportion to the assets in eachSub-Account. If your loan amount is greater than your Contract Value in theSub-Accounts, 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 theSub-Accounts and the Guaranteed Maturity Fixed Account Options, we will transfer the remaining required collateral from the Dollar Cost Averaging Fixed Account Option.
We will not charge a Withdrawal Charge on the loan or on the transfer from theSub-Accounts 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 theSub-Accounts.
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:
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| | 3) | the amount available for partial withdrawal; |
| | 4) | the amount applied on the Annuity Date to provide annuity payments; and |
| | 5) | the amount applied on the Annuity Date to provide annuity payments under the Enhanced Income Benefit Rider, Enhanced Death and Income Benefit Rider, or the Enhanced Death and Income Benefit Rider II. |
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 theSub-Account(s) in the proportion that you have selected for Purchase Payments. 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 Fidelity® VIP Government Money Market, InitialClass Sub-Account.
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 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 and incur the early withdrawal tax penalty. We will capitalize interest on a loan in default.
If the total loan balance exceeds the Surrender Value, 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.
Withdrawals (Redemptions). Except as explained below, you may redeem a Contract for all or a portion of its Contract Value before the Annuity Date. We may impose a Withdrawal Charge, which would reduce the amount paid to you upon redemption. The Withdrawal Charges are described in the “Sales Charges” section of this prospectus. Withdrawals from the Fixed Account may be increased or decreased by a Market Value Adjustment, as described in the “Market Value Adjustment” section of this prospectus.
In general, you must withdraw at least $50 at a time. You may also withdraw a lesser amount if you are withdrawing your entire interest in aSub-Account. If your request for a partial withdrawal would reduce the Contract Value to less than $500, we may treat it as a request for a withdrawal of your entire Contract Value, as described in the “Minimum Contract Value” section of this prospectus. Your Contract will terminate if you withdraw all of your Contract Value.
Withdrawals taken prior to annuitization are generally considered to come from the earnings in the Contract first. If the Contract istax-qualified, generally all withdrawals are treated as distribution of earnings. 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.
We may be required to withhold 20% of withdrawals and distributions from Contracts issued in connection with certain Qualified Plans, as described in the “Income Tax Withholding on Tax Qualified Contracts” section of this prospectus.
To make a withdrawal, you must send us a written withdrawal request or systematic withdrawal program enrollment form. You may obtain the required forms from us at the address and phone number given on the first page of this prospectus.
WRITTEN REQUESTS 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.
For partial withdrawals, you may allocate the amount among theSub-Accounts and the Fixed Accounts. If we do not receive allocation instructions from you, we usually will allocate the partial withdrawal proportionately among theSub-Accounts and the Guaranteed Maturity Fixed Account Options based upon the balance of theSub-Accounts and the Guaranteed Maturity Fixed Account Options, with any remainder being distributed from the Dollar Cost Averaging Fixed Account Option. You may not make a partial withdrawal from the Fixed Account in an amount greater than the total amount of the partial withdrawal multiplied by the ratio of the value of the Fixed Account to the Contract Value immediately before the partial withdrawal.
If you request a total withdrawal, you must send us your Contract. The Surrender Value will equal the Contract Value minus any applicable Withdrawal Charge and adjusted by any applicable Market Value Adjustment. We also will deduct a contract maintenance
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charge of $35, unless we have waived the contract maintenance charge on your Contract as described in the “Administrative Charges” section of this prospectus. We determine the Surrender Value based on the Contract Value next computed after we receive a properly completed surrender request. We will usually pay the Surrender Value within seven days after the day we receive a completed request form. However, we may suspend the right of withdrawal from the Separate Account or delay payment for withdrawals for more than seven days in the following circumstances:
| | 1) | whenever the New York Stock Exchange (“NYSE”) is closed (other than customary weekend and holiday closings); |
| | 2) | when trading on the NYSE is restricted or an emergency exists, as determined by the SEC, so that disposal of the Separate Account’s investments or determination of Accumulation Unit Values is not reasonably practicable; or |
| | 3) | at any other time permitted by the SEC for your protection. |
In addition, we may delay payment of the Surrender Value in the Fixed Account for up to 6 months or a shorter period if required by law. If we delay payment from the Fixed Account for more than 30 days, we will pay interest as required by applicable law.
You may withdraw amounts attributable to contributions made pursuant to a salary reduction agreement (in accordance with Section 403(b) (11) of the Code) only in the following circumstances:
| | 1) | when you attain age 59 1/2; |
| | 2) | when you terminate your employment with the plan sponsor; |
| | 4) | upon your disability as defined in Section 72(m)(7) of the Code; |
| | 5) | or in the case of hardship. |
If you seek a hardship withdrawal, you may only withdraw amounts attributable to your Purchase Payments; you may not withdraw any earnings. These limitations on withdrawals apply to:
| | 1) | salary reduction contributions made after December 31, 1988; |
| | 2) | income attributable to such contributions; and |
| | 3) | income attributable to amounts held as of December 31, 1988. |
The limitations on withdrawals do not affect transfers between certain Qualified Plans. Additional restrictions and limitations may apply to distributions from any Qualified Plan. Tax penalties may also apply. You should seek tax advice regarding any withdrawals or distributions from Qualified Plans.
Systematic Withdrawal Program. If your Contract is anon-Qualified Contract or IRA, you may participate in our Systematic Withdrawal Program. You must complete an enrollment form and send it to us. You must complete the withholding election section of the enrollment form before the systematic withdrawals will begin. You may choose withdrawal payments of a flat dollar amount, earnings, or a percentage of Purchase Payments. You may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis. Systematic withdrawals will be deducted from yourSub-Account and Fixed Account balances, excluding the Dollar Cost Averaging Fixed Account, on a pro rata basis.
Depending on fluctuations in the net asset value of theSub-Accounts and the value of the Fixed Account, systematic withdrawals may reduce or even exhaust the Contract Value. The minimum amount of each systematic withdrawal is $50.
We will make systematic withdrawal payments to you or your designated payee. 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.
ERISA Plans.A married participant may need spousal consent to receive a distribution from a Contract issued in connection with a Qualified Plan or aNon-Qualified Plan covered by to Title 1 of ERISA. You should consult an adviser.
MINIMUM CONTRACT VALUE
If as a result of withdrawals your Contract Value would be less than $500 and you have not made any Purchase Payments during the previous three full calendar years, we may terminate your Contract and distribute its Surrender Value to you. Before we do this, we will give you 60 days notice. We will not terminate your Contract on this ground if the Contract Value has fallen below $500 due to either a decline in Accumulation Unit Value or the imposition of fees and charges. In addition, in some states we are not permitted to terminate Contracts on this ground. Different rules may apply to Contracts issued in connection with Qualified Plans.
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Contract Charges
We assess charges under the Contract in three ways:
| | 1) | as deductions from Contract Value for contract maintenance charges and, if applicable, for premium taxes; |
| | 2) | as charges against the assets of the Separate Account for administrative expenses and for the assumption of mortality and expense risks; and |
| | 3) | as Withdrawal Charges (contingent deferred sales charges) subtracted from withdrawal and surrender payments. |
In addition, certain deductions are made from the assets of the Portfolios for investment management fees and expenses. Those fees and expenses are summarized in the “Fee Tables” section of this prospectus, and described more fully in the Prospectuses and Statements of Additional Information for the Portfolios.
Mortality and Expense Risk Charge.We deduct a mortality and expense risk charge from eachSub-Account during each Valuation Period. The mortality and expense risk charge is equal, on an annual basis, to 1.15% of the average net asset value of eachSub-Account. The mortality risks arise from our contractual obligations:
| | 1) | to make annuity payments after the Annuity Date for the life of the Annuitant(s); |
| | 2) | to waive the Withdrawal Charge upon your death; and |
| | 3) | to provide the Death Benefit prior to the Annuity Date. A detailed explanation of the Death Benefit may be found in the “Other Contract Benefits” section of this prospectus. |
The expense risk is that it may cost us more to administer the Contracts and the Separate Account than we receive from the contract maintenance charge and the administrative expense charge. We guarantee the mortality and expense risk charge and we cannot increase it. We assess the mortality and expense risk charge during both the Accumulation Period and the Annuity Period.
If you select the Enhanced Death Benefit Rider, your mortality and expense risk charge will be 1.35% of average net asset value of eachSub-Account. If you select the Enhanced Income Rider, your mortality and expense risk charge will be 1.50% of average daily net asset value of eachSub-Account. If you select the Enhanced Death and Income Benefit Rider, your mortality and expense risk charge will be 1.55% of average daily net asset value of eachSub-Account. If you select the Enhanced Death and Income Benefit Rider II, your mortality and expense risk charge will be 1.70% of average daily net asset value of eachSub-Account. We charge a higher mortality and expense risk charge for the Riders to compensate us for the additional risk that we accept by providing the Riders. We will calculate a separate Accumulation Unit Value for the base Contract, and for Contracts with each type of Rider, in order to reflect the difference in the mortality and expense risk charges.
ADMINISTRATIVE CHARGES
Contract Maintenance Charge. We charge an annual contract maintenance charge of $35 on your Contract. The amount of this charge is guaranteed not to increase. This charge reimburses us for our expenses incurred in maintaining your Contract.
Before the Annuity Date, we assess the contract maintenance charge on each Contract Anniversary. To obtain payment of this charge, on a pro rata basis we will allocate this charge among theSub-Accounts to which you have allocated your Contract Value, and redeem Accumulation Units accordingly. We will waive this charge if you pay more than $50,000 in Purchase Payments or if you allocate all of your Contract Value to the Fixed Account. If you surrender your Contract, we will deduct the full $35 charge as of the date of surrender, unless your Contract qualifies for a waiver.
After the Annuity Date and if allowed in your state, we will subtract this charge in equal parts from each of your annuity payments. We will waive this charge if on the Annuity Date your Contract Value is $50,000 or more or if all of your annuity payments are Fixed Annuity payments.
Administrative Expense Charge. We deduct an administrative expense charge from eachSub-Account during each Valuation Period. This charge is equal, on an annual basis, to 0.10% of the average net asset value of theSub-Accounts. This charge is designed to compensate us for the cost of administering the Contracts and the Separate Account. The administrative expense charge is assessed during both the Accumulation Period and the Annuity Period.
Transfer Fee. We currently are waiving the transfer fee. The Contract, however, permits us to charge a transfer fee of $10 on the second and each subsequent transaction in each calendar month in which transfer(s) are effected between Subaccount(s) and/or the Fixed Account. We will notify you if we begin to charge this fee. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging or Portfolio Rebalancing program.
The transfer fee will be deducted from Contract Value that remains in the Subaccount(s) or Fixed Account from which the transfer was made. If that amount is insufficient to pay the transfer fee, we will deduct the fee from the transferred amount.
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SALES CHARGES
Withdrawal Charge. We may charge a Withdrawal Charge, which is a contingent deferred sales charge, upon certain withdrawals.
As a general rule, the Withdrawal Charge equals a percentage of Purchase Payments withdrawn that are: (a) less than seven years old; and (b) not eligible for a free withdrawal. The applicable percentage depends on how many years ago you made the Purchase Payment being withdrawn, as shown in this chart:
| | |
| CONTRIBUTION YEAR | | WITHDRAWAL CHARGE PERCENTAGE |
First and Second | | 7% |
Third and Fourth | | 6% |
Fifth | | 5% |
Sixth | | 4% |
Seventh | | 3% |
Eighth and later | | 0% |
When we calculate the Withdrawal Charge, we do not take any applicable Market Value Adjustment into consideration. Beginning on January 1, 2004, if you make a withdrawal before the Annuity Date, we will apply the withdrawal charge percentage in effect on the date of the withdrawal, or the withdrawal charge percentage in effect on the following day, whichever is lower.
We subtract the Withdrawal Charge from the Contract Value remaining after your withdrawal. As a result, the decrease in your Contract Value will be greater than the withdrawal amount requested and paid.
For purposes of determining the Withdrawal Charge, the Contract Value is deemed to be withdrawn in the following order:
First.Earnings - the current Contract Value minus all Purchase Payments that have not previously been withdrawn;
Second. “Old Purchase Payments” - Purchase Payments received by us more than seven years before the date of withdrawal that have not been previously withdrawn;
Third. Any additional amounts available as a “Free Withdrawal,” as described on below;
Fourth. “New Purchase Payments” - Purchase Payments received by us less than seven years before the date of withdrawal. These Payments are deemed to be withdrawn on afirst-in,first-out basis.
No Withdrawal Charge is applied in the following situations:
| | • | | the payment of a Death Benefit; |
| | • | | a free withdrawal amount, as described below; |
| | • | | certain withdrawals for Contracts issued under 403(b) plans or 401 plan under our prototype as described below; |
| | • | | withdrawals taken to satisfy IRS minimum distribution rules; |
| | • | | withdrawals that qualify for one of the waiver benefits described below; and |
| | • | | withdrawal under Contracts issued to employees of Lincoln Benefit Life Company or its affiliates, Surety Life Insurance Company and Allstate Financial Services, L.L.C., or to their spouses or minor children if those individuals reside in the State of Nebraska. |
We will never waive or eliminate a Withdrawal Charge where such waiver or elimination would be unfairly discriminatory to any person or where it is prohibited by state law.
We may waive withdrawal charges if this Contract is surrendered, and the entire proceeds of the surrender are directly used to purchase a new Contract also issued by us or any affiliated company. Such waivers will be granted on anon-discriminatory basis.
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 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. The amount of your withdrawal may be affected by a Market Value Adjustment. Additional restrictions may apply to Contracts held in Qualified Plans. We outline the tax requirements applicable to withdrawals in the “Taxation of Partial and Full Withdrawals” section of this prospectus. You should consult your own tax counsel or other tax advisers regarding any withdrawals.
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Free Withdrawal. Withdrawals of the following amounts are never subject to the Withdrawal Charge:
| | • | | In any Contract Year, the greater of: (a) earnings that have not previously been withdrawn; or (b) 15 percent of New Purchase Payments; and |
| | • | | Any Old Purchase Payments that have not been previously withdrawn. |
However, even if you do not owe a Withdrawal Charge on a particular withdrawal, you may still owe taxes or penalty taxes, or be subject to a market Value Adjustment. The tax treatment of withdrawals is summarized in the “Taxes” section of this prospectus.
WAIVER BENEFITS
General. If approved in your state, we will offer the three waiver benefits described below. In general, if you qualify for one of these benefits, we will permit you to make one or more partial or full withdrawals without paying any otherwise applicable Withdrawal Charge or Market Value Adjustment. While we have summarized those benefits here, you should consult your Contract for the precise terms of the waiver benefits.
Some Qualified Plans may not permit you to utilize these benefits. Also, even if you do not need to pay our Withdrawal Charge because of these benefits, 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.
Confinement Waiver Benefit. Under this benefit, we will waive the Withdrawal Charge and Market Value Adjustment on all withdrawals under your Contract if the following conditions are satisfied:
| | 1) | Any Contract Owner or the Annuitant, if the Contract is owned by a company or other legal entity, is confined to a long term care facility or a hospital for at least 90 consecutive days. The Owner or Annuitant must enter the long term care facility or hospital at least 30 days after the Issue Date; |
| | 2) | You request the withdrawal no later than 90 days following the end of the Owner or Annuitant’s stay at the long term care facility or hospital. You must provide written proof of the stay with your withdrawal request; and |
| | 3) | A physician must have prescribed the stay and the stay must be medically necessary. |
You may not claim this benefit if the physician prescribing the Owner or Annuitant’s stay in a long term care facility is the Owner or Annuitant or a member of the Owner or Annuitant’s immediate family.
Terminal Illness Waiver Benefit. Under this benefit, we will waive any Withdrawal Charge and Market Value Adjustment on all withdrawals under your Contract if, at least 30 days after the Issue Date, you, or the Annuitant if the Owner is not a living person, are diagnosed with a terminal illness. We may require confirmation of the diagnosis as provided in the Contract.
Unemployment Waiver Benefit. Under this benefit, we will waive any Withdrawal Charge and Market Value Adjustment on one partial or full withdrawal from your Contract, if you meet the following requirements:
| | 1) | you become unemployed at least 1 year after the Issue Date; |
| | 2) | you receive unemployment compensation for at least 30 consecutive days as a result of that unemployment; and |
| | 3) | you claim this benefit within 180 days of your initial receipt of unemployment compensation. |
You may exercise this benefit once before the Annuity Date.
Waiver of Withdrawal Charge For Certain Qualified Plan Withdrawals.For Contracts issued under a Section 403(b) plan or a Section 401 plan under our prototype, we will waive the Withdrawal Charge when:
| | 1) | the Annuitant becomes disabled (as defined in Section 72(m)(7)) of the Code; |
| | 2) | the Annuitant reaches age 59 1/2 and at least 5 Contract Years have passed since the Contract was issued; |
| | 3) | at least 15 Contract Years have passed since the Contract was issued. |
Our prototype is a Section 401 Defined Contribution Qualified Retirement plan. This plan may be established as a Money Purchase plan, a Profit Sharing plan, or a paired plan (Money Purchase and Profit Sharing). For more information about our prototype plan, call us at1-800-457-7617.
Premium Taxes.We will charge premium taxes or other state or local taxes against the Contract Value, including Contract Value that results from amounts transferred from existing policies (Section 1035 exchange) issued by us or other insurance companies. Some states assess premium taxes when Purchase Payments are made; others assess premium taxes when annuity payments begin. We will deduct any applicable premium taxes upon full surrender, death, or annuitization. Premium taxes generally range from 0% to 3.5%.
Deduction For Separate Account Income Taxes. We may assess a charge against theSub-accounts and the Fixed Rate Options equal to any taxes which may be imposed upon the Separate Account. We may pay company income taxes on the taxable corporate earnings created by this Separate Account product. While we may consider company income taxes when pricing our products, we do
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not currently include such income taxes in the charges you pay under the contract. We will periodically review the issue of charging for these taxes and may impose a charge in the future. In calculating our corporate income tax liability, we derive certain corporate income tax benefits associated with the investment of company assets, including Separate Account assets, which are treated as company assets under applicable income tax law. These benefits reduce our overall corporate income tax liability. Under current law, such benefits may include foreign tax credits and corporate dividends received deductions. We do not pass these tax benefits through to holders of the Separate Account annuity contracts because (i) the contract owners are not the owners of the assets generating these benefits under applicable income tax law and (ii) we do not currently include company income taxes in the charges you pay under the contract.
Our status under the Code is briefly described in the “Taxes” section of this prospectus.
Other Expenses.
You indirectly bear the charges and expenses of the Portfolios whose shares are held by theSub-Accounts to which you allocate your Contract value. For a summary of current estimates of those charges and expenses, see page 3. For more detailed information about those charges and expenses, please refer to the prospectuses for the appropriate Portfolios. We receive compensation from the investment advisers or administrators or the Portfolios in connection with administrative service and cost savings experienced by the investment advisers or administrators. We collect this compensation under agreements between us and the Portfolio’s investment adviser, administrators or distributors, and is calculated based on a percentage of the average assets allocated to the Portfolio.
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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 Separate 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 Separate Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, Lincoln Benefit believes that the Separate 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 Separate 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 Separate Account, then Lincoln Benefit may impose a charge against the Separate 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 Separate Account are “adequately diversified” according to Treasury Department regulations, and |
| | • | | Lincoln Benefit is considered the owner of the Separate 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 bynon-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 thenon-natural owner during the taxable year.
Exceptions to theNon-Natural Owner Rule. There are several exceptions to the general rule that annuity contracts held by anon-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 anon-Qualified deferred compensation arrangement for its employees. Other exceptions to thenon-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.
Trusts are required to complete and submit a Certificate of Entity form, and we will tax report based on the information provided on this form.
Grantor Trust Owned Annuity. Contracts owned by a grantor trust are considered owned by anon-natural owner. Grantor trust owned contracts receive tax deferral as described in the Exceptions to theNon-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 beneficiary. A trust named beneficiary, 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 Separate Account must be “adequately diversified” consistent with standards under Treasury Department regulations. If the investments in the Separate 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 announced that the regulations do not provide guidance concerning
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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 directsub-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 Separate Account. If this occurs, income and gain from the Separate 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 Separate Account. However, we make no guarantee that such modification to the Contract will be successful.
Cost Basis.Generally, the cost basis in an annuity not associated with a qualified retirement plan is the amount you pay into your annuity, or into annuity exchanged for your annuity, on anafter-tax basis less any withdrawals of such payments. Cost basis for a qualified retirement plan is provided only in limited circumstances, such as for contributions to a Roth IRA or nondeductible contributions to a traditional IRA. We do not track cost basis for qualified retirement plans, which is the responsibility of the Contract Owner.
Taxation of Partial and Full Withdrawals. If you make a partial withdrawal under aNon-Qualified Contract, the amount you receive will be taxed as ordinary income, rather than as return of cost basis, without regard to surrender charges, until all gain has been withdrawn. If you make a full withdrawal under aNon-Qualified Contract, the amount received will be taxable only to the extent it exceeds your cost basis in the Contract.
Taxation of Annuity Payments. Generally, the rule for income taxation of annuity payments received from aNon-Qualified Contract provides for the return of your cost basis in the Contract in equaltax-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 cost basis 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 cost basis in the Contract by the total number of expected payments. The annuity payments will be fully taxable after the total amount of the cost basis 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.
Partial Annuitization
An individual may partially annuitize theirnon-qualified annuity if the contract so permits. The tax law allows for a portion of anon-qualified annuity, endowment or life insurance contract to be annuitized while the balance is not annuitized. The annuitized portion must be paid out over 10 or more years or over the lives of one or more individuals. The annuitized portion of the contract is treated as a separate contract for purposes of determining taxability of the payments under Section 72 of the Code. We do not currently permit partial annuitization.
Taxation of Level Monthly Variable Annuity Payments. You may have an option to elect a variable income payment stream consisting of level monthly payments that are recalculated annually. Although we will report your levelized payments to the IRS in the year distributed, it is possible the IRS could determine that receipt of the first monthly payout of each annual amount is constructive receipt of the entire annual amount. If the IRS were to take this position, the taxable amount of your levelized payments would be accelerated to the time of the first monthly payout and reported in the tax year in which the first monthly payout is received.
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; |
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| | • | | 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 anon-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 anon-natural person will be treated as the death of the Contract Owner. |
Prior to a 2013 Supreme Court decision, and consistent with Section 3 of the federal Defense of Marriage Act (“DOMA”), same sex marriages under state law were not recognized as same sex marriages for purposes of federal law. However, inUnited States v. Windsor, the U.S. Supreme Court struck down Section 3 of DOMA as unconstitutional, thereby recognizing a valid same sex marriage for federal law purposes. On June 26, 2015, the Supreme Court ruled inObergefell v. Hodges thatsame-sex couples have a constitutional right to marry, thus requiring all states to allowsame-sex marriage. TheWindsor andObergefell decisions mean that the federal and state tax law provisions applicable to an opposite sex spouse will also apply to a same sex spouse. Please note that a civil union or registered domestic partnership is generally not recognized as a marriage.
Please consult with your tax or legal advisor for more information.
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 total withdrawal, or |
| | • | | if distributed under an Income Plan, the amounts are taxed in the same manner as annuity payments. |
Medicare Tax on Net Investment Income. The Patient Protection and Affordable Care Act, enacted in 2010, included a Medicare tax on investment income. This tax assesses a 3.8% surtax on the lesser of (1) net investment income or (2) the excess of “modified adjusted gross income” over a threshold amount. The “threshold amount” is $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, $200,000 for single taxpayers, and approximately $12,500 for trusts. The taxable portion of payments received as a withdrawal, surrender, annuity payment, death benefit payment or any other actual or deemed distribution under the contract will be considered investment income for purposes of this surtax.
Penalty Tax on Premature Distributions. A 10% penalty tax applies to the taxable amount of any premature distribution from anon-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 (as defined by the Code) 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 and the annuity start date is no more than one year from the date of purchase (the first annuity payment must commence within 13 months of the date of purchase), 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 tonon-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.
Special Rules in Relation toTax-free Exchanges Under Section 1035.Section 1035 of the Code of 1986 permits certaintax-free exchanges of a life insurance, annuity or endowment contract for an annuity, includingtax-free exchanges of annuity death benefits for a Beneficiary Annuity. 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. After you elect an Annuity Option, as described in the Annuity Options section earlier in the prospectus, you are not eligible for atax-free exchange under Section 1035.
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Partial Exchanges.The IRS has issued rulings that permit partial exchanges of annuity contracts. Effective for exchanges on or after October 24, 2011, where there is a surrender or distribution from either the initial annuity contract or receiving annuity contract within 180 days of the date on which the partial exchange was completed, the IRS will apply general tax rules to determine the substance and treatment of the original transfer.
If a partial exchange is retroactively negated, the amount originally transferred to the recipient contract is treated as a withdrawal from the source contract, taxable to the extent of any gain in that contract on the date of the exchange. An additional 10% tax penalty may also apply if the Contract Owner is under age 591/2. Your Contract may not permit partial exchanges.
Taxation of Ownership Changes. If you transfer anon-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 cost basis 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 allnon-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 allnon-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made or no U.S. taxpayer identification number is provided 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, Code Section 1441 provides that Lincoln Benefit as a withholding agent must withhold 30% of the taxable amounts paid to anon-resident alien. Anon-resident alien is someone other than a U.S. citizen or resident alien. We require an original IRS FormW-8BEN at issue to certify the owners’ foreign status. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and thenon-resident alien’s country of residence if the payee provides a U.S. taxpayer identification number on a fully completed FormW-8(BEN,BEN-E,EXP,ECI,IMY) (Generally a FormW-8BEN is the appropriate form). A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number (“ITIN”). ITINs are issued by the IRS tonon-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.
Certain payees may be subject to the Foreign Accounts Tax Compliance Act (FATCA) which may require 30% mandatory withholding for certain entities. Please consult with your tax advisor for additional information regarding FATCA.
TAX QUALIFIED CONTRACTS
The income on tax sheltered annuity (TSA) and IRA investments is tax deferred, and the income from 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 an annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as or in connection with:
| | • | | Individual Retirement Annuities (IRAs) under Code Section 408(b); |
| | • | | Roth IRAs under Code Section 408A; |
| | • | | Simplified Employee Pension (SEP IRA) under Code Section 408(k); |
| | • | | Savings Incentive Match Plans for Employees (SIMPLE IRA) under Code Section 408(p); |
| | • | | Tax Sheltered Annuities under Code Section 403(b); |
| | • | | Corporate and Self Employed Pension and Profit Sharing Plans under Code Section 401; and |
| | • | | State and Local Government andTax-Exempt Organization Deferred Compensation Plans under Code Section 457. |
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. If you use the Contract within an employer sponsored qualified retirement
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plan, the plan may impose different or additional conditions or limitations on withdrawals, waiver of 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.
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 qualified retirement plan. Note that in 2014, the U.S. Supreme Court ruled that Inherited IRAs, other than IRAs inherited by the owner’s spouse, do not qualify as retirement assets for purposes of protection under the federal bankruptcy laws.
Please refer to your Endorsement for IRAs or 403(b) plans, if applicable, for additional information on your death settlement options. In the case of certain Qualified Plans, the terms of the Qualified Plan Endorsement and 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 generally 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.
Required Minimum Distributions. Generally, Tax Qualified Contracts (excluding Roth IRAs) 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. Effective December 31, 2005, the IRS requires annuity contracts to include the actuarial present value of other benefits for purposes of calculating the required minimum distribution amount. These other benefits may include accumulation, income, or death benefits. 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 TSA or employer sponsored qualified retirement 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 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, |
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| | • | | made in substantially equal periodic payments (as defined by the Code) 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 (does not apply to 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), |
| | • | | made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs), and |
| | • | | from an IRA or attributable to elective deferrals under a 401(k) plan, 403(b) annuity, or certain similar arrangements made to individuals who (because of their being members of a reserve component) are ordered or called to active duty after Sept. 11, 2001, for a period of more than 179 days or for an indefinite period; and made during the period beginning on the date of the order or call to duty and ending at the close of the active duty period. |
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 allnon-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, or if no U.S. taxpayer identification number is provided, 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 Tax Qualified Contracts, 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. |
With respect to any Contract held under a Section 457 plan or by the trustee of a Section 401 Pension or Profit Sharing Plan, we will not issue payments directly to a plan participant or beneficiary. Consequently, the obligation to comply with the withholding requirements described above will be the responsibility of the plan.
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, Code Section 1441 provides that Lincoln Benefit as a withholding agent must withhold 30% of the taxable amounts paid to anon-resident alien. Anon-resident alien is someone other than a U.S. citizen or resident alien. We require an original IRS FormW-8 at issue to certify the owners’ foreign status. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and thenon-resident alien’s country of residence if the payee provides a U.S. taxpayer identification number on a fully completed FormW-8(BEN,BEN-E,EXP,ECI,IMY) (Generally a FormW-8BEN is the appropriate form). A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number (“ITIN”). ITINs are issued by the IRS tonon-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.
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Certain payees may be subject to the Foreign Accounts Tax Compliance Act (FATCA) which may require 30% mandatory withholding for certain entities. Please consult with your tax advisor for additional information regarding FATCA.
Charitable IRA Distributions. Certain qualified IRA distributions for charitable purposes are eligible for an exclusion from gross income, up to $100,000 for otherwise taxable IRA distributions from a traditional or Roth IRA. A qualified charitable distribution is a distribution that is made (1) directly by the IRA trustee to certain qualified charitable organizations and (2) on or after the date the IRA owner attains age 70 1/2. Distributions that are excluded from income under this provision are not taken into account in determining the individual’s deductions, if any, for charitable contributions.
The IRS has indicated that an IRA trustee is not responsible for determining whether a distribution to a charity is one that satisfies the requirements of the charitable giving incentive. Consistent with the applicable IRS instructions, we report these distributions as normal IRA distributions on Form1099-R. Individuals are responsible for reflecting the distributions as charitable IRA distributions on their personal tax returns.
Individual Retirement Annuities. Code Section 408(b) 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 retirement plans may be “rolled over” on atax-deferred basis into an Individual Retirement Annuity. For IRA rollovers, an individual can only make an IRA to IRA rollover if the individual has not made a rollover involving any IRAs owned by the individual in the prior 12 months. An IRA transfer is atax-freetrustee-to-trustee “transfer” from one IRA account to another. IRA transfers are not subject to this 12 month rule.
Roth Individual Retirement Annuities. Code Section 408A 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.
A traditional Individual Retirement Account or Annuity may be converted or “rolled over” to a Roth Individual Retirement Annuity. The tax law allows distributions from qualified retirement plans including tax sheltered annuities and governmental Section 457 plans to be rolled over directly into a Roth IRA, subject to the usual rules that apply to conversions from a traditional IRA into a Roth IRA. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. Effective January 1, 2005, the IRS requires conversions of annuity contracts to include the actuarial present value of other benefits for purposes of valuing the taxable amount of the conversion.
Annuities Held By Individual Retirement Accounts (commonly known as Custodial IRAs). 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.
If you have a contract issued as an IRA under Code Section 408(b) and request to change the ownership to an IRA custodian permitted under Section 408, we will treat a request to change ownership from an individual to a custodian as an indirect rollover. We will send a Form1099-R to report the distribution and the custodian should issue a Form 5498 for the contract value contribution.
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 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. (SEP IRA) Code Section 408(k) 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.
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Savings Incentive Match Plans for Employees (SIMPLE IRA). Code Section 408(p) allows 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. SIMPLE IRA plans must include the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2007 (EGTRRA) to avoid adverse tax consequences. If your current SIMPLE IRA plan uses IRS Model Form 5304-SIMPLE with a revision date of March 2012 or later, then your plan is up to date. If your plan has a revision date prior to March 2012, please consult with your tax or legal advisor to determine the action you need to take in order to comply with this requirement.
To determine if you are eligible to contribute to any of the above listed IRAs (traditional, Roth, SEP, or SIMPLE), please refer to IRS Publication590-A and your competent tax advisor.
Tax Sheltered Annuities.Code Section 403(b) providestax-deferred retirement savings plans for employees of certainnon-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:
| | • | | 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 funds in 403(b) contracts that are subject to the Employee Retirement Income Security Act of 1974 (ERISA).
Caution: Under IRS regulations we can accept contributions, transfers and rollovers only if we have entered into an information-sharing agreement, or its functional equivalent, with the applicable employer or its plan administrator. Unless your contract is grandfathered from certain provisions in these regulations, we will only process certain transactions (e.g, transfers, withdrawals, hardship distributions and, if applicable, loans) with employer approval. This means that if you request one of these transactions we will not consider your request to be in good order, and will not therefore process the transaction, until we receive the employer’s approval in written or electronic form.
Corporate and Self-Employed Pension and Profit Sharing Plans.
Section 401(a) of the Code permits corporate employers to establish various types of tax favored retirement plans for employees. Self-employed individuals may establish tax favored retirement plans for themselves and their employees (commonly referred to as “H.R.10” or “Keogh”). Such retirement plans may permit the purchase of annuity contracts. Lincoln Benefit no longer issues annuity contracts to employer sponsored qualified retirement plans.
There are two owner types for contracts intended to qualify under Section 401(a): a qualified plan fiduciary or an annuitant owner.
| | • | | A qualified plan fiduciary exists when a qualified plan trust that is intended to qualify under Section 401(a) of the Code is the owner. The qualified plan trust must have its own tax identification number and a named trustee acting as a fiduciary on behalf of the plan. The annuitant should be the person for whose benefit the contract was purchased. |
| | • | | An annuitant owner exists when the tax identification number of the owner and annuitant are the same, or the annuity contract is not owned by a qualified plan trust. The annuitant should be the person for whose benefit the contract was purchased. |
If a qualified plan fiduciary is the owner of the contract, the qualified plan must be the beneficiary so that death benefits from the annuity are distributed in accordance with the terms of the qualified plan. Annuitant owned contracts require that the beneficiary be the annuitant’s spouse (if applicable), which is consistent with the required IRS language for qualified plans under Section 401(a). A completed Annuitant Owned Qualified Plan Designation of Beneficiary form is required in order to change the beneficiary of an annuitant owned Qualified Plan contract.
State and Local Government andTax-Exempt Organization Deferred Compensation Plans. Section 457 of the Code permits employees of state and local governments andtax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. In eligible governmental plans, all assets and income must be held in a trust/custodial account/annuity contract for the exclusive benefit of the participants and their
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beneficiaries. To the extent the Contracts are used in connection with anon-governmental eligible plan, employees are considered general creditors of the employer and the employer as owner of the Contract has the sole right to the proceeds of the Contract. Under eligible 457 plans, contributions made for the benefit of the employees will not be includible in the employees’ gross income until distributed from the plan. Lincoln Benefit no longer issues annuity contracts to 457 plans.
New Late Rollover Self-Certification. After August 24, 2016, you may be able to apply a rollover contribution to your IRA or qualified retirement plan after the60-day deadline through a new self-certification procedure established by the IRS. Please consult your tax or legal adviser regarding your eligibility to use this self-certification procedure. As indicated in this IRS guidance, we, as a financial institution, are not required to accept your self-certification for waiver of the60-day deadline.
ERISA Requirements
ERISA (the “Employee Retirement Income Security Act of 1974”) and the Code prevent a fiduciary and other “parties in interest” with respect to a plan (and, for these purposes, an IRA would also constitute a “plan”) from receiving any benefit from any party dealing with the plan, as a result of the sale of the Annuity. Administrative exemptions under ERISA generally permit the sale of insurance/annuity products to plans, provided that certain information is disclosed to the person purchasing the Annuity. This information has to do primarily with the fees, charges, discounts and other costs related to the Annuity, as well as any commissions paid to any agent selling the Annuity. Information about any applicable fees, charges, discounts, penalties or adjustments may be found in the applicable sections of this prospectus. Information about sales representatives and commissions may be found in the sections of this prospectus addressing distribution of the Annuities.
Other relevant information required by the exemptions is contained in the contract and accompanying documentation.
Please consult with your tax adviser if you have any questions about ERISA and these disclosure requirements.
Spousal Consent Rules for Retirement Plans - Qualified Annuities
If you are married at the time your payments commence, you may be required by federal law to choose an income option that provides survivor annuity income to your spouse, unless your spouse waives that right. Similarly, if you are married at the time of your death, federal law may require all or a portion of the Death Benefit to be paid to your spouse, even if you designated someone else as your Beneficiary. A brief explanation of the applicable rules follows. For more information, consult the terms of your retirement arrangement.
Defined Benefit Plans and Money Purchase Pension Plans. If you are married at the time your payments commence, federal law requires that benefits be paid to you in the form of a “qualified joint and survivor annuity” (QJSA), unless you and your spouse waive that right, in writing. Generally, this means that you will receive a reduced payment during your life and, upon your death, your spouse will receive at leastone-half of what you were receiving for life. You may elect to receive another income option if your spouse consents to the election and waives his or her right to receive the QJSA. If your spouse consents to the alternative form of payment, your spouse may not receive any benefits from the plan upon your death. Federal law also requires that the plan pay a Death Benefit to your spouse if you are married and die before you begin receiving your benefit. This benefit must be available in the form of an Annuity for your spouse’s lifetime and is called a “qualifiedpre-retirement survivor annuity” (QPSA). If the plan pays Death Benefits to other Beneficiaries, you may elect to have a Beneficiary other than your spouse receive the Death Benefit, but only if your spouse consents to the election and waives his or her right to receive the QPSA. If your spouse consents to the alternate Beneficiary, your spouse will receive no benefits from the plan upon your death. Any QPSA waiver prior to your attaining age 35 will become null and void on the first day of the calendar year in which you attain age 35, if still employed.
Defined Contribution Plans (including 401(k) Plans and ERISA 403(b) Annuities). Spousal consent to a distribution is generally not required. Upon your death, your spouse will receive the entire Death Benefit, even if you designated someone else as your Beneficiary, unless your spouse consents in writing to waive this right. Also, if you are married and elect an Annuity as a periodic income option, federal law requires that you receive a QJSA (as described above), unless you and your spouse consent to waive this right.
IRAs,non-ERISA 403(b) Annuities, and 457 Plans. Spousal consent to a distribution usually is not required. Upon your death, any Death Benefit will be paid to your designated Beneficiary.
Gifts and Generation-skipping Transfers
The transfer of the contract or designation of a beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate, and generation-skipping transfer taxes. For example, the transfer of the contract to, or the designation as a beneficiary of, or the payment of proceeds to, a person who is assigned to a generation which is two or more generations below the generation assignment of the owner may have generation skipping transfer tax consequences under federal tax law. The individual situation of each contract owner or beneficiary will determine the extent, if any, to which federal, state, and local transfer and inheritance taxes may be imposed and how ownership or receipt of contract proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes. Under certain circumstances, the Code may impose a generation-skipping transfer (“GST”) tax when all or part of an annuity contract is transferred to, or a death benefit is paid to, an individual two or more generations younger than the owner. Regulations issued under the Code may require us to deduct the tax from your contract, or from any applicable payment, and pay it directly to the IRS. Additionally, if you transfer your Annuity to another
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person for less than adequate consideration, there may be federal or state income tax consequences. The potential application of these taxes underscores the importance of seeking guidance from a qualified adviser to help ensure that your estate plan adequately addresses your needs and those of your beneficiaries under all possible scenarios.
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Description of Lincoln Benefit Life Company and the Separate Account
LINCOLN BENEFIT LIFE COMPANY
Lincoln Benefit 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 1221 N Street, Suite 200, Lincoln, NE 68508. Lincoln Benefit is a wholly-owned subsidiary of Resolution Life, Inc., a Delaware corporation, which is a wholly-owned, indirect subsidiary of Resolution Life L.P., a Bermuda limited partnership and Resolution Life (Parallel) Partnership, a Bermuda-based partnership.
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 will 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 Separate Account and/or the Fixed Account.
Lincoln Benefit has reinsurance agreements whereby certain premiums, contract charges, interest credited to contract holder funds, benefits and expenses are ceded to Allstate Life Insurance Company (“Allstate Life”) and othernon-affiliated reinsurers. The benefits and provisions of the Contracts have not been changed by these transactions and agreements. None of these transactions or agreements has changed the fact that we are primarily liable to you for your Contract.
SEPARATE ACCOUNT
Lincoln Benefit Life Variable Annuity Account was originally established in 1992, as a segregated asset account of Lincoln Benefit. The Separate Account meets the definition of a “separate account” under the federal securities laws and is registered with the SEC as a unit investment trust under the Investment Company Act of 1940. The SEC does not supervise the management of the Separate Account or Lincoln Benefit.
We own the assets of the Separate Account, but we hold them separate from our other assets. To the extent that these assets are attributable to the Contract Value of the Contracts offered by this prospectus, these assets are not chargeable with liabilities arising out of any other business we may conduct. Income, gains, and losses, whether or not realized, from assets allocated to the Separate Account are credited to or charged against the Separate Account without regard to our other income, gains, or losses. Our obligations arising under the Contracts are general corporate obligations of Lincoln Benefit.
The Separate Account is divided intoSub-Accounts. The assets of eachSub-Account are invested in the shares of one of the Portfolios. We do not guarantee the investment performance of the Separate Account, itsSub-Accounts or the Portfolios. Values allocated to the Separate Account and the amount of Variable Annuity payments will rise and fall with the values of shares of the Portfolios and are also reduced by Contract charges. We may also use the Separate Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Separate Account.
We have included additional information about the Separate Account in the Statement of Additional Information. You may obtain a copy of the Statement of Additional Information by writing to us or calling us at1-800-457-7617. See also the “Table of Contents of the Statement of Additional Information” section of this prospectus.
State Regulation of Lincoln Benefit.We are subject to the laws of Nebraska and regulated by the Nebraska Department of Insurance. Every year we file an annual statement with the Department of Insurance covering our operations for the previous year and our financial condition as of the end of the year. We are inspected periodically by the Department of Insurance to verify our contract liabilities and reserves. Our books and records are subject to review by the Department of Insurance at all times. We are also subject to regulation under the insurance laws of every jurisdiction in which we operate.
Financial Statements.The financial statements of Lincoln Benefit and the financial statements of the Separate Account, which are comprised of the financial statements of the underlyingSub-Accounts, are set forth in the Statement of Additional Information.
Administration. We have primary responsibility for all administration of the Contracts and the Variable Account. We entered into an administrative services agreement with Allstate Life. Allstate Life entered into an administrative services agreement with The Prudential Insurance Company of America (“PICA”) pursuant to which 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, LLC, of 5801 SW 6th Avenue, Topeka, Kansas 66636, whereby se2, LLC provides certain business process outsourcing services with respect to the Contracts. se2, LLC may engage other service providers to provide certain administrative functions. These service providers may change over time, and as of December 31, 2016, consisted of the following: NTT DATA, Inc. (administrative services) located at 100 City Square, Boston, MA 02129; RR Donnelley Global Investment Markets, a division of RR Donnelley & Sons Company (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
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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; Venio LLC, d/b/a Keane (lost shareholder search) located at PO Box 1508, Southeastern, PA 19399-1508; 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. |
We will send you Contract statements at least annually. We will also send you transaction confirmations. 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 or a confirmation. 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 will make the adjustment as of the date that we receive notice of the potential error. Correspondence you send by regular mail to our service center should be sent to P.O. Box 758566, Topeka, KS 66675-8566. Your correspondence will be picked up at this address and then delivered to our service center. Your correspondence is not considered received by us until it is received at our service center. Where this prospectus refers to the day when we receive a purchase payment, request, election, notice, transfer or any other transaction request from you, we mean the day on which that item (or the last requirement needed for us to process that item) arrives in complete and proper form at our service center or via the appropriate telephone or fax number if the item is a type we accept by those means. There are two main exceptions: if the item arrives at our service center (1) on a day that is not a business day, or (2) after the close of a business day, then, in each case, we are deemed to have received that item on the next business day.
We will also provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws.
We provide information about cyber security risks associated with this Contract in the Statement of Additional Information.
Distribution of Contracts
Please note that these Contracts are no longer available for new sales. The information provided in this section is for informational purposes only.
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 6% of all Purchase Payments (on a present value basis). From time to time, we may offer additional sales incentives of up to 1% of Purchase Payments to broker-dealers who maintain certain sales volume levels.
Allstate Distributors, LLC (“ADLLC”), located at 3075 Sanders Road, Northbrook, IL 60062-7154 serves as distributor of the Contracts. ADLLC is a wholly owned subsidiary of Allstate Life. 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.
Lincoln Benefit does not pay ADLLC a commission for distribution of the Contracts. The underwriting agreement with ADLLC provides that we will reimburse ADLLC for expenses incurred in distributing the Contracts, including liability arising out of services we provide on the Contracts.
Lincoln Benefit and ADLLC have also entered into wholesaling agreements with certain independent contractors and their broker-dealers. Under these agreements, compensation based on a percentage of premium payments and/or Contract values is paid to the wholesaling broker-dealer for the wholesaling activities of their registered representative.
Legal Proceedings
There are no pending legal proceedings affecting the Separate Account. Lincoln Benefit is engaged in routine lawsuits which, in our management’s judgment, are not of material importance to their respective total assets or material with respect to the Separate Account.
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Legal Matters
Matters of Nebraska law pertaining to the Contract, including the validity of the Contract and Lincoln Benefit’s right to issue the Contract under Nebraska law, have been passed upon by Lamson Dugan & Murray LLP, Omaha, Nebraska.
Registration Statement
We have filed a registration statement with the SEC, under the Securities Act of 1933 as amended, with respect to the Contracts covered by this prospectus. This prospectus does not contain all the information set forth in the registration statement and the exhibits filed as part of the registration statement. You should refer to the registration statement and the exhibits for further information concerning the Separate Account, Lincoln Benefit, and the Contracts. The descriptions in this prospectus of the Contracts and other legal instruments are summaries. You should refer to those instruments as filed for the precise terms of those instruments. You may inspect and obtain copies of the registration statement as described on the cover page of this prospectus.
About Lincoln Benefit Life Company
Rule12h-7 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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. The variable annuities described in this prospectus fall within the exemption provided under rule12h-7. We rely on the exemption provided under rule12h-7 and do not file reports under the Exchange Act.
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Table of Contents of Statement of Additional Information
|
| The Contract |
Annuity Payments |
Initial Monthly Annuity Payment |
Subsequent Monthly Payments |
Transfers After Annuity Date |
Annuity Unit Value |
| Illustrative Example of Annuity Unit Value Calculation |
| Illustrative Example of Variable Annuity Payments |
| Experts |
| Financial Statements |
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APPENDIX A – ACCUMULATION UNIT VALUES
Appendix A presents the Accumulation Unit Values and number of Accumulation Units outstanding for eachSub-Account since theSub-Accounts were first offered under the Contracts; for a maximum of 10 years. This Appendix includes Accumulation Unit Values representing the highest and lowest available combinations of Contract charges that affect Accumulation Unit Values for each Contract; as well as outstanding units for each suchsub-accounts, which may include other variable annuities offered, as of the dates shown. The Statement of Additional Information, which is available upon request without charge, contains the Accumulation Unit Values for all other available combinations of Contract charges that affect Accumulation Unit Values for each Contract. Please contact us at1-800-457-7617 to obtain a copy of the Statement of Additional Information.
The LBL Consultant Variable Annuity I Contracts and all of the VariableSub-Accounts shown below were first offered under the Contracts on September 9, 1998, except for the Janus Aspen Series Foreign Stock – Service Shares Sub-Account, LSA Balanced, Oppenheimer Main Street Small- &Mid-Cap Fund/VA – Service SharesSub-Account, PIMCO Foreign Bond (U.S. Dollar-Hedged) – Administrative SharesSub-Account, PIMCO Total Return – Administrative SharesSub-Account, Premier VIT OpCap BalancedSub-Account, Premier VIT NACM Small Cap Portfolio Class 1Sub-Account, Putnam VT International Value Fund – Class IBSub-Account, Invesco Van Kampen V.I. Growth and Income Fund – Series IISub-Account which were first offered under the Contracts on May 1, 2002; the Invesco Van Kampen V.I. Value Opportunities Fund – Series ISub-Account, Legg Mason ClearBridge Variable Large Cap Value Portfolio – Class I Sub-Account, Invesco Van Kampen V.I. American Value Fund – Series ISub-Account which were first offered under the Contracts on April 30, 2004; the Wells Fargo Advantage VT DiscoverySub-Account, Wells Fargo Advantage VT OpportunitySub-Account which were first offered under the Contracts on April 8, 2005; and the DWS VSII: Global Income Builder VIP – Class ASub-Account which was first offered under the Contracts on April 29, 2005 and Janus Aspen Overseas Portfolio – Service ShareSub-Account which was first offered under the Contracts on April 30, 2008. Accumulation unit value: unit of measure used to calculate the value or a Contract Owner’s interest in aSub-Account 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 Contract Maintenance Charge.
The name of the followingSub-Account changed since December 31, 2016. The name shown in the table of Accumulation Units corresponds to the name of theSub-Account on December 31, 2016.
| | |
Sub-Account Name as of December 31, 2016 (as appears in the following tables of Accumulation Unit Values) | | Sub-Account Name on/about May 1, 2017 |
Janus Aspen Series Janus Portfolio - Institutional Shares | | Janus Aspen Series Research Portfolio - Institutional Shares |
A-1
LBL CONSULTANT I VARIABLE ANNUITY - PROSPECTUS
ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR
EACH VARIABLESUB-ACCOUNT*
Basic Policy
Mortality & Expense = 1.15
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Alger Capital Appreciation Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $17.148 | | $22.613 | | 307,354 |
| | | 2008 | | $22.613 | | $12.252 | | 182,353 |
| | | 2009 | | $12.252 | | $18.283 | | 147,379 |
| | | 2010 | | $18.283 | | $20.589 | | 125,277 |
| | | 2011 | | $20.589 | | $20.272 | | 102,062 |
| | | 2012 | | $20.272 | | $23.684 | | 78,761 |
| | | 2013 | | $23.684 | | $31.621 | | 65,750 |
| | | 2014 | | $31.621 | | $35.523 | | 58,244 |
| | | 2015 | | $35.523 | | $37.254 | | 52,334 |
| | | 2016 | | $37.254 | | $36.977 | | 46,003 |
| Alger Growth & Income Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $13.673 | | $14.870 | | 289,123 |
| | | 2008 | | $14.870 | | $8.889 | | 189,627 |
| | | 2009 | | $8.889 | | $11.603 | | 144,735 |
| | | 2010 | | $11.603 | | $12.865 | | 102,497 |
| | | 2011 | | $12.865 | | $13.533 | | 80,128 |
| | | 2012 | | $13.533 | | $15.013 | | 64,595 |
| | | 2013 | | $15.013 | | $19.263 | | 55,508 |
| | | 2014 | | $19.263 | | $21.405 | | 51,188 |
| | | 2015 | | $21.405 | | $21.345 | | 44,622 |
| | | 2016 | | $21.345 | | $23.240 | | 41,390 |
A-2
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Alger Large Cap Growth Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $12.208 | | $14.460 | | 340,976 |
| | | 2008 | | $14.460 | | $7.689 | | 252,531 |
| | | 2009 | | $7.689 | | $11.206 | | 202,899 |
| | | 2010 | | $11.206 | | $12.549 | | 159,401 |
| | | 2011 | | $12.549 | | $12.350 | | 114,291 |
| | | 2012 | | $12.350 | | $13.399 | | 90,699 |
| | | 2013 | | $13.399 | | $17.875 | | 81,073 |
| | | 2014 | | $17.875 | | $19.592 | | 72,833 |
| | | 2015 | | $19.592 | | $19.681 | | 65,250 |
| | | 2016 | | $19.681 | | $19.276 | | 58,065 |
| Alger Mid Cap Growth Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $20.104 | | $26.119 | | 395,122 |
| | | 2008 | | $26.119 | | $10.741 | | 307,529 |
| | | 2009 | | $10.741 | | $16.093 | | 251,589 |
| | | 2010 | | $16.093 | | $18.974 | | 201,160 |
| | | 2011 | | $18.974 | | $17.188 | | 154,396 |
| | | 2012 | | $17.188 | | $19.725 | | 126,168 |
| | | 2013 | | $19.725 | | $26.462 | | 97,572 |
| | | 2014 | | $26.462 | | $28.226 | | 82,799 |
| | | 2015 | | $28.226 | | $27.440 | | 74,353 |
| | | 2016 | | $27.440 | | $27.364 | | 65,314 |
| Alger SmallCap Growth Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $12.935 | | $14.976 | | 268,659 |
| | | 2008 | | $14.976 | | $7.898 | | 187,715 |
| | | 2009 | | $7.898 | | $11.349 | | 171,410 |
| | | 2010 | | $11.349 | | $14.043 | | 140,374 |
| | | 2011 | | $14.043 | | $13.427 | | 117,145 |
| | | 2012 | | $13.427 | | $14.918 | | 92,887 |
| | | 2013 | | $14.918 | | $19.780 | | 75,544 |
| | | 2014 | | $19.780 | | $19.619 | | 61,624 |
| | | 2015 | | $19.619 | | $18.733 | | 55,890 |
| | | 2016 | | $18.733 | | $19.655 | | 46,055 |
| ClearBridge Variable Large Cap Value Portfolio-Class I | | | | | | | | |
| | | 2007 | | $13.461 | | $13.811 | | 35,322 |
| | | 2008 | | $13.811 | | $8.781 | | 26,875 |
| | | 2009 | | $8.781 | | $10.796 | | 20,239 |
| | | 2010 | | $10.796 | | $11.671 | | 17,945 |
| | | 2011 | | $11.671 | | $12.098 | | 17,154 |
| | | 2012 | | $12.098 | | $13.919 | | 16,971 |
| | | 2013 | | $13.919 | | $18.195 | | 17,545 |
| | | 2014 | | $18.195 | | $20.073 | | 15,298 |
| | | 2015 | | $20.073 | | $19.255 | | 9,148 |
| | | 2016 | | $19.255 | | $21.489 | | 5,939 |
| Deutsche VSI: Bond VIP - Class A | | | | | | | | |
| | | 2007 | | $13.671 | | $14.064 | | 339,879 |
| | | 2008 | | $14.064 | | $11.560 | | 255,646 |
| | | 2009 | | $11.560 | | $12.566 | | 186,602 |
| | | 2010 | | $12.566 | | $13.253 | | 155,647 |
| | | 2011 | | $13.253 | | $13.833 | | 108,411 |
| | | 2012 | | $13.833 | | $14.722 | | 82,736 |
| | | 2013 | | $14.722 | | $14.099 | | 69,186 |
| | | 2014 | | $14.099 | | $14.847 | | 50,085 |
| | | 2015 | | $14.847 | | $14.620 | | 46,046 |
| | | 2016 | | $14.620 | | $15.295 | | 43,016 |
A-3
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Deutsche VSI: Core Equity VIP - Class A | | | | | | | | |
| | | 2007 | | $11.345 | | $11.355 | | 73,259 |
| | | 2008 | | $11.355 | | $6.918 | | 49,772 |
| | | 2009 | | $6.918 | | $9.164 | | 38,191 |
| | | 2010 | | $9.164 | | $10.354 | | 21,260 |
| | | 2011 | | $10.354 | | $10.211 | | 20,105 |
| | | 2012 | | $10.211 | | $11.678 | | 17,593 |
| | | 2013 | | $11.678 | | $15.838 | | 17,088 |
| | | 2014 | | $15.838 | | $17.491 | | 15,990 |
| | | 2015 | | $17.491 | | $18.180 | | 14,822 |
| | | 2016 | | $18.180 | | $19.836 | | 10,538 |
| Deutsche VSI: CROCI® International VIP - Class A | | | | | | | | |
| | | 2007 | | $13.967 | | $15.805 | | 113,896 |
| | | 2008 | | $15.805 | | $8.083 | | 101,279 |
| | | 2009 | | $8.083 | | $10.658 | | 69,353 |
| | | 2010 | | $10.658 | | $10.697 | | 54,718 |
| | | 2011 | | $10.697 | | $8.803 | | 41,799 |
| | | 2012 | | $8.803 | | $10.488 | | 31,677 |
| | | 2013 | | $10.488 | | $12.453 | | 41,029 |
| | | 2014 | | $12.453 | | $10.851 | | 33,147 |
| | | 2015 | | $10.851 | | $10.129 | | 15,779 |
| | | 2016 | | $10.129 | | $10.077 | | 14,031 |
| Deutsche VSI: Global Small Cap VIP - Class A | | | | | | | | |
| | | 2007 | | $24.544 | | $26.499 | | 131,794 |
| | | 2008 | | $26.499 | | $13.094 | | 97,138 |
| | | 2009 | | $13.094 | | $19.164 | | 83,558 |
| | | 2010 | | $19.164 | | $23.968 | | 72,183 |
| | | 2011 | | $23.968 | | $21.328 | | 61,099 |
| | | 2012 | | $21.328 | | $24.300 | | 42,306 |
| | | 2013 | | $24.300 | | $32.623 | | 35,943 |
| | | 2014 | | $32.623 | | $30.887 | | 29,476 |
| | | 2015 | | $30.887 | | $30.858 | | 22,688 |
| | | 2016 | | $30.858 | | $30.954 | | 20,609 |
| Deutsche VSII: Global Income Builder VIP - Class A | | | | | | | | |
| | | 2007 | | $11.543 | | $11.950 | | 249,164 |
| | | 2008 | | $11.950 | | $8.576 | | 165,654 |
| | | 2009 | | $8.576 | | $10.454 | | 114,278 |
| | | 2010 | | $10.454 | | $11.483 | | 87,837 |
| | | 2011 | | $11.483 | | $11.179 | | 63,813 |
| | | 2012 | | $11.179 | | $12.473 | | 52,594 |
| | | 2013 | | $12.473 | | $14.366 | | 46,688 |
| | | 2014 | | $14.366 | | $14.731 | | 41,478 |
| | | 2015 | | $14.731 | | $14.338 | | 38,344 |
| | | 2016 | | $14.338 | | $15.126 | | 31,863 |
| Federated Fund for U.S. Government Securities II | | | | | | | | |
| | | 2007 | | $13.478 | | $14.146 | | 603,659 |
| | | 2008 | | $14.146 | | $14.568 | | 494,396 |
| | | 2009 | | $14.568 | | $15.136 | | 374,113 |
| | | 2010 | | $15.136 | | $15.721 | | 305,850 |
| | | 2011 | | $15.721 | | $16.423 | | 238,391 |
| | | 2012 | | $16.423 | | $16.701 | | 220,033 |
| | | 2013 | | $16.701 | | $16.155 | | 179,191 |
| | | 2014 | | $16.155 | | $16.692 | | 132,457 |
| | | 2015 | | $16.692 | | $16.570 | | 116,141 |
| | | 2016 | | $16.570 | | $16.628 | | 103,485 |
A-4
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Federated High Income Bond Fund II | | | | | | | | |
| | | 2007 | | $13.088 | | $13.368 | | 432,506 |
| | | 2008 | | $13.368 | | $9.770 | | 344,383 |
| | | 2009 | | $9.770 | | $14.748 | | 260,044 |
| | | 2010 | | $14.748 | | $16.710 | | 201,597 |
| | | 2011 | | $16.710 | | $17.356 | | 164,486 |
| | | 2012 | | $17.356 | | $19.659 | | 148,235 |
| | | 2013 | | $19.659 | | $20.771 | | 133,814 |
| | | 2014 | | $20.771 | | $21.065 | | 112,577 |
| | | 2015 | | $21.065 | | $20.269 | | 100,418 |
| | | 2016 | | $20.269 | | $22.984 | | 84,638 |
| Federated Managed Volatility Fund II | | | | | | | | |
| | | 2007 | | $9.980 | | $10.253 | | 154,739 |
| | | 2008 | | $10.253 | | $8.062 | | 102,548 |
| | | 2009 | | $8.062 | | $10.213 | | 101,513 |
| | | 2010 | | $10.213 | | $11.305 | | 68,578 |
| | | 2011 | | $11.305 | | $11.698 | | 50,687 |
| | | 2012 | | $11.698 | | $13.118 | | 46,621 |
| | | 2013 | | $13.118 | | $15.772 | | 46,726 |
| | | 2014 | | $15.772 | | $16.185 | | 40,121 |
| | | 2015 | | $16.185 | | $14.776 | | 38,435 |
| | | 2016 | | $14.776 | | $15.715 | | 32,856 |
| Fidelity VIP Asset Manager Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $12.690 | | $14.474 | | 252,896 |
| | | 2008 | | $14.474 | | $10.189 | | 202,629 |
| | | 2009 | | $10.189 | | $12.992 | | 144,646 |
| | | 2010 | | $12.992 | | $14.661 | | 116,581 |
| | | 2011 | | $14.661 | | $14.108 | | 93,211 |
| | | 2012 | | $14.108 | | $15.672 | | 74,411 |
| | | 2013 | | $15.672 | | $17.908 | | 63,012 |
| | | 2014 | | $17.908 | | $18.717 | | 54,882 |
| | | 2015 | | $18.717 | | $18.511 | | 44,855 |
| | | 2016 | | $18.511 | | $18.843 | | 38,406 |
| Fidelity VIP Contrafund® Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $18.546 | | $21.536 | | 1,005,803 |
| | | 2008 | | $21.536 | | $12.226 | | 742,971 |
| | | 2009 | | $12.226 | | $16.386 | | 631,023 |
| | | 2010 | | $16.386 | | $18.969 | | 511,344 |
| | | 2011 | | $18.969 | | $18.261 | | 383,384 |
| | | 2012 | | $18.261 | | $20.994 | | 335,707 |
| | | 2013 | | $20.994 | | $27.220 | | 271,301 |
| | | 2014 | | $27.220 | | $30.092 | | 238,198 |
| | | 2015 | | $30.092 | | $29.918 | | 205,942 |
| | | 2016 | | $29.918 | | $31.913 | | 179,095 |
| Fidelity VIP Equity-Income Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $16.496 | | $16.539 | | 684,837 |
| | | 2008 | | $16.539 | | $9.366 | | 412,487 |
| | | 2009 | | $9.366 | | $12.044 | | 308,304 |
| | | 2010 | | $12.044 | | $13.697 | | 252,183 |
| | | 2011 | | $13.697 | | $13.658 | | 198,587 |
| | | 2012 | | $13.658 | | $15.823 | | 163,437 |
| | | 2013 | | $15.823 | | $20.025 | | 133,321 |
| | | 2014 | | $20.025 | | $21.500 | | 117,357 |
| | | 2015 | | $21.500 | | $20.391 | | 95,842 |
| | | 2016 | | $20.391 | | $23.767 | | 79,707 |
A-5
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Fidelity VIP Government Money Market Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $12.017 | | $12.487 | | 1,221,039 |
| | | 2008 | | $12.487 | | $12.705 | | 1,305,720 |
| | | 2009 | | $12.705 | | $12.637 | | 985,343 |
| | | 2010 | | $12.637 | | $12.511 | | 775,634 |
| | | 2011 | | $12.511 | | $12.369 | | 634,224 |
| | | 2012 | | $12.369 | | $12.232 | | 505,511 |
| | | 2013 | | $12.232 | | $12.083 | | 410,477 |
| | | 2014 | | $12.083 | | $11.934 | | 320,879 |
| | | 2015 | | $11.934 | | $11.789 | | 228,320 |
| | | 2016 | | $11.789 | | $11.667 | | 199,121 |
| Fidelity VIP Growth Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $11.500 | | $14.418 | | 618,823 |
| | | 2008 | | $14.418 | | $7.523 | | 492,708 |
| | | 2009 | | $7.523 | | $9.531 | | 405,357 |
| | | 2010 | | $9.531 | | $11.688 | | 320,051 |
| | | 2011 | | $11.688 | | $11.566 | | 270,601 |
| | | 2012 | | $11.566 | | $13.100 | | 225,513 |
| | | 2013 | | $13.100 | | $17.638 | | 186,919 |
| | | 2014 | | $17.638 | | $19.387 | | 165,248 |
| | | 2015 | | $19.387 | | $20.520 | | 139,306 |
| | | 2016 | | $20.520 | | $20.428 | | 124,728 |
| Fidelity VIP Index 500 Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $13.233 | | $13.778 | | 1,041,479 |
| | | 2008 | | $13.778 | | $8.572 | | 756,199 |
| | | 2009 | | $8.572 | | $10.718 | | 592,792 |
| | | 2010 | | $10.718 | | $12.176 | | 493,294 |
| | | 2011 | | $12.176 | | $12.270 | | 410,778 |
| | | 2012 | | $12.270 | | $14.046 | | 343,300 |
| | | 2013 | | $14.046 | | $18.344 | | 307,792 |
| | | 2014 | | $18.344 | | $20.574 | | 249,167 |
| | | 2015 | | $20.574 | | $20.590 | | 202,228 |
| | | 2016 | | $20.590 | | $22.746 | | 177,211 |
| Fidelity VIP Overseas Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $15.773 | | $18.273 | | 327,028 |
| | | 2008 | | $18.273 | | $10.141 | | 276,821 |
| | | 2009 | | $10.141 | | $12.672 | | 211,336 |
| | | 2010 | | $12.672 | | $14.155 | | 161,268 |
| | | 2011 | | $14.155 | | $11.580 | | 132,738 |
| | | 2012 | | $11.580 | | $13.808 | | 109,420 |
| | | 2013 | | $13.808 | | $17.787 | | 90,942 |
| | | 2014 | | $17.787 | | $16.147 | | 81,429 |
| | | 2015 | | $16.147 | | $16.525 | | 70,824 |
| | | 2016 | | $16.525 | | $15.494 | | 64,005 |
| Invesco V.I. American Value Fund - Series I | | | | | | | | |
| | | 2007 | | $14.984 | | $15.958 | | 210,481 |
| | | 2008 | | $15.958 | | $9.252 | | 158,166 |
| | | 2009 | | $9.252 | | $12.720 | | 131,570 |
| | | 2010 | | $12.720 | | $15.356 | | 113,395 |
| | | 2011 | | $15.356 | | $15.306 | | 92,596 |
| | | 2012 | | $15.306 | | $17.731 | | 76,421 |
| | | 2013 | | $17.731 | | $23.511 | | 52,878 |
| | | 2014 | | $23.511 | | $25.483 | | 40,485 |
| | | 2015 | | $25.483 | | $22.869 | | 31,596 |
| | | 2016 | | $22.869 | | $26.086 | | 27,815 |
A-6
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Invesco V.I. Growth and Income Fund - Series II | | | | | | | | |
| | | 2007 | | $14.397 | | $14.576 | | 306,627 |
| | | 2008 | | $14.576 | | $9.758 | | 199,062 |
| | | 2009 | | $9.758 | | $11.960 | | 183,308 |
| | | 2010 | | $11.960 | | $13.252 | | 150,424 |
| | | 2011 | | $13.252 | | $12.792 | | 100,474 |
| | | 2012 | | $12.792 | | $14.445 | | 78,301 |
| | | 2013 | | $14.445 | | $19.082 | | 62,871 |
| | | 2014 | | $19.082 | | $20.723 | | 41,000 |
| | | 2015 | | $20.723 | | $19.788 | | 34,836 |
| | | 2016 | | $19.788 | | $23.340 | | 33,660 |
| Invesco V.I. Mid Cap Growth Fund - Series II | | | | | | | | |
| | | 2007 | | $12.686 | | $14.732 | | 39,490 |
| | | 2008 | | $14.732 | | $7.735 | | 29,220 |
| | | 2009 | | $7.735 | | $11.945 | | 38,907 |
| | | 2010 | | $11.945 | | $15.014 | | 25,399 |
| | | 2011 | | $15.014 | | $13.440 | | 18,967 |
| | | 2012 | | $13.440 | | $14.816 | | 15,527 |
| | | 2013 | | $14.816 | | $19.988 | | 11,807 |
| | | 2014 | | $19.988 | | $21.258 | | 12,458 |
| | | 2015 | | $21.258 | | $21.213 | | 13,061 |
| | | 2016 | | $21.213 | | $21.070 | | 12,892 |
| Invesco V.I. Value Opportunities Fund - Series I | | | | | | | | |
| | | 2007 | | $12.634 | | $12.669 | | 199,610 |
| | | 2008 | | $12.669 | | $6.034 | | 176,998 |
| | | 2009 | | $6.034 | | $8.820 | | 148,589 |
| | | 2010 | | $8.820 | | $9.351 | | 119,425 |
| | | 2011 | | $9.351 | | $8.953 | | 77,525 |
| | | 2012 | | $8.953 | | $10.407 | | 62,452 |
| | | 2013 | | $10.407 | | $13.747 | | 56,742 |
| | | 2014 | | $13.747 | | $14.475 | | 43,123 |
| | | 2015 | | $14.475 | | $12.808 | | 41,630 |
| | | 2016 | | $12.808 | | $14.969 | | 37,575 |
| Janus Aspen Enterprise Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $15.497 | | $18.677 | | 344,083 |
| | | 2008 | | $18.677 | | $10.380 | | 288,564 |
| | | 2009 | | $10.380 | | $14.846 | | 221,943 |
| | | 2010 | | $14.846 | | $18.452 | | 186,653 |
| | | 2011 | | $18.452 | | $17.965 | | 157,425 |
| | | 2012 | | $17.965 | | $20.809 | | 139,793 |
| | | 2013 | | $20.809 | | $27.204 | | 119,634 |
| | | 2014 | | $27.204 | | $30.230 | | 106,398 |
| | | 2015 | | $30.230 | | $31.058 | | 94,655 |
| | | 2016 | | $31.058 | | $34.465 | | 83,548 |
| Janus Aspen Global Research Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $12.594 | | $13.634 | | 562,020 |
| | | 2008 | | $13.634 | | $7.451 | | 410,898 |
| | | 2009 | | $7.451 | | $10.132 | | 336,082 |
| | | 2010 | | $10.132 | | $11.591 | | 263,086 |
| | | 2011 | | $11.591 | | $9.874 | | 207,953 |
| | | 2012 | | $9.874 | | $11.709 | | 180,063 |
| | | 2013 | | $11.709 | | $14.851 | | 152,881 |
| | | 2014 | | $14.851 | | $15.758 | | 126,783 |
| | | 2015 | | $15.758 | | $15.207 | | 115,550 |
| | | 2016 | | $15.207 | | $15.329 | | 102,970 |
A-7
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Janus Aspen Janus Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $11.676 | | $13.270 | | 469,901 |
| | | 2008 | | $13.270 | | $7.900 | | 371,128 |
| | | 2009 | | $7.900 | | $10.637 | | 290,538 |
| | | 2010 | | $10.637 | | $12.031 | | 230,669 |
| | | 2011 | | $12.031 | | $11.252 | | 195,033 |
| | | 2012 | | $11.252 | | $13.177 | | 155,917 |
| | | 2013 | | $13.177 | | $16.961 | | 128,313 |
| | | 2014 | | $16.961 | | $18.927 | | 117,019 |
| | | 2015 | | $18.927 | | $19.691 | | 109,573 |
| | | 2016 | | $19.691 | | $19.544 | | 97,007 |
| Janus Aspen Overseas Portfolio - Service Shares | | | | | | | | |
| | | 2008 | | $10.000 | | $7.495 | | 62,852 |
| | | 2009 | | $7.495 | | $13.254 | | 86,323 |
| | | 2010 | | $13.254 | | $16.365 | | 71,833 |
| | | 2011 | | $16.365 | | $10.935 | | 59,162 |
| | | 2012 | | $10.935 | | $12.222 | | 39,058 |
| | | 2013 | | $12.222 | | $13.794 | | 31,628 |
| | | 2014 | | $13.794 | | $11.975 | | 26,783 |
| | | 2015 | | $11.975 | | $10.785 | | 23,810 |
| | | 2016 | | $10.785 | | $9.937 | | 22,876 |
| Janus Aspen Series Balanced Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $17.282 | | $18.865 | | 747,492 |
| | | 2008 | | $18.865 | | $15.679 | | 535,796 |
| | | 2009 | | $15.679 | | $19.493 | | 427,444 |
| | | 2010 | | $19.493 | | $20.865 | | 348,978 |
| | | 2011 | | $20.865 | | $20.945 | | 284,742 |
| | | 2012 | | $20.945 | | $23.501 | | 258,732 |
| | | 2013 | | $23.501 | | $27.887 | | 196,994 |
| | | 2014 | | $27.887 | | $29.883 | | 169,459 |
| | | 2015 | | $29.883 | | $29.695 | | 151,948 |
| | | 2016 | | $29.695 | | $30.677 | | 135,435 |
| Janus Aspen Series Flexible Bond Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $14.017 | | $14.816 | | 327,277 |
| | | 2008 | | $14.816 | | $15.514 | | 272,856 |
| | | 2009 | | $15.514 | | $17.346 | | 231,270 |
| | | 2010 | | $17.346 | | $18.496 | | 202,832 |
| | | 2011 | | $18.496 | | $19.499 | | 171,010 |
| | | 2012 | | $19.499 | | $20.862 | | 146,755 |
| | | 2013 | | $20.862 | | $20.575 | | 105,740 |
| | | 2014 | | $20.575 | | $21.322 | | 81,060 |
| | | 2015 | | $21.322 | | $21.104 | | 71,503 |
| | | 2016 | | $21.104 | | $21.357 | | 62,281 |
| Janus Aspen Series Foreign Stock Portfolio - Service Shares | | | | | | | | |
| | | 2007 | | $14.605 | | $17.055 | | 73,894 |
| | | 2008 | | $17.055 | | $16.058 | | 0 |
A-8
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| MFS® Growth Series - Initial Class | | | | | | | | |
| | | 2007 | | $11.531 | | $13.798 | | 126,996 |
| | | 2008 | | $13.798 | | $8.528 | | 102,015 |
| | | 2009 | | $8.528 | | $11.594 | | 78,308 |
| | | 2010 | | $11.594 | | $13.207 | | 66,211 |
| | | 2011 | | $13.207 | | $13.001 | | 60,057 |
| | | 2012 | | $13.001 | | $15.071 | | 50,368 |
| | | 2013 | | $15.071 | | $20.369 | | 39,799 |
| | | 2014 | | $20.369 | | $21.915 | | 31,469 |
| | | 2015 | | $21.915 | | $23.279 | | 27,675 |
| | | 2016 | | $23.279 | | $23.552 | | 26,011 |
| MFS® Investors Trust Series - Initial Class | | | | | | | | |
| | | 2007 | | $11.824 | | $12.880 | | 126,138 |
| | | 2008 | | $12.880 | | $8.512 | | 100,457 |
| | | 2009 | | $8.512 | | $10.668 | | 84,052 |
| | | 2010 | | $10.668 | | $11.704 | | 56,558 |
| | | 2011 | | $11.704 | | $11.307 | | 36,636 |
| | | 2012 | | $11.307 | | $13.308 | | 32,003 |
| | | 2013 | | $13.308 | | $17.356 | | 24,351 |
| | | 2014 | | $17.356 | | $19.026 | | 17,070 |
| | | 2015 | | $19.026 | | $18.831 | | 16,801 |
| | | 2016 | | $18.831 | | $20.195 | | 16,279 |
| MFS® New Discovery Series - Initial Class | | | | | | | | |
| | | 2007 | | $19.241 | | $19.479 | | 139,957 |
| | | 2008 | | $19.479 | | $11.671 | | 119,273 |
| | | 2009 | | $11.671 | | $18.809 | | 94,439 |
| | | 2010 | | $18.809 | | $25.325 | | 80,183 |
| | | 2011 | | $25.325 | | $22.443 | | 58,617 |
| | | 2012 | | $22.443 | | $26.868 | | 53,041 |
| | | 2013 | | $26.868 | | $37.551 | | 49,336 |
| | | 2014 | | $37.551 | | $34.393 | | 39,916 |
| | | 2015 | | $34.393 | | $33.325 | | 35,322 |
| | | 2016 | | $33.325 | | $35.891 | | 31,289 |
| MFS® Research Series - Initial Class | | | | | | | | |
| | | 2007 | | $12.095 | | $13.521 | | 86,910 |
| | | 2008 | | $13.521 | | $8.534 | | 55,904 |
| | | 2009 | | $8.534 | | $11.002 | | 49,781 |
| | | 2010 | | $11.002 | | $12.593 | | 38,970 |
| | | 2011 | | $12.593 | | $12.381 | | 34,033 |
| | | 2012 | | $12.381 | | $14.339 | | 29,467 |
| | | 2013 | | $14.339 | | $18.732 | | 21,713 |
| | | 2014 | | $18.732 | | $20.387 | | 15,365 |
| | | 2015 | | $20.387 | | $20.296 | | 14,416 |
| | | 2016 | | $20.296 | | $21.795 | | 14,576 |
| MFS® Total Return Series - Initial Class | | | | | | | | |
| | | 2007 | | $16.260 | | $16.734 | | 661,560 |
| | | 2008 | | $16.734 | | $12.868 | | 464,793 |
| | | 2009 | | $12.868 | | $15.000 | | 347,219 |
| | | 2010 | | $15.000 | | $16.285 | | 279,717 |
| | | 2011 | | $16.285 | | $16.368 | | 217,821 |
| | | 2012 | | $16.368 | | $17.983 | | 185,517 |
| | | 2013 | | $17.983 | | $21.143 | | 153,519 |
| | | 2014 | | $21.143 | | $22.654 | | 114,901 |
| | | 2015 | | $22.654 | | $22.290 | | 81,974 |
| | | 2016 | | $22.290 | | $24.016 | | 70,562 |
A-9
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Oppenheimer Main Street Small Cap Fund/VA - Service Shares | | | | | | | | |
| | | 2007 | | $16.144 | | $15.720 | | 219,803 |
| | | 2008 | | $15.720 | | $9.625 | | 151,992 |
| | | 2009 | | $9.625 | | $13.011 | | 120,823 |
| | | 2010 | | $13.011 | | $15.812 | | 98,906 |
| | | 2011 | | $15.812 | | $15.244 | | 74,721 |
| | | 2012 | | $15.244 | | $17.714 | | 78,073 |
| | | 2013 | | $17.714 | | $24.600 | | 71,129 |
| | | 2014 | | $24.600 | | $27.126 | | 52,019 |
| | | 2015 | | $27.126 | | $25.157 | | 38,809 |
| | | 2016 | | $25.157 | | $29.236 | | 32,927 |
| PIMCO Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares | | | | | | | | |
| | | 2007 | | $11.657 | | $11.929 | | 175,543 |
| | | 2008 | | $11.929 | | $11.501 | | 185,837 |
| | | 2009 | | $11.501 | | $13.133 | | 139,898 |
| | | 2010 | | $13.133 | | $14.072 | | 137,307 |
| | | 2011 | | $14.072 | | $14.838 | | 121,733 |
| | | 2012 | | $14.838 | | $16.243 | | 102,765 |
| | | 2013 | | $16.243 | | $16.122 | | 103,151 |
| | | 2014 | | $16.122 | | $17.698 | | 84,730 |
| | | 2015 | | $17.698 | | $17.529 | | 67,505 |
| | | 2016 | | $17.529 | | $18.433 | | 60,607 |
| PIMCO Total Return Portfolio - Administrative Shares | | | | | | | | |
| | | 2007 | | $11.771 | | $12.643 | | 737,286 |
| | | 2008 | | $12.643 | | $13.088 | | 699,373 |
| | | 2009 | | $13.088 | | $14.744 | | 709,743 |
| | | 2010 | | $14.744 | | $15.743 | | 639,674 |
| | | 2011 | | $15.743 | | $16.109 | | 508,815 |
| | | 2012 | | $16.109 | | $17.434 | | 464,493 |
| | | 2013 | | $17.434 | | $16.880 | | 289,601 |
| | | 2014 | | $16.880 | | $17.383 | | 226,411 |
| | | 2015 | | $17.383 | | $17.244 | | 169,773 |
| | | 2016 | | $17.244 | | $17.487 | | 152,572 |
| Premier VIT NACM Small Cap Portfolio - Class 1 | | | | | | | | |
| | | 2007 | | $14.300 | | $14.203 | | 142,608 |
| | | 2008 | | $14.203 | | $8.186 | | 108,005 |
| | | 2009 | | $8.186 | | $9.344 | | 85,491 |
| | | 2010 | | $9.344 | | $10.843 | | 0 |
| Premier VIT OpCap Balanced Portfolio | | | | | | | | |
| | | 2007 | | $12.005 | | $11.330 | | 58,167 |
| | | 2008 | | $11.330 | | $7.700 | | 43,630 |
| | | 2009 | | $7.700 | | $7.432 | | 0 |
| Putnam VT International Value Fund - Class IB | | | | | | | | |
| | | 2007 | | $18.881 | | $19.952 | | 125,260 |
| | | 2008 | | $19.952 | | $10.636 | | 74,027 |
| | | 2009 | | $10.636 | | $13.254 | | 56,664 |
| | | 2010 | | $13.254 | | $14.022 | | 39,029 |
| | | 2011 | | $14.022 | | $11.940 | | 26,096 |
| | | 2012 | | $11.940 | | $14.350 | | 21,954 |
| | | 2013 | | $14.350 | | $17.320 | | 21,131 |
| | | 2014 | | $17.320 | | $15.482 | | 16,908 |
| | | 2015 | | $15.482 | | $14.984 | | 15,321 |
| | | 2016 | | $14.984 | | $14.962 | | 14,371 |
A-10
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Ridgeworth Large Cap Growth Stock Fund | | | | | | | | |
| | | 2007 | | $9.773 | | $11.125 | | 88,003 |
| | | 2008 | | $11.125 | | $6.517 | | 81,011 |
| | | 2009 | | $6.517 | | $6.634 | | 0 |
| Ridgeworth Large Cap Value Equity Fund | | | | | | | | |
| | | 2007 | | $12.937 | | $13.229 | | 83,673 |
| | | 2008 | | $13.229 | | $8.781 | | 59,269 |
| | | 2009 | | $8.781 | | $8.309 | | 0 |
| T. Rowe Price Equity Income Portfolio - I | | | | | | | | |
| | | 2007 | | $17.984 | | $18.339 | | 575,733 |
| | | 2008 | | $18.339 | | $11.571 | | 402,473 |
| | | 2009 | | $11.571 | | $14.353 | | 288,947 |
| | | 2010 | | $14.353 | | $16.304 | | 227,597 |
| | | 2011 | | $16.304 | | $15.987 | | 165,957 |
| | | 2012 | | $15.987 | | $18.495 | | 147,085 |
| | | 2013 | | $18.495 | | $23.694 | | 114,417 |
| | | 2014 | | $23.694 | | $25.126 | | 91,032 |
| | | 2015 | | $25.126 | | $23.113 | | 78,126 |
| | | 2016 | | $23.113 | | $27.202 | | 69,617 |
| T. Rowe Price International Stock Portfolio - I | | | | | | | | |
| | | 2007 | | $13.934 | | $15.553 | | 191,891 |
| | | 2008 | | $15.553 | | $7.879 | | 149,103 |
| | | 2009 | | $7.879 | | $11.858 | | 116,835 |
| | | 2010 | | $11.858 | | $13.403 | | 95,977 |
| | | 2011 | | $13.403 | | $11.538 | | 69,775 |
| | | 2012 | | $11.538 | | $13.495 | | 78,643 |
| | | 2013 | | $13.495 | | $15.201 | | 65,383 |
| | | 2014 | | $15.201 | | $14.826 | | 30,868 |
| | | 2015 | | $14.826 | | $14.510 | | 29,451 |
| | | 2016 | | $14.510 | | $14.635 | | 21,910 |
| T. Rowe PriceMid-Cap Growth Portfolio - I | | | | | | | | |
| | | 2007 | | $21.626 | | $25.097 | | 295,779 |
| | | 2008 | | $25.097 | | $14.931 | | 222,831 |
| | | 2009 | | $14.931 | | $21.476 | | 160,985 |
| | | 2010 | | $21.476 | | $27.173 | | 125,304 |
| | | 2011 | | $27.173 | | $26.495 | | 92,948 |
| | | 2012 | | $26.495 | | $29.801 | | 73,521 |
| | | 2013 | | $29.801 | | $40.231 | | 65,296 |
| | | 2014 | | $40.231 | | $44.942 | | 56,067 |
| | | 2015 | | $44.942 | | $47.296 | | 46,953 |
| | | 2016 | | $47.296 | | $49.633 | | 41,818 |
| T. Rowe Price New America Growth Portfolio - I | | | | | | | | |
| | | 2007 | | $10.888 | | $12.233 | | 117,852 |
| | | 2008 | | $12.233 | | $7.461 | | 92,406 |
| | | 2009 | | $7.461 | | $11.035 | | 64,870 |
| | | 2010 | | $11.035 | | $13.040 | | 49,935 |
| | | 2011 | | $13.040 | | $12.740 | | 45,311 |
| | | 2012 | | $12.740 | | $14.232 | | 48,686 |
| | | 2013 | | $14.232 | | $19.398 | | 28,832 |
| | | 2014 | | $19.398 | | $20.945 | | 25,891 |
| | | 2015 | | $20.945 | | $22.464 | | 17,669 |
| | | 2016 | | $22.464 | | $22.476 | | 13,833 |
A-11
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Wells Fargo VT Discovery Fund | | | | | | | | |
| | | 2007 | | $12.999 | | $15.702 | | 161,353 |
| | | 2008 | | $15.702 | | $8.628 | | 115,632 |
| | | 2009 | | $8.628 | | $11.956 | | 82,156 |
| | | 2010 | | $11.956 | | $16.004 | | 68,993 |
| | | 2011 | | $16.004 | | $15.872 | | 55,858 |
| | | 2012 | | $15.872 | | $18.455 | | 53,856 |
| | | 2013 | | $18.455 | | $26.209 | | 42,675 |
| | | 2014 | | $26.209 | | $25.975 | | 35,208 |
| | | 2015 | | $25.975 | | $25.277 | | 29,411 |
| | | 2016 | | $25.277 | | $26.872 | | 26,796 |
| Wells Fargo VT Opportunity Fund - Class 2 | | | | | | | | |
| | | 2007 | | $12.235 | | $12.884 | | 339,846 |
| | | 2008 | | $12.884 | | $7.622 | | 257,232 |
| | | 2009 | | $7.622 | | $11.120 | | 196,311 |
| | | 2010 | | $11.120 | | $13.591 | | 157,062 |
| | | 2011 | | $13.591 | | $12.682 | | 117,739 |
| | | 2012 | | $12.682 | | $14.468 | | 100,940 |
| | | 2013 | | $14.468 | | $18.672 | | 73,852 |
| | | 2014 | | $18.672 | | $20.362 | | 64,044 |
| | | 2015 | | $20.362 | | $19.489 | | 53,089 |
| | | 2016 | | $19.489 | | $21.601 | | 50,024 |
| | * | The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.15% and an administrative expense charge of 0.10%. |
A-12
LBL CONSULTANT I VARIABLE ANNUITY - PROSPECTUS
ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR
EACH VARIABLESUB-ACCOUNT*
Basic Policy plus Death Benefit and Income Benefit Rider II
Mortality & Expense = 1.7
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Alger Capital Appreciation Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $7.621 | | $9.995 | | 759,050 |
| | | 2008 | | $9.995 | | $5.385 | | 521,910 |
| | | 2009 | | $5.385 | | $7.992 | | 457,894 |
| | | 2010 | | $7.992 | | $8.951 | | 466,843 |
| | | 2011 | | $8.951 | | $8.765 | | 505,465 |
| | | 2012 | | $8.765 | | $10.184 | | 243,023 |
| | | 2013 | | $10.184 | | $13.522 | | 262,580 |
| | | 2014 | | $13.522 | | $15.108 | | 223,337 |
| | | 2015 | | $15.108 | | $15.757 | | 167,264 |
| | | 2016 | | $15.757 | | $15.554 | | 130,160 |
| Alger Growth & Income Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $7.786 | | $8.421 | | 308,605 |
| | | 2008 | | $8.421 | | $5.006 | | 254,925 |
| | | 2009 | | $5.006 | | $6.499 | | 249,853 |
| | | 2010 | | $6.499 | | $7.166 | | 199,795 |
| | | 2011 | | $7.166 | | $7.496 | | 169,075 |
| | | 2012 | | $7.496 | | $8.271 | | 171,101 |
| | | 2013 | | $8.271 | | $10.554 | | 135,343 |
| | | 2014 | | $10.554 | | $11.663 | | 100,392 |
| | | 2015 | | $11.663 | | $11.567 | | 92,201 |
| | | 2016 | | $11.567 | | $12.525 | | 78,970 |
| Alger Large Cap Growth Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $7.271 | | $8.565 | | 371,317 |
| | | 2008 | | $8.565 | | $4.529 | | 324,912 |
| | | 2009 | | $4.529 | | $6.565 | | 298,212 |
| | | 2010 | | $6.565 | | $7.311 | | 266,498 |
| | | 2011 | | $7.311 | | $7.156 | | 160,824 |
| | | 2012 | | $7.156 | | $7.721 | | 136,867 |
| | | 2013 | | $7.721 | | $10.244 | | 111,785 |
| | | 2014 | | $10.244 | | $11.167 | | 132,723 |
| | | 2015 | | $11.167 | | $11.156 | | 98,878 |
| | | 2016 | | $11.156 | | $10.867 | | 63,796 |
| Alger Mid Cap Growth Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $11.277 | | $14.569 | | 822,716 |
| | | 2008 | | $14.569 | | $5.959 | | 721,972 |
| | | 2009 | | $5.959 | | $8.878 | | 656,392 |
| | | 2010 | | $8.878 | | $10.410 | | 560,969 |
| | | 2011 | | $10.410 | | $9.379 | | 432,244 |
| | | 2012 | | $9.379 | | $10.704 | | 356,543 |
| | | 2013 | | $10.704 | | $14.281 | | 307,935 |
| | | 2014 | | $14.281 | | $15.150 | | 241,703 |
| | | 2015 | | $15.150 | | $14.647 | | 200,464 |
| | | 2016 | | $14.647 | | $14.526 | | 171,047 |
A-13
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Alger SmallCap Growth Portfolio -Class I-2 | | | | | | | | |
| | | 2007 | | $7.840 | | $9.027 | | 386,201 |
| | | 2008 | | $9.027 | | $4.734 | | 324,933 |
| | | 2009 | | $4.734 | | $6.765 | | 302,059 |
| | | 2010 | | $6.765 | | $8.326 | | 273,464 |
| | | 2011 | | $8.326 | | $7.917 | | 210,162 |
| | | 2012 | | $7.917 | | $8.747 | | 163,618 |
| | | 2013 | | $8.747 | | $11.535 | | 126,657 |
| | | 2014 | | $11.535 | | $11.379 | | 107,060 |
| | | 2015 | | $11.379 | | $10.805 | | 94,529 |
| | | 2016 | | $10.805 | | $11.275 | | 76,306 |
| ClearBridge Variable Large Cap Value Portfolio-Class I | | | | | | | | |
| | | 2007 | | $13.264 | | $13.534 | | 46,980 |
| | | 2008 | | $13.534 | | $8.557 | | 42,904 |
| | | 2009 | | $8.557 | | $10.464 | | 43,855 |
| | | 2010 | | $10.464 | | $11.250 | | 44,795 |
| | | 2011 | | $11.250 | | $11.597 | | 35,396 |
| | | 2012 | | $11.597 | | $13.269 | | 103,883 |
| | | 2013 | | $13.269 | | $17.251 | | 42,635 |
| | | 2014 | | $17.251 | | $18.927 | | 26,998 |
| | | 2015 | | $18.927 | | $18.056 | | 11,475 |
| | | 2016 | | $18.056 | | $20.041 | | 10,354 |
| Deutsche VSI: Bond VIP - Class A | | | | | | | | |
| | | 2007 | | $12.902 | | $13.200 | | 192,164 |
| | | 2008 | | $13.200 | | $10.790 | | 162,984 |
| | | 2009 | | $10.790 | | $11.665 | | 139,150 |
| | | 2010 | | $11.665 | | $12.234 | | 131,495 |
| | | 2011 | | $12.234 | | $12.700 | | 95,813 |
| | | 2012 | | $12.700 | | $13.442 | | 74,674 |
| | | 2013 | | $13.442 | | $12.803 | | 68,152 |
| | | 2014 | | $12.803 | | $13.408 | | 61,385 |
| | | 2015 | | $13.408 | | $13.130 | | 54,641 |
| | | 2016 | | $13.130 | | $13.661 | | 45,461 |
| Deutsche VSI: Core Equity VIP - Class A | | | | | | | | |
| | | 2007 | | $9.874 | | $9.829 | | 76,673 |
| | | 2008 | | $9.829 | | $5.955 | | 67,583 |
| | | 2009 | | $5.955 | | $7.846 | | 85,215 |
| | | 2010 | | $7.846 | | $8.815 | | 73,664 |
| | | 2011 | | $8.815 | | $8.646 | | 63,481 |
| | | 2012 | | $8.646 | | $9.834 | | 48,726 |
| | | 2013 | | $9.834 | | $13.264 | | 44,715 |
| | | 2014 | | $13.264 | | $14.568 | | 42,080 |
| | | 2015 | | $14.568 | | $15.059 | | 64,556 |
| | | 2016 | | $15.059 | | $16.341 | | 29,925 |
| Deutsche VSI: CROCI® International VIP - Class A | | | | | | | | |
| | | 2007 | | $9.606 | | $10.810 | | 202,975 |
| | | 2008 | | $10.810 | | $5.498 | | 253,788 |
| | | 2009 | | $5.498 | | $7.210 | | 164,420 |
| | | 2010 | | $7.210 | | $7.197 | | 126,785 |
| | | 2011 | | $7.197 | | $5.890 | | 106,508 |
| | | 2012 | | $5.890 | | $6.979 | | 98,904 |
| | | 2013 | | $6.979 | | $8.241 | | 70,952 |
| | | 2014 | | $8.241 | | $7.142 | | 48,579 |
| | | 2015 | | $7.142 | | $6.630 | | 33,935 |
| | | 2016 | | $6.630 | | $6.560 | | 31,069 |
A-14
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Deutsche VSI: Global Small Cap VIP - Class A | | | | | | | | |
| | | 2007 | | $13.120 | | $14.087 | | 319,396 |
| | | 2008 | | $14.087 | | $6.922 | | 292,135 |
| | | 2009 | | $6.922 | | $10.076 | | 295,598 |
| | | 2010 | | $10.076 | | $12.533 | | 247,927 |
| | | 2011 | | $12.533 | | $11.091 | | 194,798 |
| | | 2012 | | $11.091 | | $12.567 | | 162,040 |
| | | 2013 | | $12.567 | | $16.779 | | 115,189 |
| | | 2014 | | $16.779 | | $15.799 | | 127,708 |
| | | 2015 | | $15.799 | | $15.697 | | 106,456 |
| | | 2016 | | $15.697 | | $15.660 | | 93,364 |
| Deutsche VSII: Global Income Builder VIP - Class A | | | | | | | | |
| | | 2007 | | $11.437 | | $11.776 | | 108,626 |
| | | 2008 | | $11.776 | | $8.404 | | 99,008 |
| | | 2009 | | $8.404 | | $10.189 | | 96,552 |
| | | 2010 | | $10.189 | | $11.130 | | 85,675 |
| | | 2011 | | $11.130 | | $10.777 | | 62,067 |
| | | 2012 | | $10.777 | | $11.958 | | 55,722 |
| | | 2013 | | $11.958 | | $13.697 | | 45,570 |
| | | 2014 | | $13.697 | | $13.968 | | 45,285 |
| | | 2015 | | $13.968 | | $13.521 | | 37,109 |
| | | 2016 | | $13.521 | | $14.185 | | 35,589 |
| Federated Fund for U.S. Government Securities II | | | | | | | | |
| | | 2007 | | $12.523 | | $13.072 | | 721,964 |
| | | 2008 | | $13.072 | | $13.388 | | 610,475 |
| | | 2009 | | $13.388 | | $13.834 | | 473,221 |
| | | 2010 | | $13.834 | | $14.289 | | 324,041 |
| | | 2011 | | $14.289 | | $14.846 | | 269,692 |
| | | 2012 | | $14.846 | | $15.014 | | 209,711 |
| | | 2013 | | $15.014 | | $14.444 | | 173,446 |
| | | 2014 | | $14.444 | | $14.842 | | 170,920 |
| | | 2015 | | $14.842 | | $14.653 | | 146,826 |
| | | 2016 | | $14.653 | | $14.623 | | 111,142 |
| Federated High Income Bond Fund II | | | | | | | | |
| | | 2007 | | $13.026 | | $13.231 | | 379,607 |
| | | 2008 | | $13.231 | | $9.617 | | 307,223 |
| | | 2009 | | $9.617 | | $14.437 | | 275,990 |
| | | 2010 | | $14.437 | | $16.268 | | 242,351 |
| | | 2011 | | $16.268 | | $16.804 | | 195,932 |
| | | 2012 | | $16.804 | | $18.930 | | 179,749 |
| | | 2013 | | $18.930 | | $19.891 | | 128,657 |
| | | 2014 | | $19.891 | | $20.062 | | 108,552 |
| | | 2015 | | $20.062 | | $19.197 | | 63,913 |
| | | 2016 | | $19.197 | | $21.650 | | 49,255 |
| Federated Managed Volatility Fund II | | | | | | | | |
| | | 2007 | | $8.776 | | $8.966 | | 65,968 |
| | | 2008 | | $8.966 | | $7.012 | | 98,652 |
| | | 2009 | | $7.012 | | $8.834 | | 87,864 |
| | | 2010 | | $8.834 | | $9.725 | | 54,559 |
| | | 2011 | | $9.725 | | $10.008 | | 30,900 |
| | | 2012 | | $10.008 | | $11.161 | | 104,369 |
| | | 2013 | | $11.161 | | $13.345 | | 27,541 |
| | | 2014 | | $13.345 | | $13.619 | | 15,762 |
| | | 2015 | | $13.619 | | $12.365 | | 7,046 |
| | | 2016 | | $12.365 | | $13.079 | | 4,667 |
A-15
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Fidelity VIP Asset Manager Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $10.466 | | $11.872 | | 125,667 |
| | | 2008 | | $11.872 | | $8.311 | | 130,724 |
| | | 2009 | | $8.311 | | $10.540 | | 122,598 |
| | | 2010 | | $10.540 | | $11.828 | | 129,616 |
| | | 2011 | | $11.828 | | $11.320 | | 72,461 |
| | | 2012 | | $11.320 | | $12.506 | | 62,231 |
| | | 2013 | | $12.506 | | $14.212 | | 34,548 |
| | | 2014 | | $14.212 | | $14.772 | | 28,682 |
| | | 2015 | | $14.772 | | $14.529 | | 28,433 |
| | | 2016 | | $14.529 | | $14.709 | | 23,554 |
| Fidelity VIP Contrafund® Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $12.977 | | $14.986 | | 1,188,207 |
| | | 2008 | | $14.986 | | $8.461 | | 1,080,956 |
| | | 2009 | | $8.461 | | $11.277 | | 1,046,007 |
| | | 2010 | | $11.277 | | $12.983 | | 998,155 |
| | | 2011 | | $12.983 | | $12.430 | | 709,229 |
| | | 2012 | | $12.430 | | $14.212 | | 690,676 |
| | | 2013 | | $14.212 | | $18.326 | | 549,301 |
| | | 2014 | | $18.326 | | $20.149 | | 482,522 |
| | | 2015 | | $20.149 | | $19.922 | | 383,861 |
| | | 2016 | | $19.922 | | $21.134 | | 322,988 |
| Fidelity VIP Equity-Income Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $14.468 | | $14.426 | | 349,218 |
| | | 2008 | | $14.426 | | $8.125 | | 273,985 |
| | | 2009 | | $8.125 | | $10.390 | | 270,828 |
| | | 2010 | | $10.390 | | $11.751 | | 237,804 |
| | | 2011 | | $11.751 | | $11.654 | | 185,670 |
| | | 2012 | | $11.654 | | $13.427 | | 142,532 |
| | | 2013 | | $13.427 | | $16.899 | | 116,569 |
| | | 2014 | | $16.899 | | $18.045 | | 96,979 |
| | | 2015 | | $18.045 | | $17.020 | | 83,523 |
| | | 2016 | | $17.020 | | $19.730 | | 92,698 |
| Fidelity VIP Government Money Market Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $10.750 | | $11.108 | | 714,035 |
| | | 2008 | | $11.108 | | $11.240 | | 1,173,850 |
| | | 2009 | | $11.240 | | $11.119 | | 894,758 |
| | | 2010 | | $11.119 | | $10.947 | | 697,719 |
| | | 2011 | | $10.947 | | $10.764 | | 551,078 |
| | | 2012 | | $10.764 | | $10.586 | | 452,033 |
| | | 2013 | | $10.586 | | $10.400 | | 331,128 |
| | | 2014 | | $10.400 | | $10.216 | | 325,818 |
| | | 2015 | | $10.216 | | $10.036 | | 257,184 |
| | | 2016 | | $10.036 | | $9.878 | | 242,981 |
| Fidelity VIP Growth Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $6.732 | | $8.394 | | 682,803 |
| | | 2008 | | $8.394 | | $4.356 | | 663,776 |
| | | 2009 | | $4.356 | | $5.488 | | 676,234 |
| | | 2010 | | $5.488 | | $6.693 | | 597,279 |
| | | 2011 | | $6.693 | | $6.587 | | 435,815 |
| | | 2012 | | $6.587 | | $7.420 | | 377,416 |
| | | 2013 | | $7.420 | | $9.936 | | 310,756 |
| | | 2014 | | $9.936 | | $10.861 | | 284,700 |
| | | 2015 | | $10.861 | | $11.432 | | 233,240 |
| | | 2016 | | $11.432 | | $11.319 | | 206,034 |
A-16
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Fidelity VIP Index 500 Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $9.557 | | $9.896 | | 1,295,792 |
| | | 2008 | | $9.896 | | $6.123 | | 1,150,557 |
| | | 2009 | | $6.123 | | $7.614 | | 1,043,678 |
| | | 2010 | | $7.614 | | $8.602 | | 911,514 |
| | | 2011 | | $8.602 | | $8.621 | | 744,841 |
| | | 2012 | | $8.621 | | $9.814 | | 646,616 |
| | | 2013 | | $9.814 | | $12.747 | | 569,038 |
| | | 2014 | | $12.747 | | $14.219 | | 505,643 |
| | | 2015 | | $14.219 | | $14.152 | | 451,144 |
| | | 2016 | | $14.152 | | $15.548 | | 387,687 |
| Fidelity VIP Overseas Portfolio - Initial Class | | | | | | | | |
| | | 2007 | | $10.909 | | $12.569 | | 470,601 |
| | | 2008 | | $12.569 | | $6.937 | | 476,598 |
| | | 2009 | | $6.937 | | $8.620 | | 469,624 |
| | | 2010 | | $8.620 | | $9.577 | | 413,895 |
| | | 2011 | | $9.577 | | $7.792 | | 323,321 |
| | | 2012 | | $7.792 | | $9.240 | | 281,150 |
| | | 2013 | | $9.240 | | $11.837 | | 229,142 |
| | | 2014 | | $11.837 | | $10.687 | | 249,029 |
| | | 2015 | | $10.687 | | $10.877 | | 209,121 |
| | | 2016 | | $10.877 | | $10.142 | | 143,466 |
| Invesco V.I. American Value Fund - Series I | | | | | | | | |
| | | 2007 | | $14.765 | | $15.638 | | 269,763 |
| | | 2008 | | $15.638 | | $9.017 | | 244,967 |
| | | 2009 | | $9.017 | | $12.329 | | 201,588 |
| | | 2010 | | $12.329 | | $14.802 | | 159,248 |
| | | 2011 | | $14.802 | | $14.672 | | 123,833 |
| | | 2012 | | $14.672 | | $16.904 | | 96,739 |
| | | 2013 | | $16.904 | | $22.292 | | 87,271 |
| | | 2014 | | $22.292 | | $24.029 | | 76,406 |
| | | 2015 | | $24.029 | | $21.446 | | 73,197 |
| | | 2016 | | $21.446 | | $24.328 | | 47,254 |
| Invesco V.I. Growth and Income Fund - Series II | | | | | | | | |
| | | 2007 | | $14.033 | | $14.129 | | 213,247 |
| | | 2008 | | $14.129 | | $9.407 | | 187,559 |
| | | 2009 | | $9.407 | | $11.466 | | 182,380 |
| | | 2010 | | $11.466 | | $12.635 | | 151,891 |
| | | 2011 | | $12.635 | | $12.129 | | 114,411 |
| | | 2012 | | $12.129 | | $13.621 | | 84,341 |
| | | 2013 | | $13.621 | | $17.896 | | 65,957 |
| | | 2014 | | $17.896 | | $19.329 | | 56,013 |
| | | 2015 | | $19.329 | | $18.355 | | 43,036 |
| | | 2016 | | $18.355 | | $21.531 | | 48,769 |
| Invesco V.I. Mid Cap Growth Fund - Series II | | | | | | | | |
| | | 2007 | | $12.500 | | $14.437 | | 59,849 |
| | | 2008 | | $14.437 | | $7.538 | | 46,687 |
| | | 2009 | | $7.538 | | $11.577 | | 51,595 |
| | | 2010 | | $11.577 | | $14.472 | | 53,523 |
| | | 2011 | | $14.472 | | $12.884 | | 45,673 |
| | | 2012 | | $12.884 | | $14.125 | | 28,551 |
| | | 2013 | | $14.125 | | $18.951 | | 27,068 |
| | | 2014 | | $18.951 | | $20.045 | | 22,224 |
| | | 2015 | | $20.045 | | $19.892 | | 13,397 |
| | | 2016 | | $19.892 | | $19.650 | | 14,071 |
A-17
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Invesco V.I. Value Opportunities Fund - Series I | | | | | | | | |
| | | 2007 | | $12.450 | | $12.415 | | 241,174 |
| | | 2008 | | $12.415 | | $5.881 | | 236,766 |
| | | 2009 | | $5.881 | | $8.549 | | 231,753 |
| | | 2010 | | $8.549 | | $9.014 | | 197,346 |
| | | 2011 | | $9.014 | | $8.583 | | 140,959 |
| | | 2012 | | $8.583 | | $9.922 | | 122,553 |
| | | 2013 | | $9.922 | | $13.034 | | 99,437 |
| | | 2014 | | $13.034 | | $13.649 | | 71,338 |
| | | 2015 | | $13.649 | | $12.011 | | 62,300 |
| | | 2016 | | $12.011 | | $13.960 | | 53,762 |
| Janus Aspen Enterprise Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $5.423 | | $6.499 | | 505,513 |
| | | 2008 | | $6.499 | | $3.592 | | 433,329 |
| | | 2009 | | $3.592 | | $5.110 | | 419,789 |
| | | 2010 | | $5.110 | | $6.316 | | 360,339 |
| | | 2011 | | $6.316 | | $6.116 | | 287,583 |
| | | 2012 | | $6.116 | | $7.045 | | 245,055 |
| | | 2013 | | $7.045 | | $9.159 | | 211,368 |
| | | 2014 | | $9.159 | | $10.123 | | 174,695 |
| | | 2015 | | $10.123 | | $10.343 | | 170,349 |
| | | 2016 | | $10.343 | | $11.414 | | 148,501 |
| Janus Aspen Global Research Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $6.905 | | $7.434 | | 327,739 |
| | | 2008 | | $7.434 | | $4.040 | | 279,358 |
| | | 2009 | | $4.040 | | $5.464 | | 445,607 |
| | | 2010 | | $5.464 | | $6.216 | | 264,635 |
| | | 2011 | | $6.216 | | $5.266 | | 213,672 |
| | | 2012 | | $5.266 | | $6.211 | | 195,301 |
| | | 2013 | | $6.211 | | $7.834 | | 175,354 |
| | | 2014 | | $7.834 | | $8.267 | | 159,472 |
| | | 2015 | | $8.267 | | $7.934 | | 134,398 |
| | | 2016 | | $7.934 | | $7.954 | | 120,830 |
| Janus Aspen Janus Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $6.610 | | $7.471 | | 225,942 |
| | | 2008 | | $7.471 | | $4.423 | | 195,932 |
| | | 2009 | | $4.423 | | $5.923 | | 193,524 |
| | | 2010 | | $5.923 | | $6.662 | | 183,375 |
| | | 2011 | | $6.662 | | $6.197 | | 129,587 |
| | | 2012 | | $6.197 | | $7.217 | | 107,789 |
| | | 2013 | | $7.217 | | $9.239 | | 89,643 |
| | | 2014 | | $9.239 | | $10.253 | | 84,701 |
| | | 2015 | | $10.253 | | $10.608 | | 97,418 |
| | | 2016 | | $10.608 | | $10.472 | | 71,433 |
| Janus Aspen Overseas Portfolio - Service Shares | | | | | | | | |
| | | 2008 | | $10.000 | | $7.225 | | 81,678 |
| | | 2009 | | $7.225 | | $12.707 | | 127,139 |
| | | 2010 | | $12.707 | | $15.603 | | 120,730 |
| | | 2011 | | $15.603 | | $10.369 | | 236,411 |
| | | 2012 | | $10.369 | | $11.526 | | 64,984 |
| | | 2013 | | $11.526 | | $12.937 | | 54,455 |
| | | 2014 | | $12.937 | | $11.168 | | 47,779 |
| | | 2015 | | $11.168 | | $10.003 | | 38,109 |
| | | 2016 | | $10.003 | | $9.166 | | 38,488 |
A-18
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| Janus Aspen Series Balanced Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $11.389 | | $12.364 | | 559,884 |
| | | 2008 | | $12.364 | | $10.220 | | 522,134 |
| | | 2009 | | $10.220 | | $12.636 | | 495,193 |
| | | 2010 | | $12.636 | | $13.451 | | 424,233 |
| | | 2011 | | $13.451 | | $13.428 | | 402,662 |
| | | 2012 | | $13.428 | | $14.984 | | 302,661 |
| | | 2013 | | $14.984 | | $17.683 | | 251,992 |
| | | 2014 | | $17.683 | | $18.846 | | 202,417 |
| | | 2015 | | $18.846 | | $18.624 | | 174,813 |
| | | 2016 | | $18.624 | | $19.135 | | 159,183 |
| Janus Aspen Series Flexible Bond Portfolio - Institutional Shares | | | | | | | | |
| | | 2007 | | $13.069 | | $13.738 | | 380,041 |
| | | 2008 | | $13.738 | | $14.306 | | 355,482 |
| | | 2009 | | $14.306 | | $15.908 | | 323,948 |
| | | 2010 | | $15.908 | | $16.870 | | 295,938 |
| | | 2011 | | $16.870 | | $17.687 | | 252,052 |
| | | 2012 | | $17.687 | | $18.819 | | 193,648 |
| | | 2013 | | $18.819 | | $18.458 | | 167,369 |
| | | 2014 | | $18.458 | | $19.024 | | 147,083 |
| | | 2015 | | $19.024 | | $18.726 | | 126,920 |
| | | 2016 | | $18.726 | | $18.846 | | 104,660 |
| Janus Aspen Series Foreign Stock Portfolio - Service Shares | | | | | | | | |
| | | 2007 | | $14.235 | | $16.532 | | 78,321 |
| | | 2008 | | $16.532 | | $15.537 | | 0 |
| MFS® Growth Series - Initial Class | | | | | | | | |
| | | 2007 | | $5.588 | | $6.650 | | 220,878 |
| | | 2008 | | $6.650 | | $4.087 | | 314,346 |
| | | 2009 | | $4.087 | | $5.527 | | 175,017 |
| | | 2010 | | $5.527 | | $6.261 | | 155,208 |
| | | 2011 | | $6.261 | | $6.130 | | 113,799 |
| | | 2012 | | $6.130 | | $7.067 | | 98,625 |
| | | 2013 | | $7.067 | | $9.499 | | 67,784 |
| | | 2014 | | $9.499 | | $10.164 | | 57,852 |
| | | 2015 | | $10.164 | | $10.737 | | 71,819 |
| | | 2016 | | $10.737 | | $10.804 | | 89,858 |
| MFS® Investors Trust Series - Initial Class | | | | | | | | |
| | | 2007 | | $9.682 | | $10.488 | | 127,128 |
| | | 2008 | | $10.488 | | $6.893 | | 180,349 |
| | | 2009 | | $6.893 | | $8.591 | | 197,186 |
| | | 2010 | | $8.591 | | $9.375 | | 86,881 |
| | | 2011 | | $9.375 | | $9.007 | | 59,938 |
| | | 2012 | | $9.007 | | $10.543 | | 53,533 |
| | | 2013 | | $10.543 | | $13.674 | | 32,594 |
| | | 2014 | | $13.674 | | $14.908 | | 34,154 |
| | | 2015 | | $14.908 | | $14.674 | | 20,675 |
| | | 2016 | | $14.674 | | $15.650 | | 18,751 |
A-19
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| MFS® New Discovery Series - Initial Class | | | | | | | | |
| | | 2007 | | $8.868 | | $8.928 | | 480,804 |
| | | 2008 | | $8.928 | | $5.320 | | 407,025 |
| | | 2009 | | $5.320 | | $8.527 | | 412,667 |
| | | 2010 | | $8.527 | | $11.418 | | 350,753 |
| | | 2011 | | $11.418 | | $10.063 | | 280,613 |
| | | 2012 | | $10.063 | | $11.981 | | 214,325 |
| | | 2013 | | $11.981 | | $16.653 | | 215,511 |
| | | 2014 | | $16.653 | | $15.169 | | 156,877 |
| | | 2015 | | $15.169 | | $14.617 | | 133,921 |
| | | 2016 | | $14.617 | | $15.657 | | 119,586 |
| MFS® Research Series - Initial Class | | | | | | | | |
| | | 2007 | | $8.141 | | $9.050 | | 50,049 |
| | | 2008 | | $9.050 | | $5.681 | | 46,891 |
| | | 2009 | | $5.681 | | $7.284 | | 43,067 |
| | | 2010 | | $7.284 | | $8.291 | | 38,811 |
| | | 2011 | | $8.291 | | $8.107 | | 26,137 |
| | | 2012 | | $8.107 | | $9.337 | | 155,546 |
| | | 2013 | | $9.337 | | $12.132 | | 42,010 |
| | | 2014 | | $12.132 | | $13.131 | | 19,004 |
| | | 2015 | | $13.131 | | $13.000 | | 32,400 |
| | | 2016 | | $13.000 | | $13.884 | | 10,820 |
| MFS® Total Return Series - Initial Class | | | | | | | | |
| | | 2007 | | $14.243 | | $14.577 | | 589,170 |
| | | 2008 | | $14.577 | | $11.148 | | 454,138 |
| | | 2009 | | $11.148 | | $12.923 | | 417,681 |
| | | 2010 | | $12.923 | | $13.953 | | 393,032 |
| | | 2011 | | $13.953 | | $13.947 | | 283,231 |
| | | 2012 | | $13.947 | | $15.240 | | 249,819 |
| | | 2013 | | $15.240 | | $17.819 | | 220,864 |
| | | 2014 | | $17.819 | | $18.989 | | 195,280 |
| | | 2015 | | $18.989 | | $18.581 | | 169,003 |
| | | 2016 | | $18.581 | | $19.910 | | 134,774 |
| Oppenheimer Main Street Small Cap Fund/VA - Service Shares | | | | | | | | |
| | | 2007 | | $15.735 | | $15.238 | | 316,074 |
| | | 2008 | | $15.238 | | $9.278 | | 291,787 |
| | | 2009 | | $9.278 | | $12.473 | | 266,203 |
| | | 2010 | | $12.473 | | $15.075 | | 255,321 |
| | | 2011 | | $15.075 | | $14.454 | | 208,709 |
| | | 2012 | | $14.454 | | $16.704 | | 184,340 |
| | | 2013 | | $16.704 | | $23.071 | | 188,258 |
| | | 2014 | | $23.071 | | $25.301 | | 140,674 |
| | | 2015 | | $25.301 | | $23.335 | | 106,694 |
| | | 2016 | | $23.335 | | $26.970 | | 101,989 |
| PIMCO Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares | | | | | | | | |
| | | 2007 | | $11.362 | | $11.563 | | 106,231 |
| | | 2008 | | $11.563 | | $11.086 | | 122,885 |
| | | 2009 | | $11.086 | | $12.591 | | 135,635 |
| | | 2010 | | $12.591 | | $13.417 | | 119,213 |
| | | 2011 | | $13.417 | | $14.070 | | 85,468 |
| | | 2012 | | $14.070 | | $15.317 | | 51,144 |
| | | 2013 | | $15.317 | | $15.120 | | 37,907 |
| | | 2014 | | $15.120 | | $16.507 | | 32,734 |
| | | 2015 | | $16.507 | | $16.260 | | 22,035 |
| | | 2016 | | $16.260 | | $17.005 | | 16,901 |
A-20
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| PIMCO Total Return Portfolio - Administrative Shares | | | | | | | | |
| | | 2007 | | $11.473 | | $12.255 | | 483,376 |
| | | 2008 | | $12.255 | | $12.616 | | 572,089 |
| | | 2009 | | $12.616 | | $14.135 | | 536,002 |
| | | 2010 | | $14.135 | | $15.010 | | 502,876 |
| | | 2011 | | $15.010 | | $15.275 | | 328,409 |
| | | 2012 | | $15.275 | | $16.441 | | 247,570 |
| | | 2013 | | $16.441 | | $15.831 | | 198,615 |
| | | 2014 | | $15.831 | | $16.214 | | 162,790 |
| | | 2015 | | $16.214 | | $15.996 | | 132,480 |
| | | 2016 | | $15.996 | | $16.132 | | 107,521 |
| Premier VIT NACM Small Cap Portfolio - Class 1 | | | | | | | | |
| | | 2007 | | $13.938 | | $13.767 | | 172,785 |
| | | 2008 | | $13.767 | | $7.892 | | 167,008 |
| | | 2009 | | $7.892 | | $8.958 | | 160,896 |
| | | 2010 | | $8.958 | | $10.376 | | 0 |
| Premier VIT OpCap Balanced Portfolio | | | | | | | | |
| | | 2007 | | $11.829 | | $11.102 | | 94,157 |
| | | 2008 | | $11.102 | | $7.504 | | 80,619 |
| | | 2009 | | $7.504 | | $7.230 | | 0 |
| Putnam VT International Value Fund - Class IB | | | | | | | | |
| | | 2007 | | $18.403 | | $19.339 | | 175,336 |
| | | 2008 | | $19.339 | | $10.253 | | 80,251 |
| | | 2009 | | $10.253 | | $12.707 | | 72,272 |
| | | 2010 | | $12.707 | | $13.369 | | 62,701 |
| | | 2011 | | $13.369 | | $11.322 | | 51,749 |
| | | 2012 | | $11.322 | | $13.532 | | 44,267 |
| | | 2013 | | $13.532 | | $16.243 | | 35,363 |
| | | 2014 | | $16.243 | | $14.440 | | 28,523 |
| | | 2015 | | $14.440 | | $13.898 | | 23,083 |
| | | 2016 | | $13.898 | | $13.802 | | 19,339 |
| Ridgeworth Large Cap Growth Stock Fund | | | | | | | | |
| | | 2007 | | $8.879 | | $10.052 | | 47,830 |
| | | 2008 | | $10.052 | | $5.856 | | 43,139 |
| | | 2009 | | $5.856 | | $5.951 | | 0 |
| Ridgeworth Large Cap Value Equity Fund | | | | | | | | |
| | | 2007 | | $15.546 | | $15.810 | | 49,278 |
| | | 2008 | | $15.810 | | $10.437 | | 30,278 |
| | | 2009 | | $10.437 | | $9.859 | | 0 |
| T. Rowe Price Equity Income Portfolio - I | | | | | | | | |
| | | 2007 | | $16.254 | | $16.483 | | 601,481 |
| | | 2008 | | $16.483 | | $10.343 | | 537,201 |
| | | 2009 | | $10.343 | | $12.759 | | 523,378 |
| | | 2010 | | $12.759 | | $14.414 | | 428,716 |
| | | 2011 | | $14.414 | | $14.056 | | 307,413 |
| | | 2012 | | $14.056 | | $16.172 | | 260,866 |
| | | 2013 | | $16.172 | | $20.605 | | 241,316 |
| | | 2014 | | $20.605 | | $21.730 | | 218,509 |
| | | 2015 | | $21.730 | | $19.880 | | 175,297 |
| | | 2016 | | $19.880 | | $23.269 | | 180,650 |
A-21
| | | | | | | | |
| | | FOR THE YEAR ENDING DECEMBER 31 | | ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD | | ACCUMULATION UNIT VALUE AT END OF PERIOD | | NUMBER OF UNITS OUTSTANDING AT END OF PERIOD |
| T. Rowe Price International Stock Portfolio - I | | | | | | | | |
| | | 2007 | | $10.006 | | $11.107 | | 256,965 |
| | | 2008 | | $11.107 | | $5.596 | | 188,929 |
| | | 2009 | | $5.596 | | $8.375 | | 202,112 |
| | | 2010 | | $8.375 | | $9.415 | | 262,241 |
| | | 2011 | | $9.415 | | $8.060 | | 158,565 |
| | | 2012 | | $8.060 | | $9.376 | | 121,404 |
| | | 2013 | | $9.376 | | $10.503 | | 128,895 |
| | | 2014 | | $10.503 | | $10.187 | | 103,817 |
| | | 2015 | | $10.187 | | $9.915 | | 79,820 |
| | | 2016 | | $9.915 | | $9.946 | | 64,340 |
| T. Rowe PriceMid-Cap Growth Portfolio - I | | | | | | | | |
| | | 2007 | | $14.114 | | $16.289 | | 538,625 |
| | | 2008 | | $16.289 | | $9.638 | | 472,274 |
| | | 2009 | | $9.638 | | $13.787 | | 438,741 |
| | | 2010 | | $13.787 | | $17.348 | | 371,524 |
| | | 2011 | | $17.348 | | $16.823 | | 257,098 |
| | | 2012 | | $16.823 | | $18.818 | | 214,315 |
| | | 2013 | | $18.818 | | $25.264 | | 179,849 |
| | | 2014 | | $25.264 | | $28.068 | | 155,681 |
| | | 2015 | | $28.068 | | $29.376 | | 129,291 |
| | | 2016 | | $29.376 | | $30.659 | | 114,712 |
| T. Rowe Price New America Growth Portfolio - I | | | | | | | | |
| | | 2007 | | $8.581 | | $9.589 | | 126,622 |
| | | 2008 | | $9.589 | | $5.816 | | 125,436 |
| | | 2009 | | $5.816 | | $8.555 | | 120,111 |
| | | 2010 | | $8.555 | | $10.054 | | 108,637 |
| | | 2011 | | $10.054 | | $9.769 | | 81,021 |
| | | 2012 | | $9.769 | | $10.853 | | 68,813 |
| | | 2013 | | $10.853 | | $14.711 | | 43,587 |
| | | 2014 | | $14.711 | | $15.797 | | 41,020 |
| | | 2015 | | $15.797 | | $16.850 | | 35,137 |
| | | 2016 | | $16.850 | | $16.767 | | 39,787 |
| Wells Fargo VT Discovery Fund | | | | | | | | |
| | | 2007 | | $12.876 | | $15.468 | | 167,923 |
| | | 2008 | | $15.468 | | $8.453 | | 150,363 |
| | | 2009 | | $8.453 | | $11.648 | | 130,113 |
| | | 2010 | | $11.648 | | $15.507 | | 125,559 |
| | | 2011 | | $15.507 | | $15.296 | | 90,356 |
| | | 2012 | | $15.296 | | $17.686 | | 106,448 |
| | | 2013 | | $17.686 | | $24.980 | | 120,720 |
| | | 2014 | | $24.980 | | $24.621 | | 48,514 |
| | | 2015 | | $24.621 | | $23.828 | | 46,932 |
| | | 2016 | | $23.828 | | $25.194 | | 37,898 |
| Wells Fargo VT Opportunity Fund - Class 2 | | | | | | | | |
| | | 2007 | | $12.120 | | $12.692 | | 391,679 |
| | | 2008 | | $12.692 | | $7.467 | | 344,261 |
| | | 2009 | | $7.467 | | $10.835 | | 303,876 |
| | | 2010 | | $10.835 | | $13.169 | | 278,789 |
| | | 2011 | | $13.169 | | $12.221 | | 163,451 |
| | | 2012 | | $12.221 | | $13.865 | | 116,811 |
| | | 2013 | | $13.865 | | $17.796 | | 101,343 |
| | | 2014 | | $17.796 | | $19.300 | | 80,714 |
| | | 2015 | | $19.300 | | $18.371 | | 62,042 |
| | | 2016 | | $18.371 | | $20.251 | | 56,951 |
| * | The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.70% and an administrative expense charge of 0.10%. |
A-22
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
| | |
Purchase Payment: | | $40,000.00 |
Guarantee Period: | | 5 Years |
Guaranteed Interest Rate: | | 5% Annual Effective Rate |
5-year Treasury Rate at Time of Purchase Payment: | | 6% |
The following examples illustrate how the Market Value Adjustment and the Withdrawal Charge may affect the values of a Contract upon a withdrawal. The 5% assumed Guaranteed Interest Rate is the rate required to be used in the “Summary of Expenses.” In these examples, the withdrawal occurs one year after the Issue Date. The Market Value Adjustment operates in a similar manner for transfers, except that there is no free amount for transfers. No Withdrawal Charge applies to transfers.
Assuming that the entire $40,000.00 Purchase Payment is allocated to the Guaranteed Maturity Fixed Account for the Guarantee Period specified above, at the end of the five-year Guarantee Period the Contract Value would be $51,051.26. After one year, when the withdrawals occur in these examples, the Contract Value would be $42,000.00. We have assumed that no prior partial withdrawals or transfers have occurred.
The Market Value Adjustment and the Withdrawal Charge only apply to the portion of a withdrawal that is greater than the Free Withdrawal Amount. Accordingly, the first step is to calculate the Free Withdrawal Amount.
The Free Withdrawal Amount is equal to:
| | • | | earnings not previously withdrawn; or |
| | • | | 15% of your total Purchase Payments in the most recent seven years; plus |
| | (b) | an amount equal to your total Purchase Payments made more than seven years ago, to the extent not previously withdrawn. |
Here, (a) equals $6,000.00, because 15% of the total Purchase Payments in the most recent seven years ($6,000.00 = 15% × $40,000.00) is greater than the earnings not previously withdrawn ($2,000.00). (b) equals $0, because all of the Purchase Payments were made less than seven years age. Accordingly, the Free Withdrawal Amount is $6,000.00.
The formula that we use to determine the amount of the Market Value Adjustment is:
.9 × (I - J) × N
where: I = the Treasury Rate for a maturity equal to the relevant Guarantee Period for the week preceding the beginning of the Guarantee Period;
J = the Treasury Rate for a maturity equal to the relevant Guarantee Period for the week preceding our receipt of your withdrawal request, death benefit request, transfer request, or annuity option request; and
N = the number of whole and partial years from the date we receive your request until the end of the relevant Guarantee Period.
We will base the Market Value Adjustment on the current Treasury Rate for a maturity corresponding in length to the relevant Guarantee Period. These examples also show the Withdrawal Charge (if any), which would be calculated separately from the Market Value Adjustment.
Example of a Downward Market Value Adjustment
A downward Market Value Adjustment results from a full or partial withdrawal that occurs when interest rates have increased. Assume interest rates have increased one year after the Purchase Payment, such that the five-year Treasury Rate is now 6.5%. Upon a withdrawal, the market value adjustment factor would be:
.9 × (.06 - .065) × 4 = -.0180
The Market Value Adjustment is a reduction of $648.00 from the amount withdrawn:
$ - 648.00 = -.0180 × ($42,000.00 - $6,000.00)
A Withdrawal Charge of 7% would be assessed against the Purchase Payments withdrawn that are less than seven years old and are not eligible for free withdrawal. 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 $4,000.00 ($6,000.00 - $2,000.00).
B-1
Therefore, the Withdrawal Charge would be:
$2,520.00 = 7% × (40,000.00 - $4,000.00)
As a result, the net amount payable to you would be:
$38,832.00 =$42,000.00-$648.00 - $2,520.00
Example of an Upward Market Value Adjustment
An upward Market Value Adjustment results from a withdrawal that occurs when interest rates have decreased. Assume interest rates have decreased one year after the Purchase Payment, such that the five-year
Treasury Rate is now 5.5%. Upon a withdrawal, the market value adjustment factor would be:
.9 × (.06 - .055) × 4 = .0180
The Market Value Adjustment would increase the amount withdrawn by $648.00, as follows:
$648.00 = .0180 × ($42,000.00 - $6,000.00)
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 $4,000.00 ($6,000.00 - $2,000.00). Therefore, the Withdrawal Charge would be:
$2,520.00 = 7% × ($40,000.00 - $4,000.00)
As a result, the net amount payable to you would be:
$40,128.00 = $42,000.00 + $648.00 - $2,520.00
Example of a Partial Withdrawal
If you request a partial withdrawal from a Guarantee Period, we can either (1) withdraw the specified amount of Contract Value and pay you that amount as adjusted by any applicable Market Value Adjustment or (2) pay you the amount requested, and subtract an amount from your Contract Value that equals the requested amount after application of the Market Value Adjustment and Withdrawal Charge. Unless you instruct us otherwise, when you request a partial withdrawal we will assume that you wish to receive the amount requested. We will make the necessary calculations and on your request provide you with a statement showing our calculations.
For example, if in the first example you wished to receive $20,000.00 as a partial withdrawal, the Market Value Adjustment and Withdrawal Charge would be calculated as follows:
| | | | | | |
Let: | | AW | | = | | the total amount to be withdrawn from your Contract Value |
| | MVA | | = | | Market Value Adjustment |
| | WC | | = | | Withdrawal Charge |
| | AW’ | | = | | amount subject to Market Value Adjustment and Withdrawal Charge |
Then | | AW | | - | | $20,000.00 = WC - MVA |
Since neither the Market Value Adjustment nor the Withdrawal Charge apply to the free withdrawal amount, we can solve directly for the amount subject to the Market Value Adjustment and the Withdrawal Charge (i.e., AW’), which equals AW - $6,000.00. Then, AW = AW’ + $6,000, and AW’ + $6,000.00 - $20,000.00 = WC - MVA.
| | | | | | |
MVA | | | = | | | - .018 × AW’ |
WC | | | = | | | .07 × AW’ |
WC | | | - | | | MVA = .088AW’ |
AW’ | | | - | | | $14,000.00 = .088AW’ |
AW’ | | | = | | | $14,000.00 / (1 - .088) = $15,350.88 |
MVA | | | = | | | - .018 × $15,350.88 = - $276.32 |
WC | | | = | | | .07 × $15,350.88 = $1,074.56 |
AW = Total amount withdrawn = $15,350.88 + $6,000.00 = $21,350.88
You receive $20,000.00; the total amount subtracted from your contract is $21,350.88; the Market Value Adjustment is $276.32; and the Withdrawal Charge is $1,074.56. Your remaining Contract Value is $20,649.12.
If, however, in the same example, you wished to withdraw $20,000.00 from your Contract Value and receive the adjusted amount, the calculations would be as follows:
By definition, AW = total amount withdrawn from your Contract Value = $20,000.00
B-2
| | | | |
AW’ | | = | | amount that MVA & WC are applied to |
| | = | | amount withdrawn in excess of Free Amount = $20,000.00 - $6,000.00 = $14,000.00 |
MVA | | = | | - .018 × $14,000.00 = - $252.00 |
WC | | = | | .07 × $14,000.00 = $980.00 |
You would receive $20,000.00 - $252.00 - $980.00 = $18,768.00; the total amount subtracted from your Contract Value is $20,000.00. Your remaining Contract Value would be $22,000.00.
Example of Free Withdrawal Amount
Assume that in the foregoing example, after four years $8,620.25 in interest had been credited and that the Contract Value in the Fixed Account equaled $48,620.25. In this example, if no prior withdrawals have been made, you could withdraw up to $8,620.25 without incurring a Market Value Adjustment or a Withdrawal Charge. The Free Withdrawal Amount would be $8,620.25, because the interest credited ($8,620.25) is greater than 15% of the Total Purchase Payments in the most recent seven years ($40,000.00 × .15 = $6,000.00).
B-3
LBL3055-7
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 | | $ | 0 | |
Cost of printing and engraving | | $ | 1,379 | |
Legal fees | | $ | 1,841 | |
Accounting fees | | $ | 21,508 | |
Mailing fees | | $ | 1,590 | |
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.
Resolution Life, Inc. has obtained directors and officers insurance, which includes indemnification for liability arising under the Securities Act of 1933 that the directors and officers of Resolution Life, Inc. and its subsidiaries may, in such capacities, incur.
Insofar as indemnification for liability arising under the Securities Act of 1933 (the “Act”) 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 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 to Form N-4 for Lincoln Benefit Life Variable Annuity Account (File No. 333-50545, 811-07924) filed January 28, 1999. |
| 1(a) | Amended and Restated Principal Underwriting Agreement by and between Lincoln Benefit Life Company and Allstate Distributors, LLC, effective April 1, 2014. Incorporated herein by reference to Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 2 to Registration Statement filed on April 4, 2014. (SEC File No. 333-180375) |
| 3(i) | Amended and Restated Articles of Incorporation of Lincoln Benefit Life Company dated September 26, 2000, as amended by the Articles of Amendment to the Articles of Incorporation of Lincoln Benefit Life Company dated January 21, 2015. Incorporated herein by reference to Exhibit 3(i) to Lincoln Benefit Life Company’s Registration Statement on Form S-1 filed on April 13, 2015 (File No. 333-203371). |
| 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 Registration Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account (File No. 333-82427, 811-07924) filed July 8, 1999. |
| 4(b) | Form of Application. Incorporated herein by reference to Registration Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account (File No. 333-82427, 811-07924) filed July 8, 1999. |
| 5(a) | Opinion and Consent of Counsel regarding legality. Incorporated herein by reference to Post-Effective Amendment to Form S-3 on Form S-1 for Lincoln Benefit Life Variable Annuity Account (File No. 333-88045) filed April 6, 2000. |
| 5(b) | Opinion and Consent of Counsel regarding legality. Incorporated herein by reference to Registrant’s Form S-3 Registration Statement (File No. 333-158181) dated March 24, 2009. |
| 5(c) | Opinion and Consent of Counsel regarding legality. (Incorporated by reference to Registrant’s Form S-1 Registration Statement (File No. 333-180371) dated March 27, 2012). |
| 5(d) | Opinion and Consent of Counsel regarding legality. Incorporated herein by reference to Exhibit 5(d) to Lincoln Benefit Life Company’s Registration Statement on Form S-1 filed on April 13, 2015 (File No. 333-203371). |
| 5(e) | Opinion and Consent of Counsel regarding legality. Incorporated herein by reference to Exhibit 5(e) of Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 1 to Registration Statement filed on April 1, 2016 (SEC File No. 333-203371). |
| 5(f) | Opinion and Consent of Counsel regarding legality. Filed herewith. |
| 10.1 | 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) |
| 10.2 | 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. 333-66452) |
| 10.3 | 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) |
| 10.4 | 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) |
| 10.5 | 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. 333-66452) |
| 10.6 | 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) |
| 10.7 | 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. 333-66452) |
| 10.8 | 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) |
| 10.9 | 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. 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) |
| 10.10 | Reinsurance Agreement between Lincoln Benefit Life Company and Lincoln Benefit Reinsurance Company effective September 30, 2012, Incorporated herein by reference to Exhibit 10.1 to Allstate Life Insurance Company’s Current Report on Form 8-K filed October 3, 2012. (SEC File No. 000-31248) |
| 10.11 | Recapture Agreement between Allstate Life Insurance Company (“ALIC”) and Lincoln Benefit Life Company (“LBL”), effective September 30, 2012. Incorporated herein by reference to Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 1 to Registration Statement filed on April 3, 2013. (SEC File No. 333-180375) |
| 10.12 | Voluntary Separation Agreement and Release by and between Allstate Insurance Company and Anurag Chandra, dated October 17, 2013. Incorporated herein by reference to Exhibit 10.22 of Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 2 to Registration Statement filed on April 4, 2014. (SEC File No. 333-180375) |
| 10.13 | Voluntary Separation Agreement and Release by and between Allstate Insurance Company and Lawrence W. Dahl, dated August 1, 2013. Incorporated herein by reference to Exhibit 10.23 of Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 2 to Registration Statement filed on April 4, 2014. (SEC File No. 333-180375) |
| 10.14 | Amended and Restated Administrative Services Agreement by and between Lincoln Benefit Life Company and Allstate Life Insurance Company, effective April 1, 2014. Incorporated herein by reference to Exhibit 10.14 of Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 1 to Registration Statement filed on April 1, 2016 (SEC File No. 333-203371) |
| 10.15 | Amended and Restated Reinsurance Agreement by and between Lincoln Benefit Life Company and Allstate Life Insurance Company, effective April 1, 2014. Incorporated herein by reference to Exhibit 10.25 of Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 2 to Registration Statement filed on April 4, 2014. (SEC File No. 333-180375) |
| 10.16 | Partial Commutation Agreement by and between Allstate Life Insurance Company and Lincoln Benefit Life Company, effective April 1, 2014. Incorporated herein by reference to Exhibit 10.26 of Lincoln Benefit Life Company’s Form S-1 Post-Effective Amendment No. 2 to Registration Statement filed on April 4, 2014. (SEC File No. 333-180375) |
| 21 | Subsidiaries of the registrant. Incorporated herein by reference to Exhibit 21 to Lincoln Benefit Life Company’s Registration Statement on Form S-1 filed on April 13, 2015 (File No. 333-203371) |
| 23 | Consents of Independent Registered Public Accounting Firms. Filed herewith. |
| 24 | Powers of Attorney for Stephen Campbell, Richard Carbone, Clive Cowdery, Ann Frohman, Jon Hack, Robert Stein and Grace Vandecruze. Filed herewith. |
| 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.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to the 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 percent 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 purpose of determining 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 initialbona 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 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 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 Securities 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 Stamford in the State of Connecticut on 3rd day of April, 2017.
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| | LINCOLN BENEFIT LIFE COMPANY (REGISTRANT) |
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| By: | | /s/ W. Weldon Wilson |
| | W. Weldon Wilson |
| | Director and Chief Executive Officer |
Pursuant to 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 capacity indicated on 3rd day of April, 2017.
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| SIGNATURE | | TITLE | | |
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*Richard Carbone Richard Carbone | | Director | | |
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*Clive Cowdery Clive Cowdery | | Director | | |
| | |
*Ann Frohman Ann Frohman | | Director | | |
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*Jon Hack Jon Hack | | Director | | |
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*Robert Stein Robert Stein | | Director | | |
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*Grace Vandecruze Grace Vandecruze | | Director | | |
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*Stephen Paul Campbell Stephen Paul Campbell | | Director | | |
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/s/ W. Weldon Wilson W. Weldon Wilson | | Director and Chief Executive Officer (Principal Executive Officer) | | |
| | |
/s/ Robyn Wyatt Robyn Wyatt | | Chief Financial Officer, Treasurer and Executive Vice President (Principal Financial Officer and Principal Accounting Officer) | | |
*By: /s/ Robyn Wyatt, pursuant to Power of Attorney.
EXHIBIT LIST
| 5(f) | Opinion and Consent of Counsel regarding legality. |
| 23.1 | Consent of Independent Registered Public Accounting Firm. |
| 23.2 | Consent of Independent Registered Public Accounting Firm. |
| 24 | Powers of Attorney for Stephen Campbell, Richard Carbone, Clive Cowdery, Ann Frohman, Jon Hack, Robert Stein and Grace Vandecruze. |
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
