UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-66452
LINCOLN BENEFIT LIFE COMPANY
(Exact name of registrant as specified in its charter)
Nebraska 47-0221457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2940 South 84th Street
Lincoln, Nebraska 68506-4142
(Address of principal executive offices) (zip code)
Registrant's telephone number, including are code:
1-800-525-9287
Indicate by check mark whether the Registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes /X/ No
As of April 30, 2002, Registrant had 25,000 shares of common capital
stock outstanding, par value $100 per share all of which shares are
held by Allstate Life Insurance Company.
LINCOLN BENEFIT LIFE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2002
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Statements of Operations for the Three Months Ended
March 31, 2002 and 2001 (unaudited) 3
Condensed Statements of Financial Position as of March 31, 2002
(unaudited) and December 31, 2001 4
Condensed Statements of Cash Flows for the Three Month Periods
Ended March 31, 2002 and 2001 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 2002 2001
---- ----
(unaudited)
REVENUES
Net investment income $ 2,953 $ 3,137
Realized capital gains and losses 450 (844)
------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 3,403 2,293
Income tax expense 1,189 800
------- -------
NET INCOME $ 2,214 $ 1,493
======= =======
See notes to condensed financial statements.
3
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
MARCH 31, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS, EXCEPT PAR VALUE DATA) (unaudited)
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $164,283 and $179,124) $ 169,370 $ 186,709
Short-term 24,965 6,856
------------ ------------
Total investments 194,335 193,565
Cash 85,128 43,796
Reinsurance recoverable from Allstate Life Insurance Company, net 9,943,065 9,564,440
Reinsurance recoverable from non-affiliates, net 473,752 458,563
Receivable from affiliate, net - 17,027
Other assets 3,142 2,924
Separate Accounts 1,621,150 1,565,708
------------ ------------
TOTAL ASSETS $ 12,320,572 $ 11,846,023
============ ============
LIABILITIES
Contractholder funds $ 9,638,144 $ 9,287,599
Reserve for life-contingent contract benefits 769,994 724,044
Current income taxes payable 4,865 3,645
Deferred income taxes 5,281 6,187
Payable to affiliates, net 27,441 -
Other liabilities and accrued expenses 64,503 70,237
Separate Accounts 1,621,150 1,565,708
------------ ------------
TOTAL LIABILITIES 12,131,378 11,657,420
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 30,000 shares authorized, 25,000 shares issued
and outstanding 2,500 2,500
Additional capital paid-in 126,750 126,750
Retained income 56,637 54,423
Accumulated other comprehensive income:
Unrealized net capital gains and losses 3,307 4,930
------------ ------------
Total accumulated other comprehensive income 3,307 4,930
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 189,194 188,603
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 12,320,572 $ 11,846,023
============ ============
See notes to condensed financial statements.
4
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------
(IN THOUSANDS) 2002 2001
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,214 $ 1,493
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation, amortization and other non-cash items (71) (130)
Realized capital gains and losses (450) 844
Changes in:
Life-contingent contract benefits and contractholder funds, net of
reinsurance recoverables 2,681 3,237
Income taxes payable 1,189 801
Receivable/payable to affiliates, net 44,468 (9,874)
Other operating assets and liabilities (6,053) 15,265
------- -------
Net cash provided by operating activities 43,978 11,636
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 11,087 3,175
Investment collections 6,289 1,944
Investments purchases (1,913) (8,245)
Change in short-term investments, net (18,109) 793
------- -------
Net cash used in investing activities (2,646) (2,333)
------- -------
NET INCREASE IN CASH 41,332 9,303
CASH AT BEGINNING OF PERIOD 43,796 76
------- -------
CASH AT END OF PERIOD $ 85,128 $ 9,379
======== =======
See notes to condensed financial statements.
5
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts
of Lincoln Benefit Life Company ("the Company"), a wholly owned
subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly
owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary
of The Allstate Corporation (the "Corporation").
The condensed financial statements and notes as of March 31, 2002,
and for the three month periods ended March 31, 2002 and 2001, are
unaudited. The condensed financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods.
These condensed financial statements and notes should be read in
conjunction with the financial statements and notes thereto included in
the Lincoln Benefit Life Company Annual Report on Form 10-K for the year
ended December 31, 2001. The results of operations for the interim
periods should not be considered indicative of results to be expected for
the full year. To conform with the 2002 presentation, certain prior year
amounts have been reclassified.
2. REINSURANCE
The Company has reinsurance agreements whereby premiums, contract
charges, credited interest, policy benefits and expenses are ceded to
ALIC and certain non-affiliates, and reflected net of such reinsurance in
the condensed statements of operations. Reinsurance recoverable and the
related reserve for life-contingent contract benefits and contractholder
funds are reported separately in the condensed statements of financial
position. The Company continues to have primary liability as the direct
insurer for risks reinsured.
Investment income earned on the assets which support contractholder
funds and the reserve for life-contingent contract benefits is not
included in the Company's condensed financial statements as those assets
are owned and managed by ALIC under terms of the reinsurance agreements.
The following table summarizes amounts ceded to ALIC and non-affiliates
under reinsurance agreements.
The effects of reinsurance on premiums written and earned and
contract charges are as follows:
THREE MONTHS ENDED MARCH 31,
2002 2001
---- ----
(IN THOUSANDS)
PREMIUMS AND CONTRACT CHARGES
Direct $ 145,809 $ 101,071
Assumed - 1
Ceded
Affiliate (88,485) (57,653)
Non-affiliate (57,324) (43,419)
--------- ---------
Premiums and contract charges, net of reinsurance $ - $ -
========= =========
The effects of reinsurance on credited interest, policy benefits and
other expenses are as follows:
THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS) 2002 2001
---- ----
CREDITED INTEREST, POLICY BENEFITS AND OTHER EXPENSES
Direct $ 284,327 $ 188,695
Assumed - -
Ceded
Affiliate (207,318) (135,747)
Non-affiliate (77,009) (52,948)
--------- ---------
Credited interest, policy benefits and other expenses,
net of reinsurance $ - $ -
========= =========
6
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENS
(UNAUDITED)
3. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and
after-tax basis are as follows:
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
--------------------------------- -----------------------------
After- After-
Pretax Tax tax Pretax Tax tax
------ --- ----- ------ --- ------
UNREALIZED CAPITAL GAINS AND LOSSES:
Unrealized holding (losses) gains
arising during the period $ (2,048) $ 717 $ (1,331) $ 1,845 $ (646) $ 1,199
Less: reclassification adjustments 450 (158) 292 (844) 295 (549)
-------- ------ -------- ------- ------ -------
Unrealized net capital (losses) gains (2,498) 875 (1,623) 2,689 (941) 1,748
-------- ------ --------- ------- ------ -------
Other comprehensive (loss) income $ (2,498) $ 875 (1,623) $ 2,689 $ (941) 1,748
======== ======= ======= ======
Net income 2,214 1,493
-------- -------
Comprehensive income $ 591 $ 3,241
========= =======
4. REGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing
social, economic and regulatory environment. State and federal regulatory
initiatives have varied and have included employee benefit regulations,
removal of barriers preventing banks from engaging in the securities and
insurance businesses, tax law changes affecting the taxation of insurance
companies, the tax treatment of insurance products and its impact on the
relative desirability of various personal investment vehicles and the
overall expansion of regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
From time to time the Company is involved in pending and
threatened litigation in the normal course of its business in which claims
for monetary damages are asserted. In the opinion of management, the
ultimate liability, if any, in one or more of these actions in excess of
amounts currently reserved is not expected to have a material effect on
the results of operations, liquidity or financial position of the Company.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Lincoln Benefit Life
Company (the "Company"). It should be read in conjunction with the condensed
financial statements and related notes thereto found under Part I Item 1
contained herein and with the discussion, analysis, financial statements and
notes thereto in Part I Item 1 and Part II Items 7 and 8 of the Lincoln Benefit
Life Company Annual Report on Form 10-K for the year ended December 31, 2001.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets a diversified group of products to meet consumer's
lifetime needs in the areas of protection and retirement solutions through
independent insurance agents and broker/dealers, including master brokerage
agencies. Products distributed through independent insurance agents include term
life insurance; whole life; universal life; variable universal life; single
premium life; fixed annuities, including market value adjusted annuities and
equity-indexed annuities; immediate annuities; variable annuities and long-term
care products. Variable annuities and variable universal life products are also
distributed through independent broker/dealers. ALFS, Inc. ("ALFS") is the
principal underwriter for certain Lincoln Benefit products, such as variable
universal life, variable annuities and market value adjusted annuities. ALFS is
a wholly owned subsidiary of ALIC and is a registered broker/dealer under the
Securities Exchange Act of 1934.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable contracts are legally
segregated and reflected as Separate Accounts. The assets of the Separate
Accounts are carried at fair value. Separate Accounts liabilities represent the
contractholders' claims to the related assets and are carried at the fair value
of the 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 condensed statements of operations. Revenues to the
Company from the Separate Accounts consist of contract maintenance and
administration fees and mortality, surrender and expense charges all of which
are ceded to ALIC.
Absent any contract provision wherein the Company guarantees either a
minimum return of account value upon death or annuitization, variable annuity
and variable life contractholders bear the investment risk that the Separate
Accounts' funds may not meet their stated objectives.
RESULTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2002 2001
---------------- ---------------
Net investment income $ 2,953 $ 3,137
Realized capital gains and losses 450 (844)
Income tax expense 1,189 800
------- -------
Net income $ 2,214 $ 1,493
======= =======
The Company has reinsurance agreements whereby premiums, contract charges,
credited interest, policy benefits and expenses are ceded to ALIC and certain
non-affiliates, and reflected net of such reinsurance in the condensed
statements of operations. The Company's results of operations include net
investment income and realized capital gains and losses earned on the assets of
the Company that are not transferred under the reinsurance agreements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
Net income for the first three months of 2002 increased 48.3% to $2.2
million compared to the same period last year, due to realized capital gains
during the first three months of 2002 partially offset by a decrease in net
investment income.
Net investment income for the first three months of 2002 decreased 5.9% to
$3.0 million compared to the same period last year, due to lower investment
yields partially offset by increased investment balances. Investment balances,
excluding Separate Accounts and unrealized gains and losses on fixed income
securities, increased 5.3% to $189.2 million at March 31, 2002 from $179.8
million at March 31, 2001. This increase was due to positive cash flows from
operations.
Realized capital gains, after-tax, were $293 thousand for the first three
months of 2002 compared to realized capital losses of $549 thousand for the same
period last year. Realized capital gains and losses result from the sale of
fixed income securities. Period to period fluctuations in realized capital gains
and losses are the result of timing of sales decisions reflecting management's
decision on positioning the portfolio, assessments of individual securities,
overall market conditions and write-downs when an assessment is made by the
Company that a decline in value of a security is other than temporary.
FINANCIAL POSITION
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Fixed income securities (1) $ 169,370 $ 186,709
Short-term investments 24,965 6,856
----------- -----------
Total investments $ 194,335 $ 193,565
=========== ===========
Cash $ 85,128 $ 43,796
=========== ===========
Reinsurance recoverable from ALIC, net $ 9,943,065 $ 9,564,440
=========== ===========
Contractholder funds $ 9,638,144 $ 9,287,599
=========== ===========
Reserve for life-contingent contract benefits $ 769,994 $ 724,044
=========== ===========
Separate Accounts assets and liabilities $ 1,621,150 $ 1,565,708
=========== ===========
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $164.3 million and $179.1 million at March 31, 2002 and December
31, 2001, respectively.
Total investments were $194.3 million at March 31, 2002 compared to $193.6
million at December 31, 2001. The increase was due to positive cash flows
generated from operations offset in part by fewer unrealized gains on fixed
income securities. Unrealized net capital gains on fixed income securities were
$5.1 million at March 31, 2002 compared to $7.6 million at December 31, 2001.
Investments at March 31, 2002, excluding unrealized gains on fixed income
securities, grew 1.8% from December 31, 2001.
At March 31, 2002, 97.9% of the Company's fixed income securities
portfolio was rated investment grade, which is defined by the Company as a
security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating.
At March 31, 2002, cash was $85.1 million compared to $43.8 million at
December 31, 2001. Cash increased due to a change in the settlement process for
intercompany balances.
At March 31, 2002, Contractholder funds increased to $9.64 billion from
$9.29 billion at December 31, 2001 as the result of additional deposits from
fixed annuities and credited interest that were partially offset by surrenders
and withdrawals. Reserves for life-contingent contract benefits increased $46.0
million to $770.0 million at March 31, 2002 resulting from increased sales of
term products that was partially offset by benefits paid. Reinsurance
recoverable from ALIC increased correspondingly by $378.6 million due to the
increase in contractholder funds.
Separate Accounts assets and liabilities increased 3.5% to $1.62 billion
at March 31, 2002 as compared to the December 31, 2001 balance. The increases
were primarily attributable to additional sales of variable annuity contracts
and transfers from the fixed account option contract to variable Separate
Accounts funds partially offset by surrenders and withdrawals and expense
charges.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
The company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources:
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2002 2001
---- ----
Common stock and retained income $ 185,887 $ 183,673
Other comprehensive income 3,307 4,930
---------- -----------
Total shareholder's equity $ 189,194 $ 188,603
========== ===========
SHAREHOLDER'S EQUITY
Shareholder's equity increased for March 31, 2002 due to net income
partially offset by a decrease in unrealized net capital gains and losses.
DEBT
The Company had no outstanding debt at March 31, 2002 and December 31,
2001. The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds available to the Company is at the discretion
of the Corporation. The maximum amount of loans the Corporation will have
outstanding to all its eligible subsidiaries at any given point in time is
limited to $1.00 billion. No amounts were outstanding under the intercompany
loan agreement at March 31, 2002 and December 31, 2001. The Corporation uses
commercial paper borrowings and can use bank lines of credit to fund
intercompany borrowings.
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important factor
in establishing the competitive position of insurance companies and, generally,
may be expected to have an effect on an insurance company's sales. On an ongoing
basis, rating agencies review the financial performance and condition of
insurers. A multiple level downgrade, while not expected, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company shares its financial strength ratings with its parent,
ALIC, due to the 100% reinsurance agreements. The Company's current financial
strength ratings are listed below:
RATING AGENCY RATING RATING STRUCTURE
------------- ------ ----------------
Moody's Investors Service, Inc. Aa2 Second highest of nine ratings
("Excellent") categories and mid-range within the
category based on modifiers (e.g.,
Aa1, Aa2 and Aa3 are "Excellent")
Standard & Poor's Ratings Services AA+ Second highest of nine ratings
("Very Strong") categories and highest within the
category based on modifiers (e.g.,
AA+, AA and AA- are "Very Strong")
A.M. Best Company, Inc. A+ Highest of nine ratings categories
("Superior") and second highest within the
category based on modifiers (e.g.,
A++ and A+ are "Superior" while A
and A- are "Excellent")
In February 2002, Standard & Poor's affirmed its December 31, 2001
ratings. Standard & Poor's revised its outlook for ALIC and its rated
subsidiaries and affiliates to "negative" from "stable". This revision is part
of an ongoing life insurance industry review recently initiated by Standard &
Poor's. Moody's and A.M. Best reaffirmed their ratings and outlook for the
Company and ALIC.
LIQUIDITY
Under the terms of reinsurance agreements, premiums and deposits,
excluding those relating to Separate Accounts, are transferred primarily to
ALIC, which maintains the investment portfolios supporting the Company's
products. Payments of policyholder claims, benefits, contract maturities,
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
contract surrenders and withdrawals and certain operating costs, excluding those
relating to Separate Accounts, are also reimbursed primarily by ALIC, under the
terms of the reinsurance agreements. The Company continues to have primary
liability as a direct insurer for risks reinsured. The Company's ability to meet
liquidity demands is dependent on ALIC's ability to meet those demands. ALIC's
financial strength was rated Aa2, AA+, and A+ by Moody's, Standard & Poor's and
A.M. Best, respectively, at March 31, 2002.
The primary sources of funds for the Company are collection of principal
and interest from the investment portfolio, capital contributions from ALIC and
intercompany loans from the Corporation. The primary uses of these funds are to
purchase investments, pay costs associated with the maintenance of the Company's
investment portfolio, income taxes, dividends to ALIC, and the repayment of
intercompany loans from the Corporation.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate
results based on management's plans are subject to uncertainty. These statements
are made subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or
current facts and may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "estimates," "intends," "believes," "likely,"
and other words with similar meanings. These statements may address, among other
things, our strategy for growth, product development, regulatory approvals,
market position, expenses, financial results and reserves. Forward-looking
statements are based on management's current expectations of future events. We
cannot guarantee that any forward-looking statement will be accurate. However,
we believe that our forward-looking statements are based on reasonable, current
expectations and assumptions. We assume no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual results
could differ materially from those communicated in these forward-looking
statements. In addition to the normal risks of business, the Company is subject
to significant risk factors, including those listed below which apply to it as
an insurance business and a provider of other financial services.
o There is uncertainty involved in estimating the availability of reinsurance
and the collectibility of reinsurance and recoverables. This uncertainty
arises from a number of factors, including whether losses meet the
qualifying conditions of the reinsurance contracts and if the reinsurers
have the financial capacity and willingness to pay.
o Currently, the Corporation is examining the potential exposure, if any, of
its insurance operations from acts of terrorism. The Corporation is also
examining how best to address this exposure, if any, considering the
interests of policyholders, shareholders, the lending community, regulators
and others. The Company generally does not have exclusions for terrorist
events included in its life insurance policies. In the event that a
terrorist act occurs, the Company may be adversely impacted, depending on
the nature of the event. With respect to the Company's investment
portfolio, in the event that commercial insurance coverage for terrorism
becomes unavailable or very expensive, there could be significant adverse
impacts on some portion of the Company's portfolio, particularly in sectors
such as airlines and real estate. For example, certain debt obligations
might be adversely affected due to the inability to obtain coverage to
restore the related real estate or other property, thereby creating the
potential for increased default risk.
o Changes in market interest rates can have adverse effects on the Company's
investment portfolio and investment income. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
In addition, increases in market interest rates as compared to rates
offered on some of the Company's products could make those products less
attractive and lead to lower sales and/or increase the level of surrenders
on these products. Declining market interest rates could have an adverse
impact on the Company's investment income as the Company reinvests proceeds
from positive cash flows from operations and proceeds from maturing and
called investments into new investments that could be yielding less than
the portfolio's average rate.
o The impact of decreasing Separate Accounts balances resulting from volatile
market conditions, underlying fund performance and sales management
performance could cause contract charges realized by the Company, as well
as ALIC, to decrease and lead to an increase of exposure to pay guaranteed
minimum income and death benefits.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o The Company amortizes deferred policy acquisition costs ("DAC") related to
contractholder funds in proportion to gross profits over the estimated
lives of the contract periods. Periodically, the Company updates the
assumptions underlying the gross profits, which include estimated future
fees, investment margins and expenses, in order to reflect actual
experience. Updates to these assumptions result in adjustments to the
cumulative amortization of DAC. These adjustments may have a material
effect on results of operations. DAC and any related adjustments are ceded
to ALIC.
o In order to manage interest rate risk, from time to time the Company
adjusts the effective duration of assets in the investment portfolio. Those
adjustments may have an impact on the value of the investment portfolio and
on investment income.
o It is possible that the assumptions and projections used by the Company in
establishing prices for the guaranteed minimum death benefits and
guaranteed minimum income benefits on variable annuities, particularly
assumptions and projections about investment performance, do not accurately
anticipate the level of costs the Company will ultimately incur and cede to
ALIC in providing those benefits.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not occur until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations ceded to ALIC.
o Under current U.S. tax law and regulations, deferred and immediate
annuities and life insurance, including interest-sensitive products,
receive favorable policyholder tax treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance used
in estate planning.
o The Company distributes its products under agreements with other members of
the financial services industry that are not affiliated with the Company.
Termination of one or more of these agreements due to, for example, changes
in control of any of these entities, could have a detrimental effect on the
Company's sales. This risk may be exacerbated due to the enactment of the
Gramm-Leach-Bliley Act of 1999, which eliminated many federal and state law
barriers to affiliations among banks, securities firms, insurers and other
financial service providers.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophe which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade in AIC's financial strength rating
from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best,
respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard &
Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a
downgrade of the Corporation's ratings, ALIC and its rated subsidiaries
could also experience a similar downgrade.
o The events of September 11 and the resulting disruption in the financial
markets revealed weaknesses in the physical and operational infrastructure
that underlies the U.S. and worldwide financial systems. Those weaknesses
did not impair the Company's liquidity in the wake of September 11.
However, if an event of similar or greater magnitude occurs in the future
and if the weaknesses in the physical and operational infrastructure of the
U.S. and worldwide financial systems are not remedied, the Company could
encounter significant difficulties in transferring funds, buying and
selling securities and engaging in other financial transactions that
support its liquidity.
o Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers. A multiple level downgrade of either
the Company or ALIC, while not expected, could have a material adverse
effect on the Company's sales, including the competitiveness of the
Company's product offerings, its ability to market products, and its
financial condition and results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends to ALIC and to use its capital in other ways.
o Following enactment of the Gramm-Leach-Bliley Act of 1999, federal
legislation that allows mergers that combine commercial banks, insurers and
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the United States insurance business in an effort to determine the
proper role of state insurance regulation in the U. S. financial services
industry. We cannot predict whether any state or federal measures will be
adopted to change the nature or scope of the regulation of the insurance
business or what affect any such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and securities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition, grand-fathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o In some states, mutual insurance companies can convert to a hybrid
structure known as a mutual holding company. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, some
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). The ability of mutual insurance
companies to convert to mutual holding companies or to demutualize may
materially adversely affect all of our product lines by substantially
increasing competition for capital in the financial services industry.
13
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The discussion "Regulation and Legal Proceedings" in Part I, Item 1,
Note 4 of this Form 10-Q is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An Exhibit Index has been filed as part of this report on page E-1
(b) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 13, 2002. LINCOLN BENEFIT LIFE COMPANY
- --------------------------------------------------------------
(Registrant)
/s/THOMAS J. WILSON, II
Thomas J. Wilson, II
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(Authorized Officer of Registrant)
/s/SAMUEL H. PILCH
Samuel H. Pilch
GROUP VICE PRESIDENT AND CONTROLLER
(Chief Accounting Officer)
15
Exhibit Index
Exhibit No. Description
3(i) Amended and Restated Articles of Incorporation of Lincoln Benefit Life Company
dated September 26, 2000.
3(ii) Amended and Restated By-Laws of Lincoln Benefit Life Company dated July 23,
1997. Incorporated herein by reference to Exhibit 6(b) to Lincoln Benefit Life
Variable Life Account Registration Statement No. 333-47717 on Form S-6 filed
March 11, 1998.
10.1 Service and Expense Agreement among Allstate Insurance
Company and The Allstate Corporation and Certain
Insurance Subsidiaries dated January 1, 1999.
Incorporated herein by reference to Exhibit 10.2 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.2 Investment Management Agreement and Amendment to Certain Service and Expense
Agreements Among Allstate Investments, LLC and Allstate Insurance Company and The
Allstate Corporation and Certain Affiliates effective as of January 1, 2002.
Incorporated herein by reference to Exhibit 10.3 to Northbrook Life Insurance
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.3 Tax Sharing Agreement dated as of November 12, 1996
among The Allstate Corporation and certain affiliates.
Incorporated herein by reference to Exhibit 10.4 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.4 Cash Management Services Master Agreement between
Allstate Insurance Company and Allstate Bank (fka
Allstate Federal Savings Bank) dated March 16, 1999.
10.5 Amendment No.1 to Cash Management Services Master Agreement effective January 5,
2001.
E-1