FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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: September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-59765
333-59769
333-82427
LINCOLN BENEFIT LIFE COMPANY
(Exact name of registrant as specified in its charter)
Nebraska 470221457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
206 South 13th Street
Lincoln, Nebraska 68508
(Address of principal executive offices)(zip code)
1-800-525-9287
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares of each of the issuer's classes of common
stock as of September 30, 1999; there were 25,000 shares of common capital stock
outstanding, par value $100 per share all of which shares are held by Allstate
Life Insurance Company.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Position
September 30, 1999 (Unaudited) and December 31, 1998........... 3
Consolidated Statements of Operations
Three Months Ended September 30, 1999 and September 30, 1998,
and Nine Months Ended September 30, 1999 and September 30,
1998 (Unaudited)............................................... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and September 30, 1998
(Unaudited).................................................... 5
Notes to Financial Statements.................................. 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK*............................................. N/A
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................. 17
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS*..................... N/A
Item 3. DEFAULTS UPON SENIOR SECURITIES*............................... N/A
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS*....................................................... N/A
Item 5. OTHER INFORMATION.............................................. 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 17
SIGNATURE PAGE......................................................... 18
*Omitted pursuant to General Instruction H(2) of Form 10-Q.
2
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ----------
($ in thousands, except par value data) (UNAUDITED)
ASSETS
Investments
Fixed income securities, at fair value
(amortized cost $145,311 and $149,898) ......... $ 146,263 $ 158,984
Short-term ........................................ 13,279 3,675
---------- ----------
Total investments ........................... 159,542 162,659
Cash ................................................. 1,161 1,735
Reinsurance recoverable from
Allstate Life Insurance Company ................... 7,282,999 6,938,717
Reinsurance recoverable from non-affiliates .......... 233,237 191,092
Receivable from affiliates, net ...................... 41,819 37,073
Other assets ......................................... 20,635 25,286
Separate Accounts .................................... 1,080,107 763,416
---------- ----------
TOTAL ASSETS ................................ $8,819,500 $8,119,978
========== ==========
LIABILITIES
Reserve for life-contingent contract benefits ........ $ 397,111 $ 338,069
Contractholder funds ................................. 7,109,316 6,785,070
Current income taxes payable ......................... 1,861 3,659
Deferred income taxes ................................ 2,730 5,546
Other liabilities and accrued expenses ............... 70,054 64,440
Separate Accounts .................................... 1,080,107 763,416
---------- ----------
TOTAL LIABILITIES ........................... 8,661,179 7,960,200
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 30,000 shares
authorized, 25,000 issued and outstanding ...... 2,500 2,500
Additional capital paid-in ........................... 116,750 116,750
Retained income ...................................... 38,452 34,622
Accumulated other comprehensive income:
Unrealized net capital gains ..................... 619 5,906
---------- ----------
Total accumulated other comprehensive income 619 5,906
---------- ----------
TOTAL SHAREHOLDER'S EQUITY .................. 158,321 159,778
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .. $8,819,500 $8,119,978
========== ==========
See notes to consolidated financial statements.
3
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
($ in thousands) 1999 1998 1999 1998
-------- ------- ------- --------
(UNAUDITED) (UNAUDITED)
REVENUES
Net investment income ................ $ 2,772 $ 2,355 $ 8,158 $ 7,534
Realized capital gains and losses .... (357) 31 (766) 31
Other income (expense) ............... (1,306) 208 (1,497) 262
------- ------- ------- -------
INCOME FROM OPERATIONS BEFORE
INCOME TAX EXPENSE ................ 1,109 2,594 5,895 7,827
Income tax expense ................... 388 945 2,065 2,786
------- ------- ------- -------
NET INCOME ........................... $ 721 $ 1,649 $ 3,830 $ 5,041
======= ======= ======= =======
See notes to consolidated financial statements.
4
LINCOLN BENEFIT LIFE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
($ in thousands) 1999 1998
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 3,830 $ 5,041
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and other non-cash items 1,136 12
Realized capital gains and losses ................. 766 (31)
Changes in:
Reserve for life-contingent contract benefits
and contractholder funds .................. (3,139) (6,875)
Income taxes payable .......................... (1,768) 1,764
Other operating assets and liabilities ........ 2,225 9,699
------------ ------------
Net cash provided by operating activities . 3,050 9,610
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales ............................... 11,183 --
Investment collections ............................ 12,559 7,482
Investment purchases .............................. (17,955) (14,597)
Change in short-term investments, net .................... (9,411) (2,024)
------------ ------------
Net cash used in investing activities ..... (3,624) (9,139)
------------ ------------
NET (DECREASE) INCREASE IN CASH .......................... (574) 471
CASH AT THE BEGINNING OF PERIOD .......................... 1,735 4,220
------------ ------------
CASH AT END OF PERIOD .................................... $ 1,161 $ 4,691
============ ============
See notes to consolidated financial statements.
5
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Lincoln Benefit Life Company ("LBL") and its wholly owned subsidiary, AFD,
Inc., (formerly Allstate Financial Distributors, Inc.) a registered
broker-dealer (collectively, the "Company"). LBL is 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"). These consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles.
The consolidated financial statements and notes as of September 30, 1999
and for the three month and nine month periods ended September 30, 1999
and 1998 are unaudited. The consolidated 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. The consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Lincoln Benefit Life Company Annual Report on Form 10-K
for 1998. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.
Effective January 1, 1999, the Company adopted Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance concerning when
to recognize a liability for insurance-related assessments and how those
liabilities should be measured. Specifically, insurance-related
assessments should be recognized as liabilities when all of the following
criteria have been met: 1) an assessment has been imposed or it is
probable that an assessment will be imposed, 2) the event obligating an
entity to pay an assessment has occurred and 3) the amount of the
assessment can be reasonably estimated. The adoption of this statement had
an immaterial impact on the Company's results of operations and financial
position.
To conform with the 1999 presentation, certain amounts in the prior years'
consolidated financial statements and notes have been reclassified.
2. REINSURANCE
The Company has reinsurance agreements whereby premiums, contract charges,
credited interest, policy benefits and certain expenses are ceded,
primarily to ALIC, and reflected net of such reinsurance in the
consolidated statements of operations. The amounts shown in the Company's
consolidated statements of operations relate to the investment of those
assets of the Company that are not transferred under reinsurance
agreements. Reinsurance recoverable and the related reserve for
life-contingent contract benefits and contractholder funds are reported
separately in the consolidated statements of financial position. The
Company continues to have primary liability as the direct insurer for
risks reinsured.
6
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 consolidated financial statements as those assets are owned
and managed by the assuming company under the terms of reinsurance
agreements.
The following amounts were ceded to ALIC under reinsurance agreements.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
($ in thousands) 1999 1998 1999 1998
--------------- ------------- ------------ ---------------
Premiums $ 12,878 $11,516 $ 42,802 $29,479
Contract charges 31,940 29,454 92,878 79,330
Credited interest, policy
benefits, and certain
expenses 138,133 174,985 488,072 463,217
The following amounts were ceded to third parties under reinsurance
agreements.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
($ in thousands) 1999 1998 1999 1998
---------------- ------------ -------------------------------
Premiums $ 71,315 $43,438 $ 146,940 $ 109,446
Credited interest, policy
benefits, and certain
expenses 61,924 41,775 170,199 144,532
7
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and after-tax
basis are as follows:
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
($ in thousands) 1999 1998
-------------------------------------- -----------------------------------
AFTER- AFTER-
PRETAX TAX TAX PRETAX TAX TAX
------ --- --- ------ --- ---
Unrealized capital gains and losses:
Unrealized holding
(losses) gains arising
during the period $ (1,105) $ 387 $ (718) $ 4,367 $ (1,529) $ 2,838
Less: reclassification
adjustment for realized
net capital (losses)
gains included in net
income (357) 125 (232) 31 (11) 20
-------- -------- ------- -------- -------- --------
Unrealized net capital
(losses) gains (748) 262 (486) 4,336 (1,518) 2,818
-------- -------- ------- -------- -------- --------
Other comprehensive
(loss) income $ (748) $ 262 (486) $ 4,336 $ (1,518) 2,818
======== ======== ======== ========
Net income 721 1,649
------- -------
Comprehensive
income $ 235 $ 4,467
======= =======
8
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMPREHENSIVE INCOME (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
($ in thousands) 1999 1998
-------------------------------------- -----------------------------------
AFTER- AFTER-
PRETAX TAX TAX PRETAX TAX TAX
------ --- --- ------ --- ---
Unrealized capital gains and losses:
Unrealized holding
(losses) gains arising
during the period $ (8,900) $ 3,115 $(5,785) $ 5,285 $ (1,850) $ 3,435
Less: reclassification
adjustment for realized
net capital (losses)
gains included in net
income (766) 268 (498) 31 (11) 20
-------- -------- ------- -------- -------- --------
Unrealized net capital
(losses) gains (8,134) 2,847 (5,287) 5,254 (1,839) 3,415
-------- -------- ------- -------- -------- --------
Other comprehensive
(loss) income $ (8,134) $ 2,847 (5,287) $ 5,254 $ (1,839) 3,415
======== ======== ======== ========
Net income 3,830 5,041
------- -------
Comprehensive
(loss) income $(1,457) $ 8,456
======= =======
4. COMMITMENTS AND CONTINGENT LIABILITIES
REGULATION AND LEGAL PROCEEDINGS
The Company is subject to the effects of a changing social, economic and
regulatory environment. Public and regulatory initiatives have varied and
have included employee benefit regulations, removal of barriers preventing
banks from engaging in securities and insurance business, tax law changes
affecting the taxation of insurance companies, and tax treatment of
insurance products and its impact on the relative desirability of personal
investment vehicles and proposed legislation to prohibit the use of gender
in determining insurance rates and benefits. The ultimate changes and
eventual effects, if any, of these initiatives are uncertain.
Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. 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.
5. IMPAIRMENT OF LONG-LIVED ASSET
Included within other expenses for the third quarter of 1999, is a
write-down of $1.2 million related to unamortized improvements to the
Company's building in Lincoln, Nebraska. It is anticipated that the
building will be vacated and used for storage purposes in the fourth
quarter of 1999.
9
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Lincoln Benefit
Life Company ("LBL") and its wholly owned subsidiary, AFD, Inc., ("AFDI",
formerly Allstate Financial Distributors, Inc.) (collectively the
"Company"). It should be read in conjunction with the consolidated
financial statements and related notes thereto found under items 7 and 8
of Part II of the Lincoln Benefit Life Company Annual Report on Form 10-K
for the year ended December 31, 1998.
LBL is 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 Company markets life insurance and savings products primarily through
independent insurance agents and brokers. Life insurance includes
traditional life, such as term and whole life insurance, as well as
variable life and universal life products. Savings products consist of
fixed annuity products, including indexed and market value adjusted
annuities, as well as variable annuities. The Company has identified
itself as a single segment entity.
The assets and liabilities related to variable annuity contracts and
variable life policies are legally segregated and reflected as Separate
Account assets and liabilities and carried at fair value in the
consolidated statements of financial position. Investment income and
realized gains and losses of the Separate Accounts accrue directly to the
contractholders (net of fees) and, therefore, are not included in the
Company's consolidated statements of operations.
CONSOLIDATED RESULTS OF OPERATIONS
($ in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
Net investment
income $ 2,772 $ 2,355 $ 8,158 $ 7,534
========= ========= ========= =========
Realized capital gains
and losses, after-tax $ (232) $ 20 $ (498) $ 20
========= ========= ========= =========
Net income $ 721 $ 1,649 $ 3,830 $ 5,041
========= ========= ========= =========
Total investments $ 159,542 $ 163,601 $ 159,542 $ 163,601
========= ========= ========= =========
The Company has reinsurance agreements under which contract and policy
related transactions are transferred primarily to ALIC. The Company's
consolidated results of operations include primarily net investment income
and realized capital gains and losses earned on the assets of the Company
that are not transferred under the reinsurance agreements. The results of
AFDI and certain non-investment related expenses which are not transferred
under the reinsurance agreements are presented in other revenues and
expenses.
10
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
Net income for the third quarter and first nine months of 1999 was $721
thousand and $3.8 million, respectively, compared to $1.6 million and $5.0
million for the comparable periods in 1998. The decrease in net income for
both periods was primarily due to a $1.2 million write-down of building
improvements in the third quarter of 1999 and realized capital losses on
the sale of publicly-traded corporate bonds. The Company plans to vacate
its building in Lincoln, Nebraska in the fourth quarter of 1999 and use it
for storage purposes.
Pretax net investment income for the third quarter of 1999 increased $417
thousand to $2.8 million compared to $2.4 million for the same period last
year. The increase in net investment income for the third quarter of 1999
was primarily due to larger investment balances and slightly higher
investment yields partially offset by increased expenses. For the first
nine months of 1999, pretax net investment income increased 8.3% to $8.2
million compared to $7.5 million for the same period in 1998. For the nine
month period ended September 30, 1999, higher investment balances from
positive cash flows generated from operations and lower investment
expenses were partially offset by lower investment yields. Investments at
September 30, 1999, excluding Separate Accounts and unrealized gains on
fixed income securities, grew 4.3% from the same period last year. Lower
investment yields are due, in part, to the investment of proceeds from
calls and maturities and the investment of positive cash flows from
operations in securities yielding less than the average portfolio rate. In
relatively low interest rate environments, funds from called or maturing
investments may be reinvested at interest rates lower than those which
prevailed when the funds were previously invested, resulting in lower
investment yields.
11
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
FINANCIAL POSITION
($ in thousands) SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ------------
Fixed income securities (1) $ 146,263 $ 158,984
Short-term investments 13,279 3,675
----------- -----------
Total investments $ 159,542 $ 162,659
=========== ===========
Reinsurance recoverable from ALIC $ 7,282,999 $ 6,938,717
=========== ===========
Separate Account assets and liabilities $ 1,080,107 $ 763,416
=========== ===========
Contracholder funds $ 7,109,316 $ 6,785,070
=========== ===========
(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $145,311 and $149,898 at September 30, 1999 and
December 31, 1998, respectively.
Total investments were $159.5 million at September 30, 1999 compared to
$162.7 million at December 31, 1998. Positive cash flows generated from
operations were more than offset by a decrease in unrealized capital gains
on fixed income securities. At September 30, 1999, unrealized net capital
gains on fixed income securities were $952 thousand compared to $9.1
million at December 31, 1998. The significant change in the unrealized
gain position is primarily attributable to rising interest rates.
At September 30, 1999, all of the Company's fixed income securities
portfolio is rated investment grade, with a National Association of
Insurance Commissioners rating of 1 or 2, a Moody's rating of Aaa, Aa, A
or Baa, or a comparable Company internal rating.
Contractholder funds grew $324.2 million to $7.11 billion at September 30,
1999, primarily due to sales of indexed and market value adjusted annuity
contracts and higher levels of interest credited to contractholder
balances, partially offset by fixed annuity surrenders and withdrawals.
Reinsurance recoverable from ALIC at September 30, 1999 was $7.28 billion
versus $6.94 billion at December 31, 1998. Reinsurance recoverable from
ALIC relates to contract benefit obligations ceded to ALIC.
Separate Account assets and liabilities increased $316.7 million to $1.08
billion at September 30, 1999. The increase was primarily attributable to
sales of variable annuity contracts and the favorable investment
performance of the Separate Account investment portfolios.
12
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
LIQUIDITY AND CAPITAL RESOURCES
Under the terms of reinsurance agreements, all 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, contract surrenders and withdrawals and certain operating
costs 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 September 30, 1999.
The primary source for the remainder of the Company's funds is the
collection of principal and interest from the investment portfolio. The
Company may also receive capital contributions from ALIC. The primary uses
for the remainder of the Company's funds are to purchase investments and
pay costs associated with the maintenance of the Company's investment
portfolio.
YEAR 2000
The Company is dependent upon certain services provided for it by the
Corporation including computer-related systems, and systems and equipment
not typically thought of as computer-related (referred to as "non-IT").
For this reason, the Company is reliant upon the Corporation for the
establishment and maintenance of its computer-related systems and
equipment and non-IT.
The Corporation is heavily dependent upon complex computer systems and
equipment for all phases of its operations, including product
distribution, customer service, insurance processing, underwriting, loss
reserving, investments and other enterprise systems. Since many older
computer software programs recognize only the last two digits of the year
in any date, some software may fail to operate properly in or after the
year 1999 if the software is not reprogrammed, remediated, or replaced
("Year 2000"). Also, non-IT contain embedded hardware or software that may
have a Year 2000 sensitive component. The Corporation believes that many
of its counterparties and suppliers also have Year 2000 issues and non-IT
issues which could affect the Corporation.
In 1995, the Corporation commenced a plan consisting of four phases which
are intended to mitigate and/or prevent the adverse effects of Year 2000
issues on its systems and equipment: 1) inventory and assessment of
affected systems and equipment, 2) remediation and compliance of systems
and equipment through strategies that include the replacement or
enhancement of existing systems, upgrades to operating systems already
covered by maintenance agreements and modifications to existing systems to
make them Year 2000 compliant, 3) testing of systems and equipment using
clock-forward testing for both current and future dates and for dates
which trigger specific processing, and 4) contingency planning to address
possible adverse scenarios and the potential financial impact to the
Corporation's results of operations, liquidity or financial position.
13
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
The Corporation believes that the first three phases of this plan,
assessment, remediation and testing, including clock-forward testing which
was performed on the Corporation's systems and equipment and non-IT, are
complete. It is expected that the implementation and rollout of the
remediated personal computer environment will be completed by December
1999. In addition, some systems and equipment and non-IT related to
discontinued or non-critical functions of the Corporation are planned to
be abandoned by the end of 1999.
The fourth phase of this plan, contingency planning, is currently in
process. Detailed plans have been created in the event that the systems
and equipment or major external counterparties and suppliers supporting
critical processes are not Year 2000 compliant in or after the year 1999.
These plans, created by each corporate function and business unit of the
Corporation, identify and document the risks associated with Year 2000 and
their business processes. Appropriate plans have been developed to
mitigate those risks. A common inclusion in many of the plans is a
description of manual processes and personnel needed in the event of a
temporary Year 2000 failure. Contingency plans will be tested
appropriately by the corporate function or business unit for their
effective operation and for achieving their desired results. This testing
will be complete by December 1999. In addition, the Corporation's
management is reviewing all corporate function and business units' plans
for accuracy and comprehensiveness. This review will also be complete by
December 1999. Monitoring of these plans will continue throughout the end
of 1999 and beyond, as needed.
The final step of the contingency planning phase includes the
establishment of a Year 2000 Command Center and wellness checks for the
Corporation's systems and equipment. The Command Center will be in
operation 24 hours a day for several days before and after January 1, 2000
and other critical Year 2000 dates, to serve as a center of expertise in
the event a Year 2000 problem is encountered at the Corporation. Wellness
checks will be performed by designated personnel throughout the
Corporation on specified systems and non-IT to determine that they are
functioning properly on or after January 1, 2000. The results of the
wellness checks will be reported to the Command Center.
The Corporation has considered numerous risk scenarios during the
contingency planning phase. Through this planning, management believes
that the scenario which could be considered the worst case, includes a
widespread, prolonged failure of public utility systems which would not
only cause power outages for the Corporation, but also cause
telecommunication, banking or external counterparty and supplier service
outages. While the Corporation has assessed and will continue to assess
data on the utility, telecommunication and banking industries, it
acknowledges the possibility that a prolonged widespread outage in any or
all of these industries could lead to a worst case scenario. However, the
Corporation does not consider such prolonged widespread outages to be
reasonably likely. Therefore, the Corporation has focused its most
reasonably likely worst case scenario contingency planning on limited
scale outages in order to ensure the ability to deal with risks of likely
scenarios. Because the Corporation is prepared for outages on a localized
basis as part of normal business operations, the Corporation considers the
impacts of this most reasonably likely scenario to be immaterial to the
Corporation's results of operations, liquidity or financial position.
14
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
The Company markets products primarily through independent agencies, which
are independent of the Corporation, and have not been directly included in
the Corporation-wide four phase plan, and potentially may not be Year 2000
compliant during or after the year 1999. Because the risk associated with
this scenario is diffused across thousands of appointed independent
agencies, located throughout the United States, using many different
technologies, the impact on the Company's results of operations, liquidity
or financial condition is not determinable.
In addition, the Corporation is actively working with its major external
counterparties and suppliers, including public utility companies and banks
and brokers involved in its distribution channel, to assess their
compliance efforts and the Corporation's exposure to both their Year 2000
issues and non-IT issues. This assessment has included soliciting external
counterparties and suppliers, evaluating responses received and testing
third party interfaces and interactions to determine compliance. Currently
the Corporation has solicited, and has received responses from, the
majority of its counterparties and suppliers. These responses generally
state that they believe they will be Year 2000 compliant and that no
transactions will be affected. However, certain vendors are also in
ongoing assessment and testing of their products whereby they are
currently unable to identify all potential problems in certain products
which are used by the Corporation. The Corporation believes that these
vendors will make no statements regarding their Year 2000 readiness other
than to publish declarations addressing specific compliance issues
identified with their products. The Corporation is working with these key
vendors and has procedures in place to stay aware of any compliance issues
encountered by these vendors. The Corporation has also decided to test
certain interfaces and interactions to gain additional assurance on third
party compliance. Currently, the Corporation does not have sufficient
information to determine whether all of its external counterparties and
suppliers will be Year 2000 compliant. If they are not Year 2000
compliant, the Corporation is unable to determine the impact of any
consequent losses on its results of operations, liquidity or financial
position.
The Corporation may be exposed to the risk that the issuers of investments
in its portfolio will be adversely impacted by Year 2000 issues. The
Corporation assesses the impact which Year 2000 issues have on the
Corporation's investments as part of due diligence for proposed new
investments and in its ongoing review of all current portfolio holdings.
Any recommended actions with respect to individual investments are
determined by taking into account the potential impact of Year 2000 on the
issuer. Based on its current review, the Corporation believes that
although Year 2000 issues may temporarily affect the market or individual
issuers, the potential impact of Year 2000 on its investment portfolio
will not be material.
The Corporation presently believes that it will resolve the Year 2000
issue in a timely manner. Year 2000 costs are expensed as incurred. The
majority of the expenses related to this project have been incurred as of
September 30, 1999. The Corporation estimates that approximately $125
million in costs will be incurred between the years of 1995 and 2000.
These amounts include costs directly related to fixing Year 2000 issues,
such as modifying software and hiring Year 2000 solution providers, as
well as costs incurred to replace certain non-compliant systems which
would not have been otherwise replaced. A portion of these costs will be
incurred by the Company on a pro rata basis of usage of the
computer-related systems and equipment and non-IT, as compared to the
usage of all entities which share these services with the Corporation.
These amounts are not expected to be material to the results of operations
of the Company.
15
LINCOLN BENEFIT LIFE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
PENDING ACCOUNTING STANDARDS
In July 1999, the Financial Accounting Standards Board delayed the
effective date of Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
replaces existing pronouncements and practices with a single, integrated
accounting framework for derivatives and hedging activities. The delay was
effected through the issuance of SFAS No. 137, which extends the effective
date of SFAS No. 133 requirements to fiscal years beginning after June 15,
2000. As such, the Company expects to adopt the provisions of SFAS No. 133
as of January 1, 2001. Based on existing interpretations of the
requirements of SFAS No. 133, the impact of the adoption is not expected
to be material to the results of operations or financial position of the
Company.
FORWARD-LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis that
are not historical information are forward-looking statements that are
based on management's estimates, assumptions and projections. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under The
Securities Act of 1933 and the Securities Exchange Act of 1934 for
forward-looking statements. In order to comply with the terms of the safe
habor, the Company notes the following important factor that could cause
the Company's actual results and experience with respect to
forward-looking statements to differ materially from the anticipated
results or other expectations expressed in the Company's forward-looking
statements:
The Corporation presently believes that it will resolve the Year 2000
issues affecting its computer operations in a timely manner, and that
the costs incurred between the years of 1995 and 2000 in resolving
those issues will be approximately $125 million. However, the extent
to which the computer operations of the Corporation's external
counterparties and suppliers are adversely affected could, in turn,
affect the Corporation's ability to communicate with such
counterparties and suppliers, could increase the cost of resolving the
Year 2000 issues, and could materially affect the Corporation's
results of operations, liquidity and financial condition in any period
or periods.
16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal proceedings
pending to which the Company is a party or which would materially affect the
Company. The Company is involved in pending and threatened litigation in the
normal course of its business in which claims for monetary damages are asserted.
Management, after consultation with legal counsel, does not anticipate the
ultimate liability arising from such pending or threatened litigation to have a
material effect on the financial condition of the Company.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-k
(a) Exhibits required by Item 601 of Regulation S-K
(2) None
(3) (i) Articles of Incorporation*
(ii) By-laws*
(4) Lincoln Benefit Life Company Flexible Premium Deferred Annuity Contract and
Application**
(10) Reinsurance Agreement between Lincoln Benefit Life Company and Allstate Life Insurance
Company*
(11) None
(15) None
(18) None
(19) None
(22) None
(23)(a) Consent of Independent Public Accountants***
(b) Consent of Attorneys***
(24) None
(27) Financial Data Schedule
(99) None
(b) Reports on 8-K
No reports on Form 8-K were filed during the second
quarter of 1998.
*Incorporated herein by reference to the Registration Statement on Form N-4 for
Lincoln Benefit Life Variable Annuity Account (File No. 333-50545, 811-07924)
filed April 21, 1998.
**Incorporated herein by reference to the Registration Statement on Form N-4 for
Lincoln Benefit Life Variable Annuity Account (File No. 333-50545, 811-07924)
filed April 21, 1998. Incorporated herein by reference to the Registration
Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account (File
No. 333-50737, 811-07924) filed April 22, 1998. Incorporated by reference to the
Registration Statement on Form N-4 for Lincoln Benefit Life Variable Annuity
Account (File No. 333-82427, 811-07924) filed July 8, 1999.
***Incorporated herein by reference to the Post-effective Amendment #1 to
Registration Statement on Form S-1 for Lincoln Benefit life Company (File No.
333-59765) filed April 1, 1999. Incorporated herein by reference to the
Post-effective Amendment #1 to Registration Statement on Form S-1 for Lincoln
Benefit Life Company (File No. 333-59769) filed April 1, 1999. Incorporated
herein by reference to Pre-effective Amendment No. 1 to the Registration
Statement on Form S-1 for Lincoln Benefit Life Company (File No. 333-88045)
filed September 29, 1999.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 12th day of November, 1999.
LINCOLN BENEFIT LIFE COMPANY
(Registrant)
/s/ B. EUGENE WRAITH PRESIDENT, CHIEF OPERATING
B. EUGENE WRAITH OFFICER AND DIRECTOR
(Principal Executive Officer)
/s/MARVIN P. EHLY SENIOR VICE PRESIDENT
MARVIN P. EHLY TREASURER AND DIRECTOR
(Principal Financial Officer)
18
Exhibit Index
Exhibit No. Exhibit
(27) Financial Data Schedule