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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
FORM 10-K
Registrant meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-111553
LINCOLN BENEFIT LIFE COMPANY
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0221457
(State of Incorporation) (I.R.S. Employer Identification No.)
2940 SOUTH 84TH STREET
LINCOLN, NEBRASKA 68506
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 800-525-9287
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934: NONE
INDICATE BY CHECK MARK IF THE REGISTRANT IS A WELL-KNOWN SEASONED ISSUER, AS
DEFINED IN RULE 405 OF THE SECURITIES ACT. YES / / NO /X/
INDICATE BY CHECK MARK IF THE REGISTRANT IS NOT REQUIRED TO FILE REPORTS
PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE ACT. YES / / NO /X/
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, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. /X/
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN
ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF "ACCELERATED
FILER AND LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE ACT.
LARGE ACCELERATED FILER ACCELERATED FILER NON-ACCELERATED FILER
/ / / / /X/
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12b-2 OF THE EXCHANGE ACT). YES / / NO /X/
NONE OF THE COMMON EQUITY OF THE REGISTRANT IS HELD BY NON-AFFILIATES.
THEREFORE, THE AGGREGATE MARKET VALUE OF COMMON EQUITY HELD BY NON-AFFILIATES OF
THE REGISTRANT IS ZERO.
AS OF MARCH 10, 2006, THE REGISTRANT HAD 25,000 COMMON SHARES, $100 PAR VALUE,
OUTSTANDING, ALL OF WHICH ARE HELD BY ALLSTATE LIFE INSURANCE COMPANY.
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TABLE OF CONTENTS
<Table>
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PAGE
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PART I
Item 1. Business 1
Item 1A. Risk Factors 2
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders * N/A
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities 2
Item 6. Selected Financial Data * N/A
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 17
Item 8. Financial Statements and Supplementary Data 18
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure 44
Item 9A. Controls and Procedures 44
Item 9B. Other Information 44
PART III
Item 10. Directors and Executive Officers of the Registrant * N/A
Item 11. Executive Compensation* N/A
Item 12. Security Ownership of Certain Beneficial Owners and Management * N/A
Item 13. Certain Relationships and Related Transactions * N/A
Item 14. Principal Accountant Fees and Services 45
PART IV
Item 15. Exhibits and Financial Statement Schedules 46
Signatures 49
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Securities Exchange Act of 1934 by Registrants Which Have Not
Registered Securities Pursuant to Section 12 of the Securities Exchange Act of 1934 50
Financial Statement Schedules S-1
</Table>
* Omitted pursuant to General Instruction I(2) of Form 10-K
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PART I
ITEM 1. BUSINESS
Lincoln Benefit Life Company ("Lincoln Benefit", "we", "our" or "us") was
incorporated under the laws of the State of Nebraska in 1938. Lincoln Benefit is
a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), a stock
life insurance company incorporated under the laws of the State of Illinois.
ALIC is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a stock
property-liability insurance company organized under the laws of the State of
Illinois. All of the outstanding capital stock of Allstate Insurance Company is
owned by The Allstate Corporation (the "Corporation" or "Allstate"), a publicly
owned holding company incorporated under the laws of the State of Delaware. The
Corporation is the largest publicly held personal lines insurer in the United
States. Widely known through the "You're In Good Hands With Allstate(R)" slogan,
Allstate provides insurance products to more than 17 million households through
a distribution network that utilizes a total of 14,100 exclusive agencies and
exclusive financial specialists in the United States and Canada. Allstate is the
second-largest personal property and casualty insurer in the United States on
the basis of 2004 statutory premiums earned. In addition, it is the nation's
13th largest life insurance business on the basis of 2004 ordinary life
insurance in force and 17th largest on the basis of 2004 statutory admitted
assets.
We are authorized to sell life insurance, retirement and investment
products in all states except New York, as well as in the District of Columbia,
Guam and the U.S. Virgin Islands.
Our mission is to assist financial services professionals in meeting their
clients' financial protection, retirement and investment needs by providing
top-tier products delivered with reliable and efficient service.
The Company provides life insurance, retirement and investment products to
individuals. Our principal products include interest-sensitive and traditional
life insurance, variable life insurance, variable and fixed annuities and
accident and health insurance. Products are sold through Allstate exclusive
agencies, independent agents (including master brokerage agencies) and
broker/dealers.
We compete principally on the basis of the scope of our distribution
systems, the breadth of our product offerings, the recognition of our brands,
our financial strength and ratings, our product features and prices, and the
level of customer service that we provide. In addition, with respect to variable
annuity and variable life insurance products in particular, we compete on the
basis of the variety of fund managers and choices of funds for our separate
accounts and the management and performance of those funds within our separate
accounts.
The market for life insurance, retirement and investment products continues
to be highly fragmented and competitive. As of December 31, 2005, there were
approximately 740 groups of life insurance companies in the United States, most
of which offered one or more similar products. In addition, because many of
these products include a savings or investment component, our competition
includes domestic and foreign securities firms, investment advisors, mutual
funds, banks and other financial institutions. Competitive pressure is growing
due to several factors, including cross marketing alliances between unaffiliated
businesses, as well as consolidation activity in the financial services
industry.
We cede the mortality risk on certain life policies, depending upon the
issue year and product, to a pool of twelve non-affiliated reinsurers. Beginning
in 1998, we cede mortality risk on new business in excess of $2 million per life
for individual coverage. For business sold prior to 1998, we ceded mortality
risk in excess of $350 thousand per life for individual coverage.
Under agreements with ALIC, all business not reinsured to non-affiliated
reinsurers is ceded to ALIC. Premiums, contract charges, interest credited to
contractholder funds, contract benefits and certain expenses of substantially
all general account contracts are reinsured by ALIC. Assets that support general
account product liabilities are owned and managed by ALIC. The obligations of
ALIC under the reinsurance agreements are to us. We continue to have primary
liability as the direct insurer for risks reinsured.
Separate accounts liabilities related to variable annuity and life
contracts are ceded to ALIC via a 100% modified coinsurance agreement whereby
assets are maintained in our legally segregated unitized separate accounts.
Contract charges assessed against the separate accounts assets and contract
benefits are ceded to ALIC.
1
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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 regulatory agency. In general, such regulation is intended for the
protection of those who purchase or use insurance products. These rules have a
substantial effect on our business and relate to a wide variety of matters
including insurance company licensing and examination, agent licensing and
compensation, trade practices, policy forms, accounting methods, the nature and
amount of investments, claims practices, participation in guaranty funds,
reserve adequacy, insurer solvency, transactions with affiliates, the payment of
dividends, and underwriting standards. For discussion of statutory financial
information, see Note 10 of the Financial Statements. For discussion of
regulatory contingencies, see Note 8 of the Financial Statements. Notes 8 and 10
are incorporated in this Part I, Item 1 by reference.
In recent years the state insurance regulatory framework has come under
increased federal scrutiny. Legislation that would provide for federal
chartering of insurance companies has been proposed. In addition, state
legislators and insurance regulators continue to examine the appropriate nature
and scope of state insurance regulation. We cannot predict whether any specific
state or federal measures will be adopted to change the nature or scope of the
regulation of the insurance business or what effect any such measures would have
on Lincoln Benefit.
ITEM 1A. RISK FACTORS
Information required in Item 1A is incorporated by reference to the
discussion under heading "Forward-Looking Statements and Risk Factors" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 2. PROPERTIES
We occupy office space in Lincoln, Nebraska that is owned by AIC. Expenses
associated with this facility are allocated to us on a direct basis. We also
lease office space in Lincoln for general operations, file storage and
information technology support.
ITEM 3. LEGAL PROCEEDINGS
Information for Item 3 is incorporated by reference to the discussion under
the headings "Regulation" and "Legal and regulatory proceedings and inquiries"
in Note 8 of our financial statements.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
No established public trading market exists for our common stock. All of
our outstanding common stock is owned by our parent, ALIC. All of ALIC's
outstanding common stock is owned by AIC. All of the outstanding common stock of
AIC is owned by the Corporation. Within the past three years, we have not sold
or repurchased any of our equity securities.
From January 1, 2003 through March 15, 2006, we paid no dividends on our
common stock to ALIC.
For additional information on dividends, including restrictions on the
payment of dividends, see the discussion under the heading "Dividends" in Note
10 of our financial statements, which is incorporated herein by reference.
2
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion highlights significant factors influencing the
financial position and results of operations of Lincoln Benefit Life Company
(referred to in this document as "we", "Lincoln Benefit", "our", "us" or the
"Company"). It should be read in conjunction with the financial statements and
related notes found under Part II Item 8 contained herein. We operate as a
single segment entity, based on the manner in which financial information is
used internally to evaluate performance and determine the allocation of
resources.
The most important matters that we monitor to evaluate the financial
condition and performance of our company include:
- For operations: premiums and deposits ceded to ALIC, and invested
assets;
- For investments: credit quality/experience, stability of long-term
returns, cash flows and asset duration;
- For financial condition: our financial strength ratings and capital
position; and
- For product distribution: profitably growing distribution partner
relationships and Allstate exclusive agencies sales of all products
and services, which we cede to ALIC under the terms of the reinsurance
agreements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
We have identified two accounting policies that require us to make
assumptions and estimates that are significant to the financial statements. It
is reasonably likely that changes in these assumptions and estimates could occur
from period to period and result in a material impact on our financial
statements. A brief summary of each of these critical accounting policies
follows. For a more detailed discussion of the effect of these policies on our
financial statements, and the judgments and estimates relating to these
policies, see the referenced sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A"). For a complete summary
of our significant accounting policies see Note 2 of the financial statements.
INVESTMENT VALUATION The fair value of publicly traded fixed income securities
is based on independent market quotations.
For investments classified as available for sale, the difference between
fair value and amortized cost for fixed income securities, net of deferred
income taxes, is reported as a component of accumulated other comprehensive
income on the Statements of Financial Position and is not reflected in the
operating results of any period until reclassified to net income upon the
consummation of a transaction with an unrelated third party, or when declines in
fair values are deemed other than temporary. The assessment of other than
temporary impairment of a security's fair value is performed on a portfolio
review as well as a case-by-case basis considering a wide range of factors. For
our portfolio review evaluations, we ascertain whether there are any approved
programs involving the disposition of investments such as changes in duration,
revision to strategic asset allocations and liquidity actions; and any
dispositions planned by the portfolio managers. In these instances, we recognize
impairment on securities being considered for these approved planned actions if
the security is in an unrealized loss position. There are a number of
assumptions and estimates inherent in evaluating impairments and determining if
they are other than temporary, including 1) our ability and intent to retain the
investment for a period of time sufficient to allow for an anticipated recovery
in value; 2) the expected recoverability of principal and interest; 3) the
duration and extent to which the fair value has been less than amortized cost;
4) the financial condition, near-term and long-term prospects of the issuer,
including relevant industry conditions and trends, and implications of rating
agency actions and offering prices; and 5) the specific reasons that a security
is in a significant unrealized loss position, including market conditions which
could affect liquidity. Additionally, once assumptions and estimates are made,
any number of changes in facts and circumstances could cause us to later
determine that an impairment is other than temporary, including 1) general
economic conditions that are worse than previously assumed or that have a
greater adverse effect on a particular issuer than originally estimated; 2)
changes in the facts and circumstances related to a particular issuer's ability
to meet all of its contractual obligations; and 3) changes in facts and
circumstances or new information that we obtained which causes a change in our
ability or intent to hold a security to maturity or until it recovers in value.
Changes in assumptions, facts and circumstances could result in additional
charges to earnings in future periods to the extent that losses are realized.
The charge to earnings, while potentially significant to net income, would not
have a significant effect on shareholder's equity since our
3
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
portfolio is carried at fair value and as a result, any related unrealized loss,
net of deferred tax, would already be reflected as accumulated other
comprehensive income in shareholder's equity.
For a more detailed discussion of the risks relating to changes in
investment values and levels of investment impairment, and the potential causes
of such changes, see Note 4 of the financial statements and the Financial
Position, Market Risk and Forward-looking Statements and Risk Factors sections
of MD&A.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS ESTIMATION Long-term actuarial
assumptions of future investment yields, mortality, morbidity, policy
terminations and expenses are used when establishing the reserve for
life-contingent contract benefits. These assumptions, which for traditional life
insurance are applied using the net level premium method, include provisions for
adverse deviation and generally vary by such characteristics as type of
coverage, year of issue and policy duration. Future investment yield assumptions
are determined at the time the policy is issued based upon prevailing investment
yields as well as estimated reinvestment yields. Mortality, morbidity and policy
termination assumptions are based on our experience and industry experience
prevailing at the time the policies are issued. Expense assumptions include the
estimated effects of inflation and expenses to be incurred beyond the
premium-paying period.
For further discussion of these policies see Note 6 of the financial
statements and the Forward-looking Statements and Risk Factors sections of the
MD&A.
OPERATIONS
OVERVIEW AND STRATEGY We are 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" or "Allstate"). ALIC, along with Lincoln Benefit and its
other wholly owned subsidiaries provide life insurance, retirement and
investment products to individual customers. Our mission is to assist financial
services professionals in meeting their clients' financial protection,
retirement and investment needs by providing top-tier products delivered with
reliable and efficient service.
We are pursuing the following actions and strategies to improve return on
equity: maintaining and developing focused top-tier products, deepening
distribution partner relationships, improving our cost structure through scale
and efficiencies and advancing our enterprise risk management program. The
execution of our business strategies has and may continue to involve simplifying
our business model and focusing on those products and distribution relationships
where we can secure strong leadership positions while generating acceptable
returns. This may require modifying the number and selection of products
marketed; terminating underperforming distribution relationships; reducing
policy administration software systems; and other actions that we may determine
are appropriate to successfully execute our business strategies.
RESULTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
(IN THOUSANDS) 2005 2004 2003
-------------- ------------ -------------
Net investment income $ 13,632 $ 11,234 $ 11,434
Realized capital gains and losses (174) 5 73
Income tax expense 4,671 3,925 4,092
-------------- ------------ -------------
Net income $ 8,787 $ 7,314 $ 7,415
============== ============ =============
</Table>
We have reinsurance agreements whereby premiums, contract charges, interest
credited to contractholder funds, contract benefits and certain expenses are
ceded to ALIC and other non-affiliated reinsurers, and are reflected net of such
reinsurance in the Statements of Operations and Comprehensive Income. Our
results of operations include net investment income and realized capital gains
and losses earned on the assets that are not transferred under the reinsurance
agreements.
NET INCOME increased 20.1% in 2005 compared to 2004 and decreased 1.4% in 2004
compared to 2003. The increase in 2005 was due to higher net investment income,
partially offset by realized capital losses in the current year compared to
realized capital gains in the prior year. The decrease in 2004 was due to
decreased net
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
investment income and realized capital gains, partially offset by lower income
tax expense.
NET INVESTMENT INCOME increased 21.3% in 2005 compared to 2004 and decreased
1.7% in 2004 compared to 2003. The increase in 2005 was due to higher average
invested assets due to a capital contribution that was received late in 2004 and
higher portfolio yields. The decrease in 2004 was due to lower portfolio yields,
partially offset by higher portfolio balances resulting from a capital
contribution from ALIC.
NET REALIZED CAPITAL LOSSES were $174 thousand in 2005 compared net realized
capital gains of $5 thousand and $73 thousand in 2004 and 2003, respectively.
The realized capital gains and losses for 2005, 2004 and 2003 were attributable
to dispositions of fixed income securities. For further discussion of realized
capital gains and losses see Net Realized Capital Gains and Losses section of
the MD&A.
FINANCIAL POSITION
(IN THOUSANDS)
<Table>
<Caption>
2005 2004
----------------- ----------------
Fixed income securities (1) $ 267,545 $ 242,799
Short-term 3,824 30,408
----------------- ----------------
Total investments $ 271,369 $ 273,207
================= ================
Cash $ 8,349 $ 10,532
Reinsurance recoverable from ALIC 18,350,983 17,083,056
Reinsurance recoverable from non-affiliates 1,019,850 839,738
Contractholder funds 17,462,104 16,231,489
Reserve for life-contingent contract benefits 1,892,194 1,671,729
Separate accounts assets and liabilities 2,718,509 2,368,312
</Table>
(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $266.5 million and $234.4 million at December 31,
2005 and 2004, respectively.
Total investments decreased to $271.4 million at December 31, 2005 from
$273.2 million at December 31, 2004 primarily due to lower unrealized capital
gains on fixed income securities, partially offset by the investment of
operating cash flows. At December 31, 2005 and 2004, unrealized capital gains on
fixed income securities were $1.1 million and $8.4 million, respectively.
FIXED INCOME SECURITIES
See Note 4 of the financial statements for a table showing the amortized
cost, unrealized gains, unrealized losses and fair value for each type of fixed
income security for the years ended December 31, 2005 and 2004.
Municipal bonds, primarily tax-exempt securities, totaled $544 thousand at
December 31, 2005, all of which were rated investment grade. The municipal bond
portfolio was insured by one bond insurer and accordingly had a Moody's
equivalent rating of Aaa. Corporate bonds totaled $90.8 million and all were
rated as investment grade at December 31, 2005.
Mortgage-backed securities ("MBS") totaled $32.0 million at December 31,
2005, all of which were investment grade. Approximately 94.4% of the MBS
portfolio consists of securities that were issued by, or have underlying
collateral that is guaranteed by U.S. government agencies or U.S. government
sponsored entities. For the remaining portion of the portfolio not guaranteed by
U.S. government agencies or entities, 100% had a Moody's rating of Aaa or a
Standard & Poor's ("S&P") rating of AAA, the highest rating category. The MBS
portfolio is subject to interest rate risk since price volatility and ultimate
realized yield are affected by the rate of prepayment of the underlying
mortgages.
Commercial Mortgage-backed securities ("CMBS") totaled $27.2 million at
December 31, 2005. CMBS investments primarily represent pools of commercial
mortgages, broadly diversified across property types and geographical area. The
CMBS portfolio is subject to credit risk, but unlike other structured products
is generally
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
not subject to prepayment risk due to protections within the underlying
commercial mortgages, whereby borrowers are effectively restricted from
prepaying their mortgages due to changes in interest rates. Credit defaults can
result in credit directed prepayments. All securities in the CMBS portfolio had
a Moody's rating of Aaa or a Standard & Poor's ("S&P") rating of AAA, the
highest rating category, at December 31, 2005.
Asset-backed securities ("ABS") totaled $15.6 million at December 31, 2005.
Our ABS portfolio is subject to credit and interest rate risk. Credit risk is
managed by monitoring the performance of the collateral. In addition, many of
the securities in the ABS portfolio are credit enhanced with features such as
over-collateralization, subordinated structures, reserve funds, guarantees
and/or insurance. All securities in the ABS portfolio had a Moody's rating of
Aaa or an S&P rating of AAA. A portion of the ABS portfolio is also subject to
interest rate risk since, for example, price volatility and ultimate realized
yield are affected by the rate of repayment of the underlying assets.
At December 31, 2005, all securities in the fixed income portfolio were
rated investment grade, which is defined as a security having a rating from the
National Association of Insurance Commissioners ("NAIC") of 1 or 2; a rating of
Aaa, Aa, A or Baa from Moody's or a rating of AAA, AA, A or BBB from S&P, Fitch
or Dominion; or a comparable internal rating if an externally provided rating is
not available.
The following table summarizes the credit quality of the fixed income
securities portfolio at December 31, 2005.
(IN THOUSANDS)
<Table>
<Caption>
NAIC PERCENT OF
RATINGS MOODY'S EQUIVALENT FAIR VALUE TOTAL
- -------------- ------------------------------------------- ------------------- --------------
1 Aaa/Aa/A $ 252,996 94.6 %
2 Baa 14,549 5.4
------------------- --------------
$ 267,545 100.0 %
=================== ==============
</Table>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
UNREALIZED GAINS AND LOSSES See Note 4 of the financial statements for further
disclosures regarding unrealized losses on fixed income securities and factors
considered in determining whether they are not other than temporarily impaired.
The unrealized net capital gains on fixed income securities at December 31, 2005
totaled $1.1 million, a decrease of $7.3 million or 87.1% since December 31,
2004. Gross unrealized gains and losses on fixed income securities are provided
in the table below.
<Table>
<Caption>
GROSS UNREALIZED
AMORTIZED -------------------------------- FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
------------- -------------- -------------- --------------
AT DECEMBER 31, 2005
Corporate:
Capital goods $ 21,439 $ 156 $ (487) $ 21,108
Financial services 17,878 514 (149) 18,243
Consumer goods 15,919 6 (357) 15,568
Banking 15,164 331 (101) 15,394
Utilities 8,324 - (320) 8,004
Transportation 8,219 110 (242) 8,087
Basic industry 2,992 - (90) 2,902
Communications 1,489 16 - 1,505
------------- -------------- -------------- --------------
Total corporate fixed income portfolio 91,424 1,133 (1,746) 90,811
U.S. government and agencies 99,197 3,333 (1,139) 101,391
Municipal 503 41 - 544
Asset-backed securities 15,120 546 (48) 15,618
Mortgage-backed securities 32,362 209 (606) 31,965
Commercial mortgage-backed securities 27,851 69 (704) 27,216
------------- -------------- -------------- --------------
Total fixed income securities $ 266,457 $ 5,331 $ (4,243) $ 267,545
============= ============== ============== ==============
</Table>
The capital goods, consumer goods and utilities sectors had the highest
concentration of unrealized losses in our corporate fixed income securities
portfolio at December 31, 2005. The gross unrealized losses in these sectors
were primarily interest rate related or company specific. All securities in an
unrealized loss position at December 31, 2005 were included in our portfolio
monitoring process wherein it was determined that the declines in value were not
other than temporary.
The following table shows the composition by credit quality of fixed income
securities with gross unrealized losses at December 31, 2005.
(IN THOUSANDS)
<Table>
<Caption>
NAIC UNREALIZED PERCENT FAIR PERCENT
RATING MOODY'S EQUIVALENT LOSS OF TOTAL VALUE OF TOTAL
------------- ------------- ------------ -----------
1 Aaa/Aa/A $ (3,777) 89.0% $ 155,615 94.4%
2 Baa (466) 11.0 9,230 5.6
------------- ------------- ------------ -----------
Total $ (4,243) 100.0% $ 164,845 100.0%
============= ============= ============ ===========
</Table>
At December 31, 2005, all of the gross unrealized losses were related to
investment grade fixed income securities. Unrealized losses on investment grade
securities principally relate to changes in interest rates or changes in
sector-related credit spreads since the securities were acquired.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
The scheduled maturity dates for fixed income securities in an unrealized
loss position at December 31, 2005 are shown below. Actual maturities may differ
from those scheduled as a result of prepayments by the issuers.
<Table>
<Caption>
UNREALIZED PERCENT FAIR PERCENT
(IN THOUSANDS) LOSS OF TOTAL VALUE OF TOTAL
---------------- ----------- ------------ -------------
Due after one year through five years (686) 16.2 % $ 46,563 28.3 %
Due after five years through ten years (2,272) 53.5 68,604 41.6
Due after ten years (631) 14.9 21,646 13.1
Mortgage- and asset- backed securities (1) (654) 15.4 28,032 17.0
---------------- ----------- ------------ -------------
Total $ (4,243) 100.0 % $ 164,845 100.0 %
================ =========== ============ =============
</Table>
(1)Because of the potential for prepayment, mortgage- and asset-backed
securities are not categorized based on their contractual maturities.
PORTFOLIO MONITORING We have a comprehensive portfolio monitoring process to
identify and evaluate, on a case by case basis, fixed income securities for
which carrying value may be other than temporarily impaired. The process
includes a quarterly review of all securities using a screening process to
identify those securities for which fair value compared to amortized cost is
below established thresholds for certain time periods, or which are identified
through other monitoring criteria such as ratings downgrades or payment
defaults. The securities identified, in addition to other securities for which
we may have a concern, are evaluated based on facts and circumstances for
inclusion on our watch-list. As a result of approved programs involving the
disposition of investments such as changes in duration and revisions to
strategic asset allocations, and certain dispositions anticipated by portfolio
managers, we also conduct a portfolio review to recognize impairment losses on
securities in an unrealized loss position for which we do not have the intent
and ability to hold until recovery. All securities in an unrealized loss
position at December 31, 2005 were included in our portfolio monitoring process
wherein it was determined that the declines in value were not other than
temporary.
We also monitor the quality of our fixed income portfolio by categorizing
certain investments as "problem", "restructured" or "potential problem". Problem
fixed income securities are securities in default with respect to principal or
interest and/or securities issued by companies that have gone into bankruptcy
subsequent to our acquisition of the security. Restructured fixed income
securities have rates and terms that are not consistent with market rates or
terms prevailing at the time of the restructuring. Potential problem fixed
income securities are current with respect to contractual principal and/or
interest, but because of other facts and circumstances, we have concerns
regarding the borrower's ability to pay future principal and interest, which
causes us to believe these securities may be classified as problem or
restructured in the future.
As of December 31, 2005, we did not have any fixed income securities
categorized as problem, restructured or potential problem.
NET REALIZED CAPITAL GAINS AND LOSSES The following table presents realized
capital gains and losses on a pretax and after-tax basis for the years ended
December 31. Realized capital gains and losses in 2005, 2004 and 2003 related
entirely to dispositions, which include sales, losses recognized in anticipation
of dispositions and other transactions such as calls and prepayments.
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
----------- ----------- -----------
Realized capital gains and losses, pretax $ (174) $ 5 $ 73
Income tax benefit (expense) 60 (2) (26)
----------- ----------- -----------
Realized capital gains and losses, after-tax $ (114) $ 3 $ 47
=========== =========== ===========
</Table>
We may sell securities during the period in which fair value has declined
below amortized cost for fixed income securities. In certain situations new
factors such as negative developments, subsequent credit deterioration, relative
value opportunities, market liquidity concerns and portfolio reallocations can
subsequently change our previous intent to continue holding a security.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
SHORT-TERM INVESTMENTS Our short-term investment portfolio was $3.8 million and
$30.4 million at December 31, 2005 and 2004, respectively. We invest available
cash balances primarily in taxable short-term securities having a final maturity
date or redemption date of less than one year.
CASH At December 31, 2005, the cash balance was $8.3 million compared to $10.5
million at December 31, 2004. Fluctuations in our cash position generally result
from differences in the timing of reinsurance payments to and from ALIC.
REINSURANCE RECOVERABLE, CONTRACTHOLDER FUNDS AND RESERVE FOR LIFE-CONTINGENT
CONTRACT BENEFITS Under accounting principles generally accepted in the United
States of America ("GAAP"), when reinsurance contracts do not relieve the ceding
company of legal liability to contractholders, the ceding company is required to
report reinsurance recoverables arising from these contracts separately as
assets. The liabilities for the contracts are reported as contractholder funds,
reserve for life-contingent contract benefits, or separate accounts liabilities
depending on the characteristics of the contracts. We reinsure all reserve
liabilities with ALIC or other non-affiliated reinsurers. Reinsurance
recoverables and the related reserve for life-contingent contract benefits and
contractholder funds are reported separately in the Statements of Financial
Position, while the assets which support the separate accounts liabilities are
reflected as separate accounts assets.
At December 31, 2005, contractholder funds increased to $17.46 billion from
$16.23 billion at December 31, 2004 as a result of new and additional deposits
from fixed annuities and interest credited to contractholder funds partially
offset by surrenders, withdrawals and benefit payments. The reserve for
life-contingent contract benefits increased $220.5 million to $1.89 billion at
December 31, 2005 resulting from sales of immediate annuities with life
contingences and other life-contingent products, partially offset by benefits
paid and policy lapses. Reinsurance recoverables from ALIC and reinsurance
recoverable from non-affiliates increased correspondingly by $1.27 billion and
$180.1 million, respectively.
We purchase reinsurance after evaluating the financial condition of the
reinsurer, as well as the terms and price of coverage. We reinsure certain of
our risks to non-affiliated reinsurers under yearly renewable term and
coinsurance agreements. Yearly renewable term and coinsurance agreements result
in a passing of the agreed-upon portion of risk to the reinsurer in exchange for
negotiated reinsurance premium payments.
Developments in the insurance industry have included consolidation activity
between reinsurers, which causes reinsurance risk across the industry to be
concentrated among fewer companies. At December 31, 2005, approximately 99% of
non-affiliated reinsurance recoverables were reinsured under uncollateralized
reinsurance agreements with companies that had a financial strength rating of A-
or above, as measured by S&P. In certain cases, these ratings refer to the
financial strength of the affiliated group or parent company of the reinsurer.
We continuously monitor the creditworthiness of reinsurers in order to
determine our risk of recoverability on an individual and aggregate basis and a
provision for uncollectible reinsurance is recorded if needed. No amounts have
been deemed unrecoverable in the three-years ended December 31, 2005.
SEPARATE ACCOUNTS Separate accounts assets and liabilities increased 14.8% to
$2.72 billion at December 31, 2005 compared to December 31, 2004. The increase
was primarily attributable to sales of variable annuity contracts, increases in
the fair value of the separate accounts' funds values and transfers from the
general account to the separate accounts' funds, partially offset by surrenders
and withdrawals and expense charges.
The assets related to variable contracts are legally segregated and are
reflected as separate accounts assets. 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 our Statements of Operations and Comprehensive Income. Our revenues
from the separate accounts consist of contract charges related to maintenance
and administration, mortality, early surrender and expenses, which are then
ceded to ALIC.
Absent any contract provision wherein we guarantee either a minimum return
or account value upon death, a specified contract anniversary date, partial
withdrawal or annuitization, variable annuity and variable life insurance
contractholders bear the investment risk that the separate accounts' funds may
not meet their stated investment objectives. The risk and associated cost of
these contract guarantees are ceded to ALIC in accordance with our reinsurance
agreements.
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in
interest rates or equity prices. Our primary market risk exposure is to changes
in interest rates, although we also have certain exposures to changes in equity
prices in our equity-indexed annuities and separate accounts liabilities. This
risk is transferred to ALIC in accordance with our reinsurance agreements.
OVERVIEW Investment policies define the overall framework for managing market
and other investment risks, including accountability and control over risk
management activities. These investment activities follow policies that have
been approved by our board of directors. These investment policies specify the
investment limits and strategies that are appropriate given our liquidity,
surplus, product profile, and regulatory requirements. Executive oversight of
investment activities is conducted primarily through our board of directors.
We manage our exposure to market risk through the use of asset allocation
and duration limits and, as appropriate, through the use of stress tests. We
have asset allocation limits that place restrictions on the total funds that may
be invested within an asset class. We have duration limits on our investment
portfolio, and, as appropriate, on individual components of the portfolio. These
duration limits place restrictions on the amount of interest rate risk that may
be taken. Comprehensive day-to-day management of market risk within defined
tolerance ranges occurs as portfolio managers buy and sell within their
respective markets based upon the acceptable boundaries established by the
investment policies.
INTEREST RATE RISK is the risk that we will incur loss due to adverse changes in
interest rates. This risk arises from our investment in interest-sensitive
assets.
One of the measures used to quantify interest rate exposure is duration.
Duration measures the price sensitivity of assets to changes in interest rates.
For example, if interest rates increase by 100 basis points the fair value of an
asset with a duration of 5 is expected to decrease in value by approximately 5%.
Our asset duration was approximately 4.6 and 5.0 at December 31, 2005 and 2004,
respectively
To calculate duration, we project asset cash flows and calculate their net
present value using a risk-free market interest rate adjusted for credit
quality, sector attributes, liquidity and other specific risks. Duration is
calculated by revaluing these cash flows at alternative interest rates and
determining the percentage change in aggregate fair value. The projections
include assumptions (based upon historical market experience and our experience)
that reflect the effect of changing interest rates on the prepayment, lapse,
leverage and/or option features of instruments, where applicable. Such
assumptions relate primarily to mortgage-backed securities, collateralized
mortgage obligations, and municipal and corporate obligations.
Based upon the information and assumptions we use in our duration
calculation and interest rates in effect at December 31, 2005, we estimate that
a 100 basis point immediate, parallel increase in interest rates ("rate shock")
would decrease the net fair value of the assets by approximately $12.3 million
compared to $11.8 million at December 31, 2004. 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
impact 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 calculation assumes that the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the effect of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.
EQUITY PRICE RISK is the risk that we will incur economic losses due to adverse
changes in the general levels of the equity markets. At December 31, 2005 and
2004, we had separate account assets related to variable annuities and variable
life contracts with account values totaling $2.72 billion and $2.37 billion,
respectively. We earn contract charges as a percentage of these account values.
In the event of an immediate decline of 10% in the account values due to equity
market declines, we would have earned approximately $2.5 million and $3.2
million less in fee revenue at December 31, 2005 and 2004, respectively, which
would be ceded to ALIC.
Variable annuity contracts we sell have a guaranteed minimum death benefit
("GMDB") and customers may have chosen to purchase an enhanced GMDB, a
guaranteed minimum income benefit ("GMIB") from 1998 to December 31, 2003, a
TrueReturnSM guaranteed minimum accumulation benefit ("GMAB") beginning in 2004,
and a SureIncomeSM guaranteed minimum withdrawal benefit ("GMWB") beginning in
2005. These guarantees
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
subject us to additional equity market risk because the beneficiary or
contractholder may receive a benefit that is greater than their corresponding
account value, which are ceded to ALIC. GMDBs are payable upon death. GMIBs may
be exercised on or after the ten-year anniversary (not prior to 2008) of the
contract if the contractholder elects to receive a defined stream of payments
("annuitize"). GMABs are credited to the contractholder account on a contract
anniversary date that is pre-determined by the contractholder, between the
eighth and twentieth year after contract issue (not prior to 2012). GMABs
guarantee an account value of up to 2.5 times (or 250%) of the amount deposited
in the contract, depending on the amount of time the contract is in force and
adherence to certain fund allocation requirements. GMWBs may be payable if the
contractholder elects to take partial withdrawals. GMWBs guarantee that the
contractholder can take annual partial withdrawals up to 8% of the amount
deposited in the contract until their withdrawals total the initial deposit. All
variable annuity contract charges and fees, liabilities and benefits, including
the GMDBs, GMIBs, GMABs and GMWBs are ceded to ALIC in accordance with the
reinsurance agreements, thereby limiting our equity risk exposure.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES consist of shareholder's equity. The following table
summarizes our capital resources at December 31:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
---------------- ---------------- ---------------
Common stock, additional capital paid-in and
retained income $ 268,544 $ 259,757 $ 202,748
Accumulated other comprehensive income 707 5,479 7,265
---------------- ---------------- ---------------
Total shareholder's equity $ 269,251 $ 265,236 $ 210,013
================ ================ ===============
</Table>
SHAREHOLDER'S EQUITY increased $4.0 million during the year ended December 31,
2005 when compared to December 31, 2004, due to net income of $8.8 million
partially offset by a decrease in unrealized net capital gains on fixed income
securities of $4.8 million. Shareholder's equity increased $55.2 million during
the year ended December 31, 2004 when compared to December 31, 2003, due to net
income of $7.3 million and a cash capital contribution of $49.7 million
partially offset by a decrease in unrealized net capital gains of $1.8 million.
FINANCIAL RATINGS AND STRENGTH We share the insurance financial strength ratings
of our parent, ALIC, because our business is reinsured to ALIC. Our insurance
financial strength was rated Aa2, AA, and A+g by Moody's, Standard & Poor's and
A.M. Best, respectively, at December 31, 2005.
Our ratings are influenced by many factors including our operating and
financial performance, asset quality, liquidity, asset/liability management,
overall portfolio mix, the amount of financial leverage (i.e., debt), risk
exposures, operating leverage, ALIC's ratings and other factors.
State laws specify regulatory actions if an insurer's risk-based capital
("RBC"), a measure of an insurer's solvency, falls below certain levels. The
NAIC has a standard formula for annually assessing RBC. The formula for
calculating RBC for life insurance companies takes into account factors relating
to insurance, business, asset and interest rate risks. At December 31, 2005, our
RBC was above levels that would require regulatory actions.
The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or actions by insurance regulatory
authorities. The NAIC analyzes financial data provided by insurance companies
using prescribed ratios, each with defined "usual ranges." Generally, regulators
will begin to monitor an insurance company if its ratios fall outside the usual
ranges for four or more of the ratios. If an insurance company has insufficient
capital, regulators may act to reduce the amount of insurance it can issue. Our
ratios are within these ranges.
11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
LIQUIDITY SOURCES AND USES Our potential sources of funds principally include
the following activities:
- Receipt of insurance premiums
- Contractholder fund deposits
- Reinsurance recoveries
- Receipts of principal and interest on investments
- Sales of investments
- Inter-company loans
- Capital contributions from parent
Our potential uses of funds principally include the following activities:
- Payment of contract benefits, surrenders and withdrawals
- Reinsurance cessions and payments
- Operating costs and expenses
- Purchase of investments
- Repayment of inter-company loans
- Tax payments/settlements
- Dividends to parent
As reflected in our Statements of Cash Flows, net cash provided by
operating activities was $11.6 million in 2005. This compares to net cash used
in operating activities of $4.2 million in 2004 and $93.8 million in 2003.
Fluctuations in net cash provided by or used in operating activities primarily
occur as a result of changes in net investment income and differences in the
timing of reinsurance payments to and from ALIC.
Under the terms of reinsurance agreements, all premiums and deposits,
excluding those relating to variable contracts and those reinsured to
non-affiliated reinsurers, are transferred to ALIC, which maintains the
investment portfolios supporting our products. Payments of contractholder
claims, benefits (including GMDBs, GMIBs, GMABs and GMWBs), contract maturities,
contract surrenders and withdrawals and certain operating costs (excluding
investment-related expenses), are also or will be reimbursed by ALIC, under the
terms of the reinsurance agreements. We continue to have primary liability as a
direct insurer for risks reinsured. Our ability to meet liquidity demands is
dependent on ALIC's 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 statutory surplus and statutory net
gain from operations, as well as the timing and amount of dividends paid in the
preceding twelve months. The maximum amount of dividends that we can distribute
during 2006 without prior approval of the Nebraska Department of Insurance is
$26.8 million.
We have entered into an inter-company loan agreement with the Corporation.
The amount of inter-company loans available to us 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. We had no amounts outstanding under the inter-company loan agreement at
December 31, 2005 or 2004, respectively. The Corporation uses commercial paper
borrowings and bank lines of credit to fund inter-company borrowings.
Certain remote events and circumstances could constrain the Corporation's
liquidity. Those events and circumstances include, for example, a catastrophe
resulting in extraordinary losses, a downgrade in the Corporation's long-term
debt rating of A1, A+ and a (from Moody's, Standard & Poor's and A.M. Best,
respectively) to non-investment grade status of below Baa3/BBB-/bb, 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/A-, or a downgrade in
ALIC's or our financial strength ratings from Aa2, AA and A+ (from Moody's,
Standard & Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. The rating
agencies also consider the interdependence of the Corporation's individually
rated entities, and therefore, a rating change in one entity could potentially
affect the ratings of other related entities.
12
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
CONTRACTUAL OBLIGATIONS
Due to the reinsurance agreements that we have in place, our contractual
obligations are ceded to ALIC and other non-affiliated reinsurers.
REGULATION AND LEGAL PROCEEDINGS
We are subject to extensive regulation and we are involved in various legal
and regulatory actions, all of which have an effect on specific aspects of our
business. For a detailed discussion of the legal and regulatory actions in which
we are involved, see Note 8 of the financial statements.
PENDING ACCOUNTING STANDARDS
As of December 31, 2005, there were pending accounting standards that we
have not implemented either because the standard had not been finalized or the
implementation date had not yet occurred. For a discussion of these pending
standards, see Note 2 of the financial statements.
The effect of implementing certain accounting standards on our financial
results and financial condition is often based in part on market conditions at
the time of implementation of the standard and other factors we are unable to
determine prior to implementation. For this reason, we are sometimes unable to
estimate the effect of certain pending accounting standards until the relevant
authoritative body finalizes these standards or until we implement them.
FORWARD-LOOKING STATEMENTS AND 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, product development,
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. Factors which could cause
actual results to differ materially from those suggested by such forward-looking
statements include but are not limited to those discussed or identified in this
document (including the risks described below) and in our public filings with
the Securities and Exchange Commission ("SEC").
In addition to the normal risks of business, we are subject to significant
risks and uncertainties, including those listed below, which apply to us as an
insurer and a provider of other financial services.
CHANGES IN UNDERWRITING AND ACTUAL EXPERIENCE COULD MATERIALLY AFFECT
PROFITABILITY OF BUSINESS CEDED TO ALIC.
Our product pricing includes long-term assumptions regarding investment
returns, mortality, morbidity, persistency and operating costs and expenses of
the Company, which are ceded to ALIC. Management establishes target returns for
each product based upon these factors and the average amount of capital the
Company must hold to support in-force contracts, satisfy rating agencies and
meet regulatory requirements. We monitor and manage our pricing and overall
sales mix to achieve target returns on a portfolio basis. Profitability from new
business emerges over a period of years depending on the nature and life of the
product and is subject to variability as actual results may differ from pricing
assumptions.
ALIC's profitability depends on the adequacy of investment margins, the
management of market and credit risks associated with investments, our ability
to maintain premiums and contract charges at a level adequate to cover mortality
and morbidity benefits, the adequacy of contract charges on variable contracts
to cover the costs of various product features, the persistency of policies to
ensure recovery of acquisition expenses, and the management of operating costs
and expenses within anticipated pricing allowances. Legislation and regulation
of the insurance marketplace and products could also affect ALIC's
profitability.
13
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
CHANGES IN RESERVE ESTIMATES MAY REDUCE PROFITABILITY OF BUSINESS CEDED TO ALIC
Reserve for life-contingent contract benefits is computed on the basis of
long-term actuarial assumptions of future investment yields, mortality,
morbidity, policy terminations 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 adverse effect on our financial condition and operating
results ceded to ALIC.
CHANGES IN MARKET INTEREST RATES MAY LEAD TO A SIGNIFICANT DECREASE IN THE SALES
AND PROFITABILITY OF SPREAD-BASED PRODUCTS CEDED TO ALIC
ALIC's ability to manage the investment margin for spread-based products,
such as fixed annuities, is dependent upon maintaining profitable spreads
between investment yields and interest crediting rates on business ceded to
ALIC. As interest rates decrease or remain at low levels, proceeds from
investments that have matured, prepaid or been sold may be reinvested at lower
yields, reducing investment margin. Lowering interest crediting rates can offset
decreases in investment margin on some products. However, these changes could be
limited by market conditions, regulatory or contractual minimum rate guarantees
on many contracts and may not match the timing or magnitude of changes in asset
yields. Decreases in the rates offered on products could make those products
less attractive, leading to lower sales and/or changes in the level of
surrenders and withdrawals for these products. Non-parallel shifts in interest
rates, such as increases in short-term rates without accompanying increases in
medium- and long-term rates, can influence customer demand for fixed annuities,
which could impact the level and profitability of new customer deposits.
Increases in market interest rates can also have negative effects on the
business ceded to ALIC, for example by increasing the attractiveness of other
investments to our customers, which can lead to higher surrenders at a time when
the fixed income investment asset values are lower as a result of the increase
in interest rates. For certain products, principally fixed annuity and
interest-sensitive life products, the earned rate on assets could lag behind
market yields. We may react to market conditions by increasing crediting rates,
which could narrow spreads. Unanticipated surrenders could result in deferred
policy acquisition costs ("DAC") unlocking or affect the recoverability of DAC
and thereby increase expenses ceded to ALIC and reduce the profitability of
ALIC.
DECLINING EQUITY MARKETS MAY REDUCE BOTH SALES OF PRODUCTS AND INCOME FROM
CONTRACT CHARGES AND MAY ADVERSELY AFFECT OPERATING RESULTS AND FINANCIAL
CONDITION OF ALIC
Conditions in the domestic and international stock markets affect the sale
and profitability of our variable annuities. In general, sales of variable
annuities decrease when stock markets are declining over an extended period of
time. The effect of decreasing separate accounts balances resulting from
volatile equity markets, lower underlying fund performance or declining consumer
confidence could cause contract charges earned and ceded to ALIC to decrease. In
addition, it is possible that the assumptions and projections we use to
establish prices for GMDB, GMIB, GMAB and GMWB products, particularly
assumptions and projections about investment performance, do not accurately
reflect the level of costs that we will ultimately incur in providing those
benefits and cede to ALIC, resulting in adverse margin trends. These factors may
result in accelerated DAC amortization at ALIC and require increases in
reserves, which would reduce ALIC's statutory capital and surplus and/or net
income. Poor fund performance could also result in higher partial withdrawals of
account value which, for some contracts, do not reduce the GMDB by a
proportional amount.
CHANGES IN ESTIMATES OF PROFITABILITY ON INTEREST-SENSITIVE LIFE, FIXED AND
VARIABLE ANNUITIES AND OTHER INVESTMENT PRODUCTS MAY HAVE AN ADVERSE EFFECT ON
RESULTS THROUGH INCREASED AMORTIZATION OF DAC FOR ALIC
DAC related to interest-sensitive life, fixed and variable annuities and
other investment contracts is amortized in proportion to actual historical gross
profits ("AGP") and estimated future gross profits ("EGP") over the estimated
lives of the contracts. Assumptions underlying EGP, including those relating to
margins from mortality, investment margin, contract administration, surrender
and other contract charges, are updated from time to time in order to reflect
actual and expected experience and its potential effect on the valuation of DAC.
Updates to these assumptions could result in DAC unlocking, which in turn could
adversely affect our operating results ceded to ALIC and the financial condition
of ALIC.
14
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
A LOSS OF KEY PRODUCT DISTRIBUTION RELATIONSHIPS COULD MATERIALLY AFFECT SALES
Certain products are distributed under agreements with other members of the
financial services industry that are not affiliated with us. Termination of one
or more of these agreements due to, for example, a change in control of one of
these distributors, could have a detrimental effect on our sales.
CHANGES IN TAX LAWS MAY DECREASE SALES AND PROFITABILITY OF PRODUCTS CEDED TO
ALIC
Under current federal and state income tax law, certain products we offer,
primarily life insurance and annuities, receive favorable tax treatment. This
favorable treatment may give certain of our products a competitive advantage
over noninsurance products. Congress from time to time considers legislation
that would reduce or eliminate the favorable policyholder tax treatment
currently applicable to life insurance and annuities. Congress also considers
proposals to reduce the taxation of certain products or investments that may
compete with life insurance and annuities. Legislation that increases the
taxation on insurance products or reduces the taxation on competing products
could lessen the advantage or create a disadvantage of certain of our products
making them less competitive. Such proposals, if adopted, could have a material
adverse effect on ALIC's financial position or our ability to sell such products
and could result in the surrender of some existing contracts and policies. In
addition, changes in the federal estate tax laws could negatively affect the
demand for the types of life insurance used in estate planning.
ACTIONS TAKEN TO SIMPLIFY OUR BUSINESS MODEL AND IMPROVE PROFITABILITY MAY
NOT BE SUCCESSFUL AND MAY RESULT IN LOSSES AND COSTS, CEDED TO ALIC
We are pursuing strategies intended to improve return on equity. Actions
that we have taken and may continue to take include changing the number and
selection of products being marketed, terminating underperforming distribution
relationships, reducing policy administration software systems, and other
actions that we may determine are appropriate to successfully execute our
business strategies. The actions that we have taken and may take in the future
may not achieve their intended outcome and could result in lower premiums and
contract charges, restructuring costs and losses related to the discontinuance
of individual products or distribution relationships, ceded to ALIC.
RISKS RELATING TO THE INSURANCE INDUSTRY
OUR FUTURE RESULTS ARE DEPENDENT IN PART ON OUR ABILITY TO SUCCESSFULLY OPERATE
IN AN INSURANCE INDUSTRY THAT IS HIGHLY COMPETITIVE
The insurance industry is highly competitive. Our competitors include other
insurers and, because many of our products include a savings or investment
component, securities firms, investment advisers, mutual funds, banks and other
financial institutions. Many of our competitors have well-established national
reputations and market similar insurance products. Because of the competitive
nature of the insurance industry, including competition for producers such as
exclusive and independent agents, there can be no assurance that we will
continue to effectively compete with our industry rivals, or that competitive
pressure will not have a material adverse effect on our business, operating
results or financial condition. The ability of banks to affiliate with insurers
may have a material adverse effect on all of our product lines by substantially
increasing the number, size and financial strength of potential competitors.
Furthermore, certain competitors operate using a mutual insurance company
structure and therefore, may have dissimilar profitability and return targets.
WE ARE SUBJECT TO MARKET RISK AND DECLINES IN CREDIT QUALITY
We are subject to market risk, the risk that we will incur losses due to
adverse changes in interest rates and equity prices. For additional information
on market risk, see the "Market Risk" section of MD&A.
A decline in market interest rates could have an adverse effect on our
investment income as we invest cash in new investments that may yield less than
the portfolio's average rate. An increase in market interest rates could have an
adverse effect on the value of our investment portfolio. Increases in interest
rates also may lead to an increase in policy loans, surrenders and withdrawals
that generally would be funded at a time when fair values of fixed income
securities are lower. A decline in the quality of our investment portfolio as a
result of adverse economic conditions or otherwise could cause additional
realized losses on securities.
15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
CONCENTRATION OF OUR INVESTMENT PORTFOLIO IN ANY PARTICULAR SEGMENT OF THE
ECONOMY MAY HAVE ADVERSE EFFECTS
The concentration of our investment portfolio in any particular industry,
group of related industries or geographic sector could have an adverse effect on
our investment portfolio and consequently on our results of operations and
financial position. While we seek to mitigate this risk by having a broadly
diversified portfolio, 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.
WE MAY SUFFER LOSSES FROM LITIGATION
As is typical for a large insurance group, the Allstate group is involved
in a substantial amount of litigation, including class action litigation
challenging a range of company practices. In the event of an unfavorable outcome
in one or more of these matters, the ultimate liability may be in excess of
amounts currently reserved and may be material to our operating results or cash
flows ceded to ALIC for a particular quarter or annual period. For a description
of our current legal proceedings, see Note 8 of the financial statements.
In some circumstances, we, or others in the Allstate Group, may be able to
collect on third-party insurance that we carry to recover all or part of the
amounts that we pay in judgments, settlements and litigation expenses. However,
we, or others in the Allstate Group, may not be able to resolve issues
concerning the availability, if any, or the ability to collect such insurance
concurrently with the underlying litigation. Consequently, the timing of the
resolution of a particular piece of litigation and the determination of our
insurance recovery with respect to that litigation may not coincide and,
therefore, may be reflected in our financial statements in different fiscal
quarters.
WE ARE SUBJECT TO EXTENSIVE REGULATION AND POTENTIAL FURTHER RESTRICTIVE
REGULATION MAY INCREASE OUR OPERATING COSTS CEDED TO ALIC AND LIMIT OUR GROWTH
As an insurance company, we are subject to extensive laws and regulations.
These laws and regulations are complex and subject to change. Moreover, they are
administered and enforced by a number of different governmental authorities,
including state insurance regulators, state securities administrators, the SEC,
the National Association of Securities Dealers, the U.S. Department of Justice,
and state attorneys general, each of which exercises a degree of interpretive
latitude. 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 regulator's or enforcement
authority'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 changing, cause us to change our views regarding the actions we need
to take from a legal risk management perspective, thus necessitating changes to
our practices that may, in some cases, limit our ability to grow and improve the
profitability of our business ceded to ALIC. Furthermore, in some cases, these
laws and regulations are designed to protect the interests of a specific
constituency rather than a range of constituencies. For example, state insurance
laws and regulations are generally intended to protect purchasers or users of
insurance products. In many respects, these laws and regulations limit our
ability to grow and improve the profitability of business ceded to ALIC.
In recent years, the state insurance regulatory framework has come under
public scrutiny and members of Congress have discussed proposals to provide for
optional federal chartering of insurance companies. We can make no assurances
regarding the potential impact of state or federal measures that may change the
nature or scope of insurance regulation.
REINSURANCE MAY BE UNAVAILABLE AT CURRENT LEVELS AND PRICES, WHICH MAY LIMIT OUR
ABILITY TO WRITE NEW BUSINESS
Market conditions beyond our control determine the availability and cost of
the reinsurance we purchase. No assurances can be made that reinsurance will
remain continuously available to us to the same extent and on the same terms and
rates as are currently available. If we were unable to maintain our current
level of reinsurance or purchase new reinsurance protection in amounts that we
consider sufficient and at prices that we consider acceptable, either ALIC would
have to accept an increase in exposure risk, or we would have to reduce our
insurance writings and develop or seek other alternatives.
16
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
REINSURANCE SUBJECTS US TO THE CREDIT RISK OF OUR REINSURERS AND MAY NOT BE
ADEQUATE TO PROTECT US AGAINST LOSSES ARISING FROM CEDED INSURANCE
The collectibility of reinsurance recoverables is subject to uncertainty
arising from a number of factors, including whether insured losses meet the
qualifying conditions of the reinsurance contract and whether reinsurers, or
their affiliates, have the financial capacity and willingness to make payments
under the terms of a reinsurance treaty or contract. Our inability to collect a
material recovery from a reinsurer could have a material adverse effect on
operating results ceded to ALIC.
THE CONTINUED THREAT OF TERRORISM AND ONGOING MILITARY ACTIONS MAY ADVERSELY
AFFECT THE LEVEL OF CLAIM EXPENSE WE INCUR AND CEDE TO ALIC, AND THE VALUE OF
OUR INVESTMENT PORTFOLIO
The continued threat of terrorism, both within the United States and
abroad, and ongoing military and other actions and heightened security measures
in response to these types of threats, may cause significant volatility and
losses from declines in the equity markets and from interest rate changes in the
United States, Europe and elsewhere, and may result in loss of life, property
damage, additional disruptions to commerce and reduced economic activity. Some
of the assets in our investment portfolio may be adversely affected by declines
in the equity markets and reduced economic activity caused by the continued
threat of terrorism. Additionally, in the event that a terrorist act occurs, we
may be adversely affected, depending on the nature of the event.
ANY DECREASE IN OUR FINANCIAL STRENGTH RATINGS MAY HAVE AN ADVERSE EFFECT ON OUR
COMPETITIVE POSITION
Financial strength ratings are important factors in establishing the
competitive position of insurance companies and generally have an effect on an
insurance company's business. On an ongoing basis, rating agencies review the
financial performance and condition of insurers and could downgrade or change
the outlook on an insurer's ratings due to, for example, a change in an
insurer's statutory capital; a change in a rating agency's determination of the
amount of risk-adjusted capital required to maintain a particular rating; an
increase in the perceived risk of an insurer's investment portfolio; a reduced
confidence in management or a host of other considerations that may or may not
be under the insurer's control. The insurance financial strength ratings of AIC,
ALIC and the Company are A+, AA and Aa2 from A.M. Best, Standard & Poor's and
Moody's, respectively. Because all of these ratings are subject to continuous
review, the retention of these ratings cannot be assured. A multiple level
downgrade in any of these ratings could have a material adverse effect on our
sales, our competitiveness, the marketability of our product offerings, our
liquidity, and operating results ceded to ALIC.
CHANGES IN ACCOUNTING STANDARDS ISSUED BY THE FINANCIAL ACCOUNTING STANDARDS
BOARD (THE "FASB") OR OTHER STANDARD-SETTING BODIES MAY ADVERSELY AFFECT OUR
FINANCIAL STATEMENTS
Our financial statements are subject to the application of GAAP, which is
periodically revised and/or expanded. Accordingly, we are required to adopt new
or revised accounting standards issued from time to time by recognized
authoritative bodies, including the FASB. It is possible that future changes we
are required to adopt could change the current accounting treatment that we
apply to our financial statements and that such changes could have a material
adverse effect on our financial condition and operating results that we cede to
ALIC. For a description of potential changes in accounting standards that could
affect us currently, see Note 2 of the financial statements.
THE OCCURRENCE OF EVENTS UNANTICIPATED IN OUR DISASTER RECOVERY SYSTEMS AND
MANAGEMENT CONTINUITY PLANNING COULD IMPAIR OUR ABILITY TO CONDUCT BUSINESS
EFFECTIVELY
In the event of a disaster such as a natural catastrophe, an industrial
accident, a terrorist attack or war, events unanticipated in our disaster
recovery systems could have an adverse impact on our ability to conduct business
and on our results of operations ceded to ALIC and financial condition,
particularly if those events affect our computer-based data processing,
transmission, storage and retrieval systems. In the event that a significant
number of our managers could be unavailable in the event of a disaster, our
ability to effectively conduct our business could be severely compromised.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required for Item 7A is incorporated by reference to the
material under the caption "Market Risk" in Part II, Item 7 of this report.
17
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
(IN THOUSANDS) 2005 2004 2003
---------------- --------------- ---------------
REVENUES
Net investment income $ 13,632 $ 11,234 $ 11,434
Realized capital gains and losses (174) 5 73
---------------- --------------- ---------------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 13,458 11,239 11,507
Income tax expense 4,671 3,925 4,092
---------------- --------------- ---------------
NET INCOME 8,787 7,314 7,415
---------------- --------------- ---------------
OTHER COMPREHENSIVE LOSS, AFTER-TAX
Change in unrealized net capital gains and losses (4,772) (1,786) (3,557)
---------------- --------------- ---------------
COMPREHENSIVE INCOME $ 4,015 $ 5,528 $ 3,858
================ =============== ===============
</Table>
See notes to financial statements.
18
<Page>
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF FINANCIAL POSITION
<Table>
<Caption>
(IN THOUSANDS, EXCEPT PAR VALUE DATA) DECEMBER 31,
-------------------------------------
2005 2004
----------------- ----------------
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $266,457 and $234,371) $ 267,545 $ 242,799
Short-term 3,824 30,408
----------------- ----------------
Total investments 271,369 273,207
Cash 8,349 10,532
Reinsurance recoverable from Allstate Life Insurance Company 18,350,983 17,083,056
Reinsurance recoverable from non-affiliates 1,019,850 839,738
Receivable from affiliates, net 10,394 27,449
Current income taxes receivable - 38
Other assets 96,059 83,853
Separate accounts 2,718,509 2,368,312
----------------- ----------------
TOTAL ASSETS $ 22,475,513 $ 20,686,185
================= ================
LIABILITIES
Contractholder funds $ 17,462,104 $ 16,231,489
Reserve for life-contingent contract benefits 1,892,194 1,671,729
Unearned premiums 26,992 23,362
Deferred income taxes 591 3,257
Current income taxes payable 4,769 -
Other liabilities and accrued expenses 101,103 122,800
Separate accounts 2,718,509 2,368,312
----------------- ----------------
TOTAL LIABILITIES 22,206,262 20,420,949
----------------- ----------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 8)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 30 thousand shares authorized, 25 thousand shares
issued and outstanding 2,500 2,500
Additional capital paid-in 180,000 180,000
Retained income 86,044 77,257
Accumulated other comprehensive income:
Unrealized net capital gains and losses 707 5,479
----------------- ----------------
Total accumulated other comprehensive income 707 5,479
----------------- ----------------
TOTAL SHAREHOLDER'S EQUITY 269,251 265,236
----------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 22,475,513 $ 20,686,185
================= ================
</Table>
See notes to financial statements.
19
<Page>
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
(IN THOUSANDS) 2005 2004 2003
--------------- -------------- ---------------
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
--------------- -------------- ---------------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year 180,000 130,305 126,750
Capital contribution - 49,695 3,555
--------------- -------------- ---------------
Balance, end of year 180,000 180,000 130,305
--------------- -------------- ---------------
RETAINED INCOME
Balance, beginning of year 77,257 69,943 62,528
Net income 8,787 7,314 7,415
--------------- -------------- ---------------
Balance, end of year 86,044 77,257 69,943
--------------- -------------- ---------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year 5,479 7,265 10,822
Change in unrealized net capital gains and losses (4,772) (1,786) (3,557)
--------------- -------------- ---------------
Balance, end of year 707 5,479 7,265
--------------- -------------- ---------------
TOTAL SHAREHOLDER'S EQUITY $ 269,251 $ 265,236 $ 210,013
=============== ============== ===============
</Table>
See notes to financial statements.
20
<Page>
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------
(IN THOUSANDS) 2005 2004 2003
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,787 $ 7,314 $ 7,415
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and other non-cash items 466 293 2
Realized capital gains and losses 174 (5) (73)
Changes in:
Reserve for life-contingent contract benefits and
contractholder funds, net of reinsurance recoverables 3,041 (11,474) (1,358)
Income taxes 4,709 1,438 184
Receivable/payable to affiliates, net 17,055 (50,781) (89,833)
Other operating assets and liabilities (22,674) 49,016 (10,111)
------------ ------------- ------------
Net cash provided by (used in) operating activities 11,558 (4,199) (93,774)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 5,066 1,007 19,930
Investment collections 22,557 15,667 32,686
Investments purchases (67,948) (45,793) (67,729)
Change in short-term investments 26,584 (29,301) 2,094
------------ ------------- ------------
Net cash used in investing activities (13,741) (58,420) (13,019)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution - 49,695 -
------------ ------------- ------------
Net cash provided by financing activities - 49,695 -
------------ ------------- ------------
NET DECREASE IN CASH (2,183) (12,924) (106,793)
CASH AT BEGINNING OF YEAR 10,532 23,456 130,249
------------ ------------- ------------
CASH AT END OF YEAR $ 8,349 $ 10,532 $ 23,456
============ ============= ============
</Table>
See notes to financial statements.
21
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LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Lincoln
Benefit Life Company ("Lincoln Benefit" or 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"). These financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America ("GAAP").
To conform to the 2005 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
NATURE OF OPERATIONS
The Company sells life insurance, retirement and investment products to
individual customers through several distribution channels. The principal
products are deferred and immediate fixed annuities, variable annuities,
interest sensitive-life and traditional life insurance, variable life insurance
and accident and health insurance.
The Company is authorized to sell life insurance, retirement and investment
products in all states except New York, as well as in the District of Columbia,
Guam and the U.S. Virgin Islands. For 2005, the top geographic locations for
statutory premiums and annuity considerations for the Company were California,
Florida, Texas and Pennsylvania. No other jurisdiction accounted for more than
5% of statutory premiums and annuity considerations. All statutory premiums and
annuity considerations are ceded under reinsurance agreements.
The Company distributes its products through multiple intermediary
distribution channels, including Allstate exclusive agencies, independent
agencies, banks and broker-dealers. The Company sells products through
independent agencies affiliated with master brokerage agencies. Although the
Company currently benefits from agreements with financial services entities that
market and distribute its products, change in control of these non-affiliated
entities could negatively impact the Company's sales.
The Company monitors economic and regulatory developments that have the
potential to impact its business. The ability of banks to affiliate with
insurers may have a material adverse effect on all of the Company's product
lines by substantially increasing the number, size and financial strength of
potential competitors. Furthermore, federal and state laws and regulations
affect the taxation of insurance companies and life insurance and annuity
products. Congress and various state legislatures have considered proposals
that, if enacted, could impose a greater tax burden on the Company or could have
an adverse impact on the tax treatment of some insurance products offered by the
Company, including favorable policyholder tax treatment currently applicable to
life insurance and annuities. Legislation that reduced the federal income tax
rates applicable to certain dividends and capital gains realized by individuals,
or other proposals, if adopted, that reduce the taxation, or permit the
establishment, of certain products or investments that may compete with life
insurance or annuities could have an adverse effect on the Company's and ALIC's
financial position or ability to sell such products and could result in the
surrender of some existing contracts and policies. In addition, changes in the
federal estate tax laws have negatively affected the demand for the types of
life insurance used in estate planning.
22
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LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds, mortgage-backed, commercial
mortgage-backed and asset-backed securities. Fixed income securities may be sold
prior to their contractual maturity ("available for sale") and are carried at
fair value. The fair value of publicly traded fixed income securities is based
upon independent market quotations. The difference between amortized cost and
fair value, net of deferred income taxes, are reflected as a component of
accumulated other comprehensive income. Cash received from calls, principal
payments and make-whole payments is reflected as a component of proceeds from
sales. Cash received from maturities and pay-downs is reflected as a component
of investment collections.
Short-term investments are carried at cost or amortized cost, which
approximates fair value.
Investment income consists of interest and is recognized on an accrual
basis. Interest income on mortgage-backed, commercial mortgage-backed and
asset-backed securities is determined using the effective yield method,
considering estimated principal repayments. Accrual of income is suspended for
fixed income securities that are in default or when the receipt of interest
payments is in doubt.
Realized capital gains and losses include gains and losses on investment
dispositions, and write-downs in value due to other than temporary declines in
fair value. Dispositions include sales, losses recognized in anticipation of
dispositions and other transactions such as calls and prepayments. Realized
capital gains and losses on investment dispositions are determined on a specific
identification basis.
The Company recognizes other-than-temporary impairment losses on fixed
income securities when the decline in fair value is deemed other than temporary
(see Note 4).
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES, AND RELATED BENEFITS AND
INTEREST CREDITED
The Company has reinsurance agreements whereby all premiums, contract
charges, interest credited to contractholder funds, contract benefits and
certain expenses are ceded to ALIC and non-affiliated reinsurers (see Notes 3
and 7). Amounts reflected in the Statements of Operations and Comprehensive
Income are presented net of reinsurance.
Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Premiums from these products are recognized as revenue when
due from policyholders. Benefits are recognized in relation to such revenue so
as to result in the recognition of profits over the life of the policy and are
reflected in contract 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 such revenue such that profits are recognized over the lives of the
contracts.
Interest-sensitive life contracts, such as universal life and single
premium life, are insurance contracts whose terms are not fixed and guaranteed.
The terms that may be changed include premiums paid by the contractholder,
interest credited to the contractholder account balance and any amounts assessed
against the contractholder account balance. Premiums from these contracts are
reported as contractholder fund deposits. Contract charges consist of fees
assessed against the contractholder account balance for cost of insurance
(mortality risk), contract administration and early surrender. These revenues
are recognized when assessed against the contractholder account balance.
Contract benefits include life-contingent benefit payments in excess of the
contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed annuities,
including market value adjusted annuities, equity-indexed annuities and
immediate annuities without life contingencies are considered investment
contracts. Consideration received for such contracts are reported as
contractholder fund deposits. Contract charges for investment contracts consist
of fees assessed against the contractholder account balance for maintenance,
administration and surrender of the contract prior to contractually specified
dates, and are recognized when assessed against the contractholder account
balance. Certain variable annuity contracts include embedded derivatives that
are separated from the host instrument and accounted for as derivative
23
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LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
financial instruments ("subject to bifurcation"). The change in the fair value
of derivatives embedded in liabilities and subject to bifurcation is reported in
contract benefits or interest credited to contractholder funds and is ceded to
ALIC under the reinsurance agreements.
Interest credited to contractholder funds represents interest accrued or
paid for interest-sensitive life contracts and investment contracts. Crediting
rates for certain fixed annuities and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions
subject to contractually guaranteed minimum rates.
Separate account products include variable annuities and variable life
insurance contracts. The assets supporting these products are legally segregated
and available only to settle separate account contract obligations. Deposits
received are reported as separate accounts liabilities. Contract charges for
these products consist of fees assessed against the contractholder account
values for contract maintenance, administration, mortality, expense and early
surrender. Contract benefits incurred include guaranteed minimum death, income,
withdrawal and accumulation benefits incurred on variable annuity and life
insurance contracts.
REINSURANCE
The Company has reinsurance agreements whereby the Company cedes the
mortality risk on certain life policies, depending upon the issue year and
product, to a pool of twelve non-affiliated reinsurers. Beginning in 1998, the
Company cedes mortality risk on new business in excess of $2 million per life
for individual coverage. For business sold prior to 1998, the Company ceded
mortality risk in excess of $350 thousand per life for individual coverage. The
remaining amounts are ceded to ALIC.
Reinsurance recoverables and the related reserve for life-contingent
contract benefits and contractholder funds are reported separately in the
Statements of Financial Position. The Company continues to have primary
liability as the direct insurer for the risks reinsured.
Investment income earned on the assets that support contractholder funds
and the reserve for life-contingent contract benefits is not included in the
Company's financial statements as those assets are owned and managed by ALIC
under terms of the reinsurance agreements.
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
unrealized capital gains and losses on fixed income securities and differences
in tax bases of investments. A deferred tax asset valuation allowance is
established when there is uncertainty that such assets would be realized.
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits, which relates to
traditional life, immediate annuities with life contingencies and accident and
health insurance, is computed on the basis of long-term actuarial assumptions as
to future investment yields, mortality, morbidity, policy terminations and
expenses (see Note 6). These assumptions, which for traditional life insurance
are applied using the net level premium method, include provisions for adverse
deviation and generally vary by such characteristics as type of coverage, year
of issue and policy duration.
CONTRACTHOLDER FUNDS
Contractholder funds represent interest-bearing liabilities arising from
the sale of products, such as interest-sensitive life, fixed annuities, and
variable annuity and life deposits allocated to fixed accounts. Contractholder
funds are comprised primarily of deposits received and interest credited to the
benefit of the contractholder less surrenders and withdrawals, mortality charges
and administrative expenses (See Note 6). Contractholder funds also include
reserves for secondary guarantees on interest-sensitive life insurance and
certain fixed annuity contracts.
24
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LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPARATE ACCOUNTS
The Company issues variable annuities and variable life insurance
contracts, the assets and liabilities of which are legally segregated and
recorded as assets and liabilities of the 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 Statements of Operations and
Comprehensive Income. Revenues to the Company from the separate accounts consist
of contract charges for maintenance, administration, cost of insurance and
surrender of the contract prior to the contractually specified dates and are
ceded to ALIC. Deposits to the separate accounts are not included in cash flows.
Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death, a specified contract anniversary
date, partial withdrawal or annuitization, variable annuity and variable life
insurance contractholders bear the investment risk that the separate accounts'
funds may not meet their stated investment objectives. The risk and associated
cost of these contract guarantees are ceded to ALIC in accordance with the
reinsurance agreements.
LIABILITIES FOR VARIABLE CONTRACT GUARANTEES
The Company offers various guarantees to variable annuity contractholders
including a return of no less than (a) total deposits made on the contract less
any customer withdrawals, (b) total deposits made on the contract less any
customer withdrawals plus a minimum return or (c) the highest contract value on
a specified anniversary date minus any customer withdrawals following the
contract anniversary. These guarantees include benefits that are payable in the
event of death (death benefits), upon annuitization (income benefits), upon
periodic withdrawal (withdrawal benefits), or at specified dates during the
accumulation period (accumulation benefits). Liabilities for variable contract
guarantees related to death benefits are included in the reserve for
life-contingent contract benefits and the liabilities related to the income,
withdrawal and accumulation benefits are included in contractholder funds in the
Statements of Financial Position (See Note 6).
Pursuant to the adoption of Statement of Position ("SOP") 03-1 in 2004, the
liability for death and income benefit guarantees is established equal to a
benefit ratio multiplied by the cumulative contract charges earned, plus accrued
interest less contract benefit payments. The benefit ratio is calculated as the
estimated present value of all expected contract benefits divided by the present
value of all expected contract charges. The establishment of reserves for these
guarantees requires the projection of future separate account fund performance,
mortality, persistency and customer benefit utilization rates. These assumptions
are periodically reviewed and updated. For guarantees related to death benefits,
benefits represent the current guaranteed minimum death benefit payments in
excess of the current account balance. For guarantees related to income
benefits, benefits represent the present value of the minimum guaranteed
annuitization benefits in excess of the current account balance.
Projected benefits and contract charges used in determining the liability
for certain guarantees are developed using models and stochastic scenarios that
are also used in the development of estimated expected gross profits. Underlying
assumptions for the liability related to income benefits include assumed future
annuitization elections based on factors such as the extent of benefit to the
potential annuitant, eligibility conditions and the annuitant's attained age.
The liability for guarantees is re-evaluated periodically, and adjustments are
made to the liability balance through a charge or credit to contract benefits.
Guarantees related to withdrawal and accumulation benefits are considered
to be derivative financial instruments; therefore, the liability for these
benefits is established based on its fair value.
25
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LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
ADOPTED ACCOUNTING STANDARDS
SOP 03-1, "ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS" ("SOP
03-1")
On January 1, 2004, the Company adopted SOP 03-1. The major provisions of
the SOP affecting the Company require:
- Establishment of reserves primarily related to death benefit and
income benefit guarantees provided under variable annuity contracts,
all of which are ceded to ALIC;
- Deferral of sales inducements that meet certain criteria, and
amortization using the same method used for deferred policy
acquisition costs ("DAC"), all of which are ceded to ALIC.
The cumulative effect of the change in accounting principle from
implementing SOP 03-1 was a loss of $26.9 million, after-tax ($41.4 million,
pre-tax) that was ceded to ALIC under the terms of the reinsurance agreements.
It was comprised of an increase in contractholder funds of $30 million, pre-tax,
and reserves for life-contingent contract benefits of $11.4 million, pre-tax.
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ("AICPA") TECHNICAL PRACTICE
AID ("TPA") RE.
SOP 03-1
In September 2004, the staff of the AICPA, aided by industry experts,
issued a set of technical questions and answers on financial accounting and
reporting issues related to SOP 03-1 that will be included in the AICPA's TPAs.
The TPA addresses a number of issues related to SOP 03-1 including when it is
necessary to establish a liability in addition to the account balance for
certain contracts such as single premium and universal life that meet the
definition of an insurance contract and have amounts assessed against the
contractholder in a manner that is expected to result in profits in earlier
years and losses in subsequent years from the insurance benefit function. The
impact of adopting the provisions of the TPA was not material to the Company's
Statements of Operations and Comprehensive Income or Financial Position.
PENDING ACCOUNTING STANDARDS
FINANCIAL ACCOUNTING STANDARDS BOARD STAFF POSITION NO. FAS 115-1, "THE MEANING
OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS"
("FSP FAS 115-1")
In November 2005, the Financial Accounting Standards Board ("FASB") issued
FSP FAS 115-1, which nullifies the guidance in paragraphs 10-18 of EITF Issue
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" and references existing other than temporary impairment
guidance. FSP FAS 115-1 clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell the security has not been made,
and also provides guidance on the subsequent accounting for an impaired debt
security. FSP FAS 115-1 is effective for reporting periods beginning after
December 15, 2005. The adoption of FSP FAS 115-1 may have a material impact on
the Company's Statements of Operations and Comprehensive Income but is not
expected to have a material impact on the Company's Statements of Financial
Position as fluctuations in fair value are already recorded in accumulated other
comprehensive income.
STATEMENT OF POSITION 05-1, ACCOUNTING BY INSURANCE ENTERPRISES FOR DEFERRED
ACQUISITION COSTS IN CONNECTION WITH MODIFICATIONS OR EXCHANGES OF INSURANCE
CONTRACTS ("SOP 05-1")
In October 2005, the AICPA issued SOP 05-1. SOP 05-1 provides accounting
guidance for deferred policy acquisition costs on internal replacements of
insurance and investment contracts other than those specifically described in
SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments. SOP 05-1 defines an internal replacement as a modification in
product benefits, features, rights or coverages that occurs by the exchange of a
contract for a new contract, or by amendment, endorsement or rider to a
contract, or by the election of a feature or coverage within a contract.
Internal replacement contracts are those that are substantially changed from the
replaced contract and are accounted for as an extinguishment
26
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
of the replaced contract. Nonintegrated contract features are accounted for as
separately issued contracts. Modifications resulting from the election of a
feature or coverage within a contract or from an integrated contract feature
generally do not result in an internal replacement contract subject to SOP 05-1
provided certain conditions are met. The provisions of SOP 05-1 are effective
for internal replacements occurring in fiscal years beginning after December 15,
2006. The Company's accounting policy for internal replacements is generally
consistent with the accounting guidance prescribed in SOP 05-1. Any impact
resulting from the adoption of SOP 05-1 on the Company's results of operations
will be ceded to ALIC under the terms of the reinsurance agreements.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 154, ACCOUNTING CHANGES AND
ERROR CORRECTIONS ("SFAS NO. 154")
In May 2005, the FASB issued SFAS No. 154, which replaces Accounting
Principles Board ("APB") Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No.
154 requires retrospective application to prior periods' financial statements
for changes in accounting principle, unless determination of either the period
specific effects or the cumulative effect of the change is impracticable or
otherwise promulgated. SFAS No. 154 is effective for fiscal years beginning
after December 15, 2005. SFAS No. 154, upon adoption, is not expected to have a
material effect on the results of operations or financial position of the
Company.
3. RELATED PARTY TRANSACTIONS
BUSINESS OPERATIONS
The Company uses services provided by its affiliates, AIC, ALIC and
Allstate Investments LLC, and business facilities owned or leased and operated
by AIC in conducting its business activities. In addition, the Company shares
the services of employees with AIC. The Company reimburses its affiliates for
the operating expenses incurred on behalf of the Company. The Company is charged
for the cost of these operating expenses based on the level of services
provided. Operating expenses, including compensation and retirement and other
benefit programs, allocated to the Company were $158.7 million, $161.4 million
and $112.6 million in 2005, 2004 and 2003, respectively. Of these costs, the
Company retains investment related expenses on the invested assets of the
Company. All other costs are ceded to ALIC under the reinsurance agreements.
BROKER/DEALER SERVICES
The Company has a service agreement with Allstate Distributors, LLC
("ADLLC"), a broker/dealer affiliate of the Company, whereby ADLLC promotes and
markets the fixed and variable annuities sold by the Company to unaffiliated
financial services firms. In addition, ADLLC acts as the underwriter of variable
annuities sold by the Company. In return for these services, the Company
recorded commission expense of $659 thousand, $447 thousand and $138 thousand
for the years ended December 31, 2005, 2004 and 2003, respectively, that was
ceded to ALIC under the terms of the reinsurance agreements.
The Company receives underwriting and distribution services from Allstate
Financial Services, LLC ("AFS"), an affiliated broker/dealer company, for
certain variable annuity and variable life insurance contracts sold by Allstate
exclusive agencies. The Company recorded commission expense for these services
of $44.6 million, $41.7 million and $35.9 million for the years ended December
31, 2005, 2004 and 2003, respectively, that were ceded to ALIC under the terms
of the reinsurance agreements.
REINSURANCE
The following table summarizes amounts that were ceded to ALIC under the
reinsurance agreements:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------
(IN THOUSANDS) 2005 2004 2003
----------- ----------- ------------
Premiums and contract charges $ 461,496 $ 405,748 $ 546,741
Interest credited to contractholder funds, contract benefits and
certain expenses 1,483,707 1,354,508 1,272,290
</Table>
27
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
STRUCTURED SETTLEMENT OBLIGATIONS
The Company received premiums of $301 thousand and $3.2 million from AIC in
2004 and 2003, respectively, to assume certain structured settlement obligations
at prices determined based upon interest rates in effect at the time of
purchase. The Company subsequently ceded these premiums to ALIC under the terms
of its reinsurance agreements. The Company did not receive any structured
settlement premiums from AIC in 2005.
CAPITAL CONTRIBUTION
During the fourth quarter of 2004, ALIC made a cash capital contribution of
$49.7 million. This transaction was reflected in additional capital paid-in on
the Statements of Financial Position.
During the third quarter of 2003, ALIC authorized the forgiveness of $3.6
million of inter-company debt that the Company owed to ALIC. This transaction
was recognized as a non-cash capital contribution and reflected in additional
capital paid-in on the Statements of Financial Position.
INCOME TAXES
The Company is a party to a federal income tax allocation agreement with
the Corporation (Note 9).
DEBT
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 under the intercompany loan agreement to all its eligible
subsidiaries at any given point in time is limited to $1.00 billion. The Company
had no amounts outstanding under the agreement at December 31, 2005 and 2004.
The Corporation uses commercial paper borrowings, bank lines of credit and
repurchase agreements to fund intercompany borrowings.
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses, and fair value for
fixed income securities are as follows:
<Table>
<Caption>
GROSS UNREALIZED
(IN THOUSANDS) AMORTIZED -------------------------------- FAIR
COST GAINS LOSSES VALUE
------------- -------------- -------------- --------------
AT DECEMBER 31, 2005
U.S. government and agencies $ 99,197 $ 3,333 $ (1,139) $ 101,391
Corporate 91,424 1,133 (1,746) 90,811
Municipal 503 41 - 544
Mortgage-backed securities 32,362 209 (606) 31,965
Commercial mortgage-backed securities 27,851 69 (704) 27,216
Asset-backed securities 15,120 546 (48) 15,618
------------- -------------- -------------- --------------
Total fixed income securities $ 266,457 $ 5,331 $ (4,243) $ 267,545
============= ============== ============== ==============
AT DECEMBER 31, 2004
U.S. government and agencies $ 81,655 $ 4,793 $ (291) $ 86,157
Corporate 81,711 2,871 (725) 83,857
Municipal 502 62 - 564
Mortgage-backed securities 28,942 587 (27) 29,502
Commercial mortgage-backed securities 26,391 398 (262) 26,527
Asset-backed securities 15,170 1,049 (27) 16,192
------------- -------------- -------------- --------------
Total fixed income securities $ 234,371 $ 9,760 $ (1,332) $ 242,799
============= ============== ============== ==============
</Table>
28
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at
December 31, 2005:
<Table>
<Caption>
AMORTIZED FAIR
(IN THOUSANDS) COST VALUE
------------------ -------------------
Due in one year or less $ 11,681 $ 11,764
Due after one year through five years 84,087 84,444
Due after five years through ten years 87,597 86,105
Due after ten years 35,610 37,649
------------------ -------------------
218,975 219,962
Mortgage and asset-backed securities 47,482 47,583
------------------ -------------------
Total $ 266,457 $ 267,545
================== ===================
</Table>
Actual maturities may differ from those scheduled as a result of
prepayments by the issuers. Because of the potential for prepayment on mortgage
and asset-backed securities, they are not categorized by contractual maturity.
The commercial mortgage-backed securities are categorized by contractual
maturity because they generally are not subject to prepayment risk.
NET INVESTMENT INCOME
Net investment income for the years ended December 31 is as follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
-------------- -------------- --------------
Fixed income securities $ 13,190 $ 11,297 $ 11,324
Short-term investments 689 185 384
-------------- -------------- --------------
Investment income, before expense 13,879 11,482 11,708
Investment expense 247 248 274
-------------- -------------- --------------
Net investment income $ 13,632 $ 11,234 $ 11,434
============== ============== ==============
</Table>
REALIZED CAPITAL GAINS AND LOSSES, AFTER-TAX
Realized capital gains and losses by security type for the years ended
December 31 are as follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
------------- ------------ -------------
Fixed income securities $ (174) $ 5 $ 73
Income tax benefit (expense) 60 (2) (26)
------------- ------------ -------------
Realized capital gains and losses, after-tax $ (114) $ 3 $ 47
============= ============ =============
</Table>
Realized capital gains and losses by transaction type for the years ended
December 31 are as follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
------------- ------------ -------------
Dispositions $ (174) $ 5 $ 73
------------- ------------ -------------
Realized capital gains and losses (174) 5 73
Income tax benefit (expense) 60 (2) (26)
------------- ------------ -------------
Realized capital gains and losses, after-tax $ (114) $ 3 $ 47
============= ============ =============
</Table>
Gross gains of $5 thousand and $289 thousand were realized on fixed income
securities during 2004 and 2003, respectively. Gross losses of $174 thousand and
$216 thousand were realized on sales of fixed income securities during 2005 and
2003, respectively.
29
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses on fixed income securities included
in accumulated other comprehensive income at December 31 are as follows:
<Table>
<Caption>
GROSS UNREALIZED
(IN THOUSANDS) FAIR ----------------------- UNREALIZED
AT DECEMBER 31, 2005 VALUE GAINS LOSSES NET GAINS
----------- ---------- ---------- -------------
Fixed income securities $ 267,545 $ 5,331 $ (4,243) $ 1,088
Deferred income taxes (381)
-------------
Unrealized net capital gains and losses $ 707
=============
</Table>
<Table>
<Caption>
GROSS UNREALIZED
(IN THOUSANDS) FAIR ----------------------- UNREALIZED
AT DECEMBER 31, 2004 VALUE GAINS LOSSES NET GAINS
----------- ---------- ---------- -------------
Fixed income securities $ 242,799 $ 9,760 $ (1,332) $ 8,428
Deferred income taxes (2,949)
-------------
Unrealized net capital gains and losses $ 5,479
=============
</Table>
CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES
The change in unrealized net capital gains and losses for the years ended
December 31 is as follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
------------- ------------ -------------
Fixed income securities $ (7,340) $ (2,748) $ (5,473)
Deferred income taxes 2,568 962 1,916
------------- ------------ -------------
Decrease in unrealized net capital gains and losses $ (4,772) $ (1,786) $ (3,557)
============= ============ =============
</Table>
PORTFOLIO MONITORING
Inherent in the Company's evaluation of a particular security are
assumptions and estimates about the operations of the issuer and its future
earnings potential. Some of the factors considered in evaluating whether a
decline in fair value is other than temporary are: 1) the Company's ability and
intent to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; 2) the recoverability of principal and interest;
3) the duration and extent to which the fair value has been less than amortized
cost; 4) the financial condition, near-term and long-term prospects of the
issuer, including relevant industry conditions and trends, and implications of
rating agency actions and offering prices; and 5) the specific reasons that a
security is in a significant unrealized loss position, including market
conditions which could affect access to liquidity.
30
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
The following table summarizes the gross unrealized losses and fair value
of fixed income securities by the length of time that individual securities have
been in a continuous unrealized loss position.
<Table>
<Caption>
LESS THAN 12 MONTHS 12 MONTHS OR MORE
-------------------------------------- -------------------------------------- TOTAL
($ IN THOUSANDS) NUMBER OF FAIR UNREALIZED NUMBER OF FAIR UNREALIZED UNREALIZED
AT DECEMBER 31, 2005 ISSUES VALUE LOSSES ISSUES VALUE LOSSES LOSSES
----------- ---------- ---------- ----------- ---------- ---------- ----------
Fixed income securities
U.S. Government and
agencies 9 $ 46,404 $ (625) 3 $ 11,682 $ (514) $ (1,139)
Corporate 18 46,255 (1,059) 8 10,301 (687) (1,746)
Mortgage-backed securities 7 24,100 (507) 3 2,970 (99) (606)
Commercial mortgage-backed
securities 8 16,503 (296) 2 5,669 (408) (704)
Asset-backed securities - - - 1 961 (48) (48)
----------- ---------- ---------- ----------- ---------- ---------- ----------
Total 42 $ 133,262 $ (2,487) 17 $ 31,583 $ (1,756) $ (4,243)
=========== ========== ========== =========== ========== ========== ==========
Investment grade fixed
income securities 42 $ 133,262 $ (2,487) 17 $ 31,583 $ (1,756) $ (4,243)
Below investment grade
fixed income securities - - - - - - -
----------- ---------- ---------- ----------- ---------- ---------- ----------
Total fixed income
securities 42 $ 133,262 $ (2,487) 17 $ 31,583 $ (1,756) $ (4,243)
=========== ========== ========== =========== ========== ========== ==========
AT DECEMBER 31, 2004
Fixed income securities
U.S. government and agencies 5 $ 17,511 $ (171) 1 $ 4,034 $ (120) $ (291)
Corporate 6 15,344 (77) 8 11,567 (648) (725)
Mortgage-backed securities 4 3,693 (27) - - - (27)
Commercial mortgage-backed
securities 1 2,925 (89) 1 2,898 (173) (262)
Asset-backed securities 1 984 (27) - - - (27)
----------- ---------- ---------- ----------- ---------- ---------- ----------
Total 17 $ 40,457 $ (391) 10 $ 18,499 $ (941) $ (1,332)
=========== ========== ========== =========== ========== ========== ==========
Investment grade fixed
income securities 17 $ 40,457 $ (391) 10 $ 18,499 $ (941) $ (1,332)
Below investment grade
fixed income securities - - - - - - -
----------- ---------- ---------- ----------- ---------- ---------- ----------
Total fixed income securities 17 $ 40,457 $ (391) 10 $ 18,499 $ (941) $ (1,332)
=========== ========== ========== =========== ========== ========== ==========
</Table>
At December 31, 2005, the Company had unrealized losses of $4.2 million
which related to 59 holdings of fixed income securities with a fair value of
$164.8 million. All unrealized losses related to securities with an unrealized
loss position less than 20% of amortized cost, the degree of which suggests that
these securities did not pose a high risk of being other than temporarily
impaired. Unrealized losses totaling $2.5 million were in an unrealized loss
position for a period less than twelve months and $1.8 million were in an
unrealized loss position for a period of twelve months or more. Additionally,
all unrealized losses were rated investment grade. Investment grade is defined
as a security having a rating from the National Association of Insurance
Commissioners ("NAIC") of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody's or
a rating of AAA, AA, A or BBB from Standard & Poor's ("S&P"), Fitch or Dominion;
or a comparable internal rating if an externally provided rating is not
available. Unrealized losses on investment grade securities are principally
related to rising interest rates or changes in credit spreads since the
securities were acquired.
At December 31, 2004, the Company had unrealized losses of $1.3 million
which related to 27 holdings of fixed income securities with a fair value of
$59.0 million. All unrealized losses related to securities with an unrealized
loss position less than 20% of amortized cost, the degree of which suggests that
these securities did not pose a high risk of being other than temporarily
impaired. Unrealized losses totaling $391 thousand were in an unrealized loss
position for a period less than twelve months and $941 thousand were in an
unrealized loss position for a period of twelve months or more. Additionally,
all unrealized losses were rated investment grade.
As of December 31, 2005, the Company had the intent and ability to hold the
fixed income securities with unrealized losses for a period of time sufficient
for them to recover in value.
31
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
OTHER INVESTMENT INFORMATION
At December 31, 2005, fixed income securities and short-term investments
with a carrying value of $9.8 million were on deposit with regulatory
authorities as required by law.
5. Financial Instruments
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since reinsurance recoverables, net, reserve for
life-contingent contract benefits and deferred income taxes are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income
and cash, are generally of a short-term nature. Their carrying values are deemed
to approximate fair value.
FINANCIAL ASSETS
<Table>
<Caption>
(IN THOUSANDS) DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- -------------
Fixed income securities $ 267,545 $ 267,545 $ 242,799 $ 242,799
Short-term investments 3,824 3,824 30,408 30,408
Separate accounts 2,718,509 2,718,509 2,368,312 2,368,312
</Table>
Fair values of publicly traded fixed income securities are based upon
quoted market prices or dealer quotes. Short-term investments are highly liquid
investments with maturities of one year or less whose carrying values are deemed
to approximate fair value. Separate accounts assets are carried in the
Statements of Financial Position at fair value based on quoted market prices.
FINANCIAL LIABILITIES
<Table>
<Caption>
(IN THOUSANDS) DECEMBER 31, 2005 DECEMBER 31, 2004
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- --------------
Contractholder funds on investment contracts $ 14,931,738 $ 14,122,657 $ 13,778,428 $ 13,132,656
Separate accounts 2,718,509 2,718,509 2,368,312 2,368,312
</Table>
Contractholder funds include interest-sensitive life insurance contracts
and investment contracts. Interest-sensitive life insurance contracts are not
considered financial instruments subject to fair value disclosure requirements.
The fair value of investment contracts is based on the terms of the underlying
contracts. Fixed annuities are valued at the account balance less surrender
charges. Immediate annuities without life contingencies are valued at the
present value of future benefits using current interest rates. Market value
adjusted annuities' fair value is estimated to be the market adjusted surrender
value. Equity-indexed annuity contracts' fair value approximates carrying value
since the embedded equity options are carried at fair value in the financial
statements. Separate accounts liabilities are carried at the fair value of the
underlying assets.
32
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments include embedded derivative financial
instruments. Derivatives that are embedded in certain variable annuity
contracts and equity-indexed annuity contracts are required to be separated
from the host instrument and accounted for as derivative financial
instruments ("subject to bifurcation"). Embedded derivative financial
instruments are accounted for on a fair value basis. Embedded derivative
financial instruments subject to bifurcation are reflected as a component of
contractholder funds in the Statements of Financial Position. Changes in the
fair value of embedded derivative financial instruments are ceded to ALIC.
Reinsurance agreements that cede the value of embedded derivative financial
instruments are reflected as a component of reinsurance recoverables in the
Statements of Financial Position.
The following table summarizes the notional amount, fair value and carrying
value of the Company's embedded derivative financial instruments:
<Table>
<Caption>
CARRYING CARRYING
NOTIONAL FAIR VALUE VALUE
(IN THOUSANDS) AMOUNT VALUE ASSETS (LIABILITIES)
------------ ------------ ------------ ---------------
AT DECEMBER 31, 2005
Equity-indexed and forward starting
options in life and annuity product
contracts $ 2,356,357 $ (105,754) $ - $ (105,754)
Guaranteed accumulation benefits 242,234 288 - 288
Guaranteed withdrawal benefits 26,390 (14) - (14)
Other embedded derivative financial
instruments 3,775 (5) - (5)
</Table>
<Table>
<Caption>
CARRYING CARRYING
NOTIONAL FAIR VALUE VALUE
(IN THOUSANDS) AMOUNT VALUE ASSETS (LIABILITIES)
------------ ------------ ------------ ---------------
AT DECEMBER 31, 2004
Equity-indexed and forward starting
options in life and annuity product
contracts $ 1,712,610 $ (92,788) $ - $ (92,788)
Guaranteed accumulation benefits 104,732 77 - 77
Other embedded derivative financial
instruments 3,636 (7) - (7)
</Table>
The notional amounts specified in the contracts are used to calculate the
exchange of contractual payments under the agreements, and are not
representative of the potential for gain or loss on these agreements.
Fair value, which is equal to the carrying value, is based on widely
accepted pricing and valuation models, which use independent third party data as
inputs.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments that the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions.
33
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
There were no off-balance-sheet financial instruments at December 31, 2005
or 2004.
6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, the reserve for life-contingent contract benefits consists
of the following:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004
---------------- ----------------
Immediate annuities $ 723,691 $ 715,732
Traditional life 821,341 712,618
Other 347,162 243,379
---------------- ----------------
Total reserve for life-contingent contract benefits $ 1,892,194 $ 1,671,729
================ ================
</Table>
The following table highlights the key assumptions generally used in
calculating the reserve for life-contingent contract benefits:
<Table>
<Caption>
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ----------------------------------- --------------------------- -------------------------- --------------------------
Immediate annuities 1983 individual annuity Interest rate Present value of
mortality table assumptions range from expected future benefits
1983-a annuity mortality 3.0% - 8.8% based on historical
table experience
Annuity 2000 mortality
table
Traditional life Actual company experience Interest rate Net level premium
plus loading assumptions range from reserve method using the
4.0% - 8.0% Company's withdrawal
experience rates
Other:
Variable annuity 90% of 1994 group annuity 7% Projected benefit ratio
guaranteed minimum death mortality table with applied to cumulative
benefits internal modifications assessments
Actual company experience Unearned premium;
Accident & health plus loading additional contract
reserves for traditional
life
</Table>
At December 31, contractholder funds consists of the following:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004
---------------- ----------------
Interest-sensitive life $ 2,516,464 $ 2,441,324
Investment contracts:
Immediate annuities 459,893 407,907
Fixed annuities 14,435,800 13,346,872
Other 49,947 35,386
---------------- ----------------
Total contractholder funds $ 17,462,104 $ 16,231,489
================ ================
</Table>
34
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
The following table highlights the key contract provisions relating to
contractholder funds:
<Table>
<Caption>
PRODUCT INTEREST RATE WITHDRAWAL/SURRENDER CHARGES
- -------------------------------------------- ---------------------------- -----------------------------------
Interest-sensitive life Interest rates credited Either a percentage of account
range from 3.5% - 6.0% balance or dollar amount grading
off generally over 20 years
Immediate and fixed annuities Interest rates credited Either a declining or a level
range from 2.6% to 8.8% percentage charge generally over
for immediate annuities nine years or less. Additionally,
and 0% - 12.0% for fixed approximately 42.3% of fixed
annuities (which include annuities are subject to market
equity-indexed annuities value adjustment for
whose returns are indexed discretionary withdrawals.
to the S&P 500)
Other:
Variable guaranteed minimum income Interest rates used in Withdrawal and surrender charges
and secondary guarantees on establishing reserves are based on the terms of the
interest-sensitive life and fixed range from 1.75% to 10.3% related interest-sensitive life
annuities or fixed annuity contract.
</Table>
Contractholder funds activity for the years ended December 31 is as
follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004
---------------- ----------------
Balance, beginning of year $ 16,231,489 $ 13,802,815
Impact of adoption of SOP 03-1(1) - 135,665
Deposits 2,822,820 2,992,683
Interest credited 779,071 747,512
Benefits (373,164) (266,718)
Surrenders and partial withdrawals (1,735,777) (916,028)
Net transfers to separate accounts (70,542) (76,316)
Contract charges (206,363) (168,083)
Other adjustments 14,570 (20,041)
---------------- ----------------
Balance, end of year $ 17,462,104 $ 16,231,489
================ ================
</Table>
(1) The increase in contractholder funds due to the adoption of SOP 03-1
reflects the establishment of reserves for certain liabilities that are
primarily related to income benefit guarantees provided under variable
annuity contracts and secondary guarantees on interest-sensitive life and
certain fixed annuity contracts. These reserves were ceded to ALIC under the
terms of the reinsurance agreements.
35
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
The table below presents information regarding the Company's variable
annuity contracts with guarantees. The Company's variable annuity contracts may
offer more than one type of guarantee in each contract; therefore, the sum of
amounts listed exceeds the total account balances of variable annuity contracts'
separate accounts with guarantees.
<Table>
<Caption>
DECEMBER 31,
($ IN MILLIONS) 2005 2004
-------------- -------------
IN THE EVENT OF DEATH
Separate account value $ 2,084.2 $ 1,824.6
Net amount at risk (1) $ 148.1 $ 176.7
Average attained age of contractholders 59.54 years 59.90 years
AT ANNUITIZATION
Separate account value $ 372.3 $ 391.2
Net amount at risk (2) $ 0.7 $ 0.6
Weighted average waiting period until annuitization options available 3.64 years 4.06 years
FOR CUMULATIVE PERIODIC WITHDRAWALS
Separate account value $ 23.2 $ -
Net amount at risk (3) $ - $ -
ACCUMULATION AT SPECIFIED DATES
Separate account value $ 229.6 $ 95.4
Net amount at risk (4) $ - $ -
Weighted average waiting period until guarantee date 13.37 years 13.37 years
</Table>
(1) Defined as the estimated current guaranteed minimum death benefit in
excess of the current account balance at the balance sheet date.
(2) Defined as the estimated present value of the guaranteed minimum annuity
payments in excess of the current account balance.
(3) Defined as the estimated current guaranteed minimum withdrawal balance
(initial deposit) in excess of the current account balance at the balance
sheet date.
(4) Defined as the estimated present value of the guaranteed minimum
accumulation balance in excess of the current account balance.
As of December 31, 2005, reserves for variable annuity contracts and
secondary guarantee liabilities related to death benefits, income benefits,
accumulation and withdrawal benefits were $21 million, $36 million, $(288)
thousand and $14 thousand, respectively. As of December 31, 2004, reserves
for variable annuity contracts and secondary guarantee liabilities related to
death benefits, income benefits and accumulation benefits were $19 million,
$25 million and $(77) thousand, respectively.
7. REINSURANCE
The Company has entered into reinsurance agreements under which it
reinsures all of its business to ALIC or other non-affiliated reinsurers. Under
the agreements, premiums, contract charges, interest credited to contractholder
funds, contract benefits and certain expenses are reinsured. The Company
purchases reinsurance to limit aggregate and single losses on large risks. The
Company cedes a portion of the mortality risk on certain life policies with a
pool of twelve non-affiliated reinsurers. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. At December 31, 2005, 94.7% of the total
reinsurance recoverables were related to ALIC and 5.3% were related to
non-affiliated reinsurers. Substantially all of the non-affiliated reinsurance
recoverables are due from companies rated A- or better by S&P.
36
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
The effects of reinsurance on premiums and contract charges for the years
ended December 31 are as follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
------------- ------------- -------------
PREMIUMS AND CONTRACT CHARGES
Direct $ 840,691 $ 742,557 $ 870,257
Assumed 6,572 3,785 2
Ceded:
Affiliate (461,496) (405,748) (546,741)
Non-affiliate (385,767) (340,594) (323,518)
------------- ------------- -------------
Premiums and contract charges, net of reinsurance $ - $ - $ -
============= ============= =============
</Table>
The effects of reinsurance on interest credited to contractholder funds,
contract benefits and certain expenses for the years ended December 31 are as
follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
---------------- -------------- ---------------
INTEREST CREDITED TO CONTRACTHOLDER FUNDS, CONTRACT
BENEFITS AND CERTAIN EXPENSES
Direct $ 1,959,229 $ 1,735,510 $ 1,602,127
Assumed 7,658 4,972 202
Ceded:
Affiliate (1,483,707) (1,354,508) (1,272,290)
Non-affiliate (483,180) (385,974) (330,039)
---------------- -------------- ---------------
Interest credited to contractholder funds, contract
benefits and certain expenses, net of reinsurance $ - $ - $ -
================ ============== ===============
</Table>
8. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES
LEASES
The Company leases certain office facilities and computer equipment. Total
rent expense for all leases was $469 thousand, $681 thousand and $879 thousand
in 2005, 2004 and 2003, respectively, and was ceded to ALIC under the terms of
the reinsurance agreements.
Minimum rental commitments under operating leases with an initial or
remaining term of more than one year as of December 31, 2005 are as follows:
<Table>
<Caption>
(IN THOUSANDS) OPERATING
LEASES
--------------
2006 $ 51,196
2007 48,810
2008 3,936
2009 -
2010 -
Thereafter -
--------------
$ 103,942
==============
</Table>
GUARANTEES
The Company has issued universal life insurance contracts to third parties who
finance the premium payments on the universal life insurance contracts through a
commercial paper program. The Company has issued a repayment guarantee on the
outstanding commercial paper balance that is fully collateralized by the cash
surrender value of the universal life insurance contracts. At December 31, 2005,
the amount due under the commercial paper program is $57 million and the cash
surrender value of the policies is $58 million. The repayment guarantee expires
April 30, 2006. These contracts are ceded to ALIC under the terms of the
reinsurance agreements.
37
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
In the normal course of business, the Company provides standard
indemnifications to counterparties in contracts in connection with numerous
transactions, including acquisitions and divestures. The types of
indemnifications typically provided include indemnifications for breach of
representations and warranties, taxes and certain other liabilities, such as
third party lawsuits. The indemnification clauses are often standard contractual
terms and were entered into in the normal course of business based on an
assessment that the risk of loss would be remote. The terms of the
indemnifications vary in duration and nature. In many cases, the maximum
obligation is not explicitly stated and the contingencies triggering the
obligation to indemnify have not occurred and are not expected to occur.
Consequently, the maximum amount of the obligation under such indemnifications
is not determinable. Historically, the Company has not made any material
payments pursuant to these obligations.
The aggregate liability balance related to all guarantees, ceded to ALIC,
was not material as of December 31, 2005.
REGULATION
The Company is subject to changing social, economic and regulatory
conditions. From time to time regulatory authorities seek to impose additional
regulations regarding agent and broker compensation and otherwise expand overall
regulation of insurance products and the insurance industry. The ultimate
changes and eventual effects of these initiatives on the Company's business, if
any, are uncertain.
LEGAL AND REGULATORY PROCEEDINGS AND INQUIRIES
BACKGROUND
The Company and certain affiliates are involved in a number of lawsuits,
regulatory inquiries, and other legal proceedings arising out of various aspects
of its business. As background to the "Proceedings" sub-section below, please
note the following:
- These matters raise difficult and complicated factual and legal issues
and are subject to many uncertainties and complexities, including but
not limited to, the underlying facts of each matter; novel legal
issues; variations between jurisdictions in which matters are being
litigated, heard or investigated; differences in applicable laws and
judicial interpretations; the length of time before many of these
matters might be resolved by settlement, through litigation or
otherwise and, in some cases, the timing of their resolutions relative
to other similar matters involving other companies; the fact that some
of the lawsuits are putative class actions in which a class has not
been certified and in which the purported class may not be clearly
defined; the fact that some of the lawsuits involve multi-state class
actions in which the applicable law(s) for the claims at issue is in
dispute and therefore unclear; and the current challenging legal
environment faced by large corporations and insurance companies.
- In the lawsuits, plaintiffs seek a variety of remedies including
equitable relief in the form of injunctive and other remedies and
monetary relief in the form of contractual and extra-contractual
damages. In some cases, the monetary damages sought include punitive
damages. Often specific information about the relief sought, such as
the amount of damages, is not available because plaintiffs have not
requested specific relief in their pleadings. In our experience, when
specific monetary demands are made in pleadings, they bear little
relation to the ultimate loss, if any, to the Company.
- In connection with regulatory examinations and proceedings, government
authorities may seek various forms of relief, including penalties,
restitution and changes in business practices. The Company may not be
advised of the nature and extent of relief sought until the final
stages of the examination or proceeding.
- For the reasons specified above, it is not possible at this time to
make meaningful estimates of the amount or range of loss that could
result from the matters described below in the "Proceedings"
subsection. The Company reviews these matters on an on-going basis and
follows the provisions of SFAS No. 5, "Accounting for Contingencies"
when making accrual and disclosure decisions.
38
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
When assessing reasonably possible and probable outcomes, the Company
bases its decisions on its assessment of the ultimate outcome
following all appeals.
- Due to the complexity and scope of the matters disclosed in the
"Proceedings" subsection below and the many uncertainties that exist,
the ultimate outcome of these matters cannot be reasonably predicted.
In the event of an unfavorable outcome in one or more of these
matters, the ultimate liability may be in excess of amounts currently
reserved and may be material to the Company's operating results or
cash flows for a particular quarter or annual period. However, based
on information currently known to it, management believes that the
ultimate outcome of all matters described below as they are resolved
over time is not likely to have a material adverse effect on the
financial position of the Company.
PROCEEDINGS
Legal proceedings involving Allstate agencies and AIC may impact the
Company, even when the Company is not directly involved, because the Company
sells its products through a variety of distribution channels including Allstate
agencies. Consequently, information about the more significant of these
proceedings is provided in the following paragraph.
AIC is defending certain matters relating to its agency program
reorganization announced in 1999. These matters include a lawsuit filed in
December 2001 by the U.S. Equal Employment Opportunity Commission ("EEOC")
alleging retaliation under federal civil rights laws, a class action filed in
August 2001 by former employee agents alleging retaliation and age
discrimination under the Age Discrimination in Employment Act, breach of
contract and ERISA violations, and a lawsuit filed in October 2004 by the EEOC
alleging age discrimination with respect to a policy limiting the rehire of
agents affected by the agency program reorganization. AIC is also defending a
certified class action filed by former employee agents who terminated their
employment prior to the agency program reorganization. These plaintiffs have
asserted breach of contract and ERISA claims and are seeking actual damages
including benefits under Allstate employee benefit plans and payments provided
in connection with the reorganization, as well as punitive damages. In late
March 2004, in the first EEOC lawsuit and class action lawsuit, the trial court
issued a memorandum and order that, among other things, certified classes of
agents, including a mandatory class of agents who had signed a release, for
purposes of effecting the court's declaratory judgment that the release is
voidable at the option of the release signer. The court also ordered that an
agent who voids the release must return to AIC "any and all benefits received by
the [agent] in exchange for signing the release." The court also "concluded
that, on the undisputed facts of record, there is no basis for claims of age
discrimination." The EEOC and plaintiffs have asked the court to clarify and/or
reconsider its memorandum and order. The case otherwise remains pending. A
putative nationwide class action has also been filed by former employee agents
alleging various violations of ERISA, including a worker classification issue.
These plaintiffs are challenging certain amendments to the Agents Pension Plan
and are seeking to have exclusive agent independent contractors treated as
employees for benefit purposes. This matter was dismissed with prejudice by the
trial court, was the subject of further proceedings on appeal, and was reversed
and remanded to the trial court in April 2005. In these matters, plaintiffs seek
compensatory and punitive damages, and equitable relief. AIC has been vigorously
defending these lawsuits and other matters related to its agency program
reorganization. In addition, AIC has been defending certain matters relating to
its life agency program reorganization announced in 2000. These matters have
been the subject of an investigation by the EEOC with respect to allegations of
age discrimination and retaliation and conciliation discussions between AIC and
the EEOC. The outcome of these disputes is currently uncertain.
OTHER MATTERS
The Corporation and some of its subsidiaries, including the Company, have
received interrogatories and demands for information from regulatory and
enforcement authorities relating to various insurance products and practices.
The areas of inquiry include variable annuity market timing and late trading.
The Corporation and some of its subsidiaries, including the Company, have also
received interrogatories and
39
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
demands for information from authorities seeking information relevant to
on-going investigations into the possible violation of antitrust or insurance
laws by unnamed parties and, in particular, seeking information as to whether
any person engaged in activities for the purpose of price fixing, market
allocation, or bid rigging. The Company believes that these inquiries are
similar to those made to many financial services companies as part of
industry-wide investigations by various authorities into the practices, policies
and procedures relating to insurance and financial services products. The
Corporation and its subsidiaries have responded and will continue to respond to
these inquiries.
Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the target of a number of
lawsuits and proceedings, some of which involve claims for substantial or
indeterminate amounts. These actions are based on a variety of issues and target
a range of the Company's practices. The outcome of these disputes is currently
unpredictable. However, based on information currently known to it and the
existence of the reinsurance agreements with ALIC, management believes that the
ultimate outcome of all matters described in this "Other Matters" subsection in
excess of amounts currently reserved, as they are resolved over time is not
likely to have a material effect on the operating results, cash flows or
financial position of the Company.
9. INCOME TAXES
The Company joins the Corporation and its other eligible domestic
subsidiaries (the "Allstate Group") in the filing of a consolidated federal
income tax return and is party to a federal income tax allocation agreement (the
"Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the
Company pays to or receives from the Corporation the amount, if any, by which
the Allstate Group's federal income tax liability is affected by virtue of
inclusion of the Company in the consolidated federal income tax return. The
Company has also entered into a supplemental tax sharing agreement with respect
to reinsurance ceded to ALIC to allocate the tax benefits and costs related to
such reinsurance. Effectively, these agreements result in the Company's annual
income tax provision being computed, with adjustments, as if the Company filed a
separate return, adjusted for the reinsurance ceded to ALIC.
The Internal Revenue Service ("IRS") has completed its review of the
Allstate Group's federal income tax returns through the 2002 tax year. Any
adjustments that may result from IRS examinations of tax returns are not
expected to have a material impact on the financial position, liquidity or
results of operations of the Company.
The components of the deferred income tax liabilities at December 31 are as
follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004
------------- -------------
Unrealized net capital gains $ (381) $ (2,949)
Difference in tax bases of investments (208) (306)
Other liabilities (2) (2)
------------- -------------
Net deferred liabilities $ (591) $ (3,257)
============= =============
</Table>
The components of income tax expense for the years ended December 31 are as
follows:
<Table>
<Caption>
(IN THOUSANDS) 2005 2004 2003
------------ ------------ ------------
Current $ 4,769 $ 3,877 $ 2,999
Deferred (98) 48 1,093
------------ ------------ ------------
Total income tax expense $ 4,671 $ 3,925 $ 4,092
============ ============ ============
</Table>
The Company received an income tax refund of $38 thousand in 2005 and paid
income taxes of $2.5 million and $4.3 million in 2004 and 2003, respectively.
40
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO 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 is as
follows:
<Table>
<Caption>
2005 2004 2003
------------ ------------ ------------
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
Other (0.3) (0.1) 0.6
------------ ------------ ------------
Effective income tax rate 34.7 % 34.9 % 35.6 %
============ ============ ============
</Table>
Prior to January 1, 1984, the Company was entitled to exclude certain
amounts from taxable income and accumulate such amounts in a "policyholder
surplus" account. Pursuant to the American Jobs Creation Act of 2004 ("the 2004
Act"), the Company can reduce the policyholders surplus account in 2005 and 2006
without incurring any tax liability. The remaining aggregate balance in this
account at December 31, 2005, was $340 thousand, which prior to the 2004 Act
would have resulted in federal income taxes payable of $119 thousand if such
amounts had been distributed or deemed distributed from the policyholders
surplus account. No provision for taxes has ever been made for this item as the
Company had no prior intention of incurring such tax liability. The Company
expects to utilize the 2004 Act provision in 2006, thereby eliminating this
remaining potential tax liability.
10. STATUTORY FINANCIAL INFORMATION
The Company prepares its statutory-basis financial statements in conformity
with accounting practices prescribed or permitted by the State of Nebraska. The
State of Nebraska requires insurance companies 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. Prescribed statutory accounting
practices include a variety of publications of the NAIC, as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
Statutory accounting practices primarily differ from GAAP since they require
charging policy acquisition and certain sales inducement costs to expense as
incurred, establishing life insurance reserves based on different actuarial
assumptions, and valuing investments and establishing deferred taxes on a
different basis.
Statutory net income for 2005, 2004, and 2003 was $8.8 million, $7.4
million and $8.4 million, respectively. Statutory capital and surplus as of
December 31, 2005 and 2004 was $267.5 million and $255.5 million, respectively.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The payment of shareholder dividends by the Company without prior approval of
the state insurance regulator is limited to formula amounts based on net income
and capital and surplus, determined in conformity with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 2006 without prior approval of the Nebraska Department of Insurance is
$26.8 million. In the twelve-month period beginning January 1, 2005 the Company
did not pay any dividends.
41
<Page>
LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS
11. OTHER COMPREHENSIVE INCOME
The components of other comprehensive (loss) income on a pretax and
after-tax basis for the years ended December 31 are as follows:
(IN THOUSANDS)
<Table>
<Caption>
2005
------------------------------------
AFTER-
UNREALIZED CAPITAL GAINS AND LOSSES: PRETAX TAX TAX
--------- --------- ---------
Unrealized holding (losses) gains arising during the period $ (7,514) $ 2,628 $ (4,886)
Less: reclassification adjustments (174) 60 (114)
--------- --------- ---------
Unrealized net capital gains and losses (7,340) 2,568 (4,772)
--------- --------- ---------
Other comprehensive (loss) income $ (7,340) $ 2,568 $ (4,772)
========= ========= =========
<Caption>
2004
-------------------------------------
AFTER-
UNREALIZED CAPITAL GAINS AND LOSSES: PRETAX TAX TAX
---------- --------- ----------
Unrealized holding (losses) gains arising during the period $ (2,743) $ 960 $ (1,783)
Less: reclassification adjustments 5 (2) 3
---------- --------- ----------
Unrealized net capital gains and losses (2,748) 962 (1,786)
---------- --------- ----------
Other comprehensive (loss) income $ (2,748) $ 962 $ (1,786)
========== ========= ==========
<Caption>
2003
-------------------------------------
AFTER-
UNREALIZED CAPITAL GAINS AND LOSSES: PRETAX TAX TAX
--------- --------- ---------
Unrealized holding (losses) gains arising during the period $ (5,349) $ 1,873 $ (3,476)
Less: reclassification adjustments 124 (43) 81
--------- --------- ---------
Unrealized net capital gains and losses (5,473) 1,916 (3,557)
--------- --------- ---------
Other comprehensive (loss) income $ (5,473) $ 1,916 $ (3,557)
========= ========= =========
</Table>
42
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
LINCOLN BENEFIT LIFE COMPANY:
We have audited the accompanying Statements of Financial Position of Lincoln
Benefit Life Company (the "Company", an affiliate of The Allstate Corporation)
as of December 31, 2005 and 2004, and the related Statements of Operations and
Comprehensive Income, Shareholder's Equity, and Cash Flows for each of the three
years in the period ended December 31, 2005. Our audits also included the
financial statement schedules listed in the Index at Item 15. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2005 and
2004, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2005, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 10, 2006
43
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures as defined in Rule 15d-15(e) under the Securities
Exchange Act of 1934. Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based upon this evaluation, the principal executive officer and the principal
financial officer concluded that our disclosure controls and procedures are
effective in providing reasonable assurance that material information required
to be disclosed in our reports filed with or submitted to the Securities and
Exchange Commission under the Securities Exchange Act is made known to
management, including the principal executive officer and the principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the fiscal
quarter ended December 31, 2005, there have been no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None
44
<Page>
PART III
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1), (2), (3) AND (4) DISCLOSURE OF FEES -
The following fees have been, or are anticipated to be billed by Deloitte &
Touche LLP, the member firms of Deloitte & Touche Tohmatsu, and their respective
affiliates, for professional services rendered to us for the fiscal years ending
December 31, 2005 and 2004.
<Table>
<Caption>
2005 2004
--------- ----------
Audit fees (a) $ 213,706 $ 196,060
--------- ----------
TOTAL FEES $ 213,706 $ 196,060
========= ==========
</Table>
(a) Fees for audits of annual financial statements including financial
statements for the separate accounts, reviews of quarterly financial
statements, statutory audits, attest services, comfort letters,
consents and review of documents filed with the SEC. These fees are
ceded to ALIC under the Company's reinsurance agreements.
(5)(i) AND (ii) AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES -
The Audit Committee of The Allstate Corporation has established
pre-approval policies and procedures for itself and its consolidated
subsidiaries, including Lincoln Benefit. Those policies and procedures are
incorporated into this Item 14 (5) by reference to Exhibit 99(ii) - The
Allstate Corporation Policy Regarding Pre-Approval of Independent Auditors'
Services (the "Pre-Approval Policy"). In addition, in 2005 the Audit
Committee of ALIC adopted the Pre-Approval Policy, as it may be amended from
time to time by the Audit Committee or the Board of Directors of the
Corporation, as its own policy, provided that the Designated Member referred
to in such policy need not be independent because the New York Stock Exchange
corporate governance standards do not apply to ALIC. The Board of Directors
of Lincoln Benefit has delegated to the Audit Committee of ALIC the authority
to approve services to be provided by Lincoln Benefit's independent auditor.
All of the services provided by Deloitte & Touche LLP to Lincoln Benefit in
2005 were pre-approved by The Allstate Corporation and the ALIC Audit
Committees and all of the services provided in 2004 were pre-approved by The
Allstate Corporation Audit Committee.
45
<Page>
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The following financial statements, notes thereto and related
information of Lincoln Benefit are included in Item 8.
Statements of Operations and Comprehensive Income
Statements of Financial Position
Statements of Shareholder's Equity
Statements of Cash Flows
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
(2) The following additional financial statement schedules are furnished
herewith pursuant to the requirements of Form 10-K.
<Table>
<Caption>
Lincoln Benefit Life Company Page
---------------------------- ----
Schedules required to be filed under provisions of Regulation S-X Article 7:
Schedule I - Summary of Investments - Other Than Investments in Related Parties S-1
Schedule IV - Reinsurance S-2
</Table>
All other schedules have been omitted because they are not applicable or
required or because the required information is included in the financial
statements or notes thereto.
(3) The following is a list of the exhibits filed as part of this Form
10-K. The SEC file number for the exhibits incorporated by reference is
333-59765 except as otherwise noted.
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- -----------
3(i) Amended and Restated Articles of Incorporation of Lincoln
Benefit Life Company dated September 26, 2000. Incorporated
herein by reference to Exhibit 3(i) to Lincoln Benefit Life
Company's Quarterly Report on Form 10-Q for quarter ended
March 31, 2002.
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 on Form S-6 filed March 11, 1998. (SEC
File No. 333-47717)
10.1 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 10.28 to Allstate
Life Insurance Company's Form 10 filed on April 24, 2002.
(SEC File No. 000-31248)
10.2 Tax Sharing Agreement dated as of November 12, 1996 among The
Allstate Corporation and certain affiliates. Incorporated
herein by reference to Exhibit 10.36 to Allstate Life
Insurance Company's Form 10 filed on April 24, 2002. (SEC File
No. 000-31248)
10.3 Cash Management Services Master Agreement between Allstate
Insurance Company and Allstate Bank (aka Allstate Federal
Savings Bank) dated March 16, 1999. Incorporated herein by
reference to Exhibit 10.4 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for quarter ended March 31,
2002.
</Table>
46
<Page>
<Table>
10.4 Amendment No.1 to Cash Management Services Master Agreement
effective January 5, 2001. Incorporated herein by reference to
Exhibit 10.5 to Lincoln Benefit Life Company's Quarterly
Report on Form 10-Q for quarter ended March 31, 2002.
10.5 Amended and Restated Service and Expense Agreement between
Allstate Insurance Company, The Allstate Corporation and
certain affiliates, effective January 1, 2004. Incorporated
herein by reference to Exhibit 10.1 to Allstate Life Insurance
Company's Report on Form 10-Q for quarter ended March 31,
2005.
10.6 Administrative Services Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company dated
October 1, 1996. Incorporated herein by reference to Exhibit
10.1 to Lincoln Benefit Life Company's Quarterly Report on
Form 10-Q for quarter ended June 30, 2002.
10.7 Service Agreement between Lincoln Benefit Life Company and
Allstate Financial Services, LLC effective April 1, 1998.
Incorporated herein by reference to Exhibit 10.3 to Lincoln
Benefit Life Company's Quarterly Report on Form 10-Q for
quarter ended June 30, 2002.
10.8 Administrative Services Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company, effective
September 1, 1998 and as amended effective June 19, 2000.
Incorporated herein by reference to Exhibit 10.4 to Lincoln
Benefit Life Company's Quarterly Report on Form 10-Q for
quarter ended June 30, 2002.
10.9 Principal Underwriting Agreement between Lincoln Benefit Life
Company and ALFS, Inc., 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.
10.10 Principal Underwriting Agreement between Lincoln Benefit Life
Company and ALFS, Inc., effective November 25, 1998. (Variable
Annuity Account). Incorporated herein by reference to Exhibit
10.7 to Lincoln Benefit Life Company's Quarterly Report on
Form 10-Q for quarter ended June 30, 2002.
10.11 Selling Agreement between Lincoln Benefit Life Company, ALFS,
Inc. (f/k/a Allstate Financial Services, Inc.) 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)
10.12 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.
10.13 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.
10.14 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.
23 Consent of Independent Registered Public Accounting Firm
31.1 Rule 15d-14(a) Certification of Principal Executive Officer
</Table>
47
<Page>
<Table>
31.2 Rule 15d-14(a) Certification of Principal Financial Officer
32 Section 1350 Certifications
99(ii) The Allstate Corporation Policy Regarding Pre-Approval of
Independent Auditor's Services effective November 10, 2003.
Incorporated herein by reference to Exhibit 99(ii) to Lincoln
Benefit Life Company's Annual Report on Form 10-K for 2004.
</Table>
(b) The exhibits are listed in Item 15. (a) (3) above.
(c) The financial statement schedules are listed in Item 15. (a) (2) above.
48
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
LINCOLN BENEFIT LIFE COMPANY
(Registrant)
March 13, 2006 /s/Samuel H. Pilch
--------------------------------------------------
By: Samuel H. Pilch
(chief accounting officer and duly authorized officer of the
registrant)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Casey J. Sylla Chairman of the Board, March 13, 2006
- ---------------------------------------- Chief Executive Officer and
Casey J. Sylla a Director
(Principal Executive
Officer)
/s/John C. Pintozzi Senior Vice President, March 13, 2006
- ---------------------------------------- Chief Financial Officer and
John C. Pintozzi a Director
(Principal Financial
Officer)
/s/Lawrence W. Dahl Director March 13, 2006
- ----------------------------------------
Lawrence W. Dahl
/s/ John C. Lounds
- ---------------------------------------- Director March 13, 2006
John C. Lounds
/s/Kevin R. Slawin Director March 13, 2006
- ----------------------------------------
Kevin R. Slawin
/s/Michael J. Velotta Director March 13, 2006
- ----------------------------------------
Michael J. Velotta
/s/Douglas B. Welch Director March 13, 2006
- ----------------------------------------
Douglas B.Welch
</Table>
49
<Page>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
All of the outstanding common stock of the Company is owned by Allstate
Life Insurance Company. The Company has not provided any of the following items
to security holders:
(1) annual reports to security holders covering the registrant's last
fiscal year; or
(2) proxy statements, forms of proxy or other proxy soliciting
materials.
50
<Page>
LINCOLN BENEFIT LIFE COMPANY
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENT
IN RELATED PARTIES
DECEMBER 31, 2005
<Table>
<Caption>
AMOUNTS AT
(IN THOUSANDS) WHICH
SHOWN ON
BALANCE
COST FAIR VALUE SHEET
---- ---------- -----
TYPE OF INVESTMENT
Fixed maturities:
Bonds:
United States government, government agencies and authorities....... $ 99,197 $ 101,391 $ 101,391
States, municipalities and political subdivisions................... 503 544 544
Public utilities.................................................... 8,324 8,004 8,004
All other corporate bonds........................................... 83,100 82,807 82,807
Mortgage-backed securities............................................. 32,362 31,965 31,965
Asset-backed securities................................................ 15,120 15,618 15,618
Commercial mortgage-backed securities.................................. 27,851 27,216 27,216
-------------- ------------- ------------
Total fixed maturities.............................................. 266,457 $ 267,545 267,545
-------------- ------------- ------------
Short-term investments.................................................... 3,824 3,824
-------------- ------------
Total investments................................................... $ 270,281 $ 271,369
============== ============
</Table>
S-1
<Page>
LINCOLN BENEFIT LIFE COMPANY
SCHEDULE IV--REINSURANCE
(IN THOUSANDS)
<Table>
<Caption>
GROSS NET
YEAR ENDED DECEMBER 31, 2005 AMOUNT CEDED AMOUNT
- ------------------------------------ --------------- ------------------ ---------------
Life insurance in force $ 250,002,951 $ 250,002,951 $ -
--------------- ------------------ ---------------
Premiums and contract charges:
Life and annuities $ 735,892 $ 735,892 $ -
Accident and health 111,371 111,371 -
--------------- ------------------ ---------------
$ 847,263 $ 847,263 $ -
--------------- ------------------ ---------------
<Caption>
GROSS NET
YEAR ENDED DECEMBER 31, 2004 AMOUNT CEDED AMOUNT
- ------------------------------------ --------------- ------------------ ---------------
Life insurance in force $ 211,262,503 $ 211,262,503 $ -
--------------- ------------------ ---------------
Premiums and contract charges:
Life and annuities $ 649,996 $ 649,996 $ -
Accident and health 96,346 96,346 -
--------------- ------------------ ---------------
$ 746,342 $ 746,342 $ -
--------------- ------------------ ---------------
<Caption>
GROSS NET
YEAR ENDED DECEMBER 31, 2003 AMOUNT CEDED AMOUNT
- ------------------------------------ --------------- ------------------ ---------------
Life insurance in force $ 179,908,435 $ 179,908,435 $ -
--------------- ------------------ ---------------
Premiums and contract charges:
Life and annuities $ 773,023 $ 773,023 $ -
Accident and health 97,236 97,236 -
--------------- ------------------ ---------------
$ 870,259 $ 870,259 $ -
--------------- ------------------ ---------------
</Table>
S-2