As Filed with the Securities and Exchange Commission on April 8, 2010
File No. 333-158181
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM S-1
POST-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
LINCOLN BENEFIT LIFE COMPANY
(Exact name of Registrant as Specified in its Charter)
Nebraska 6300 470221457
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or
organization) Classification Code Number) Identification No.)
2940 South 84th St., Lincoln, Nebraska 68506
1-800-525-9287
(Address of registrant's principal executive offices)
JAN FISCHER-WADE, ESQ.
LINCOLN BENEFIT LIFE COMPANY
2940 South 84th St.
LINCOLN, NE 68506
1-800-525-9287
(Name of agent for service)
Approximate date of commencement of proposed sale to the Public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
LINCOLN BENEFIT LIFE COMPANY
Supplement Dated May 1, 2010
To the following Prospectuses, as supplemented
CONSULTANT SOLUTIONS (CLASSIC, PLUS, ELITE, SELECT) PROSPECTUS DATED MAY 1, 2010
CONSULTANT I PROSPECTUS DATED MAY 1, 2010
LBL ADVANTAGE PROSPECTUS DATED MAY 1, 2004
CONSULTANT II PROSPECTUS DATED MAY 1, 2004
PREMIER PLANNER PROSPECTUS DATED MAY 1, 2004
The following information supplements the prospectus for your variable
annuity contract issued by Lincoln Benefit Life Company.
SUPPLEMENTAL INFORMATION
ABOUT LINCOLN BENEFIT LIFE COMPANY
INDEX
PAGE
----
Item 11(a) Description of Business.................................................... 1
Item 11(b) Description of Property.................................................... 3
Item 11(c) Legal Proceedings.......................................................... 3
Item 11(e) Financial Statements and Notes to Financial Statements..................... 3
Item 11(f) Selected Financial Data.................................................... 36
Item 11(h) Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 37
Item 11(i) Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 52
Item 11(j) Quantitative and Qualitative Disclosures About Market Risk................. 52
Item 11(k) Directors, Executive Officers, Promoters and Control Persons............... 52
Item 11(l) Executive Compensation..................................................... 54
Item 11(m) Security Ownership of Certain Beneficial Owners and Management............. 83
Item 11(n) Transactions with Related Persons, Promoters and Certain Control Persons... 84
Other Information...................................................................... 87
Filing of Reports.......................................................... 87
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities.............................................................. 87
Experts.................................................................... 88
ITEM 11(A). DESCRIPTION OF BUSINESS
Lincoln Benefit Life Company ("Lincoln Benefit") was incorporated under the
laws of the State of Nebraska in 1938. Lincoln Benefit is a wholly owned
subsidiary of Allstate Life Insurance Company ("ALIC"), a stock life insurance
company incorporated under the laws of the State of Illinois. ALIC is a wholly
owned subsidiary of Allstate Insurance Company ("AIC"), a stock
property-liability insurance company organized under the laws of the State of
Illinois. All of the outstanding capital stock of Allstate Insurance Company is
owned by Allstate Insurance Holdings, LLC, which is wholly owned by The
Allstate Corporation (the "Corporation" or "Allstate"), a publicly owned
holding company incorporated under the laws of the State of Delaware. The
Allstate Corporation is the largest publicly held personal lines insurer in the
United States. Widely known through the "You're In Good Hands With Allstate(R)"
slogan, Allstate is reinventing protection and retirement to help individuals
in approximately 17 million households protect what they have today and better
prepare for tomorrow. Customers can access Allstate products and services such
as auto insurance and homeowners insurance through more than 14,000 exclusive
Allstate agencies and financial representatives in the United States and
Canada. Allstate is the 2/nd/ largest personal property and casualty insurer in
the United States on the basis of
2008 statutory direct premiums earned. In addition, according to A.M. Best, it
is the nation's 16/th/ largest issuer of life insurance business on the basis
of 2008 ordinary life insurance in force and 17/th/ largest on the basis of
2008 statutory admitted assets.
To achieve its goals in 2010, Allstate is focused on these priorities:
improve customer loyalty, reinvent protection and retirement for the consumer,
and grow its businesses.
In our reports, we occasionally refer to statutory financial information.
All domestic United States insurance companies are required to prepare
statutory-basis financial statements. As a result, industry data is available
that enables comparisons between insurance companies, including competitors
that are not subject to the requirement to prepare financial statements in
conformity with accounting principles generally accepted in the United States
of America ("GAAP"). We frequently use industry publications containing
statutory financial information to assess our competitive position.
We provide life insurance, retirement and investment products. Our principal
products are fixed annuities, including deferred and immediate; and
interest-sensitive, traditional and variable life insurance. We sell products
through multiple intermediary distribution channels, including Allstate
exclusive agencies and exclusive financial specialists, independent agents
(including master brokerage agencies), and, through March 31, 2010,
broker-dealers.
We compete on a wide variety of factors, including the scope of our
distribution systems, the type of our product offerings, the recognition of our
brands, our financial strength and ratings, our differentiated product features
and prices, and the level of customer service that we provide. In addition,
with respect to 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, 2009, there were
approximately 480 groups of life insurance companies in the United States, most
of which offered one or more similar products. In addition, because many of
these products include a savings or investment component, our competition
includes domestic and foreign securities firms, investment advisors, mutual
funds, banks and other financial institutions. Competitive pressure continues
to grow due to several factors, including cross marketing alliances between
unaffiliated businesses, as well as consolidation activity in the financial
services industry.
We cede the mortality risk on certain life policies, depending upon the
issue year and product, to a pool of twelve non-affiliated reinsurers. All
business not reinsured to non-affiliated reinsurers is ceded to ALIC. Premiums,
contract charges, interest credited to contractholder funds, contract benefits
and substantially all expenses are reinsured by ALIC. Assets that support
general account product liabilities are owned and managed by ALIC. We continue
to have primary liability as the direct insurer for risks reinsured as ALIC's
obligations under the reinsurance agreements are to us and not the
contractholder.
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 separate accounts. Contract charges
assessed against the separate accounts assets and contract benefits are ceded
to ALIC.
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, price
setting, trade practices, policy forms, accounting methods, corporate
governance, the nature and amount of investments, claims practices,
participation
2
in guaranty funds, reserve adequacy, insurer solvency, transactions with
affiliates, the payment of dividends, and underwriting standards. For a
discussion of statutory financial information, see Note 11 of the Financial
Statements. For a discussion of regulatory contingencies, see Note 9 of the
Financial Statements. Notes 9 and 11 are incorporated in this Item 11(a) by
reference.
In recent years, the state insurance regulatory framework has come under
increased federal scrutiny. Legislation that would provide for increased
federal regulation of insurance, including the federal chartering of insurance
companies, has been proposed. Moreover, as part of an effort to strengthen the
regulation of the financial services market, the federal government has
proposed a set of regulatory reforms, including the establishment of an Office
of National Insurance within the Treasury Department. The reforms could
increase the regulation of large insurance conglomerates whose failure could
pose a systemic risk to the financial system. 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 or financial services business or what effect any
such measures would have on Lincoln Benefit.
ITEM 11(B). DESCRIPTION OF PROPERTY
Lincoln Benefit occupies office space in Lincoln, Nebraska and Northbrook,
Illinois that is owned by Allstate Insurance Company. Expenses associated with
these facilities are allocated to us on a direct basis.
ITEM 11(C). LEGAL PROCEEDINGS
Information required for Item 11(c) is incorporated by reference to the
discussion under the headings "Regulation and Compliance" and under the heading
"Legal and regulatory proceedings and inquiries" in Note 9 of the Financial
Statements.
ITEM 11(E). FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
------------------------
2009 2008 2007
($ IN THOUSANDS) ------- ------- -------
REVENUES
Net investment income.................................. $11,783 $13,940 $14,257
Realized capital gains and losses...................... 1,480 5,952 (417)
------- ------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE....... 13,263 19,892 13,840
Income tax expense..................................... 4,634 6,918 4,835
------- ------- -------
NET INCOME............................................. 8,629 12,974 9,005
------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX
Change in unrealized net capital gains and losses...... 5,783 (4,351) 4,307
------- ------- -------
COMPREHENSIVE INCOME................................... $14,412 $ 8,623 $13,312
======= ======= =======
See notes to financial statements.
3
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31,
-----------------------
2009 2008
($ IN THOUSANDS, EXCEPT PAR VALUE DATA) ----------- -----------
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $299,787 and
$229,667).................................................................. $ 308,343 $ 229,328
Short-term, at fair value (amortized cost $8,557 and $80,705)................ 8,557 80,703
----------- -----------
Total investments........................................................ 316,900 310,031
Cash............................................................................ 10,063 3,145
Reinsurance recoverable from Allstate Life Insurance Company.................... 18,689,074 18,791,710
Reinsurance recoverable from non-affiliates..................................... 1,766,824 1,613,685
Other assets.................................................................... 110,400 113,637
Separate accounts............................................................... 2,039,647 1,823,163
----------- -----------
TOTAL ASSETS.......................................................... $22,932,908 $22,655,371
=========== ===========
LIABILITIES
Contractholder funds............................................................ $17,633,027 $17,787,376
Reserve for life-contingent contract benefits................................... 2,805,387 2,581,186
Unearned premiums............................................................... 21,656 24,169
Deferred income taxes........................................................... 3,300 --
Payable to affiliates, net...................................................... 14,749 36,029
Current income taxes payable.................................................... 4,656 7,017
Other liabilities and accrued expenses.......................................... 97,513 97,870
Separate accounts............................................................... 2,039,647 1,823,163
----------- -----------
TOTAL LIABILITIES..................................................... 22,619,935 22,356,810
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 9)
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 30 thousand shares authorized, 25 thousand shares
issued and outstanding........................................................ 2,500 2,500
Additional capital paid-in...................................................... 180,000 180,000
Retained income................................................................. 124,912 116,283
Accumulated other comprehensive income (loss):
Unrealized net capital gains and losses...................................... 5,561 (222)
----------- -----------
Total accumulated other comprehensive income (loss)................... 5,561 (222)
----------- -----------
TOTAL SHAREHOLDER'S EQUITY............................................ 312,973 298,561
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................ $22,932,908 $22,655,371
=========== ===========
See notes to financial statements.
4
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31,
----------------------------
2009 2008 2007
($ IN THOUSANDS) -------- -------- --------
COMMON STOCK........................................... $ 2,500 $ 2,500 $ 2,500
-------- -------- --------
ADDITIONAL CAPITAL PAID-IN............................. 180,000 180,000 180,000
-------- -------- --------
RETAINED INCOME
Balance, beginning of year............................. 116,283 103,309 94,304
Net income............................................. 8,629 12,974 9,005
-------- -------- --------
Balance, end of year................................... 124,912 116,283 103,309
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year............................. (222) 4,129 (178)
Change in unrealized net capital gains and losses...... 5,783 (4,351) 4,307
-------- -------- --------
Balance, end of year................................... 5,561 (222) 4,129
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY............................. $312,973 $298,561 $289,938
======== ======== ========
See notes to financial statements.
5
LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------
2009 2008 2007
($ IN THOUSANDS) --------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 8,629 $ 12,974 $ 9,005
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization and other non-cash items.............................. 932 143 25
Realized capital gains and losses.................................. (1,480) (5,952) 417
Changes in:
Policy benefit and other insurance reserves.................... 19,349 (5,052) (18,124)
Income taxes................................................... (2,174) 2,065 428
Receivable/payable to affiliates, net.......................... (21,280) 14,117 46,902
Other operating assets and liabilities......................... 369 (24,195) (24,698)
--------- -------- --------
Net cash provided by (used in) operating activities......... 4,345 (5,900) 13,955
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed income securities........................ 46,330 101,584 5,176
Collections on fixed income securities................................ 35,334 7,693 13,732
Purchases of fixed income securities.................................. (151,234) (64,497) (17,982)
Change in short-term investments...................................... 72,143 (54,347) (19,621)
--------- -------- --------
Net cash provided by (used in) investing activities......... 2,573 (9,567) (18,695)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH....................................... 6,918 (15,467) (4,740)
CASH AT BEGINNING OF YEAR............................................. 3,145 18,612 23,352
--------- -------- --------
CASH AT END OF YEAR................................................... $ 10,063 $ 3,145 $ 18,612
========= ======== ========
See notes to financial statements.
6
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Lincoln
Benefit Life Company (the "Company"), a wholly owned subsidiary of Allstate
Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance
Company ("AIC"). All of the outstanding common stock of AIC is owned by
Allstate Insurance Holdings, LLC, a wholly owned subsidiary of The Allstate
Corporation (the "Corporation"). These financial statements have been prepared
in conformity with accounting principles generally accepted in the United
States of America ("GAAP").
To conform to the current year 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. The
principal products are fixed annuities, and interest-sensitive, traditional and
variable life insurance.
The Company is authorized to sell life insurance and retirement products in
all states except New York, as well as in the District of Columbia, the U.S.
Virgin Islands and Guam. For 2009, the top geographic locations for statutory
premiums and annuity considerations 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 distribution channels, including Allstate
exclusive agencies, which include exclusive financial specialists, independent
agents (including master brokerage agencies), and, through March 31, 2010,
broker-dealers.
The Company has exposure to market risk as a result of its investment
portfolio. Market risk is the risk that the Company will incur realized and
unrealized net capital losses due to adverse changes in interest rates and
credit spreads. The Company also has certain exposures to changes in equity
prices in its equity-indexed annuities and separate accounts liabilities, which
are transferred to ALIC in accordance with reinsurance agreements. Interest
rate risk is the risk that the Company will incur a loss due to adverse changes
in interest rates relative to the interest rate characteristics of its interest
bearing assets. This risk arises from the Company's investment in
interest-sensitive assets. Interest rate risk includes risks related to changes
in U.S. Treasury yields and other key risk-free reference yields. Credit spread
risk is the risk that the Company will incur a loss due to adverse changes in
credit spreads. This risk arises from many of the Company's primary activities,
as the Company invests substantial funds in spread-sensitive fixed income
assets.
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. 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. 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
7
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 could negatively affect the
demand for the types of life insurance used in estate planning.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed income securities include bonds, asset-backed securities ("ABS"),
residential mortgage-backed securities ("RMBS") and commercial mortgage-backed
securities ("CMBS"). Fixed income securities, which may be sold prior to their
contractual maturity, are designated as available for sale and are carried at
fair value. The difference between amortized cost and fair value, net of
deferred income taxes, is reflected as a component of accumulated other
comprehensive income. Cash received from calls, principal payments and
make-whole payments is reflected as a component of proceeds from sales and cash
received from maturities and pay-downs is reflected as a component of
investment collections within the Statements of Cash Flows.
Short-term investments, including money market funds and other short-term
investments, are carried at fair value.
Investment income consists primarily of interest and is recognized on an
accrual basis using the effective yield method. Interest income for certain
asset-backed securities, residential mortgage-backed securities and commercial
mortgage-backed securities is determined considering estimated principal
repayments obtained from third party data sources and internal estimates.
Actual prepayment experience is periodically reviewed and effective yields are
recalculated on a retrospective basis when differences arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. For other-than-temporarily impaired fixed income
securities, the effective yield method utilizes the difference between the
amortized cost basis at impairment and the cash flows expected to be collected.
Accrual of income is suspended for other-than-temporarily impaired fixed income
securities when the timing and amount of cash flows expected to be received is
not reasonably estimable.
Realized capital gains and losses include gains and losses on investment
sales and write-downs in value due to other-than-temporary declines in fair
value. Realized capital gains and losses on investment sales include calls and
prepayments and 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
including when the Company has made the decision to sell or it is more likely
than not the Company will be required to sell the fixed income security before
recovery of its amortized cost basis. Additionally, if the Company does not
expect to receive cash flows sufficient to recover the entire amortized cost
basis of the fixed income security, the credit loss component of the impairment
is recorded in earnings, with the remaining amount of the unrealized loss
deemed to be related to other factors and recognized in other comprehensive
income ("OCI"). Fixed income securities subject to other-than-temporary
impairment write-downs continue to earn investment income when future expected
payments are reasonably estimable, and any discount or premium is recognized
using the effective yield method over the expected life of the security;
otherwise income recognition is discontinued.
8
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES, AND RELATED BENEFITS
AND INTEREST CREDITED
The Company has reinsurance agreements whereby all premiums, contract
charges, interest credited to contractholder funds, contract benefits and
substantially all expenses are ceded to ALIC and non-affiliated reinsurers (see
Notes 3 and 8). Amounts reflected in the Statements of Operations and
Comprehensive Income are presented net of reinsurance.
Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Premiums from these products are recognized as revenue when
due from policyholders. Benefits are reflected in contract benefits and
recognized in relation to premiums, so that profits are recognized over the
life of the policy.
Immediate annuities with life contingencies provide insurance protection
over a period that extends beyond the period during which premiums are
collected. Premiums from these products are recognized as revenue when received
at the inception of the contract. Benefits and expenses are recognized in
relation to premiums. Profits from these policies come from investment income,
which is recognized over the life of the contract.
Interest-sensitive life contracts, such as universal life and single premium
life, are insurance contracts whose terms are not fixed and guaranteed. The
terms that may be changed include premiums paid by the contractholder, interest
credited to the contractholder account balance and contract charges assessed
against the contractholder account balance. Premiums from these contracts are
reported as contractholder fund deposits. Contract charges consist of fees
assessed against the contractholder account balance for the cost of insurance
(mortality risk), contract administration and early surrender. These contract
charges are recognized as revenue when assessed against the contractholder
account balance. Contract benefits include life-contingent benefit payments in
excess of the contractholder account balance.
Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed
annuities, including market value adjusted annuities, equity-indexed annuities
and immediate annuities without life contingencies, are considered investment
contracts. Consideration received for such contracts is reported as
contractholder fund deposits. Contract charges for investment contracts consist
of fees assessed against the contractholder account balance for maintenance,
administration and surrender of the contract prior to contractually specified
dates, and are recognized when assessed against the contractholder account
balance.
Interest credited to contractholder funds represents interest accrued or
paid on interest-sensitive life contracts and investment contracts. Crediting
rates for certain fixed annuities and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions
subject to contractually guaranteed minimum rates. Crediting rates for indexed
annuities are generally based on an equity index, such as the Standard & Poor's
("S&P") 500 Index.
Contract charges for variable life and variable annuity products consist of
fees assessed against the contractholder account values for contract
maintenance, administration, mortality, expense and early surrender. Contract
benefits incurred for variable annuity products include guaranteed minimum
death, income, withdrawal and accumulation benefits.
REINSURANCE
The Company has reinsurance agreements whereby all premiums, contract
charges, interest credited to contractholder funds, contract benefits and
substantially all expenses are ceded to ALIC and non-affiliated reinsurers (see
Notes 3 and 8). Reinsurance recoverables and the related reserve for
life-contingent contract
9
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
benefits and contractholder funds are reported separately in the Statements of
Financial Position. The Company regularly evaluates the financial condition of
its reinsurers including their activities with respect to claim settlement
practices and establishes allowances for uncollectible reinsurance as
appropriate. No amounts have been deemed unrecoverable in the three years ended
December 31, 2009. 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 the terms of the reinsurance agreements.
INCOME TAXES
The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
unrealized capital gains and losses on investments and differences in tax bases
of invested assets. A deferred tax asset valuation allowance is established
when there is uncertainty that such assets will be realized (see Note 10).
RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS
The reserve for life-contingent contract benefits payable under insurance
policies, including traditional life insurance and life-contingent immediate
annuities, is computed on the basis of long-term actuarial assumptions of
future investment yields, mortality, morbidity, policy terminations and
expenses (see Note 7). These assumptions, which for traditional life insurance
are applied using the net level premium method, include provisions for adverse
deviation and generally vary by characteristics such as type of coverage, year
of issue and policy duration.
CONTRACTHOLDER FUNDS
Contractholder funds represent interest-bearing liabilities arising from the
sale of products, such as interest-sensitive life and fixed annuities.
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 7). Contractholder
funds also include reserves for secondary guarantees on interest-sensitive life
insurance and certain fixed annuity contracts and reserves for certain
guarantees on variable annuity contracts.
SEPARATE ACCOUNTS
Separate accounts assets are carried at fair value. The assets of the
separate accounts are legally segregated and available only to settle separate
account contract obligations. Separate accounts liabilities represent the
contractholders' claims to the related assets and are carried at an amount
equal to the separate accounts assets. Investment income and realized capital
gains and losses of the separate accounts accrue directly to the
contractholders and therefore, are not included in the Company's Statements of
Operations and Comprehensive Income. Deposits to and surrenders and withdrawals
from the separate accounts are reflected in separate accounts liabilities and
are not included in cash flows.
Absent any contract provision wherein the Company provides a guarantee,
variable annuity and variable life insurance contractholders bear the
investment risk that the separate accounts' funds may not meet their stated
investment objectives. The risk and associated cost of these contract
guarantees are ceded to ALIC in accordance with the reinsurance agreements.
10
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ADOPTED ACCOUNTING STANDARDS
RECOGNITION AND PRESENTATION OF OTHER-THAN-TEMPORARY IMPAIRMENTS
In April 2009, the FASB issued new accounting guidance for the recognition
of other-than-temporary impairments ("OTTI") of debt securities. If the fair
value of a debt security is less than its amortized cost basis at the reporting
date, an entity shall assess whether the impairment is an OTTI. When an entity
intends to sell an impaired security or more likely than not will be required
to sell an impaired security before recovery of its amortized cost basis, an
OTTI is recognized in earnings. If the entity does not expect to recover the
entire amortized cost basis of an impaired debt security, even if it does not
intend to sell the security and it is not more likely than not that it would be
required to sell the security before recovery of its amortized cost basis, the
entity must consider, based upon an estimate of the present value of cash flows
expected to be collected on the debt security as compared to its amortized cost
basis, whether a credit loss exists. The portion of the total OTTI related to a
credit loss shall be recognized in earnings while the portion of the total OTTI
related to factors other than credit shall be recognized in OCI. The statement
of operations is required to present the total OTTI with an offset for the
amount of the total OTTI that is recognized in OCI, if any. The statement
disclosing accumulated other comprehensive income ("AOCI") is required to
separately present amounts recognized for debt securities for which a portion
of an OTTI has been recognized in earnings, if any.
The new guidance expands disclosure requirements for both debt and equity
securities and requires a more detailed, risk-oriented breakdown of security
types and related information. In addition, new disclosures are required about
significant inputs used in determining credit losses as well as a rollforward
of credit losses, if any. The disclosures are not required for earlier periods
presented for comparative purposes. The new guidance applies to existing and
new investments held as of the beginning of the period of adoption.
The Company adopted the provisions of the new guidance as of April 1, 2009.
The adoption had no effect on the Company's results of operations or financial
position.
DETERMINING FAIR VALUE WHEN THE VOLUME AND LEVEL OF ACTIVITY FOR THE ASSET OR
LIABILITY HAVE SIGNIFICANTLY DECREASED AND IDENTIFYING TRANSACTIONS THAT ARE
NOT ORDERLY
In April 2009, the FASB issued new accounting guidance relating to fair
value measurements to provide additional guidance for estimating fair value
when the volume and level of activity for an asset or liability have
significantly decreased. Guidance on identifying circumstances that indicate a
transaction is not orderly is also provided. If it is concluded that there has
been a significant decrease in the volume and level of market activity for an
asset or liability in relation to normal market activity, transaction or quoted
prices may not be determinative of fair value and further analysis of
transaction or quoted prices may be necessary. Determination of whether a
transaction is orderly is based on the weight of relevant evidence.
The disclosure requirements are expanded to include the inputs and valuation
techniques used to measure fair value and a discussion of changes in valuation
techniques and related inputs during the reporting period. Disclosures of
assets and liabilities measured at fair value are to be presented by major
security type. Disclosures are not required for earlier periods presented for
comparative purposes. Revisions resulting from a change in valuation technique
or its application shall be accounted for as a change in accounting estimate
and disclosed, along with the total effect of the change in valuation technique
and related inputs, if practicable, by major category. The Company adopted the
provisions of the new guidance as of April 1, 2009. The adoption had no effect
on the Company's results of operations or financial position.
DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In March 2008, the FASB issued new accounting guidance, which amends and
expands the disclosure requirements for derivatives. The new disclosures are
designed to enhance the understanding of how and why an
11
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
entity uses derivative instruments and how derivative instruments affect an
entity's financial position, results of operations, and cash flows. The
standard requires quantitative disclosures about the potential cash outflows
associated with the triggering of credit-risk-contingent features, if any;
tabular disclosures about the classification and fair value amounts of
derivative instruments reported in the statement of financial position;
disclosure of the location and amount of gains and losses on derivative
instruments reported in the statement of operations; and qualitative
information about how and why an entity uses derivative instruments and how
derivative instruments and related hedged items affect the entity's financial
statements. Disclosures are not required for earlier periods presented for
comparative purposes. The new guidance affects disclosures only and therefore
the adoption as of March 31, 2009 had no impact on the Company's results of
operations or financial position.
PENDING ACCOUNTING STANDARD
DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS
In January 2010, the FASB issued new accounting guidance which expands
disclosure requirements relating to fair value measurements. The guidance adds
requirements for disclosing amounts of and reasons for significant transfers
into and out of Levels 1 and 2 and requires gross rather than net disclosures
about purchases, sales, issuances and settlements relating to Level 3
measurements. The guidance also provides clarification that fair value
measurement disclosures are required for each class of assets and liabilities.
Disclosures about the valuation techniques and inputs used to measure fair
value for measurements that fall in either Level 2 or Level 3 are also
required. The new disclosures and clarifications of existing disclosures are
effective for periods beginning after December 15, 2009, except for disclosures
about purchases, sales, issuances and settlements in the roll forward of
activity in Level 3 fair value measurements, which are required for fiscal
years beginning after December 15, 2010. Disclosures are not required for
earlier periods presented for comparative purposes. The new guidance affects
disclosures only and therefore its adoption will have no impact on the
Company's results of operations or financial position.
3. RELATED PARTY TRANSACTIONS
BUSINESS OPERATIONS
The Company uses services performed by its affiliates, AIC, ALIC and
Allstate Investments LLC, and business facilities owned or leased and operated
by AIC in conducting its business activities. In addition, the Company shares
the services of employees with AIC. The Company reimburses its affiliates for
the operating expenses incurred on behalf of the Company. The Company is
charged for the cost of these operating expenses based on the level of services
provided. Operating expenses, including compensation, retirement and other
benefit programs, allocated to the Company were $202.9 million, $227.0 million
and $202.2 million in 2009, 2008 and 2007, 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 AGREEMENTS
The Company has a service agreement with Allstate Distributors, LLC
("ADLLC"), a broker-dealer company owned by ALIC, whereby ADLLC promotes and
markets the fixed annuities sold by the Company to unaffiliated financial
services firms. In return for these services, the Company recorded commission
expense of $4.6 million, $5.1 million and $3.4 million for the years ended
December 31, 2009, 2008 and 2007, respectively, that was ceded to ALIC under
the terms of the reinsurance agreements.
The Company receives distribution services from Allstate Financial Services,
LLC ("AFS"), an affiliated broker-dealer company, for certain variable life
insurance contracts sold by Allstate exclusive agencies. For these services,
the Company incurred $9.1 million, $18.4 million and $25.5 million of
commission and other distribution expenses for the years ending December 31,
2009, 2008 and 2007, respectively, that were ceded to ALIC.
12
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REINSURANCE
The following table summarizes amounts that were ceded to ALIC and reported
net in the Statements of Operations and Comprehensive Income under the
reinsurance agreements:
2009 2008 2007
($ IN THOUSANDS) ---------- ---------- ----------
Premiums and contract charges.............. $ 734,369 $ 691,267 $ 623,102
Interest credited to contractholder funds,
contract benefits and expenses........... 1,621,011 1,468,505 1,421,831
Reinsurance recoverables due from ALIC totaled $18.69 billion and $18.79
billion as of December 31, 2009 and 2008, respectively.
INCOME TAXES
The Company is a party to a federal income tax allocation agreement with the
Corporation (see Note 10).
INTERCOMPANY LOAN AGREEMENT
The Company has an intercompany loan agreement with the Corporation. The
amount of intercompany loans available to the Company is at the discretion of
the Corporation. The maximum amount of loans the Corporation will have
outstanding to all its eligible subsidiaries at any given point in time is
limited to $1.00 billion. The Corporation may use commercial paper borrowings,
bank lines of credit and repurchase agreements to fund intercompany borrowings.
The Company had no amounts outstanding under the intercompany loan agreement at
December 31, 2009 and 2008.
4. INVESTMENTS
FAIR VALUES
The amortized cost, gross unrealized gains and losses and fair value for
fixed income securities are as follows:
GROSS UNREALIZED
AMORTIZED -------------- FAIR
COST GAINS LOSSES VALUE
($ IN THOUSANDS) --------- ------ ------- --------
AT DECEMBER 31, 2009
U.S. government and agencies.......... $ 79,982 $1,852 $ (283) $ 81,551
Municipal............................. 2,999 96 -- 3,095
Corporate............................. 131,466 6,192 (85) 137,573
RMBS.................................. 66,326 1,733 (84) 67,975
CMBS.................................. 10,520 57 (873) 9,704
ABS................................... 8,494 -- (49) 8,445
-------- ------ ------- --------
Total fixed income securities...... $299,787 $9,930 $(1,374) $308,343
======== ====== ======= ========
AT DECEMBER 31, 2008
U.S. government and agencies.......... $ 75,374 $3,700 $ (258) $ 78,816
Municipal............................. 502 -- (3) 499
Corporate............................. 77,192 603 (2,092) 75,703
RMBS.................................. 46,720 1,680 (49) 48,351
CMBS.................................. 22,896 -- (3,936) 18,960
ABS................................... 6,983 20 (4) 6,999
-------- ------ ------- --------
Total fixed income securities...... $229,667 $6,003 $(6,342) $229,328
======== ====== ======= ========
13
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SCHEDULED MATURITIES
The scheduled maturities for fixed income securities are as follows at
December 31, 2009:
AMORTIZED FAIR
COST VALUE
($ IN THOUSANDS) --------- --------
Due in one year or less...................... $ 16,527 $ 16,729
Due after one year through five years........ 133,714 138,059
Due after five years through ten years....... 63,046 65,915
Due after ten years.......................... 11,680 11,220
-------- --------
224,967 231,923
RMBS and ABS................................. 74,820 76,420
-------- --------
Total..................................... $299,787 $308,343
======== ========
Actual maturities may differ from those scheduled as a result of prepayments
by the issuers. Because of the potential for prepayment on RMBS and ABS, they
are not categorized by contractual maturity. The CMBS are categorized by
contractual maturity because they generally are not subject to prepayment risk.
NET INVESTMENT INCOME
Net investment income for the years ended December 31 is as follows:
2009 2008 2007
($ IN THOUSANDS) ------- ------- -------
Fixed income securities............ $12,098 $13,302 $13,533
Short-term and other investments... 107 992 1,117
------- ------- -------
Investment income, before
expense....................... 12,205 14,294 14,650
Investment expense.............. (422) (354) (393)
------- ------- -------
Net investment income....... $11,783 $13,940 $14,257
======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES
The Company recognized net realized capital gains of $1.5 million and $6.0
million in 2009 and 2008, respectively, and net realized capital losses of $417
thousand in 2007. Realized capital gains and losses in 2009 did not include any
other-than-temporary impairment losses and therefore, none were included in
other comprehensive income. No other-than-temporary impairment losses are
included in accumulated other comprehensive income as of December 31, 2009.
Gross gains of $1.5 million and $8.2 million were realized on sales of fixed
income securities during 2009 and 2008, respectively. There were no gross gains
realized on sales of fixed income securities in 2007. Gross losses of $3
thousand and $32 thousand were realized on sales of fixed income securities
during 2009 and 2007, respectively. There were no gross losses realized on
sales of fixed income securities in 2008.
14
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
UNREALIZED NET CAPITAL GAINS AND LOSSES
Unrealized net capital gains and losses included in accumulated other
comprehensive income are as follows:
GROSS UNREALIZED
FAIR -------------- UNREALIZED NET
VALUE GAINS LOSSES GAINS (LOSSES)
($ IN THOUSANDS) -------- ------ ------- --------------
AT DECEMBER 31, 2009
Fixed income securities................................. $308,343 $9,930 $(1,374) $ 8,556
Short-term investments.................................. 8,557 -- -- --
-------
Unrealized net capital gains and losses, pre-tax..... 8,556
Deferred income taxes................................ (2,995)
-------
Unrealized net capital gains and losses, after-tax... $ 5,561
=======
GROSS UNREALIZED
FAIR -------------- UNREALIZED NET
VALUE GAINS LOSSES GAINS (LOSSES)
-------- ------ ------- --------------
AT DECEMBER 31, 2008
Fixed income securities................................. $229,328 $6,003 $(6,342) $ (339)
Short-term investments.................................. 80,703 -- (2) (2)
-------
Unrealized net capital gains and losses, pre-tax..... (341)
Deferred income taxes................................ 119
-------
Unrealized net capital gains and losses, after-tax... $ (222)
=======
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:
2009 2008 2007
($ IN THOUSANDS) ------- ------- -------
Fixed income securities................................. $ 8,895 $(6,691) $ 6,625
Short-term investments.................................. 2 (2) --
------- ------- -------
Total................................................ 8,897 (6,693) 6,625
Deferred income taxes................................... (3,114) 2,342 (2,318)
------- ------- -------
Increase (decrease) in unrealized net capital gains and
losses................................................ $ 5,783 $(4,351) $ 4,307
======= ======= =======
PORTFOLIO MONITORING
The Company has a comprehensive portfolio monitoring process to identify and
evaluate each fixed income security whose carrying value may be
other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, the Company
assesses whether management with the appropriate authority has made a decision
to sell or whether it is more likely than not the Company will be required to
sell the security before recovery of the amortized cost basis for reasons such
as liquidity, contractual or regulatory purposes. If a security meets either of
these criteria, the security's decline in fair value is deemed other than
temporary and is recorded in earnings.
If the Company has not made the decision to sell the fixed income security
and it is not more likely than not the Company will be required to sell the
fixed income security before recovery of its amortized cost basis, the
15
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company evaluates if it expects to receive cash flows sufficient to recover the
entire amortized cost basis of the security by comparing the estimated recovery
value calculated by discounting the best estimate of future cash flows at the
security's original or current effective rate, as appropriate, with the
amortized cost of the security. If the Company does not expect to receive cash
flows sufficient to recover the entire amortized cost basis of the fixed income
security, the credit loss component of the impairment is recorded in earnings,
with the remaining amount of the unrealized loss deemed to be related to other
factors and recognized in OCI.
The Company's portfolio monitoring process includes a quarterly review of
all securities through a screening process which identifies instances where the
fair value compared to amortized cost is below established thresholds, and also
includes the monitoring of other criteria such as ratings, ratings downgrades
or payment defaults. The securities identified, in addition to other securities
for which the Company may have a concern, are evaluated for potential
other-than-temporary impairment using all reasonably available information
relevant to the collectability or recovery of the security. Inherent in the
Company's evaluation of other-than-temporary impairment for these fixed income
securities are assumptions and estimates about the financial condition of the
issue or 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 length of time and extent to which the fair value has
been less than amortized cost; 2) the financial condition, near-term and
long-term prospects of the issue or issuer, including relevant industry
specific market conditions and trends, geographic location and implications of
rating agency actions and offering prices; and 3) the specific reasons that a
security is in a significant unrealized loss position, including overall market
conditions which could affect liquidity.
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.
LESS THAN 12 MONTHS 12 MONTHS OR MORE
--------------------------- -------------------------- TOTAL
NUMBER FAIR UNREALIZED NUMBER FAIR UNREALIZED UNREALIZED
OF ISSUES VALUE LOSSES OF ISSUES VALUE LOSSES LOSSES
($ IN THOUSANDS) --------- ------- ---------- --------- ------ ---------- ----------
AT DECEMBER 31, 2009
U.S. government and agencies.... 2 $41,469 $ (283) -- $ -- $ -- $ (283)
Corporate....................... 5 11,269 (71) 1 3,485 (14) (85)
RMBS............................ 1 4,543 (84) -- -- -- (84)
CMBS............................ 2 3,475 (27) 1 1,158 (846) (873)
ABS............................. 1 8,445 (49) -- -- -- (49)
-- ------- ------- -- ------ ------- -------
Total........................ 11 $69,201 $ (514) 2 $4,643 $ (860) $(1,374)
== ======= ======= == ====== ======= =======
AT DECEMBER 31, 2008
U.S. government and agencies.... 1 $30,731 $ (258) -- $ -- $ -- $ (258)
Municipal....................... 1 499 (3) -- -- -- (3)
Corporate....................... 24 47,272 (1,691) 4 4,982 (401) (2,092)
RMBS............................ 1 1,119 (49) -- -- -- (49)
CMBS............................ 9 18,337 (2,555) 1 623 (1,381) (3,936)
ABS............................. 1 997 (4) -- -- -- (4)
-- ------- ------- -- ------ ------- -------
Total........................ 37 $98,955 $(4,560) 5 $5,605 $(1,782) $(6,342)
== ======= ======= == ====== ======= =======
At December 31, 2009, $529 thousand of unrealized losses are related to
fixed income securities with an unrealized loss position less than 20% of
amortized cost, the degree of which suggests that these securities do not pose
a high risk of being other-than-temporarily impaired. All of the unrealized
losses are related to investment grade fixed income securities. Investment
grade is defined as a security having a rating of Aaa, Aa, A or Baa from
Moody's, a rating of AAA, AA, A or BBB from Standard & Poors, Fitch, Dominion
or Realpoint, a rating of aaa, aa, a or bbb from A.M. Best, or a comparable
internal rating if an externally provided rating is not
16
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
available, which is consistent with the National Association of Insurance
Commissioners ("NAIC") rating. Unrealized losses on investment grade securities
are principally related to rising interest rates or changes in credit spreads
since the securities were acquired.
As of December 31, 2009, the remaining $845 thousand of unrealized losses
are related to securities in unrealized loss positions greater than or equal to
20% of amortized cost. These unrealized losses were evaluated based on factors
such as discounted cash flows, the financial condition and near-term and
long-term prospects of the issue or issuer and were determined to have adequate
resources to fulfill contractual obligations, such as recent financings or bank
loans, cash flows from operations or collateral.
As of December 31, 2009, the Company has not made a decision to sell and it
is not more likely than not the Company will be required to sell fixed income
securities with unrealized losses before recovery of the amortized cost basis.
OTHER INVESTMENT INFORMATION
At December 31, 2009, 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. FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In determining fair value, the Company
principally uses the market approach which generally utilizes market
transaction data for the same or similar instruments. To a lesser extent, the
Company uses the income approach which involves determining fair values from
discounted cash flow methodologies.
The hierarchy for inputs used in determining fair value maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring
that observable inputs be used when available. Assets and liabilities recorded
on the Statements of Financial Position at fair value are categorized in the
fair value hierarchy based on the observability of inputs to the valuation
techniques as follows:
LEVEL 1:Assets and liabilities whose values are based on unadjusted quoted
prices for identical assets or liabilities in an active market that the
Company can access.
LEVEL 2:Assets and liabilities whose values are based on the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in
markets that are not active; or
c) Valuation models whose inputs are observable, directly or indirectly,
for substantially the full term of the asset or liability.
LEVEL 3:Assets and liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. Unobservable inputs
reflect the Company's estimates of the assumptions that market
participants would use in valuing the assets and liabilities.
The availability of observable inputs varies by instrument. In situations
where fair value is based on internally developed pricing models or inputs that
are unobservable in the market, the determination of fair value requires more
judgment. The degree of judgment exercised by the Company in determining fair
value is typically
17
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
greatest for instruments categorized in Level 3. In many instances, valuation
inputs used to measure fair value fall into different levels of the fair value
hierarchy. The category level in the fair value hierarchy is determined based
on the lowest level input that is significant to the fair value measurement in
its entirety. The Company uses prices and inputs that are current as of the
measurement date, including during periods of market disruption. In periods of
market disruption, the ability to observe prices and inputs may be reduced for
many instruments. This condition could cause an instrument to be reclassified
from Level 1 to Level 2, or from Level 2 to Level 3. As of December 31, 2009,
10.3% of total assets are measured at fair value and 1.0% of total liabilities
are measured at fair value.
SUMMARY OF SIGNIFICANT VALUATION TECHNIQUES FOR ASSETS AND LIABILITIES
MEASURED AT FAIR VALUE ON A RECURRING BASIS
Level 1 measurements
. Fixed income securities: Comprise U.S. Treasuries. Valuation is based on
unadjusted quoted prices for identical assets in active markets that the
Company can access.
. Short-term: Comprise actively traded money market funds that have daily
quoted net asset values for identical assets that the Company can access.
. Separate account assets: Comprise actively traded mutual funds that have
daily quoted net asset values for identical assets that the Company can
access. Net asset values for the actively traded mutual funds in which
the separate account assets are invested are obtained daily from the
fund managers.
Level 2 measurements
. Fixed income securities:
U.S. GOVERNMENT AND AGENCIES: Valued based on inputs including quoted
prices for identical or similar assets in markets that are not active.
MUNICIPAL: Externally rated municipals are valued based on inputs
including quoted prices for identical or similar assets in markets that
are not active.
CORPORATE, INCLUDING PRIVATELY PLACED: Valued based on inputs including
quoted prices for identical or similar assets in markets that are not
active. Also includes privately placed securities valued using a
discounted cash flow model that is widely accepted in the financial
services industry and uses market observable inputs and inputs derived
principally from, or corroborated by, observable market data. The
primary inputs to the discounted cash flow model include an interest
rate curve, as well as published credit spreads for similar assets in
markets that are not active that incorporate the credit quality and
industry sector of the issuer.
RMBS; ABS: Valued based on inputs including quoted prices for identical
or similar assets in markets that are not active.
CMBS: Valuation is principally based on inputs including quoted prices
for identical or similar assets in markets that are not active.
. Short-term: Valued based on quoted prices for identical or similar
assets in markets that are not active or amortized cost.
. Contractholder funds: Derivatives embedded in certain annuity contracts
are valued based on internal models that rely on inputs such as interest
rate yield curves and equity index volatility assumptions that are
market observable for substantially the full term of the contract. The
valuation techniques are widely accepted in the financial services
industry and do not include significant judgment.
18
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Level 3 measurements
. Fixed income securities:
CORPORATE: Valued based on models that are widely accepted in the
financial services industry with certain inputs to the valuation model
that are significant to the valuation, but are not market observable.
CMBS: Valued based on inputs including quoted prices for identical or
similar assets in markets that exhibit less liquidity relative to those
markets supporting Level 2 fair value measurements. Due to the reduced
availability of actual market prices or relevant observable inputs as a
result of the decrease in liquidity that has been experienced in the
market for these securities, certain CMBS are categorized as Level 3.
Contractholder funds: Derivatives embedded in certain annuity contracts
are valued internally using models widely accepted in the financial
services industry that determine a single best estimate of fair value
for the embedded derivatives within a block of contractholder
liabilities. The models use stochastically determined cash flows based
on the contractual elements of embedded derivatives and other applicable
market data. These are categorized as Level 3 as a result of the
significance of non-market observable inputs.
The following table summarizes the Company's assets and liabilities measured
at fair value on a recurring and non-recurring basis as of December 31, 2009:
QUOTED PRICES SIGNIFICANT
IN ACTIVE OTHER SIGNIFICANT
MARKETS FOR OBSERVABLE UNOBSERVABLE BALANCE AS OF
IDENTICAL ASSETS INPUTS INPUTS DECEMBER 31,
(LEVEL 1) (LEVEL 2) (LEVEL 3) 2009
($ IN THOUSANDS) ---------------- ----------- ------------ -------------
ASSETS:
Fixed income securities:
U.S. government and agencies.................. $ 29,273 $ 52,278 $ -- $ 81,551
Municipal..................................... -- 3,095 -- 3,095
Corporate..................................... -- 136,484 1,089 137,573
RMBS.......................................... -- 67,975 -- 67,975
CMBS.......................................... -- 8,546 1,158 9,704
ABS........................................... -- 8,445 -- 8,445
---------- --------- -------- ----------
Total fixed income securities.............. 29,273 276,823 2,247 308,343
Short-term investments............................ 8,507 50 -- 8,557
Separate account assets........................... 2,039,647 -- -- 2,039,647
---------- --------- -------- ----------
TOTAL RECURRING BASIS ASSETS.................. 2,077,427 276,873 2,247 2,356,547
---------- --------- -------- ----------
TOTAL ASSETS AT FAIR VALUE........................... $2,077,427 $ 276,873 $ 2,247 $2,356,547
========== ========= ======== ==========
% of total assets at fair value...................... 88.2% 11.7% 0.1% 100.0%
LIABILITIES:
Contractholder funds:
Derivatives embedded in annuity contracts..... $ -- $(199,765) $(15,526) $ (215,291)
---------- --------- -------- ----------
TOTAL LIABILITIES AT FAIR VALUE...................... $ -- $(199,765) $(15,526) $ (215,291)
========== ========= ======== ==========
% of total liabilities at fair value................. -- % 92.8% 7.2% 100.0%
19
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the Company's assets and liabilities measured
at fair value on a recurring and non-recurring basis as of December 31, 2008:
QUOTED PRICES SIGNIFICANT
IN ACTIVE OTHER SIGNIFICANT
MARKETS FOR OBSERVABLE UNOBSERVABLE BALANCE AS OF
IDENTICAL ASSETS INPUTS INPUTS DECEMBER 31,
(LEVEL 1) (LEVEL 2) (LEVEL 3) 2008
($ IN THOUSANDS) ---------------- ----------- ------------ -------------
ASSETS:
Fixed income securities:
U.S. government and agencies.................. $ 48,085 $ 30,731 $ -- $ 78,816
Municipal..................................... -- 499 -- 499
Corporate..................................... -- 74,396 1,307 75,703
RMBS.......................................... -- 48,351 -- 48,351
CMBS.......................................... -- 18,960 -- 18,960
ABS........................................... -- 997 6,002 6,999
---------- -------- -------- ----------
Total fixed income securities.............. 48,085 173,934 7,309 229,328
Short-term investments............................ 30,657 50,046 -- 80,703
Separate account assets........................... 1,823,163 -- -- 1,823,163
---------- -------- -------- ----------
TOTAL RECURRING BASIS ASSETS.................. 1,901,905 223,980 7,309 2,133,194
---------- -------- -------- ----------
TOTAL ASSETS AT FAIR VALUE........................... $1,901,905 $223,980 $ 7,309 $2,133,194
========== ======== ======== ==========
% of total assets at fair value...................... 89.2% 10.5% 0.3% 100.0%
LIABILITIES:
Contractholder funds:
Derivatives embedded in annuity contracts..... $ -- $(33,466) $(36,544) $ (70,010)
---------- -------- -------- ----------
TOTAL LIABILITIES AT FAIR VALUE...................... $ -- $(33,466) $(36,544) $ (70,010)
========== ======== ======== ==========
% of total liabilities at fair value................. -- % 47.8% 52.2% 100.0%
When the inputs used to measure fair value fall into different levels of the
fair value hierarchy, the categorization is based on the lowest level input
that is significant to the fair value measurement in its entirety. Thus, a
Level 3 fair value measurement may include inputs that are observable (Level 1
or Level 2) and unobservable (Level 3).
20
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table provides a summary of changes in fair value during the
year ended December 31, 2009 of Level 3 assets and liabilities held at fair
value on a recurring basis. Net transfers in and/or out of Level 3 are reported
as having occurred at the beginning of the quarter the transfer occurred;
therefore, for all transfers into Level 3, all realized and changes in
unrealized gains and losses in the quarter of transfer are reflected in the
table below.
TOTAL
GAINS (LOSSES)
TOTAL REALIZED AND UNREALIZED INCLUDED IN
GAINS (LOSSES) INCLUDED IN: PURCHASES, NET INCOME
---------------------------- SALES, FOR ASSETS AND
BALANCE OCI ON ISSUANCES NET BALANCE LIABILITIES
AS OF STATEMENT OF AND TRANSFERS IN AS OF STILL HELD AT
DECEMBER 31, NET FINANCIAL SETTLEMENTS, AND/OR (OUT) DECEMBER 31, DECEMBER 31,
2008 INCOME/(1)/ POSITION NET OF LEVEL 3 2009 2009/(2)/
($ IN THOUSANDS) ------------ ---------- ------------ ------------ ------------ ------------ --------------
ASSETS
Fixed income securities:
Corporate................. $ 1,307 $ (2) $ 96 $ (216) $(96) $ 1,089 $ (2)
CMBS...................... -- -- 535 -- 623 1,158 --
ABS....................... 6,002 288 (19) (6,271) -- -- --
-------- ------- ---- ------- ---- -------- -------
TOTAL RECURRING LEVEL 3
ASSETS................... $ 7,309 $ 286 $612 $(6,487) $527 $ 2,247 $ (2)
======== ======= ==== ======= ==== ======== =======
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts........ $(36,544) $19,984 $ -- $ 1,034 $ -- $(15,526) $19,984
-------- ------- ---- ------- ---- -------- -------
TOTAL RECURRING LEVEL 3
LIABILITIES.............. $(36,544) $19,984 $ -- $ 1,034 $ -- $(15,526) $19,984
======== ======= ==== ======= ==== ======== =======
- --------
(1)The amount above attributable to fixed income securities is reported in the
Statements of Operations and Comprehensive Income as follows: $288 thousand
in realized capital gains and losses, and $(2) thousand in net investment
income. The amount above attributable to derivatives embedded in annuity
contracts is reported as a component of contract benefits and is ceded in
accordance with the Company's reinsurance agreements.
(2)The amount above attributable to fixed income securities is reported as a
component of net investment income in the Statements of Operations and
Comprehensive Income. The amount above attributable to derivatives embedded
in annuity contracts is reported as a component of contract benefits and is
ceded in accordance with the Company's reinsurance agreements.
21
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table provides a summary of changes in fair value during the
year ended December 31, 2008 of Level 3 assets and liabilities held at fair
value on a recurring basis.
TOTAL
GAINS (LOSSES)
INCLUDED IN
TOTAL REALIZED AND UNREALIZED NET INCOME
GAINS (LOSSES) INCLUDED IN: PURCHASES, FOR ASSETS
---------------------------- SALES, AND
BALANCE OCI ON ISSUANCES BALANCE LIABILITIES
AS OF STATEMENT OF AND AS OF STILL HELD AT
JANUARY 1, NET FINANCIAL SETTLEMENTS, DECEMBER 31, DECEMBER 31,
2008 INCOME/(1)/ POSITION NET 2008 2008/(2)/
($ IN THOUSANDS) ---------- ----------- ------------ ------------ ------------ --------------
ASSETS
Fixed income securities:
Corporate................ $ 1,500 $ (1) $ -- $ (192) $ 1,307 $ (2)
ABS...................... 10,484 181 (434) (4,229) 6,002 (1)
------- -------- ----- ------- -------- --------
TOTAL RECURRING LEVEL 3
ASSETS................. $11,984 $ 180 $(434) $(4,421) $ 7,309 $ (3)
======= ======== ===== ======= ======== ========
LIABILITIES
Contractholder funds:
Derivatives embedded in
annuity contracts...... $ (256) $(36,498) $ -- $ 210 $(36,544) $(36,498)
------- -------- ----- ------- -------- --------
TOTAL RECURRING LEVEL 3
LIABILITIES............ $ (256) $(36,498) $ -- $ 210 $(36,544) $(36,498)
======= ======== ===== ======= ======== ========
- --------
(1)The amount above attributable to fixed income securities is reported in the
Statements of Operations and Comprehensive Income as follows: $185 thousand
in realized capital gains and losses, and $(5) thousand in net investment
income. The amount above attributable to derivatives embedded in annuity
contracts is reported as a component of contract benefits and is ceded in
accordance with the Company's reinsurance agreements.
(2)The amount above attributable to fixed income securities is reported as a
component of net investment income in the Statements of Operations and
Comprehensive Income. The amount above attributable to derivatives embedded
in annuity contracts is reported as a component of contract benefits and is
ceded in accordance with the Company's reinsurance agreements.
As of December 31, 2009 and 2008, financial instruments not carried at fair
value included contractholder funds on investment contracts. The carrying value
and fair value of contractholder funds on investment contracts were $13.64
billion and $12.64 billion, respectively, as of December 31, 2009 and were
$14.08 billion and $12.67 billion, respectively, as of December 31, 2008.
The fair value of contractholder funds on investment contracts is based on
the terms of the underlying contracts utilizing prevailing market rates for
similar contracts adjusted for credit risk. Deferred annuities included in
contractholder funds are valued using discounted cash flow models which
incorporate market value margins, which are based on the cost of holding
economic capital, and the Company's own credit risk. Immediate annuities
without life contingencies are valued at the present value of future benefits
using market implied interest rates which include the Company's own credit risk.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has derivatives embedded in non-derivative "host" contracts,
which are required to be separated from the host contracts and accounted for at
fair value as derivative instruments. The Company does
22
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
not use derivatives for trading purposes. The Company's embedded derivatives
are equity options in annuity product contracts, which provide equity returns
to contractholders; and guaranteed minimum accumulation and withdrawal benefits
related to the Company's variable annuity contracts.
The following table provides a summary of the volume and fair value
positions of derivative instruments as well as their reporting location in the
Statements of Financial Position at December 31, 2009.
VOLUME- FAIR
BALANCE SHEET NOTIONAL VALUE, GROSS GROSS
LOCATION AMOUNT NET ASSET LIABILITY
($ IN THOUSANDS) --------------------- ---------- --------- ----- ---------
DERIVATIVES NOT DESIGNATED AS ACCOUNTING
HEDGING INSTRUMENTS
EMBEDDED DERIVATIVE FINANCIAL
INSTRUMENTS
Equity index options in life and
annuity product contracts........... Contractholder funds $4,018,238 $(199,765) $-- $(199,765)
Guaranteed accumulation
benefits............................ Contractholder funds 237,005 (13,690) -- (13,690)
Guaranteed withdrawal benefits........ Contractholder funds 37,835 (1,836) -- (1,836)
---------- --------- --- ---------
TOTAL DERIVATIVES............................ $4,293,078 $(215,291) $-- $(215,291)
========== ========= === =========
The following table summarizes the notional amount, fair value and carrying
value of the Company's derivative financial instruments at December 31, 2008.
CARRYING VALUE
NOTIONAL FAIR -----------------
AMOUNT VALUE ASSETS (LIABILITIES)
($ IN THOUSANDS) ---------- -------- ------ -------------
EMBEDDED DERIVATIVE FINANCIAL INSTRUMENTS
Equity index options in life and annuity product
contracts....................................... $3,827,332 $(33,466) $-- $(33,466)
Guaranteed accumulation benefits.................. 218,234 (31,020) -- (31,020)
Guaranteed withdrawal benefits.................... 36,605 (5,524) -- (5,524)
---------- -------- --- --------
TOTAL DERIVATIVES.................................... $4,082,171 $(70,010) $-- $(70,010)/(1)/
========== ======== === ========
- --------
(1)Presented in the Statements of Financial Position as contractholder funds.
Losses from valuation on embedded derivative financial instruments recorded
in contract benefits for the year ended December 31, 2009 were $145.3 million,
which in turn were ceded to ALIC.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
There were no off-balance-sheet financial instruments at December 31, 2009
or 2008.
23
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS
At December 31, the reserve for life-contingent contract benefits consists
of the following:
2009 2008
($ IN THOUSANDS) ---------- ----------
Traditional life............................... $1,280,461 $1,169,049
Immediate fixed annuities...................... 686,057 700,935
Accident and health............................ 831,211 705,785
Other.......................................... 7,658 5,417
---------- ----------
Total reserve for life-contingent contract
benefits.................................. $2,805,387 $2,581,186
========== ==========
The following table highlights the key assumptions generally used in
calculating the reserve for life-contingent contract benefits:
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD
- ------- -------------------- ------------------- -------------------
Traditional life Actual company Interest rate Net level premium
insurance experience plus assumptions range reserve method
loading from 4.0% to 8.0% using the Company's
withdrawal
experience rates
Immediate fixed 1983 individual Interest rate Present value of
annuities annuity mortality assumptions range expected future
table with internal from 2.3% to 8.8% benefits based on
modifications; 1983 historical
individual annuity experience
mortality table;
Annuity 2000
mortality table
with internal
modifications
Accident and health Actual company Unearned premium;
experience plus additional contract
loading reserves for
mortality risk
Other:
Variable annuity Interest rate Projected benefit
guaranteed minimum 100% of Annuity assumptions range ratio applied to
death benefits 2000 mortality table from 4.5% to 5.5% cumulative
assessments
At December 31, contractholder funds consist of the following:
2009 2008
($ IN THOUSANDS) ----------- -----------
Interest-sensitive life insurance..... $ 3,844,319 $ 3,572,143
Investment contracts:
Fixed annuities.................... 13,675,700 14,103,390
Other investment contracts......... 113,008 111,843
----------- -----------
Total contractholder funds..... $17,633,027 $17,787,376
=========== ===========
24
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table highlights the key contract provisions relating to
contractholder funds:
WITHDRAWAL/SURRENDER
PRODUCT INTEREST RATE CHARGES
- ------- -------------------- --------------------
Interest-sensitive Interest rates Either a percentage
life insurance credited range from of account balance
3.0% to 6.0% or dollar amount
grading off
generally over 20
years
Fixed annuities Interest rates Either a declining
credited range from or a level
1.5% to 8.8% for percentage charge
immediate annuities generally over nine
and 0% to 16.0% for years or less.
other fixed Additionally,
annuities (which approximately 22.1%
include of fixed annuities
equity-indexed are subject to
annuities whose market value
returns are indexed adjustment for
to the S&P 500) discretionary
withdrawals.
Other investment
contracts:
Interest rates used Withdrawal and
Guaranteed in establishing surrender charges
minimum income, reserves range from are based on the
accumulation and 1.8% to 10.3% terms of the related
withdrawal interest-sensitive
benefits on life insurance or
variable fixed annuity
annuities and contract.
secondary
guarantees on
interest-sensitive
life insurance
and fixed
annuities
Contractholder funds activity for the years ended December 31 is as follows:
2009 2008
($ IN THOUSANDS) ----------- -----------
Balance, beginning of year.............. $17,787,376 $17,820,885
Deposits................................ 1,751,516 2,148,361
Interest credited....................... 821,046 528,493
Benefits................................ (523,905) (552,047)
Surrenders and partial withdrawals...... (1,826,122) (1,855,296)
Contract charges........................ (417,398) (367,880)
Net transfers from separate accounts.... 14,400 18,595
Other adjustments....................... 26,114 46,265
----------- -----------
Balance, end of year.................... $17,633,027 $17,787,376
=========== ===========
25
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The table below presents information regarding the Company's variable
annuity contracts with guarantees. The Company's variable annuity contracts may
offer more than one type of guarantee in each contract; therefore, the sum of
amounts listed exceeds the total account balances of variable annuity
contracts' separate accounts with guarantees.
DECEMBER 31,
-------------------
2009 2008
($ IN MILLIONS) --------- ---------
IN THE EVENT OF DEATH
Separate account value............................... $ 1,405.4 $ 1,327.3
Net amount at risk/(1)/.............................. $ 213.1 $ 455.0
Average attained age of contractholders.............. 57 years 56 years
AT ANNUITIZATION
Separate account value............................... $ 263.7 $ 233.4
Net amount at risk/(2)/.............................. $ 75.9 $ 139.8
Weighted average waiting period until annuitization
options available.................................. 3 years 4 years
FOR CUMULATIVE PERIODIC WITHDRAWALS
Separate account value............................... $ 37.8 $ 36.6
Net amount at risk/(3)/.............................. $ 0.6 $ 5.0
ACCUMULATION AT SPECIFIED DATES
Separate account value............................... $ 236.8 $ 218.0
Net amount at risk/(4)/.............................. $ 26.9 $ 52.9
Weighted average waiting period until guarantee
date............................................... 10 years 10 years
- --------
(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, 2009, liabilities for guarantees related to death,
income, accumulation and withdrawal benefits were $65.9 million, $38.6 million,
$13.7 million and $2.4 million, respectively. As of December 31, 2008,
liabilities for guarantees related to death, income, accumulation and
withdrawal benefits were $48.4 million, $32.3 million, $31.0 million and $5.5
million, respectively.
8. REINSURANCE
The Company has reinsurance agreements under which it reinsures all of its
business to ALIC or other non-affiliated reinsurers. Under the agreements,
premiums, contract charges, interest credited to contractholder funds, contract
benefits and substantially all expenses are reinsured. The Company purchases
reinsurance to limit aggregate and single losses on large risks. The Company
cedes a portion of the mortality risk on certain life policies to a pool of
twelve non-affiliated reinsurers. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. At December 31, 2009, 91.4% of the total
26
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
reinsurance recoverables were related to ALIC and 8.6% were related to
non-affiliated reinsurers. At both December 31, 2009 and 2008, 97% of the
Company's non-affiliated reinsurance recoverables are due from companies rated
A or better by S&P.
The effects of reinsurance on premiums and contract charges for the years
ended December 31 are as follows:
2009 2008 2007
($ IN THOUSANDS) ---------- ---------- ----------
PREMIUMS AND CONTRACT CHARGES
Direct................................ $1,194,526 $1,138,747 $1,038,671
Assumed............................... 7,849 8,576 9,132
Ceded:
Affiliate.......................... (734,369) (691,267) (623,102)
Non-affiliate...................... (468,006) (456,056) (424,701)
---------- ---------- ----------
Premiums and contract charges, net of
reinsurance......................... $ -- $ -- $ --
========== ========== ==========
The effects of reinsurance on interest credited to contractholder funds,
contract benefits and expenses for the years ended December 31 are as follows:
2009 2008 2007
($ IN THOUSANDS) ----------- ----------- -----------
INTEREST CREDITED TO CONTRACTHOLDER FUNDS,
CONTRACT BENEFITS AND EXPENSES
Direct..................................... $ 2,159,262 $ 2,065,299 $ 1,964,326
Assumed.................................... 11,101 8,922 10,473
Ceded:
Affiliate............................... (1,621,011) (1,468,505) (1,421,831)
Non-affiliate........................... (549,352) (605,716) (552,968)
----------- ----------- -----------
Interest credited to contractholder funds,
contract benefits and expenses, net of
reinsurance.............................. $ -- $ -- $ --
=========== =========== ===========
9. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES
GUARANTEES
In the normal course of business, the Company provides standard
indemnifications to contractual counterparties in connection with numerous
transactions, including acquisitions and divestitures. The types of
indemnifications typically provided include indemnifications for breaches of
representations and warranties, taxes and certain other liabilities, such as
third party lawsuits. The indemnification clauses are often standard
contractual terms and are entered into in the normal course of business based
on an assessment that the risk of loss would be remote. The terms of the
indemnifications vary in duration and nature. In many cases, the maximum
obligation is not explicitly stated and the contingencies triggering the
obligation to indemnify have not occurred and are not expected to occur.
Consequently, the maximum amount of the obligation under such indemnifications
is not determinable. Historically, the Company has not made any material
payments pursuant to these obligations.
The aggregate liability balance related to all guarantees was not material
as of December 31, 2009.
27
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REGULATION AND COMPLIANCE
The Company is subject to changing social, economic and regulatory
conditions. From time to time, regulatory authorities or legislative bodies
seek to impose additional regulations regarding agent and broker compensation
and otherwise expand overall regulation of insurance products and the insurance
industry. The Company has established procedures and policies to facilitate
compliance with laws and regulations, to foster prudent business operations,
and to support financial reporting. The Company routinely reviews its practices
to validate compliance with laws and regulations and with internal procedures
and policies. As a result of these reviews, from time to time the Company may
decide to modify some of its procedures and policies. Such modifications, and
the reviews that led to them, may be accompanied by payments being made and
costs being incurred. The ultimate changes and eventual effects of these
actions on the Company's business, if any, are uncertain.
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" subsection below,
please note the following:
. These matters raise difficult and complicated factual and legal issues
and are subject to many uncertainties and complexities, including 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; 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.
. The outcome of these matters may be affected by decisions, verdicts, and
settlements, and the timing of such decisions, verdicts, and
settlements, in other individual and class action lawsuits that involve
the Company, other insurers, or other entities and by other legal,
governmental, and regulatory actions that involve the Company, other
insurers, or other entities. The outcome may also be affected by future
state or federal legislation, the timing or substance of which cannot be
predicted.
. 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 the Company's
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 often not possible 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 ongoing basis and follows
appropriate accounting guidance when making accrual and disclosure
decisions. When assessing reasonably possible and probable outcomes, the
Company bases its decisions on its assessment of the ultimate outcome
following all appeals.
28
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
. 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, if
any, and may be material to the Company's operating results or cash
flows for a particular quarterly 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 are in various stages of
development.
. These matters include a lawsuit filed in 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") alleging retaliation under
federal civil rights laws (the "EEOC I" suit) and a class action filed
in 2001 by former employee agents alleging retaliation and age
discrimination under the Age Discrimination in Employment Act ("ADEA"),
breach of contract and ERISA violations (the "Romero I" suit). In 2004,
in the consolidated EEOC I and Romero I litigation, 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 stated that, "on the undisputed
facts of record, there is no basis for claims of age discrimination."
The EEOC and plaintiffs asked the court to clarify and/or reconsider its
memorandum and order and in January 2007, the judge denied their
request. In June 2007, the court granted AIC's motions for summary
judgment. Following plaintiffs' filing of a notice of appeal, the U.S.
Court of Appeals for the Third Circuit ("Third Circuit") issued an order
in December 2007 stating that the notice of appeal was not taken from a
final order within the meaning of the federal law and thus not
appealable at this time. In March 2008, the Third Circuit decided that
the appeal should not summarily be dismissed and that the question of
whether the matter is appealable at this time will be addressed by the
Third Circuit along with the merits of the appeal. In July 2009, the
Third Circuit vacated the decision which granted AIC's summary judgment
motions, remanded the cases to the trial court for additional discovery,
and directed that the cases be reassigned to another trial court judge.
. 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 2005. In June 2007, the court granted AIC's motion
to dismiss the case. Following plaintiffs' filing of a notice of appeal,
the Third Circuit issued an order in December 2007 stating that the
notice of appeal was not taken from a final order within the meaning of
the federal law and thus not appealable at this time. In March 2008, the
Third Circuit decided that the appeal should not summarily be dismissed
and that the question of whether the matter is appealable at this time
will be addressed by the Third Circuit along with the merits of the
appeal. In July 2009, the Third Circuit vacated the decision which
granted AIC's motion to dismiss the case, remanded the case to the trial
court for additional discovery, and directed that the case be reassigned
to another trial court judge.
29
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In all of these various 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.
OTHER MATTERS
Various other legal, governmental, and regulatory actions, including state
market conduct exams, and other governmental and regulatory inquiries 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 other types of 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, if any, 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.
10. INCOME TAXES
The Company joins the Corporation and its other 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 also has a
supplemental tax sharing agreement with respect to reinsurance ceded to ALIC to
allocate the tax benefits and costs related to such reinsurance. Effectively,
these agreements result in the Company's annual income tax provision being
computed, with adjustments, as if the Company filed a separate return, adjusted
for the reinsurance ceded to ALIC.
The Internal Revenue Service ("IRS") is currently examining the Allstate
Group's 2007 and 2008 federal income tax returns. The IRS has completed its
examination of the Allstate Group's federal income tax returns filed for
2005-2006 and the case is under consideration at the IRS Appeals Office. The
Allstate Group's tax years prior to 2005 have been examined by the IRS and the
statute of limitations has expired on those years. Any adjustments that may
result from IRS examinations of tax returns are not expected to have a material
effect on the results of operations, cash flows or financial position of the
Company.
The Company had no liability for unrecognized tax benefits at December 31,
2009 or 2008, and believes it is reasonably possible that the liability balance
will not significantly increase within the next twelve months. No amounts have
been accrued for interest or penalties.
The components of the deferred income tax assets and liabilities at
December 31 are as follows:
2009 2008
($ IN THOUSANDS) ------- -----
DEFERRED ASSETS
Unrealized net capital losses.............. $ -- $ 119
Other assets............................... -- 20
------- -----
Total deferred assets................... -- 139
------- -----
DEFERRED LIABILITIES
Unrealized net capital gains............... (2,995) --
Difference in tax bases of investments..... (118) (139)
Other liabilities.......................... (187) --
------- -----
Total deferred liabilities.............. (3,300) (139)
------- -----
Net deferred liabilities............ $(3,300) $ --
======= =====
30
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of income tax expense for the years ended December 31 are as
follows:
2009 2008 2007
($ IN THOUSANDS) ------ ------ ------
Current......................... $4,447 $7,054 $4,810
Deferred........................ 187 (136) 25
------ ------ ------
Total income tax expense..... $4,634 $6,918 $4,835
====== ====== ======
The Company paid income taxes of $6.8 million, $4.9 million and $4.4 million
in 2009, 2008 and 2007, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the years ended December 31 is as
follows:
2009 2008 2007
---- ---- ----
Statutory federal income tax
rate.......................... 35.0% 35.0% 35.0%
Other........................... (0.1) (0.2) (0.1)
---- ---- ----
Effective income tax rate....... 34.9% 34.8% 34.9%
==== ==== ====
11. STATUTORY FINANCIAL INFORMATION
The Company prepares its statutory-basis financial statements in conformity
with accounting practices prescribed or permitted by the State of Nebraska. The
State of Nebraska requires insurance companies domiciled in its state to
prepare statutory-basis financial statements in conformity with the NAIC
Accounting Practices and Procedures Manual, subject to any deviations
prescribed or permitted by the State of Nebraska Insurance Commissioner.
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 differ from GAAP primarily since they require
charging policy acquisition and certain sales inducement costs to expense as
incurred, establishing life insurance reserves based on different actuarial
assumptions, and valuing certain investments and establishing deferred taxes on
a different basis.
Statutory net income for 2009, 2008, and 2007 was $8.5 million, $7.8 million
and $9.1 million, respectively. Statutory capital and surplus was $306.0
million and $278.8 million as of December 31, 2009 and 2008, respectively.
DIVIDENDS
The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant
factors. The payment of shareholder dividends by the Company without the prior
approval of the state insurance regulator is limited to formula amounts based
on net income and capital and surplus, determined in conformity with statutory
accounting practices, as well as the timing and amount of dividends paid in the
preceding twelve months. Based on the Company's statutory capital and surplus
as of December 31, 2009, the maximum amount of dividends that the Company can
distribute during 2010 without prior approval of the Nebraska Department of
Insurance is $30.6 million. The Company did not pay any dividends in 2009.
31
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income (loss) on a pre-tax and
after-tax basis for the years ended December 31 are as follows:
2009
--------------------------
PRE-TAX TAX AFTER-TAX
($ IN THOUSANDS) ------- ------- ---------
Unrealized net holding gains arising during the period.......... $10,135 $(3,547) $ 6,588
Less: reclassification adjustment of realized capital gains and
losses........................................................ 1,238 (433) 805
------- ------- -------
Unrealized net capital gains and losses......................... 8,897 (3,114) 5,783
------- ------- -------
Other comprehensive income...................................... $ 8,897 $(3,114) $ 5,783
======= ======= =======
2008
--------------------------
PRE-TAX TAX AFTER-TAX
- - ------- ------- ---------
Unrealized net holding losses arising during the period......... $(3,078) $ 1,077 $(2,001)
Less: reclassification adjustment of realized capital gains and
losses........................................................ 3,615 (1,265) 2,350
------- ------- -------
Unrealized net capital gains and losses......................... (6,693) 2,342 (4,351)
------- ------- -------
Other comprehensive loss........................................ $(6,693) $ 2,342 $(4,351)
======= ======= =======
2007
--------------------------
PRE-TAX TAX AFTER-TAX
- - ------- ------- ---------
Unrealized net holding gains arising during the period.......... $ 6,211 $(2,173) $ 4,038
Less: reclassification adjustment of realized capital gains and
losses........................................................ (414) 145 (269)
------- ------- -------
Unrealized net capital gains and losses......................... 6,625 (2,318) 4,307
------- ------- -------
Other comprehensive income...................................... $ 6,625 $(2,318) $ 4,307
======= ======= =======
32
LINCOLN BENEFIT LIFE COMPANY
SCHEDULE I--SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2009
AMOUNTS AT
WHICH
SHOWN ON
AMORTIZED FAIR BALANCE
COST VALUE SHEET
($ IN THOUSANDS) --------- -------- ----------
Type of investment
Fixed maturities:
Bonds:
United States government, government agencies and authorities..... $ 79,982 $ 81,551 $ 81,551
States, municipalities and political subdivisions................. 2,999 3,095 3,095
Public utilities.................................................. 12,037 12,602 12,602
All other corporate bonds......................................... 119,429 124,971 124,971
Asset-backed securities............................................... 8,494 8,445 8,445
Residential mortgage-backed securities................................ 66,326 67,975 67,975
Commercial mortgage-backed securities................................. 10,520 9,704 9,704
-------- -------- --------
Total fixed maturities............................................ 299,787 308,343 308,343
Short-term investments................................................... 8,557 8,557 8,557
-------- -------- --------
Total investments................................................. $308,344 $316,900 $316,900
======== ======== ========
33
LINCOLN BENEFIT LIFE COMPANY
SCHEDULE IV--REINSURANCE
PERCENTAGE
ASSUMED OF AMOUNT
CEDED TO OTHER FROM OTHER NET ASSUMED
GROSS AMOUNT COMPANIES/(1)/ COMPANIES AMOUNT TO NET
($ IN THOUSANDS) ------------ -------------- ---------- ------ ----------
YEAR ENDED DECEMBER 31, 2009
Life insurance in force........ $349,952,260 $356,581,252 $6,628,992 $-- --
============ ============ ========== ===
Premiums and contract charges:
Life and annuities.......... $ 1,072,840 $ 1,080,689 $ 7,849 $-- --
Accident and health......... 121,686 121,686 -- -- --
------------ ------------ ---------- ---
$ 1,194,526 $ 1,202,375 $ 7,849 $-- --
============ ============ ========== ===
YEAR ENDED DECEMBER 31, 2008
Life insurance in force........ $337,177,898 $344,250,029 $7,072,131 $-- --
============ ============ ========== ===
Premiums and contract charges:
Life and annuities.......... $ 1,017,339 $ 1,025,915 $ 8,576 $-- --
Accident and health......... 121,408 121,408 -- -- --
------------ ------------ ---------- ---
$ 1,138,747 $ 1,147,323 $ 8,576 $-- --
============ ============ ========== ===
YEAR ENDED DECEMBER 31, 2007
Life insurance in force........ $315,111,039 $322,635,416 $7,524,377 $-- --
============ ============ ========== ===
Premiums and contract charges:
Life and annuities.......... $ 922,355 $ 931,487 $ 9,132 $-- --
Accident and health......... 116,316 116,316 -- -- --
------------ ------------ ---------- ---
$ 1,038,671 $ 1,047,803 $ 9,132 $-- --
============ ============ ========== ===
- --------
(1)No reinsurance or coinsurance income was netted against premiums ceded in
2009, 2008 and 2007.
34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
Lincoln Benefit Life Company
Lincoln, NE
We have audited the accompanying Statements of Financial Position of Lincoln
Benefit Life Company (the "Company"), an affiliate of The Allstate Corporation,
as of December 31, 2009 and 2008, 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, 2009. Our audits also included
Schedule I--Summary of Investments--Other than Investments in Related Parties
and Schedule IV--Reinsurance. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Lincoln Benefit Life Company as of
December 31, 2009 and 2008, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, Schedule I--Summary of Investments--Other
than Investments in Related Parties and Schedule IV--Reinsurance, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the financial statements, the Company changed its
recognition and presentation for other-than-temporary impairments of debt
securities in 2009.
/s/ Deloitte & Touche LLP
Chicago, Illinois
March 12, 2010
35
ITEM 11(F). SELECTED FINANCIAL DATA
LINCOLN BENEFIT LIFE COMPANY
5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2009 2008 2007 2006 2005
($ IN THOUSANDS) ----------- ----------- ----------- ----------- -----------
OPERATING RESULTS
Net investment income......... $ 11,783 $ 13,940 $ 14,257 $ 13,948 $ 13,632
Realized capital gains and
losses...................... 1,480 5,952 (417) (1,255) (174)
Total revenues................ 13,263 19,892 13,840 12,693 13,458
Net income.................... 8,629 12,974 9,005 8,260 8,787
FINANCIAL POSITION
Investments................... $ 316,900 $ 310,031 $ 301,201 $ 276,322 $ 271,369
Total assets.................. 22,932,908 22,655,371 23,700,007 23,862,919 22,475,513
Reserve for life-contingent
contract benefits and
contractholder funds........ 20,438,414 20,368,562 20,169,001 20,322,077 19,354,298
Shareholder's equity.......... 312,973 298,561 289,938 276,626 269,251
36
ITEM 11(H).MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion highlights significant factors influencing the
financial position and results of operations of Lincoln Benefit Life Company
(referred to in this document as "we", "Lincoln Benefit", "our", "us" or the
"Company"). It should be read in conjunction with the financial statements and
related notes found under Item 11(e) contained herein. We operate as a single
segment entity, based on the manner in which we use financial information to
evaluate business performance and to determine the allocation of resources.
The most important factors we monitor to evaluate the financial condition
and performance of our company include:
. For operations: premiums and deposits ceded to ALIC, and invested assets;
. For investments: credit quality/experience, realized capital gains and
losses, investment income, unrealized capital gains and losses,
stability of long-term returns, cash flows and asset duration; and
. For financial condition: financial strength ratings and capital
positions.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to adopt accounting policies and make estimates and assumptions that
affect amounts reported in the financial statements. The most critical
estimates include those used in determining:
. Fair value of financial assets
. Impairment of fixed income securities
In making these determinations, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain. Many of these policies, estimates and related judgments are common
in the insurance and financial services industries; others are specific to our
businesses and operations. It is reasonably likely that changes in these
estimates could occur from period to period and result in a material impact on
our financial statements.
A brief summary of each of these critical accounting estimates follows. For
a more detailed discussion of the effect of these estimates on our financial
statements, and the judgments and assumptions related to these estimates, see
the referenced sections of this document. For a complete summary of our
significant accounting policies, see Note 2 of the financial statements.
FAIR VALUE OF FINANCIAL ASSETS Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. We categorize
our financial assets measured at fair value into a three-level hierarchy based
on the observability of inputs to the valuation techniques as follows:
LEVEL 1:Financial assets are based on unadjusted quoted prices for identical
assets in an active market that we can access.
LEVEL 2:Financial assets values are based on the following:
a) Quoted prices for similar assets in active markets;
b) Quoted prices for identical or similar assets in markets that are not
active; or
c) Valuation models whose inputs are observable, directly or indirectly,
for substantially the full term of the asset.
37
LEVEL 3:Financial assets values are based on prices or valuation techniques
that require inputs that are both unobservable and significant to the
overall fair value measurement. Unobservable inputs reflect our
estimates of the assumptions that market participants would use in
valuing the financial assets.
Observable inputs are inputs that reflect the assumptions market
participants would use in valuing financial assets that are developed based on
market data obtained from independent sources. In the absence of sufficient
observable inputs, unobservable inputs reflect our estimates of the assumptions
market participants would use in valuing financial assets and are developed
based on the best information available in the circumstances. The degree of
management judgment involved in determining fair values is inversely related to
the availability of market observable information. If valuation inputs used to
measure fair value fall into different levels of the fair value hierarchy, the
categorization is based on the lowest level input that is significant to the
fair value measurement in its entirety.
We are responsible for the determination of fair value of financial assets
and the supporting assumptions and methodologies. We gain assurance on the
overall reasonableness and consistent application of valuation input
assumptions, valuation methodologies and compliance with accounting standards
for fair value determination through the execution of various processes and
controls designed to ensure that our financial assets are appropriately valued.
We monitor fair values received from third parties and those derived internally
on an ongoing basis.
We employ independent third-party valuation service providers, broker quotes
and internal pricing methods to determine fair values, which provide a single
quote or price for each financial instrument. We obtain or calculate only one
quote or price per instrument.
Valuation service providers typically obtain data about market transactions
and other key valuation model inputs from multiple sources and, through the use
of proprietary algorithms, produce valuation information in the form of a
single fair value for individual securities for which a fair value has been
requested under the terms of our agreements. For certain security types, fair
values are derived from the valuation service providers' proprietary valuation
models. The inputs used by the valuation service providers include, but are not
limited to, market prices from recently completed transactions and transactions
of comparable securities, interest rate yield curves, credit spreads, liquidity
spreads, currency rates, and other information, as applicable. Credit and
liquidity spreads are typically implied from completed transactions and
transactions of comparable securities. Valuation service providers also use
proprietary discounted cash flow models that are widely accepted in the
financial services industry and similar to those used by other market
participants to value the same financial instruments. The valuation models take
into account, among other things, market observable information as of the
measurement date, as described above, as well as the specific attributes of the
security being valued including its term, interest rate, credit rating,
industry sector, and where applicable, collateral quality and other issue or
issuer specific information. Executing valuation models effectively requires
seasoned professional judgment and experience. In cases where market
transactions or other market observable data is limited, the extent to which
judgment is applied varies inversely with the availability of market observable
information.
For certain of our financial assets carried at fair value, where our
valuation service providers cannot provide fair value determinations, we obtain
a single non-binding price quote from a broker familiar with the security who,
similar to our valuation service providers, may consider transactions or
activity in similar securities, as applicable, among other information. The
brokers providing price quotes are generally from the brokerage divisions of
leading financial institutions with market making, underwriting and
distribution expertise regarding the security subject to valuation.
The fair value of certain financial assets, including privately placed
corporate securities, where our valuation service providers or brokers do not
provide fair value determinations, is determined using valuation methods and
models widely accepted in the financial services industry. Internally developed
valuation models, which include inputs that may not be market observable and as
such involve some degree of judgment, are considered appropriate for each class
of security to which they are applied.
38
Our internal pricing methods are primarily based on models using discounted
cash flow methodologies that develop a single best estimate of fair value. Our
models generally incorporate inputs that we believe are representative of
inputs other market participants would use to determine fair value of the same
instruments, including yield curves, quoted market prices of comparable
securities, published credit spreads, and other applicable market data.
Additional inputs that are used to model fair value include internally-derived
assumptions such as liquidity premium and credit ratings, as well as
instrument-specific characteristics that include, but are not limited to,
coupon rate, expected cash flows, sector of issuer, and call provisions.
Internally assigned credit ratings are generally consistent with external
ratings published by the National Association of Insurance Commissioners
("NAIC"); however, they are developed at a more finite level. For example, an
NAIC rating of 1 includes securities rated triple, double and single A by at
least one nationally recognized statistical rating organization ("NRSRO"). We
believe our internal ratings provide for a more reliable estimate of fair value
since we can more precisely match these ratings to other market observable
valuation inputs, such as credit and sector spreads, when performing these
valuations. Due to the existence of non-market observable inputs, such as
liquidity premiums, judgment is required in developing these fair values. As a
result, the fair value of these financial assets may differ from the amount
actually received to sell an asset in an orderly transaction between market
participants at the measurement date. Moreover, the use of different valuation
assumptions may have a material effect on the financial assets' fair values.
For the majority of our financial assets measured at fair value, all
significant inputs are based on market observable data and significant
management judgment does not affect the periodic determination of fair value.
The determination of fair value using discounted cash flow models involves
management judgment when significant model inputs are not based on market
observable data. However, where market observable data is available, it takes
precedence, and as a result, no range of reasonably likely inputs exists from
which the basis of a sensitivity analysis could be constructed.
We believe our most significant exposure to changes in fair value is due to
market risk. Our exposure to changes in market conditions is discussed fully in
the Market Risk section of the MD&A.
We employ specific control processes to determine the reasonableness of the
fair values of our financial assets. Our processes are designed to ensure that
the values received or internally estimated are accurately recorded and that
the data inputs and the valuation techniques utilized are appropriate,
consistently applied, and that the assumptions are reasonable and consistent
with the objective of determining fair value. For example, on a continuing
basis, we assess the reasonableness of individual security values received from
valuation service providers and those derived from internal models that exceed
certain thresholds as compared to previous values received from those valuation
service providers or derived from internal models. In addition, we may validate
the reasonableness of fair values by comparing information obtained from our
valuation service providers to other third party valuation sources for selected
securities. For internal pricing models, we have implemented price validation
procedures such as back-testing of actual sales, which corroborates the various
model inputs to market observable data. When fair value determinations are
expected to be more variable, we validate them through reviews by members of
management who have relevant expertise and who are independent of those charged
with executing investment transactions.
We also perform an analysis to determine whether there has been a
significant decrease in the volume and level of activity for the asset when
compared to normal market activity, and if so, whether transactions may not be
orderly. Among the indicators we consider in determining whether a significant
decrease in the volume and level of market activity for a specific asset has
occurred include the level of new issuances in the primary market, trading
volume in the secondary market, level of credit spreads over historical levels,
bid-ask spread, and price consensuses among market participants and sources. If
evidence indicates that prices are based on transactions that are not orderly,
we place little, if any, weight on the transaction price and will estimate fair
value using an internal pricing model. As of December 31, 2009 and 2008, we did
not alter fair values provided by our valuation service providers or brokers or
substitute them with an internal pricing model.
39
The following table identifies fixed income and short-term investments as of
December 31, 2009 by source of value determination:
FAIR PERCENT
VALUE TO TOTAL
($ IN THOUSANDS) -------- --------
Fair value based on internal sources...... $ 1,140 0.4%
Fair value based on external sources/(1)/. 315,760 99.6
-------- -----
Total investments......................... $316,900 100.0%
======== =====
- --------
(1)None were valued using broker quotes.
For more detailed information on our accounting policy for the fair value of
financial assets and the financial assets by level in the fair value hierarchy,
see Notes 2 and 5 of the financial statements.
IMPAIRMENT OF FIXED INCOME SECURITIES For fixed income securities classified
as available for sale, the difference between fair value and amortized cost,
net of deferred income taxes, is reported as a component of accumulated other
comprehensive income on the Statements of Financial Position and is not
reflected in the operating results of any period until reclassified to net
income upon the consummation of a transaction with an unrelated third party or
when the decline in fair value is deemed other than temporary. We have a
comprehensive portfolio monitoring process to identify and evaluate each fixed
income security whose carrying value may be other-than-temporarily impaired.
For each fixed income security in an unrealized loss position, we assess
whether management with the appropriate authority has made a decision to sell
or whether it is more likely than not we will be required to sell the security
before recovery of the amortized cost basis for reasons such as liquidity,
contractual or regulatory purposes. If a security meets either of these
criteria, the security's decline in fair value is deemed other than temporary
and is recorded in earnings.
If we have not made the decision to sell the fixed income security and it is
not more likely than not we will be required to sell the fixed income security
before recovery of its amortized cost basis, we evaluate whether we expect to
receive cash flows sufficient to recover the entire amortized cost basis of the
security. We use our best estimate of future cash flows expected to be
collected from the fixed income security discounted at the security's original
or current effective rate, as appropriate, to calculate a recovery value and
determine whether a credit loss exists. The determination of cash flow
estimates is inherently subjective and methodologies may vary depending on
facts and circumstances specific to the security. All reasonably available
information relevant to the collectability of the security, including past
events, current conditions, and reasonable and supportable assumptions and
forecasts, are considered when developing the estimate of cash flows expected
to be collected. That information generally includes, but is not limited to,
the remaining payment terms of the security, prepayment speeds, foreign
exchange rates, the financial condition of the issue or issuer(s), expected
defaults, expected recoveries, the value of underlying collateral and current
subordination levels, vintage, geographic concentration, available reserves or
escrows, third party guarantees and other credit enhancements. Additionally,
other information, such as industry analyst reports and forecasts, sector
credit ratings, financial condition of the bond insurer for insured fixed
income securities, and other market data relevant to the realizability of
contractual cash flows, may also be considered. The estimated fair value of
collateral may be used to estimate recovery value if we determine that the
security is dependent on the liquidation of collateral for ultimate settlement.
If the estimated recovery value is less than the amortized cost of the
security, a credit loss exists and an other-than-temporary impairment for the
difference between the estimated recovery value and amortized cost is recorded
in earnings. The unrealized loss deemed to be related to factors other than
credit remains classified in other comprehensive income. If we determine that
the fixed income security does not have sufficient cash flow or other
information to determine a recovery value for the security, we may conclude
that the entire decline in fair value is deemed to be credit related and is
recorded in earnings.
40
Once assumptions and estimates are made, any number of changes in facts and
circumstances could cause us to subsequently determine that a fixed income
security is other than temporarily impaired, including: 1) general economic
conditions that are worse than previously forecasted or that have a greater
adverse effect on a particular issuer or industry sector than originally
estimated; 2) changes in the facts and circumstances related to a particular
issue or issuer's ability to meet all of its contractual obligations; and 3)
changes in facts and circumstances that result in changes to management's
intent to sell or result in our assessment that it is more likely than not we
will be required to sell before recovery of the amortized cost. 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 portfolio is designated
as available-for-sale and carried at fair value and as a result, any related
unrealized loss, net of deferred income taxes, would already be reflected as a
component of accumulated other comprehensive income in shareholder's equity.
The determination of the amount of impairment is an inherently subjective
process based on periodic evaluation of the factors described above. Such
evaluations and assessments are revised as conditions change and new
information becomes available. We update our evaluations regularly and reflect
changes in other-than-temporary impairments in results of operations as such
evaluations are revised. The use of different methodologies and assumptions in
the determination of the amount of impairments may have a material effect on
the amounts presented within the financial statements.
Fixed income securities subject to other-than-temporary impairment
write-downs continue to earn investment income when future expected payments
are reasonably estimable, and any discount or premium is recognized using the
effective yield method over the expected life of the security; otherwise income
recognition is discontinued.
For additional detail on investment impairments, see Note 4 of the financial
statements.
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 Allstate Insurance
Holdings, LLC, which is wholly owned by The Allstate Corporation (the
"Corporation"). We provide life insurance, retirement and investment products.
Our strategic vision is to reinvent protection and retirement for the consumer.
We plan to offer a suite of products that are easy for middle market and
emerging affluent consumers to understand, meet their protection needs and help
them better prepare for retirement.
Our products include fixed annuities such as deferred and immediate
annuities; and interest-sensitive, traditional and variable life insurance. Our
products are sold through multiple distribution channels including Allstate
exclusive agencies, which include exclusive financial specialists, independent
agents (including master brokerage agencies), and, through March 31, 2010,
broker-dealers.
NET INCOME
2009 2008 2007
($ IN THOUSANDS) ------- ------- -------
Net investment income............. $11,783 $13,940 $14,257
Realized capital gains and losses. 1,480 5,952 (417)
Income tax expense................ (4,634) (6,918) (4,835)
------- ------- -------
Net income........................ $ 8,629 $12,974 $ 9,005
======= ======= =======
We have reinsurance agreements whereby all premiums, contract charges,
interest credited to contractholder funds, contract benefits and substantially
all expenses are ceded to ALIC and other non-affiliated reinsurers, and
41
are reflected net of such reinsurance in the Statements of Operations and
Comprehensive Income. Our results of operations include net investment income
and realized capital gains and losses recognized in connection with the assets
that are not transferred under the reinsurance agreements.
NET INCOME decreased 33.5% in 2009 compared to 2008 and increased 44.1% in
2008 compared to 2007. The decrease in 2009 was due to lower net realized
capital gains and lower net investment income, partially offset by lower income
tax expense. The increase in 2008 was due to net realized capital gains in 2008
compared to net realized capital losses in 2007, partially offset by higher
income tax expense and lower net investment income.
NET INVESTMENT INCOME decreased 15.5% in 2009 compared to 2008 and 2.2% in
2008 compared to 2007. The decrease in 2009 was primarily due to lower yields
on fixed income securities. The decrease in 2008 was primarily due to lower
average fixed income security balances and lower yields on short-term
investments, partially offset by higher average short-term investment balances.
NET REALIZED CAPITAL GAINS of $1.5 million and $6.0 million were recognized
in 2009 and 2008, respectively, compared to net realized capital losses of $417
thousand in 2007. The realized capital gains and losses in 2009, 2008 and 2007
were related to sales of investments. For further discussion of realized
capital gains and losses see the Net realized capital gains and losses section
of the MD&A.
INCOME TAX EXPENSE decreased 33.0% in 2009 compared to 2008 and increased
43.1% in 2008 compared to 2007. These changes were due to the proportional
change in the income on which the income tax expense was determined.
FINANCIAL POSITION
2009 2008
($ IN THOUSANDS) ----------- -----------
Fixed income securities/(1)/.................. $ 308,343 $ 229,328
Short-term/(2)/............................... 8,557 80,703
----------- -----------
Total investments.......................... $ 316,900 $ 310,031
=========== ===========
Cash.......................................... $ 10,063 $ 3,145
Reinsurance recoverable from ALIC............. 18,689,074 18,791,710
Reinsurance recoverable from non-affiliates... 1,766,824 1,613,685
Contractholder funds.......................... 17,633,027 17,787,376
Reserve for life-contingent contract benefits. 2,805,387 2,581,186
Separate accounts assets and liabilities...... 2,039,647 1,823,163
- --------
(1)Fixed income securities are carried at fair value. Amortized cost basis for
these securities was $299.8 million and $229.7 million at December 31, 2009
and 2008, respectively.
(2)Short-term investments are carried at fair value. Amortized cost basis for
these securities was $8.6 million and $80.7 million at December 31, 2009 and
2008, respectively.
Total investments increased to $316.9 million at December 31, 2009 from
$310.0 million at December 31, 2008 due primarily to a favorable change in net
unrealized capital gains and losses on fixed income securities.
42
FIXED INCOME SECURITIES The following table shows fixed income securities by
type.
FAIR VALUE AT PERCENT TO FAIR VALUE AT PERCENT TO
DECEMBER 31, TOTAL DECEMBER 31, TOTAL
2009 INVESTMENTS 2008 INVESTMENTS
($ IN THOUSANDS) ------------- ----------- ------------- -----------
U.S. government and agencies........... $ 81,551 25.7% $ 78,816 25.4%
Municipal.............................. 3,095 1.0 499 0.2
Corporate.............................. 137,573 43.4 75,703 24.4
Residential mortgage-backed securities
("RMBS")............................. 67,975 21.4 48,351 15.6
Commercial mortgage-backed securities
("CMBS")............................. 9,704 3.1 18,960 6.1
Asset-backed securities ("ABS")........ 8,445 2.7 6,999 2.3
-------- ---- -------- ----
Total fixed income securities.......... $308,343 97.3% $229,328 74.0%
======== ==== ======== ====
At December 31, 2009, all of the fixed income securities portfolio was rated
investment grade, which is defined as a security having of rating of Aaa, Aa, A
or Baa from Moody's, a rating of AAA, AA, A or BBB from S&P, Fitch, Dominion,
or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a comparable
internal rating if an externally provided rating is not available, which is
consistent with the NAIC rating. The Valuation of Securities Taskforce of the
NAIC instituted a new process to be used by insurance companies during the
fourth quarter of 2009 for statutory accounting, reporting and estimating
risk-based capital requirements for non-agency RMBS, and as a result the NAIC
ratings used for statutory reporting may differ from those shown below which
are based on credit ratings. The following table summarizes the credit rating
of the fixed income securities portfolio at December 31, 2009.
($ IN THOUSANDS) PERCENT
NAIC RATING CREDIT RATING FAIR VALUE TO TOTAL
----------- ------------- ---------- --------
1 Aaa/Aa/A $300,862 97.6%
2 Baa 7,481 2.4
-------- -----
$308,343 100.0%
======== =====
The following table summarizes the fair value and unrealized net capital
gains and losses for fixed income securities by credit rating as of
December 31, 2009.
AAA AA A
- - ------------------- ------------------- -------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS)
($ IN THOUSANDS) -------- ----------- ------- ----------- ------- -----------
U.S. government and agencies........... $ 81,551 $1,569 $ -- $ -- $ -- $ --
Municipal
Tax exempt.......................... -- -- 524 23 -- --
Taxable............................. -- -- 2,571 73 -- --
Corporate
Public.............................. 2,989 (5) 25,076 997 78,472 4,071
Privately placed.................... -- -- 2,096 101 11,910 432
Hybrid.............................. -- -- -- -- -- --
RMBS
U.S. government sponsored entities
("U.S. Agency")................... 61,666 1,726 -- -- -- --
Prime residential mortgage-backed
securities ("Prime").............. 6,309 (77) -- -- -- --
CMBS................................... 8,546 29 -- -- -- --
ABS.................................... -- -- -- -- -- --
-------- ------ ------- ------ ------- ------
Total fixed income securities.......... $161,061 $3,242 $30,267 $1,194 $90,382 $4,503
======== ====== ======= ====== ======= ======
43
BAA TOTAL
------------------ -------------------
FAIR UNREALIZED FAIR UNREALIZED
VALUE GAIN/(LOSS) VALUE GAIN/(LOSS)
------- ----------- -------- -----------
U.S. government and agencies.. $ -- $ -- $ 81,551 $1,569
Municipal
Tax exempt................. -- -- 524 23
Taxable.................... -- -- 2,571 73
Corporate
Public..................... 16,009 517 122,546 5,580
Privately placed........... -- -- 14,006 533
Hybrid..................... 1,021 (6) 1,021 (6)
RMBS
U.S. Agency................ -- -- 61,666 1,726
Prime...................... -- -- 6,309 (77)
CMBS.......................... 1,158 (845) 9,704 (816)
ABS........................... 8,445 (49) 8,445 (49)
------- ----- -------- ------
Total fixed income securities. $26,633 $(383) $308,343 $8,556
======= ===== ======== ======
CORPORATE BONDS, including publicly traded, privately placed and hybrid
securities totaled $137.6 million as of December 31, 2009 with an unrealized
net capital gain of $6.1 million. Privately placed securities primarily consist
of corporate issued senior debt securities that are in unregistered form or are
directly negotiated with the borrower. Privately placed corporate securities
are rated by the NAIC in instances when information is provided to them.
RMBS, CMBS AND ABS are structured securities that are primarily
collateralized by residential and commercial real estate related loans and
other consumer related borrowings. The cash flows are generally applied in a
pre-determined order and are designed so that each security issued qualifies
for a specific original rating. The security issue is typically referred to as
the "class". For example, the "senior" portion or "top" of the capital
structure, or rating class, which would originally qualify for a rating of Aaa
typically has priority in receiving the principal repayments on the collateral.
In a sequential structure, underlying collateral principal repayments are
directed to the most senior rated Aaa class in the structure until paid in
full, after which principal repayments are directed to the next most senior Aaa
class in the structure until it is paid in full. Senior Aaa classes generally
share any losses from the underlying collateral on a pro-rata basis after
losses are absorbed by classes with lower original ratings and include other
"junior" or "subordinate" securities. The collateral can have fixed interest
rates, variable interest rates (such as adjustable rate mortgages ("ARM")) or
may contain features of both fixed and variable rate mortgages.
RMBS, including U.S. Agency and Prime totaled $68.0 million at December 31,
2009. The RMBS portfolio is subject to interest rate risk, but unlike other
fixed income securities, is additionally subject to significant prepayment risk
from the underlying mortgages. The credit risk associated with our RMBS is
mitigated due to the fact that 90.7% of the portfolio consists of securities
that were issued by, or have underlying collateral that is guaranteed by, U.S.
government agencies.
CMBS totaled $9.7 million at December 31, 2009. The CMBS portfolio is
subject to credit risk, but unlike other structured securities, is generally
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. All of the CMBS
investments are traditional conduit transactions collateralized by pools of
commercial mortgages, broadly diversified across property types and
geographical area. The unrealized net capital loss of $816 thousand at
December 31, 2009 on our CMBS portfolio was a result of wider credit spreads
than at initial purchase, which is largely due to the macroeconomic conditions
and credit market deterioration, including the impact of real estate
valuations, that persisted throughout 2009.
44
ABS totaled $8.4 million at December 31, 2009. Credit risk is managed by
monitoring the performance of the collateral. The ABS portfolio is subject to
interest rate risk since price volatility and the ultimate realized yields are
affected by the rate of prepayment of the underlying assets.
SHORT-TERM INVESTMENTS Our short-term investment portfolio was $8.6 million
and $80.7 million at December 31, 2009 and 2008, respectively. The decrease in
short-term investments was primarily due to funding purchases of fixed income
securities.
UNREALIZED NET CAPITAL 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 securities are
other-than-temporarily impaired. Unrealized net capital gains totaled $8.6
million as of December 31, 2009, compared to unrealized net capital losses of
$341 thousand at December 31, 2008. The improvement since December 31, 2008 for
fixed income securities was primarily a result of tightening credit spreads on
certain fixed income securities during 2009 that more than offset the rise in
risk-free interest rates. The following table presents unrealized net capital
gains and losses, pre-tax and after-tax at December 31.
2009 2008
($ IN THOUSANDS) ------- -------
U.S. government and agencies....................... $ 1,569 $ 3,442
Municipal.......................................... 96 (3)
Corporate.......................................... 6,107 (1,489)
RMBS............................................... 1,649 1,631
CMBS............................................... (816) (3,936)
ABS................................................ (49) 16
------- -------
Fixed income securities............................ 8,556 (339)
Short-term investments............................. -- (2)
------- -------
Unrealized net capital gains and losses, pre-tax... 8,556 (341)
Deferred income taxes.............................. (2,995) 119
------- -------
Unrealized net capital gains and losses, after-tax. $ 5,561 $ (222)
======= =======
The net unrealized gain for the fixed income portfolio totaled $8.6 million,
comprised of $9.93 million of gross unrealized gains and $1.37 million of gross
unrealized losses at December 31, 2009. This is compared to a net unrealized
loss for the fixed income portfolio totaling $339 thousand, comprised of $6.0
million of gross unrealized gains and $6.3 million of gross unrealized losses
at December 31, 2008.
45
Gross unrealized gains and losses as of December 31, 2009 on fixed income
securities by type and sector are provided in the table below.
AMORTIZED FAIR VALUE
GROSS UNREALIZED COST AS A AS A PERCENT
PAR AMORTIZED -------------- FAIR PERCENT OF OF
VALUE COST GAINS LOSSES VALUE PAR VALUE PAR VALUE
($ IN THOUSANDS) -------- --------- ------ ------- -------- ---------- ------------
Corporate:
Energy........................ $ 16,000 $ 16,105 $ 515 $ (30) $ 16,590 100.7% 103.7%
Transportation................ 8,087 8,380 242 (30) 8,592 103.6 106.2
Financial services............ 15,500 15,521 690 (14) 16,197 100.1 104.5
Banking....................... 15,000 15,048 816 (6) 15,858 100.3 105.7
Consumer goods (cyclical and
non-cyclical)............... 43,000 43,239 2,151 (5) 45,385 100.6 105.5
Utilities..................... 12,000 12,037 565 -- 12,602 100.3 105.0
Capital goods................. 11,000 11,149 784 -- 11,933 101.4 108.5
Basic industry................ 4,000 3,993 231 -- 4,224 99.8 105.6
Technology.................... 6,000 5,994 198 -- 6,192 99.9 103.2
-------- -------- ------ ------- --------
Total corporate fixed income
portfolio...................... 130,587 131,466 6,192 (85) 137,573 100.7 105.3
-------- -------- ------ ------- --------
U.S. government and agencies..... 75,320 79,982 1,852 (283) 81,551 106.2 108.3
Municipal........................ 3,000 2,999 96 -- 3,095 100.0 103.2
RMBS............................. 66,369 66,326 1,733 (84) 67,975 99.9 102.4
CMBS............................. 10,500 10,520 57 (873) 9,704 100.2 92.4
ABS.............................. 8,070 8,494 -- (49) 8,445 105.3 104.6
-------- -------- ------ ------- --------
Total fixed income securities.... $293,846 $299,787 $9,930 $(1,374) $308,343 102.0 104.9
======== ======== ====== ======= ========
The energy, transportation and financial services sectors had the highest
concentration of gross unrealized losses in our corporate fixed income
securities portfolio at December 31, 2009. While credit spreads have tightened
in the last three quarters of 2009 from the historically high levels observed
in the fourth quarter of 2008 and the first quarter of 2009, they remain wider
than at initial purchase for certain securities in the portfolio.
The scheduled maturity dates for fixed income securities in a gross
unrealized loss position at December 31, 2009 are shown below. Actual
maturities may differ from those scheduled as a result of prepayments by the
issuers.
UNREALIZED PERCENT FAIR PERCENT
LOSS OF TOTAL VALUE OF TOTAL
($ IN THOUSANDS) ---------- -------- ------- --------
Due in one year or less................ $ (15) 1.1% $ 5,483 7.4%
Due after one year through five years.. (208) 15.1 34,610 46.9
Due after five years through ten years. (145) 10.6 16,129 21.8
Due after ten years.................... (873) 63.5 4,634 6.3
RMBS and ABS/(1)/...................... (133) 9.7 12,988 17.6
------- ----- ------- -----
Total.................................. $(1,374) 100.0% $73,844 100.0%
======= ===== ======= =====
- --------
(1)Because of the potential for prepayment, these securities are not
categorized based on their contractual maturities.
OTHER-THAN-TEMPORARY IMPAIRMENT EVALUATION We have a comprehensive portfolio
monitoring process to identify and evaluate each fixed income security whose
carrying value may be other-than-temporarily impaired. The process includes a
quarterly review of all securities through a screening process which identifies
instances
46
where the fair value compared to amortized cost is below established
thresholds, and also includes the monitoring of other criteria such as ratings,
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. All investments in an
unrealized loss position at December 31, 2009 were included in our portfolio
monitoring process for determining whether declines in value were other than
temporary.
At December 31, 2009, $529 thousand of unrealized losses are related to
fixed income securities with an unrealized loss position less than 20% of
amortized cost, the degree of which suggests that these securities do not pose
a high risk of being other-than-temporarily impaired. The remaining $845
thousand of unrealized losses are related to investment grade CMBS securities
in unrealized loss positions greater than or equal to 20% of amortized cost for
a period of twelve or more consecutive months. Consistent with their rating,
our portfolio monitoring indicates that the securities have a relatively low
risk of default.
We also monitor the quality of our fixed income securities by categorizing
certain investments as "problem," "restructured," or "potential problem."
Problem fixed income securities are in default with respect to principal or
interest and/or are investments issued by companies that have gone into
bankruptcy subsequent to our acquisition or loan. Fixed income securities are
categorized as restructured when the debtor is in financial difficulty and we
grant a concession. Potential problem fixed income securities are current with
respect to contractual principal and/or interest, but because of other facts
and circumstances, we have concerns regarding the borrower's ability to pay
future principal and interest according to the original terms, which causes us
to believe these investments may be classified as problem or restructured in
the future.
As of December 31, 2009 and 2008, we did not have any fixed income
securities categorized as problem, restructured or potential problem.
NET INVESTMENT INCOME The following table presents net investment income for
the years ended December 31.
2009 2008 2007
($ IN THOUSANDS) ------- ------- -------
Fixed income securities............. $12,098 $13,302 $13,533
Short-term and other investments.... 107 992 1,117
------- ------- -------
Investment income, before expense... 12,205 14,294 14,650
Investment expense.................. (422) (354) (393)
------- ------- -------
Net investment income............... $11,783 $13,940 $14,257
======= ======= =======
NET REALIZED CAPITAL GAINS AND LOSSES The following table presents realized
capital gains and losses and the related tax effect for the years ended
December 31.
2009 2008 2007
($ IN THOUSANDS) ------ ------- -----
Realized capital gains and losses, pre-tax..... $1,480 $ 5,952 $(417)
Income tax (expense) benefit................... (518) (2,083) 146
------ ------- -----
Realized capital gains and losses, after-tax... $ 962 $ 3,869 $(271)
====== ======= =====
Net realized capital gains of $1.5 million in 2009 comprised gross gains of
$1.5 million and gross losses of $8 thousand. Net realized capital gains of
$6.0 million in 2008 comprised gross gains of $8.5 million and gross losses of
$2.5 million.
CASH At December 31, 2009, our cash balance was $10.1 million compared to
$3.1 million at December 31, 2008. Fluctuations in our cash flows generally
result from differences in the timing of reinsurance payments to and from ALIC.
47
REINSURANCE RECOVERABLE, CONTRACTHOLDER FUNDS AND RESERVE FOR
LIFE-CONTINGENT CONTRACT BENEFITS Under 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, 2009, contractholder funds decreased to $17.63 billion from
$17.79 billion at December 31, 2008 as a result of new and additional deposits
on fixed annuities and interest-sensitive life policies and interest credited
to contractholder funds being more than offset by surrenders, withdrawals,
benefit payments and related contract charges. The reserve for life-contingent
contract benefits increased to $2.81 billion at December 31, 2009 from $2.58
billion as of December 31, 2008 due primarily to the aging of the in force
block of certain business and sales of traditional life insurance, partially
offset by benefits paid and policy lapses. Reinsurance recoverables from ALIC
decreased by $102.6 million and reinsurance recoverables from non-affiliates
increased $153.1 million.
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.
At December 31, 2009, 97% of reinsurance recoverables due from
non-affiliated companies were reinsured under uncollateralized reinsurance
agreements with companies that had a financial strength rating of A or above,
as measured by S&P. In certain cases, these ratings refer to the financial
strength of the affiliated group or parent company of the reinsurer.
We continuously monitor the creditworthiness of reinsurers in order to
determine our risk of recoverability on an individual and aggregate basis and a
provision for uncollectible reinsurance is recorded if needed. No amounts have
been deemed unrecoverable in the three years ended December 31, 2009.
MARKET RISK
Market risk is the risk that we will incur losses due to adverse changes in
interest rates and credit spreads. We also have certain exposures to changes in
equity prices in our equity-indexed annuities and separate accounts
liabilities, which are transferred to ALIC in accordance with our reinsurance
agreements.
OVERVIEW In formulating and implementing guidelines for investing funds, we
seek to earn returns that contribute to attractive and stable profits and
long-term capital growth.
We manage our exposure to market risk through the use of asset allocation,
duration, and as appropriate, through the use of stress tests. We have asset
allocation limits that place restrictions on the total funds that may be
invested within an asset class. 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
investment policies.
INTEREST RATE RISK is the risk that we will incur a loss due to adverse
changes in interest rates relative to the interest rate characteristics of
interest bearing assets. This risk arises from our investment in
interest-sensitive assets. Interest rate risk includes risks related to changes
in U.S. Treasury yields and other key risk-free reference yields.
48
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 3.7 and 3.0 at December 31, 2009 and 2008,
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. The proceeding assumptions relate primarily to mortgage-backed
securities, collateralized mortgage obligations, and municipal and corporate
obligations.
Based upon the information and assumptions used in the duration calculation,
and interest rates in effect at December 31, 2009, we estimate that a 100 basis
point immediate, parallel increase in interest rates ("rate shock") would
decrease the net fair value of the assets by $11.3 million, compared to $8.5
million at December 31, 2008. The selection of a 100 basis point immediate
parallel change in interest rates should not be construed as our prediction of
future market events, but only as an illustration of the potential effect of
such an event.
To the extent that conditions differ from the assumptions we used in these
calculations, duration and rate shock measures could be significantly impacted.
Additionally, our calculations assume that the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the effect of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.
CREDIT SPREAD RISK is the risk that we will incur a loss due to adverse
changes in credit spreads ("spreads"). This risk arises from many of our
primary activities, as we invest substantial funds in spread-sensitive fixed
income assets.
We manage the spread risk in our assets. One of the measures used to
quantify this exposure is spread duration. Spread duration measures the price
sensitivity of the assets to changes in spreads. For example, if spreads
increase 100 basis points, the fair value of an asset exhibiting a spread
duration of 5 is expected to decrease in value by approximately 5%.
Spread duration is calculated similarly to interest rate duration. At
December 31, 2009, the spread duration of assets was 3.6, compared to 3.4 at
December 31, 2008. Based upon the information and assumptions we use in this
spread duration calculation, and spreads in effect at December 31, 2009, we
estimate that a 100 basis point immediate, parallel increase in spreads across
all asset classes, industry sectors and credit ratings ("spread shock") would
decrease the net fair value of the assets by $8.4 million, compared to $7.2
million at December 31, 2008. The selection of a 100 basis point immediate
parallel change in spreads should not be construed as our prediction of future
market events, but only as an illustration of the potential effect of such an
event.
EQUITY PRICE RISK is the risk that we will incur losses due to adverse
changes in the general levels of the equity markets. At December 31, 2009 and
2008, we had separate accounts assets related to variable annuities and
variable life contracts with account values totaling $2.04 billion and $1.82
billion, respectively. Equity risk exists for contract charges based on
separate account balances and guarantees for death and/or income benefits
provided by our variable products. All variable life and annuity contract
charges and fees, liabilities and benefits, including guarantees for death
and/or income are ceded to ALIC in accordance with the reinsurance agreements,
thereby limiting our equity risk exposure. In 2006, ALIC disposed of
substantially all of its variable annuity business through a reinsurance
agreement with The Prudential Insurance Company of America, a subsidiary of
Prudential Financial, Inc. (collectively "Prudential"), and therefore mitigated
this aspect of ALIC's risk. The Company was not a direct participant of this
agreement and its reinsurance agreements with ALIC remain unchanged.
49
At December 31, 2009 and 2008 we had $4.16 billion and $3.79 billion,
respectively, in equity-indexed annuity liabilities that provide customers with
interest crediting rates based on the performance of the S&P 500. All contract
charges and fees, and liabilities and benefits related to equity-indexed
annuity liabilities are ceded to ALIC in accordance with the reinsurance
agreements, thereby limiting our equity risk exposure.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES consist of shareholder's equity. The following table
summarizes our capital resources at December 31.
2009 2008 2007
($ IN THOUSANDS) -------- -------- --------
Common stock, additional capital paid-in and retained
income.............................................. $307,412 $298,783 $285,809
Accumulated other comprehensive income (loss)......... 5,561 (222) 4,129
-------- -------- --------
Total shareholder's equity............................ $312,973 $298,561 $289,938
======== ======== ========
SHAREHOLDER'S EQUITY increased $14.4 million in 2009 due to net income of
$8.6 million and a favorable change in unrealized net capital gains and losses
totaling $5.8 million. Shareholder's equity increased $8.6 million in 2008, due
to net income of $13.0 million partially offset by an unfavorable change in
unrealized net capital gains and losses totaling $4.4 million.
FINANCIAL RATINGS AND STRENGTH We share the insurance financial strength
ratings of our parent, ALIC, as our business is reinsured to ALIC. The
following table summarizes ALIC's financial strength ratings at December 31,
2009.
RATING AGENCY RATING
------------- --------------------
A.M. Best Company, Inc.................. A+ ("Superior")
Standard & Poor's Ratings Services...... AA- ("Very Strong")
Moody's Investors Service, Inc.......... A1 ("Good")
ALIC's ratings are influenced by many factors including operating and
financial performance, asset quality, liquidity, asset/liability management,
overall portfolio mix, financial leverage (i.e., debt), exposure to risks, the
current level of operating leverage and AIC's ratings.
On November 20, 2009, A.M. Best affirmed ALIC's A+ financial strength
rating. ALIC's outlook was revised to negative from stable. On November 23,
2009, S&P affirmed ALIC's AA- financial strength rating. The outlook for the
S&P rating remained negative. On January 29, 2009, S&P downgraded ALIC's
financial strength rating to AA- from AA. On November 5, 2009, Moody's affirmed
ALIC's financial strength rating of A1. The outlook for the Moody's rating
remained stable. On January 29, 2009, Moody's downgraded ALIC's financial
strength rating to A1 from Aa3.
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,
2009, our RBC was within the range that we target.
The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or actions by insurance regulatory
authorities. The NAIC analyzes financial data provided by insurance companies
using prescribed ratios, each with defined "usual ranges". Generally,
regulators will begin to monitor an insurance company if its ratios fall
outside the usual ranges for four or more of the ratios. If an insurance
company has insufficient capital, regulators may act to reduce the amount of
insurance it can issue. Our ratios are within these ranges.
50
LIQUIDITY SOURCES AND USES Our potential sources of funds principally
include the activities as follows.
. Receipt of insurance premiums
. Contractholder fund deposits
. Reinsurance recoveries
. Receipts of principal and interest on investments
. Sales of investments
. Intercompany loans
. Capital contributions from parent
Our potential uses of funds principally include the activities as follows.
. Payment of contract benefits, surrenders and withdrawals
. Reinsurance cessions and payments
. Operating costs and expenses
. Purchase of investments
. Repayment of intercompany loans
. Dividends to parent
. Tax payments/settlements
CASH FLOWS As reflected in our Statements of Cash Flows, net cash provided
by (used in) operating activities was $4.3 million, $(5.9) million and $14.0
million in 2009, 2008 and 2007, respectively. Fluctuations in net cash provided
by operating activities primarily occur as a result of changes in net
investment income and differences in the timing of reinsurance payments to and
from ALIC.
Under the terms of reinsurance agreements, all premiums and deposits,
excluding variable annuity and life contract deposits allocated to separate
accounts and those reinsured to non-affiliated reinsurers, are transferred to
ALIC, which maintains the investment portfolios supporting our products.
Payments of contractholder claims, benefits, contract surrenders and
withdrawals and certain operating costs (excluding investment-related
expenses), are reimbursed by ALIC, under the terms of the reinsurance
agreements. We continue to have primary liability as a direct insurer for risks
reinsured. Our ability to meet liquidity demands is dependent on ALIC's and
other reinsurers' ability to meet those obligations under the reinsurance
programs.
Our ability to pay dividends is dependent on business conditions, income,
cash requirements and other relevant factors. The payment of shareholder
dividends without the prior approval of the state insurance regulator is
limited by Nebraska law to formula amounts based on net income and capital and
surplus, determined in conformity with statutory accounting practices, as well
as the timing and amount of dividends paid in the preceding twelve months. The
maximum amount of dividends that we can distribute during 2010 without prior
approval of the Nebraska Department of Insurance is $30.6 million.
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 9 of the financial statements.
51
PENDING ACCOUNTING STANDARDS
There are several pending accounting standards that we have not implemented
either because the standard has not been finalized or the implementation date
has not yet occurred. For a discussion of these pending standards, see Note 2
of the financial statements.
The effect of implementing certain accounting standards on our financial
results and financial condition is often based in part on market conditions at
the time of implementation of the standard and other factors we are unable to
determine prior to implementation. For this reason, we are sometimes unable to
estimate the effect of certain pending accounting standards until the relevant
authoritative body finalizes these standards or until we implement them.
ITEM 11(I).CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 11(J).QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required for Item 11(j) is incorporated by reference to the
material under the caption "Market Risk" in Item 11(h) of this report.
ITEM 11(K).DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
Directors are elected at each annual meeting of shareholders, for a term of
one year. The biographies of each of the directors below contains information
regarding the person's service as a director, business experience, director
positions held currently or at any time during the last five years, and the
experiences, qualifications, attributes or skills that caused the company
management to determine that a director should serve as such for Lincoln
Benefit. Unless otherwise indicated, each director and executive officer has
served for at least five years in the business position currently or most
recently held.
LAWRENCE W. DAHL, 50, has been a director since 1999 and President and Chief
Operating Officer since November 2005. In his current role, Mr. Dahl manages
the distribution relationships for Lincoln Benefit. Mr. Dahl began his Allstate
career in 1987 in the Tax Department before becoming the Executive Vice
President of Administration for Lincoln Benefit, where he was responsible for
Marketing, Field Technology, Compliance, Planning and Strategy. Mr. Dahl
progressed through various other leadership positions, including Executive Vice
President of Sales and President of Distribution before becoming the President
and Chief Operating Officer. Mr. Dahl has also earned a JURIS DOCTOR degree and
a Certified Public Account designation. Currently, Mr. Dahl also serves as a
director for ALFS, Inc. and Surety Life Insurance Company, each of which is
affiliated with Lincoln Benefit. Over the course of his career with Lincoln
Benefit, Mr. Dahl has gained deep knowledge of the life insurance industry as
well as extensive experience with distribution and sales.
MATTHEW S. EASLEY, 54, has been a director since March 2009 and Senior Vice
President since March 2010. Mr. Easley is also a Vice President for Allstate
Life Insurance Company. Mr. Easley is responsible for Product Management,
Underwriting, and Asset Liability Management within the Allstate Financial
group of companies. Prior to joining Allstate, Mr. Easley spent 23 years at
Nationwide Financial including 11 years as the head of Annuity and Pension
Actuarial, where he started a 401(k) business with a new-to-the-world business
model, created a synthetic asset segmentation method, co-invented a patented
retirement planning software and led a team to create a new strategic plan as
part of the initial public offering of Nationwide Financial Services stock.
Currently, Mr. Easley also serves as a director for ALFS, Inc., ALIC
Reinsurance Company, Allstate Assignment Company, Allstate Assurance Company,
Allstate Life Insurance Company, Allstate Life Insurance Company of New York,
Allstate Settlement Corporation, American Heritage Life Insurance Company,
Charter National Life
52
Insurance Company, Intramerica Life Insurance Company and Surety Life Insurance
Company, each of which is affiliated with Lincoln Benefit. Mr. Easley possesses
extensive insurance business, product and liability management experience.
MARK A GREEN, 42, became Senior Vice President on March 16, 2010. Mr. Green
is also the Vice President of National Sales for Allstate Life Insurance
Company. Prior to his current role, Mr. Green was the Assistant Field Vice
President for Allstate Insurance Company in the Capital Region, where he had
geographic responsibility for West Virginia, Delaware and Washington D.C.
Before joining Allstate in 2009, Mr. Green was a founding equity partner and
chief risk officer for AIX Group in Connecticut, where he was responsible for
corporate development and overall risk and investment management. He has worked
for Wells Fargo, Chubb Group and Swiss Reinsurance. Currently, Mr. Green also
serves as a director for Allstate Life Insurance Company of New York and
Intramerica Life Insurance Company, each of which is an affiliate of Lincoln
Benefit. Mr. Green has experience in optimizing insurance company operations to
drive profitable growth.
SUSAN L. LEES, 52, has been director and Senior Vice President, General
Counsel and Secretary since August 2008. Ms. Lees is also Senior Vice
President, General Counsel and Secretary of Allstate Life Insurance Company. At
Allstate for over 20 years, Ms. Lees progressed through various counsel
positions throughout Allstate before become an assistant vice president in
1999. As the leader of the Corporate Law division of Allstate Law and
Regulation, Ms. Lees gained extensive experience working with a number of the
business areas throughout the enterprise, including Allstate Life Insurance
Company. Currently, Ms. Lees serves as a director for Life Insurance Council of
New York. She also serves as a director for ALIC Reinsurance Company, Allstate
Assignment Company, Allstate Assurance Company, Allstate Financial Corporation,
Allstate Life Insurance Company, Allstate Life Insurance Company of New York,
Allstate Settlement Corporation, American Heritage Life Insurance Company,
Charter National Life Insurance Company, Intramerica Life Insurance Company,
and Surety Life Insurance Company, each of which is affiliated with Lincoln
Benefit. Ms. Lees has a deep understanding of insurance business generally, as
well as applicable laws and regulations, including corporate and securities
laws and corporate governance matters. In addition, Ms. Lees has extensive
knowledge regarding Lincoln Benefit's business, including its employees,
products, agencies and customers.
JOHN C. PINTOZZI, 44, has been director, Senior Vice President and Chief
Financial Officer since March 2005. Mr. Pintozzi also is Senior Vice President
and Chief Financial Officer for Allstate Life Insurance Company. In these
positions, Mr. Pintozzi is responsible for the planning and analysis, capital
allocation, valuation and compliance functions as well as Allstate Federal
Savings Bank. Prior to Allstate, Mr. Pintozzi was an audit partner with
Deloitte & Touche, specializing in the insurance and financial services
industries. He is a Certified Public Accountant and holds memberships with the
American Institute of Certified Public Accountants and the Illinois CPA
Society. In addition, Mr. Pintozzi currently serves as a director for ALIC
Reinsurance Company, Allstate Assignment Company, Allstate Assurance Company,
Allstate Bank, Allstate Life Insurance Company, Allstate Life Insurance Company
of New York, Allstate Settlement Corporation, American Heritage Life Insurance
Company, Charter National Life Insurance Company, Intramerica Life Insurance
Company, and Surety Life Insurance, each of which is affiliated with Lincoln
Benefit. Mr. Pintozzi has extensive experience in corporate and insurance
company finance and accounting.
MATTHEW E. WINTER, 53, has been a director since December 2009, Chief
Executive Officer and Chairman of the Board since March 2010. Mr. Winter is
also the President and Chief Executive Officer of Allstate Life Insurance
Company and Senior Vice President of Allstate Insurance Company, each a parent
organization of Lincoln Benefit. Prior to Allstate, Mr. Winter was the Vice
Chairman of American International Group, President and Chief Executive Officer
of American General Life Companies, and Executive Vice President for MassMutual
Financial Group. For a brief period in 2009, Mr. Winter served as a director of
EP Global Communications, a magazine publication and distribution company.
Currently, Mr. Winter also serves as a director for Allstate Insurance Company,
Allstate Life Insurance Company, Allstate Life Insurance Company of New York,
American Heritage Life Insurance Company, American Heritage Life Investment
Corporation, and Intramerica Life Insurance Company, each of which is
affiliated with Lincoln Benefit. Mr. Winter was also a
53
former Chairman of the Houston Food Bank Board of Directors. Mr. Winter has
extensive experience leading major life insurance and financial services
providers, working with financial and estate planning products and overseeing
the operations of insurance companies.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
No directors or executive officers have been involved in any legal
proceedings that are material to an evaluation of the ability or integrity of
any director or executive officer of Lincoln Benefit.
ITEM 11(L).EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS ("CD&A")
OVERVIEW
. Executive officers of Lincoln Benefit also serve as officers of other
subsidiaries of The Allstate Corporation ("Allstate") and receive no
compensation directly from Lincoln Benefit. They are employees of an
Allstate subsidiary. Allocations have been made for each named executive
based on the amount of the named executive's compensation allocated to
Lincoln Benefit under the Amended and Restated Service and Expense
Agreement among Allstate Insurance Company, Allstate and certain
affiliates, as amended effective January 1, 2009, to which Lincoln
Benefit is a party (the "Service and Expense Agreement"). Those
allocations are reflected in the Summary Compensation Table set forth
below and in this disclosure, except where noted. The named executives
may have received additional compensation for services rendered to other
Allstate subsidiaries, and those amounts are not reported. Lincoln
Benefit's directors receive no compensation for serving as directors in
addition to their compensation as employees of an Allstate affiliate.
. Allstate provides its executive officers with the following core
compensation elements: annual salary, annual cash incentive awards, and
equity awards. In 2009, Allstate discontinued future cycles of its
long-term cash incentive plan in favor of placing greater emphasis on
long-term equity awards, consistent with its compensation philosophy,
and to a lesser extent, annual cash incentive awards.
. Allstate embraces a pay-for-performance philosophy for its executives in
which variable compensation represents a large portion of potential
compensation and is tied to appreciation of Allstate stock and
Allstate's performance in achieving short-term and long-term business
goals.
. Allstate uses equity-based compensation to align the interests of its
executives with long-term stockholder value and as a tool for retaining
executive talent. Once granted, the value of these awards rises and
falls with the price of Allstate stock. Equity awards granted in 2010,
including stock options and restricted stock units, will vest in three
installments of 50% on the second anniversary of the grant date and 25%
on each of the third and fourth anniversary dates. Restricted stock
units granted in 2010 will no longer receive dividend equivalents on a
quarterly schedule; instead dividend equivalents will be paid when the
underlying restricted stock unit vests.
. In 2009 the executive compensation program was simplified by reducing
the number of performance measures under the Annual Executive Incentive
Compensation Plan. Consistent with current market trends, the maximum
corporate multiplier for the 2010 performance year for an executive
officer's Annual Executive Incentive Plan award will be 250% of target.
In addition, the minimum payout, upon achieving the performance
threshold, will be 50% of target.
. Allstate offers its executives limited perquisites.
54
NAMED EXECUTIVES
This CD&A, on pages 54 to 63, describes the executive compensation program
for Allstate and specifically describes total 2009 compensation for the
following named executives of Lincoln Benefit:
. Frederick F. Cripe--Chairman and Chief Executive Officer until March 12,
2010
. John C. Pintozzi--Senior Vice President and Chief Financial Officer
. Lawrence W. Dahl--President and Chief Operating Officer
. Matthew S. Easley--Vice President
. John C. Lounds--Vice President until July 31, 2009
. J. Eric Smith--Vice President until January 15, 2010
COMPENSATION PHILOSOPHY
Allstate's compensation philosophy is based on these central beliefs:
. Executive compensation should be aligned with performance and
stockholder value. Accordingly, a significant amount of executive
compensation should be in the form of equity.
. The compensation of executives should vary both with appreciation in the
price of Allstate stock and with Allstate's performance in achieving
strategic short and long-term business goals designed to drive stock
price appreciation.
. Allstate's compensation program should inspire executives to strive for
performance that is better than the industry average.
. A greater percentage of compensation should be at risk for executives
who bear higher levels of responsibility for Allstate's performance.
. Allstate should provide competitive levels of compensation for
competitive levels of performance and superior levels of compensation
for superior levels of performance.
Allstate's executive compensation program has been designed around these
beliefs. They serve Allstate's goal of attracting, motivating, and retaining
highly talented executives to compete in the complex and highly regulated
insurance and financial services industry.
COMPENSATION PRACTICES
Allstate reviews the design of its executive compensation program and
executive pay levels on an annual basis and performance and goal attainment
within this design throughout the year. As part of that review, Allstate
considers available data regarding compensation paid to similarly-situated
executives at companies against which it competes for executive talent. With
respect to the compensation program for 2009 for Allstate executives, including
the named executives of Lincoln Benefit, Allstate management considered
compensation surveys, as well as compensation data for the peer companies
listed on page 61, that provided information on companies of broadly similar
size and business mix as Allstate, as well as companies with a broader market
context. The compensation surveys considered include the Mercer Property &
Casualty Insurance Company Survey, the 2008 Towers Perrin Diversified Insurance
Survey, and the Towers Perrin Compensation Data Bank. The weight given to
information obtained from these sources varied depending on the position being
evaluated. The Diversified Insurance Survey includes 29 insurance organizations
with assets ranging from $20 billion to $1 trillion, with a median asset size
of $131 billion. The Towers Perrin Compensation Data Bank provides compensation
data on 80 of the Fortune 100 companies. The Mercer Property & Casualty
Insurance Company Survey includes compensation data for 45 property and
casualty insurance companies with at least $1 billion in annual premiums. In
addition, in its executive pay and performance discussions, Allstate management
considered information regarding other companies in the financial services
industries.
55
CORE ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM
The following table lists the core elements of Allstate's executive
compensation program for 2009.
CORE ELEMENT PURPOSE
- ------------ -------
Annual salary......... Provides a base level of competitive cash compensation for executive talent
Annual cash incentive Reward performance on key strategic, operational, and financial measures over
awards.............. the year
Equity awards......... Align the interests of executives with long-term Allstate shareholder value and
retain executive talent
These core elements are designed to balance individual, business unit, and
overall corporate performance. The goals for incentive awards are aligned with
Allstate's strategic vision and 2009 operating priorities of keeping Allstate
financially strong, improving customer loyalty, and reinventing protection and
retirement for the consumer.
Allstate's compensation design balances annual and long-term incentive
awards with short and long-term business goals. At the target level of
performance, annual and long-term incentive awards are designed to constitute a
significant percentage of an executive's total core compensation. The target
incentive-based core compensation for Mr. Cripe, who had the greatest level of
responsibility for Allstate's performance, was 77% of his total core
compensation (19% annual cash incentive award, 38% stock options, and 20%
restricted stock units). Messrs. Pintozzi's, Easley's, Lounds', and Smith's
incentive-based core compensation on average was targeted at 64% of their total
core compensation (21% annual cash incentive award, 28% stock options, and 15%
restricted stock units). The target incentive-based core compensation for
Mr. Dahl was 50% of his total core compensation (35% annual cash incentive
award, 10% stock options, and 5% restricted stock units).
SALARY
. Mr. Cripe's salary was set by the Allstate Board of Directors based on
the recommendations of its Compensation and Succession Committee (the
"Committee"). The salaries of other executive officers are set by
Allstate management.
. In recommending executive base salary levels, Allstate uses the
50/th/ percentile of comparable companies as a guideline to align with
Allstate's pay philosophy for competitive positioning in the market for
executive talent.
. The average enterprise-wide merit and promotional increases are based on
a combination of U.S. general and the insurance industry market data and
are set at levels intended to be competitive.
. Annual merit increases for the named executives are based on evaluations
of their performance by Allstate's management, using the average
enterprise-wide merit increase as a guideline.
. Promotional increases are based on the increased responsibilities of the
new position and the skills and experience of the executive being
promoted.
ANNUAL CASH INCENTIVE COMPENSATION
In 2009 Allstate maintained the Annual Executive Incentive Compensation
Plan, an Allstate stockholder-approved plan under which executive officers had
the opportunity to earn an annual cash incentive award based on the achievement
of a combination of Allstate corporate and business unit performance measures
for Allstate's main business units including Allstate Financial. Lincoln
Benefit is part of the Allstate Financial business unit.
The Committee approves performance measures and goals for annual cash
incentive awards under the Annual Executive Incentive Compensation Plan during
the first quarter of the year. The performance measures
56
and goals are aligned with Allstate's objectives and tied to Allstate's
strategic vision and operating priorities. They are designed to reward
executives for actual performance, to reflect objectives that will require
significant effort and skill to achieve, and to drive stockholder value.
After the end of the year, the Committee reviews the extent to which
Allstate has achieved the various performance measures and approves the actual
amount of the annual cash incentive award. The Committee may adjust the amount
of an annual cash incentive award. Allstate pays the annual cash incentive
awards in March, after the end of the year.
For 2009, the Committee adopted corporate and Allstate Financial business
unit annual performance measures and weighted them as applied to each of the
named executives in accordance with their responsibilities for Allstate's
overall corporate performance and the performance of Allstate Financial. Each
measure is assigned a weight expressed as a percentage of the total annual cash
incentive award opportunity, with all weights for any particular named
executive adding to 100%.
The following table lists the performance measures and related target goals
for 2009, as well as the weighting factors and actual results, applicable to
the named executives. The performance measures were designed to focus executive
attention on key strategic, operational, and financial measures including top
line growth and profitability. For each performance measure, the Committee
approved a threshold, target, and maximum goal. The target goals for the
performance measures were based on evaluations of Allstate's historical
performance and plans to drive projected performance. A description of each
performance measure is provided under the "Performance Measures" caption on
page 81.
ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN
PERFORMANCE MEASURES, TARGETS, AND WEIGHTING
ACHIEVEMENT
RELATIVE TO
THRESHOLD, TARGET,
PERFORMANCE MEASURE/(1)/ WEIGHTING TARGET ACTUAL/(2)/ MAXIMUM GOALS
- ----------------------- --------- ------------ ------------ ------------------
CORPORATE-LEVEL PERFORMANCE MEASURE....... 20%
Adjusted Operating Income Per Diluted
Share................................ $5.10 $3.55 Below threshold
ALLSTATE FINANCIAL PERFORMANCE MEASURES... 80%
Adjusted Operating Income.............. $300 million $279 million Between threshold
and target
Financial Product Sales (Production
Credits)............................. $285 million $255 million Below threshold
Allstate Financial Total Return........ 4.50% 14.84% Exceeded maximum
- --------
(1)Information regarding Allstate's performance measures is disclosed in the
limited context of the annual cash incentive awards and should not be
understood to be statements of management's expectations or estimates of
results or other guidance. We specifically caution investors not to apply
these statements to other contexts.
(2)Stated as a percentage of target goals with a range from 0% to 300% (with
the exception of Mr. Dahl, who had a target goal with a range from 0% to
250%), the actual performance comprises 0% for Adjusted Operating Income Per
Diluted Share performance, and 99% for Allstate Financial performance.
Target award opportunities approved by the Committee are stated as a
percentage of annual base salary. Annual cash incentive awards are calculated
using base salary, as adjusted by any merit and promotional increases granted
during the year on a prorated basis, except for Mr. Dahl, whose incentive award
was calculated using his 2009 year-end salary. One of the central beliefs on
which Allstate's compensation philosophy is based is that a greater percentage
of compensation should be at risk for executives who bear higher levels of
57
responsibility for Allstate's performance. In setting target incentive levels
for named executive officers, the Committee gives the most consideration to
market data primarily focusing on pay levels at peer group companies with which
it directly competes for executive talent and stockholder investment.
In calculating the annual cash incentive awards, Allstate's achievement with
respect to each performance measure is expressed as a percentage of the target
goal, with interpolation applied between the threshold and target goals and
between the target and maximum goals. Unless otherwise adjusted by the
Committee for Mr. Cripe or by management for the other named executives, the
amount of the annual cash incentive award is the sum of the amounts calculated
using the calculation below for all of the performance measures.
Actual performance interpolated relative to X Weighting X Target award opportunity as a X Salary*
threshold and target on a range of 0% to percentage of salary*
100% and relative to target and maximum on
a range of 100% to 300%**
- --------
* Base salary, as adjusted by any merit and promotional increases granted
during the year on a prorated basis (except for Mr. Dahl).
** 100% to 250% for Mr. Dahl, whose incentive award was calculated using his
2009 year-end salary.
Annual cash incentive awards based on the achievement of the performance
measures for 2009 are included in the amounts reported in the Non-Equity
Incentive Plan Compensation column of the Summary Compensation Table on page 63
and broken out separately from long-term cash incentive awards in a footnote to
that table. In addition, the threshold, target, and maximum annual award
opportunities for 2009 are included in the Estimated Future Payouts Under
Non-Equity Incentive Plan Awards column in the Grants of Plan-Based Awards
table on page 65.
As President and Chief Operating Officer of Lincoln Benefit, Mr. Dahl
participated in a cash-based sales incentive plan (the "Sales Incentive Plan")
based on first year premiums for universal life and term policies, as well as
deposits for annuities, sold by one of Lincoln Benefit's distribution channels.
In 2009, the targeted compensation level for the Sales Incentive Plan was
$100,000. Payments related to the Sales Incentive Plan were made to Mr. Dahl on
a monthly basis and totaled $62,343 for 2009. Payments were below plan for 2009
because targeted sales levels were not achieved. No other named executives of
Lincoln Benefit participated in the Sales Incentive Plan.
LONG-TERM INCENTIVE AWARDS--CASH AND EQUITY
As part of total core compensation, Allstate historically has provided three
forms of long-term incentive awards: stock options, restricted stock units, and
long-term cash incentive awards. In 2009, Allstate discontinued future cycles
of the long-term cash incentive plan. The relative mix of various forms of
these awards is driven by Allstate's objectives in providing the specific form
of award, as described below.
LONG-TERM INCENTIVE AWARDS--EQUITY
As stated in its compensation philosophy, Allstate believes that a
significant amount of executive compensation should be in the form of equity
and that a greater percentage of compensation should be at risk for executives
who bear higher levels of responsibility for Allstate's performance. Consistent
with that philosophy, the size of stock option and restricted stock unit awards
granted by the Committee is usually larger for executives with the broadest
scope of responsibility. However, from time to time, larger equity awards are
granted to attract new executives.
STOCK OPTIONS
Stock options represent the opportunity to buy shares of Allstate stock at a
fixed exercise price at a future date. They are utilized to align the interests
of executives with long-term value of Allstate stockholders.
58
KEY ELEMENTS:
. Under the Allstate stockholder-approved equity incentive plan, the
exercise price cannot be less than the fair market value of a share on
the date of grant.
. Stock option repricing is not permitted. In other words, absent an event
such as a stock split, if the Committee cancels an award and substitutes
a new award in its place, the exercise price of the new award cannot be
less than the exercise price of the cancelled award.
. All stock option awards have been made in the form of nonqualified stock
options.
. Allstate stock options vest over stated vesting periods measured from
the date of grant.
. The options granted to the named executives in 2009 become exercisable
in four installments of 25% on the first four anniversaries of the grant
date and expire in ten years, except in certain change-in-control
situations or under other special circumstances approved by the
Committee.
RESTRICTED STOCK UNITS
Each restricted stock unit represents Allstate's promise to transfer one
fully vested share of Allstate stock in the future if and when the restrictions
expire (when the unit "vests"). Because restricted stock units are based on and
payable in stock, they serve to reinforce the alignment of interests of
executives and Allstate stockholders. In addition, because restricted stock
units have a real, current value that is forfeited, except in some
circumstances, if an executive terminates employment before the restricted
stock units vest, they provide a significant retention incentive. Under the
terms of the restricted stock unit awards, the executives have only the rights
of general unsecured creditors of Allstate and no rights as stockholders until
delivery of the underlying shares.
KEY ELEMENTS:
. The restricted stock units granted to the named executives in 2009 vest
in one installment on the fourth anniversary of the date of grant,
except in certain change-in-control situations or under other special
circumstances approved by the Committee.
. Allstate restricted stock units granted to the named executives in 2009
and prior years include the right to receive dividend equivalents in the
same amount and at the same time as dividends paid to all Allstate
common stockholders.
TIMING OF EQUITY AWARDS AND GRANT PRACTICES
The Committee grants existing employee equity incentive awards on an annual
basis normally during a meeting in the first fiscal quarter, after the issuance
of Allstate's prior fiscal year-end earnings release. Throughout the year, the
Committee grants equity incentive awards in connection with new hires and
promotions and in recognition of achievements. The Committee approved a
one-time recognition award of non-qualified stock options and restricted stock
units to Mr. Cripe in November 2009. This award was granted in recognition of
his leadership of Allstate Financial.
Pursuant to authority delegated by the Allstate Board and the Committee,
equity incentive awards also may be granted by a subcommittee consisting of the
Committee chair or by an equity award committee which currently consists of
Allstate's CEO. The subcommittee may grant restricted stock or restricted stock
units to new hires. The equity award committee may grant restricted stock units
and stock options in connection with new hires and promotions and in
recognition of achievements.
STOCK OWNERSHIP GUIDELINES
Because Allstate believes strongly in linking the interests of management
with those of its stockholders, it instituted stock ownership guidelines in
1996 that require each of the named executives, with the exception of
59
Mr. Dahl, to own, as of March 1 following the fifth year after assuming a
senior management position, common stock, including restricted stock units,
worth a multiple of base salary. Unexercised stock options do not count towards
meeting the stock ownership guidelines. Messrs. Cripe and Pintozzi have met
their respective goals. Mr. Easley has until March 1, 2011, to meet his goal.
Messrs. Lounds and Smith retired or left Allstate prior to March 1, 2010 and
are no longer subject to the guidelines. For Mr. Cripe, the goal is four times
salary. For Messrs. Pintozzi and Easley, the goal is two times salary. After a
named executive meets the guideline for the position, if the value of his
shares does not equal the specified multiple of base salary solely due to the
fact that the value of the shares has declined, the executive is still deemed
to be in compliance with the guideline. However, any executive in that
situation may not sell any shares acquired upon the exercise of an option or
conversion of any equity award except to satisfy tax withholding obligations,
until the value of his shares again equals the specified multiple of base
salary. In accordance with Allstate's policy on insider trading, all officers,
directors, and employees are prohibited from engaging in transactions with
respect to any securities issued by Allstate or any of its subsidiaries that
might be considered speculative or regarded as hedging, such as selling short
or buying or selling options.
LONG-TERM INCENTIVE AWARDS--CASH
After the end of the three-year cycle for long-term cash incentive awards,
the Committee reviews the extent to which Allstate has achieved the various
performance measures and approves the actual amount of the long-term cash
incentive awards. Allstate pays long-term cash incentive awards after the end
of the three-year cycle.
Long-term cash incentive awards were designed to reward executives for
collective results attained over a three-year performance cycle. Each of the
named executives except for Mr. Dahl is eligible for these awards. The
Committee approved performance measures and threshold, target, and maximum
goals for long-term cash incentive awards at the beginning of each three-year
cycle and a new cycle started every year. However, the Committee discontinued
future long-term incentive plan awards in 2009, making the 2008-2010 cycle the
final cycle under the Long-Term Executive Incentive Compensation Plan. The
final award under this plan was made in February 2008 and will be paid out in
March 2011. For the 2007-2009 cycle, there were three performance measures. The
target goals for each performance measure, the actual results, and the relative
weight of each measure are shown in the following table. The selection and
weighting of these measures was intended to focus executive attention on the
collective achievement of Allstate's long-term financial goals across its
various product lines. A description of each performance measure is provided
under the "Performance Measures" caption on page 81.
LONG-TERM CASH INCENTIVE AWARDS, 2007-2009 CYCLE
PERFORMANCE MEASURES, WEIGHTING, AND TARGET GOALS/(1)/
PERCENTAGE
WEIGHT OF THE ACHIEVEMENT
TOTAL RELATIVE TO
POTENTIAL THRESHOLD, TARGET,
PERFORMANCE MEASURES AWARD/(2)/ TARGET ACTUAL MAXIMUM GOALS/(3)/
- -------------------- ------------- ----------- ----------- ------------------
Average adjusted return on equity.......................... 50% 5/th/ 5/th/ Target
position position
relative to relative to
peers peers
Allstate Protection growth in policies in force over the
3-year cycle............................................. 25% 5.0% (3.8)% Below threshold
Allstate Financial return on total capital over the 3-year
cycle.................................................... 25% 9.5% 7.9% Below threshold
- --------
(1)Information regarding performance measures is disclosed in the limited
context of long-term cash incentive awards and should not be understood to
be statements of management's expectations or estimates of results or other
guidance. We specifically caution investors not to apply these statements to
other contexts.
60
(2)Same weight applied for all eligible named executives.
(3)Stated as a percentage of target goals with a range from 0% to 300%, the
actual performance comprises 50% for the average adjusted return on equity
measure, 0% for the Allstate Protection measure, and 0% for the Allstate
Financial measure. The weighted results for all three measures stated as a
percentage of the target goals for all the eligible named executives was 50%.
The target goal for the average adjusted return on equity was set at a level
representing average projected industry performance. The target goals for
Allstate Protection growth in policies in force over the three-year cycle and
Allstate Financial return on total capital over the three-year cycle were based
on evaluations of Allstate's historical performance and plans to drive
projected performance.
The average adjusted return on equity measure compares Allstate's
performance to the following peer insurance companies:
The Chubb Corporation MetLife Inc.
CNA Financial Corporation The Progressive Corporation
The Hartford Financial Services Group, Inc. Prudential Financial, Inc.
Lincoln National Corporation The Travelers Companies, Inc.
Allstate's ranked position relative to this peer group determines the
percentage of the total target award for this performance measure to be paid,
as indicated in the following table. However no payment is made unless the
average adjusted return on equity exceeds the average risk free rate of return
on three-year Treasury notes over the three-year cycle, plus 200 basis points,
regardless of Allstate's standing compared to the peer group. For the 2007-2009
cycle, Allstate achieved the 5/th/ position and met the target level of
performance. The average adjusted return on equity exceeded the average risk
free rate of return by 375 basis points.
AVERAGE ADJUSTED RETURN ON EQUITY RELATIVE
TO PEER GROUP, 2007-2009 CYCLE
PEER POSITION % OF TARGET AWARD
------------- -----------------
Threshold. 9 0%
8 40%
7 60%
6 80%
Target.... 5 100%
4 150%
3 200%
2 250%
Maximum... 1 300%
Target award opportunities approved by the Committee are stated as a
percentage of annual base salary. Award opportunities for the eligible named
executives are capped at 300% of the target awards. Awards for each cycle are
calculated using base salary in effect at the beginning of the cycle, as
adjusted by any promotional increases granted during the course of the cycle on
a prorated basis. Mr. Cripe had a target award opportunity of 70%. Messrs.
Pintozzi, Easley, Smith, and Lounds each had a target award opportunity of 40%.
The size of these target awards is based on each executive's level of
responsibility for contributing to Allstate's long-term performance and overall
market competitiveness.
Unless otherwise adjusted by the Committee, in calculating the long-term
cash incentive awards, Allstate's achievement with respect to each performance
measure for a particular cycle is expressed as a percentage of the target goal
with interpolation applied between threshold and target goals and between
target and maximum goals.
61
The amount of each eligible named executive's award is the sum of the amounts
calculated using the following calculation for all of the long-term cash
incentive performance measures.
Actual performance interpolated relative to X Weighting X Target award opportunity as a X Salary*
threshold and target on a range of 0% to percentage of salary*
100% and relative to target and maximum on
a range of 100% to 300%
- --------
* Base salary in effect at the beginning of the cycle, as adjusted by any
promotional increases granted during the course of the cycle on a prorated
basis.
Long-term cash incentive awards based on the achievement of the performance
measures for the 2007-2009 cycle were paid in March 2010 and are included in
the amounts reported in the Non-Equity Incentive Plan Compensation column of
the Summary Compensation Table and broken out separately from annual cash
incentive awards in a footnote to that table.
OTHER ELEMENTS OF COMPENSATION
To remain competitive with other employers and to attract, retain, and
motivate highly talented executives and other employees, we provide the
benefits listed in the following table.
OTHER NAMED
EXECUTIVES, OTHER ALL FULL-TIME
OFFICERS, AND AND REGULAR
CERTAIN PART-TIME
BENEFIT OR PERQUISITE MR. CRIPE MANAGERS EMPLOYEES
- --------------------- --------------- ----------------- -------------
401(k)/(1)/ and defined benefit pension.................. (check mark) (check mark) (check mark)
Supplemental retirement benefit.......................... (check mark) (check mark)
Health and welfare benefits/(2)/......................... (check mark) (check mark) (check mark)
Supplemental long-term disability and executive physical
program................................................ (check mark) (check mark)/(3)/
Deferred compensation.................................... (check mark) (check mark)
Tax preparation services................................. (check mark) (check mark)
Financial planning services.............................. (check mark)
Cell phones and ground transportation.................... (check mark)/(4)/
- --------
(1)Allstate contributed $1.00 for every dollar of basic pre-tax deposits made
in 2009 on the first 3 percent of eligible pay and $.50 for every dollar of
basic pre-tax deposits made in 2009 on the next 2 percent of eligible pay
for eligible participants, including the named executive officers.
(2)Including medical, dental, vision, life, accidental death and dismemberment,
long-term disability, and group legal insurance.
(3)An executive physical program is available to all officers.
(4)Ground transportation is available to Mr. Cripe. Cell phones are available
to members of Allstate's senior management team, other officers and certain
managers, and certain employees depending on their job responsibilities.
RETIREMENT BENEFITS
Each named executive officer participates in two different defined benefit
pension plans. The Allstate Retirement Plan (ARP) is a tax qualified defined
benefit pension plan available to all of Allstate's regular full-time and
regular part-time employees who meet certain age and service requirements. The
ARP provides an assured retirement income related to an employee's level of
compensation and length of service at no cost to the employee. As the ARP is a
tax qualified plan, federal tax law places limits on (1) the amount of an
individual's compensation that can be used to calculate plan benefits and
(2) the total amount of benefits payable to a
62
participant under the plan on an annual basis. These limits may result in a
lower benefit under the ARP than would have been payable if the limits did not
exist for certain of Allstate's employees. Therefore, the Allstate Insurance
Company Supplemental Retirement Income Plan (SRIP) was created for the purpose
of providing ARP-eligible employees whose compensation or benefit amount
exceeds the federal limits with an additional defined benefit in an amount
equal to what would have been payable under the ARP if the federal limits
described above did not exist.
CHANGE-IN-CONTROL AND POST-TERMINATION BENEFITS
Allstate does not view the change-in-control benefits or post-termination
benefits as additional elements of compensation due to the fact that a
change-in-control or other triggering event may never occur. However, the use
and structure of Allstate's change-in-control and post-termination plans are
consistent with Allstate's compensation objectives to attract, motivate, and
retain highly talented executives. A change-in-control of Allstate could have a
disruptive impact on both Allstate and its executives. Allstate's
change-in-control benefits and post-termination benefits are designed to
mitigate that impact and to maintain the connection between the interests of
executives and Allstate's stockholders. As part of these benefits, executives
receive equity awards that might otherwise be eliminated by new directors of
Allstate elected in connection with a change-in-control. With the exception of
Mr. Dahl, Allstate also provides certain protections for cash incentive awards,
previously deferred compensation, and benefits if the named executive's
employment is terminated within a two-year period after a change-in-control.
The arrangements which are described in the "Potential Payments as a Result of
Termination or Change-in-Control" section are not provided exclusively to the
named executives. Certain cash severance benefits are provided to all regular
full-time and regular part-time Allstate employees. For example, Allstate
replaced its vacation policy with a paid time off bank effective January 1,
2001. Eligible employees could elect to receive their vacation days accrued but
not yet taken between their annual anniversary date in 2000 and December 31,
2000, as either paid time off or in the form of a lump sum severance payment at
termination.
SUMMARY COMPENSATION TABLE FOR 2009 AND GRANTS OF PLAN-BASED AWARDS TABLE FOR
2009
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
the named executives for all services rendered to Lincoln Benefit in 2009,
allocated to Lincoln Benefit in a manner consistent with the allocation of
compensation expenses under Service and Expense Agreement.
CHANGE IN
PENSION VALUE
NON-EQUITY AND
INCENTIVE NONQUALIFIED
STOCK OPTION PLAN DEFERRED ALL OTHER
SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
NAME/(1)/ YEAR ($) ($)/(2)/ ($)/(3)/ ($)/(4)/ ($)/(5)/ EARNINGS ($)/(6)/ ($)/(7)/ ($)
- -------- ---- ------- ------- ------- ------- ------------ ---------------- ------------ -------
Frederick F. Cripe/(1)/... 2009 105,031 0 147,479 270,938 100,391 93,351/(8)/ 7,546 724,736
(CHAIRMAN AND CHIEF
EXECUTIVE OFFICER)
John C. Pintozzi.......... 2009 120,224 7,436 55,594 106,439 75,456 10,673/(9)/ 9,053 384,875
(VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER)
Lawrence W. Dahl.......... 2009 253,299 0 25,195 48,246 113,091 235,494/(10)/ 80,690 759,285
(PRESIDENT AND CHIEF
OPERATING OFFICER)
Matthew S. Easley......... 2009 114,709 0 45,652 87,398 72,160 6,064/(11)/ 8,708 334,691
(VICE PRESIDENT)
Eric Smith/(1)/........... 2009 105,359 0 48,919 93,652 49,462 8,702/(12)/ 8,023 314,117
(VICE PRESIDENT)
John Lounds/(1)/.......... 2009 77,287 0 60,708 116,223 42,245 135,461/(13)/ 21,264 453,188
(FORMER VICE PRESIDENT)
63
- --------
(1)Mr. Lounds was a Vice President of Lincoln Benefit until July 31, 2009.
Mr. Smith was a Vice President of Lincoln Benefit until January 15, 2010.
Mr. Cripe was Chairman and CEO of Lincoln Benefit until March 12, 2010.
(2)Mr. Pintozzi received a bonus as a result of his outstanding individual
performance in 2009.
(3)The aggregate grant date fair value of restricted stock unit awards computed
in accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification Topic 718 ("ASC 718"). The number of restricted stock
units granted in 2009 to each named executive is provided in the Grants of
Plan-Based Awards table on page 65. The fair value of restricted stock unit
awards is based on the final closing price of Allstate's stock as of the
date of grant. The final closing price in part reflects the payment of
future dividends expected.
(4)The aggregate grant date fair value of option awards computed in accordance
with FASB ASC 718. The fair value of each option award is estimated on the
date of grant using a binomial lattice model. The fair value of each option
award is estimated on the date of grant using the assumptions as set forth
in the following table:
Weighted average expected term. 8.1 years
Expected volatility............ 26.3 - 79.2%
Weighted average volatility.... 38.3%
Expected dividends............. 2.6%
Risk-free rate................. 0.0 - 3.7%
The number of options granted in 2009 to each named executive is provided in
the Grants of Plan-Based Awards table on page 65.
(5)Amounts earned under the Annual Executive Incentive Compensation Plan are
paid in the year following performance. Amounts earned under the Long-Term
Executive Incentive Compensation Plan are paid in the year following the
performance cycle. The amounts shown in the table above include amounts
earned in 2009 and payable under these plans in 2010. The break-down for
each component is as follows:
ANNUAL CASH LONG-TERM
INCENTIVE CASH INCENTIVE
NAME YEAR AWARD AMOUNT CYCLE AWARD AMOUNT
---- ---- ------------ --------- --------------
Mr. Cripe.... 2009 $68,051 2007-2009 $32,340
Mr. Pintozzi. 2009 $54,970 2007-2009 $20,486
Mr. Dahl..... 2009 $50,748* 2007-2009 $ 0
Mr. Easley... 2009 $52,444 2007-2009 $19,716
Mr. Lounds... 2009 $30,824 2007-2009 $18,639
Mr. Smith.... 2009 $22,327 2007-2009 $19,918
------
* Mr. Dahl received an additional $62,343 for 2009 under the terms of the
Sales Incentive Plan.
(6)Amounts reflect the aggregate increase in actuarial value of the pension
benefits as set forth in the Pension Benefits table, accrued during 2009.
These are benefits under the Allstate Retirement Plan (ARP) and the Allstate
Insurance Company Supplemental Retirement Income Plan (SRIP). Non-qualified
deferred compensation earnings are not reflected since Allstate's Deferred
Compensation Plan does not provide above-market earnings. For 2009, the
pension plan measurement date used for financial statement reporting
purposes, December 31, as well as the methodology employed for purposes of
Allstate's financial statements, were used in the calculation of the change
in present value. (See note 16 to the Allstate audited financial statements
for 2009.) One component of the change in pension value from 2008 to 2009
displayed in this column relates to the change in the discount rate used to
calculate the value of pension benefits. The discount rate decreased from
7.5% in 2008 to 6.25% at year-end 2009, which resulted in an increase in the
present value of accrued benefits at year-end 2009. For participants earning
final average pay benefits (i.e. Messrs. Cripe, Dahl, and Lounds),
approximately 50% of the change in pension value relates to the change in
the discount rate.
(7)The "All Other Compensation for 2009--Supplemental Table" provides details
regarding the amounts for 2009 for this column.
(8)Reflects increases in the actuarial value of the benefits provided to
Mr. Cripe pursuant to the ARP and SRIP of $38,049 and $55,302 respectively.
(9)Reflects increases in the actuarial value of the benefits provided to
Mr. Pintozzi pursuant to the ARP and SRIP of $5,546 and $5,127 respectively.
(10)Reflects increases in the actuarial value of the benefits provided to
Mr. Dahl pursuant to the ARP and SRIP of $122,316 and $113,178 respectively.
(11)Reflects increases in the actuarial value of the benefits provided to
Mr. Easley pursuant to the ARP and SRIP of $2,985 and $3,079 respectively.
(12)Reflects increases in the actuarial value of the benefits provided to
Mr. Smith pursuant to the ARP and SRIP of $4,794 and $3,908 respectively.
(13)Reflects increases in the actuarial value of the benefits provided to
Mr. Lounds pursuant to the ARP and SRIP of $50,462 and $84,999 respectively.
64
ALL OTHER COMPENSATION FOR 2009--SUPPLEMENTAL TABLE
(IN DOLLARS)
The following table describes the incremental cost of other benefits
provided in 2009 that are included in the "All Other Compensation" column.
TOTAL
401(K) ALL OTHER
NAME MATCH/(1)/ OTHER/(2)/ COMPENSATION
---- --------- --------- ------------
Mr. Cripe.... 2,587 4,959 7,546
Mr. Pintozzi. 3,695 5,358 9,053
Mr. Dahl..... 9,800 87,506 97,306
Mr. Easley... 3,695 5,013 8,708
Mr. Lounds... 3,695 11,189 14,884
Mr. Smith.... 3,402 4,621 8,023
- --------
(1)Each of the named executives participated in Allstate's 401(k) plan during
2009. The amount shown is the amount allocated to their accounts as employer
matching contributions, allocated to Lincoln Benefit in a manner consistent
with the allocation of compensation expenses under the Service and Expense
Agreement.
(2)"Other" consists of premiums for group life insurance and personal benefits
and perquisites consisting of cell phones, tax preparation services,
financial planning, executive physicals, ground transportation, and
supplemental long-term disability coverage. None of the personal benefits
and perquisites individually exceeded the greater of $25,000 or 10% of the
total amount of these benefits for the named executives, except Mr. Lounds'
vacation accrual severance benefit of $3,861, which represents the value at
December 31, 2009, of his vacation days accrued but not yet taken between
his annual anniversary date in 2000 and December 31, 2000, allocated to
Lincoln Benefit in a manner consistent with the Service and Expense
Agreement; and Mr. Dahl's payment, in accordance with Nebraska law, of
$76,914 for paid time off accrued but not taken between 2001 and 2009.
Allstate provides supplemental long-term disability coverage to regular
full-time and regular part-time employees whose annual earnings exceed the
level which produces the maximum monthly benefit provided by the Group Long
Term Disability Insurance Plan. This coverage is self-insured (funded and
paid for by Allstate when obligations are incurred). No obligations for the
named executives were incurred in 2009 and so no incremental cost is
reflected in the table.
GRANTS OF PLAN-BASED AWARDS AT FISCAL YEAR-END 2009/(1)/
The following table provides information about non-equity incentive plan
awards and equity awards granted to our named executives during the fiscal year
2009 to the extent the expense for such awards was allocated to Lincoln Benefit
under the Service and Expense Agreement.
ESTIMATED FUTURE PAYOUTS
UNDER NON-EQUITY INCENTIVE GRANT DATE
PLAN AWARDS/(2)/ FAIR VALUE ($)/(4)/
------------------------ -------------------
ALL
OTHER
STOCK ALL OTHER
AWARDS: OPTION
NUMBER AWARDS: EXERCISE
OF NUMBER OF OR BASE
SHARES SECURITIES PRICE OF
OF STOCK UNDERLYING OPTION
THRESHOLD TARGET MAXIMUM OR UNITS OPTIONS AWARDS STOCK OPTION
NAME GRANT DATE PLAN NAME ($) ($) ($) (#) (#) ($/SHR)/(3)/ AWARDS AWARDS
- ---- ------------- ---------------------- --------- ------ ------- -------- ---------- ----------- ------- -------
Mr. Cripe. Annual Cash Incentive 0 86,031 258,094
Feb. 27, 2009 Restricted Stock Units 6,018 101,281
Feb. 27, 2009 Stock Options 34,198 16.83 193,903
Nov. 02, 2009 Restricted Stock Units 1,559 46,199
Nov. 02, 2009 Stock Options 8,855 29.64 77,035
65
ESTIMATED FUTURE PAYOUTS
UNDER NON-EQUITY INCENTIVE GRANT DATE
PLAN AWARDS/(2)/ FAIR VALUE ($)/(4)/
------------------------- -------------------
ALL
OTHER
STOCK ALL OTHER
AWARDS: OPTION
NUMBER AWARDS: EXERCISE
OF NUMBER OF OR BASE
SHARES SECURITIES PRICE OF
OF STOCK UNDERLYING OPTION
THRESHOLD TARGET MAXIMUM OR UNITS OPTIONS AWARDS STOCK OPTION
NAME GRANT DATE PLAN NAME ($) ($) ($) (#) (#) ($/SHR)/(3)/ AWARDS AWARDS
- ---- ------------- ---------------------- --------- ------- ------- -------- ---------- ----------- ------ -------
Mr. Pintozzi. Annual Cash Incentive 0 69,494 208,483
Feb. 27, 2009 Restricted Stock Units 3,303 55,594
Feb. 27, 2009 Stock Options 18,772 16.83 106,439
Mr. Dahl..... Annual Cash Incentive 0 73,442 186,605
Sales Incentive Plan 0 100,000
Feb. 27, 2009 Restricted Stock Units 1,497 25,195
Feb. 27, 2009 Stock Options 8,509 16.83 48,246
Mr. Easley... Annual Cash Incentive 0 66,301 198,902
Feb. 27, 2009 Restricted Stock Units 2,713 45,652
Feb. 27, 2009 Stock Options 15,414 16.83 87,398
Mr. Lounds... Annual Cash Incentive 0 44,586 133,758
Feb. 27, 2009 Restricted Stock Units 3,607 60,708
Feb. 27, 2009 Stock Options 20,498 16.83 116,223
Mr. Smith.... Annual Cash Incentive 0 60,896 182,689
Feb. 27, 2009 Restricted Stock Units 2,907 48,919
Feb. 27, 2009 Stock Options 16,517 16.83 93,652
- --------
(1)Awards under the Annual Executive Incentive Compensation Plan and the 2001
Equity Incentive Plan.
(2)The amounts in these columns consist of the threshold, target, and maximum
annual cash incentive awards for the named executives. The threshold amount
for each named executive is zero, as the minimum amount payable if no
performance measures are achieved. The target amount is based upon
achievement of certain performance measures set forth in the "Annual Cash
Incentive Compensation" section of the CD&A.
(3)The exercise price of each option is equal to the fair market value of
Allstate's common stock on the date of grant. Fair market value is equal to
the closing sale price on the date of grant or, if there was no such sale on
the date of grant, then on the last previous day on which there was a sale.
(4)As computed in accordance with FASB ASC 718, the aggregate grant date fair
value of restricted stock units and stock option awards was $16.83 and
$5.67, respectively, for awards granted on February 27, 2009, and $29.64 and
$8.70, respectively, for awards granted on November 2, 2009. The assumptions
used in the valuation are discussed in footnotes 3 and 4 to the Summary
Compensation Table on page 63.
The following discussion of incentive compensation for 2009 elaborates on
the more general information provided above in the CD&A.
NON-EQUITY INCENTIVE COMPENSATION
The Non-Equity Incentive Plan Compensation column of the Summary
Compensation Table includes each named executive's annual cash incentive award
for 2009 and long-term cash incentive award for the 2007-2009 cycle, allocated
to Lincoln Benefit under the Service and Expense Agreement. The amount
attributable to annual and long-term, respectively, is provided in a footnote
to the Summary Compensation Table. The Estimated Future Payouts Under
Non-Equity Incentive Plan Awards column of the Grants of Plan-Based Awards at
Fiscal Year-End 2009 table includes the threshold, target, and maximum award
opportunities for 2009 annual cash incentive compensation, allocated in a
manner consistent with the allocation of compensation expenses to Lincoln
Benefit under the Service and Expense Agreement.
66
EQUITY COMPENSATION
The Committee granted both restricted stock units and options in 2009. The
restricted stock units granted in 2009 vest in one installment four years after
the date of grant, except in certain change-in-control situations or under
other special circumstances approved by the Committee. Normally, the named
executive must be employed in order for the restricted stock units to vest.
However, restricted stock units continue to vest following retirement on or
after the normal retirement date specified in the award. If the named executive
dies, then as of the date of death, all unvested restricted stock units granted
in 2009 will vest and become nonforfeitable. The restricted stock units granted
in 2009 and prior years include the right to receive dividend equivalents in
the same amount and at the same time as dividends paid to all Allstate common
stockholders.
The stock options granted in 2009 become exercisable in four annual
installments of 25% on the first four anniversaries of the grant date and
expire in ten years, except in certain change-in-control situations or under
other special circumstances approved by the Committee. Normally, the named
executive must be employed at the time of vesting in order for the options to
vest. If the named executive terminates on or after the normal retirement date
under the stock option award agreements, stock options not vested will continue
to vest as scheduled. When the options become vested, they may be exercised by
the named executive at any time on or before the earlier to occur of (i) the
expiration date of the option and (ii) the fifth anniversary of the date of the
named executive's termination of employment. If the named executive dies or
becomes disabled, unvested stock options will vest and may be exercised by the
named executive officer (or personal representative, estate or transferee, as
the case may be) at any time on or before the earlier to occur of (i) the
expiration date of the option and (ii) the second anniversary of the date of
the named executive's termination of employment. If the named executive
terminates for any other reason, any portion of the option not vested will be
forfeited. Vested options may be exercised at any time on or before the earlier
to occur of (i) the expiration date of the option and (ii) three months after
the date of the named executive's termination of employment. The options were
granted with an exercise price equal to the closing sale price on the date of
grant or, if there was no sale on the date of grant, then on the last previous
day on which there was a sale. Each option is a nonqualified stock option. Each
option includes tax withholding rights that permit the holder to elect to have
shares withheld to satisfy minimum federal, state, and local tax withholding
requirements. Option holders may exchange shares previously owned to satisfy
all or part of the exercise price. The vested portions of all the options may
be transferred during the holder's lifetime to, or for the benefit of, family
members. Any taxes payable upon a transferee's subsequent exercise of the
option remain the obligation of the original option holder.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2009
The following table summarizes the outstanding equity awards of the named
executives as of December 31, 2009, allocated in a manner consistent with the
allocation of compensation expenses to Lincoln Benefit under the Service and
Expense Agreement for 2009. The percentage of each equity award actually
allocated to Lincoln Benefit has varied over the years during which these
awards were granted depending on the extent of services rendered by such
executive to Lincoln Benefit and the arrangements in place at the time of such
equity awards between Lincoln Benefit and the executive's Allstate-affiliated
employer. Because the aggregate amount of such equity awards attributable to
services rendered to Lincoln Benefit by each named executive cannot be
calculated without unreasonable effort, the allocated amount of each equity
award provided for each named executive in the following table is the amount
determined by multiplying each named executive's equity award for services
rendered to Allstate and all of its affiliates by the percentage used for
allocating such named executive's compensation to Lincoln Benefit in 2009 under
the Service and Expense Agreement.
67
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2009
OPTION AWARDS/(1)/ STOCK AWARDS
------------------------------------------------------------------------ ------------------------------
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SHARES OR
UNDERLYING UNDERLYING UNITS OF
UNEXERCISED UNEXERCISED OPTION OPTION STOCK THAT
OPTION GRANT OPTIONS (#) OPTIONS (#) EXERCISE EXPIRATION STOCK AWARD HAVE NOT
NAME DATE EXERCISABLE/(2)/ UNEXERCISABLE/(3)/ PRICE DATE GRANT DATE VESTED (#)/(4)/
- ---- -------------- --------------- ----------------- -------- -------------- -------------- --------------
Mr. Cripe
Feb. 7, 2003 1,518 0 31.78 Feb. 7, 2013
Feb. 6, 2004 5,461 0 45.96 Feb. 6, 2014
Feb. 22, 2005 3,811 0 52.57 Feb. 22, 2015
Feb. 21, 2006 3,028 1,009 53.84 Feb. 21, 2016 Feb. 21, 2006 610
Feb. 21, 2006 1,782 594 53.84 Feb. 21, 2016 Feb. 21, 2006 158*
Feb. 20, 2007 3,815 3,815 62.24 Feb. 20, 2017 Feb. 20, 2007 1,056
Feb. 26, 2008 3,168 9,504 48.82 Feb. 26, 2018 Feb. 26, 2008 1,373
Feb. 27, 2009 0 34,198 16.83 Feb. 27, 2019 Feb. 27, 2009 6,018
Nov. 2, 2009 0 8,855 29.64 Nov. 2, 2019 Nov. 2, 2009 1,559
Mr. Pintozzi
Sep. 30, 2002 471 0 35.17
Feb. 7, 2003 1320 0 31.78 Feb. 7, 2013
Feb. 6, 2004 1877 0 45.96 Feb. 6, 2014
Feb. 22, 2005 5,164 0 52.57 Feb. 22, 2015
Feb. 21, 2006 2,545 848 53.84 Feb. 21, 2016 Feb. 21, 2006 773
Feb. 21, 2006 3,835 1,279 53.84 Feb. 21, 2016 Feb. 21, 2006 226*
Feb. 20, 2007 2,510 2,510 62.24 Feb. 20, 2017 Feb. 20, 2007 692
Feb. 26, 2008 2,240 6,720 48.82 Feb. 26, 2018 Feb. 26, 2008 972
Feb. 27, 2009 0 18,772 16.83 Feb. 27, 2019 Feb. 27, 2009 3,303
Mr. Dahl
May 18, 2000 3,851 0 26.69 May 18, 2010
May 15, 2001 4,224 0 42.00 May 15, 2011
May 7, 2002 5,868 0 33.38 May 7, 2012
Feb. 7, 2003 3,200 0 31.78 Feb. 7, 2013
Feb. 6, 2004 3,333 0 45.96 Feb. 6, 2014
Feb. 22, 2005 2,492 0 52.57 Feb. 22, 2015
Feb. 21, 2006 2,563 855 53.84 Feb. 21,2016 Feb. 21, 2006 516
Feb. 20, 2007 1,436 1,437 62.24 Feb. 20, 2017 Feb. 20, 2007 397
Feb. 26, 2009 1,373 4,121 48.82 Feb. 26, 2018 Feb. 26, 2008 596
Feb. 27, 2009 0 8,509 16.83 Feb. 27, 2019 Feb. 27, 2009 1,497
Mr. Easley
May 9, 2005 5,655 0 57.04 May 9, 2015 May 9, 2005 943
Feb. 21, 2006 3,637 1,212 53.84 Feb. 21, 2016 Feb. 21, 2006 733
Feb. 21, 2006 2,545 848 53.84 Feb. 21, 2016 Feb. 21, 2006 226*
Feb. 20, 2007 2,415 2,415 62.24 Feb. 20, 2017 Feb. 20, 2007 666
Feb. 26, 2008 2,166 6,499 48.82 Feb. 26, 2018 Feb. 26, 2008 940
Feb. 27, 2009 0 15,414 16.83 Feb. 27, 2019 Feb. 27, 2009 2,713
--------------
MARKET VALUE
OF SHARES OR
UNITS OF STOCK
THAT HAVE
NOT
NAME VESTED/(5)/
- ---- --------------
Mr. Cripe
18,320
4,758
31,722
41,239
180,777
46,822
AGGREGATE
MARKET VALUE
--------------
323,638
Mr. Pintozzi
23,217
6,795
20,793
29,207
99,230
AGGREGATE
MARKET VALUE
--------------
179,242
Mr. Dahl
15,500
11,926
17,904
44,970
AGGREGATE
MARKET VALUE
--------------
90,300
Mr. Easley
28,313
22,004
6,795
20,011
28,245
81,484
AGGREGATE
MARKET VALUE
--------------
186,852
68
OPTION AWARDS/(1)/ STOCK AWARDS
------------------------------------------------------------------------ ------------------------------
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SHARES OR
UNDERLYING UNDERLYING UNITS OF
UNEXERCISED UNEXERCISED OPTION OPTION STOCK THAT
OPTION GRANT OPTIONS (#) OPTIONS (#) EXERCISE EXPIRATION STOCK AWARD HAVE NOT
NAME DATE EXERCISABLE/(2)/ UNEXERCISABLE/(3)/ PRICE DATE GRANT DATE VESTED (#)/(4)/
- ---- -------------- --------------- ----------------- -------- -------------- -------------- --------------
Mr. Smith
Feb. 6, 2004 1,222 0 45.96 Feb. 6, 2014
Feb. 22, 2005 3,116 0 52.57 Feb. 22, 2015
Feb. 21, 2006 1,917 959 53.84 Feb. 21, 2016 Feb. 21, 2006 579
Feb. 21, 2006 1,697 848 53.84 Feb. 21, 2016 Feb. 21, 2006 226*
Feb. 20, 2007 1,860 1,860 62.24 Feb. 20, 2017 Feb. 20, 2007 513
Feb. 26, 2008 1,647 4,941 48.82 Feb. 26, 2018 Feb. 26, 2008 715
Feb. 27, 2009 0 16,517 16.83 Feb. 27, 2019 Feb. 27, 2009 2,907
Mr. Lounds
May 18, 2000 8,027 0 26.69 May 18, 2010
May 15, 2001 6,824 0 42.00 May 15, 2011
Feb. 7, 2002 11,587 0 33.38 Feb. 7, 2012
Feb. 7, 2003 5,844 0 31.78 Feb. 7, 2013
Feb. 6, 2004 7,200 0 45.96 Feb. 6, 2014
Feb. 22, 2005 5,686 0 52.57 July 31, 2014
Feb. 21, 2006 4,231 1,410 53.84 July 31, 2014 Feb. 21, 2006 226*
Feb. 21, 2006 2,545 848 53.84 July 31, 2014 Feb. 21, 2006 852
Feb. 20, 2007 2,623 2,623 62.24 July 31, 2014 Feb. 20, 2007 724
Feb. 26, 2008 2,270 6,811 48.82 July 31, 2014 Feb. 26, 2008 985
Feb. 27, 2009 0 20,498 16.83 July 31, 2014 Feb. 27, 2009 3,607
--------------
MARKET VALUE
OF SHARES OR
UNITS OF STOCK
THAT HAVE
NOT
NAME VESTED/(5)/
- ---- --------------
Mr. Smith
17,395
6,795
15,425
21,472
87,317
AGGREGATE
MARKET VALUE
--------------
148,404
Mr. Lounds
6,795
25,606
21,744
29,593
108,358
AGGREGATE
MARKET VALUE
--------------
192,096
- --------
(1)Options vest in four installments on the first four anniversaries of the
grant date. The exercise price of each option is equal to the fair market
value of Allstate's common stock on the date of grant. For options granted
prior to 2007, fair market value is equal to the average of high and low
sale prices on the date of grant, and for options granted in 2007 and
thereafter, fair market value is equal to the closing sale price on the date
of grant or in each case, if there was no sale on the date of grant, then on
the last previous day on which there was a sale.
(2)The allocated aggregate value and aggregate number of exercisable
in-the-money options as of December 31, 2009, for Mr. Dahl is $12,901 (3,851
aggregate number exercisable). The allocated aggregate value and aggregate
number of exercisable in-the-money options as of December 31, 2009, for
Mr. Lounds is $26,890 (8,027 aggregate number exercisable). None of the
other named executives had any exercisable in-the-money options as of
December 31, 2009.
(3)The allocated aggregate value and aggregate number of unexercisable
in-the-money options as of December 31, 2009, for each of the named
executives is as follows: Mr. Cripe $455,298 (43,053 aggregate number
unexercisable), Mr. Pintozzi $247,983 (18,772 aggregate number
unexcercisable), Mr. Dahl $112,404 (8,509 aggregate number unexercisable),
Mr. Easley $203,619 (15,414 aggregate number unexercisable), Mr. Lounds
$270,777 (20,498 aggregate number unexercisable), and Mr. Smith $218,191
(16,517 aggregate number unexercisable).
(4)Except as otherwise noted, each restricted stock unit award vests in one
installment on the fourth anniversary of the grant date. An asterisk
(*) denotes restricted stock units that vest in four equal installments on
the first four anniversaries of the grant date.
(5)Amount is based on the closing price of Allstate common stock of $30.04 on
December 31, 2009.
69
OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2009
The following table summarizes the options exercised by the named executives
during 2009 and the restricted stock and restricted stock unit awards that
vested during 2009, allocated in a manner consistent with the allocation of
compensation expenses to Lincoln Benefit under the Service and Expense
Agreement for 2009.
OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2009
OPTION AWARDS
(AS OF 12/31/09) STOCK AWARDS
------------------------------- -------------------------------
NUMBER OF SHARES VALUE REALIZED NUMBER OF SHARES
ACQUIRED ON ON EXERCISE ACQUIRED ON VALUE REALIZED
NAME EXERCISE (#) ($) VESTING (#) ON VESTING ($)
---- ---------------- -------------- ---------------- --------------
Mr. Cripe.... 0 0 1,004 $18,514
Mr. Pintozzi. 0 0 1,014 $18,701
Mr. Dahl..... 0 0 381 $ 7,026
Mr. Easley... 0 0 226 $ 4,171
Mr. Lounds... 0 0 1,094 $20,174
Mr. Smith.... 0 0 860 $15,864
RETIREMENT BENEFITS
Each named executive participates in two different defined benefit pension
plans. Pension expense for each named executive under these plans has been
accrued annually over the course of the executive's career with Allstate. The
aggregate amount of the annual accrual specifically allocated to Lincoln
Benefit over that period of time has varied depending on the extent of services
rendered by such executive to Lincoln Benefit and the arrangements in place at
the time of accrual between Lincoln Benefit and the executive's
Allstate-affiliated employer. Because the aggregate amount of such annual
accruals earned prior to 2009 attributable to services rendered to Lincoln
Benefit by each named executive cannot be calculated without unreasonable
effort, the present value of accumulated benefit provided for each named
executive in the following table is the amount determined by multiplying the
present value of such named executive's accumulated pension benefit for
services rendered to Allstate and all of its affiliates over the course of such
named executive's career with Allstate by the percentage used for allocating
such named executive's compensation to Lincoln Benefit under the Service and
Expense Agreement in 2009.
PENSION BENEFITS
NUMBER OF PRESENT
YEARS VALUE OF PAYMENTS
CREDITED ACCUMULATED DURING LAST
NAME PLAN NAME SERVICE (#) BENEFIT/(1)/ ($) FISCAL YEAR ($)
- ---- ------------------------------------ ----------- -------------- ---------------
Mr. Cripe....... Allstate Retirement Plan 28.0 156,992 0
Supplemental Retirement Income Plan 28.0 300,422 0
Mr. Pintozzi.... Allstate Retirement Plan 7.3 14,292 0
Supplemental Retirement Income Plan 7.3 14,909 0
Mr. Dahl........ Allstate Retirement Plan 22.9 439,753 0
Supplemental Retirement Income Plan 22.9 383,527 0
Mr. Easley...... Allstate Retirement Plan 4.7 6,662 0
Supplemental Retirement Income Plan 4.7 11,081 0
Mr. Lounds/(2)/. Allstate Retirement Plan 28.0 386,444 0
Supplemental Retirement Income Plan 28.0 684,428 0
Mr. Smith....... Allstate Retirement Plan 7.0 14,250 0
Supplemental Retirement Income Plan 7.0 15,003 0
- --------
(1)These amounts are estimates and do not necessarily reflect the actual
amounts that will be paid to the named executives, which will only be known
at the time they become eligible for payment. Except for Mr. Lounds,
70
accrued benefits were calculated as of December 31, 2009, and used to
calculate the Present Value of Accumulated Benefits at December 31, 2009,
and the applicable percentages were applied based on the Service and Expense
Agreement. December 31 is the pension plan measurement date used for
financial statement reporting purposes.
(2)Accrued benefit calculated as of July 31, 2009, termination date.
The benefits and value of benefits shown in the Pension Benefits table are
based on the following material factors:
ALLSTATE RETIREMENT PLAN ("ARP")
The ARP has two different types of benefit formulas (final average pay and
cash balance) which apply to participants based on their date of hire or
individual choice made prior to the January 1, 2003, introduction of a cash
balance design. Of the named executives, Messrs. Pintozzi, Easley, and Smith
are eligible to earn cash balance benefits. Benefits under the final average
pay formula are earned and stated in the form of a straight life annuity
payable at the normal retirement date (age 65). Participants who earn final
average pay benefits may do so under one or more benefit formulas based on when
they become members of the ARP and their years of service.
Messrs. Cripe, Dahl, and Lounds have earned ARP benefits under the post-1988
final average pay formula which is the sum of the Base Benefit and the
Additional Benefit, as defined as follows:
. Base Benefit =1.55% of the participant's average annual compensation,
multiplied by credited service after 1988 (limited to 28 years of
credited service)
. Additional Benefit =0.65% of the amount, if any, of the participant's
average annual compensation that exceeds the participant's covered
compensation (the average of the maximum annual salary taxable for
Social Security over the 35-year period ending the year the participant
would reach Social Security retirement age) multiplied by credited
service after 1988 (limited to 28 years of credited service)
Since Messrs. Cripe, Dahl, and Lounds earned benefits between January 1,
1978, and December 31, 1988, one component of their ARP benefit will be based
on the following benefit formula:
1. Multiply years of credited service from 1978 through 1988 by 2 1/8%.
2. Then, multiply the percentage from step (1) by
a. Average annual compensation (five-year average) at December 31, 1988,
and by
b. Estimated Social Security at December 31, 1988.
3. Then, subtract 2(b) from 2(a). The result is the normal retirement
allowance for service from January 1, 1978, through December 31, 1988.
4. The normal retirement allowance is indexed for final average pay. In
addition, there is an adjustment of 18% of the normal retirement
allowance as of December 31, 1988, to reflect a conversion to a single
life annuity.
71
For participants eligible to earn cash balance benefits, pay credits are
added to the cash balance account on a quarterly basis as a percent of
compensation and based on the participant's years of vesting service as follows:
CASH BALANCE PLAN PAY CREDITS
VESTING SERVICE PAY CREDIT %
--------------- ------------
Less than 1 year................. 0%
1 year, but less than 5 years.... 2.5%
5 years, but less than 10 years.. 3%
10 years, but less than 15 years. 4%
15 years, but less than 20 years. 5%
20 years, but less than 25 years. 6%
25 years or more................. 7%
The earliest retirement age that a named executive may retire with unreduced
retirement benefits under the ARP and Supplemental Retirement Income Plan is
age 65. However, a participant earning final average pay benefits is entitled
to an early retirement benefit on or after age 55 if he or she terminates
employment after the completion of 20 or more years of service. A participant
earning cash balance benefits who terminates employment with at least three
years of vesting service is entitled to a lump sum benefit equal to his or her
cash balance account balance. Currently, only Mr. Lounds is eligible for an
early retirement benefit. The benefit reduction for early payment of final
average pay benefits earned after 1988 is as follows: The Base Benefit as
described above is reduced by 0.4% for each full month the benefit is paid
prior to the participant's normal retirement date (or benefit retirement age if
member prior to 1989). Mr. Lounds was a member prior to 1989 and his benefit
retirement age under the ARP is age 63. The Additional Benefit is reduced by
2/3 of 1% for each of the first 36 full months and by 1/3 of 1% for each of
the next 84 full months by which the benefit commencement date precedes the
participant's normal retirement date (age 65). The benefit reduction for early
payment of final average pay benefits earned prior to 1989 is 0.4% for each
full month prior to age 60.
SUPPLEMENTAL RETIREMENT INCOME PLAN ("SRIP")
SRIP benefits are generally determined using a two-step process:
(1) determine the amount that would be payable under the ARP formula specified
above if the federal limits described above did not apply, then (2) reduce the
amount described in (1) by the amount actually payable under the ARP formula.
The normal retirement date under the SRIP is age 65. If eligible for early
retirement under the ARP, an eligible employee is also eligible for early
retirement under the SRIP.
OTHER ASPECTS OF THE PENSION PLANS
Eligible employees are vested in the normal retirement benefit under the ARP
and the SRIP on the earlier of the completion of five years of service or upon
reaching age 65 for participants with final average pay benefits or the
completion of three years of service or upon reaching age 65 for participants
whose benefits are calculated under the cash balance formula.
For the ARP and SRIP, eligible compensation consists of salary, annual cash
incentive awards, pre-tax employee deposits made to Allstate's 401(k) plan and
Allstate's cafeteria plan, holiday pay, and vacation pay. Eligible compensation
also includes overtime pay, payment for temporary military service, and
payments for short term disability, but does not include long-term cash
incentive awards or income related to the exercise of stock options and the
vesting of restricted stock and restricted stock units. Compensation used to
determine benefits under the ARP is limited in accordance with the Internal
Revenue Code. Average annual compensation is the average compensation of the
five highest consecutive calendar years within the last ten consecutive
calendar years preceding the actual retirement or termination date.
72
Payment options under the ARP include a lump sum, straight life annuity, and
various survivor annuity options. The lump sum under the final average pay
benefit is calculated in accordance with the applicable interest rate and
mortality as required under the Internal Revenue Code. The lump sum payment
under the cash balance benefit is generally equal to a participant's cash
balance account balance.
The amounts listed in the Present Value of Accumulated Benefit column of the
Pension Benefits table and the amounts listed in the footnotes to the Change in
Pension Value column of the Summary Compensation Table are based on the
following assumptions:
. Discount rate of 6.25%, payment form assuming 80% paid as a lump sum and
20% paid as an annuity, lump-sum/annuity conversion segmented interest
rates of 5.0% for the first five years, 6.5% for the next 15 years, and
7% for all years after 20 and the 2010 combined static Pension
Protection Act funding mortality table with a blend of 50% males and 50%
females (as required under the Internal Revenue Code), and
post-retirement mortality for annuitants using the 2010 IRS-mandated
annuitant table; these are the same as those used for financial
reporting year-end disclosure as described in the notes to Allstate's
consolidated financial statements. (See note 16 to Allstate's audited
financial statements for 2009).
. Retirement age: normal retirement age under the ARP and SRIP (65). Based
on guidance provided by the Securities and Exchange Commission, we have
assumed normal retirement age regardless of any announced or anticipated
retirements.
. Expected terminations, disability, and pre-retirement mortality: none
assumed.
. The percentages used under the Service and Expense Agreement for
allocating compensation expense to Lincoln Benefit in 2009.
EXTRA SERVICE AND PENSION BENEFIT ENHANCEMENT
No additional service is granted under the ARP or the SRIP. Generally,
Allstate has not granted additional service credit outside of the actual
service used to calculate ARP and SRIP benefits.
NON-QUALIFIED DEFERRED COMPENSATION
The aggregate amount of the annual accrual specifically allocated to Lincoln
Benefit over each named executive's career with Allstate has varied depending
on the extent of services rendered by such executive to Lincoln Benefit Life
and the arrangements in place at the time of accrual between Lincoln Benefit
and the executive's Allstate-affiliated employer. Because the aggregate
earnings and balance attributable to services rendered to Lincoln Benefit by
each named executive cannot be calculated without unreasonable effort, the
aggregate earnings and aggregate balance provided for each named executive in
the following table is the amount determined by multiplying the value of such
named executive's non-qualified deferred compensation benefit for services
rendered to Allstate and all of its affiliates over the course of such named
executive's career with Allstate by the percentage used for allocating such
named executive's compensation to Lincoln Benefit under the Service and Expense
Agreement in 2009.
73
The following table summarizes the non-qualified deferred compensation
contributions, earnings, and account balances of Lincoln Benefit's named
executives in 2009. All amounts relate to the Deferred Compensation Plan.
NON-QUALIFIED DEFERRED COMPENSATION AT FISCAL YEAR-END 2009
EXECUTIVE REGISTRANT AGGREGATE
CONTRIBUTIONS CONTRIBUTIONS AGGREGATE EARNINGS WITHDRAWALS/ AGGREGATE BALANCE
IN LAST FY IN LAST FY IN LAST FY DISTRIBUTIONS AT LAST FYE
NAME ($) ($) ($)/(1)/ ($) ($)/(2)/
- ---- ------------- ------------- ------------------ ------------- -----------------
Mr. Cripe.... 0 0 0 0 0
Mr. Pintozzi. 0 0 0 0 0
Mr. Dahl..... 0 0 0 0 0
Mr. Easley... 0 0 0 0 0
Mr. Lounds... 0 0 0 0 0
Mr. Smith.... 0 0 4,073 0 55,652
- --------
(1)Aggregate earnings were not included in the named executive's compensation
as reported in the 2009 Summary Compensation Table.
(2)There are no amounts reported in the Aggregate Balance at Last FYE column
that were reported in the 2009 Summary Compensation Table.
In order to remain competitive with other employers, Allstate allows
employees, including the named executives, whose annual compensation exceeds
the amount specified in the Internal Revenue Code (e.g., $245,000 in 2009), to
defer up to 80% of their salary and/or up to 100% of their annual cash
incentive award that exceeds that amount under the Deferred Compensation Plan.
Allstate does not match participant deferrals and does not guarantee a stated
rate of return.
Deferrals under the Deferred Compensation Plan are credited with earnings,
or are subject to losses, based on the results of the investment option or
options selected by the participants. The investment options available under
the Deferred Compensation Plan are Stable Value, S&P 500, International Equity,
Russell 2000, and Bond Funds--options currently available under Allstate's
401(k) plan. Under the Deferred Compensation Plan, deferrals are not actually
invested in these funds, but instead are credited with earnings or losses based
on the funds' investment experience, which are net of administration and
investment expenses. Because the rate of return is based on actual investment
measures in Allstate's 401(k) plan, no above-market earnings are paid. Similar
to Allstate's 401(k) plan, participants can change their investment elections
daily. Investment changes are effective the next business day. The Deferred
Compensation Plan is unfunded; participants have only the rights of general
unsecured creditors.
Deferrals under the Deferred Compensation Plan are segregated into pre-2005
balances and post-2004 balances. A named executive may elect to begin receiving
a distribution of a pre-2005 balance upon separation from service or in one of
the first through fifth years after separation from service. In either event,
the named executive may elect to receive payment of a pre-2005 balance in a
lump sum or in annual cash installment payments over a period of two to ten
years. An irrevocable distribution election is required before making any
post-2004 deferrals into the plan. The distribution options available to the
post-2004 balances are similar to those available to the pre-2005 balances,
except the earliest distribution date is six months following separation from
service. Upon a showing of unforeseeable emergency, a plan participant may be
allowed to access certain funds in a deferred compensation account earlier than
the dates specified above.
POTENTIAL PAYMENTS AS A RESULT OF TERMINATION OR CHANGE-IN-CONTROL
TERMINATION OF EMPLOYMENT
The named executives may become eligible for severance benefits that all
regular full-time and regular part-time employees are eligible to receive if
their employment is terminated due to lack of work, rearrangement of
74
work, reduction in workforce, or inability to satisfactorily perform the
responsibilities of their position. The length of severance benefits depends on
the named executive's years of service, up to the maximum provided in the plans.
Allstate has entered into certain agreements or provides certain plans that
will require Allstate Insurance Company or Allstate to provide compensation or
benefits to certain of the named executives in the event of a termination of
employment--other than compensation and benefits generally available to all
salaried employees. Except where noted, the amount of compensation payable to
each named executive or the value of benefits provided to the named executives
that exceed the compensation or benefits generally available to all salaried
employees in each situation is listed in the tables below. The amounts provided
in the tables below, including amounts earned by each named executive over the
course of his career with Allstate and its affiliates, have been calculated in
a manner consistent with the allocation of compensation expenses to Lincoln
Benefit under the Service and Expense Agreement for 2009. The payment of the
2009 annual cash incentive award, the 2007-2009 long-term cash incentive award,
and any 2009 salary earned but not paid in 2009 due to Allstate's payroll cycle
are not included in these tables because these amounts are payable to the named
executives regardless of termination, death, or disability. Benefits and
payments are calculated assuming a December 31, 2009, employment termination
date.
POTENTIAL PAYMENTS UPON TERMINATION/(1)/
(NO CHANGE-IN-CONTROL)
RESTRICTED
LONG-TERM STOCK OPTIONS-- STOCK UNITS-- NON-QUALIFIED
CASH INCENTIVE UNVESTED AND UNVESTED AND PENSION WELFARE
AWARDS/(2)/ ACCELERATED/(3)/ ACCELERATED BENEFITS/(4)/ BENEFITS SEVERANCE TOTAL
NAME ($) ($) ($) ($) ($)/(5)/ ($)/(6)/ ($)
- ---- -------------- --------------- ------------- ------------- -------- --------- ---------
MR. CRIPE
Involuntary Termination/(7)/. 0 0 0 460,439 105,662 566,101
Voluntary Termination/
Retirement/(8)/............. 0 0 0 460,439 0 460,439
Death........................ 43,120 455,298/(9)/ 323,638/(11)/ 460,439 0 1,282,495
Disability................... 43,120 455,298/(9)/ 0 460,439 336,677 0 1,295,534
MR. PINTOZZI
Involuntary Termination/(7)/. 0 0 0 17,227 31,311 48,538
Voluntary Termination/
Retirement/(8)/............. 0 0 0 17,227 0 17,227
Death........................ 28,543 247,983/(9)/ 179,242/(11)/ 17,227 0 472,995
Disability................... 28,543 247,983/(9)/ 0 17,227 511,419 0 805,172
MR. DAHL
Involuntary Termination/(7)/. 0 0 0 556,481 220,684 777,165
Voluntary Termination/
Retirement/(8)/............. 0 0 0 556,481 0 556,481
Death........................ 0 112,404/(9)/ 90,300/(11)/ 556,481 0 759,185
Disability................... 0 112,404/(9)/ 0 556,481 985,550 0 1,654,435
MR. EASLEY
Involuntary Termination/(7)/. 0 0 0 12,001 17,056 29,057
Voluntary Termination/
Retirement/(8)/............. 0 0 0 12,001 0 12,001
Death........................ 27,604 203,619/(9)/ 186,852/(11)/ 12,001 0 430,076
Disability................... 27,604 203,619/(9)/ 0 12,001 331,774 0 574,998
MR. LOUNDS
Voluntary Termination/
Retirement/(8)/............. 25,392 270,777/(10)/ 192,096/(12)/ 977,300 0 0 1,465,565
MR. SMITH
Involuntary Termination/(7)/. 0 0 0 16,377 23,498 39,875
Voluntary Termination/
Retirement/(8)/............. 0 0 0 16,377 0 16,377
Death........................ 25,597 218,191/(9)/ 148,404/(11)/ 16,377 0 408,569
Disability................... 25,597 218,191/(9)/ 0 16,377 311,051 0 571,216
- --------
(1)A "0" indicates that either there is no amount payable to the named
executive or no amount payable to the named executive that is not made
available to all salaried employees. Since Mr. Lounds retired on July 31,
2009, the only termination scenario reflected is for Voluntary
Termination/Retirement.
75
(2)If a participant dies, retires or is disabled during a performance cycle,
the participant's award will be prorated based on the number of half months
in which the participant was eligible to participate during the long-term
cash incentive performance cycle. The amount reflected is calculated at
target for purposes of this disclosure. The actual payment would be made at
the time all awards are paid for that particular performance cycle and
calculated based on actual results.
(3)If the named executive's termination of employment is for any reason other
than death, disability, or retirement, unvested stock options will be
forfeited, and stock options, to the extent they are vested on the date of
termination, may be exercised at any time on or before the earlier to occur
of (a) the expiration date of the stock option and (b) three months after
the date of termination.
(4)The present value of the non-qualified pension benefits for each named
executive earned through December 31, 2009, based on a 6.25% discount rate
is disclosed in the Pension Benefits table. The value in this column
represents the present value of each named executive's non-qualified pension
benefits (SRIP) earned through December 31, 2009, after applying the
applicable allocation percentage in a manner consistent with the Service and
Expense Agreement and is based on the lump sum methodology (i.e., interest
rate and mortality table) used by the Allstate pension plans in 2010, as
required under the Pension Protection Act. Specifically, the interest rate
for 2010 is based on 40% of the average August 30-year Treasury Bond rate
from the prior year, and 60% of the average corporate bond segmented yield
curve from August of the prior year. The mortality table for 2010 is the
2010 combined static Pension Protection Act funding mortality table with a
blend of 50% males and 50% females, as published by the IRS.
SRIP benefits earned through December 31, 2004 (Pre 409A SRIP Benefits), are
generally payable at age 65, the normal retirement date under the ARP. Pre
409A SRIP Benefits may be payable earlier upon certain terminations in
accordance with the terms of the SRIP. For example, Pre 409A SRIP Benefits
may become payable upon reaching age 50 if disabled, following early
retirement at age 55 or older with 20 years of service, or upon death. SRIP
benefits earned after December 31, 2004 (Post 409A SRIP Benefits), are paid
on the January 1 following termination of employment after reaching age 55
(a minimum six month deferral period applies), or immediately upon death.
. Mr. Cripe's Pre 409A SRIP Benefit would become payable as early as
January 1, 2013, but is immediately payable upon death or disability.
Mr. Cripe's Post 409A Benefit would be paid on January 1, 2013, or
immediately upon death. Mr. Cripe will turn 65 on September 15, 2022.
. Mr. Pintozzi's Pre 409A SRIP Benefit would become payable as early as
January 1, 2011, but is immediately payable upon death. Mr. Pintozzi's
Post 409A Benefit would be paid on January 1, 2021, or immediately upon
death. Mr. Pintozzi will turn 65 on May 18, 2030.
. Mr. Dahl's Pre 409A SRIP Benefit would become payable as early as
January 1, 2015, but is immediately payable upon death or disability.
Mr. Dahl's Post 409A Benefit would be paid on January 1, 2015, or
immediately upon death. Mr. Dahl will turn 65 on August 2, 2024.
. Mr. Easley's Pre 409A SRIP Benefit would become payable as early as
January 1, 2011, but is immediately payable upon death. Mr. Easley's
Post 409A Benefit would be paid on January 1, 2012, or immediately upon
death. Mr. Easley will turn 65 on March 28, 2021.
. Based on Mr. Lounds' age and service, his Pre 409A SRIP Benefit is
payable under the terms of the plan. Mr. Lounds' Post 409A Benefit is
payable on February 1, 2010. Mr. Lounds will turn 65 on July 2, 2014.
. Mr. Smith's Pre 409A SRIP Benefit would become payable as early as
January 1, 2011, but is immediately payable upon death. Mr. Smith's Post
409A Benefit would be paid on January 1, 2013, or immediately upon
death. Mr. Smith will turn 65 on May 15, 2022.
(5)The named executives are eligible to participate in Allstate's supplemental
long-term disability plan for employees whose annual earnings exceed the
level which produces the maximum monthly benefit provided by the Allstate
Long Term Disability Plan (Basic Plan). The benefit is equal to 50% of the
named executive's qualified annual earnings divided by twelve and rounded to
the nearest one hundred dollars,
76
reduced by $7,500, which is the maximum monthly benefit payment that can be
received under the Basic Plan. The amount reflected assumes the named
executive remains totally disabled until age 65 and represents the present
value of the monthly benefit payable until age 65.
(6)The "Severance" amount is the lump sum payment that named executives would
be eligible to receive in the event of employment termination resulting from
a lack of work, rearrangement of work, or reduction in workforce plus an
amount of vacation accrual severance benefit, if applicable. The lump sum
severance benefit is equal to two weeks of pay for each complete year of
service, up to a maximum of 52 weeks of pay, and is the same benefit
available to all regular full-time and regular part-time employees. The
vacation accrual severance benefit is equal to the value at December 31,
2009, of the vacation days accrued but not yet taken between the executive's
anniversary date in 2000 and December 31, 2000. This same benefit was made
available to all eligible regular full-time and regular part-time employees
following a change to the company vacation policy. Messrs. Cripe, Dahl, and
Lounds have a vacation accrual severance benefit amount included in the
Severance column of $3,796, $11,469, and $3,861 respectively.
(7)Examples of "Involuntary Termination" independent of a change-in-control
include performance-related terminations, reorganization, and terminations
for employee dishonesty and violation of Allstate rules, regulations, or
policies.
(8)As of December 31, 2009, only Mr. Lounds was eligible to retire in
accordance with Allstate's policy or the terms of any of the Allstate
compensation and benefit plans including the long-term cash incentive and
equity incentive plans. If any of the other named executives had voluntarily
terminated employment on December 31, 2009, the non-qualified pension
benefit would become payable as described in footnote (4) above.
(9)If the named executive's termination of employment is on account of death or
disability, then stock options, to the extent not vested, will vest and may
be exercised at any time on or before the earlier to occur of (1) the
expiration date of the option and (2) the second anniversary of the date of
termination of employment. Stock option values are based on a December 31,
2009, market close price of $30.04 per share of Allstate stock.
(10)If the named executive retires at the normal retirement date or a health
retirement date, unvested stock options continue to vest in accordance with
their terms, and all outstanding stock options, when vested, may be
exercised, in whole or in part, by the named executive at any time on or
before the earlier to occur of (a) the expiration date of the stock option
and (b) the fifth anniversary of the date of such termination of
employment. The "normal retirement date" under the stock option awards is
the date on or after the date the named executive attains age 60 with at
least one year of service. The "health retirement date" is the date on
which the named executive terminates for health reasons after attaining age
50, but before attaining age 60, with at least ten years of continuous
service. If the named executive retires at the early retirement date,
unvested stock options are forfeited, and stock options, to the extent they
are vested on the date of termination, may be exercised, in whole or in
part, by the named executive at any time on or before the earlier to occur
of (a) the expiration date of the stock option and (b) the fifth
anniversary of the date of termination of employment. The "early retirement
date" is the date the named executive attains age 55 with 20 years of
service. The aggregate value of unexercisable in-the-money options as of
December 31, 2009 based on a market close price of $30.04 per share of
Allstate stock for each of the named executives is reflected in the table.
The actual amount received by the named executives would be based on the
market close price on the date the stock options were exercised.
(11)If the named executive's termination of employment is a result of death,
restricted stock units immediately become nonforfeitable and the
restrictions expire. The December 31, 2009, market close price of $30.04
per share of Allstate stock was used to value the unvested and
nonforfeitable awards.
(12)If the named executive retires on or after attaining age 60 with at least
one year of service, then no unvested restricted shares or restricted stock
units are forfeited and the unvested shares or restricted stock units will
remain subject to the restriction period established in the award
agreement. If the named executive dies following retirement and before the
end of the restriction period, then all unvested restricted stock units
immediately become nonforfeitable and vest as of the date of death. The
aggregate value of unvested restricted shares or restricted stock units as
of December 31, 2009 based on a market close price of $30.04 per share of
Allstate stock for each of the named executives is reflected in the table.
The actual amount received by the named executives would be based on the
market close price on the date the stock restriction lapses.
77
CHANGE-IN-CONTROL
Allstate and Allstate Insurance Company have entered into agreements with
the named executives, except Mr. Dahl, to provide certain benefits and
compensation in the event of a change-in-control. Although Mr. Dahl does not
have a change-in-control agreement, his unvested equity awards would become
immediately payable upon a change-in-control. In general, a change-in-control
is one or more of the following events: (1) any person acquires 30% or more of
the combined voting power of Allstate common stock within a 12-month period;
(2) any person acquires more than 50% of the combined voting power of Allstate
common stock; (3) certain changes are made to the composition of the Allstate
Board; or (4) the consummation of a merger, reorganization, or similar
transaction. These triggers were selected because, in a widely held company the
size of Allstate, they could each result in a substantial change in management.
There are no agreements in place with the named executives to provide benefits
or compensation in the event of a change-in-control of Lincoln Benefit that
does not also involve a change-in-control of Allstate.
During the two-year period following a change-in-control, the
change-in-control agreements provide for a minimum salary, annual cash
incentive awards, long-term cash incentive awards, and other benefits. In
addition, they provide that the named executives' positions, authority, duties,
and responsibilities will be at least commensurate in all material respects
with those held prior to the change-in-control.
Under the change-in-control agreements, severance benefits would be payable
if a named executive's employment is terminated either by Allstate without
"cause" or by the executive for "good reason" as defined in the agreements
during the two-year period following the change-in-control. Cause means the
named executive has been convicted of a felony or other crime involving fraud
or dishonesty, has willfully or intentionally breached the change-in-control
agreement, has habitually neglected his or her duties, or has engaged in
willful or reckless material misconduct in the performance of his or her
duties. Good reason includes a material diminution in a named executive's base
compensation, authority, duties, or responsibilities, a material change in the
geographic location where the named executive performs services, or a material
breach of the change-in-control agreement by Allstate. The principal severance
benefits payable on post-change-in-control terminations include: pro-rated
annual cash incentive awards and long-term cash incentive awards (all at
target); a payment equal to three times the sum of the executive's base salary
and target annual cash incentive award; the continuation of certain welfare
benefits for the continuation coverage period at a cost not to exceed the
amount paid by the named executive prior to termination; outplacement services;
an enhanced retirement benefit consisting of an additional three years of
service, age, and compensation; and reimbursement (on an after-tax basis) of
any resulting excise taxes.
If a named executive's employment is terminated by reason of death or
disability during the two-year period commencing on the date of a
change-in-control, Allstate will pay the named executive or the named
executive's estate a lump-sum cash amount equal to all amounts earned but
unpaid, including any annual and long-term cash incentive awards, as of the
termination date. In addition, in the event of death, the named executive's
estate or beneficiary will be entitled to survivor and other benefits,
including retiree medical coverage, if eligible, that are not less favorable
than the most favorable benefits available to the estates or surviving families
of peer executives of Allstate. In the event of disability, Allstate will pay
disability and other benefits, including supplemental long-term disability
benefits and retiree medical coverage, if eligible, that are not less favorable
than the most favorable benefits available to disabled peer executives. If
Allstate terminates a named executive's employment for cause, Allstate's sole
obligation is to pay the named executive a lump-sum cash amount equal to all
amounts earned and due to be paid, but unpaid, as of the termination date.
If a named executive incurs legal fees or other expenses in an effort to
enforce the change-in-control agreement, Allstate will reimburse the named
executive for these expenses unless it is established by a court that the named
executive had no reasonable basis for the claim or acted in bad faith.
Effective upon a change-in-control, the named executives become subject to
covenants prohibiting competition and solicitation of employees, customers, and
suppliers at any time until one year after termination of employment.
78
The following table describes the estimated compensation or benefits that
would be provided by Allstate Insurance Company or Allstate to the named
executives in the event of a change-in-control that exceed the compensation or
benefits generally available to all salaried employees in each situation. The
payment of the 2009 annual cash incentive award, the 2007-2009 long-term cash
incentive award and any 2009 salary earned but not paid in 2009 due to
Allstate's payroll cycle are not included in these tables because these amounts
are payable to the named executives regardless of termination, death, or
disability. Benefits and payments are calculated assuming a December 31, 2009,
employment termination date or change-in-control.
POTENTIAL PAYMENTS UPON CHANGE-IN-CONTROL/(1)/
STOCK RESTRICTED NON-QUALIFIED WELFARE EXCISE TAX
CHANGE-IN- OPTIONS-- STOCK UNITS-- PENSION AND BENEFITS AND REIMBURSEMENT
CONTROL UNVESTED AND UNVESTED AND DEFERRED OUTPLACEMENT AND TAX
SEVERANCE ACCELERATED/(3)/ ACCELERATED/(5)/ COMPENSATION SERVICES GROSS-UP/(9)/
NAME ($) ($) ($) ($) ($) ($)
- ---- ---------- --------------- --------------- -------------- ------------ -------------
MR. CRIPE
Immediately Payable Upon
Change-in-Control....... 0 455,298 323,638 460,439/(6)/ 0 0
Involuntary or Good
Reason Termination...... 608,478/(2)/ See footnote 4 See footnote 4 See footnote 7 8,935/(8)/ 0
Death/Disability/For
Cause Termination....... 0 0 0 0 0 0
MR. PINTOZZI
Immediately Payable Upon
Change-in-Control....... 0 247,983 179,242 17,227/(6)/ 0 0
Involuntary or Good
Reason Termination...... 400,692/(2)/ See footnote 4 See footnote 4 See footnote 7 7,773/(8)/ 0
Death/Disability/For
Cause Termination....... 0 0 0 0 0 0
MR. DAHL/(10)/
Immediately Payable Upon
Change-in-Control....... 0 112,404 90,300 0 0 0
Involuntary or Good
Reason Termination...... 0 0 0 0 0 0
Death/Disability/For
Cause Termination....... 0 0 0 0 0 0
MR. EASLEY
Immediately Payable Upon
Change-in-Control....... 0 203,619 186,852 12,001/(6)/ 0 0
Involuntary or Good
Reason Termination...... 382,366/(2)/ See footnote 4 See footnote 4 See footnote 7 11,422/(8)/ 0
Death/Disability/For
Cause Termination....... 0 0 0 0 0 0
MR. SMITH
Immediately Payable Upon
Change-in-Control....... 0 218,191 148,404 72,029/(6)/ 0 0
Involuntary or Good
Reason Termination...... 351,442/(2)/ See footnote 4 See footnote 4 See footnote 7 11,719/(8)/ 0
Death/Disability/For
Cause Termination....... 0 0 0 0 0 0
TOTAL
NAME ($)
- ---- ---------
MR. CRIPE
Immediately Payable Upon
Change-in-Control....... 1,239,375
Involuntary or Good
Reason Termination...... 617,413
Death/Disability/For
Cause Termination....... 0
MR. PINTOZZI
Immediately Payable Upon
Change-in-Control....... 444,452
Involuntary or Good
Reason Termination...... 408,465
Death/Disability/For
Cause Termination....... 0
MR. DAHL/(10)/
Immediately Payable Upon
Change-in-Control....... 202,704
Involuntary or Good
Reason Termination...... 0
Death/Disability/For
Cause Termination....... 0
MR. EASLEY
Immediately Payable Upon
Change-in-Control....... 402,472
Involuntary or Good
Reason Termination...... 393,788
Death/Disability/For
Cause Termination....... 0
MR. SMITH
Immediately Payable Upon
Change-in-Control....... 438,624
Involuntary or Good
Reason Termination...... 363,161
Death/Disability/For
Cause Termination....... 0
- --------
(1)A "0" indicates that either there is no amount payable to the named
executive or no amount payable to the named executive that is not made
available to all salaried employees. Since Mr. Lounds retired on July 31,
2009, no change-in-control benefit and payment calculations are included for
him.
79
(2)Change-in-control severance benefits upon an involuntary termination or
termination for good reason contain the following elements:
. two times the named executive's base salary (three times for Mr. Cripe);
. two times the named executive's annual cash incentive award calculated
at target (three times for Mr. Cripe);
. the named executive's pro-rata long-term cash incentive award for the
2008-2010 performance cycle calculated at target; and
. a lump sum payment equal to the positive difference, if any, between:
(a) the sum of the lump-sum values of each maximum annuity that would be
payable to the named executive under any defined benefit plan (whether
or not qualified under Section 401(a) of the Internal Revenue Code) if
the named executive had: (i) become fully vested in all such benefits,
(ii) attained as of the named executive's termination date an age that
is three years greater than named executive's actual age, (iii) accrued
a number of years of service that is three years greater than the number
of years of service actually accrued by the named executive as of the
named executive's termination date, and (iv) received a lump-sum
severance benefit consisting of three times base salary, three times
annual incentive cash compensation calculated at target, plus the 2009
annual incentive cash award as covered compensation in equal monthly
installments during the three-year period following the named
executive's termination date; and (b) the lump-sum values of the maximum
annuity benefits vested and payable to the named executive under each
defined benefit plan that is qualified under Section 401(a) of the
Internal Revenue Code plus the aggregate amounts simultaneously or
previously paid to the named executive under the defined benefit plans
(whether or not qualified under Section 401(a)). The calculation of the
lump sum amounts payable under this formula does not impact the benefits
payable under the ARP or the SRIP.
The change-in-control agreements provide that if the after-tax benefits of
all change of control payments are less than 110% of the after-tax benefit
of the safe harbor benefit amount, then the change-in-control benefits are
to be reduced to the safe harbor benefit amount. The safe harbor benefit
amount is the highest level of benefits that can be paid before which an
excise tax under section 4999 of the Internal Revenue Code would apply.
(3)Stock option values are based on a December 31, 2009, market close price of
$30.04 per share of Allstate stock.
(4)For purposes of this table, unvested stock options and restricted stock
units, which would have been immediately payable upon a change-in-control
regardless of termination of employment, were assumed to have been paid
immediately prior to termination and are reflected in the "Immediately
Payable Upon Change-in-Control" row.
(5)The December 31, 2009, market close price of $30.04 per share of Allstate
stock was used to value the unvested and nonforfeitable restricted stock
unit and restricted stock awards.
(6)Within five business days after the effective date of a change-in-control,
the named executives will receive a lump sum payment equal to the present
value of the named executive's SRIP benefit and deferred compensation
account balance. The present value of SRIP benefits earned through
December 31, 2009, is calculated in a manner consistent with the allocation
of compensation expenses to Lincoln Benefit under the Service and Expense
Agreement and is based on the lump sum methodology (i.e., interest rate and
mortality table) used by the Allstate pension plans in 2010, as required
under the Pension Protection Act. Specifically, the interest rate for 2010
is based on 40% of the average August 30-year Treasury Bond rate from the
prior year, and 60% of the average corporate bond segmented yield curve from
August of the prior year. The mortality table for 2010 is the 2010 combined
static Pension Protection Act funding mortality table with a blend of 50%
males and 50% females, as published by the IRS. Refer to the Retirement
Benefits section beginning on page 62 for a discussion of the SRIP benefit.
See the Non-Qualified Deferred Compensation at Fiscal Year-End 2009 table on
page 74 for additional information on the Deferred Compensation Plan and
information regarding the named executives' account balances as of
December 31, 2009.
80
(7)For purposes of this table, the present value of non-qualified pension
benefits earned through December 31, 2009, and the named executive's
Deferred Compensation Plan account balance, if any, which would have been
immediately payable upon a change-in-control regardless of termination of
employment were assumed to have been paid immediately prior to termination
upon the effective date of a change of control and are reflected in the
"Immediately Payable Upon Change-in-Control" row.
(8)The Welfare Benefits and Outplacement Services amount includes the cost to
provide certain welfare benefits to the named executive and family during
the period which the named executive is eligible for continuation coverage
under applicable law. The amount shown reflects Allstate's costs for these
benefits or programs assuming an 18-month continuation period. The value of
outplacement services is $20,000 for Mr. Cripe and $15,000 for each of the
other named executive officers.
(9)Certain payments made as a result of a change in control are subject to a
20% excise tax imposed on the named executive by Section 4999 of the Code.
The Excise Tax Reimbursement and Tax Gross-up is the amount Allstate would
pay to the named executive as reimbursement for the 20% excise tax plus a
tax gross-up for any taxes incurred by the named executive resulting from
the reimbursement of such excise tax, allocated in a manner consistent with
the allocation of compensation expenses to Lincoln Benefit under the Service
and Expense Agreement. The estimated amounts of reimbursement of any
resulting excise taxes were determined without regard to the effect that
restrictive covenants and any other facts and circumstances may have on the
amount of excise taxes, if any, that ultimately might be payable in the
event these payments were made to a named executive which is not subject to
reliable advance prediction or a reasonable estimate.
(10)Mr. Dahl did not have a change-in-control agreement in place. However,
pursuant to the terms of his equity awards, unvested stock options and
restricted stock units would have become immediately payable upon a
change-in-control.
COMPENSATION POLICIES AND PRACTICES RISK ANALYSIS
Allstate management has reviewed its compensation policies and practices and
believes that they are appropriately structured, that they are consistent with
its key operating priority of keeping the Allstate financially strong, and that
they avoid providing incentives for employees to engage in unnecessary and
excessive risk taking. The Allstate Board and its Audit Committee both play an
important role in risk management oversight, including reviewing how management
measures, evaluates, and manages the corporation's exposure to risks posed by a
wide variety of events and conditions. In addition, the Compensation and
Succession Committee employs an independent executive consultant each year to
assess Allstate's executive pay levels, practices, and overall program design.
Allstate's compensation programs provide a balanced mix of cash and equity
through annual and long-term incentives to align with short-term and long-term
business goals. Allstate utilizes a full range of performance measures that it
believes correlate to long-term shareholder value creation. Cash incentive
awards are paid only after a review of executive and corporate performance.
Allstate's calculation of corporate income includes a quarterly re-estimation
of property-liability reserves. As a result, to a significant extent, if
Allstate under-estimates or over-estimates losses in a given year, income and
annual cash incentives will be impacted in the following year. Furthermore, to
ensure its compensation programs do not motivate imprudent risk taking, awards
made after May 19, 2009, under the 2009 Equity Incentive Plan and awards made
beginning in 2010 under the Annual Executive Incentive Plan are subject to
clawback in the event of certain financial restatements.
PERFORMANCE MEASURES
Information regarding performance measures is disclosed in the limited
context of annual and long-term cash incentive awards and should not be
understood to be statements of management's expectations or estimates of
results or other guidance. We specifically caution investors not to apply these
statements to other contexts.
The following are descriptions of the performance measures used for
Allstate's annual cash incentive awards for 2009 (excluding the Sales Incentive
Plan in which Mr. Dahl participated) and its long-term cash
81
incentive awards for the 2007-2009 cycle which may be applied to compensation
of Lincoln Benefit's named executives. These measures are not GAAP measures.
They were developed uniquely for incentive compensation purposes and are not
reported items in Allstate's financial statements. Some of these measures use
non-GAAP measures and operating measures. The Committee has approved the use of
non-GAAP and operating measures when appropriate to drive executive focus on
particular strategic, operational, or financial factors or to exclude factors
over which Allstate's executives have little influence or control, such as
capital market conditions.
ANNUAL CASH INCENTIVE AWARDS FOR 2009
CORPORATE MEASURES
ADJUSTED OPERATING INCOME PER DILUTED SHARE: This measure is used to assess
financial performance. The measure is equal to net income adjusted to exclude
the after-tax effects of the items listed below, divided by the weighted
average shares outstanding on a diluted basis:
. Realized capital gains and losses (which includes the related effect on
the amortization of deferred acquisition and deferred sales inducement
costs) except for periodic settlements and accruals on certain non-hedge
derivative instruments, which are reported with realized capital gains
and losses but included in Operating Income, and equity method of
accounting income from limited partnership interests to be consistent
with the incentive goals.
. Gains and losses on disposed operations.
. Adjustments for other significant non-recurring, infrequent, or unusual
items, when (a) the nature of the charge or gain is such that it is
reasonably unlikely to recur within two years or (b) there has been no
similar charge or gain within the prior two years.
. Restructuring and related charges.
. Effects of acquiring businesses.
. Negative operating results of sold businesses.
. Underwriting results of the Discontinued Lines and Coverages segment.
. Any settlement, awards, or claims paid as a result of lawsuits and other
proceedings brought against Allstate subsidiaries regarding the scope
and nature of coverage provided under insurance policies issued by such
companies.
. Identifiable effects of the adopted accounting standard for
other-than-temporary impairments to be consistent with incentive goals.
ALLSTATE FINANCIAL MEASURES
ADJUSTED OPERATING INCOME: This is a measure Allstate management uses to
assess the profitability of the business. The Allstate Financial segment
measure, operating income, is adjusted to include equity method of accounting
income from limited partnership interests to be consistent with the incentive
goals, and to exclude the after tax effects of restructuring and related
charges, the potential amount by which 2009 guaranty fund assessments related
to insured solvencies exceed $6 million, and the identifiable effects of the
adopted accounting standard for other-than-temporary impairments to be
consistent with incentive goals. For disclosure of the Allstate Financial
segment measure see footnote 18 to Allstate's audited financial statements.
FINANCIAL PRODUCT SALES ("PRODUCTION CREDITS"): This measure of sales and
related profitability of proprietary and non-proprietary financial products
sold through the Allstate Exclusive Agency channel is used by management to
assess the execution of Allstate's financial services strategy. This measure is
calculated as the total amount of production credits for current year
transactions. Production credits are an internal sales statistic calculated as
a percent of premium or deposits to life insurance, annuities, or mutual funds
which vary based on the expected profitability of the specific financial
product.
82
TOTAL RETURN: Total return is principally determined using industry
standards and the same sources used in preparing the financial statements to
determine fair value. (See footnotes to Allstate's audited financial statements
for methodologies for estimating the fair value of investments.) In general,
total return represents the increase or decrease, expressed as a percentage, in
the value of the portfolio over a one-year period. Time weighted returns are
used.
. ALLSTATE FINANCIAL TOTAL RETURN: Total return for Allstate Financial
investments, including those held in certain subsidiaries, such as
Allstate Life Insurance Company of New York. Allstate Financial Total
Return includes derivatives and excludes the identifiable effects of the
adopted accounting standard for other-than-temporary impairments to be
consistent with incentive goals.
LONG-TERM CASH INCENTIVE AWARDS
AVERAGE ADJUSTED RETURN ON EQUITY RELATIVE TO PEERS: This measure is used to
assess Allstate's financial performance against its peers. It is calculated as
Allstate's ranked position relative to the insurance company peer group based
upon three-year average adjusted return on equity, calculated on the same basis
for Allstate and each of the peer insurance companies used for long-term cash
incentive awards. Three-year average adjusted return on equity is the sum of
the annual adjusted return on equity for each of the three years in the cycle
divided by three. The annual adjusted return on equity is calculated as the
ratio of net income divided by the average of Allstate shareholders' equity at
the beginning and at the end of the year after excluding the component of
accumulated other comprehensive income for unrealized net capital gains and
losses.
ALLSTATE FINANCIAL RETURN ON TOTAL CAPITAL: This is a measure management
uses to measure the efficiency of capital utilized in the business. Three-year
Allstate Financial return on total capital is the sum of the annual adjusted
return on Allstate subsidiaries' shareholder's equity for each of the three
years divided by three. The annual adjusted return on subsidiaries'
shareholder's equity is the Allstate Financial measure, operating income,
divided by the average subsidiaries' shareholder's equity at the beginning and
at the end of the year. The subsidiaries' shareholder's equity is the sum of
the subsidiaries' shareholder's equity for Allstate Life Insurance Company,
Allstate Bank, American Heritage Life Investment Corporation, and certain other
minor entities, adjusted to exclude the loan protection business and excluding
the component of accumulated other comprehensive income for unrealized net
capital gains. (See note 18 to Allstate's audited financial statements for
Allstate Financial net income.)
ALLSTATE PROTECTION GROWTH IN POLICIES IN FORCE OVER THREE-YEAR CYCLE: This
is a measure used by management to assess growth in the number of policies in
force, which is a driver of premiums written. The measure is calculated as the
sum of the percent increase in each of the three years in the total number of
policies in force at the end of the year over the beginning of the year. The
measure excludes property insurance, Allstate Motor Club, and the loan
protection business and includes Allstate Canada.
ITEM 11(M).SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table shows the number of Lincoln Benefit shares owned by any
beneficial owner who owns more than five percent of any class of Lincoln
Benefit's voting securities.
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
(A) (B) (C) (D)
- -------------- ---------------------------------------- -------------------------------- ----------
Capital Stock Allstate Life Insurance Company 100,000 100%
3100 Sanders Road, Northbrook, IL 60062
N/A Allstate Insurance Company Indirect voting and investment N/A
2775 Sanders Road, Northbrook, IL 60062 power of shares owned by
Allstate Life Insurance Company
N/A The Allstate Corporation Indirect voting and investment N/A
2775 Sanders Road, Northbrook, IL 60062 power of shares owned by
Allstate Life Insurance Company
83
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS.
The following table shows the number of shares of Allstate common stock
beneficially owned by each director and named executive officer of Lincoln
Benefit individually, and by all executive officers and directors of Lincoln
Benefit as a group. Shares reported as beneficially owned include shares held
indirectly through the Allstate 401(k) Savings Plan and other shares held
indirectly, as well as shares subject to stock options exercisable on or prior
to April 16, 2010 and restricted stock units for which restrictions expire on
or prior to April 16, 2010. The percentage of Allstate shares of common stock
beneficially owned by any Lincoln Benefit director, named executive officer or
by all directors and executive officers of Lincoln Benefit as a group does not
exceed 1%. The following share amounts are as of February 15, 2010. As of
February 15, 2010, none of these shares were pledged as security.
COMMON STOCK SUBJECT TO
OPTIONS EXERCISABLE AND
RESTRICTED STOCK UNITS FOR
AMOUNT AND NATURE OF WHICH RESTRICTIONS EXPIRE ON OR
BENEFICIAL OWNERSHIP OF PRIOR TO APRIL 16, 2010--
ALLSTATE COMMON STOCK INCLUDED IN COLUMN (A)
NAME OF BENEFICIAL OWNER (A) (B)
- ------------------------ ----------------------- -------------------------------
Frederick F. Cripe................. 169,161 146,131
Lawrence W. Dahl................... 33,508 32,079
Matthew S. Easley.................. 72,624 70,729
Susie Lees......................... 31,379 20,205
John C. Lounds..................... 167,639 153,623
John C. Pintozzi................... 90,036 82,956
J. Eric Smith...................... 2,182 0
Matthew E. Winter.................. 0 0
All directors and executive
officers as a group.............. 556,771 505,723
ITEM 11(N).TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL
PERSONS.
TRANSACTIONS WITH RELATED PERSONS.
This table describes certain intercompany agreements involving Lincoln
Benefit and the following companies:
. Allstate Life Insurance Company ("ALIC"), the direct parent of Lincoln
Benefit;
. Allstate Insurance Company ("AIC"), an indirect parent of Lincoln
Benefit; and
. The Allstate Corporation ("AllCorp"), the ultimate indirect parent of
Lincoln Benefit.
84
APPROXIMATE DOLLAR VALUE OF
THE AMOUNT INVOLVED RELATED PERSON(S) INVOLVED IN THE TRANSACTION/1/
IN THE TRANSACTION, PER FISCAL AND THE APPROXIMATE DOLLAR VALUE OF THE AMOUNT
TRANSACTION DESCRIPTION YEAR OF THE RELATED PERSON'S INTEREST IN THE TRANSACTION
- ----------------------- --------------------------- --------------------------------------------------
ALIC AIC ALLCORP
Investment Management Agreement 2007 146,726,694 83,898,860/2/ 52,363,225 536,022
among Allstate Investments, LLC, 2008 131,668,584 68,941,225/2/ 51,404,171 677,981
Allstate Insurance Company, The Allstate 2009 142,073,012 76,392,634/2/ 54,248,353 1,151,990
Corporation and certain affiliates
effective January 1, 2007.
Tax Sharing Agreement among The 2007 1,889,110,117/3/ 35,968,879 1,912,198,568 (126,810,136)
Allstate Corporation and certain affiliates 2008 465,439,826/3/ (109,322,083) 633,316,282 (121,960,368)
dated as of November 12, 1996, as 2009 1,173,212,154/3/ (534,572,879) (467,570,173) (121,813,486)
supplemented by Supplemental
Intercompany Tax Sharing Agreement
between Allstate Life Insurance Company
and Lincoln Benefit Life Company
effective December 21, 2000.
Cash Management Services Master 2007 1,242,569/4/ 315,281/5/ 617,385/5/ N/A
Agreement between Allstate Insurance 2008 1,338,376/4/ 198,098/5/ 816,143/5/
Company, Allstate Bank (aka Allstate 2009 1,527,072/4/ 158,312/5/ 1,052,781/5/
Federal Savings Bank), and certain
affiliates dated March 16, 1999, as
amended by Amendment No.1 effective
January 5, 2001, and Amendment No. 2
entered into November 8, 2002, between
Allstate Insurance Company, Allstate
Bank and Allstate Motor Club, Inc., and
as supplemented by the Premium
Depository Service Supplement dated as
of September 30, 2005, the Variable
Annuity Service Supplement dated
November 10, 2005, and the Sweep
Agreement Service Supplement dated as
of October 11, 2006.
- --------
/1/ Each identified Related Person is a Party to the transaction.
/2/ Gross amount of expense received under the transaction.
/3/ Total amounts paid to Internal Revenue Service.
/4/ Total fees collected for all bank accounts covered under the transaction.
/5/ Fees paid under the transaction.
85
APPROXIMATE DOLLAR VALUE OF
THE AMOUNT INVOLVED RELATED PERSON(S) INVOLVED IN THE TRANSACTION/1/
IN THE TRANSACTION, PER FISCAL AND THE APPROXIMATE DOLLAR VALUE OF THE AMOUNT
TRANSACTION DESCRIPTION YEAR OF THE RELATED PERSON'S INTEREST IN THE TRANSACTION
- ----------------------- --------------------------- -----------------------------------------------
ALIC AIC ALLCORP
Amended and Restated Service and 2007 3,270,782,494 224,729,858/2/ 2,392,512,051/2/ 24,957,633/2/
Expense Agreement between Allstate 2008 3,295,180,640 215,640,945/2/ 2,186,281,461/2/ 5,351,262/2/
Insurance Company, The Allstate 2009 3,451,765,246 180,154,068/2/ 1,937,571,496/2/ 2,510,800/2/
Corporation and certain affiliates
effective January 1, 2004, as amended
by Amendment No. 1 effective
January 1, 2009, and as supplemented
by New York Insurer Supplement to
Amended and Restated Service and
Expense Agreement between Allstate
Insurance Company, The Allstate
Corporation, Allstate Life Insurance
Company of New York and Intramerica
Life Insurance Company, effective
March 5, 2005.
Reinsurance Agreements between 2007 786,600,513/6/ 786,600,513/6/ N/A N/A
Lincoln Benefit Life Company and 2008 766,582,944/6/ 766,582,944/6/
Allstate Life Insurance Company: 2009 873,759,209/6/ 873,759,209/6/
Coinsurance Agreement effective
December 31, 2001; Modified
Coinsurance Agreement effective
December 31, 2001; Modified
Coinsurance Agreement effective
December 31, 2001.
Intercompany Loan Agreement among 2007 7,370,022,084 7,012,969,748/7/ 357,052,336 7,370,022,084
The Allstate Corporation, Allstate Life 2008 400,040,660 50,014,792/7/ 1,732,736 400,040,660
Insurance Company, Lincoln Benefit 2009 86,111,674 0/8/ 86,111,674 86,111,674
Life Company and other certain
subsidiaries of The Allstate Corporation
dated February 1, 1996.
Agreement for the Settlement of State 2007 14,196,008 374,100/9/ 3,463,000 N/A
and Local Tax Credits among Allstate 2008 2,089,067 356,331/9/ 1,732,736
Insurance Company and certain 2009 941,379 193,504/9/ 441,024
affiliates effective January 1, 2007.
REVIEW AND APPROVAL OF INTERCOMPANY AGREEMENTS:
All intercompany agreements to which Lincoln Benefit is a party are approved
by Lincoln Benefit's Board of Directors as well as by the board of any other
affiliate of The Allstate Corporation which is a party to the agreement.
Intercompany agreements are also submitted for approval to the Nebraska
Department of Insurance,
- --------
/6/ Net reinsurance income.
/7/ Amounts loaned and repaid.
/8/ No loans outstanding at year end.
/9/ Value of transfer transactions.
86
Lincoln Benefit's domestic regulator, and any additional states in which
Lincoln Benefit might be commercially domiciled pursuant to the applicable
state's insurance holding company systems act. This process is documented in an
internal procedure that captures the review and approval process of all
intercompany agreements. All approvals are maintained in Lincoln Benefit's
corporate records.
While there is no formal process for the review and approval of related
person transactions between unaffiliated entities specific to Lincoln Benefit,
all directors and executive officers of Lincoln Benefit are subject to the
Allstate Code of Ethics ("Code"). The Code includes a written conflict of
interest policy that was adopted by the Board of Directors of the Allstate
Corporation, the ultimate parent company of Lincoln Benefit. Any potential
relationship or activity that could impair independent thinking and judgment,
including holding a financial interest in a business venture that is similar to
Allstate, or in a business that has a relationship with Allstate, must be
disclosed to Human Resources. Human Resources will work with representatives
from the Law Department, including Enterprise Business Conduct, to determine
whether an actual conflict of interest exists. Each director and executive
officer must sign a Code of Ethics certification annually.
INDEPENDENCE STANDARDS FOR DIRECTORS
Although not subject to the independence standards of the New York Stock
Exchange, for purposes of this S-1 registration statement, Lincoln Benefit has
applied the independence standards required for listed companies of the New
York Stock Exchange to the Board of Directors. Applying these standards,
Lincoln Benefit has been determined that none of the directors are considered
to be independent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of Lincoln Benefit does not have a compensation
committee. All compensation decisions are made by The Allstate Corporation, as
the ultimate parent company of Lincoln Benefit. No executive officer of Lincoln
Benefit served as a member of the compensation committee of another entity for
which any executive officer served as a director for Lincoln Benefit.
OTHER INFORMATION
The section in your prospectus entitled "Incorporation of Certain Documents
By Reference" is deleted and replaced with the following:
FILING OF REPORTS
Rule 12h-7 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") exempts an insurance company from filing reports under the
Exchange Act when the insurance company issues certain types of insurance
products that are registered under the Securities Act of 1933 and such products
are regulated under state law. Your variable annuity issued by Lincoln Benefit
falls within the exemption provided under rule 12h-7. We rely on the exemption
provided under rule 12h-7 and do not file reports under the Exchange Act.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted in directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling
87
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The sections in your prospectus entitled "Experts" and "Financial
Statements" are deleted and replaced with the following:
EXPERTS
The financial statements and the related financial statement schedules
included herein have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
88
Supplement Dated December 31, 2009
To the Prospectus for Your Variable Annuity
Issued By
Allstate Life Insurance Company
Allstate Life Insurance Company of New York
Lincoln Benefit Life Company
This supplement amends the prospectus for your variable annuity contract issued
by Allstate Life Insurance Company, Allstate Life Insurance Company of New York,
or Lincoln Benefit Life Company.
The following provision is added to your prospectus:
WRITTEN REQUESTS AND FORMS IN GOOD ORDER. Written requests must include
sufficient information and/or documentation, and be sufficiently clear, to
enable us to complete your request without the need to exercise discretion on
our part to carry it out. You may contact our Customer Service Center to learn
what information we require for your particular request to be in "good order."
Additionally, we may require that you submit your request on our form. We
reserve the right to determine whether any particular request is in good order,
and to change or waive any good order requirements at any time.
If you have any questions, please contact your financial representative or call
our Customer Service Center at 1-800-457-7617. If you own a Putnam contract,
please call 1-800-390-1277.
For future reference, please keep this supplement together with your prospectus.
Lincoln Benefit Life Company
Supplement dated August 14, 2009
To the following Prospectuses, as supplemented:
Consultant Solutions, Prospectus Dated May 1, 2009
Consultant I, Prospectus Dated May 1, 2009
LBL Advantage, Prospectus Dated May 1, 2004
Consultant II, Prospectus Dated May 1, 2004
Premier Planner, Prospectus Dated May 1, 2004
This prospectus supplement amends certain disclosure contained in the
prospectuses referenced above for your variable annuity contract issued by
Lincoln Benefit Life Company ("Lincoln Benefit").
The "Annual Reports and Other Documents" section is deleted and replaced with
the following:
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission ("SEC") recently adopted rule 12h-7 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule 12h-7
exempts an insurance company from filing reports under the Exchange Act when the
insurance company issues certain types of insurance products that are registered
under the Securities Act of 1933 and such products are regulated under state
law. Each of the variable annuities described in the prospectuses referenced
above fall within the exemption provided under rule 12h-7. Lincoln Benefit is
hereby providing notice that it is electing to rely on the exemption provided
under rule 12h-7 effective as of the date of this prospectus supplement or as
soon as possible thereafter, and will be suspending filing reports under the
Exchange Act.
The SEC allows us to "incorporate by reference" information that we file with
the SEC into this prospectus supplement which means that incorporated documents
are considered part of this prospectus supplement. We can disclose important
information to you by referring you to those documents. This prospectus
supplement incorporates by reference our Annual Report on Form 10-K for the year
ended December 31, 2008, filed with the SEC on March 18, 2009, and our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on
May 12, 2009.
Lincoln Benefit will provide to each person, including any beneficial owner, to
whom a prospectus is delivered, a copy of any or all of the information that has
been incorporated by reference into the prospectus but not delivered with the
prospectus. Such information will be provided upon written or oral request at no
cost to the requester by writing to Lincoln Benefit, P.O. Box 758565, Topeka, KS
66675-8565 or by calling 1-800- 457- 7617. The public may read and copy any
materials that Lincoln Benefit files with the SEC at the SEC's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy,
and information statements, and other information regarding issuers that file
electronically with the SEC (see http://www.sec.gov).
Lincoln Benefit Life Company
LBL Advantage
Consultant II
Premier Planner
Supplement, dated May 1, 2009
This supplement amends certain disclosure contained in the prospectus for
certain annuity contracts issued by Lincoln Benefit Life Company.
Under the "More Information" section, the subsection entitled "Legal Matters" is
deleted and replaced with the following:
LEGAL MATTERS
Certain matters of state law pertaining to the Contracts, including the validity
of the Contracts and Lincoln Benefit Life Company's right to issue such
Contracts under applicable state insurance law, have been passed upon by Susan
L. Lees, General Counsel of Lincoln Benefit Life Company.
The "Annual Reports and Other Documents" section is deleted and replaced with
the following:
ANNUAL REPORTS AND OTHER DOCUMENTS
Lincoln Benefit Life Company ("Lincoln Benefit") incorporates by reference into
the prospectus its latest annual report on Form 10-K filed pursuant to Section
13(a) or Section 15(d) of the Exchange Act since the end of the fiscal year
covered by its latest annual report, including filings made on Form 10-Q and
Form 8-K. In addition, all documents subsequently filed by Lincoln Benefit
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act also are
incorporated into the prospectus by reference. Lincoln Benefit will provide to
each person, including any beneficial owner, to whom a prospectus is delivered,
a copy of any or all of the information that has been incorporated by reference
into the prospectus but not delivered with the prospectus. Such information will
be provided upon written or oral request at no cost to the requester by writing
to Lincoln Benefit, P.O. Box 758565, Topeka, KS 66675-8565 or by calling 1-800-
457-7617. Lincoln Benefit files periodic reports as required under the
Securities Exchange Act of 1934. The public may read and copy any materials that
Lincoln Benefit files with the SEC at the SEC's Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy, and information
statements, and other information regarding issuers that file electronically
with the SEC (see http://www.sec.gov).
Lincoln Benefit Life Company
Lincoln Benefit Life Variable Annuity Account
Supplement, dated March 31, 2008, to
the LBL Advantage Variable Annuity Prospectus
and the LBL Premier Planner Variable Annuity Prospectus
This supplement amends certain disclosure contained in the above-referenced
prospectus for certain variable annuity contracts issued by Lincoln Benefit Life
Company.
We have received notice that the Board of Trustees of the Rydex Variable Trust
has approved the following fund name change:
Effective April 1, 2008, the name of the Rydex VT OTC Fund will be changed
to the Rydex VT NASDAQ-100 (R) Fund.
Due to this name change, the corresponding Rydex VT OTC Sub-Account available
for your product will change its name to the Rydex VT NASDAQ-100 (R) Sub-Account
effective April 1, 2008.
The name change does not in any way affect the investment objective of the Fund,
which remains unchanged, or the manner in which the investment advisor manages
the fund.
Please keep this supplement for future reference together with your prospectus.
Lincoln Benefit Life Company
Lincoln Benefit Life Variable Annuity Account
Supplement, dated February 26, 2007 to
The LBL Advantage Variable Annuity Prospectus dated May 1, 2004
The Premier Planner Variable Annuity Prospectus dated May 1, 2004
This supplement amends certain disclosures contained in the above-referenced
prospectuses for certain variable annuity contracts issued by Lincoln Benefit
Life Company.
We have received notice that the Board of Trustees ("Board") of the Legg Mason
Variable Portfolios has approved the reorganization, on or about April 27, 2007
("Conversion Date"), of the Legg Mason Partners Variable All Cap Portfolio -
Class II into the Legg Mason Partners Variable Fundamental Value Portfolio -
Class I, which will be added as an investment choice to your contract as of
April 27, 2007.
To reflect the change in the underlying Portfolio, we will transfer any Contract
Value you have in the Legg Mason Partners Variable All Cap Portfolio - Class II
Sub-Account ("All Cap Sub-Account) into the Legg Mason Partners Variable
Fundamental Value Portfolio - Class I Sub-Account ("Fundamental Value
Sub-Account"). Contract owners will receive a confirmation of the transaction
reflecting this change.
Salomon Brothers Asset Management Inc. is the investment advisor for the Legg
Mason Partners Variable Fundamental Value Portfolio - Class I. The investment
objective for this Portfolio is: Long-term capital growth with current income as
a secondary consideration.
If you currently have allocations made to the All Cap Sub-Account through
automatic additions, automatic portfolio rebalancing, dollar cost averaging or
systematic withdrawal programs, any future allocations will be made to the
Fundamental Value Sub-Account as of the Conversion Date.
For additional information on how to transfer to another investment alternative,
or how to make a change to your current allocation(s), please contact your
financial representative or call our Customer Service Center at 1-800-865-5237.
Please keep this supplement for future reference together with your
prospectuses.
Lincoln Benefit Life Company
Lincoln Benefit Life Variable Annuity Account
Supplement, dated January 14, 2005,
to
The Premier Planner Variable Annuity Prospectus
dated May 1, 2004
This supplement amends certain disclosure contained in the above-referenced
prospectus for certain variable annuity contracts issued by Lincoln Benefit Life
Company.
We have received notice that the Board of Trustees ("Board") of PIMCO Advisors
VIT has approved the liquidation, on or about April 29, 2005 (the "Closing
Date"), of the PEA Science and Technology Portfolio (the "PEA Portfolio").
The Board based its decision, in part, upon the fact that the PEA Portfolio is
relatively small in asset size and has failed to garner significant exposure in
the variable contract market. In addition, the Board believes the outlook for
future growth of the PEA Portfolio is not encouraging.
Due to the liquidation of the PEA Portfolio, we will no longer accept new
premiums for investment in, nor will we permit transfers to, the PEA Science and
Technology Portfolio Sub-Account ("PEA Sub-Account") on or after April 29, 2005.
Because the PEA Sub-Account will no longer be offered as an investment
alternative as of the Closing Date, you may wish to transfer, prior to April 29,
2005, some or all of your interest in the PEA Sub-Account to the other
investment alternatives currently offered by your Contract. Any value remaining
in the PEA Sub-Account will be transferred automatically, as of the Closing
Date, to the PIMCO VIT Money Market Sub-Account, an investment alternative
already available under your Contract. These transfers are not subject to a
transfer fee.
If you currently have allocations made to the PEA Sub-Account through automatic
additions, automatic portfolio rebalancing, dollar cost averaging or systematic
withdrawal programs, your allocation in the PEA Sub-Account will also need to be
changed in these programs. If you do not change this allocation to other
investment alternatives currently available under your Policy, any allocation to
the PEA Sub-Account will be automatically allocated, as of the Closing Date, to
the PIMCO VIT Money Market Sub-Account.
If your interest in the PEA Sub-Account is transferred automatically on the
Closing Date to the PIMCO VIT Money Market Sub-Account, for 60 days following
the Closing Date, you may transfer your interest in the PIMCO VIT Money Market
Sub-Account to any other investment alternative(s) available under your
Contract. This transfer is not subject to a transfer fee.
We will send you a confirmation that shows the amount that we credited to the
PIMCO VIT Money Market Sub-Account or to the investment alternative that you
chose and the date of the transaction. For additional information on how to
transfer to another investment alternative, or how to make a change to your
current allocation(s), please contact your financial representative or call our
Customer Service Center at the number listed below.
Attached, as Appendix A, is a list of the Portfolios and Fixed Account
Investment Alternatives currently available under your Contract.
Please keep this supplement for future reference together with your
prospectuses.
Number for Customer Service Center: 1-800-865-5237
Appendix A
The Premier Planner Variable Annuity contract offers a variety of Investment
Alternatives that encompass investment choices ranging from aggressive to
conservative. Below is a listing of the Portfolios and Fixed Account Investment
Alternatives currently available. Also included is the investment objective for
each Portfolio.
For more complete information about each Portfolio, including expenses and risks
associated with the Portfolio, please refer to the relevant prospectus for the
Portfolio.
PORTFOLIOS
AIM V.I. Basic Value Fund - Series I Seeks long-term growth of capital.
Alger American Growth Portfolio - Class S Seeks long-term capital appreciation.
Fidelity VIP Growth Portfolio - Service Class 2 Seeks capital appreciation.
Fidelity VIP Investment Grade Bond Portfolio - Service Class 2 Seeks as high a
level of current income as is consistent with the preservation of capital.
Fidelity VIP Overseas Portfolio - Service Class 2 Seeks long-term growth of
capital.
Goldman Sachs VIT CORESM Small Cap Equity Fund Seeks long-term growth of
capital.
Goldman Sachs VIT International Equity Fund Seeks long-term capital
appreciation.
Janus Aspen Series Capital Appreciation Portfolio: Institutional Shares Seeks
long-term growth of capital.
Janus Aspen Series Foreign Stock Portfolio: Service Shares Seeks long-term
growth of capital.
Janus Aspen Series Worldwide Growth Portfolio: Service Shares Seeks long-term
growth of capital in a manner consistent with the preservation of capital.
Lazard Emerging Markets Portfolio Seeks long-term capital appreciation
Lazard International Equity Portfolio Seeks long-term capital appreciation
MFS New Discovery Series - Service Class Seeks capital appreciation.
MFS Utilities Series - Service Class Seeks capital growth and current income.
Oppenheimer Main Street Small Cap Fund/VA - Service Shares Seeks capital
appreciation.
PAVIT OpCap Balanced Portfolio Seeks growth of capital and investment income.
PAVIT OpCap Equity Portfolio Seeks long-term capital appreciation.
PAVIT OpCap Small Cap Portfolio Seeks capital appreciation.
PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares
Seeks to maximize total return, consistent with preservation of capital and
prudent investment management.
PIMCO VIT Money Market Portfolio - Administrative Shares Seeks to obtain maximum
current income consistent with preservation of capital and daily liquidity.
PIMCO VIT Total Return Portfolio - Administrative Shares Seeks to maximize total
return, consistent with preservation of capital and prudent investment
management.
Putnam VT High Yield Fund - Class IB
Seeks high current income. Capital growth is a secondary goal when consistent
with achieving high current income. The fund seeks its goal by investing at
least 80% in U.S. corporate rated below investment grade (junk bonds) and that
have intermediate to long-term maturities (three years or longer.)
Rydex VT OTC Fund
Seeks investment results that correspond to a benchmark for over-the-counter
securities. The Portfolio's current benchmark is the NASDAQ 100 Index.
Salomon Brothers Variable All Cap Fund - Class I Seeks capital appreciation.
Salomon Brothers Variable Investors Fund - Class I Seeks long-term growth of
capital with current income as a secondary objective.
Van Kampen UIF Equity Growth Portfolio, Class I Seeks long-term capital
appreciation by investing primarily in growth-oriented equity securities of
large capitalization companies.
Van Kampen UIF High Yield Portfolio, Class I Seeks above-average total return
over a market cycle of three to five years by investing primarily in high yield
securities (commonly referred to as "junk bonds").
Van Kampen UIF Mid Cap Growth Portfolio, Class I Seeks above-average total
return over a market cycle of three to five years by investing in common stocks
and other equity securities.
Van Kampen UIF U.S. Mid Cap Value Portfolio, Class I Seeks above-average total
return over a market cycle of three to five years by investing in common stocks
and other equity securities.
Van Kampen LIT Aggressive Growth Portfolio, Class II Seeks capital growth.
Van Kampen LIT Growth and Income Portfolio, Class II Seeks long-term growth of
capital and income.
Fixed Account Options
Standard Fixed Account
Guaranteed Maturity Fixed Account Option
PREMIER PLANNER VARIABLE ANNUITY PROSPECTUS
FLEXIBLE PREMIUM
INDIVIDUAL DEFERRED VARIABLE ANNUITY CONTRACTS
ISSUED BY
LINCOLN BENEFIT LIFE COMPANY
IN CONNECTION WITH
LINCOLN BENEFIT LIFE VARIABLE ANNUITY ACCOUNT
STREET ADDRESS: 2940 SOUTH 84TH ST., LINCOLN, NE 68506
MAILING ADDRESS: P. O. BOX 80469, LINCOLN, NE 68501-0469
TELEPHONE NUMBER: 1-800-865-5237
The Contract is a deferred annuity contract designed to aid you in long-term
financial planning. You may purchase it on either a tax qualified or non-tax
qualified basis. Lincoln Benefit Life no longer offers this Contract in most
states. If you have already purchased the Contract you may continue to make
purchase payments according to the Contract.
Because this is a flexible premium annuity contract, you may pay multiple
premiums. We allocate your premium to the investment options under the Contract
and our Fixed Account in the proportions that you choose. The Contract currently
offers thirty-four investment options, each of which is a Subaccount of the
Lincoln Benefit Life Variable Annuity Account ("Separate Account"). Each
Subaccount invests exclusively in shares of one of the following Portfolios:
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Basic Value Fund - Series I
THE ALGER AMERICAN FUND:
Alger American Growth Portfolio - Class S
FIDELITY(R) VARIABLE INSURANCE PRODUCTS:
Fidelity VIP Growth Portfolio - Service Class 2 Fidelity VIP Investment Grade
Bond Portfolio - Service Class 2 Fidelity VIP Overseas Portfolio - Service
Class 2
GOLDMAN SACHS VARIABLE INSURANCE TRUST:
Goldman Sachs VIT CORE(SM) Small Cap Equity Fund Goldman Sachs VIT International
Equity Fund
JANUS ASPEN SERIES:
Janus Aspen Series Capital Appreciation Portfolio -Institutional Shares Janus
Aspen Series Foreign Stock Portfolio - Service Shares (formerly International
Value Portfolio)
Janus Aspen Series Worldwide Growth Portfolio - Service Shares
J.P. MORGAN SERIES TRUST II:
JPMorgan Small Company Portfolio
LAZARD RETIREMENT SERIES, INC.:
Lazard Emerging Markets Portfolio
Lazard International Equity Portfolio
MFS(R) VARIABLE INSURANCE TRUST(SM):
MFS New Discovery Series - Service Class MFS Utilities Series - Service Class
OPPENHEIMER VARIABLE ACCOUNT FUNDS:
Oppenheimer Main Street Small Cap Fund/VA - Service Shares
PIMCO ADVISORS VIT:
PAVIT OpCap Balanced Portfolio
PAVIT OpCap Equity Portfolio
PAVIT OpCap Small Cap Portfolio
PAVIT PEA Science and Technology Portfolio
PIMCO VARIABLE INSURANCE TRUST:
PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares
PIMCO VIT Money Market Portfolio - Administrative Shares PIMCO VIT StocksPLUS
Growth and Income Portfolio - Administrative Shares PIMCO VIT Total Return
Portfolio - Administrative Shares
PUTNAM VARIABLE TRUST:
Putnam VT High Yield Fund - Class 1B
THE RYDEX VARIABLE TRUST:
Rydex VT OTC Fund
SALOMON BROTHERS VARIABLE SERIES FUNDS INC:
Salomon Brothers Variable All Cap Fund - Class I Salomon Brothers Variable
Investors Fund - Class I
VAN KAMPEN LIFE INVESTMENT TRUST:
Van Kampen LIT Aggressive Growth Portfolio, Class II Van Kampen LIT Growth and
Income Portfolio, Class II
1 PROSPECTUS
THE UNIVERSAL INSTITUTIONAL FUNDS, INC.:
Van Kampen UIF Equity Growth Portfolio, Class I* Van Kampen UIF High Yield
Portfolio, Class I* Van Kampen UIF Mid Cap Growth Portfolio, Class I* Van Kampen
UIF U.S. Mid Cap Value Portfolio, Class I**
* Morgan Stanley Investment Management, Inc., the advisor for the UIF
Portfolios, does business in certain instances using the name Van Kampen.
** Effective 9/20/2003, the Van Kampen UIF Mid Cap Core Portfolio, Class I
changed its name to Van Kampen UIF Mid Cap Value Portfolio, Class I.
Some of the portfolios described in this Prospectus may not be available in your
Contract. We may make available other investment options in the future.
Your Contract Value will vary daily as a function of the investment performance
of the Subaccounts to which you have allocated Purchase Payments and any
interest credited to the Fixed Account. We do not guarantee any minimum Contract
Value for amounts allocated to the Subaccounts. Benefits provided by this
Contract, when based on the Fixed Account, are subject to a Market Value
Adjustment, which may result in an upward or downward adjustment in withdrawal
benefits, death benefits, settlement values, and transfers to the Subaccounts.
The maximum age of the oldest Contract Owner and Annuitant is age 85 as of the
date we receive the completed application. The maximum age of the oldest
Contract Owner and Annuitant for purchasing the Contract with the Enhanced Death
Benefit Rider is age 80.
Each time you pay a Premium, we will credit your Contract Value with a Credit
Enhancement. In addition to this Contract, we also offer other annuity contracts
that do not provide for Credit Enhancements. The expenses for this Contract may
be higher than the expenses for an annuity contract that does not provide for
Credit Enhancements. Over time, the amount of the Credit Enhancements may be
more than offset by the higher expenses. You and your agent should decide if
this Contract is right for you.
In certain states the Contract may be offered as a group contract with
individual ownership represented by Certificates. The discussion of Contracts in
this prospectus applies equally to Certificates under group contracts, unless
the content specifies otherwise.
This prospectus sets forth the information you ought to know about the Contract.
You should read it before investing and keep it for future reference.
We have filed a Statement of Additional Information with the Securities and
Exchange Commission ("SEC"). The current Statement of Additional Information is
dated May 1, 2004. The information in the Statement of Additional Information is
incorporated by reference in this prospectus. You can obtain a free copy by
writing us or calling us at the telephone number given above. The Table of
Contents of the Statement of Additional Information appears on page 44 of this
prospectus.
At least once each year we will send you an annual statement. The annual
statement details values and specific information for your Contract. It does not
contain our financial statements. Our financial statements are set forth in the
Statement of Additional Information. Lincoln Benefit Life Company ("Lincoln
Benefit") will file annual and quarterly reports and other information with the
SEC. You may read and copy any reports, statements or other information we file
at the SEC's public reference room in Washington, D.C. You can obtain copies of
these documents by writing to the SEC and paying a duplicating fee. Please call
the SEC at 1-800-SEC-0330 for further information as to the operation of the
public reference room. Our SEC filings are also available to the public on the
SEC Internet site (http:// www.sec.gov).
The Date of this Prospectus is May 1, 2004.
EFFECTIVE MAY 1, 2004, THIS PRODUCT IS NO LONGER BEING OFFERED FOR SALE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR HAS IT PASSED ON THE ACCURACY OR THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES
FOR THE PORTFOLIOS LISTED ABOVE. IF ANY OF THESE PROSPECTUSES IS MISSING OR
OUTDATED, PLEASE CONTACT US AND WE WILL SEND YOU THE PROSPECTUS YOU NEED.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR YOUR FUTURE REFERENCE.
2 PROSPECTUS
TABLE OF CONTENTS
PAGE
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DEFINITIONS 5
FEE TABLES 6
Examples 7
Explanation of the Expense Examples 7
QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT 8
FINANCIAL INFORMATION 12
DESCRIPTION OF THE CONTRACTS 13
Summary 13
Contract Owner 13
Annuitant 13
Modification of the Contract 13
Assignment 13
Free Look Period 13
PURCHASES AND CONTRACT VALUE 14
Minimum Purchase Payment 14
Automatic Payment Plan 14
Credit Enhancement 14
Allocation of Purchase Payments 14
Contract Value 15
Separate Account Accumulation Unit Value 15
Transfer During Accumulation Period 15
Transfers Authorized by Telephone 15
Market Timing & Excessive Trading 16
Trading Limitations 16
Automatic Dollar Cost Averaging Program 16
Portfolio Rebalancing 16
THE INVESTMENT AND FIXED ACCOUNT OPTIONS 17
Separate Account Investments 17
The Portfolios 17
Voting Rights 20
Additions, Deletions, and Substitutions of Securities 20
The Fixed Account 21
General 21
Guaranteed Maturity Fixed Account Option 21
Market Value Adjustment 23
Dollar Cost Averaging Fixed Account Option 23
ANNUITY BENEFITS 23
Annuity Date 23
Annuity Options 24
Other Options 24
Annuity Payments: General 24
Variable Annuity Payments 25
Fixed Annuity Payments 25
PAGE
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Transfers During Annuity Period 25
Death Benefit During Annuity Period 25
Certain Employee Benefit Plans 26
OTHER CONTRACT BENEFITS 26
Death Benefit 26
General 26
Due Proof of Death 26
Death Proceeds 26
Death Benefit Amount 26
Death Benefit Payments 26
Enhanced Death Benefit Rider 28
Beneficiary 29
Contract Loans for 403(b) Contracts 29
Withdrawals (Redemptions) 30
Systematic Withdrawal Program 31
ERISA Plans 31
Minimum Contract Value 31
CONTRACT CHARGES 31
Mortality and Expense Risk Charge 32
Administrative Charges 32
Contract Maintenance Charge 32
Administrative Expense Charge 32
Transfer Fee 32
Sales Charges 32
Withdrawal Charge 32
Free Withdrawal 33
Waiver Benefits 33
General 33
Confinement Waiver Benefit 33
Terminal Illness Waiver Benefit 34
Waiver of Withdrawal Charge for Certain Qualified Plan Withdrawals 34
Premium Taxes 33
Deduction for Separate Account Income Taxes 34
Other Expenses 34
TAXES 35
Taxation of Lincoln Benefit Life Company 35
Taxation of Variable Annuities in General 35
Income Tax Withholding 37
Tax Qualified Contracts 38
DESCRIPTION OF LINCOLN BENEFIT LIFE COMPANY AND THE SEPARATE ACCOUNT 41
Lincoln Benefit Life Company 41
Separate Account 41
State Regulation of Lincoln Benefit 41
3 PROSPECTUS
PAGE
----
ADMINISTRATION 41
DISTRIBUTION OF CONTRACTS 42
LEGAL PROCEEDINGS 42
LEGAL MATTERS 42
ANNUAL REPORTS AND OTHER DOCUMENTS 42
REGISTRATION STATEMENT 43
PAGE
----
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION 44
APPENDIX A ACCUMULATION UNIT VALUES 45
APPENDIX B ILLUSTRATION OF A MARKET VALUE ADJUSTMENT 53
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE DO NOT AUTHORIZE ANYONE TO PROVIDE
ANY INFORMATION OR REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS
PROSPECTUS OTHER THAN AS CONTAINED IN THIS PROSPECTUS.
4 PROSPECTUS
DEFINITIONS
Please refer to this list for the meaning of the following terms:
ACCUMULATION PERIOD - The period of time beginning on the day money is put into
an annuity contract and ending when the contract is annuitized or surrendered.
ACCUMULATION UNIT - A unit of measurement which we use to calculate Contract
Value.
ANNUITANT - The living person named on an annuity contact whose life expectancy
is used to calculate the annuity payments when the contract is annuitized.
ANNUITIZATION - The process by which the accumulation phase of the contract is
terminated and the conteract is converted to the payoout phase. This is
accomplished by paying the entire contract value over a period of time.
ANNUITIZED VALUE - The Contract Value adjusted by any applicable Market Value
Adjustment and less any applicable taxes.
ANNUITY DATE - The date on which annuity payments are scheduled to begin.
ANNUITY PERIOD - The period during which annuity payments are paid. The Annuity
Period begins on the Annuity Date.
ANNUITY UNIT - A unit of measurement which we use to calculate the amount of
Variable Annuity payments.
BENEFICIARY(IES) - The person designated to receive the death benefit in the
event of all of the owners' deaths.
COMPANY ("WE," "US," "OUR," "LINCOLN BENEFIT") - Lincoln Benefit Life Company.
CONTRACT ANNIVERSARY - Each anniversary of the Issue Date.
CONTRACT OWNER ("YOU," "YOUR") - The person(s) or entity having the privileges
of ownership defined in the Contract. If your Contract is issued as part of a
retirement plan, your ownership privileges may be modified by the plan.
CONTRACT VALUE - The sum of the values of your investment in the Subaccounts of
the Separate Account and the Fixed Account.
CONTRACT YEAR - Each twelve-month period beginning on the Issue Date and each
Contract Anniversary.
CONTRIBUTION YEAR - Each twelve-month period beginning on the date a Purchase
Payment is allocated to a Subaccount, or each anniversary of that date.
CREDIT ENHANCEMENT - An amount we add to your Contract Value when a Purchase
Payment is received. Each Credit Enhancement will be counted as earnings under
your Contract.
FIXED ACCOUNT - The portion of the Contract Value allocated to our general
account.
FIXED ANNUITY - A series of annuity payments that are fixed in amount.
GUARANTEE PERIODS - A period of years for which we have guaranteed a specific
effective annual interest rate on an amount allocated to the Fixed Account.
ISSUE DATE - The date when the Contract becomes effective.
LATEST ANNUITY DATE - The latest date by which you must begin annuity payments
under the Contract.
LOAN ACCOUNT - An account established for amounts transferred from the
Subaccounts or the Fixed Account as security for outstanding Contract loans.
MARKET VALUE ADJUSTMENT - An amount added to or subtracted from certain
transactions involving your interest in the Fixed Account, to reflect the impact
of changing interest rates.
NET INVESTMENT FACTOR - The factor used to determine the value of an
Accumulation Unit and Annuity Unit in any Valuation Period. We determine the Net
Investment Factor separately for each Subaccount.
NON-QUALIFIED PLAN - A retirement plan which does not receive special tax
treatment under Sections 401, 403(b), 408, 408A or 457 of the Tax Code.
PORTFOLIO(S) - The underlying funds in which the Subaccounts invest. Each
Portfolio is an investment company registered with the SEC or a separate
investment series of a registered investment company.
PURCHASE PAYMENTS - Amounts paid to us as premium for the Contract by you or on
your behalf.
QUALIFIED PLAN - A retirement plan which receives special tax treatment under
Sections 401, 403(b), 408 or 408A of the Tax Code or a deferred compensation
plan for a state and local government or another tax exempt organization under
Section 457 of the Tax Code.
SEPARATE ACCOUNT - The Lincoln Benefit Life Variable Annuity Account, which is a
segregated investment account of the Company.
SUBACCOUNT - A subdivision of the Separate Account, which invests wholly in
shares of one of the Portfolios.
SURRENDER VALUE - The amount paid upon complete surrender of the Contract, equal
to the Contract Value, less any applicable premium taxes, Withdrawal Charge, and
the contract maintenance charge and increased or decreased by any Market Value
Adjustment.
TAX CODE - The Internal Revenue Code of 1986, as amended.
5 PROSPECTUS
TREASURY RATE - The U.S. Treasury Note Constant Maturity Yield for the preceding
week as reported in Federal Reserve Bulletin Release H.15.
VALUATION DATE - Each day the New York Stock Exchange is open for business.
VALUATION PERIOD - The period of time over which we determine the change in the
value of the Subaccounts in order to price Accumulation Units and Annuity Units.
Each Valuation Period begins at the close of normal trading on the New York
Stock Exchange ("NYSE") currently 4:00 p.m. Eastern time on each Valuation Date
and ends at the close of the NYSE on the next Valuation Date.
VARIABLE ANNUITY - A series of annuity payments that vary in amount based on
changes in the value of the Subaccounts to which your Contract Value has been
allocated.
WITHDRAWAL CHARGE - The contingent deferred sales charge that may be required
upon some withdrawals.
FEE TABLES
The following tables describe the fees and expenses that you will pay when
buying, owning and surrendering the Contract. The first table decribes the fees
and expenses that you will pay at the time that you buy the Contract, surrender
the Contract, or transfer cash value between investment options. State premium
taxes may also be deducted.
Contingent Deferred Sales Charge Withdrawal Charge (as a percentage of Purchase
Payments)
CONTRIBUTION YEAR APPLICABLE CHARGE
- ----------------- -----------------
1 8%
2-3 7%
4-5 6%
6 5%
7 4%
8 3%
9 + 0%
Transfer Fee (Applies solely to the second and subsequent transfers within a
calendar month. We are currently waiving the Transfer Fee) - $10.00
The next table describes the fees and expenses that you will pay periodically
during the time you own the Contract, not including Portfolio fees and expenses.
Annual Contract Maintenance Charge (waived if total Purchase Payments are
$50,000 or more) $35.00
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF DAILY NET ASSET VALUE
DEDUCTED FROM EACH OF THE SUBACCOUNTS OF THE SEPARATE ACCOUNT)
BASE CONTRACT (WITHOUT OPTIONAL RIDERS)
Mortality and Expense Risk Charge 1.30%
Administrative Expense Charge 0.10%
------
Total Separate Account Annual Expenses 1.40%
BASE CONTRACT (WITH ENHANCED DEATH BENEFIT RIDER)
Mortality and Expense Risk Charge 1.50%
Administrative Expense Charge 0.10%
------
Total Separate Account Annual Expenses 1.60%
The next table shows the minimum and maximum total operating expenses charged by
the Portfolios that you may pay periodically during the time that you own the
Contract. Advisers and/or other service providers of certain Portfolios may have
agreed to waive their fees and/or reimburse Portfolio expenses in order to keep
the Portfolios' expenses below
6 PROSPECTUS
specified limits. The range of expenses shown in this table does not show the
effect of any such fee waiver or expense reimbursement. More detail concerning
each Portfolio's fees and expenses appears in the prospectus for each Portfolio.
Minimum Maximum
- ------------------------------------------------------------------
Total Portfolio Annual Operating Expenses/(1)/
(expenses that are deducted
from Portfolio assets, which may include
management fees, distribution and/or
service (12b-1) fees and other expenses) 0.50% 4.31%
- ------------------------------------------------------------------
(1) Expenses are shown as a percentage of Portfolio average daily net assets
before any waiver or reimbursement as of December 31, 2003.
EXAMPLE 1
This Example is intended to help you compare the cost of investing in the
Contracts with the cost of investing in other variable annuity contracts. These
costs include Contract owner transaction expenses, Contract fees, Separate
Account annual expenses, and Portfolio fees and expenses and assumes no
transfers or exchanges were made. The example shows the dollar amount of expense
that you would bear directly or indirectly if you:
.. invested $10,000 in the Contract for the time periods indicated,
.. earned a 5% annual return on your investment,
.. surrendered your Contract, or began receiving income payments for a
specified period of less than 120 months, at the end of each time period,
and
.. elected the Enhanced Death Benefit Rider (with total Separate Account
expenses of 1.60%)
The first line of the example assumes that the maximum fees and expenses of any
of the Portfolios are charged. The second line of the example assumes that the
minimum fees and expenses of any of the Portfolios are charged. Your actual
expenses may be higher or lower than those shown below.
THE EXAMPLE DOES NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO
PAY IF YOU SURRENDER YOUR CONTRACT.
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------
Costs Based on Maximum Annual Portfolio Expenses $1,236 $2,406 $3,544 $6,033
- ----------------------------------------------------------------------------------------
Costs Based on Minimum Annual Portfolio Expenses $ 845 $1,277 $1,731 $2,763
- ----------------------------------------------------------------------------------------
EXAMPLE 2
This Example uses the same assumptions as Example 1 above, except that it
assumes you decided not to surrender your Contract, or you began receiving
income payments for a specified period of at least 120 months, at the end of
each time period.
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------
Costs Based on Maximum Annual Portfolio Expenses $641 $1,896 $3,119 $6,033
- ----------------------------------------------------------------------------------------
Costs Based on Minimum Annual Portfolio Expenses $250 $ 767 $1,306 $2,763
- ----------------------------------------------------------------------------------------
EXPLANATION OF EXPENSE EXAMPLES
PLEASE REMEMBER THAT YOU ARE LOOKING AT EXAMPLES AND NOT A REPRESENTATION OF
PAST OR FUTURE EXPENSES. YOUR RATE OF RETURN MAY BE HIGHER OR LOWER THAN 5%,
WHICH IS NOT GUARANTEED. THE EXAMPLES DO NOT ASSUME THAT ANY PORTFOLIO EXPENSE
WAIVERS OR REIMBURSEMENT ARRANGEMENTS ARE IN EFFECT FOR THE PERIODS PRESENTED.
EXAMPLES 1 AND 2 ASSUME THE ELECTION OF THE ENHANCED DEATH BENEFIT RIDER (TOTAL
SEPARATE ACCOUNT EXPENSES OF 1.60%). IF THIS RIDER WAS NOT ELECTED, THE EXPENSE
FIGURES SHOWN WOULD BE SLIGHTLY LOWER.
THE EXAMPLES REFLECT THE FREE WITHDRAWAL AMOUNTS, IF APPLICABLE AND AN ANNUAL
CONTRACT ADMINISTRATIVE CHARGE OF $35.
7 PROSPECTUS
QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT
The following are answers to some of the questions you may have about some of
the more important features of the Contract. The Contract is more fully
described in the rest of the Prospectus. Please read the Prospectus carefully.
1. WHAT IS THE CONTRACT?
The Contract is a flexible premium deferred variable annuity contract. It is
designed for tax-deferred retirement investing. The Contract is available for
non-qualified or qualified retirement plans. The Contract, like all deferred
annuity contracts, has two phases: the Accumulation Period and the Annuity
Period. During the Accumulation Period, earnings accumulate on a tax-deferred
basis and are taxed as income when you make a withdrawal. The Annuity Period
begins when you begin receiving payments under one of the annuity payment
options described in the answer to Question 2. The amount of money accumulated
under your Contract during the Accumulation Period will be used to determine the
amount of your annuity payments during the Annuity Period.
Your premiums are invested in one or more of the Subaccounts of the Separate
Account or allocated to the Fixed Account, as you instruct us. If we offer
additional Subaccounts in the future, we may limit your right to allocate your
Contract Value to up to twenty-three options under the Contract, counting each
Subaccount and the Fixed Account as one option. We will treat all of your
Contract Value allocated to the Fixed Account as one option for purposes of this
limit, even if you have chosen more than one Guarantee Period. The value of your
Contract will depend on the investment performance of the Subaccounts and the
amount of interest we credit to the Fixed Account.
Each Subaccount will invest in a single investment portfolio (a "Portfolio") of
an underlying fund. The Portfolios offer a range of investment objectives, from
conservative to aggressive. You bear the entire investment risk on amounts
allocated to the Subaccounts. The investment policies and risks of each
Portfolio are described in the accompanying prospectuses for the Portfolios.
In some states, you may also allocate all or part of your Contract Value to the
"Fixed Account", as described in the answer to Question 5.
2. WHAT ANNUITY OPTIONS DOES THE CONTRACT OFFER?
You may receive annuity payments on a fixed or a variable basis or a combination
of the two. We offer a variety of annuity options including:
.. a life annuity with payments guaranteed for five to twenty years;
.. a joint and full survivorship annuity, with payments guaranteed for five to
twenty years; and
.. fixed payments for a specified period of five to thirty years.
Call us to inquire about other options.
You may change your annuity option at any time before annuitization. You may
select the date to annuitize the Contract. The date you select, however, may be
no later than the later of the tenth Contract Anniversary or the Annuitant's
90/TH/ birthday. If your Contract was issued in connection with a qualified
plan, different deadlines may apply.
If you select annuity payments on a variable basis, the amount of our payments
to you will be affected by the investment performance of the Subaccounts you
have selected. The fixed portion of your annuity payments, on the other hand,
generally will be equal in amount to the initial payment we determine. As
explained in more detail below, however, during the Annuity Period you will have
a limited ability to change the relative weighting of the Subaccounts on which
your variable annuity payments are based or to increase the portion of your
annuity payments consisting of Fixed Annuity payments.
3. HOW DO I BUY A CONTRACT?
You can obtain a Contract application from your Lincoln Benefit agent. You must
pay at least $10,000 in Purchase Payments during the first Contract Year.
Purchase Payments must be at least $500, unless you enroll in an automatic
payment plan. Your periodic payments in an automatic payment plan must be at
least $100 per month. We may lower these minimums at our sole discretion. The
maximum age of the oldest Contract Owner and Annuitant is age 85 as of the date
we receive the completed application. The maximum age of the oldest Contract
Owner and Annuitant for purchasing the Contract with the Enhanced Death Benefit
Rider is age 80.
4. WHAT ARE MY INVESTMENT CHOICES UNDER THE CONTRACT?
You can allocate and reallocate your investment among the Subaccounts, each of
which in turn invests in a single Portfolio. Under the Contract, the Separate
Account currently invests in the following Portfolios:
PORTFOLIO(S)
- --------------------------------------------------------------------------------------------------------------------
AIM Variable Insurance Funds AIM V.I. Basic Value Fund - Series I
- --------------------------------------------------------------------------------------------------------------------
The Alger American Fund Alger American Growth Portfolio - Class S
- --------------------------------------------------------------------------------------------------------------------
Fidelity(R) Variable Insurance Products Fund Fidelity VIP Growth Portfolio - Service Class 2
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP Investment Grade Bond Portfolio - Service Class 2
- --------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio - Service Class 2
- --------------------------------------------------------------------------------------------------------------------
Goldman Sachs Variable Insurance Trust Goldman Sachs VIT CORE(SM) Small Cap Equity
- --------------------------------------------------------------------------------------------------------------------
Goldman Sachs VIT International Equity Fund
- --------------------------------------------------------------------------------------------------------------------
Janus Aspen Series Janus Aspen Series Capital Appreciation Portfolio: Institutional
Shares
- --------------------------------------------------------------------------------------------------------------------
Janus Aspen Series Foreign Stock Portfolio: Service Shares
- --------------------------------------------------------------------------------------------------------------------
Janus Aspen Series Worldwide Growth Portfolio: Service Shares
- --------------------------------------------------------------------------------------------------------------------
J.P. Morgan Series Trust II JPMorgan Small Company Portfolio
- --------------------------------------------------------------------------------------------------------------------
Lazard Retirement Series, Inc. Lazard Emerging Markets Portfolio
- --------------------------------------------------------------------------------------------------------------------
Lazard International Equity Portfolio
- --------------------------------------------------------------------------------------------------------------------
MFS(R) Variable Insurance Trust(SM) MFS New Discovery Series - Service Class
- --------------------------------------------------------------------------------------------------------------------
MFS Utilities Series - Service Class
- --------------------------------------------------------------------------------------------------------------------
Oppenheimer Variable Account Funds Oppenheimer Main Street Small Cap Fund/VA - Service Shares
- --------------------------------------------------------------------------------------------------------------------
PIMCO Advisors VIT PAVIT OpCap Balanced Portfolio
- --------------------------------------------------------------------------------------------------------------------
PAVIT OpCap Equity Portfolio
- --------------------------------------------------------------------------------------------------------------------
PAVIT OpCap Small Cap Portfolio
- --------------------------------------------------------------------------------------------------------------------
PAVIT PEA Science and Technology Portfolio
- --------------------------------------------------------------------------------------------------------------------
PIMCO Variable Insurance Trust PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) -
Administrative Shares
- --------------------------------------------------------------------------------------------------------------------
PIMCO VIT Money Market Portfolio - Administrative Shares
- --------------------------------------------------------------------------------------------------------------------
PIMCO VIT StocksPLUS Growth and Income Portfolio - Administrative
Shares
- --------------------------------------------------------------------------------------------------------------------
PIMCO VIT Total Return Portfolio - Administrative Shares
- --------------------------------------------------------------------------------------------------------------------
Putnam Variable Trust Putnam VT High Yield Fund - Class 1B
- --------------------------------------------------------------------------------------------------------------------
The Rydex Variable Trust Rydex VT OTC Fund
- --------------------------------------------------------------------------------------------------------------------
Salomon Brothers Variable Series Funds Inc Salomon Brothers Variable All Cap Fund - Class I
- --------------------------------------------------------------------------------------------------------------------
Salomon Brothers Variable Investors Fund - Class I
- --------------------------------------------------------------------------------------------------------------------
The Universal Institutional Funds, Inc.* Van Kampen UIF Equity Growth Portfolio - Class I
- --------------------------------------------------------------------------------------------------------------------
Van Kampen UIF High Yield Portfolio - Class I
- --------------------------------------------------------------------------------------------------------------------
Van Kampen UIF Mid Cap Growth Portfolio - Class I
- --------------------------------------------------------------------------------------------------------------------
Van Kampen UIF U.S. Mid Cap Value Portfolio - Class I
- --------------------------------------------------------------------------------------------------------------------
Van Kampen Life Investment Trust Van Kampen LIT Aggressive Growth Portfolio - Class II
- --------------------------------------------------------------------------------------------------------------------
Van Kampen LIT Growth and Income Portfolio - Class II
- --------------------------------------------------------------------------------------------------------------------
* Morgan Stanley Investment Management, Inc., the advisor for the UIF
Portfolios, does business in certain instances using the name Van Kampen.
Some of the Portfolios described in this prospectus may not be available in your
Contract.
Each Portfolio holds its assets separately from the assets of the other
Portfolios. Each Portfolio has distinct investment objectives and policies which
are described in the accompanying prospectuses for the Portfolios.
5. WHAT IS THE FIXED ACCOUNT OPTION?
We offer two Fixed Account interest crediting options: the Guaranteed Maturity
Fixed Account Option and the Dollar Cost Averaging Fixed Account Option.
You may allocate Purchase Payments to the Subaccount(s) and the Fixed
Account(s). Loan payments may not be allocated to the Fixed Account(s). You may
not transfer amounts into the DCA Fixed Account. The minimum amount that may be
transferred into any one of the Guaranteed Maturity Fixed Account Options is
$500.
We will credit interest to amounts allocated to the Guaranteed Maturity Fixed
Account Option at a specified rate for a specified Guarantee Period. You select
the Guarantee Period for each amount that you allocate to the Guaranteed
Maturity Fixed Account Option. We will tell you what interest rates and
Guarantee Periods we are offering at a particular time. At the end of each
Guarantee Period, you may select a new Guarantee Period from among the choices
we are then making available or transfer or withdraw the relevant amount from
the Fixed Account without any Market Value Adjustment.
9 PROSPECTUS
We may offer Guarantee Periods ranging from one to ten years in length. We are
currently offering Guarantee Periods of one, three, five, seven, and ten years
in length. In the future we may offer Guarantee Periods of different lengths or
stop offering some Guarantee Periods.
We will not change the interest rate credited to a particular allocation until
the end of the relevant Guarantee Period. From time to time, however, we may
change the interest rate that we offer to credit to new allocations to the
Guaranteed Maturity Fixed Account Option and to amounts rolled over in the Fixed
Account for new Guarantee Periods.
In addition, if you participate in our dollar cost averaging program, you may
designate amounts to be held in the Dollar Cost Averaging Fixed Account Option
until they are transferred monthly to the Subaccounts or Guarantee Periods of
your choosing. When you make an allocation to the Fixed Account for this
purpose, we will set an interest rate applicable to that amount. We will then
credit interest at that rate to that amount until it has been entirely
transferred to your chosen Subaccounts or Guarantee Periods. We will complete
the transfers within one year of the allocation. In our discretion we may change
the rate that we set for new allocations to the Fixed Account for the dollar
cost averaging program. We will never, however, set a rate less than an
effective annual rate of 3%.
A Market Value Adjustment may increase or decrease the amount of certain
transactions involving the Guaranteed Maturity Fixed Account, to reflect changes
in interest rates. As a general rule, we will apply a Market Value Adjustment to
the following transactions:
1) when you withdraw funds from the Guaranteed Maturity Fixed Account Option
in an amount greater than the Free Withdrawal Amount (which is described in
the answer to Question 6);
2) when you transfer funds from the Guaranteed Maturity Fixed Account Option
to the Subaccounts;
3) when you allocate part of your balance in the Guaranteed Maturity Fixed
Account Option to a new Guarantee Period before the end of the existing
Guarantee Period;
4) when you annuitize your Contract; and
5) when we pay a death benefit.
We will not apply a Market Value Adjustment to a transaction to the extent that:
1) it occurs within 30 days after the end of a Guarantee Period applicable to
the funds involved in the transaction; or
2) it is necessary to meet IRS minimum withdrawal requirements.
We determine the amount of a Market Value Adjustment using a formula that takes
into consideration:
1) whether current interest rates differ from interest rates at the beginning
of the applicable Guarantee Period; and
2) how many years are left until the end of the Guarantee Period.
As a general rule, if interest rates have dropped, the Market Value Adjustment
will be an addition; if interest rates have risen, the Market Value Adjustment
will be a deduction. It is therefore possible that if you withdraw an amount
from the Fixed Account during a Guarantee Period, a Market Value Adjustment may
cause you to receive less than you initially allocated to the Fixed Account.
6. WHAT ARE MY EXPENSES UNDER THE CONTRACT?
Contract Maintenance Charge. During the Accumulation Period, each year we
subtract an annual contract maintenance charge of $35 from your Contract Value
allocated to the Subaccounts. We will waive this charge if you pay $50,000 or
more in Purchase Payments or if you allocate all of your Contract Value to the
Fixed Account.
During the Annuity Period, if allowed in your state, we will subtract the annual
contract maintenance charge in equal parts from your annuity payments. We waive
this charge if on the Annuity Date your Contract Value is $50,000 or more or if
all payments are Fixed Annuity payments.
Administrative Expense Charge and Mortality and Expense Risk Charge. We impose a
mortality and expense risk charge at an annual rate of 1.30% of average daily
net assets and an administrative expense charge at an annual rate of .10% of
average daily net assets. If you select our optional enhanced death benefit
rider, however, we may charge you a higher mortality and expense risk charge.
These charges are assessed each day during the Accumulation Period and the
Annuity Period. We guarantee that we will not raise these charges.
Transfer Fee. Although we currently are not charging a transfer fee, depending
on your state, the Contract permits us to charge you up to $10 per transfer for
each transfer after the first transfer in each month, or for each transfer in
excess of twelve within a calendar year. The Contract also permits us to impose
a minimum size on transfer amounts although the minimum size may be limited to
$25 in some states.
Withdrawal Charge (Contingent Deferred Sales Charge). During the Accumulation
Period, you may withdraw all or part of the value of your Contract before your
death or, if the Contract is owned by a company or other legal entity, before
the Annuitant's death. Certain withdrawals may be made without payment of any
Withdrawal Charge, which is a contingent deferred sales charge. Other
withdrawals are subject to the Withdrawal Charge.
The Withdrawal Charge will vary depending on how many complete years have passed
since you paid the Purchase Payment being withdrawn.
The Withdrawal
10 PROSPECTUS
Charge applies to each Purchase Payment for eight complete years from the date
of the Payment (each a "Contribution Year") as follows:
Contribution Applicable
Year Charge
- ------------ ----------
1 8%
2-3 7%
4-5 6%
6 5%
7 4%
8 3%
9+ 0%
In determining Withdrawal Charges, we will deem your Purchase Payments to be
withdrawn on a first-in first-out basis.
Each year, free of Withdrawal Charge or any otherwise applicable Market Value
Adjustment, you may withdraw the Free Withdrawal Amount, which equals:
(a) the greater of:
.. earnings not previously withdrawn; or
.. 15% of your total Purchase Payments made in the most recent eight years;
plus
(b) an amount equal to your total Purchase Payments made more than eight years
ago, to the extent not previously withdrawn.
In most states, we also may waive the Withdrawal Charge if you: (1) require
long-term medical or custodial care outside the home; or (2) are diagnosed with
a terminal illness. These provisions will apply to the Annuitant, if the
Contract is owned by a company or other legal entity. Additional restrictions
and costs may apply to Contracts issued in connection with qualified plans.
Withdrawals of earnings are taxed as ordinary income and, if taken prior to age
59 1/2, may be subject to an additional 10% federal tax penalty. You should
consult with your tax counselor to determine what effect a withdrawal might have
on your tax liability. As described in the answer to Question 5, we may increase
or decrease certain withdrawals by a Market Value Adjustment.
Premium Taxes. Certain states impose a premium tax on annuity purchase payments
received by insurance companies. Any premium taxes relating to the Contract may
be deducted from Purchase Payments or the Contract Value when the tax is
incurred or at a later time. State premium taxes generally range from 0% to
3.5%.
Other Expenses. In addition to our charges under the Contract, each Portfolio
deducts amounts from its assets to pay its investment advisory fees and other
expenses.
7. HOW WILL MY INVESTMENT IN THE CONTRACT BE TAXED?
You should consult a qualified tax advisor for personalized answers. Generally,
earnings under variable annuities are not taxed until amounts are withdrawn or
distributions are made. This deferral of taxes is designed to encourage
long-term personal savings and supplemental retirement plans.
Withdrawals taken prior to annuitization are generally considered to come from
the earnings in the Contract first. If the Contract is tax-qualified, generally
all withdrawals are treated as distributions of earnings. Withdrawal of earnings
are taxed as ordinary income and, if taken prior to age 59 1/2, may be subject
to an additional 10% federal tax penalty.
Special rules apply if the Contract is owned by a company or other legal entity.
Generally, such an owner must include in income any increase in the excess of
the Contract Value over the "investment in the contract" during the taxable
year.
8. DO I HAVE ACCESS TO MY MONEY?
At any time during the Accumulation Period, we will pay you all or part of the
value of your Contract, minus any applicable charge, if you surrender your
Contract or request a partial withdrawal. Under some qualified plans, you may
also take a loan against the value of your Contract. Generally, a partial
withdrawal must equal at least $50, and after the withdrawal your remaining
Contract Value must at least equal $500.
Although you have access to your money during the Accumulation Period, certain
charges, such as the contract maintenance charge, the Withdrawal Charge, and
premium tax charges, may be deducted on a surrender or withdrawal. You may also
incur federal income tax liability or tax penalties. In addition, if you have
allocated some of the value of your Contract to the Fixed Account, the amount of
your surrender proceeds or withdrawal may be increased or decreased by a Market
Value Adjustment.
After annuitization, under certain settlement options you may be entitled to
withdraw the commuted value of the remaining payments.
9. WHAT IS THE DEATH BENEFIT?
We will pay a death benefit while the Contract is in force and before the
Annuity Date, if the Contract Owner dies, or if the Annuitant dies and the
Contract Owner is not a living person. To obtain payment of the Death Benefit,
the Beneficiary must submit to us a complete request for payment of the Death
Benefit, which includes due proof of death as specified in the Contract.
The standard death benefit is the greatest of the following:
1) your total Purchase Payments reduced proportionately for any prior partial
withdrawals;
2) your Contract Value;
3) the amount you would have received by surrendering your Contract; or
4) your Contract Value on each Contract Anniversary evenly divisible by eight,
increased by the total
11 PROSPECTUS
Purchase Payments since that anniversary and reduced proportionately by any
partial withdrawals since that anniversary.
We also offer an optional enhanced death benefit rider, which is described later
in this prospectus.
We will determine the value of the death benefit on the day that we receive all
of the information that we need to process the claim.
10. WHAT ELSE SHOULD I KNOW?
Allocation of Purchase Payments. You allocate your initial Purchase Payment
among the Subaccounts and the Fixed Account in your Contract application. You
may make your allocations in specific dollar amounts or percentages, which must
be whole numbers that add up to 100%. When you make subsequent Purchase
Payments, you may again specify how you want your payments allocated. If you do
not, we will automatically allocate the payment based on your most recent
instructions. You may not allocate Purchase Payments to the Fixed Account if it
is not available in your state.
Credit Enhancements. We will credit your Contract Value with a Credit
Enhancement of 4% of each Purchase Payment before we allocate that Purchase
Payment among the Subaccounts or to the Fixed Account. The Credit Enhancements
will be allocated in the same proportions as the corresponding Purchase Payment.
As described in "Free Look Period" on page 13, if you cancel your Contract
during the free look period we may deduct any Credit Enhancement from the amount
paid you.
Transfers. During the Accumulation Period, you may transfer Contract Value among
the Subaccounts and from the Subaccounts to the Fixed Account. If we offer
additional Subaccounts in the future, we may limit your right to allocate your
Contract Value to no more than twenty-one options under the Contract. While you
may also transfer amounts from the Fixed Account, a Market Value Adjustment may
apply. You may instruct us to transfer Contract Value by writing or calling us.
You may also use our Automatic Dollar Cost Averaging or Portfolio Rebalancing
programs. You may not use both programs at the same time.
Under the Dollar Cost Averaging program, amounts are automatically transferred
at regular intervals from the Fixed Account or a Subaccount of your choosing,
including other Subaccounts or the Fixed Account. Transfers from the Dollar Cost
Averaging Fixed Account may be made monthly only. Transfers from Subaccounts may
be made monthly, quarterly, or annually.
Under the Portfolio Rebalancing program, you can maintain the percentage of your
Contract Value allocated to each Subaccount at a pre-set level. Investment
results will shift the balance of your Contract Value allocations. If you elect
rebalancing, we will automatically transfer your Contract Value back to the
specified percentages at the frequency (monthly, quarterly, semiannually,
annually) that you specify. We will automatically terminate this program if you
request a transfer outside of the program. You may not include the Fixed Account
in a Portfolio Rebalancing program. You also may not elect rebalancing after
annuitization.
During the Annuity Period, you may not make any transfers for the first six
months after the Annuity Date. Thereafter, you may make transfers among the
Subaccounts or from the Subaccounts to increase your Fixed Annuity payments.
Your transfers, however, must be at least six months apart. You may not,
however, convert any portion of your right to receive Fixed Annuity payments
into Variable Annuity payments.
Free-Look Period. You may cancel the Contract by returning it to us within 10
days after you receive it, or after whatever longer period may be permitted by
state law. You may return it by delivering it or mailing it to us. If you return
the Contract, the Contract terminates. In most states, we will pay you an amount
equal to the Contract Value minus the Credit Enhancement. The Owner will also
bear any expenses charged with respect to the Credit Enhancement amount incurred
prior to the return of the Contract such as any mortality and expense charge.
The Contract Value may be more or less than your Purchase Payments. In some
states, we are required to send you the amount of your Purchase Payments. Since
state laws differ as to the consequences of returning a Contract, you should
refer to your Contract for specific information about your circumstances. If
your Contract is qualified under Section 408 of the Internal Revenue Code, we
will refund the greater of any purchase payments or the Contract Value.
11. WHO CAN I CONTACT FOR MORE INFORMATION?
You can write to us at Lincoln Benefit Life Company, P.O. Box 80469, Lincoln,
Nebraska 68501-0469, or call us at (800) 865-5237.
FINANCIAL INFORMATION
Attached as Appendix A is a table showing selected information concerning
Accumulation Unit Values for each Subaccount for each year since we started
offering the Contracts. Accumulation Unit Value is the unit of measure that we
use to calculate the value of your interest in a Subaccount. Accumulation Unit
Value does not reflect the deduction of certain charges that are subtracted from
your Contract Value, such as the Annual Contract Maintenance Charge. The
information in the table is included in the Separate Account's financial
statements. To obtain a fuller picture of each Subaccount's finances and
performance, you should review the Separate Account's financial statements,
which are in the Separate Account's Annual Statement dated as
12 PROSPECTUS
of December 31, 2003, contained in the Statement of Additional Information. The
Statement of Additional Information also includes a brief explanation of how
performance of the Subaccounts is calculated.
DESCRIPTION OF THE CONTRACTS
SUMMARY. The Contract is a deferred annuity contract designed to aid you in
long-term financial planning. You may add to the Contract Value by making
additional Purchase Payments. In addition, the Contract Value will change to
reflect the performance of the Subaccounts to which you allocate your Purchase
Payments and your Contract Value, as well as to reflect Credit Enhancements and
interest credited to amounts allocated to the Fixed Account. You may withdraw
your Contract Value by making a partial withdrawal or by surrendering your
Contract. Upon annuitization, we will pay you benefits under the Contract in the
form of an annuity, either for the life of the Annuitant or for a fixed number
of years. All of these features are described in more detail below.
CONTRACT OWNER. As the Contract Owner, you are the person usually entitled to
exercise all rights of ownership under the Contract. You usually are also the
person entitled to receive benefits under the Contract or to choose someone else
to receive benefits. The Contract can also be purchased as an IRA or TSA (also
known as a 403(b)). The endorsements required to qualify these annuities under
the Code may limit or modify your rights and privileges under the Contract. The
maximum age of the oldest Contract Owner and Annuitant is age 85 as of the date
we receive the completed application. The Contract cannot be jointly owned by
both a non-living person and a living person. Changing ownership of this
Contract may cause adverse tax consequences and may not be allowed under
qualified plans. Please consult with a competent tax advisor prior to making a
request for a change of Contract Owner. If the Contract Owner is a grantor
trust, the Owner will be considered a non-living person for purposes of this
section and the Death Benefit section.
ANNUITANT. The Annuitant is the living person whose life span is used to
determine annuity payments. You initially designate an Annuitant in your
application. You may change the Annuitant at any time before annuity payments
begin. If your Contract was issued under a plan qualified under Section 403(b),
408 or 408A of the Tax Code, you must be the Annuitant. If the Contract is a
non-Qualified contract, you may also designate a Joint Annuitant, who is a
second person on whose life annuity payments depend. Additional restrictions may
apply in the case of Qualified Plans. If you are a living person and are not the
Annuitant and the Annuitant dies before annuity payments begin, then either you
become the new Annuitant or you must name another person as the new Annuitant.
If you are a non-living person and the Annuitant dies before annuity payments
begin, the Beneficiary may elect to receive a death benefit as discussed in
"Death of Annuitant" on page 28. You must attest that the Annuitant is alive in
order to annuitize your Contract.
MODIFICATION OF THE CONTRACT. Only a Lincoln Benefit officer may approve a
change in or waive any provision of the Contract. Any change or waiver must be
in writing. None of our agents has the authority to change or waive the
provisions of the Contract.
We are permitted to change the terms of the Contract if it is necessary to
comply with changes in the law. If a provision of the Contract is inconsistent
with state law, we will follow state law.
ASSIGNMENT. Before the Annuity Date, if the Annuitant is still alive, you may
assign an interest in the Contract if it is a non-Qualified Contract. If a
Contract is issued pursuant to a Qualified Plan, the law prohibits some types of
assignments, pledges and transfers and imposes special conditions on others. An
assignment may also result in taxes or tax penalties.
We will not be bound by any assignment until we receive written notice of it.
Accordingly, until we receive written notice of an assignment, we will continue
to act as though the assignment had not occurred. We are not responsible for the
validity of any assignment.
BECAUSE OF THE POTENTIAL TAX CONSEQUENCES AND ERISA ISSUES ARISING FROM AN
ASSIGNMENT, YOU SHOULD CONSULT WITH AN ATTORNEY BEFORE TRYING TO ASSIGN YOUR
CONTRACT.
FREE LOOK PERIOD. You may cancel the Contract by returning it to us within 10
days after you receive it, or within whatever longer period may be permitted by
state law. You may return it by delivering it to your agent or mailing it to us.
If you return the Contract, the Contract terminates. In most states, we will pay
you an amount equal to the Contract Value minus the Credit Enhancement. The
Contract Value at that time may be more or less than your Purchase Payments. The
Owner will also bear any expense charged with respect to the Credit Enhancement
amount incurred prior to the return of the Contract, such as any Mortality and
Expense Charge.
In some states, if you exercise your "free look" rights, we are required to
return the amount of your Purchase Payments. Currently, if you live in one of
those states, on the Issue Date we will allocate your Purchase Payment to the
Subaccounts and the Fixed Account Options as you specified in your application.
However, we reserve the right in the future to delay allocating your Purchase
Payments to the Subaccounts you have selected or to the Fixed Account until 20
days after the Issue Date or, if
13 PROSPECTUS
your state's free look period is longer than ten days, for ten days plus the
period required by state law. During that time, we will allocate your Purchase
Payment to the PIMCO Money Market Subaccount. Your Contract will contain
specific information about your free-look rights in your state.
PURCHASES AND CONTRACT VALUE
MINIMUM PURCHASE PAYMENT. The minimum initial Purchase Payment for a Contract is
$10,000. You may pay it in a lump sum or in installments of your choice over the
first Contract Year. You may not pay more than $1 million in Purchase Payments
without our prior approval. As a general rule, subsequent Purchase Payments may
be made in amounts of $500 or more. Subsequent Purchase Payments made as part of
an Automatic Payment Plan, however, may be as small as $100 per month. However,
each Purchase Payment made to the Dollar Cost Averaging Fixed Account must be at
least $1200. If we receive Purchase Payments designated for the Dollar Cost
Averaging Fixed Account that are lower than the required minimum of $1200, or
purchase payments designated for the Guaranteed Maturity Fixed Account Option
that are lower than $500, such amounts will be allocated to the PIMCO Money
Market Portfolio. We may lower these minimums if we choose. We may refuse any
Purchase Payment at any time.
AUTOMATIC PAYMENT PLAN. You may make scheduled Purchase Payments of $100 or more
per month by automatic payment through your bank account. Call or write us for
an enrollment form.
CREDIT ENHANCEMENT. We will add a Credit Enhancement to your Contract Value when
each Purchase Payment is received. The Credit Enhancement is payable from our
general account. The amount of a Credit Enhancement is 4% of each Purchase
Payment. The Credit Enhancement will be allocated among the Subaccounts and
Fixed Account in the same proportion that the applicable Purchase Payment is
allocated. The amount returned if the Contract Owner exercises his or her right
to return the Contract during your Free Look period will be reduced by any
Credit Enhancements applied.
The expense charges for this Contract may be higher than the expense charges for
annuity contracts that do not offer Credit Enhancements. We expect to recoup the
cost of paying Credit Enhancements through collections of the Withdrawal Charges
on the Contract (which are contingent), as well as our legitimate profits on
this and other contracts we offer. In some circumstances - for example, if you
surrender your Contract while the Withdrawal Charge still applies to a
substantial proportion of your Premiums - your net proceeds may be lower than if
you had purchased one of our other annuity contracts that does not offer Credit
Enhancements. Likewise, over time the amount of the Credit Enhancements may be
offset by higher expenses.
Credit Enhancements are treated as "earnings" for purposes of determining
Withdrawal Charges and free withdrawal amounts on surrenders and partial
withdrawals. Similarly, Credit Enhancements are not treated as an "investment in
the contract" for tax purposes.
ALLOCATION OF PURCHASE PAYMENTS. Your Purchase Payments are allocated to the
Subaccount(s) and the Fixed Account in the proportions that you have selected.
You must specify your allocation in your Contract application, either as
percentages or specific dollar amounts. If you make your allocation in
percentages, the total must equal 100%. We will allocate your subsequent
Purchase Payments in those percentages, until you give us new allocation
instructions. You may not allocate Purchase Payments to the Fixed Account if it
is not available in your state.
If we offer additional Subaccounts in the future, we may limit your right to
allocate your Purchase Payments to up to twenty-three options, counting each
Subaccount and the Fixed Account as one option. For this purpose, we will treat
all of your allocations to the Fixed Account as one option, even if you choose
more than one Guarantee Period.
If your application is complete, we will issue your Contract within two business
days of its receipt at our P.O. Box shown on the first page of this prospectus.
If your application for a Contract is incomplete, we will notify you and seek to
complete the application within five business days. For example, if you do not
fill in allocation percentages, we will contact you to obtain the missing
percentages. If we cannot complete your application within five business days
after we receive it, we will return your application and your Purchase Payment,
unless you expressly permit us to take a longer time.
Usually, we will allocate your initial Purchase Payment to the Subaccounts and
the Fixed Account, as you have instructed us, on the Issue Date. We will
allocate your subsequent Purchase Payments on the date that we receive them at
the next computed Accumulation Unit Value.
In some states, however, we are required to return at least your Purchase
Payment if you cancel your Contract during the "free-look" period. In those
states, we currently will allocate your Purchase Payments on the Issue Date as
you have instructed us, as described above. In the future, however, we reserve
the right, if you live in one of those states, to allocate all Purchase Payments
received during the "free-look period" to the PIMCO
14 PROSPECTUS
Money Market Subaccount. If we exercise that right and your state's free look
period is ten days, we will transfer your Purchase Payments to your specified
Subaccounts or the Fixed Account 20 days after the Issue Date; if your state's
free look period is longer, we will transfer your Purchase Payment after ten
days plus the period required by state law have passed.
We determine the number of Accumulation Units in each Subaccount to allocate to
your Contract by dividing that portion of your Purchase Payment allocated to a
Subaccount by that Subaccount's Accumulation Unit Value on the Valuation Date
when the allocation occurs.
CONTRACT VALUE. We will establish an account for you and will maintain your
account during the Accumulation Period. The total value of your Contract at any
time is equal to the sum of the value of your Accumulation Units in the
Subaccounts you have selected, plus the value of your investment in the Fixed
Account.
SEPARATE ACCOUNT ACCUMULATION UNIT VALUE. As a general matter, the Accumulation
Unit Value for each Subaccount will rise or fall to reflect changes in the share
price of the Portfolio in which the Subaccount invests. In addition, we subtract
from Accumulation Unit Value amounts reflecting the mortality and expense risk
charge, administrative expense charge, and any provision for taxes that have
accrued since we last calculated the Accumulation Unit Value. We determine
Withdrawal Charges, transfer fees and contract maintenance charges separately
for each Contract. They do not affect Accumulation Unit Value. Instead, we
obtain payment of those charges and fees by redeeming Accumulation Units.
We determine a separate Accumulation Unit Value for each Subaccount. We also
determine a separate set of Accumulation Unit Values reflecting the cost of the
enhanced death benefit rider. If we elect or are required to assess a charge for
taxes, we may calculate a separate Accumulation Unit Value for Contracts issued
in connection with Non-Qualified and Qualified Plans, respectively, within each
Subaccount. We determine the Accumulation Unit Value for each Subaccount Monday
through Friday on each day that the New York Stock Exchange is open for
business.
You should refer to the prospectuses for the Portfolios which accompany this
prospectus for a description of how the assets of each Portfolio are valued,
since that determination has a direct bearing on the Accumulation Unit Value of
the corresponding Subaccount and, therefore, your Contract Value.
TRANSFER DURING ACCUMULATION PERIOD. During the Accumulation Period, you may
transfer Contract Value among the Fixed Account and the Subaccounts in writing
or by telephone. Currently, there is no minimum transfer amount. The Contract
permits us to set a minimum transfer amount in the future. You may not make a
transfer that would result in your allocating your Contract Value to more than
twenty-three options under the Contract at one time.
As a general rule, we only make transfers on days when the NYSE is open for
business. If we receive your request on one of those days, we will make the
transfer that day. If you transfer an amount from the Fixed Account to a
Subaccount before the end of the applicable Guarantee Period or you allocate an
amount in the Fixed Account to a new Guarantee Period before the end of the
existing Guarantee Period, we usually will increase or decrease the amount by a
Market Value Adjustment. The calculation of the Market Value Adjustment is
described in "Market Value Adjustment" on page 23.
Transfers within 30 days after the end of the applicable Guarantee Period are
not subject to a Market Value Adjustment.
The Contract permits us to defer transfers from the Fixed Account for up to six
months from the date you ask us.
You may not transfer Contract Value into the Dollar Cost Averaging Fixed Account
Option. You may not transfer Contract Value out of the Dollar Cost Averaging
Fixed Account Option except as part of a Dollar Cost Averaging program.
TRANSFERS AUTHORIZED BY TELEPHONE. You may make transfers by telephone. The cut
off time for telephone transfer requests is 4:00 p.m. Eastern time. Calls
completed before 4:00 p.m. will be effected on that day at that day's price.
Calls completed after 4:00 p.m. will be effected on the next day on which the
NYSE is open for business, at that day's price.
We may charge you the transfer fee or impose a minimum transfer amount as
described on page 32, although we currently are waiving it. At any time, without
notice, we may suspend, modify or terminate your privilege to make transfers via
the telephone, or via other electronic or automated means previously approved by
the Company, including, but not limited to, automated telephone services,
facsimile machine, e-mail and electronic services via online access. Among other
things, we reserve the right to limit the number of such transfers among the
Separate Subaccounts in any Contract year, or to refuse any Separate Subaccount
transfer request. We also reserve the right to restrict such transfers in any
manner reasonably designed to prevent transfers that we consider disadvantageous
to other Contract owners.
We use procedures that we believe provide reasonable assurance that telephone
authorized transfers are genuine. For example, we tape telephone conversations
with persons purporting to authorize transfers and request identifying
information. Accordingly, we disclaim any liability for losses resulting from
allegedly unauthorized telephone transfers. However, if we do not take
reasonable steps to help ensure that a telephone authorization is valid, we may
be liable for such losses.
15 PROSPECTUS
MARKET TIMING & EXCESSIVE TRADING. The Contracts are intended for long-term
investment. Frequent trading in response to short-term fluctuations in the
market can disrupt management of a Portfolio and raise its expenses, which can
impair Portfolio performance. Lincoln Benefit's policy is not to knowingly
accept any money intended for the purpose of market timing. Lincoln Benefit does
not market the Contracts to persons for the purpose of their engaging in market
timing activity.
Lincoln Benefit defines market timing activity to be the movement in and out of
a Subaccount in a short period of time designed to take advantage of short-term
market fluctuations based upon expected increases in Subaccount unit values.
Lincoln Benefit defines excessive trading activity as purchase and sale
transactions of a Contract Owner that occur with such frequency and/or such size
as to affect the Portfolio's ability to meet its investment objective, in the
judgment of Lincoln Benefit or the Portfolio.
Service center personnel seek to detect and report market timing or excessive
trading transfer activity through monitoring and review of trading activities.
Portfolios may also report suspected market timing or excessive trading transfer
activity. However, not all market timing or excessive trading transfer activity
can be prevented, as it may not be possible to identify it unless and until a
trading pattern is established. If we identify suspected market timing or
excessive trading activity, we will make further inquiry and take corrective
action as appropriate. Corrective action may include, but is not limited to,
refusing transfer requests, or suspending, modifying or terminating any
telephone, automated or electronic transfer privileges.
TRADING LIMITATIONS. We reserve the right to limit transfers among the
investment alternatives in any Contract Year, or to refuse any transfer request,
if:
.. we believe, in our sole discretion, that certain trading practices, such as
excessive trading or market timing ("Prohibited Trading Practices"), by, or
on behalf of, one or more Contract Owners, or a specific transfer request
or group of transfer requests, may have a detrimental effect on the
Accumulation Unit Values of any Variable Subaccount or on the share prices
of the corresponding Portfolio or otherwise would be to the disadvantage of
other Contract Owners; or
.. we are informed by one or more of the Portfolios that they intend to
restrict the purchase, exchange, or redemption of Portfolio shares because
of Prohibited Trading Practices or because they believe that a specific
transfer or group of transfers would have a detrimental effect on the
prices of Portfolio shares.
We may apply the restrictions in any manner reasonably designed to prevent
transfers that we consider disadvantageous to other Contract Owners.
AUTOMATIC DOLLAR COST AVERAGING PROGRAM. Under our Automatic Dollar Cost
Averaging program, you may authorize us to transfer a fixed dollar amount at
fixed intervals from the Dollar Cost Averaging Fixed Account Option or a
Variable Subaccount of your choosing. You may not use the Dollar Cost Averaging
program to transfer amounts from the Guaranteed Maturity Fixed Account Option.
The interval between transfers from the Dollar Cost Averaging Fixed Account may
be monthly only. The interval between transfers from Subaccounts may be monthly,
quarterly, or annually, at your option. The transfers will be made at the
Accumulation Unit Value on the date of the transfer. The transfers will continue
until you instruct us otherwise, or until your chosen source of transfer
payments is exhausted. Currently, the minimum transfer amount is $100 per
transfer. However, if you wish to Dollar Cost Average to a Guaranteed Maturity
Fixed Account Option, the minimum amount that must be transferred into any one
Option is $500. For each purchase payment allocated to this Option, your first
monthly transfer will occur 25 days after such purchase payment. If we do not
receive an allocation from you within 25 days of the purchase payment, we will
transfer the payment plus associated interest to the Money Market Subaccount in
equal monthly installments.Your request to participate in this program will be
effective when we receive your completed application at the P.O. Box given on
the first page of this prospectus. Call or write us for a copy of the
application. You may elect to increase, decrease or change the frequency or
amount of transfers under a Dollar Cost Averaging program. We will not charge a
transfer fee for Dollar Cost Averaging.
The theory of dollar cost averaging is that by spreading your investment over
time, you may be able to reduce the effect of transitory market conditions on
your investment. In addition, because a given dollar amount purchases more units
when the unit prices are relatively low rather than when the prices are higher,
in a fluctuating market, the average cost per unit may be less than the average
of the unit prices on the purchase dates. However, participation in this program
does not assure you of a greater profit from your purchases under the program,
nor will it prevent or necessarily reduce losses in a declining market.
Moreover, while we refer to this program of periodic transfers generally as
Dollar Cost Averaging, periodic transfers from a subaccount with more volatile
performance experience is unlikely to produce the desired effects of Dollar Cost
Averaging as would transfers from a less volatile subaccount.
PORTFOLIO REBALANCING. Portfolio Rebalancing allows you to maintain the
percentage of your Contract Value allocated to each Subaccount at a pre-set
level. Over time, the variations in each Subaccount's investment results will
shift the balance of your Contract Value allocations. Under the Portfolio
Rebalancing feature, each period, if the allocations change from your desired
percentages, we will automatically transfer your Contract Value, including new
Purchase Payments (unless you specify otherwise), back to the percentages you
specify. Portfolio Rebalancing is consistent with maintaining your allocation of
investments among market segments, although it is accomplished by reducing your
Contract Value allocated to the better performing segments.
16 PROSPECTUS
You may choose to have rebalances made monthly, quarterly, semi-annually, or
annually until your Annuity Date. Portfolio Rebalancing is not available after
you annuitize. We will not charge a transfer fee for Portfolio Rebalancing. A
one-time request to rebalance the amounts allocated to the Subaccounts is not
part of a Portfolio Rebalancing program and is subject to all of the
requirements that are applicable to transfers made during the Accumulation
Period. We will automatically terminate this option if you request any transfers
outside the Portfolio Rebalancing program. If you wish to resume the Portfolio
Rebalancing after it has been canceled, then you must complete a new Portfolio
Rebalancing form and send it to our home office. You may not include the Fixed
Account in a Portfolio Rebalancing program.
You may request Portfolio Rebalancing at any time before your Annuity Date by
submitting a completed written request to us at the P.O. Box given on the first
page of this prospectus. Please call or write us for a copy of the request form.
If you stop Portfolio Rebalancing, you must wait 30 days to begin again. In your
request, you may specify a date for your first rebalancing. If you specify a
date fewer than 30 days after your Issue Date, your first rebalance will be
delayed one month. If you request Portfolio Rebalancing in your Contract
application and do not specify a date for your first rebalancing, your first
rebalance will occur one period after the Issue Date. For example, if you
specify quarterly rebalancing, your first rebalance will occur three months
after your Issue Date. Otherwise, your first rebalancing will occur one period
after we receive your completed request form. All subsequent rebalancing will
occur at the intervals you have specified on the day of the month that coincides
with the same day of the month as your Contract Anniversary Date.
Generally, you may change the allocation percentages, frequency, or choice of
Subaccounts at any time. If your total Contract Value subject to rebalancing
falls below any minimum value that we may establish, we may prohibit or limit
your use of Portfolio Rebalancing. You may not use Dollar Cost Averaging and
Portfolio Rebalancing at the same time. We may change, terminate, limit, or
suspend Portfolio Rebalancing at any time.
THE INVESTMENT AND FIXED ACCOUNT OPTIONS
SEPARATE ACCOUNT INVESTMENTS
THE PORTFOLIOS. Each of the Subaccounts of the Separate Account invests in the
shares of one of the Portfolios. Each Portfolio is either an open-end management
investment company registered under the Investment Company Act of 1940 or a
separate investment series of an open-end management investment company. We have
briefly described the Portfolios below. You should consult the current
prospectuses for the Portfolios for more detailed and complete information
concerning the Portfolios. If you do not have a prospectus for a Portfolio,
contact us and we will send you a copy.
We do not promise that the Portfolios will meet their investment objectives.
Amounts you have allocated to Subaccounts may grow in value, decline in value,
or grow less than you expect, depending on the investment performance of the
Portfolios in which those Subaccounts invest. You bear the investment risk that
those Portfolios possibly will not meet their investment objectives. You should
carefully review their prospectuses before allocating amounts to the Subaccounts
of the Separate Account.
PORTFOLIO PORTFOLIO OBJECTIVE INVESTMENT ADVISER
- -------------------------------------------------------------------------------
AIM VARIABLE INSURANCE FUNDS
- -------------------------------------------------------------------------------
AIM V.I. Basic Value Long-term growth of capital A I M ADVISORS, INC.
Fund - Series I (4)
- -------------------------------------------------------------------------------
THE ALGER AMERICAN FUND
- -------------------------------------------------------------------------------
Alger American Growth Long-term capital FRED ALGER MANAGEMENT,
Portfolio - Class S appreciation INC.
- -------------------------------------------------------------------------------
FIDELITY(R) VARIABLE INSURANCE PRODUCTS
- -------------------------------------------------------------------------------
Fidelity VIP Growth Capital appreciation FIDELITY MANAGEMENT &
Portfolio - Service RESEARCH COMPANY
Class 2
- -------------------------------------------------------
Fidelity VIP Investment As high a level of current
Grade Bond Portfolio - income as is consistent
Service Class 2 with the preservation of
capital.
- -------------------------------------------------------
Fidelity VIP Overseas Long-term growth of capital
Portfolio - Service
Class 2
- -------------------------------------------------------------------------------
GOLDMAN SACHS VARIABLE INSURANCE TRUST
- -------------------------------------------------------------------------------
Goldman Sachs VIT Long-term growth of capital GOLDMAN SACHS ASSET
CORE(SM) Small Cap MANAGEMENT, L.P.
Equity Fund
- -------------------------------------------------------------------------------
Goldman Sachs VIT Long-term capital GOLDMAN SACHS ASSET
International Equity appreciation MANAGEMENT INTERNATIONAL
Fund
- -------------------------------------------------------------------------------
JANUS ASPEN SERIES
- -------------------------------------------------------------------------------
Janus Aspen Series Long-term growth of capital JANUS CAPITAL MANAGEMENT
Capital Appreciation LLC
Portfolio:
Institutional Shares
(5)
- -------------------------------------------------------
Janus Aspen Series Long-term growth of capital
Foreign Stock
Portfolio: Service
Shares (6)
- -------------------------------------------------------
Janus Aspen Series Long-term growth of capital
Worldwide Growth in a manner consistent with
Portfolio: Service the preservation of capital.
Shares
- -------------------------------------------------------------------------------
J.P. MORGAN SERIES TRUST II
- -------------------------------------------------------------------------------
JP Morgan Small Company High total return from a J.P. MORGAN INVESTMENT
Portfolio portfolio of small company MANAGEMENT, INC.
stocks.
- -------------------------------------------------------------------------------
LAZARD RETIREMENT SERIES INC.
- -------------------------------------------------------------------------------
Lazard Emerging Markets Long-term capital LAZARD ASSET MANAGEMENT
Portfolio appreciation LLC
- -------------------------------------------------------------------------------
Lazard International Long-term capital
Equity Portfolio appreciation
- -------------------------------------------------------------------------------
MFS(R) VARIABLE INSURANCE TRUST(SM)
- -------------------------------------------------------------------------------
MFS New Discovery Capital appreciation MFS(TM) INVESTMENT
Series - Service Class MANAGEMENT
- -------------------------------------------------------
MFS Utilities Series - Capital growth and current
Service Class income
- -------------------------------------------------------------------------------
OPPENHEIMER VARIABLE ACCOUNT FUNDS
- -------------------------------------------------------------------------------
Oppenheimer Main Street Capital appreciation OPPENHEIMERFUNDS, INC.
Small Cap Fund/VA -
Service Shares
- -------------------------------------------------------------------------------
PIMCO ADVISORS VIT
- -------------------------------------------------------------------------------
PAVIT OpCap Balanced Growth of capital and OPCAP ADVISORS LLC
Portfolio (4) investment income
- -------------------------------------------------------
PAVIT OpCap Equity Long-term capital
Portfolio appreciation
- -------------------------------------------------------
PAVIT PEA Science and Capital appreciation
Technology Portfolio
(3)
- -------------------------------------------------------
PAVIT OpCap Small Cap Capital appreciation
Portfolio
- -------------------------------------------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
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PIMCO VIT Foreign Bond To maximize total return, PACIFIC INVESTMENT
Portfolio (U.S. consistent with MANAGEMENT COMPANY LLC
Dollar-Hedged) - preservation of capital and
Administrative Shares prudent investment
management.
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PIMCO VIT Money Market To obtain maximum current
Portfolio - income consistent with
Administrative Shares preservation of capital and
daily liquidity.
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StocksPLUS Growth and A total return which exceeds
Income Portfolio - the total return
Administrative Shares performance of the S&P 500.
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PIMCO VIT Total Return To maximize total return,
Portfolio - consistent with
Administrative Shares preservation of
capital and prudent
investment management.
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PUTNAM VARIABLE TRUST
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Putnam VT High Yield High current income. Capital PUTNAM INVESTMENT
Fund - Class IB growth is a secondary goal MANAGEMENT LLC
when consistent with
achieving high current
income. The fund seeks its
goal by investing at least
80% in U.S. corporate
bonds rated below investment
grade (junkbonds) and that
have intermediate to
long-term maturities (three
years or longer.)
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THE RYDEX VARIABLE TRUST
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Rydex VT OTC Fund Investment results that RYDEX INVESTMENTS
correspond to a benchmark for
over-the-counter
securities. The Portfolio's
current benchmark is the
NASDAQ 100 Index.
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SALOMON BROTHERS VARIABLE SERIES FUNDS INC
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Salomon Brothers Capital appreciation through SALOMON BROTHERS ASSET
Variable All Cap Fund investment in securities MANAGEMENT INC
(formerly Capital that the investment manager
Fund) - Class I believes have above-average
capital appreciation
potential.
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Salomon Brothers Long-term growth of capital
Variable Investors with current income as a
Fund - Class I (4) secondary objective
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THE UNIVERSAL INSTITUTIONAL FUNDS, INC.
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Van Kampen UIF Equity Seeks long-term capital VAN KAMPEN(1)
Growth Portfolio, appreciation by investing
Class I (7) primarily in
growth-oriented equity
securities of large
capitalization companies.
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Van Kampen UIF High Above-average total return
Yield Portfolio, over a market cycle of
Class I three to five years by
investing primarily in high
yield securities.
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Van Kampen UIF Mid Cap Seeks above-average total
Growth Portfolio, return over a market cycle
Class I of three to five years by
investing in common stocks
and other equity
securities.
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Van Kampen UIF U.S. Mid Seeks to provide
Cap Value Portfolio, above-average current
Class I (formerly Mid income and long-term
Cap Core Portfolio) capital appreciation by
(2) (8) investing primarily in
equity securities of
com[panies in the U.S. real
estate industry, including
real estate investment
trusts.
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VAN KAMPEN LIFE INVESTMENT TRUST
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Van Kampen LIT Capital Growth VAN KAMPEN ASSET
Aggressive Growth MANAGEMENT
Portfolio, Class II
(9)
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Van Kampen LIT Growth Long-term growth of capital
and Income Portfolio, and income
Class II
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(1) Morgan Stanley Investment Management Inc., the investment adviser to the
Van Kampen UIF Portfolios, does business in certain instances as Van
Kampen.
(2) Effective September 30, 2003, The Universal Institutional Funds, Inc. U.S.
Mid Cap Core Portfolio, Class I changed its name to The Universal
Institutional Funds, Inc. U.S. Mid Cap Value Portfolio, Class I. The
investment objective for this Portfolio has not changed.
(3) Sub-advised by PIMCO Equity Advisers LLC.
(4) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value
Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I.
Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund -
Class I, respectively.
(5) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the
Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares.
(6) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service
Shares changed its name to the Janus Aspen Foreign Stock Portfolio -
Service Shares.
(7) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Grown Fund and LSA
Capital Growth Fund were merged into the Van Kampen UIF Equity Growth
Portfolio, Class I.
(8) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap
Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value
Portfolio, Class I.
19 PROSPECTUS
(9) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth
Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class
II.
Each Portfolio is subject to certain investment restrictions and policies which
may not be changed without the approval of a majority of the shareholders of the
Portfolio. See the accompanying prospectuses of the Portfolios for further
information.
We automatically reinvest all dividends and capital gains distributions from the
Portfolios in shares of the distributing Portfolio at their net asset value. The
income and realized and unrealized gains or losses on the assets of each
Subaccount are separate and are credited to or charged against the particular
Subaccount without regard to income, gains or losses from any other Subaccount
or from any other part of our business. We will use the net Purchase Payments
you allocate to a Subaccount to purchase shares in the corresponding Portfolio
and will redeem shares in the Portfolios to meet Contract obligations or make
adjustments in reserves. The Portfolios are required to redeem their shares at
net asset value and to make payment within seven days.
Some of the Portfolios have been established by investment advisors which manage
publicly traded mutual funds having similar names and investment objectives.
While some of the Portfolios may be similar to, and may in fact be modeled after
publicly traded mutual funds, you should understand that the Portfolios are not
otherwise directly related to any publicly traded mutual fund. Consequently, the
investment performance of publicly traded mutual funds and any similarly named
Portfolio may differ substantially.
Some of the Portfolios sell their shares to separate accounts underlying both
variable life insurance and variable annuity contracts. It is conceivable that
in the future it may be unfavorable for variable life insurance separate
accounts and variable annuity separate accounts to invest in the same Portfolio.
Although neither we nor any of the Portfolios currently foresees any such
disadvantages either to variable life insurance or variable annuity contract
owners, each Portfolio's Board of Directors intends to monitor events in order
to identify any material conflicts between variable life and variable annuity
contract owners and to determine what action, if any, should be taken in
response thereto. If a Board of Directors were to conclude that separate
investment funds should be established for variable life and variable annuity
separate accounts, Lincoln Benefit will bear the attendant expenses.
VOTING RIGHTS. As a general matter, you do not have a direct right to vote the
shares of the Portfolios held by the Subaccounts to which you have allocated
your Contract Value. Under current law, however, you are entitled to give us
instructions on how to vote those shares on certain matters. We will notify you
when your instructions are needed. We will also provide proxy materials or other
information to assist you in understanding the matter at issue. We will
determine the number of shares for which you may give voting instructions as of
the record date set by the relevant Portfolio for the shareholder meeting at
which the vote will occur.
As a general rule, before the Annuity Date, you are the person entitled to give
voting instructions. After the Annuity Date, the payee is that person.
Retirement plans, however, may have different rules for voting by plan
participants.
If you send us written voting instructions, we will follow your instructions in
voting the Portfolio shares attributable to your Contract. If you do not send us
written instructions, we will vote the shares attributable to your Contract in
the same proportions as we vote the shares for which we have received
instructions from other Contract Owners. We will vote shares that we hold in the
same proportions as we vote the shares for which we have received instructions
from other Contract Owners.
We may, when required by state insurance regulatory authorities, disregard
Contract Owner voting instructions if the instructions require that the shares
be voted so as to cause a change in the sub-classification or investment
objective of one or more of the Portfolios or to approve or disapprove an
investment advisory contract for one or more of the Portfolios.
In addition, we may disregard voting instructions in favor of changes initiated
by Contract Owners in the investment objectives or the investment advisor of the
Portfolios if we reasonably disapprove of the proposed change. We would
disapprove a proposed change only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or we reasonably conclude that
the proposed change would not be consistent with the investment objectives of
the Portfolio or would result in the purchase of securities for the Portfolio
which vary from the general quality and nature of investments and investment
techniques utilized by the Portfolio. If we disregard voting instructions, we
will include a summary of that action and our reasons for that action in the
next semi-annual financial report to you.
This description reflects our view of currently applicable law. If the law
changes or our interpretation of the law changes, we may decide that we are
permitted to vote the Portfolio shares without obtaining instructions from our
Contract Owners, and we may choose to do so.
ADDITIONS, DELETIONS, AND SUBSTITUTIONS OF SECURITIES. If the shares of any of
the Portfolios are no longer available for investment by the Separate Account or
if, in the judgment of our Board of Directors, further investment in the shares
of a Portfolio is no longer appropriate in view of the purposes of the Contract,
we may add or substitute shares of another Portfolio or underlying fund for
Portfolio shares already purchased or to be purchased in the future by Purchase
Payments
20 PROSPECTUS
under the Contract. Any substitution of securities will comply with the
requirements of the 1940 Act.
We also reserve the right to make the following changes in the operation of the
Separate Account and the Subaccounts:
(a) to operate the Separate Account in any form permitted by law;
(b) to take any action necessary to comply with applicable law or obtain and
continue any exemption from applicable laws;
(c) to transfer assets from one Subaccount to another, or from any subaccount
to our general account;
(d) to add, combine, or remove Subaccounts in the Separate Account; and
(e) to change the way in which we assess charges, as long as the total charges
do not exceed the maximum amount that may be charged the Separate Account
and the Portfolios in connection with the Contracts.
If we take any of these actions, we will comply with the then applicable legal
requirements.
THE FIXED ACCOUNT
GENERAL. You may allocate part or all of your Purchase Payments to the Fixed
Account in states where it is available. Amounts allocated to the Fixed Account
become part of the general assets of Lincoln Benefit. Loan Payments may not be
allocated to the Fixed Account(s). Allstate Life invests the assets of the
general account in accordance with applicable laws governing the investments of
insurance company general accounts. The Fixed Account may not be available in
all states. Please contact us at 1-800-865-5237 for current information.
GUARANTEED MATURITY FIXED ACCOUNT OPTION. We will credit interest to each amount
allocated to the Guaranteed Maturity Fixed Account Option at a specified rate
for a specified Guarantee Period. You select the Guarantee Period for each
amount that you allocate to this option. We will declare the interest rate that
we will guarantee to credit to that amount for that Guarantee Period. Each
amount allocated to a Guarantee Period under this option must be at least $500.
We reserve the right to limit the number of additional Purchase Payments that
may be allocated to this option.
We will tell you what interest rates and Guarantee Periods we are offering at a
particular time. We may offer Guarantee Periods ranging from one to ten years in
length. We will decide in our discretion which Guarantee Periods to offer.
Currently, we offer Guarantee Periods of one, three, five, seven and ten years.
In the future we may offer Guarantee Periods of different lengths or stop
offering some Guarantee Periods.
We will credit interest daily to each amount allocated to a Guarantee Period
under this option at a rate which compounds to the effective annual interest
rate that we declared at the beginning of the applicable Guarantee Period. We
will not change the interest rate credited to a particular allocation until the
end of the relevant Guarantee Period. We may declare different interest rates
for Guarantee Periods of the same length that begin at different times.
The following example illustrates how a Purchase Payment allocated to this
option would grow, given an assumed Guarantee Period and effective annual
interest rate:
21 PROSPECTUS
EXAMPLE
Purchase Payment $10,000
Guarantee Period 5 years
Effective Annual Rate 4.50%
Credit Enhancement $ 400
END OF CONTACT YEAR
-----------------------------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
---------- ----------- ---------- ---------- ----------
Beginning Contract
Value $10,400.00
x (1 + Effective
Annual Rate) x 1.045
----------
$10,868.00
Contract Value at end
of Contract Year $$10,868.00
x (1 + Effective
Annual Rate) x 1.045
-----------
$ 11,357.06
Contract Value at end
of Contract Year $11,357.06
x (1 + Effective
Annual Rate) x 1.045
----------
$11,868.13
Contract Value at end
of Contract Year $11,868.13
x (1 + Effective
Annual Rate) x 1.045
----------
$12,402.19
Contract Value at end
of Contract Year $12,402.19
x (1 + Effective
Annual Rate) x 1.045
----------
$12,960.29
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,560.29 ($12,960.29 -
$10,400)
NOTE: This example assumes no withdrawals during the entire five-year Guarantee
Period. If you were to make a partial withdrawal, you might be required to pay a
Withdrawal Charge and the amount withdrawn might be increased or decreased by a
Market Value Adjustment. The hypothetical interest rate is for illustrative
purposes only and is not intended to predict future interest rates to be
declared under the Contract.
We have no specific formula for determining the rate of interest that we will
declare initially or in the future. We will set those interest rates based on
relevant factors such as then current interest rates, regulatory and tax
requirements, our sales commission and administrative expenses, general economic
trends, and competitive factors. For current interest rate information, please
contact us at 1-800-865-5237.
WE WILL DETERMINE THE INTEREST RATES TO BE DECLARED IN OUR SOLE DISCRETION. WE
CAN NEITHER PREDICT NOR GUARANTEE WHAT THOSE RATES WILL BE IN THE FUTURE.
At the end of each Guarantee Period, we will mail you a notice asking you what
to do with the relevant amount, including the accrued interest. During the
30-day period after the end of the Guarantee Period, you may:
1) take no action. If so, we will automatically keep the relevant amount in
the Guaranteed Maturity Fixed Account Option. The new Guarantee Period will
be the same length as the expiring Guarantee Period and will begin on the
day the previous Guarantee Period ends. The new interest rate will be our
then current declared rate for Guarantee Periods of that length; or
2) allocate the relevant Contract Value to one or more new Guarantee Periods
of your choice in the Guaranteed Maturity Fixed Account Option. The new
Guarantee Period(s) will begin on the day the previous Guarantee Period
ends. The new interest rate will be our then current declared rate for
those Guarantee Periods; or
3) instruct us to transfer all or a portion of the relevant amount to one or
more Subaccounts. We will effect the transfer on the day we receive your
instructions. We will not adjust the amount transferred to include a Market
Value Adjustment; or
4) withdraw all or a portion of the relevant amount through a partial
withdrawal. You may be required to pay a Withdrawal Charge, but we will not
adjust the amount withdrawn to include a Market Value Adjustment. The
amount withdrawn will be deemed to have been withdrawn on the day the
Guarantee Period ends.
Under our Automatic Laddering Program, you may choose, in advance, to use
Guarantee Periods of the same length for all renewals in the Guaranteed Maturity
Fixed Account Option. You can select this program at any time during the
Accumulation Period, including on the Issue Date. We will apply renewals to
Guarantee Periods of the
22 PROSPECTUS
selected length until you direct us in writing to stop. We may stop offering
this program at any time.
MARKET VALUE ADJUSTMENT. If permitted by your state, we may increase or decrease
the amount of some transactions involving your investment in the Guaranteed
Maturity Fixed Account Option to include a Market Value Adjustment. The formula
for determining Market Value Adjustments reflects changes in interest rates
since the beginning of the relevant Guarantee Period. As a result, you will bear
some of the investment risk on amounts allocated to the Guaranteed Maturity
Fixed Account Option.
As a general rule, we will apply a Market Value Adjustment to the following
transactions involving your Fixed Account balance:
1) when you withdraw funds from the Guaranteed Maturity Fixed Account Option
in an amount greater than the Free Withdrawal Amount, as described on page
33;
2) when you transfer funds from the Guaranteed Maturity Fixed Account Option
to the Subaccounts;
3) when you allocate part of your balance in the Guaranteed Maturity Fixed
Account Option to a new Guarantee Period before the end of the existing
Guarantee Period;
4) when you annuitize your Contract; and
5) when we pay a death benefit.
We will not apply a Market Value Adjustment to a transaction, to the extent
that:
1) it occurs within 30 days after the end of a Guarantee Period applicable to
the funds involved in the transaction; or
2) you make a withdrawal to satisfy the IRS' required minimum distribution
rules for this Contract.
The formula for calculating Market Value Adjustments is set forth in Appendix B
to this prospectus, which also contains additional examples of the application
of the Market Value Adjustment. This formula primarily compares:
1) the Treasury Rate at the time of the relevant transaction for a maturity
equal in length to the relevant Guarantee Period; and
2) the Treasury Rate at the beginning of the Guarantee Period for a maturity
equal in length to the Guarantee Period.
Generally, if the Treasury Rate at the beginning of the Guarantee Period is
higher than the corresponding current Treasury Rate, then the Market Value
Adjustment will increase the amount payable to you or transferred. Similarly, if
the Treasury Rate at the beginning of the Guarantee Period is lower than the
corresponding current Treasury Rate, then the Market Value Adjustment will
reduce the amount payable to you or transferred.
For example, assume that you purchased a Contract and selected an initial
Guarantee Period of five years and the five-year Treasury Rate for that duration
is 4.50%. Assume that at the end of three years, you make a partial withdrawal.
If, at that later time, the current five-year Treasury Rate is 4.20%, then the
Market Value Adjustment will be positive, which will result in an increase in
the amount payable to you. Similarly, if the current five-year Treasury Rate is
4.80%, then the Market Value Adjustment will be negative, which will result in a
decrease in the amount payable to you.
DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. If permitted by your state, you may
also allocate Purchase Payments to the Dollar Cost Averaging Fixed Account
Option. We will credit interest to Purchase Payments allocated to this option
for up to one year at the current rate that we declare when you make the
allocation. The effective annual rate will never be less than 3%. You may not
transfer funds to this option from the Subaccounts or the Guaranteed Maturity
Fixed Account Option. We will follow your instructions in transferring amounts
from this option to the Subaccounts or the Guaranteed Maturity Fixed Account
Option on a monthly basis only, as described in "Automatic Dollar Cost Averaging
Program" on page 16 of this prospectus.
ANNUITY BENEFITS
ANNUITY DATE. You may select the Annuity Date, which is the date on which
annuity payments are to begin, in your application. The Annuity Date must always
be the business day on or immediately following the tenth day of a calendar
month.
The Annuity Date may be no later than the Latest Annuity Date. As a general
rule, the Latest Annuity Date is the later of the 10th Contract Anniversary or
the youngest Annuitant's 90/TH/ birthday. If your Contract was issued pursuant
to a Qualified Plan, however, the Tax Code generally requires you to begin to
take at least a minimum distribution by the later of:
.. the year of your separation from service; or
.. April 1 of the calendar year following the calendar year in which you
attain age 70 1/2 .
If your Contract is issued pursuant to Section 408 of the Tax Code (traditional
IRAs), you must begin taking minimum distributions by April 1 of the calendar
year following the calendar year in which you reach age 70 1/2. No minimum
distributions are required by the Tax Code for Contracts issued pursuant to
Section 408A (Roth IRAs).
23 PROSPECTUS
If your Contract was purchased by a Qualified Plan, we may require you to
annuitize by the date required by the Tax Code, unless you show us that you are
meeting the minimum distribution requirements in some other way.
If you do not select an Annuity Date, the Latest Annuity Date will automatically
become the Annuity Date. You may change the Annuity Date by writing to us at the
address given on the first page of the prospectus.
ANNUITY OPTIONS. You may elect an Annuity Option at any time before the Annuity
Date. As part of your election, you may choose the length of the applicable
guaranteed payment period within the limits available for your chosen Option. If
you do not select an Annuity Option, we will pay monthly annuity payments in
accordance with the applicable default Option. The default Options are:
.. Option A with 10 years (120 months) guaranteed, if you have designated only
one Annuitant; and
.. Option B with 10 years (120 months) guaranteed, if you have designated
joint Annuitants.
You may freely change your choice of Annuity Option, as long as you request the
change at least thirty days before the Annuity Date. Three Annuity Options are
generally available under the Contract. Each is available in the form of:
.. a Fixed Annuity;
.. a Variable Annuity; or
.. a combination of both Fixed and Variable Annuity.
A portion of each payment will be considered taxable and the remaining portion
will be a non-taxable return of your investment in the Contract, which is also
called the "basis." Once the investment in the Contract is depleted, all
remaining payments will be fully taxable. If the Contract is tax-qualified,
generally, all payments will be fully taxable. Taxable payments taken prior to
age 59 1/2 may be subject to an additional 10% federal tax penalty.
The three Annuity Options are:
OPTION A, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 5 TO 20 YEARS. We make
periodic payments at least as long as the Annuitant lives. If the Annuitant dies
before all of the guaranteed payments have been made, we will pay the remaining
guaranteed payments to the Beneficiary.
OPTION B, JOINT AND SURVIVOR ANNUITY, WITH PAYMENTS GUARANTEED FOR 5 TO 20
YEARS. We make periodic payments at least as long as either the Annuitant or the
Joint Annuitant is alive. If both the Annuitant and the Joint Annuitant die
before all of the guaranteed payments have been made, we will pay the remaining
guaranteed payments to the Beneficiary.
OPTION C, PAYMENTS FOR A SPECIFIED PERIOD CERTAIN OF 5 YEARS TO 30 YEARS. We
make periodic payments for the period you have chosen. If the Annuitant dies
before all of the guaranteed payments have been made, we will pay the remaining
guaranteed payments to the Beneficiary. If you elect this option, and request
Variable Annuity payments, you may at any time before the period expires request
a lump sum payment, subject to a Withdrawal Charge. We will charge a Withdrawal
Charge on any portion of your lump sum payment attributable to Purchase Payments
made within the prior eight years. The amount of the Withdrawal Charge will be
determined as described in "Withdrawal Charge" on page 32 below. If you elected
Variable Annuity payments, the lump sum payment after Withdrawal Charge will
depend on:
.. the investment results of the Subaccounts you have selected,
.. the Contract Value at the time you elected annuitization, and
.. the length of the remaining period for which the payee would be entitled to
payments.
No lump sum payment is available if you request Fixed Annuity payments. If you
purchased your Contract under a retirement plan, you may have a more limited
selection of Annuity Options to choose from. You should consult your Plan
documents to see what is available.
You may not "annuitize" your Contract for a lump sum payment. Instead, before
the Annuity Date you may surrender your Contract for a lump sum. As described on
page 32 below, however, we will subtract any applicable Withdrawal Charge and
increase or decrease your surrender proceeds by any applicable Market Value
Adjustment.
OTHER OPTIONS. We may have other Annuity Options available. You may obtain
information about them by writing or calling us.
If your Contract is issued under Sections 401, 403(b), 408 or 408A of the Tax
Code, we will only make payments to you and/or your spouse.
ANNUITY PAYMENTS: GENERAL. On the Annuity Date, we will apply the Annuitized
Value of your Contract to the Annuity Option you have chosen. Your annuity
payments may consist of Variable Annuity payments or Fixed Annuity payments or a
combination of the two. We will determine the amount of your annuity payments as
described in "Variable Annuity Payments" and "Fixed Annuity Payments" on page
25.
You must notify us in writing at least 30 days before the Annuity Date how you
wish to allocate your Annuitized Value between Variable Annuity and Fixed
Annuity payments. You must apply at least the Contract Value in the Fixed
Account on the Annuity Date to Fixed Annuity payments. If you wish to apply any
portion of your Fixed Account balance to your Variable Annuity payments, you
should plan ahead and transfer that amount to the Subaccounts prior to the
Annuity Date. If you do not tell us how to allocate your Contract Value among
Fixed and
24 PROSPECTUS
Variable Annuity payments, we will apply your Contract Value in the Separate
Account to Variable Annuity payments and your Contract Value in the Fixed
Account to Fixed Annuity payments.
Annuity payments begin on the Annuity Date. We make subsequent annuity payments
on the tenth of the month or, if the NYSE is closed on that day, the next day on
which the NYSE is open for business.
Annuity payments will be made in monthly, quarterly, semi-annual or annual
installments as you select. If the amount available to apply under an Annuity
Option is less than $5,000, however, and state law permits, we may pay you a
lump sum instead of the periodic payments you have chosen. In addition, if the
first annuity payment would be less than $50, and state law permits us, we may
reduce the frequency of payments so that the initial payment will be at least
$50.
We may defer for up to 15 days the payment of any amount attributable to a
Purchase Payment made by check to allow the check reasonable time to clear.
YOU MAY NOT WITHDRAW CONTRACT VALUE DURING THE ANNUITY PERIOD, IF WE ARE MAKING
PAYMENTS TO YOU UNDER ANY ANNUITY OPTION, SUCH AS OPTION A OR B ABOVE, INVOLVING
PAYMENT TO THE PAYEE FOR LIFE OR ANY COMBINATION OF PAYMENTS FOR LIFE AND
MINIMUM GUARANTEE PERIOD FOR A PREDETERMINED NUMBER OF YEARS.
VARIABLE ANNUITY PAYMENTS. One basic objective of the Contract is to provide
Variable Annuity Payments which will to some degree respond to changes in the
economic environment. The amount of your Variable Annuity Payments will depend
upon the investment results of the Subaccounts you have selected, any premium
taxes, the age and sex of the Annuitant, and the Annuity Option chosen. We
guarantee that the Payments will not be affected by: (1) actual mortality
experience; and (2) the amount of our administration expenses.
We cannot predict the total amount of your Variable Annuity payments. The
Variable Annuity payments may be more or less than your total Purchase Payments
because: (a) Variable Annuity payments vary with the investment results of the
underlying Portfolios; and (b) Annuitants may die before their actuarial life
expectancy is achieved.
The length of any guaranteed payment period under your selected Annuity Option
will affect the dollar amounts of each Variable Annuity payment. As a general
rule, longer guarantee periods result in lower periodic payments, all other
things being equal. For example, if a life Annuity Option with no minimum
guaranteed payment period is chosen, the Variable Annuity payments will be
greater than Variable Annuity payments under an Annuity Option for a minimum
specified period and guaranteed thereafter for life.
The investment results of the Subaccounts to which you have allocated your
Contract Value will also affect the amount of your periodic payment. In
calculating the amount of the periodic payments in the annuity tables in the
Contract, we assumed an annual investment rate of 3 1/2%. If the actual net
investment return is less than the assumed investment rate, then the dollar
amount of the Variable Annuity payments will decrease. The dollar amount of the
Variable Annuity payments will stay level if the net investment return equals
the assumed investment rate and the dollar amount of the Variable Annuity
payments will increase if the net investment return exceeds the assumed
investment rate. You should consult the Statement of Additional Information for
more detailed information as to how we determine Variable Annuity Payments.
FIXED ANNUITY PAYMENTS. You may choose to apply a portion of your Annuitized
Value to provide Fixed Annuity payments. We determine the Fixed Annuity payment
amount by applying the applicable Annuitized Value to the Annuity Option you
have selected.
As a general rule, subsequent Fixed Annuity payments will be equal in amount to
the initial payment. However, as described in "Transfers During the Annuity
Period" below, after the Annuity Date, you will have a limited ability to
increase the amount of your Fixed Annuity payments by making transfers from the
Subaccounts.
We may defer making Fixed Annuity payments for a period of up to six months or
whatever shorter time state law may require. During the deferral period, we
credit interest at a rate at least as high as state law requires.
TRANSFERS DURING THE ANNUITY PERIOD. During the Annuity Period, you will have a
limited ability to make transfers among the Subaccounts so as to change the
relative weighting of the Subaccounts on which your Variable Annuity payments
will be based. In addition, you will have a limited ability to make transfers
from the Subaccounts to increase the proportion of your annuity payments
consisting of Fixed Annuity payments. You may not, however, convert any portion
of your right to receive Fixed Annuity payments into Variable Annuity payments.
You may not make any transfers for the first six months after the Annuity Date.
Thereafter, you may make transfers among the Subaccounts or make transfers from
the Subaccounts to increase your Fixed Annuity payments. Your transfers must be
at least six months apart.
DEATH BENEFIT DURING ANNUITY PERIOD. If any Contract Owner dies after the
Annuity Date, the Successor Contract Owner will receive any guaranteed annuity
payments scheduled to continue. If the successor Owner dies before all of the
guaranteed payments have been made, we will continue the guaranteed payments to
the Beneficiary(ies). After annuity payments begin, upon the death of the
Annuitant and any Joint Annuitant, we will make any remaining guaranteed
payments to the
25 PROSPECTUS
Beneficiary. The amount and number of these guaranteed payments will depend on
the Annuity Option in effect at the time of the Annuitant's death. After the
Annuitant's death, any remaining guaranteed payments will be distributed at
least as rapidly as under the method of distribution in effect at the
Annuitant's death.
CERTAIN EMPLOYEE BENEFIT PLANS. The Contracts offered by this prospectus contain
income payment tables that provide for different payments to men and women of
the same age, except in states that require unisex tables. We reserve the right
to use income payment tables that do not distinguish on the basis of sex to the
extent permitted by applicable law. In certain employment-related situations,
employers are required by law to use the same income payment tables for men and
women. Accordingly, if the Contract is to be used in connection with an
employment-related retirement or benefit plan and we do not offer unisex annuity
tables in your state, you should consult with legal counsel as to whether the
purchase of a Contract is appropriate.
OTHER CONTRACT BENEFITS
DEATH BENEFIT: GENERAL. We will pay a distribution on death, if:
1) the Contract is in force;
2) annuity payments have not begun; and
3) either:
(a) any Owner dies; or
(b) any Annuitant dies and the Owner is a non-living person.
DUE PROOF OF DEATH. A complete request for settlement of the Death Proceeds must
be submitted before the Annuity Date. Where there are multiple beneficiaries, we
will value the Death Benefit at the time the first beneficiary submits a
complete request for settlement of the Death Proceeds. A complete request must
include "Due Proof of Death". We will accept the following documentation as Due
Proof of Death:
.. a certified original copy of the Death Certificate;
.. a certified copy of a court decree as to the finding of death; or
.. a written statement of a medical doctor who attended the deceased at the
time of death.
In addition, in our discretion we may accept other types of proof.
DEATH PROCEEDS. If we receive a complete request for settlement of the Death
Proceeds within 180 days of the date of your death, the Death Proceeds are equal
to the Death Benefit as described below. Otherwise, the Death Proceeds are equal
to the greater of the Contract Value or the Surrender Value. We reserve the
right to waive or extend, on a nondiscriminatory basis, the 180-day period in
which the Death Proceeds will equal the Death Benefit as described below. This
right applies only to the amount payable as Death Proceeds and in no way
restricts when the claim may be filed.
DEATH BENEFIT AMOUNT. The standard Death Benefit under the Contract is the
greatest of the following:
1) the total Purchase Payments, less a withdrawal adjustment for any prior
partial withdrawals;
2) the Contract Value on the date as of which we calculate the Death Benefit;
3) the Surrender Value;
4) the Contract Value on the eighth Contract Anniversary and each subsequent
Contract Anniversary evenly divisible by eight, increased by the total
Purchase Payments since that anniversary and reduced by a withdrawal
adjustment for any partial withdrawals since that anniversary.
The withdrawal adjustment for the Death Benefit will equal (a) divided by (b),
with the result multiplied by (c), where:
(a) = the withdrawal amount;
(b) = the Contract Value immediately before the withdrawal; and
(c) = the value of the applicable Death Benefit immediately before the
withdrawal.
As described in Enhanced Death Benefit Rider on page 28, you may add an optional
rider that in some circumstances may increase the Death Benefit under your
Contract.
DEATH BENEFIT PAYMENTS.
Death of Owner:
1. If your spouse is the sole beneficiary:
a. Your spouse may elect to receive the Death Proceeds in a lump sum; or
b. Your spouse may elect to receive the Death Proceeds paid out under one of
the annuity options, subject to the following conditions:
The Annuity Date must be within one year of your date of death.
Annuity payments must be payable:
i. over the life of your spouse; or
ii. for a guaranteed number of payments from 5 to 30 years but not to exceed
the life expectancy of your spouse; or
26 PROSPECTUS
iii. over the life of your spouse with a guaranteed number of payments from 5 to
30 years but not to exceed the life expectancy of your spouse.
c. If your spouse chooses to continue the Contract or does not elect one of
these options, then the Contract will continue in the Accumulation Period
as if the death had not occurred. If the Contract is continued in the
Accumulation Period, the following conditions apply:
Unless otherwise instructed by the continuing spouse, the excess, if any, of the
Death Proceeds over the Contract Value will be allocated to the Subaccounts.
This excess will be allocated in proportion to your Contract Value in those
Subaccounts as of the end of the Valuation Period during which we receive the
complete request for settlement of the Death Proceeds, except that any portion
of this excess attributable to the fixed account options will be allocated to
the Money Market Subaccount. Within 30 days of the date the Contract is
continued, your surviving spouse may choose one of the following transfer
alternatives without incurring a transfer fee:
i. transfer all or a portion of the excess among the Subaccounts;
ii. transfer all or a portion of the excess into the Guaranteed Maturity Fixed
Account and begin a new Guarantee Period; or
iii. transfer all or a portion of the excess into a combination of subaccounts
and the Guaranteed Maturity Fixed Account.
Any such transfer does not count as the free transfer allowed each calendar
month and is subject to any minimum allocation amount specified in your
contract.
The surviving spouse may make a single withdrawal of any amount within one year
of the date of your death without incurring a Withdrawal Charge or Market Value
Adjustment.
Prior to the Annuity Date, the death benefit of the continued Contract will be
as defined in the Death Benefit provision.
Only one spousal continuation is allowed under this Contract.
If there is no Annuitant at that time, the new Annuitant will be the surviving
spouse.
2. If the Beneficiary is not your spouse but is a living person:
a. The Beneficiary may elect to receive the Death Proceeds in a lump sum; or
b. The Beneficiary may elect to receive the Death Proceeds paid out under one
of the annuity options, subject to the following conditions:
The Annuity Date must be within one year of your date of death.
Annuity payments must be payable:
i. over the life of the Beneficiary; or
ii. for a guaranteed number of payments from 5 to 30 years but not to exceed
the life expectancy of the Beneficiary; or
iii. over the life of the Beneficiary with a guaranteed number of payments from
5 to 30 years but not to exceed the life expectancy of the Beneficiary.
c. If the Beneficiary does not elect one of the options above, then the
Beneficiary must receive the Contract Value payable within 5 years of your
date of death. We will determine the Death Proceeds as of the date we
receive the complete request for settlement of the Death Proceeds. Unless
otherwise instructed by the Beneficiary, the excess, if any, of the Death
Proceeds over the Contract Value will be allocated to the Money Market
Subaccount and the Contract Value will be adjusted accordingly. The
Beneficiary may exercise all rights as set forth in "Transfer During the
Accumulation Period" on page 15 and "Transfer Fee" on page 32 during this 5
year period.
The Beneficiary may not pay additional purchase payments into the contract under
this election. Withdrawal charges will be waived for any withdrawals made during
this 5 year period.
We reserve the right to offer additional options upon Death of Owner.
If the Beneficiary dies before the complete liquidation of the Contract Value,
then the Beneficiary's named Beneficiary(ies) will receive the greater of the
Surrender Value or the remaining Contract Value. This amount must be liquidated
as a lump sum within 5 years of the date of the original Contract Owner's death.
3. If the Beneficiary is a corporation or other type of non-living person:
a. The Beneficiary may elect to receive the Death Proceeds in a lump sum; or
b. If the Beneficiary does not elect to receive the option above, then the
Beneficiary must receive the Contract Value payable within 5 years of your
date of death. We will determine the Death Proceeds as of the date we
receive the complete request for settlement of the Death Proceeds. Unless
otherwise instructed by the Beneficiary, the excess, if any, of the Death
Proceeds over the Contract Value will be allocated to the Money Market
Subaccount and the Contract Value will be adjusted accordingly. The
Beneficiary may exercise all rights as set forth in "Transfers During the
Accumulation Period" on page 15 and "Transfer Fee" on page 32 during this
5-year period.
The Beneficiary may not pay additional purchase payments into the contract under
this election. Withdrawal Charges will be waived during this 5 year period.
We reserve the right to offer additional options upon Death of Owner.
27 PROSPECTUS
If any Beneficiary is a non-living person, all Beneficiaries will be considered
to be non-living persons for the above purposes.
Under any of these options, all contract rights, subject to any restrictions
previously placed upon the Beneficiary, are available to the Beneficiary from
the date of your death to the date on which the Death Proceeds are paid.
Different rules may apply to Contracts issued in connection with Qualified
Plans.
Death of Annuitant:
If the Annuitant who is not also the Owner dies prior to the Annuity Date, the
following apply:
1. If the Owner is a living person, then the contract will continue with a new
Annuitant as described in "Annuitant" on page 13.
2. If the Owner is a non-living person:
a. The Beneficiary may elect to receive the Death Proceeds in a lump sum; or
b. If the Beneficiary does not elect the option above, then the Beneficiary
must receive the Contract Value payable within 5 years of the Annuitant's
date of death. On the date we receive the complete request for settlement
of the Death Proceeds, the Contract Value under this option will be the
Death Proceeds. Unless otherwise instructed by the Beneficiary, the excess,
if any, of the Death Proceeds over the Contract Value will be allocated to
the Money Market Subaccount. Henceforth, the Beneficiary may exercise all
rights as set forth in the "Transfers During Accumulation Period" on page
15 and "Transfer Fee" on page 32 during this 5 year period.
No additional Purchase Payments may be added to the contract under this
election. Withdrawal charges will be waived during this 5 year period.
We reserve the right to offer additional options under Death of Annuitant.
Under any of these options, all contract rights, subject to any restrictions
previously placed upon the Beneficiary, are available to the Beneficiary from
the date of the Annuitant's death to the date on which the Death Proceeds are
paid.
ENHANCED DEATH BENEFIT RIDER: When you purchase your Contract, you may select
the Enhanced Death Benefit Rider. In certain states, this benefit may be offered
as a benefit of the base contract, rather than as a separate rider. In those
states, the expense charge will remain the same for the benefit. If you are not
an individual, the Enhanced Death Benefit applies only to the Annuitant's death.
If you select this rider, the Death Benefit will be the greater of the value
provided in your Contract or the Enhanced Death Benefit. The Enhanced Death
Benefit will be the greater of the Enhanced Death Benefit A or Enhanced Death
Benefit B. As described below, we will charge a higher mortality and expense
risk charge if you select this Rider. We may discontinue offering the Rider at
any time.
ENHANCED DEATH BENEFIT A. At issue, Enhanced Death Benefit A is equal to the
initial Purchase Payment. After issue, Enhanced Death Benefit A is adjusted
whenever you pay a Purchase Payment or make a withdrawal and on each Contract
Anniversary as follows:
.. When you pay a Purchase Payment, we will increase Enhanced Death Benefit A
by the amount of the Purchase Payment;
.. When you make a withdrawal, we will decrease Enhanced Death Benefit A by a
withdrawal adjustment, as described below; and
.. On each Contract Anniversary, we will set Enhanced Death Benefit A equal to
the greater of the Contract Value on that Contract Anniversary or the most
recently calculated Enhanced Death Benefit A.
If you do not pay any additional purchase payments or make any withdrawals,
Enhanced Death Benefit A will equal the highest Contract Value on all Contract
Anniversaries prior to the date we calculate the Death Benefit.
We will continuously adjust Enhanced Death Benefit A as described above until
the oldest Contract Owner's 85/TH/ birthday or, if the Contract Owner is not a
living individual, the Annuitant's 85/TH/ birthday. Thereafter, we will adjust
Enhanced Death Benefit A only for Purchase Payments and withdrawals.
ENHANCED DEATH BENEFIT B. Enhanced Death Benefit B is equal to:
(a) your total Purchase Payments,
(b) reduced by any withdrawal adjustments and
(c) accumulated daily at an effective annual rate of 5% per year, until the
earlier of:
1) the date we determine the death benefit;
2) the first day of the month following the oldest Contract owner's 85/TH
/birthday; or
3) if the Contract Owner is a company or other legal entity, the first day of
the month following the Annuitant's 85/TH/ birthday. Thereafter, we will
only adjust Enhanced Death Benefit B to reflect additional Purchase
Payments and withdrawals. Enhanced Death Benefit B will never be greater
than the maximum death benefit allowed by any nonforfeiture laws which
govern the Contract.
The withdrawal adjustment for both Enhanced Death Benefit A and Enhanced Death
Benefit B will equal (a) divided by (b), with the result multiplied by (c),
where:
(a) = the withdrawal amount;
(b) = the Contract Value immediately before the withdrawal; and
28 PROSPECTUS
(c) = the most recently calculated Enhanced Death Benefit A or B, as
appropriate.
BENEFICIARY. You name the Beneficiary. You may name a Beneficiary in the
application. You may also name one or more contingent Beneficiaries who are
entitled to receive benefits under the contract if all primary Beneficiary(ies)
are deceased at the time a Contract Owner or any Annuitant if the Contract Owner
is not a living person, dies. You may change the Beneficiary or add additional
Beneficiaries at any time before the Annuity Date. We will provide a form to be
signed and filed with us.
Your changes in Beneficiary take effect when we accept them, effective as of the
date you signed the form. Until we accept your change instructions, we are
entitled to rely on your most recent instructions in our files. We are not
liable for making a payment to a Beneficiary shown in our files or treating that
person in any other respect as the Beneficiary, prior to accepting a change.
Accordingly, if you wish to change your beneficiary, you should deliver your
instructions to us promptly.
If you did not name a Beneficiary or if the named Beneficiary is no longer
living, the Beneficiary will be:
.. your spouse if he or she is still alive; or, if he or she is no longer
alive,
.. your surviving children equally; or if you have no surviving children,
.. your estate.
Unless you have provided directions to the contrary, the Beneficiaries will take
equal shares. If there is more than one Beneficiary in a class and one of the
Beneficiaries predeceases the Contract Owner or Annuitant, as defined above, the
remaining Beneficiaries in that class will divide the deceased Beneficiary's
share in proportion to the original share of the remaining Beneficiaries.
If more than one Beneficiary shares in the Death Proceeds, each Beneficiary will
be treated as a separate and independent owner of his or her respective share.
Each Beneficiary will exercise all rights related to his or her share, including
the sole right to select a payout option, subject to any restrictions previously
placed upon the Beneficiary. Each Beneficiary may designate a Beneficiary(ies)
for his or her respective share, but that designated Beneficiary(ies) will be
restricted to the payout option chosen by the original Beneficiary.
If there is more than one Beneficiary and one of the Beneficiaries is a
corporation or other type of non-living person, all Beneficiaries will be
considered to be non-living persons for the above purposes.
You may specify that the Death Benefit be paid under a specific Income Plan by
submitting a written request to our Service Center. If you so request, your
Beneficiary may not change to a different Income Plan or lump sum. Once we
accept the written request, the change or restriction will take effect as of the
date you signed the request.
Different rules may apply to Contracts issued in connection with Qualified
Plans.
CONTRACT LOANS FOR 403(B) CONTRACTS. Subject to the restrictions described
below, we will make loans to the Owner of a Contract used in connection with a
Tax Sheltered Annuity Plan ("TSA Plan") under Section 403(b) of the Tax Code.
Loans are not available under Non-Qualified Contracts. We will only make loans
after the free look period and before annuitization. All loans are subject to
the terms of the Contract, the relevant Plan, and the Tax Code, which impose
restrictions on loans.
We will not make a loan to you if the total of the requested loan and your
unpaid outstanding loans will be greater than the Surrender Value of your
Contract on the date of the loan. In addition, we will not make a loan to you if
the total of the requested loan and all of the plan participant's Contract loans
under TSA plans is more than the lesser of (a) or (b) where:
(a) equals $50,000 minus the excess of the highest outstanding loan balance
during the prior 12 months over the current outstanding loan balance; and
(b) equals the greater of $10,000 or 1/2 of the Surrender Value.
The minimum loan amount is $1,000.
To request a Contract loan write to us at the address given on the first page of
the prospectus. You alone are responsible for ensuring that your loan and
repayments comply with tax requirements. Loans made before the Annuity Date are
generally treated as distributions under the Contract, and may be subject to
withholding and tax penalties for early distributions. Some of these
requirements are stated in Section 72 of the Tax Code. Please seek advice from
your plan administrator or tax advisor.
When we make a loan, we will transfer an amount equal to the loan amount from
the Separate Account and/or the Fixed Account to the Loan Account as collateral
for the loan. We will transfer to the Loan Account amounts from the Separate
Account in proportion to the assets in each Subaccount. If your loan amount is
greater than your Contract Value in the Subaccounts, we will transfer the
remaining required collateral from the Guaranteed Maturity Fixed Account
Options. If your loan amount is greater than your contract value in the
Subaccounts and the Guaranteed Maturity Fixed Account Options, we will transfer
the remaining required collateral from the Dollar Cost Averaging Fixed Account
Option.
We will not charge a Withdrawal Charge on the loan or on the transfer from the
Subaccounts or the Fixed Account. We may, however, apply a Market Value
Adjustment to a transfer from the Fixed Account to the Loan Account. If we do,
we will increase or decrease the amount remaining in the Fixed Account by the
amount of the Market Value Adjustment, so that the net amount
29 PROSPECTUS
transferred to the Loan Account will equal the desired loan amount. We will
charge a Withdrawal Charge and apply a Market Value Adjustment, if applicable,
on a distribution to repay the loan in full, in the event of loan default.
We will credit interest to the amounts in the Loan Account. The annual interest
rate credited to the Loan Account will be the greater of: (a) 3%; or (b) the
loan interest rate minus 2.25%. The value of the amounts in the Loan Account are
not affected by the changes in the value of the Subaccounts.
When you take out a loan, we will set the loan interest rate. That rate will
apply to your loan until it is repaid. From time to time, we may change the loan
interest rate applicable to new loans. We also reserve the right to change the
terms of new loans.
We will subtract the outstanding Contract loan balance, including accrued but
unpaid interest, from:
1) the Death Proceeds;
2) surrender proceeds;
3) the amount available for partial withdrawal; and
4) the amount applied on the Annuity Date to provide annuity payments.
Usually you must repay a Contract loan within five years of the date the loan is
made. Scheduled payments must be level, amortized over the repayment period, and
made at least quarterly. We may permit a repayment period of 15 or 30 years if
the loan proceeds are used to acquire your principal residence. We may also
permit other repayment periods.
You must mark your loan repayments as such. We will assume that any payment
received from you is a Purchase Payment, unless you tell us otherwise.
Generally, loan payments are allocated to the Subaccount(s) in the proportion
that you have selected for Purchase Payments. Allocations of loan payments are
not permitted to the Fixed Accounts (Guaranteed Maturity Fixed Account and
Dollar Cost Averaging Fixed Account Option). If your Purchase Payment allocation
includes any of the Fixed Accounts, the percentages allocated to the Fixed
Accounts will be allocated instead to the PIMCO Money Market Subaccount.
If you do not make a loan payment when due, we will continue to charge interest
on your loan. We also will declare the entire loan in default. We will subtract
the defaulted loan balance plus accrued interest from any future distribution
under the Contract and keep it in payment of your loan. Any defaulted amount
plus interest will be treated as a distribution for tax purposes (as permitted
by law). As a result, you may be required to pay taxes on the defaulted amount,
incur the early withdrawal tax penalty. We will capitalize interest on a loan in
default.
If the total loan balance exceeds the Surrender Value, we will mail written
notice to your last known address. The notice will state the amount needed to
maintain the Contract in force. If we do not receive payment of this amount
within 31 days after we mail this notice, we will terminate your Contract.
We may defer making any loan for 6 months after you ask us for a loan, unless
the loan is to pay a premium to us.
WITHDRAWALS (REDEMPTIONS). Except as explained below, you may redeem a Contract
for all or a portion of its Contract Value before the Annuity Date. We may
impose a Withdrawal Charge, which would reduce the amount paid to you upon
redemption. The Withdrawal Charges are described on page 32. Withdrawals from
the Fixed Account may be increased or decreased by a Market Value Adjustment, as
described in "Market Value Adjustment" on page 23.
In general, you must withdraw at least $50 at a time. You may also withdraw a
lesser amount if you are withdrawing your entire interest in a Subaccount. If
your request for a partial withdrawal would reduce the Contract Value to less
than $500, we may treat it as a request for a withdrawal of your entire Contract
Value, as described in "Minimum Contract Value" on page 31. Your Contract will
terminate if you withdraw all of your Contract Value.
Withdrawals taken prior to annuitization are generally considered to come from
the earnings in the Contract first. If the Contract is tax-qualified, generally
all withdrawals are treated as ordinary income and, if taken prior to age 59
1/2, may be subject to an additional 10% federal tax penalty.
We may be required to withhold 20% of withdrawals and distributions from
Contracts issued in connection with certain Qualified Plans, as described on
Page 39.
To make a withdrawal, you must send us a written withdrawal request or
systematic withdrawal program enrollment form. You may obtain the required forms
from us at the address and phone number given on the first page of this
prospectus.
For partial withdrawals, you may allocate the amount among the Subaccounts and
the Fixed Accounts. If we do not receive allocation instructions from you, we
usually will allocate the partial withdrawal proportionately among the
Subaccounts and the Guaranteed Maturity Fixed Account Options based upon the
balance of the Subaccounts and the Guaranteed Maturity Fixed Account Options,
with any remainder being distributed from the Dollar Cost Averaging Fixed
Account Option. You may not make a partial withdrawal from the Fixed Account in
an amount greater than the total amount of the partial withdrawal multiplied by
the ratio of the value of the Fixed Account to the Contract Value immediately
before the partial withdrawal.
If you request a total withdrawal, you must send us your Contract. The Surrender
value will equal the Contract Value minus any applicable Withdrawal Charge and
adjusted by any applicable Market Value Adjustment. We
30 PROSPECTUS
also will deduct a contract maintenance charge of $35, unless we have waived the
contract maintenance charge on your Contract as described on page 32. We
determine the Surrender Value based on the Contract Value next computed after we
receive a properly completed surrender request. We will usually pay the
Surrender Value within seven days after the day we receive a completed request
form. However, we may suspend the right of withdrawal from the Separate Account
or delay payment for withdrawals for more than seven days in the following
circumstances:
1) whenever the New York Stock Exchange ("NYSE") is closed (other than
customary weekend and holiday closings);
2) when trading on the NYSE is restricted or an emergency exists, as
determined by the SEC, so that disposal of the Separate Account's
investments or determination of Accumulation Unit Values is not reasonably
practicable; or
3) at any other time permitted by the SEC for your protection.
In addition, we may delay payment of the Surrender Value in the Fixed Account
for up to 6 months or a shorter period if required by law. If we delay payment
from the Fixed Account for more than 30 days, we will pay interest as required
by applicable law.
You may withdraw amounts attributable to contributions made pursuant to a salary
reduction agreement (in accordance with Section 403(b)(11) of the Tax Code) only
in the following circumstances:
1) when you attain age 59 1/2;
2) when you terminate your employment with the plan sponsor;
3) upon your death;
4) upon your disability as defined in Section 72(m)(7) of the Tax Code; or
5) in the case of hardship.
If you seek a hardship withdrawal, you may only withdraw amounts attributable to
your Purchase Payments; you may not withdraw any earnings. These limitations on
withdrawals apply to:
1) salary reduction contributions made after December 31, 1988;
2) income attributable to such contributions; and
3) income attributable to amounts held as of December 31, 1988.
The limitations on withdrawals do not affect transfers between certain Qualified
Plans. Additional restrictions and limitations may apply to distributions from
any Qualified Plan. Tax penalties may also apply. You should seek tax advice
regarding any withdrawals or distributions from Qualified Plans.
SYSTEMATIC WITHDRAWAL PROGRAM. If your Contract is a non-Qualified Contract or
IRA, you may participate in our Systematic Withdrawal Program. You must complete
an enrollment form and send it to us. You must complete the withholding election
section of the enrollment form before the systematic withdrawals will begin. You
may choose withdrawal payments of a flat dollar amount, earnings, or a
percentage of Purchase Payments. You may choose to receive systematic withdrawal
payments on a monthly, quarterly, semi-annual, or annual basis. Systematic
withdrawals will be deducted from your Subaccount and Fixed Account balances,
excluding the Dollar Cost Averaging Fixed Account, on a pro rata basis.
Depending on fluctuations in the net asset value of the Subaccounts and the
value of the Fixed Account, systematic withdrawals may reduce or even exhaust
the Contract Value. The minimum amount of each systematic withdrawal is $50.
We will make systematic withdrawal payments to you or your designated payee. We
may modify or suspend the Systematic Withdrawal Program and charge a processing
fee for the service. If we modify or suspend the Systematic Withdrawal Program,
existing systematic withdrawal payments will not be affected.
ERISA PLANS. A married participant may need spousal consent to receive a
distribution from a Contract issued in connection with a Qualified Plan or a
Non-Qualified Plan covered by to Title 1 of ERISA. You should consult an
advisor.
MINIMUM CONTRACT VALUE. If as a result of withdrawals your Contract Value would
be less than $500 and you have not made any Purchase Payments during the
previous three full calendar years, we may terminate your Contract and
distribute its Surrender Value to you. Before we do this, we will give you 60
days notice. We will not terminate your Contract on this ground if the Contract
Value has fallen below $500 due to either a decline in Accumulation Unit Value
or the imposition of fees and charges. In addition, in some states we are not
permitted to terminate Contracts on this ground. Different rules may apply to
Contracts issued in connection with Qualified Plans.
CONTRACT CHARGES
We assess charges under the Contract in three ways:
1) as deductions from Contract Value for contract maintenance charges and for
premium taxes, if applicable;
2) as charges against the assets of the Separate Account for administrative
expenses and for the assumption of mortality and expense risks; and
31 PROSPECTUS
3) as Withdrawal Charges (contingent deferred sales charges) subtracted from
withdrawal and surrender payments.
In addition, certain deductions are made from the assets of the Portfolios for
investment management fees and expenses. Those fees and expenses are summarized
in the Fee Tables on page 6 and described more fully in the Prospectuses and
Statements of Additional Information for the Portfolios.
MORTALITY AND EXPENSE RISK CHARGE. We deduct a mortality and expense risk charge
from each Subaccount during each Valuation Period. The mortality and expense
risk charge is equal, on an annual basis, to 1.30% of the average net asset
value of each Subaccount. The mortality risks arise from our contractual
obligations:
1) to make annuity payments after the Annuity Date for the life of the
Annuitant(s);
2) to waive the Withdrawal Charge upon your death; and
3) to provide the Death Benefit prior to the Annuity Date. A detailed
explanation of the Death Benefit may be found beginning on page 26.
The expense risk is that it may cost us more to administer the Contracts and the
Separate Account than we receive from the contract maintenance charge and the
administrative expense charge. We guarantee the mortality and expense risk
charge and we cannot increase it. We assess the mortality and expense risk
charge during both the Accumulation Period and the Annuity Period.
If you select the Enhanced Death Benefit Rider, your mortality and expense risk
charge will be 1.50% of average net asset value of each Subaccount. We charge a
higher mortality and expense risk charge for the Rider to compensate us for the
additional risk that we accept by providing the Rider. We will calculate a
separate Accumulation Unit Value for the base Contract, and for Contracts with
the Rider, in order to reflect the difference in the mortality and expense risk
charges.
ADMINISTRATIVE CHARGES
CONTRACT MAINTENANCE CHARGE. We charge an annual contract maintenance charge of
$35 on your Contract. The amount of this charge is guaranteed not to increase.
This charge reimburses us for our expenses incurred in maintaining your
Contract.
Before the Annuity Date, we assess the contract maintenance charge on each
Contract Anniversary. To obtain payment of this charge, on a pro rata basis we
will allocate this charge among the Subaccounts to which you have allocated your
Contract Value, and redeem Accumulation Units accordingly. We will waive this
charge if you pay $50,000 or more in Purchase Payments or if you allocate all of
your Contract Value to the Fixed Account. If you surrender your Contract, we
will deduct the full $35 charge as of the date of surrender, unless your
Contract qualifies for a waiver.
After the Annuity Date, if allowed in your state, we will subtract this charge
in equal parts from each of your annuity payments. We will waive this charge if
on the Annuity Date your Contract Value is $50,000 or more or if all of your
annuity payments are Fixed Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE. We deduct an administrative expense charge from
each Subaccount during each Valuation Period. This charge is equal, on an annual
basis, to 0.10% of the average net asset value of the Subaccounts. This charge
is designed to compensate us for the cost of administering the Contracts and the
Separate Account. The administrative expense charge is assessed during both the
Accumulation Period and the Annuity Period.
TRANSFER FEE. We currently are waiving the transfer fee. The Contract, however,
depending on your state, either permits us to charge you up to $10 per transfer
for each transfer effected between Subaccount(s) and/or the Fixed Account after
the first transfer in each month, or for each transfer in excess of twelve
within a calendar year. The Contract also permits us to impose a minimum size on
transfer amounts although the minimum size may be limited to $25 in some states.
We will notify you if we begin to charge this fee or impose a minimum size on
transfer amounts. We will not charge a transfer fee on transfers that are part
of a Dollar Cost Averaging or Portfolio Rebalancing program.
The transfer fee will be deducted from Contract Value that remains in the
Subaccount(s) or Fixed Account from which the transfer was made. If that amount
is insufficient to pay the transfer fee, we will deduct the fee from the
transferred amount.
SALES CHARGES
WITHDRAWAL CHARGE. We may charge a Withdrawal Charge, which is a contingent
deferred sales charge, upon certain withdrawals. As a general rule, the
Withdrawal Charge equals a percentage of Purchase Payments withdrawn that are:
(a) less than eight years old; and (b) not eligible for a free withdrawal. The
applicable percentage depends on how many years ago you made the Purchase
Payment being withdrawn, as shown in this chart:
WITHDRAWAL
CHARGE
CONTRIBUTION YEAR PERCENTAGE
- ----------------- ----------
First 8%
Second and Third 7%
Fourth and Fifth 6%
Sixth 5%
Seventh 4%
Eighth 3%
Ninth and later 0%
When we calculate the Withdrawal Charge, we do not take any applicable Market
Value Adjustment into
32 PROSPECTUS
consideration. If you make a withdrawal before the Annuity Date, we will apply
the withdrawal charge percentage in effect on the date of the withdrawal, or the
withdrawal charge percentage in effect on the following day, whichever is lower.
We subtract the Withdrawal Charge from the Contract Value remaining after your
withdrawal. As a result, the decrease in your Contract Value will be greater
than the withdrawal amount requested and paid.
For purposes of determining the Withdrawal Charge, the Contract Value is deemed
to be withdrawn in the following order:
First. Earnings - the current Contract Value minus all Purchase Payments that
have not previously been withdrawn; Credit Enhancements are treated as
"earnings" for this purpose;
Second. "Old Purchase Payments" - Purchase Payments received by us more than
eight years before the date of withdrawal that have not been previously
withdrawn;
Third. Any additional amounts available as a "Free Withdrawal," as described
below;
Fourth. "New Purchase Payments - Purchase Payments received by us less than
eight years before the date of withdrawal. These Payments are deemed to be
withdrawn on a first-in, first-out basis.
No Withdrawal Charge is applied in the following situations:
.. on annuitization;
.. the payment of a Death Benefit;
.. a free withdrawal amount, as described on page 33;
.. certain withdrawals for Contracts issued under 403(b) plans or 401 plans
under our prototype as described on page 33;
.. withdrawals taken to satisfy IRS minimum distribution rules;
.. withdrawals that qualify for one of the waiver benefits described on page
33 below; and
.. withdrawals under Contracts issued to employees of Lincoln Benefit Life
Company, Surety Life Insurance Company, and Allstate Financial Services,
L.L.C. or to their spouses or minor children, if these individuals reside
in the State of Nebraska.
We will never waive or eliminate a Withdrawal Charge where such waiver or
elimination would be unfairly discriminatory to any person or where it is
prohibited by state law.
We use the amounts obtained from the Withdrawal Charge to pay sales commissions
and other promotional or distribution expenses associated with marketing the
Contracts. To the extent that the Withdrawal Charge does not cover all sales
commissions and other promotional or distribution expenses, we may use any of
our corporate assets, including potential profit which may arise from the
mortality and expense risk charge or any other charges or fee described above,
to make up any difference.
Withdrawals of earnings are taxed as ordinary income and, if taken prior to age
59 1/2, may be subject to an additional 10% federal tax penalty. The amount of
your withdrawal may be affected by a Market Value Adjustment. Additional
restrictions may apply to Contracts held in Qualified Plans. We outline the tax
requirements applicable to withdrawals on page 36. You should consult your own
tax counsel or other tax advisors regarding any withdrawals.
FREE WITHDRAWAL. Withdrawals of the following amounts are never subject to the
Withdrawal Charge:
.. In any Contract Year, the greater of: (a) earnings that have not previously
been withdrawn; or (b) 15 percent of New Purchase Payments; and
.. Any Old Purchase Payments that have not been previously withdrawn.
Credit Enhancements are treated as earnings for purposes of determining the free
withdrawal amount. However, even if you do not owe a Withdrawal Charge on a
particular withdrawal, you may still owe taxes or penalty taxes, or be subject
to a Market Value Adjustment. The tax treatment of withdrawals is summarized on
page 36.
WAIVER BENEFITS
GENERAL. If approved in your state, we will offer the two waiver benefits
described below. In general, if you qualify for one of these benefits, we will
permit you to make one or more partial or full withdrawals without paying any
otherwise applicable Withdrawal Charge or Market Value Adjustment. While we have
summarized those benefits here, you should consult your Contract for the precise
terms of the waiver benefits.
Some Qualified Plans may not permit you to utilize these benefits. Also, even if
you do not need to pay our Withdrawal Charge because of these benefits, you
still may be required to pay taxes or tax penalties on the amount withdrawn. You
should consult your tax advisor to determine the effect of a withdrawal on your
taxes.
CONFINEMENT WAIVER BENEFIT. Under this benefit, we will waive the Withdrawal
Charge and Market Value Adjustment on all withdrawals under your Contract if the
following conditions are satisfied:
1) Any Contract owner or the Annuitant, if the Contract is owned by a company
or other legal entity, is confined to a long term care facility or a
hospital for at least 90 consecutive days. The Owner or Annuitant must
enter the long term care facility or hospital at least 30 days after the
Issue Date;
2) You request the withdrawal no later than 90 days following the end of the
Owner or Annuitant's stay at the long term care facility or hospital. You
must
33 PROSPECTUS
provide written proof of the stay with your withdrawal request; and
3) A physician must have prescribed the stay and the stay must be medically
necessary.
You may not claim this benefit if the physician prescribing the Owner or
Annuitant's stay in a long term care facility is the Owner or Annuitant or a
member of the Owner or Annuitant's immediate family.
TERMINAL ILLNESS WAIVER BENEFIT. Under this benefit, we will waive any
Withdrawal Charge and Market Value Adjustment on all withdrawals under your
Contract if, at least 30 days after the Issue Date, you or the Annuitant are
diagnosed with a terminal illness. Due proof of the diagnosis, as provided in
the Contract, must be given to us prior to, or at the time of, any withdrawal
request.
WAIVER OF WITHDRAWAL CHARGE FOR CERTAIN QUALIFIED PLAN WITHDRAWALS. For
Contracts issued under a Section 403(b) plan or a Section 401 plan under our
prototype, we will waive the Withdrawal Charge when:
1) the Annuitant becomes disabled (as defined in Section 72(m)(7) of the Tax
Code);
2) the Annuitant reaches age 59 1/2 and at least 5 Contract Years have passed
since the Contract was issued;
3) at least 15 Contract Years have passed since the Contract was issued.
Our prototype is a Section 401 Defined Contribution Qualified Retirement plan.
This plan may be established as a Money Purchase plan, a Profit Sharing plan, or
a paired plan (Money Purchase and Profit Sharing). For more information about
our prototype plan, call us at 1-800-865-5237.
PREMIUM TAXES. We will charge premium taxes or other state or local taxes
against the Contract Value, including Contract Value that results from amounts
transferred from existing policies (Section 1035 exchange) issued by us or other
insurance companies. Some states assess premium taxes when Purchase Payments are
made; others assess premium taxes when annuity payments begin. We will deduct
any applicable premium taxes upon full surrender, death, or annuitization.
Premium taxes generally range from 0% to 3.5%.
DEDUCTION FOR SEPARATE ACCOUNT INCOME TAXES. We are not currently maintaining a
provision for taxes. In the future, however, we may establish a provision for
taxes if we determine, in our sole discretion, that we will incur a tax as a
result of the operation of the Separate Account. We will deduct for any taxes we
incur as a result of the operation of the Separate Account, whether or not we
previously made a provision for taxes and whether or not it was sufficient. Our
status under the Tax Code is briefly described in the Statement of Additional
Information.
OTHER EXPENSES. You indirectly bear the charges and expenses of the Portfolios
whose shares are held by the Subaccounts to which you allocate your Contract
Value. For a summary of current estimates of those charges and expenses, see
page 6. For more detailed information about those charges and expenses, please
refer to the prospectuses for the appropriate Portfolios. We may receive
compensation from the investment advisors or administrators of the Portfolios in
connection with administrative service and cost savings experienced by the
investment advisors or administrators.
34 PROSPECTUS
TAXES
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. LINCOLN
BENEFIT MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT.
Federal, state, local and other tax consequences of ownership or receipt of
distributions under an annuity contract depend on your individual circumstances.
If you are concerned about any tax consequences with regard to your individual
circumstances, you should consult a competent tax adviser.
TAXATION OF LINCOLN BENEFIT LIFE
COMPANY
Lincoln Benefit is taxed as a life insurance company under Part I of Subchapter
L of the Code. Since the Separate
Account is not an entity separate from Lincoln Benefit, and its operations form
a part of Lincoln Benefit, it will not be taxed separately. Investment income
and realized capital gains of the Separate Account are automatically applied to
increase reserves under the Contract. Under existing federal income tax law,
Lincoln Benefit believes that the Separate Account investment income and capital
gains will not be taxed to the extent that such income and gains are applied to
increase the reserves under the Contract. Accordingly, Lincoln Benefit does not
anticipate that it will incur any federal income tax liability attributable to
the Separate Account, and therefore Lincoln Benefit does not intend to make
provisions for any such taxes. If Lincoln Benefit is taxed on investment income
or capital gains of the Separate Account, then Lincoln Benefit may impose a
charge against the Separate
Account in order to make provision for such taxes.
TAXATION OF VARIABLE ANNUITIES IN GENERAL
TAX DEFERRAL. Generally, you are not taxed on increases in the Contract Value
until a distribution occurs. This rule applies only where:
.. the Contract Owner is a natural person,
.. the investments of the Separate Account are "adequately diversified"
according to Treasury Department regulations, and
.. Lincoln Benefit is considered the owner of the Separate Account assets for
federal income tax purposes.
NON-NATURAL OWNERS. Non-natural owners are also referred to as Non Living Owners
in this prospectus. As a general rule, annuity contracts owned by non-natural
persons such as corporations, trusts, or other entities are not treated as
annuity contracts for federal income tax purposes. The income on such contracts
does not enjoy tax deferral and is taxed as ordinary income received or accrued
by the non-natural owner during the taxable year.
EXCEPTIONS TO THE NON-NATURAL OWNER RULE. There are several exceptions to the
general rule that annuity contracts held by a non-natural owner are not treated
as annuity contracts for federal income tax purposes. Contracts will generally
be treated as held by a natural person if the nominal owner is a trust or other
entity which holds the contract as agent for a natural person. However, this
special exception will not apply in the case of an employer who is the nominal
owner of an annuity contract under a non-Qualified deferred compensation
arrangement for its employees. Other exceptions to the non-natural owner rule
are: (1) contracts acquired by an estate of a decedent by reason of the death of
the decedent; (2) certain qualified contracts; (3) contracts purchased by
employers upon the termination of certain qualified plans; (4) certain contracts
used in connection with structured settlement agreements; and (5) immediate
annuity contracts, purchased with a single premium, when the annuity starting
date is no later than a year from purchase of the annuity and substantially
equal periodic payments are made, not less frequently than annually, during the
annuity period.
GRANTOR TRUST OWNED ANNUITY. Contracts owned by a grantor trust are considered
owned by a non-natural owner. Grantor trust owned contracts receive tax deferral
as described in the Exceptions to the Non-Natural Owner Rule section. In
accordance with the Code, upon the death of the annuitant, the death benefit
must be paid. According to your Contract, the Death Benefit is paid to the
beneficiary. A trust named beneficiary, including a grantor trust, has two
options for receiving any death benefits: 1) a lump sum payment, or 2) payment
deferred up to five years from date of death.
DIVERSIFICATION REQUIREMENTS. For a Contract to be treated as an annuity for
federal income tax purposes, the investments in the Separate Account must be
"adequately diversified" consistent with standards under Treasury Department
regulations. If the investments in the Separate Account are not adequately
diversified, the Contract will not be treated as an annuity contract for federal
income tax purposes. As a result, the income on the Contract will be taxed as
ordinary income received or accrued by the Contract owner during the taxable
year. Although Lincoln Benefit does not have control over the Portfolios or
their investments, we expect the Portfolios to meet the diversification
requirements.
OWNERSHIP TREATMENT. The IRS has stated that a contract owner will be considered
the owner of separate account assets if he possesses incidents of ownership in
those assets, such as the ability to exercise investment control over the
assets. At the time the diversification regulations were issued, the Treasury
Department announced that the regulations do not provide guidance concerning
circumstances in which investor control of the separate account investments may
cause a Contract
35 PROSPECTUS
owner to be treated as the owner of the separate account. The Treasury
Department also stated that future guidance would be issued regarding the extent
that owners could direct sub-account investments without being treated as owners
of the underlying assets of the separate account.
Your rights under the Contract are different than those described by the IRS in
private and published rulings in which it found that Contract owners were not
owners of separate account assets. For example, if your contract offers more
than twenty (20) investment alternatives you have the choice to allocate
premiums and contract values among a broader selection of investment
alternatives than described in such rulings. You may be able to transfer among
investment alternatives more frequently than in such rulings. These differences
could result in you being treated as the owner of the Separate Account. If this
occurs, income and gain from the Separate Account assets would be includible in
your gross income. Lincoln
Benefit does not know what standards will be set forth in any regulations or
rulings which the Treasury Department may issue. It is possible that future
standards announced by the Treasury Department could adversely affect the tax
treatment of your Contract. We reserve the right to modify the Contract as
necessary to attempt to prevent you from being considered the federal tax owner
of the assets of the Separate Account. However, we make no guarantee that such
modification to the Contract will be successful.
TAXATION OF PARTIAL AND FULL WITHDRAWALS. If you make a partial withdrawal under
a Non-Qualified Contract, amounts received are taxable to the extent the
Contract Value, without regard to surrender charges, exceeds the investment in
the Contract. The investment in the Contract is the gross premium paid for the
contract minus any amounts previously received from the Contract if such amounts
were properly excluded from your gross income. If you make a full withdrawal
under a Non-Qualified Contract, the amount received will be taxable only to the
extent it exceeds the investment in the Contract.
TAXATION OF ANNUITY PAYMENTS. Generally, the rule for income taxation of annuity
payments received from a Non-Qualified Contract provides for the return of your
investment in the Contract in equal tax-free amounts over the payment period.
The balance of each payment received is taxable. For fixed annuity payments, the
amount excluded from income is determined by multiplying the payment by the
ratio of the investment in the Contract (adjusted for any refund feature or
period certain) to the total expected value of annuity payments for the term of
the Contract. If you elect variable annuity payments, the amount excluded from
taxable income is determined by dividing the investment in the Contract by the
total number of expected payments. The annuity payments will be fully taxable
after the total amount of the investment in the Contract is excluded using these
ratios. If any variable payment is less than the excludable amount you should
contact a competent tax advisor to determine how to report any unrecovered
investment. The federal tax treatment of annuity payments is unclear in some
respects. As a result, if the IRS should provide further guidance, it is
possible that the amount we calculate and report to the IRS as taxable could be
different. If you die, and annuity payments cease before the total amount of the
investment in the Contract is recovered, the unrecovered amount will be allowed
as a deduction for your last taxable year.
TAXATION OF LEVEL MONTHLY VARIABLE ANNUITY PAYMENTS. You may have an option to
elect a variable income payment stream consisting of level monthly payments that
are recalculated annually. Although we will report your levelized payments to
the IRS in the year distributed, it is possible the IRS could determine that
receipt of the first monthly payout of each annual amount is constructive
receipt of the entire annual amount. If the IRS were to take this position, the
taxable amount of your levelized payments would be accelerated to the time of
the first monthly payout and reported in the tax year in which the first monthly
payout is received.
WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding
the taxation of any additional withdrawal received after the Payout Start Date.
It is possible that a greater or lesser portion of such a payment could be
taxable than the amount we determine.
DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for
federal income tax purposes, the Contract must provide:
.. if any Contract Owner dies on or after the Payout Start Date but before the
entire interest in the Contract has been distributed, the remaining portion
of such interest must be distributed at least as rapidly as under the
method of distribution being used as of the date of the Contract Owner's
death;
.. if any Contract Owner dies prior to the Payout Start Date, the entire
interest in the Contract will be distributed within 5 years after the date
of the Contract Owner's death. These requirements are satisfied if any
portion of the Contract Owner's interest that is payable to (or for the
benefit of) a designated Beneficiary is distributed over the life of such
Beneficiary (or over a period not extending beyond the life expectancy of
the Beneficiary) and the distributions begin within 1 year of the Contract
Owner's death. If the Contract Owner's designated Beneficiary is the
surviving spouse of the Contract Owner, the Contract may be continued with
the surviving spouse as the new Contract Owner.
.. if the Contract Owner is a non-natural person, then the Annuitant will be
treated as the Contract Owner for purposes of applying the distribution at
death rules. In addition, a change in the Annuitant on a Contract owned by
a non-natural person will be treated as the death of the Contract Owner.
36 PROSPECTUS
TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income
as follows:
.. if distributed in a lump sum, the amounts are taxed in the same manner as a
full withdrawal, or
.. if distributed under an Income Plan, the amounts are taxed in the same
manner as annuity payments.
PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable
amount of any premature distribution from a non-Qualified Contract. The penalty
tax generally applies to any distribution made prior to the date you attain age
59 1/2. However, no penalty tax is incurred on distributions:
.. made on or after the date the Contract Owner attains age 59 1/2,
.. made as a result of the Contract Owner's death or becoming totally
disabled,
.. made in substantially equal periodic payments over the Contract Owner's
life or life expectancy, or over the joint lives or joint life expectancies
of the Contract Owner and the Beneficiary,
.. made under an immediate annuity, or
.. attributable to investment in the Contract before August 14, 1982.
You should consult a competent tax advisor to determine how these exceptions may
apply to your situation.
SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts
using substantially equal periodic payments or immediate annuity payments as an
exception to the penalty tax on premature distributions, any additional
withdrawal or other material modification of the payment stream would violate
the requirement that payments must be substantially equal. Failure to meet this
requirement would mean that the income portion of each payment received prior to
the later of 5 years or the Contract Owner's attaining age 59 1/2 would be
subject to a 10% penalty tax unless another exception to the penalty tax
applied. The tax for the year of the modification is increased by the penalty
tax that would have been imposed without the exception, plus interest for the
years in which the exception was used. A material modification does not include
permitted changes described in published IRS rulings. You should consult a
competent tax advisor prior to creating or modifying a substantially equal
periodic payment stream.
TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is
a tax-free exchange of a non-qualified life insurance contract, endowment
contract or annuity contract into a non-Qualified annuity contract. The contract
owner(s) must be the same on the old and new contract. Basis from the old
contract carries over to the new contract so long as we receive that information
from the relinquishing company. If basis information is never received, we will
assume that all exchanged funds represent earnings and will allocate no cost
basis to them.
PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of
annuity contracts. Under this ruling, if you take a withdrawal from a receiving
or relinquishing annuity contract within 24 months of the partial exchange, then
special aggregation rules apply for purposes of determining the taxable amount
of a distribution. The IRS has issued limited guidance on how to aggregate and
report these distributions. The IRS is expected to provide further guidance, as
a result, it is possible that the amount we calculate and report to the IRS as
taxable could be different.
TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without
full and adequate consideration to a person other than your spouse (or to a
former spouse incident to a divorce), you will be taxed on the difference
between the Contract Value and the investment in the Contract at the time of
transfer. Any assignment or pledge (or agreement to assign or pledge) of the
Contract Value is taxed as a withdrawal of such amount or portion and may also
incur the 10% penalty tax.
AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified
deferred annuity contracts issued by Lincoln Benefit (or its affiliates) to the
same Contract Owner during any calendar year be aggregated and treated as one
annuity contract for purposes of determining the taxable amount of a
distribution.
INCOME TAX WITHHOLDING
Generally, Lincoln Benefit is required to withhold federal income tax at a rate
of 10% from all non-annuitized distributions. The customer may elect out of
withholding by completing and signing a withholding election form. If no
election is made, we will automatically withhold the required 10% of the taxable
amount. In certain states, if there is federal withholding, then state
withholding is also mandatory.
Lincoln Benefit is required to withhold federal income tax using the wage
withholding rates for all annuitized distributions. The customer may elect out
of withholding by completing and signing a withholding election form. If no
election is made, we will automatically withhold using married with three
exemptions as the default. If no U.S. taxpayer identification number is
provided, we will automatically withhold using single with zero exemptions as
the default. In certain states, if there is federal withholding, then state
withholding is also mandatory.
Election out of withholding is valid only if the customer provides a U.S.
residence address and taxpayer identification number.
Generally, Section 1441 of the Code provides that Lincoln Benefit as a
withholding agent must withhold 30% of the taxable amounts paid to a
non-resident alien. A non-resident alien is someone other than a U.S. citizen or
resident alien. Withholding may be reduced or eliminated if covered by an income
tax treaty between the U.S. and the non-resident alien's country of residence if
37 PROSPECTUS
the payee provides a U.S. taxpayer identification number on a completed Form
W-8BEN. A U.S. taxpayer identification number is a social security number or an
individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS
to non-resident alien individuals who are not eligible to obtain a social
security number. The U.S. does not have a tax treaty with all countries nor do
all tax treaties provide an exclusion or lower withholding rate for annuities.
TAX QUALIFIED CONTRACTS
The income on tax sheltered annuity (TSA) and IRA investments is tax deferred,
and the income on variable annuities held by such plans does not receive any
additional tax deferral. You should review the annuity features, including all
benefits and expenses, prior to purchasing a variable annuity as a TSA or IRA.
Tax Qualified Contracts are contracts purchased as investments as:
.. Individual Retirement Annuities (IRAs) under Section 408(b) of the Code;
.. Roth IRAs under Section 408A of the Code;
.. Simplified Employee Pension (SEP IRA) under Section 408(k) of the Code;
.. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Section
408(p) of the Code; and
.. Tax Sheltered Annuities under Section 403(b) of the Code.
Lincoln Benefit reserves the right to limit the availability of the Contract for
use with any of the retirement plans listed above or to modify the Contract to
conform with tax requirements.
The tax rules applicable to participants with tax qualified annuities vary
according to the type of contract and the terms and conditions of the
endorsement. Adverse tax consequences may result from certain transactions such
as excess contributions, premature distributions, and, distributions that do not
conform to specified commencement and minimum distribution rules. Lincoln
Benefit can issue an individual retirement annuity on a rollover or transfer of
proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under
which the decedent's surviving spouse is the beneficiary. Lincoln Benefit does
not offer an individual retirement annuity that can accept a transfer of funds
for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer
sponsored retirement plan.
In the case of certain qualified plans, the terms of the plans may govern the
right to benefits, regardless of the terms of the Contract.
TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If
you make a partial withdrawal under a Tax Qualified Contract other than a Roth
IRA, the portion of the payment that bears the same ratio to the total payment
that the investment in the Contract (i.e., nondeductible IRA contributions)
bears to the Contract Value, is excluded from your income. We do not keep track
of nondeductible contributions, and all tax reporting of distributions from Tax
Qualified Contracts other than Roth IRAs will indicate that the distribution is
fully taxable.
"Qualified distributions" from Roth IRAs are not included in gross income.
"Qualified distributions" are any distributions made more than five taxable
years after the taxable year of the first contribution to any Roth IRA and which
are:
.. made on or after the date the Contract Owner attains age 59 1/2,
.. made to a beneficiary after the Contract Owner's death,
.. attributable to the Contract Owner being disabled, or
.. made for a first time home purchase (first time home purchases are subject
to a lifetime limit of $10,000).
"Nonqualified distributions" from Roth IRAs are treated as made from
contributions first and are included in gross income only to the extent that
distributions exceed contributions. All tax reporting of distributions from Roth
IRAs will indicate that the taxable amount is not determined.
REQUIRED MINIMUM DISTRIBUTIONS. Generally, IRAs (excluding Roth IRAs) and TSAs
require minimum distributions upon reaching age 70 1/2. Failure to withdraw the
required minimum distribution will result in a 50% tax penalty on the shortfall
not withdrawn from the Contract. Not all income plans offered under the Contract
satisfy the requirements for minimum distributions. Because these distributions
are required under the Code and the method of calculation is complex, please see
a competent tax advisor.
THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS
regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA)
may not invest in life insurance contracts. However, an IRA may provide a death
benefit that equals the greater of the purchase payments or the Contract Value.
The Contract offers a death benefit that in certain circumstances may exceed the
greater of the purchase payments or the Contract Value. We believe that the
Death Benefits offered by your Contract do not constitute life insurance under
these regulations.
It is also possible that certain death benefits that offer enhanced earnings
could be characterized as an incidental death benefit. If the death benefit were
so characterized, this could result in current taxable income to a Contract
Owner. In addition, there are limitations on the amount of incidental death
benefits that may be provided under qualified plans, such as in connection with
a 403(b) plan.
Lincoln Benefit reserves the right to limit the availability of the Contract for
use with any of the qualified plans listed above.
38 PROSPECTUS
PENALTY TAX ON PREMATURE DISTRIBUTIONS FROM TAX QUALIFIED CONTRACTS. A 10%
penalty tax applies to the taxable amount of any premature distribution from a
Tax Qualified Contract. The penalty tax generally applies to any distribution
made prior to the date you attain age 59 1/2. However, no penalty tax is
incurred on distributions:
.. made on or after the date the Contract Owner attains age 59 1/2,
.. made as a result of the Contract Owner's death or total disability,
.. made in substantially equal periodic payments over the Contract Owner's
life or life expectancy, or over the joint lives or joint life expectancies
of the Contract Owner and the Beneficiary,
.. made after separation from service after age 55 (applies only for IRAs),
.. made pursuant to an IRS levy,
.. made for certain medical expenses,
.. made to pay for health insurance premiums while unemployed (applies only
for IRAs),
.. made for qualified higher education expenses (applies only for IRAs), and
.. made for a first time home purchase (up to a $10,000 lifetime limit and
applies only for IRAs).
During the first 2 years of the individual's participation in a SIMPLE IRA,
distributions that are otherwise subject to the premature distribution penalty,
will be subject to a 25% penalty tax.
You should consult a competent tax advisor to determine how these exceptions may
apply to your situation.
SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect
to Tax Qualified Contracts using substantially equal periodic payments as an
exception to the penalty tax on premature distributions, any additional
withdrawal or other material modification of the payment stream would violate
the requirement that payments must be substantially equal. Failure to meet this
requirement would mean that the income portion of each payment received prior to
the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to
a 10% penalty tax unless another exception to the penalty tax applied. The tax
for the year of the modification is increased by the penalty tax that would have
been imposed without the exception, plus interest for the years in which the
exception was used. A material modification does not include permitted changes
described in published IRS rulings. You should consult a competent tax advisor
prior to creating or modifying a substantially equal periodic payment stream.
INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Lincoln Benefit is
required to withhold federal income tax at a rate of 10% from all non-annuitized
distributions that are not considered "eligible rollover distributions." The
customer may elect out of withholding by completing and signing a withholding
election form. If no election is made, we will automatically withhold the
required 10% from the taxable amount. In certain states, if there is federal
withholding, then state withholding is also mandatory. Lincoln Benefit is
required to withhold federal income tax at a rate of 20% on all "eligible
rollover distributions" unless you elect to make a "direct rollover" of such
amounts to an IRA or eligible retirement plan. Eligible rollover distributions
generally include all distributions from employer sponsored retirement plans,
including TSAs but excluding IRAs, with the exception of:
.. required minimum distributions, or,
.. a series of substantially equal periodic payments made over a period of at
least 10 years, or,
.. a series of substantially equal periodic payments made over the life (joint
lives) of the participant (and beneficiary), or,
.. hardship distributions.
For all annuitized distributions that are not subject to the 20% withholding
requirement, Lincoln Benefit is required to withhold federal income tax using
the wage withholding rates. The customer may elect out of withholding by
completing and signing a withholding election form. If no election is made, we
will automatically withhold using married with three exemptions as the default.
If no U.S. taxpayer identification number is provided, we will automatically
withhold using single with zero exemptions as the default. In certain states, if
there is federal withholding, then state withholding is also mandatory.
Election out of withholding is valid only if the customer provides a U.S.
residence address and taxpayer identification number.
Generally, Section 1441 of the Code provides that Lincoln Benefit as a
withholding agent must withhold 30% of the taxable amounts paid to a
non-resident alien. A non-resident alien is someone other than a U.S. citizen or
resident alien. Withholding may be reduced or eliminated if covered by an income
tax treaty between the U.S. and the non-resident alien's country of residence if
the payee provides a U.S. taxpayer identification number on a completed Form
W-8BEN. A U.S. taxpayer identification number is a social security number or an
individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS
to non-resident alien individuals who are not eligible to obtain a social
security number. The U.S. does not have a tax treaty with all countries nor do
all tax treaties provide an exclusion or lower withholding rate for annuities.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity (IRA). Individual Retirement Annuities are subject
to limitations on the amount that
39 PROSPECTUS
can be contributed and on the time when distributions may commence. Certain
distributions from other types of qualified plans may be "rolled over" on a
tax-deferred basis into an Individual Retirement Annuity.
ROTH INDIVIDUAL RETIREMENT ANNUITIES. Section 408A of the Code permits eligible
individuals to make nondeductible contributions to an individual retirement
program known as a Roth Individual Retirement Annuity. Roth Individual
Retirement Annuities are subject to limitations on the amount that can be
contributed and on the time when distributions may commence.
Subject to certain limitations, a traditional Individual Retirement Account or
Annuity may be converted or "rolled over" to a Roth Individual Retirement
Annuity. The income portion of a conversion or rollover distribution is taxable
currently, but is exempted from the 10% penalty tax on premature distributions.
ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL
IRAS)
Internal Revenue Code Section 408 permits a custodian or trustee of an
Individual Retirement Account to purchase an annuity as an investment of the
Individual Retirement Account. If an annuity is purchased inside of an
Individual Retirement Account, then the Annuitant must be the same person as the
beneficial owner of the Individual Retirement Account.
Generally, the death benefit of an annuity held in an Individual Retirement
Account must be paid upon the death of the Annuitant. However, in most states,
the Contract permits the custodian or trustee of the Individual Retirement
Account to continue the Contract in the accumulation phase, with the Annuitant's
surviving spouse as the new Annuitant, if the following conditions are met:
1) The custodian or trustee of the Individual Retirement Account is the owner
of the annuity and has the right to the death proceeds otherwise payable
under the annuity contract;
2) The deceased Annuitant was the beneficial owner of the Individual
Retirement Account;
3) We receive a complete request for settlement for the death of the
Annuitant; and
4) The custodian or trustee of the Individual Retirement Account provides us
with a signed certification of the following:
(a) The Annuitant's surviving spouse is the sole beneficiary of the Individual
Retirement Account;
(b) The Annuitant's surviving spouse has elected to continue the Individual
Retirement Account as his or her own Individual Retirement Account; and
(c) The custodian or trustee of the Individual Retirement Account has continued
the Individual Retirement Account pursuant to the surviving spouse's
election.
SIMPLIFIED EMPLOYEE PENSION IRA. Section 408(k) of the Code allows eligible
employers to establish simplified employee pension plans for their employees
using individual retirement annuities. These employers may, within specified
limits, make deductible contributions on behalf of the employees to the
individual retirement annuities. Employers intending to use the Contract in
connection with such plans should seek competent tax advice.
SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Section 408(p) of the
Code allow eligible employers with 100 or fewer employees to establish SIMPLE
retirement plans for their employees using individual retirement annuities. In
general, a SIMPLE IRA consists of a salary deferral program for eligible
employees and matching or nonelective contributions made by employers. Employers
intending to purchase the Contract as a SIMPLE IRA should seek competent tax and
legal advice.
TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS
(TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND
YOUR COMPETENT TAX ADVISOR.
TAX SHELTERED ANNUITIES. Section 403(b) of the Code provides tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. Under Section 403(b), any contract used for a 403(b) plan must
provide that distributions attributable to salary reduction contributions made
after 12/31/88, and all earnings on salary reduction contributions, may be made
only on or after the date the employee:
.. attains age 59 1/2,
.. severs employment,
.. dies,
.. becomes disabled, or
.. incurs a hardship (earnings on salary reduction contributions may not be
distributed on account of hardship).
These limitations do not apply to withdrawals where Lincoln Benefit is directed
to transfer some or all of the Contract Value to another 403(b) plan. Generally,
we do not accept Employee Retirement Income Security Act of 1974 (ERISA) funds
in 403(b) contracts.
40 PROSPECTUS
DESCRIPTION OF LINCOLN BENEFIT LIFE COMPANY AND THE SEPARATE ACCOUNT
LINCOLN BENEFIT LIFE COMPANY. Lincoln Benefit Life Company is a stock life
insurance company organized under the laws of the state of Nebraska in 1938. Our
legal domicile and principal business address is 2940 South 84th Street,
Lincoln, Nebraska, 68506-4142. Lincoln Benefit is a wholly owned subsidiary of
Allstate Life Insurance Company ("Allstate Life"), a stock life insurance
company incorporated under the laws of the State of Illinois. Allstate Life is a
wholly owned subsidiary of Allstate Insurance Company ("AIC"), a stock
property-liability insurance company incorporated under the laws of Illinois.
All outstanding capital stock of AIC is owned by The Allstate Corporation
("Allstate").
We are authorized to conduct life insurance and annuity business in the District
of Columbia, Guam, U.S. Virgin Islands and all states except New York. We intend
to market the Contract everywhere we conduct variable annuity business. The
Contracts offered by this prospectus are issued by us and will be funded in the
Separate Account and/or the Fixed Account.
Under our reinsurance agreements with Allstate Life, substantially all contract
related transactions are transferred to Allstate Life and substantially all of
the assets backing our reinsured liabilities are owned by Allstate Life. These
assets represent our general account and are invested and managed by Allstate
Life. Accordingly, the results of operations with respect to applications
received and contracts issued by Lincoln Benefit are not reflected in our
financial statements. The amounts reflected in our financial statements relate
only to the investment of those assets of Lincoln Benefit that are not
transferred to Allstate Life under the reinsurance agreements. While the
reinsurance agreements provide us with financial backing from Allstate Life, it
does not create a direct contractual relationship between Allstate Life and you.
Under the Company's reinsurance agreements with Allstate Life, the Company
reinsures all reserve liabilities with Allstate Life except for variable
contracts. The Company's variable contract assets and liabilities are held in
legally-segregated, unitized Separate Accounts and are retained by the Company.
However, Lincoln Benefit's economic risks and returns related to such variable
contracts are transferred to Allstate Life.
SEPARATE ACCOUNT. Lincoln Benefit Life Variable Annuity Account was originally
established in 1992, as a segregated asset account of Lincoln Benefit. The
Separate Account meets the definition of a "separate account" under the federal
securities laws and is registered with the SEC as a unit investment trust under
the Investment Company Act of 1940. The SEC does not supervise the management of
the Separate Account or Lincoln Benefit.
We own the assets of the Separate Account, but we hold them separate from our
other assets. To the extent that these assets are attributable to the Contract
Value of the Contracts offered by this prospectus, these assets are not
chargeable with liabilities arising out of any other business we may conduct.
Income, gains, and losses, whether or not realized, from assets allocated to the
Separate Account are credited to or charged against the Separate Account without
regard to our other income, gains, or losses. Our obligations arising under the
Contracts are general corporate obligations of Lincoln Benefit.
The Separate Account is divided into Subaccounts. The assets of each Subaccount
are invested in the shares of one of the Portfolios. We do not guarantee the
investment performance of the Separate Account, its Subaccounts or the
Portfolios. Values allocated to the Separate Account and the amount of Variable
Annuity payments will rise and fall with the values of shares of the Portfolios
and are also reduced by Contract charges. We may also use the Separate Account
to fund our other annuity contracts. We will account separately for each type of
annuity contract funded by the Separate Account.
We have included additional information about the Separate Account in the
Statement of Additional Information. You may obtain a copy of the Statement of
Additional Information by writing to us or calling us at 1-800-865-5237. We have
reproduced the Table of Contents of the Statement of Additional Information on
44.
STATE REGULATION OF LINCOLN BENEFIT. We are subject to the laws of Nebraska and
regulated by the Nebraska Department of Insurance. Every year we file an annual
statement with the Department of Insurance covering our operations for the
previous year and our financial condition as of the end of the year. We are
inspected periodically by the Department of Insurance to verify our contract
liabilities and reserves. Our books and records are subject to review by the
Department of Insurance at all times. We are also subject to regulation under
the insurance laws of every jurisdiction in which we operate.
ADMINISTRATION
We have primary responsibility for all administration of the Contracts and the
Separate Account. Our mailing address is P.O. Box 80469, Lincoln, Nebraska
68501-0469.
41 PROSPECTUS
We provide the following administrative services, among others: issuance of the
Contracts; maintenance of Contract Owner records; Contract Owner services;
calculation of unit values; maintenance of the Separate Account; and preparation
of Contract Owner reports.
We will send you Contract statements and transaction confirmations at least
quarterly. You should notify us promptly in writing of any address change. You
should read your statements and confirmations carefully and verify their
accuracy. You should contact us promptly if you have a question about a periodic
statement. We will investigate all complaints and make any necessary adjustments
retroactively, but you must notify us of a potential error within a reasonable
time after the date of the questioned statement. If you wait too long, we will
make the adjustment as of the date that we receive notice of the potential
error.
We will also provide you with additional periodic and other reports, information
and prospectuses as may be required by federal securities laws.
DISTRIBUTION OF CONTRACTS
The Contracts described in this prospectus are sold by registered
representatives of broker-dealers who are our licensed insurance agents, either
individually or through an incorporated insurance agency. Commissions paid to
broker-dealers may vary, but we estimate that the total commissions paid on all
Contract sales will not exceed 5.5% of all Purchase Payments (on a present value
basis). From time to time, we may offer additional sales incentives of up to 1%
of Purchase Payments and other cash bonuses to broker-dealers who maintain
certain sales volume levels. ALFS, Inc. ("ALFS") located at 3100 Sanders Road,
Northbrook, IL 60062-7154 serves as distributor of the Contracts. ALFS, an
affiliate of Lincoln Benefit, is a wholly owned subsidiary of Allstate Life
Insurance Company. ALFS is a registered broker dealer under the Securities and
Exchange Act of 1934, as amended, and is a member of the National Association of
Securities Dealers, Inc. Lincoln Benefit does not pay ALFS a commission for
distribution of the Contracts. The underwriting agreement with ALFS provides
that we will reimburse ALFS for expenses incurred in distributing the Contracts,
including liability arising out of services we provide on the Contracts.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Separate Account. Lincoln
Benefit is engaged in routine lawsuits which, in our management's judgment, are
not of material importance to their respective total assets or material with
respect to the Separate Account.
LEGAL MATTERS
All matters of Nebraska law pertaining to the Contract, including the validity
of the Contract and our right to issue the Contract under Nebraska law, have
been passed upon by William F. Emmons, Vice President, Assistant General
Counsel, and Assistant Secretary of Lincoln Benefit.
ANNUAL REPORTS AND OTHER DOCUMENTS
Lincoln Benefit's annual report on Form 10-K for the year ended December 31,
2003, is incorporated herein by reference, which means that it is legally a part
of this prospectus.
After the date of this prospectus and before we terminate the offering of the
securities under this prospectus, all documents or reports we file with the SEC
under the Exchange Act of 1934 are also incorporated herein by reference, which
means that they also legally become a part of this prospectus.
Statements in this prospectus, or in documents that we file later with the SEC
and that legally become a part of this prospectus, may change or supersede
statement in other documents that are legally part of this prospectus.
We file our Exchange Act documents and reports, including our annual and
quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR"
system using the identifying number CIK No. 0000910739. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is http:// www.sec.gov. You also can view these materials at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. For more information on the operations of SEC's Public Reference Room,
call 1-800-SEC-0330.
If you have received a copy of this prospectus, and would like a free copy of
any document incorporated herein by
42 PROSPECTUS
reference (other than exhibits not specifically incorporated by reference into
the text of such documents), please write or call us at Lincoln Benefit Life
Company, P.O. Box 80469, Lincoln, Nebraska 68501-0469 or 1-800-865-5237.
REGISTRATION STATEMENT
We have filed a registration statement with the SEC, under the Securities Act of
1933 as amended, with respect to the Contracts offered by this prospectus. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits filed as part of the registration statement. You
should refer to the registration statement and the exhibits for further
information concerning the Separate Account, Lincoln Benefit, and the Contracts.
The descriptions in this prospectus of the Contracts and other legal instruments
are summaries. You should refer to those instruments as filed for the precise
terms of those instruments. You may inspect and obtain copies of the
registration statement as described on the cover page of this prospectus.
43 PROSPECTUS
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
THE CONTRACT
Annuity Payments
Initial Monthly Annuity Payment
Subsequent Monthly Payments
Transfers After Annuity Date
Annuity Unit Value
PAGE
Illustrative Example of Annuity Unit Value Calculation
Illustrative Example of Variable Annuity Payments
EXPERTS
FINANCIAL STATEMENTS
44 PROSPECTUS
APPENDIX A
ACCUMULATION UNIT VALUES /(1)/
BASIC POLICY
Year ending December 31,
---------------------------------------------------
FUND 1999 2000 2001 2002 2003
- -----------------------------------------------------------------------------
AIM V.I. Basic Value
Fund (6)
Accumulation Unit Value
Beginning -- -- -- -- --
Accumulation Unit Value
Ending -- -- -- -- --
Number of Units
Outstanding at End of -- -- -- -- --
Year
Alger American Growth
Portfolio (5)
Accumulation Unit Value
Beginning -- -- -- -- $ 10.00
Accumulation Unit Value
Ending -- -- -- -- $ 12.358
Number of Units
Outstanding at End of -- -- -- -- 54,381
Year
Fidelity VIP Growth
Portfolio (5)
Accumulation Unit Value
Beginning -- -- -- -- $ 10.00
Accumulation Unit Value
Ending -- -- -- -- $ 12.458
Number of Units
Outstanding at End of -- -- -- -- 111,685
Year
Fidelity VIP Investment
Grade Bond (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 10.721
Accumulation Unit Value
Ending -- -- -- $ 10.721 $ 11.094
Number of Units
Outstanding at End of -- -- -- 178,620 645,218
Year
Fidelity VIP Overseas
(4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.724
Accumulation Unit Value
Ending -- -- -- $ 7.724 $ 10.895
Number of Units
Outstanding at End of -- -- -- 3,650 40,658
Year
Goldman Sachs VIT
International Equity (2)
Accumulation Unit Value
Beginning $ 10.00 $ 12.29 $ 10.52 $ 8.07 $ 6.495
Accumulation Unit Value
Ending $ 12.29 $ 10.52 $ 8.07 $ 6.495 $ 8.678
Number of Units
Outstanding at End of 22,152 159,917 114,948 254,616 287,318
Year
Goldman Sachs VIT CORE
Small Cap Equity (2)
Accumulation Unit Value
Beginning $ 10.00 $ 12.19 $ 12.23 $ 12.61 $ 10.573
Accumulation Unit Value
Ending $ 12.19 $ 12.23 $ 12.61 $ 10.573 $ 15.223
Number of Units
Outstanding at End of 32,499 94,926 230,893 127,061 199,375
Year
Janus Aspen Series
Capital Appreciation (7)
Accumulation Unit Value
Beginning -- -- -- -- --
Accumulation Unit Value
Ending -- -- -- -- --
Number of Units
Outstanding at End of -- -- -- -- --
Year
Janus Aspen Series
Foreign Stock (4) (8)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.755
Accumulation Unit Value
Ending -- -- -- $ 7.755 $ 10.200
Number of Units
Outstanding at End of -- -- -- 10,251 32,987
Year
Janus Aspen Series
Worldwide Growth (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.806
Accumulation Unit Value
Ending -- -- -- $ 7.806 $ 9.520
Number of Units
Outstanding at End of -- -- -- 13,094 51,204
Year
JPMorgan Small Company
(2)
Accumulation Unit Value
Beginning $ 10.00 $ 14.01 $ 12.25 $ 11.11 $ 8.582
Accumulation Unit Value
Ending $ 14.01 $ 12.25 $ 11.11 $ 8.582 $ 11.508
Number of Units
Outstanding at End of 42,567 135,018 148,118 229,162 235,165
Year
Lazard Emerging Markets
(2)
Accumulation Unit Value
Beginning $ 10.00 $ 13.27 $ 9.41 $ 8.81 $ 8.555
Accumulation Unit Value
Ending $ 13.27 $ 9.41 $ 8.81 $ 8.555 $ 12.903
Number of Units
Outstanding at End of 11,803 34,832 51,868 78,720 112,391
Year
Lazard International
Equity (2)
Accumulation Unit Value
Beginning $ 10.00 $ 11.25 $ 10.02 $ 7.50 $ 6.607
Accumulation Unit Value
Ending $ 11.25 $ 10.02 $ 7.50 $ 6.607 $ 8.374
Number of Units
Outstanding at End of 27,207 79,805 118,331 162,113 148,319
Year
LSA Aggressive Growth
(4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.299
Accumulation Unit Value
Ending -- -- -- $ 7.299 $ 9.982
Number of Units
Outstanding at End of -- -- -- 10,154 73,878
Year
LSA Balanced (2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.40 $ 11.17 $ 11.26 $ 9.073
Accumulation Unit Value
Ending $ 10.40 $ 11.17 $ 11.26 $ 9.073 $ 11.561
Number of Units
Outstanding at End of 386 124,389 266,745 514,929 685,220
Year
LSA Basic Value (6)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.638
Accumulation Unit Value
Ending -- -- -- $ 7.638 $ 10.049
Number of Units
Outstanding at End of -- -- -- 63,427 353,241
Year
LSA Blue Chip (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.975
Accumulation Unit Value
Ending -- -- -- $ 7.975 $ 9.848
Number of Units
Outstanding at End of -- -- -- 24,337 260,606
Year
LSA Capital Appreciation
(4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 8.163
Accumulation Unit Value
Ending -- -- -- $ 8.163 $ 10.491
Number of Units
Outstanding at End of -- -- -- 14,015 73,575
Year
LSA Capital Growth (2)
Accumulation Unit Value
Beginning $ 10.00 $ 12.22 $ 11.03 $ 9.33 $ 6.910
Accumulation Unit Value
Ending $ 12.22 $ 11.03 $ 9.33 $ 6.910 $ 8.472
Number of Units
Outstanding at End of 3,394 142,502 226,920 226,041 330,980
Year
LSA Diversified Mid Cap
(4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.783
Accumulation Unit Value
Ending -- -- -- $ 7.783 $ 10.192
Number of Units
Outstanding at End of -- -- -- 26,268 172,288
Year
LSA Emerging Growth
Equity (2)
Accumulation Unit Value
Beginning $ 10.00 $ 17.48 $ 12.04 $ 9.75 $ 5.589
Accumulation Unit Value
Ending $ 17.48 $ 12.04 $ 9.75 $ 5.589 $ 8.098
Number of Units
Outstanding at End of 16,191 131,445 150,128 161,610 207,970
Year
LSA Equity Growth (2)
Accumulation Unit Value
Beginning $ 10.00 $ 12.49 $ 10.86 $ 9.05 $ 6.224
Accumulation Unit Value
Ending $ 12.49 $ 10.86 $ 9.05 $ 6.224 $ 7.627
Number of Units
Outstanding at End of 34,228 160,257 240,525 85,390 619,195
Year
LSA Mid Cap Value (10)
Accumulation Unit Value
Beginning $ 8.437
Accumulation Unit Value
Ending $ 11.629
Number of Units
Outstanding at End of 165,206
Year
LSA Value Equity (2)
Accumulation Unit Value
Beginning $ 10.00 $ 11.03 $ 12.55 $ 11.77 $ 9.035
Accumulation Unit Value
Ending $ 11.03 $ 12.55 $ 11.77 $ 9.035 $ 11.622
Number of Units
Outstanding at End of 32 122,654 235,535 428,181 484,234
Year
MFS New Discovery (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.473
Accumulation Unit Value
Ending -- -- -- $ 7.473 $ 9.833
Number of Units
Outstanding at End of -- -- -- 20,998 103,156
Year
MFS Utilities (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 8.370
Accumulation Unit Value
Ending -- -- -- $ 8.370 $ 11.189
Number of Units
Outstanding at End of -- -- -- 13,969 71,175
Year
Oppenheimer Main Street
Small Cap (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 7.839
Accumulation Unit Value
Ending -- -- -- $ 7.839 $ 11.151
Number of Units
Outstanding at End of -- -- -- 28,379 251,859
Year
PAVIT OpCap Balanced (6)
Accumulation Unit Value
Beginning -- -- -- -- --
Accumulation Unit Value
Ending -- -- -- -- --
Number of Units
Outstanding at End of -- -- -- -- --
Year
PAVIT OpCap Equity (2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.62 $ 11.51 $ 10.56 $ 8.180
Accumulation Unit Value
Ending $ 10.62 $ 11.51 $ 10.56 $ 8.180 $ 10.371
Number of Units
Outstanding at End of 0 58,987 110,288 195,029 295,226
Year
PAVIT OpCap Small Cap
(2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.65 $ 15.15 $ 16.18 $ 12.502
Accumulation Unit Value
Ending $ 10.65 $ 15.15 $ 16.18 $ 12.502 $ 17.586
Number of Units
Outstanding at End of 0 49,685 75,521 140,778 232,549
Year
PAVIT PEA Science and
Technology (3)
Accumulation Unit Value
Beginning -- -- $ 10.00 $ 3.36 $ 1.803
Accumulation Unit Value
Ending -- -- $ 3.36 $ 1.803 $ 2.903
Number of Units
Outstanding at End of -- -- 59,395 160,966 1,167,164
Year
PIMCO VIT Foreign Bond
(U.S. Dollar-Hedged) (2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.29 $ 10.99 $ 11.66 $ 12.443
Accumulation Unit Value
Ending $ 10.29 $ 10.99 $ 11.66 $ 12.443 $ 12.547
Number of Units
Outstanding at End of 17,747 30,068 49,293 93,732 218,507
Year
PIMCO VIT Money Market
(2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.07 $ 10.54 $ 10.79 $ 10.786
Accumulation Unit Value
Ending $ 10.07 $ 10.54 $ 10.79 $ 10.786 $ 10.713
Number of Units
Outstanding at End of 45,777 307,495 918,122 1,311,411 1,069,740
Year
PIMCO VIT StocksPLUS
Growth and Income (4)
Accumulation Unit Value
Beginning $ 10.00 $ 11.64 $ 10.39 $ 9.07 $ 7.139
Accumulation Unit Value
Ending $ 11.64 $ 10.39 $ 9.07 $ 7.139 $ 9.179
Number of Units
Outstanding at End of 21 97,992 171,296 335,810 444,281
Year
PIMCO VIT Total Return
Bond (2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.13 $ 11.01 $ 11.77 $ 12.656
Accumulation Unit Value
Ending $ 10.13 $ 11.01 $ 11.77 $ 12.656 $ 13.109
Number of Units
Outstanding at End of 54,509 181,857 356,786 916,788 1,387,841
Year
Putnam VT High Yield (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 9.568
Accumulation Unit Value
Ending -- -- -- $ 9.568 $ 11.939
Number of Units
Outstanding at End of -- -- -- 14,843 151,285
Year
Rydex VT OTC (3)
Accumulation Unit Value
Beginning -- -- $ 10.00 $ 5.75 $ 3.470
Accumulation Unit Value
Ending -- -- $ 5.75 $ 3.470 $ 4.976
Number of Units
Outstanding at End of -- -- 7,617 73,139 169,077
Year
Salomon Brothers
Variable All Cap (2)
Accumulation Unit Value
Beginning $ 10.00 $ 11.54 $ 13.45 $ 13.51 $ 9.987
Accumulation Unit Value
Ending $ 11.54 $ 13.45 $ 13.51 $ 9.987 $ 13.693
Number of Units
Outstanding at End of 49,256 141,167 260,699 321,536 374,930
Year
Salomon Brothers
Variable Investors (6)
Accumulation Unit Value
Beginning -- -- -- -- --
Accumulation Unit Value
Ending -- -- -- -- --
Number of Units
Outstanding at End of -- -- -- -- --
Year
Van Kampen UIF Equity
Growth (2) (9)
Accumulation Unit Value
Beginning -- -- -- -- --
Accumulation Unit Value
Ending -- -- -- -- --
Number of Units
Outstanding at End of -- -- -- -- --
Year
Van Kampen UIF High
Yield (2)
Accumulation Unit Value
Beginning $ 10.00 $ 10.37 $ 9.14 $ 8.61 $ 7.872
Accumulation Unit Value
Ending $ 10.37 $ 9.14 $ 8.61 $ 7.872 $ 9.759
Number of Units
Outstanding at End of 17,868 68,958 94,964 148,434 259,819
Year
Van Kampen UIF. Mid Cap
Growth (2)
Accumulation Unit Value
Beginning $ 10.00 $ 13.80 $ 12.61 $ 8.79 $ 5.967
Accumulation Unit Value
Ending $ 13.80 $ 12.61 $ 8.79 $ 5.967 $ 8.341
Number of Units
Outstanding at End of 409 170,775 213,956 302,409 426,417
Year
Van Kampen UIF U.S. Mid
Cap Value (10)
Accumulation Unit Value
Beginning $ 10.00 $ 12.06 $ 13.17 $ 12.57 $ 8.924
Accumulation Unit Value
Ending $ 12.06 $ 13.17 $ 12.57 $ 8.924 $ 12.453
Number of Units
Outstanding at End of 0 85,226 189,874 301,924 324,553
Year
Van Kampen LIT
Aggressive Growth (11)
Accumulation Unit Value
Beginning -- -- -- -- --
Accumulation Unit Value
Ending -- -- -- -- --
Number of Units
Outstanding at End of -- -- -- -- --
Year
Van Kampen LIT Growth
and Income (4)
Accumulation Unit Value
Beginning -- -- -- $ 10.00 $ 8.155
Accumulation Unit Value
Ending -- -- -- $ 8.155 $ 10.267
Number of Units
Outstanding at End of -- -- -- 58,636 266,307
Year
(1) Accumulation Unit Value: unit of measure used to calculate the value of a
Contract Owner's interest in a Subaccount for any Valuation Period. An
Accumulation Unit Value does not reflect deduction of certain charges under
the Contract that are deducted from your Contract Value, such as the
Administrative Expense Charge. The beginning value reflects the
Accumulation Unit Value as of October 18, 1999, the date Lincoln Benefit
started to offer the Contract.
(2) First offered 10/18/1999.
(3) First offered 1/17/2001.
(4) First offered 5/1/2002.
(5) First offered 5/1/03.(6) Effective 4/30/04, the LSA Balance Fund, LSA Basic
Value Fund and LSA Value Equity Fund were merged into the PAVIT OpCap
Balanced Portfolio, AIM V.I. Basic Value Fund - Series I and Salomon
Brothers Variable Investors Fund - Class I, respectively. Accordingly, on
4/30/04, we transferred the value of the LSA Balanced Variable Sub-Account
and the LSA Value Equity Variable Sub-Account to the PAVIT OpCap Balanced
Variable Sub-Account, AIM V.I. Basic Value Variable Sub-Account and the
Salomon Brothers Variable Investors Variable Sub-Account, respectively.
(6) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value
Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I.
Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund -
Class I, respectively. Accordingly, on 4/30/04, we transferred the value of
the LSA Balanced Variable Sub-Account and the LSA Value Equity Variable
Sub-Account to the PAVIT OpCap Balanced Variable Sub-Account, AIM V.I.
Basic Value Variable Sub-Account and the Salomon Brothers Variable
Investors Variable Sub-Account, respectively.
(7) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the
Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares.
Accordingly, on 4/30/04, we transferred the value of the LSA Capital
Appreciation Variable Sub-Account to the Janus Aspen Serioed Capital
Appreciation Variable Sub-Account.
(8) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service
Shares changed its name to the Janus Aspen Foreign Stock Portfolio -
Service Shares. We have made a corresponding change in the name of the
Variable Sub-Account that invests in this Portfolio.
(9) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA
Capital Growth Fund were merged into the Van Kampen UIF Equity Growth
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Blue Chip Variable Sub-Account, LSA Equity Growth Variable
Sub-Account and LSA Capital Growth Variable Sub-Account to the Van Kampen
UIF Equity Growth Variable Sub-Account.
(10) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap
Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Diversified Mid-Cap Growth Variable Sub-Account and the LSA MidCap
Value Variable Sub-Account to the Van Kampen UIF U.S. Mid Cap Value
Variable Sub-Account.
(11) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth
Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class
II. Accordingly, on 4/30/04, we transferred the value of the LSA Aggressive
Growth Variable Sub-Account and the LSA Emerging Growth Variable
Sub-Account to the Van Kampen LIT Aggressive Growth Variable Sub-Account.
A brief explanation of how performance of the Subaccounts is calculated may be
found in the Statement of Additional Information.
48 PROSPECTUS
ACCUMULATION UNIT VALUES
BASIC POLICY PLUS ENHANCED DEATH BENEFIT RIDER
Year ending December 31,
---------------------------------------------------
FUND 1999 2000 2001 2002 2003
- ------------------------------------------------------ ------------------------------------------
AIM Basic Value (6)
Accumulation Unit Value Beginning -- -- -- -- --
Accumulation Unit Value Ending -- -- -- -- --
Number of Units Outstanding at End of Year -- -- -- -- --
Alger American Growth (5)
Accumulation Unit Value Beginning -- -- -- -- $ 10.00
Accumulation Unit Value Ending -- -- -- -- $ 12.341
Number of Units Outstanding at End of Year -- -- -- -- 30,627
Fidelity VIP Growth Portfolio (5)
Accumulation Unit Value Beginning -- -- -- -- $ 10.00
Accumulation Unit Value Ending -- -- -- -- $ 12.441
Number of Units Outstanding at End of Year -- -- -- -- 71,284
Fidelity VIP Investment Grade Bond (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 10.706
Accumulation Unit Value Ending -- -- -- $ 10.706 $ 11.057
Number of Units Outstanding at End of Year -- -- -- 84,421 275,877
Fidelity VIP Overseas (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.714
Accumulation Unit Value Ending -- -- -- $ 7.714 $ 10.858
Number of Units Outstanding at End of Year -- -- -- 8,812 22,038
Goldman Sachs VIT International Equity (2)
Accumulation Unit Value Beginning $ 10.00 $ 12.29 $ 10.50 $ 8.03 $ 6.453
Accumulation Unit Value Ending $ 12.29 $ 10.50 $ 8.03 $ 6.453 $ 8.605
Number of Units Outstanding at End of Year 5,621 78,931 112,245 114,893 135,685
Goldman Sachs VIT CORE Small Cap Equity (2)
Accumulation Unit Value Beginning $ 10.00 $ 12.19 $ 12.20 $ 12.55 $ 10.505
Accumulation Unit Value Ending $ 12.19 $ 12.20 $ 12.55 $ 10.505 $ 15.095
Number of Units Outstanding at End of Year 3,604 24,178 35,125 59,592 108,325
Janus Aspen Series Capital Appreciation (7)
Accumulation Unit Value Beginning -- -- -- -- --
Accumulation Unit Value Ending -- -- -- -- --
Number of Units Outstanding at End of Year -- -- -- -- --
Janus Aspen Series Foreign Stock (4) (8)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.744
Accumulation Unit Value Ending -- -- -- $ 7.744 $ 10.166
Number of Units Outstanding at End of Year -- -- -- 6,035 20,593
Janus Aspen Series Worldwide Growth (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.795
Accumulation Unit Value Ending -- -- -- $ 7.795 $ 9.488
Number of Units Outstanding at End of Year -- -- -- 13,160 39,364
JPMorgan Small Company (2)
Accumulation Unit Value Beginning $ 10.00 $ 14.00 $ 12.22 $ 11.06 $ 8.527
Accumulation Unit Value Ending $ 14.00 $ 12.22 $ 11.06 $ 8.527 $ 11.412
Number of Units Outstanding at End of Year 0 53,597 58,437 83,459 115,268
Lazard Emerging Markets (2)
Accumulation Unit Value Beginning $ 10.00 $ 13.26 $ 9.39 $ 8.77 $ 8.501
Accumulation Unit Value Ending $ 13.26 $ 9.39 $ 8.77 $ 8.501 $ 12.795
Number of Units Outstanding at End of Year 2,809 25,988 32,552 51,013 81,410
Lazard International Equity (2)
Accumulation Unit Value Beginning $ 10.00 $ 11.24 $ 10.00 $ 7.47 $ 6.565
Accumulation Unit Value Ending $ 11.24 $ 10.00 $ 7.47 $ 6.565 $ 8.304
Number of Units Outstanding at End of Year 4,064 50,850 71,754 73,992 82,929
LSA Aggressive Growth (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.289
Accumulation Unit Value Ending -- -- -- $ 7.289 $ 9.949
Number of Units Outstanding at End of Year -- -- -- 5,753 41,947
LSA Balanced (2)
Accumulation Unit Value Beginning $ 10.00 $ 10.40 $ 11.14 $ 11.21 $ 9.015
Accumulation Unit Value Ending $ 10.40 $ 11.14 $ 11.21 $ 9.015 $ 11.464
Number of Units Outstanding at End of Year 7,126 69,393 144,623 221,913 419,279
LSA Basic Value (6)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.627
Accumulation Unit Value Ending -- -- -- $ 7.627 $ 10.015
Number of Units Outstanding at End of Year -- -- -- 30,010 144,113
LSA Blue Chip (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.964
Accumulation Unit Value Ending -- -- -- $ 7.964 $ 9.816
Number of Units Outstanding at End of Year -- -- -- 9,727 122,223
LSA Capital Appreciation (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 8.152
Accumulation Unit Value Ending -- -- -- $ 8.152 $ 10.456
Number of Units Outstanding at End of Year -- -- -- 4,462 52,459
LSA Diversified Mid Cap (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.772
Accumulation Unit Value Ending -- -- -- $ 7.772 $ 10.158
Number of Units Outstanding at End of Year -- -- -- 7,362 76,253
LSA Emerging Growth Equity (2)
Accumulation Unit Value Beginning $ 10.00 $ 17.47 $ 12.01 $ 9.71 $ 5.553
Accumulation Unit Value Ending $ 17.47 $ 12.01 $ 9.71 $ 5.553 $ 8.030
Number of Units Outstanding at End of Year 5,259 86,819 94,558 98,810 110,592
LSA Equity Growth (2)
Accumulation Unit Value Beginning $ 10.00 $ 12.48 $ 10.83 $ 9.01 $ 6.224
Accumulation Unit Value Ending $ 12.48 $ 10.83 $ 9.01 $ 6.224 $ 7.563
Number of Units Outstanding at End of Year 8,359 54,291 90,631 85,390 $243,908
LSA Capital Growth(2)
Accumulation Unit Value Beginning $ 10.00 $ 12.21 $ 11.00 $ 9.28 $ 6.910
Accumulation Unit Value Ending $ 12.21 $ 11.00 $ 9.28 $ 6.910 $ 8.401
Number of Units Outstanding at End of Year 24,902 123,406 172,729 226,041 268,165
LSA Mid Cap Value (10)
Accumulation Unit Value Beginning $ 8.246
Accumulation Unit Value Ending $ 11.591
Number of Units Outstanding at End of Year 107,129
LSA Value Equity (2)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 8.978
Accumulation Unit Value Ending -- -- -- $ 8.426 $ 11.525
Number of Units Outstanding at End of Year -- -- -- 25,180 234,745
MFS New Discovery (4)
Accumulation Unit Value Beginning $ 10.00 $ 11.03 $ 12.52 $ 11.72 $ 8.978
Accumulation Unit Value Ending $ 11.03 $ 12.52 $ 11.72 $ 8.978 $ 9.800
Number of Units Outstanding at End of Year 17,183 62,043 130,669 179,820 46,541
MFS Utilities (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.463
Accumulation Unit Value Ending -- -- -- $ 7.463 $ 11.152
Number of Units Outstanding at End of Year -- -- -- 10,193 37,809
PAVIT OpCap Balanced (2) (6)
Accumulation Unit Value Beginning -- -- -- -- --
Accumulation Unit Value Ending -- -- -- -- --
Number of Units Outstanding at End of Year -- -- -- -- --
PAVIT OpCap Equity (2)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 8.359
Accumulation Unit Value Ending -- -- -- $ 8.359 $ 10.284
Number of Units Outstanding at End of Year -- -- -- 6,880 158,681
PAVIT PEA Science and Technology (3)
Accumulation Unit Value Beginning $ 10.00 $ 10.62 $ 11.49 $ 10.51 $ 8.128
Accumulation Unit Value Ending $ 10.62 $ 11.49 $ 10.51 $ 8.128 $ 10.284
Number of Units Outstanding at End of Year 5,784 61,655 97,863 115,950 158,681
PAVIT OpCap Small Cap (2)
Accumulation Unit Value Beginning -- -- $ 10.00 $ 3.62 $ 1.796
Accumulation Unit Value Ending -- -- $ 3.62 $ 1.796 $ 17.439
Number of Units Outstanding at End of Year -- -- 14,533 63,153 137,092
Oppenheimer Main Street Small Cap (4)
Accumulation Unit Value Beginning $ 10.00 $ 10.65 $ 15.11 $ 16.11 $ 12.422
Accumulation Unit Value Ending $ 10.65 $ 15.11 $ 16.11 $ 12.422 $ 11.113
Number of Units Outstanding at End of Year 0 16,703 43,783 74,972 108,430
PIMCO VIT Foreign Bond (U.S. Dollar-Hedged)
(2)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 7.829
Accumulation Unit Value Ending -- -- -- $ 7.829
Number of Units Outstanding at End of Year -- -- -- 27,890
PIMCO VIT Money Market (2)
Accumulation Unit Value Beginning $ 10.00 $ 10.28 $ 10.97 $ 11.61 $ 12.364
Accumulation Unit Value Ending $ 10.28 $ 10.97 $ 11.61 $ 12.364
Number of Units Outstanding at End of Year 0 1,231 3,605 27,152
PIMCO VIT StocksPLUS Growth and Income (2)
Accumulation Unit Value Beginning $ 10.00 $ 10.07 $ 10.51 $ 10.74 $ 10.717
Accumulation Unit Value Ending $ 10.07 $ 10.51 $ 10.74 $ 10.717
Number of Units Outstanding at End of Year 10,350 104,093 239,107 467,548
PIMCO VIT Total Return Bond (2)
Accumulation Unit Value Beginning $ 10.00 $ 11.64 $ 10.37 $ 9.03 $ 7.094
Accumulation Unit Value Ending $ 11.64 $ 10.37 $ 9.03 $ 7.094
Number of Units Outstanding at End of Year 12,776 82,128 112,333 161,698
Putnam VT High Yield (4)
Accumulation Unit Value Beginning $ 10.00 $ 10.13 $ 10.98 $ 11.71 $ 12.575
Accumulation Unit Value Ending $ 10.13 $ 10.98 $ 11.71 $ 12.575
Number of Units Outstanding at End of Year 224 57,774 148,500 491,013
Rydex VT OTC (3)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 9.555
Accumulation Unit Value Ending -- -- -- $ 9.555
Number of Units Outstanding at End of Year -- -- -- 6,438
Salomon Brothers Variable All Cap (2)
Accumulation Unit Value Beginning -- -- $ 10.00 $ 5.74 3.457
Accumulation Unit Value Ending -- -- $ 5.74 3.457
Number of Units Outstanding at End of Year -- -- 14,044 83,805
Salomon Brothers Variable Investors (6)
Accumulation Unit Value Beginning -- -- -- -- --
Accumulation Unit Value Ending -- -- -- -- --
Number of Units Outstanding at End of Year -- -- -- -- --
Van Kampen UIF Equity Growth (2) (9)
Accumulation Unit Value Beginning -- -- -- -- --
Accumulation Unit Value Ending -- -- -- -- --
Number of Units Outstanding at End of Year -- -- -- -- --
Van Kampen UIF High Yield (2)
Accumulation Unit Value Beginning $ 10.00 $ 11.53 $ 13.42 $ 13.46 $ 7.822
Accumulation Unit Value Ending $ 11.53 $ 13.42 $ 13.46 $ 7.822
Number of Units Outstanding at End of Year 0 64,958 121,931 60,785
Van Kampen UIF Mid Cap Growth (2)
Accumulation Unit Value Beginning $ 10.00 $ 13.80 $ 12.58 $ 8.75 $ 5.929
Accumulation Unit Value Ending $ 13.80 $ 12.58 $ 8.75 $ 5.929
Number of Units Outstanding at End of Year 6,216 87,781 123,258 135,098
Van Kampen UIF U.S. Mid Cap Value (2) (10)
Accumulation Unit Value Beginning $ 10.00 $ 12.05 $ 13.14 $ 12.52 $ 8.867
Accumulation Unit Value Ending $ 12.05 $ 13.14 $ 12.52 $ 8.867
Number of Units Outstanding at End of Year 6,021 44,148 95,312 151,383
Van Kampen LIT Aggressive Growth (11)
Accumulation Unit Value Beginning -- -- -- -- --
Accumulation Unit Value Ending -- -- -- -- --
Number of Units Outstanding at End of Year -- -- -- -- --
Van Kampen LIT Growth and Income (4)
Accumulation Unit Value Beginning -- -- -- $ 10.00 $ 8.144
Accumulation Unit Value Ending -- -- -- $ 8.144
Number of Units Outstanding at End of Year -- -- -- 26,840
(1) Accumulation Unit Value: unit of measure used to calculate the value of a
Contract Owner's interest in a Subaccount for any Valuation Period. An
Accumulation Unit Value does not reflect deduction of certain charges under
the Contract that are deducted from your Contract Value, such as the
Administrative Expense Charge.
(2) First offered 10/18/1999.
(3) First offered 1/17/2001.
(4) First offered 5/1/2002.
(5) First offered 5/1/03.(6) Effective 4/30/04, the LSA Balance Fund, LSA Basic
Value Fund and LSA Value Equity Fund were merged into the PAVIT OpCap
Balanced Portfolio, AIM V.I. Basic Value Fund - Series I and Salomon
Brothers Variable Investors Fund - Class I, respectively. Accordingly, on
4/30/04, we transferred the value of the LSA Balanced Variable Sub-Account
and the LSA Value Equity Variable Sub-Account to the PAVIT OpCap Balanced
Variable Sub-Account, AIM V.I. Basic Value Variable Sub-Account and the
Salomon Brothers Variable Investors Variable Sub-Account, respectively.
(6) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value
Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I.
Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund -
Class I, respectively. Accordingly, on 4/30/04, we transferred the value of
the LSA Balanced Variable Sub-Account and the LSA Value Equity Variable
Sub-Account to the PAVIT OpCap Balanced Variable Sub-Account, AIM V.I.
Basic Value Variable Sub-Account and the Salomon Brothers Variable
Investors Variable Sub-Account, respectively.
(7) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the
Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares.
Accordingly, on 4/30/04, we transferred the value of the LSA Capital
Appreciation Variable Sub-Account to the Janus Aspen Serioed Capital
Appreciation Variable Sub-Account.
(8) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service
Shares changed its name to the Janus Aspen Foreign Stock Portfolio -
Service Shares. We have made a corresponding change in the name of the
Variable Sub-Account that invests in this Portfolio.
(9) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA
Capital Growth Fund were merged into the Van Kampen UIF Equity Growth
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Blue Chip Variable Sub-Account, LSA Equity Growth Variable
Sub-Account and LSA Capital Growth Variable Sub-Account to the Van Kampen
UIF Equity Growth Variable Sub-Account.
(10) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap
Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value
Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of
the LSA Diversified Mid-Cap Growth Variable Sub-Account and the LSA MidCap
Value Variable Sub-Account to the Van Kampen UIF U.S. Mid Cap Value
Variable Sub-Account.
(11) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth
Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class
II. Accordingly, on 4/30/04, we transferred the value of the LSA Aggressive
Growth Variable Sub-Account and the LSA Emerging Growth Variable
Sub-Account to the Van Kampen LIT Aggressive Growth Variable Sub-Account.
A brief explanation of how performance of the Subaccounts is calculated may be
found in the Statement of Additional Information.
52 PROSPECTUS
APPENDIX B
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $ 40,000.00
Credit Enhancement: 1,600.00
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5% Annual Effective Rate
5-year Treasury Rate at Time of Purchase
Payment: 6%
The following examples illustrate how the Market Value Adjustment and the
Withdrawal Charge may affect the values of a Contract upon a withdrawal. The 5%
assumed Guaranteed Interest Rate is the rate required to be used in the "Summary
of Expenses." In these examples, the withdrawal occurs one year after (in the
second Contract Year) the Issue Date. The Market Value Adjustment operates in a
similar manner for transfers, except that there is no free amount for transfers.
No Withdrawal Charge applies to transfers.
Assuming that the entire $40,000.00 Purchase Payment and $1,600.00 Credit
Enhancement are allocated to the Guaranteed Maturity Fixed Account for the
Guarantee Period specified above, at the end of the five-year Guarantee Period
the Contract Value would be $53,093.31. After one year, when the withdrawals
occur in these examples, the Contract Value would be $43,680.00. We have assumed
that no prior partial withdrawals or transfers have occurred.
The Market Value Adjustment and the Withdrawal Charge only apply to the portion
of a withdrawal that is greater than the Free Withdrawal Amount. Accordingly,
the first step is to calculate the Free Withdrawal Amount.
The Free Withdrawal Amount is equal to:
(a) the greater of:
.. earnings not previously withdrawn; or
.. 15% of your total Purchase Payments in the most recent eight years; plus
(b) an amount equal to your total Purchase Payments made more than eight years
ago, to the extent not previously withdrawn.
Here, (a) equals $6,000.00, because 15% of the total Purchase Payments in the
most recent eight years ($6,000.00 = 15% x $40,000.00) is greater than the
earnings not previously withdrawn ($3,680.00). (B) equals $0, because all of the
Purchase Payments were made less than eight years age. Accordingly, the Free
Withdrawal Amount is $6,000.00.
The formula that we use to determine the amount of the Market Value Adjustment
is:
..9 x (I - J) x N,
where: I = the Treasury Rate for a maturity equal to the relevant Guarantee
Period for the week preceding the beginning of the Guarantee Period;
J = the Treasury Rate for a maturity equal to the relevant Guarantee Period for
the week preceding our receipt of your withdrawal request, death benefit
request, transfer request, or annuity option request; and
N = the number of whole and partial years from the date we receive your request
until the end of the relevant Guarantee Period.
We will base the Market Value Adjustment on the current Treasury Rate for a
maturity corresponding in length to the relevant Guarantee Period. These
examples also show the Withdrawal Charge (if any), which would be calculated
separately from the Market Value Adjustment.
EXAMPLE OF A DOWNWARD MARKET VALUE ADJUSTMENT
A downward Market Value Adjustment results from a full or partial withdrawal
that occurs when interest rates have increased. Assume interest rates have
increased one year after the Purchase Payment, such that the five-year Treasury
Rate is now 6.5%. Upon a withdrawal, the market value adjustment factor would
be:
..9 x (.06 - .065) x 4 = -.0180
The Market Value Adjustment is a reduction of $678.24 from the amount withdrawn:
$-678.24 = -.0180 x ($43,680 - $6,000.00)
A Withdrawal Charge of 7% (assuming the Withdrawal occurs at the start of the
second Contract year) would be assessed against the Purchase Payments withdrawn
that are less than eight years old and are not eligible for free withdrawal.
Under the Contract, earnings are deemed to be withdrawn before Purchase
Payments. Accordingly, in this example, the amount of the Purchase Payment
eligible for free withdrawal would equal the Free Withdrawal Amount less the
interest credited or $2,320.00 ($6,000.00 - $3,680.00).
Therefore, the Withdrawal Charge would be:
$2,637.60 = 7% x (40,000.00 - $2,320.00)
As a result, the net amount payable to you would be:
$40,364.16 = $43,680.00 - $678.24 - $2,637.60
EXAMPLE OF AN UPWARD MARKET VALUE ADJUSTMENT
An upward Market Value Adjustment results from a withdrawal that occurs when
interest rates have decreased. Assume interest rates have decreased one year
53 PROSPECTUS
after the Purchase Payment, such that the five-year Treasury Rate is now 5.5%.
Upon a withdrawal, the market value adjustment factor would be:
..9 x (.06 - .055) x 4 = .0180
The Market Value Adjustment would increase the amount withdrawn by $648.00, as
follows:
$678.24 = .0180 x ($43,680 - $6,000.00)
As above, in this example, the amount of the Purchase Payment eligible for free
withdrawal would equal the Free Withdrawal Amount less the interest credited or
$2,320.00 ($6,000.00 - $3,680.00). Therefore, the Withdrawal Charge would be:
$2,637.60 = 7% x ($40,000.00 - $2,320.00)
As a result, the net amount payable to you would be:
$41,720.64 = $43,680.00 + $678.24 - $2,637.60
EXAMPLE OF A PARTIAL WITHDRAWAL
If you request a partial withdrawal from a Guarantee Period, we can either (1)
withdraw the specified amount of Contract Value and pay you that amount as
adjusted by any applicable Market Value Adjustment or (2) pay you the amount
requested, and subtract an amount from your Contract Value that equals the
requested amount after application of the Market Value Adjustment and Withdrawal
Charge. Unless you instruct us otherwise, when you request a partial withdrawal
we will assume that you wish to receive the amount requested. We will make the
necessary calculations and on your request provide you with a statement showing
our calculations.
For example, if in the first example you wished to receive $20,000.00 as a
partial withdrawal, the Market Value Adjustment and Withdrawal Charge would be
calculated as follows:
let: AW = the total amount to be withdrawn from your Contract Value
MVA = Market Value Adjustment
WC = Withdrawal Charge
AW' = amount subject to Market Value Adjustment and Withdrawal Charge
Then AW - $20,000.00 = WC - MVA
Since neither the Market Value Adjustment nor the Withdrawal Charge apply to the
free withdrawal amount, we can solve directly for the amount subject to the
Market Value Adjustment and the Withdrawal Charge (i.e., AW'), which equals AW ?
$6,000.00. Then, AW = AW' + $6,000, and AW' + $6,000.00 - $20,000.00 = WC - MVA.
MVA = -.018 x AW'
WC = .07 x AW'
WC - MVA = .088AW'
AW' - $14,000.00 = .088AW'
AW' = $14,000.00 / (1 - .088) = $15,350.88
MVA = -.018 x $15,350.88 = - $276.32
WC = .07 x $15,350.88 = $1,074.56
AW = Total amount withdrawn = $15,350.88 + $6,000.00 = $21,350.88
You receive $20,000.00; the total amount subtracted from your contract is
$21,350.88; the Market Value Adjustment is $276.32; and the Withdrawal Charge is
$1,074.56. Your remaining Contract Value is $20,649.12.
If, however, in the same example, you wished to withdraw $20,000.00 from your
Contract Value and receive the adjusted amount, the calculations would be as
follows:
By definition, AW = total amount withdrawn from your Contract Value = $20,000.00
AW' = amount that MVA & WC are applied to
= amount withdrawn in excess of Free Amount = $20,000.00 - $6,000.00 =
$14,000.00
MVA = -.018 x $14,000.00 = $-252.00
WC = .07 x $14,000.00 = $980.00
You would receive $20,000.00 - $252.00 - $980.00 = $18,768.00; the total amount
subtracted from your Contract Value is $20,000.00. Your remaining Contract Value
would be $22,000.00.
EXAMPLE OF FREE WITHDRAWAL AMOUNT
Assume that in the foregoing example, after four years $10,565.06 in earnings;
including the Credit Enhancement had been credited and that the Contract Value
in the Fixed Account equaled $50,565.06. In this example, if no prior
withdrawals have been made, you could withdraw up to $10,565.06 without
incurring a Market Value Adjustment or a Withdrawal Charge. The Free Withdrawal
Amount would be $10,565.06, because the interest credited ($10,565.06) is
greater than 15% of the Total Purchase Payments in the most recent eight years
($40,000.00 x .15 = $6,000.00).
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
54 PROSPECTUS
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registrant anticipates that it will incur the following approximate expenses in
connection with the issuance and distribution of the securities to be
registered:
Registration fees................. $ 0.00
Cost of printing and engraving.... $4,000.00
Legal fees........................ $ 0.00
Accounting fees................... $3,000.00
Mailing fees...................... $6,500.00
Item 14. Indemnification of Directors and Officers
The Articles of Incorporation of Lincoln Benefit Life Company (Registrant)
provide for the indemnification of its directors and officers against expenses,
judgments, fines and amounts paid in settlement as incurred by such person, so
long as such person shall not have been adjudged to be liable for negligence or
misconduct in the performance of a duty to the Company. This right of indemnity
is not exclusive of other rights to which a director or officer may otherwise be
entitled.
The By-Laws of ALFS, Inc. (Distributor) provide that the corporation will
indemnify a director, officer, employee or agent of the corporation to the full
extent of Delaware law. In general, Delaware law provides that a corporation may
indemnify a director, officer, employee or agent against expenses, judgments,
fines and amounts paid in settlement if that individual acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
No indemnification shall be made for expenses, including attorney's fees, if the
person shall have been judged to be liable to the corporation unless a court
determines such person is entitled to such indemnity. Expenses incurred by such
individual in defending any action or proceeding may be advanced by the
corporation so long as the individual agrees to repay the corporation if it is
later determined that he or she is not entitled to such indemnification.
Under the terms of the form of Underwriting Agreement, the Registrant agrees to
indemnify the Distributor for any liability that the latter may incur to a
Contract owner or party-in-interest under a Contract, (a) arising out of any act
or omission in the course of or in connection with rendering services under such
Agreement, or (b) arising out of the purchase, retention or surrender of a
Contract; provided that the Registrant will not indemnify the Distributor for
any such liability that results from the latter's willful misfeasance, bad faith
or grow negligence, or from the reckless disregard by the latter of its duties
and obligations under the Underwriting Agreement.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the forgoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suite or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
During the period beginning on December 1, 2008 and ending on March 26, 2009,
the Registrant inadvertently sold participating interests in existing deferred
annuity contracts pursuant to registration statements on Form S-3 that were not
in compliance with Rule 415(a)(5) under the Securities Act of 1933. The
aggregate amount of securities sold was $13,933,172. Purchasers, however, did
receive all material information relating to the security prior to sale,
including the prospectus from the existing registration statement. When the
technical violation was discovered, the Registrant filed new registration
statements on Form S-3 with the Commission to comply with the requirements of
Rule 415(a)(5) for continuous offering. These registration statements were
declared effective on March 27, 2009 (SEC File Nos. 333-158172, 333-158176,
333-158180, 333-158181, 333-158192). Although the legal effect of a violation of
Rule 415(a)(5) is not entirely clear, the Registrant may have been deemed to
have inadvertently sold unregistered securities during the time period noted
above. New procedures have been implemented to ensure timely submission of
future registration statement filings.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
16(a)
Exh. No. Description
1 Form of Principal Underwriting Agreement. Incorporated herein by reference
to Post-Effective Amendment to Form N-4 for Lincoln Benefit Life Variable
Annuity Account (File No. 333-50545, 811-07924) filed January 28, 1999
3(i) Amended and Restated Articles of Incorporation of Lincoln Benefit Life
Company dated September 26, 2000. Incorporated herein by reference to
Exhibit 3(i) to Lincoln Benefit Life Company's Quarterly Report on Form
10-Q for quarter ended March 31, 2002. (SEC File No. 333-111553)
3(ii) Amended and Restated By-Laws of Lincoln Benefit Life Company effective
March 10, 2006. Incorporated herein by reference to Exhibit 3.2 to Lincoln
Benefit Life Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006. (SEC File No. 333-111553)
4(a) Form of Variable Annuity Contract. Incorporated herein by reference to
Registration Statement on Form N-4 for Lincoln Benefit Life Variable
Annuity Account (File No. 333-82427, 811-07924) filed July 8, 1999
4(b) Form of Application. Incorporated herein by reference to Registration
Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account
(File No. 333-82427, 811-07924) filed July 8, 1999
5(a) Opinion and Consent of Counsel regarding legality. Incorporated herein by
reference to Post-Effective Amendment to Form S-3 on Form S-1 for Lincoln
Benefit Life Variable Annuity Account (File No. 333-88045) filed April 6,
2000.
5(b) Opinion and Consent of Counsel regarding legality. Opinion of General
Counsel Re: Legality (Incorporated herein by reference to Registrant's
Form S-3 Registration Statement (File No. 333-158176) dated March 24,
2009)
8 None
9 None
10 Material Contracts
10.1 Form of Investment Management Agreement among Allstate Investments, LLC,
Allstate Insurance Company, The Allstate Corporation and certain
affiliates effective January 1, 2007. Incorporated herein by reference to
Exhibit 10.12 to Allstate Life Insurance Company's Annual Report on Form
10-K for 2007. (SEC File No. 000-31248)
10.2 Form of Tax Sharing Agreement among The Allstate Corporation and certain
affiliates dated as of November 12, 1996. Incorporated herein by reference
to Exhibit 10.24 to Allstate Life Insurance Company's Annual Report on
Form 10-K for 2007. (SEC File No. 000-31248)
10.3 Supplemental Intercompany Tax Sharing Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company effective December 21,
2000. Incorporated herein by reference to Exhibit 10.3 to Lincoln
Benefit Life Company's Annual Report on Form 10-K for the year ended
December 31, 2009. (SEC File No. 333-111553)
10.4 Cash Management Services Master Agreement between Allstate Insurance
Company and Allstate Bank (aka Allstate Federal Savings Bank) dated March
16, 1999. Incorporated herein by reference to Exhibit 10.4 to Lincoln
Benefit Life Company's Quarterly Report on Form 10-Q for quarter ended
March 31, 2002. (SEC File No. 333-111553)
10.5 Amendment No.1 to Cash Management Services Master Agreement effective
January 5, 2001. Incorporated herein by reference to Exhibit 10.5 to
Lincoln Benefit Life Company's Quarterly Report on Form 10-Q for quarter
ended March 31, 2002. (SEC File No. 333-111553)
10.6 Amendment No. 2 entered into November 8, 2002 to the Cash Management
Services Master Agreement between Allstate Insurance Company, Allstate
Bank and Allstate Motor Club, Inc. dated March 16, 1999. Incorporated
herein by reference to Exhibit 10.19 to Allstate Life Insurance Company's
Annual Report on Form 10-K filed for 2007. (SEC File No. 000-31248)
10.7 Premium Depository Service Supplement dated as of September 30, 2005
to Cash Management Services Master Agreement between Allstate Insurance
Company, Allstate Bank, Allstate Motor Club, Inc. and certain other
parties. Incorporated herein by reference to Exhibit 10.20 to Allstate
Life Insurance Company's Annual Report on Form 10-K filed for 2007. (SEC
File No. 000-31248)
10.8 Variable Annuity Service Supplement dated November 10, 2005 to Cash
Management Services Agreement between Allstate Bank, Allstate Life
Insurance Company of New York and certain other parties. Incorporated
herein by reference to Exhibit 10.21 to Allstate Life Insurance Company's
Annual Report on Form 10-K filed for 2007. (SEC File No. 000-31248)
10.9 Sweep Agreement Service Supplement dated as of October 11, 2006 to
Cash Management Services Master Agreement between Allstate Life Insurance
Company, Allstate Bank, Allstate Motor Club, Inc. and certain other
companies. Incorporated herein by reference to Exhibit 10.22 to Allstate
Life Insurance Company's Annual Report on Form 10-K filed for 2007. (SEC
File No. 000-31248)
10.10 Form of Amended and Restated Service and Expense Agreement between
Allstate Insurance Company, The Allstate Corporation and certain
affiliates effective January 1, 2004. Incorporated herein by reference to
Exhibit 10.1 to Allstate Life Insurance Company's Annual Report on Form
10-K for 2007. (SEC File No. 000-31248)
10.11 Form of Amendment No. 1 to Amended and Restated Service and Expense
Agreement between Allstate Insurance Company, The Allstate Corporation and
certain affiliates effective January 1, 2009. Incorporated herein by
reference to Exhibit 10.1 to Allstate Life Insurance Company's Current
Report on Form 8-K filed February 17, 2010. (SEC File No. 000-31248)
10.12 Administrative Services Agreement between Lincoln Benefit Life Company and
Allstate Life Insurance Company effective June 1, 2006. Incorporated
herein by reference to Exhibit 10.1 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. (SEC
File No. 333-111553)
10.13 Principal Underwriting Agreement 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. (SEC File No. 333-111553)
10.14 Amended and Restated Principal Underwriting Agreement between Lincoln
Benefit Life Company and ALFS, Inc. effective June 1, 2006. Incorporated
herein by reference to Exhibit 10.1 to Lincoln Benefit Life Company's
Current Report on Form 8-K filed December 20, 2007. (SEC File No. 333-
111553)
10.15 Selling Agreement between Lincoln Benefit Life Company, 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)
10.16 Coinsurance Agreement between Allstate Life Insurance Company and Lincoln
Benefit Life Company, effective December 31, 2001. Incorporated herein by
reference to Exhibit 10.11 to Lincoln Benefit Life Company's Quarterly
Report on Form 10-Q for quarter ended June 30, 2002. (SEC File No. 333-
111553)
10.17 Modified Coinsurance Agreement between Allstate Life Insurance Company and
Lincoln Benefit Life Company, effective December 31, 2001. Incorporated
herein by reference to Exhibit 10.12 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File
No. 333-111553)
10.18 Modified Coinsurance Agreement between Allstate Life Insurance Company and
Lincoln Benefit Life Company, effective December 31, 2001. Incorporated
herein by reference to Exhibit 10.13 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for quarter ended June 30, 2002. (SEC File
No. 333-111553)
10.19 Intercompany Loan Agreement among The Allstate Corporation, Allstate Life
Insurance Company, Lincoln Benefit Life Company and other certain
subsidiaries of The Allstate Corporation dated February 1, 1996.
Incorporated herein by reference to Exhibit 10.24 of Allstate Life
Insurance Company's Annual Report on Form 10-K for 2006. (SEC File No.
000-31248)
10.20 Form of Service Agreement between Lincoln Benefit Life Company and
Allstate Assignment Company effective June 25, 2001. Incorporated herein
by reference to Exhibit 10.22 of Lincoln Benefit Life Company's Annual
Report on Form 10-K for 2007. (SEC File No. 333-111553)
10.21 First Amendment to Service Agreement between Lincoln Benefit Life Company
and Allstate Assignment Company effective December 1, 2007. Incorporated
herein by reference to Exhibit 10.23 of Lincoln Benefit Life Company's
Annual Report on Form 10-K for 2007. (SEC File No. 333-111553)
10.22 Agreement for the Settlement of State and Local Tax Credits among Allstate
Insurance Company and certain affiliates effective January 1, 2007.
Incorporated herein by reference to Exhibit 10.1 to Lincoln Benefit Life
Company's Current Report on Form 8-K filed February 21, 2008. (SEC File
No. 333-111553)
10.23 Administrative Services Agreement between ALFS, Inc., Allstate Life
Insurance Company, Lincoln Benefit Life Company and Charter National Life
Insurance Company effective January 1, 2000. Incorporated herein by
reference to Exhibit 10.22 to Lincoln Benefit Life Company's Annual Report
on Form 10-K for the year ended December 31, 2008. (SEC File No. 333-
111553)
11 None
12 None
15 Not applicable
16 Letter re change in certifying accountant. Not applicable.
21 Subsidiaries of the registrant. Not applicable.
23 Consent of Independent Public Accounting Firm. Filed herewith.
24(a) Powers of Attorney for Lawrence W. Dahl, Matthew S. Easley, Susan L. Lees,
Samuel H. Pilch, and John Pintozzi. Incorporated herein by reference to
the Registration Statement on Form S-3 File No. 333-158181 dated March 24,
2009.
24(b) Power of Attorney for Matthew E. Winter. Filed herewith.
16(b)
Financial statement schedules required by Regulation S-X (17 CFR Part 210) and
Item 11(e) of Form S-1 are included in Part I.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(2) That, for the determining of any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining liability under the Securities Act of
1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of
a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(5) That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities:
The undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of
any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule 424 ((S)230.424
of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted in directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Lincoln and State of Nebraska on the 8th day of
April, 2010.
LINCOLN BENEFIT LIFE COMPANY (Registrant)
By: /s/ Susan L. Lees
-------------------------------------
Susan L. Lees
Director, Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following directors and principal
officers of Lincoln Benefit Life Company in the capacities indicated on the 8th
day of April, 2010.
(Signature) (Title)
- ------------------------------------ -----------------------------------
*/ Lawrence W. Dahl Director, President, and Chief Operating
- ------------------------------------ Officer
Lawrence W. Dahl
*/ Matthew S. Easley Director and Senior Vice President
- ------------------------------------
Matthew S. Easley
/s/ Susan L. Lees Director, Senior Vice President,
- ------------------------------------ General Counsel and Secretary
Susan L. Lees
*/ Samuel H. Pilch Group Vice President and Controller
- ------------------------------------
Samuel H. Pilch
*/ John C. Pintozzi Director, Senior Vice President and
- ------------------------------------ Chief Financial Officer
John C. Pintozzi
*/ Matthew E. Winter Director, Chief Executive Officer and
- ------------------------------------ Chairman of the Board
Matthew E. Winter
* By Susan L. Lees, pursuant to Power of Attorney.
EXHIBITS
Exhibit No. Description
- ----------- -------------------------------------------------------------
23 Consent of Independent Registered Public Accounting Firm
24(b) Power of Attorney for Matthew E. Winter