FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2001March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-82427333-66452
LINCOLN BENEFIT LIFE COMPANY
(Exact name of registrant as specified in its charter)
Nebraska 47022145747-0221457
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2940 South 84th Street
Lincoln, Nebraska 68506-4142
(Address of principal executive offices)(zip (zip code)
1-800-525-9287
(Registrant'sRegistrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)are code:
1-800-525-9287
Indicate by check mark whether the registrantRegistrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes /X/ No
Indicate the numberAs of shares of each of the issuer's classes of common
stock as of November 9, 2001; there wereApril 30, 2002, Registrant had 25,000 shares of common capital
stock outstanding, par value $100 per share all of which shares are
held by Allstate Life Insurance Company.
LINCOLN BENEFIT LIFE COMPANY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2001MARCH 31, 2002
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Statements of Operations for the Three Months Ended
March 31, 2002 and Nine Months Ended September 30, 2001 and 2000 (unaudited).................................. 3
Condensed Statements of Financial Position as of September 30,
2001March 31, 2002
(unaudited) and December 31, 2000 ....................................................2001 4
Condensed Statements of Cash Flows for the NineThree Month Periods
Ended September 30,March 31, 2002 and 2001 and 2000 (unaudited) ............................................. 5
Notes to Condensed Financial Statements (unaudited)........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................... 98
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................... 7
Item 5. Other Information.......................................................................... 1314
Item 6. Exhibits and Reports on Form 8-K........................................................... 138-K 14
Signature Page ............................................................................ 1415
2
PART I.1. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- ---------------------------------------
(in thousands) 2001 2000 2001 2000
---------------- ---------------- ----------------- ------------------
(Unaudited) (Unaudited)
RevenuesTHREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 2002 2001
---- ----
(unaudited)
REVENUES
Net investment income $ 3,1152,953 $ 2,932 $ 9,148 $ 8,8873,137
Realized capital gains and losses - - (1,352) -
Other income (expense) - (1) - (20)
-------------- ------------- --------------- -------------
Income from operations before
income tax expense 3,115 2,931 7,796 8,867450 (844)
------- -------
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 3,403 2,293
Income tax expense 1,088 1,025 2,722 3,102
-------------- ------------- --------------- -------------
Net income1,189 800
------- -------
NET INCOME $ 2,0272,214 $ 1,906 $ 5,074 $ 5,765
============== ============= =============== =============1,493
======= =======
See notes to condensed financial statements.
3
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
2001 2000
------------------- -------------------
------------------- -------------------
(in thousands, except par value data) (Unaudited)
AssetsMARCH 31, DECEMBER 31,
2002 2001
---- ----
(IN THOUSANDS, EXCEPT PAR VALUE DATA) (unaudited)
ASSETS
Investments
Fixed income securities, at fair value (amortized cost $165,391$164,283 and $166,893)$179,124) $ 175,548169,370 $ 170,142186,709
Short-term 20,525 11,243
------------------ -----------------24,965 6,856
------------ ------------
Total investments 196,073 181,385194,335 193,565
Cash 38,640 7685,128 43,796
Reinsurance recoverable from Allstate Life Insurance Company, 9,155,419 8,366,927net 9,943,065 9,564,440
Reinsurance recoverable from non-affiliates, net 435,176 353,789473,752 458,563
Receivable from affiliate, net - 17,027
Other assets 4,374 2,3933,142 2,924
Separate Accounts 1,398,192 1,648,691
------------------ -----------------
Total assets1,621,150 1,565,708
------------ ------------
TOTAL ASSETS $ 11,227,87412,320,572 $ 10,553,261
================== =================
Liabilities11,846,023
============ ============
LIABILITIES
Contractholder funds $ 9,638,144 $ 9,287,599
Reserve for life-contingent contract benefits $ 685,999 $ 550,334
Contractholder funds 8,898,368 8,157,502769,994 724,044
Current income taxes payable 2,538 2,7854,865 3,645
Deferred income taxes 7,148 4,6075,281 6,187
Payable to affiliates, 2,187 9,210net 27,441 -
Other liabilities and accrued expenses 45,117 1,37164,503 70,237
Separate Accounts 1,398,192 1,648,691
------------------ -----------------
Total liabilities 11,039,549 10,374,500
------------------ -----------------
Commitments and Contingent Liabilities (Note1,621,150 1,565,708
------------ ------------
TOTAL LIABILITIES 12,131,378 11,657,420
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4)
Shareholder's EquitySHAREHOLDER'S EQUITY
Common stock, $100 par value, 30,000 shares authorized, 25,000 shares issued
and outstanding 2,500 2,500
Additional capital paid-in 126,750 126,750
Retained income 52,473 47,39956,637 54,423
Accumulated other comprehensive income:
Unrealized net capital gains 6,602 2,112
----------------- ----------------and losses 3,307 4,930
------------ ------------
Total accumulated other comprehensive income 6,602 2,112
----------------- ----------------
Total shareholder's equity 188,325 178,761
----------------- ----------------
Total liabilities and shareholder's equity3,307 4,930
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 189,194 188,603
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 11,227,87412,320,572 $ 10,553,261
================= ================11,846,023
============ ============
See notes to condensed financial statements.
4
LINCOLN BENEFIT LIFE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-------------------------------------------
(in thousands) 2001 2000
----------------- -----------------
(Unaudited)
Cash flows from operating activitiesTHREE MONTHS ENDED
MARCH 31,
---------
(IN THOUSANDS) 2002 2001
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,0742,214 $ 5,7651,493
Adjustments to reconcile net income to net cash provided by operating activities:activities
Depreciation, amortization and other non-cash items (405) (719)(71) (130)
Realized capital gains and losses 1,352 -(450) 844
Changes in:
Life-contingent contract benefits and contractholder funds, 6,652 81net of
reinsurance recoverables 2,681 3,237
Income taxes payable (124) 1,7301,189 801
Receivable/payable to affiliates, net 44,468 (9,874)
Other operating assets and liabilities 34,741 264(6,053) 15,265
------- -------------
Net cash provided by operating activities 47,290 7,12143,978 11,636
------- ------
Cash flows from investing activities-------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 10,922 13,90011,087 3,175
Investment collections 11,737 6,155
Investment6,289 1,944
Investments purchases (22,103) (19,686)(1,913) (8,245)
Change in short-term investments, net (9,282) (8,380)(18,109) 793
------- -------
Net cash used in investing activities (8,726) (8,011)(2,646) (2,333)
------- -------
Net increase (decrease) in cash 38,564 (890)
Cash at beginning of periodNET INCREASE IN CASH 41,332 9,303
CASH AT BEGINNING OF PERIOD 43,796 76 982
------- -------
Cash at end of period $38,640CASH AT END OF PERIOD $ 92
=======85,128 $ 9,379
======== =======
See notes to condensed financial statements.
5
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)STATEMENS
(UNAUDITED)
1. Basis of PresentationBASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts
of Lincoln Benefit Life Company (the "Company"("the Company"), a wholly owned
subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly
owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary
of The Allstate Corporation (the "Corporation").
The condensed financial statements and notes as of September 30, 2001,March 31, 2002,
and for the three month and nine month periods ended September 30,March 31, 2002 and 2001, and 2000, are
unaudited. The condensed financial statements reflect all adjustments
(consisting only of normal recurring accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods.
TheThese condensed financial statements and notes should be read in
conjunction with the financial statements and notes thereto included in
the Lincoln Benefit Life Company Annual Report on Form 10-K for 2000.the year
ended December 31, 2001. The results of operations for the interim
periods should not be considered indicative of results to be expected for
the full year. 6
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)To conform with the 2002 presentation, certain prior year
amounts have been reclassified.
2. ReinsuranceREINSURANCE
The Company has reinsurance agreements whereby certain premiums, contract
charges, credited interest, policy benefits and certain expenses are ceded to
ALIC and other non-affiliated reinsurerscertain non-affiliates, and reflected net of such reinsurance in
the condensed statements of operations. Reinsurance recoverable and the
related reserve for life-contingent contract benefits and contractholder
funds are reported separately in the condensed statements of financial
position. The Company continues to have primary liability as the direct
insurer for risks reinsured.
Investment income earned on the assets which support contractholder
funds and the reserve for life-contingent contract benefits is not
included in the Company's condensed financial statements as those assets
are owned and managed by ALIC under terms of the reinsurance agreements.
The following table summarizes amounts ceded to ALIC and non-affiliates
under reinsurance agreements.
The effects of reinsurance on premiums written and earned and
contract charges are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2001 2000 2001 2000
------------- -------------- -------------- ----------------
Premiums and Contract Charges
THREE MONTHS ENDED MARCH 31,
2002 2001
---- ----
(IN THOUSANDS)
PREMIUMS AND CONTRACT CHARGES
Direct $ 161,918145,809 $ 119,792 $ 402,039 $ 326,242101,071
Assumed - - 1 1
Ceded
Affiliate (100,229) (63,338) (242,299) (174,502)(88,485) (57,653)
Non-affiliate (61,689) (56,454) (159,741) (151,741)
----------- ------------ ------------ -----------(57,324) (43,419)
--------- ---------
Premiums and contract charges, net of reinsurance $ - $ -
$ - $ -
=========== ============ ============ ==================== =========
The effects of reinsurance on credited interest, policy benefits and
other expenses are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands)THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS) 2002 2001
2000 2001 2000
------------- ------------- ------------ --------------
Credited Interest, Policy Benefits and
Other Expenses---- ----
CREDITED INTEREST, POLICY BENEFITS AND OTHER EXPENSES
Direct $ 259,981284,327 $ 227,658 $ 722,097 $ 652,963188,695
Assumed - -
Ceded
Affiliate (177,459) (167,426) (521,661) (479,139)(207,318) (135,747)
Non-affiliate (82,522) (60,231) (200,436) (173,804)
------------ ---------- ------------- ------------(77,009) (52,948)
--------- ---------
Credited interest, policy benefits and other expenses,
net of reinsurance $ - $ 1 $ -
$ 20
============ ========== ============= ===================== =========
76
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)STATEMENS
(UNAUDITED)
3. Comprehensive IncomeCOMPREHENSIVE INCOME
The components of other comprehensive income on a pretax and
after-tax basis are as follows:
Three months ended September 30,
(in thousands)
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
(IN THOUSANDS) 2002 2001
2000
------------------------------------ ------------------------------------------------------------------------ -----------------------------
After- After-
Pretax Tax tax Pretax Tax tax
Unrealized capital gains and losses:------ --- ----- ------ --- ------
UNREALIZED CAPITAL GAINS AND LOSSES:
Unrealized holding (losses) gains (losses)
arising during the period $ 5,731(2,048) $ (2,006)717 $ 3,725(1,331) $ 2,0511,845 $ (718)(646) $ 1,3331,199
Less: reclassification adjustments - - - - - -
----------- --------- ---------- --------- --------- ---------450 (158) 292 (844) 295 (549)
-------- ------ -------- ------- ------ -------
Unrealized net capital (losses) gains (losses) 5,731 (2,006) 3,725 2,051 (718) 1,333
-----------(2,498) 875 (1,623) 2,689 (941) 1,748
-------- ------ --------- ---------- --------- --------- ---------------- ------ -------
Other comprehensive (loss) income (loss) $ 5,731(2,498) $ (2,006) 3,725875 (1,623) $ 2,0512,689 $ (718) 1,333
=========== ========= ========= =========(941) 1,748
======== ======= ======= ======
Net income 2,027 1,906
---------- ---------2,214 1,493
-------- -------
Comprehensive income $ 5,752591 $ 3,239
==========3,241
========= Nine months ended September 30,
(in thousands) 2001 2000
------------------------------------ ----------------------------------------
After- After-
Pretax Tax tax Pretax Tax tax
Unrealized capital gains and losses:
Unrealized holding gains (losses)
arising during the period $ 5,556 $ (1,945) $ 3,611 $ 2,115 $ (740) $ 1,375
Less: reclassification adjustments (1,352) 473 (879) - - -
---------- -------- --------- --------- -------- ----------
Unrealized net capital gains (losses) 6,908 (2,418) 4,490 2,115 (740) 1,375
---------- -------- --------- --------- -------- ----------
Other comprehensive income (loss) $ 6,908 $ (2,418) 4,490 $ 2,115 $ (740) 1,375
========== ======== ========= =======
Net income 5,074 5,765
--------- ----------
Comprehensive income $ 9,564 $ 7,140
========= ==========
8
LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Regulation and Legal ProceedingsREGULATION AND LEGAL PROCEEDINGS
The Company's business is subject to the effects of a changing
social, economic and regulatory environment. Recent stateState and federal regulatory
initiatives have varied and have included employee benefit regulations,
removal of barriers preventing banks from engaging in the securities and
insurance business,businesses, tax law changes affecting the taxation of insurance
companies, the tax treatment of insurance products and its impact on the
relative desirability of various personal investment vehicles and the
overall expansion of regulation. The ultimate changes and eventual
effects, if any, of these initiatives are uncertain.
InFrom time to time the Company is involved in pending and
threatened litigation in the normal course of its business the Company is involved from time to
time in pending and threatened litigation and regulatory actions in which claims
for monetary damages are asserted. Regulatory actions include, but are not
limited to, market conduct and compliance issues. At this time, based on the
present status of such litigation and regulatory actions, it is inIn the opinion of management, that the
ultimate liability, if any, in one or more of these mattersactions in excess of
amounts currently reserved is not expected to have a material adverse effect on
the results of operations, liquidity or financial position of the Company.
7
ITEM 2. MANAGEMENTMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE
MONTH PERIODS
ENDED SEPTEMBER 30,MARCH 31, 2002 AND 2001 AND 2000
The following discussion highlights significant factors influencing
results of operations and changes in financial position of Lincoln Benefit Life
Company (the "Company"). It should be read in conjunction with the condensed
financial statements and related notes thereto found under Part I Item 1
contained herein and with the discussion, analysis, financial statements and
notes thereto in Part I Item 1 and Part II Items 7 and 8 of the Lincoln Benefit
Life Company Annual Report on Form 10-K for the year ended December 31, 2000.2001.
OVERVIEW
The Company, a wholly owned subsidiary of Allstate Life Insurance Company
("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"), markets life insurancea diversified group of products to meet consumer's
lifetime needs in the areas of protection and investment productsretirement solutions through
independent insurance agents and securities firms. Lifebroker/dealers, including master brokerage
agencies. Products distributed through independent insurance consists of
traditional products,agents include term
life insurance; whole life; universal life; variable universal life; single
premium life; fixed annuities, including term and whole life, interest-sensitive life,
immediate annuities with life contingencies, variable life and indexed life
insurance. Investment products include deferred annuities and immediate
annuities without life contingencies. Deferred annuities include fixed rate, market value adjusted indexedannuities and
equity-indexed annuities; immediate annuities; variable annuities and long-term
care products. Variable annuities and variable universal life products are also
distributed through independent broker/dealers. ALFS, Inc. ("ALFS") is the
principal underwriter for certain Lincoln Benefit products, such as variable
universal life, variable annuities and market value adjusted annuities. ALFS is
a wholly owned subsidiary of ALIC and is a registered broker/dealer under the
Securities Exchange Act of 1934.
The Company has identified itself as a single segment entity.
The assets and liabilities related to variable annuity and variable life contracts are legally
segregated and reflected as Separate Accounts. The assets of the Separate
Accounts are carried at fair value. Separate Accounts liabilities represent the
contractholders' claims to the related assets and are carried at the fair value
of the assets. Investment income and realized capital gains and losses of the
Separate Accounts accrue directly to the conractholderscontractholders and therefore, are not
included in the Company's condensed statements of operations. Certain variable annuity contracts have provisionsRevenues to the
Company from the Separate Accounts consist of contract maintenance and
administration fees and mortality, surrender and expense charges all of which
are ceded to ALIC.
Absent any contract provision wherein the Company
contractually guarantees either a
minimum return orof account value upon death or annuitization. An actuarial general account reserve is established inannuitization, variable annuity
and variable life contractholders bear the eventinvestment risk that the account value of certain contracts is projected to be below the value
guaranteed by the Company at the expected date of death or annuitization and is
transferred to ALIC under intercompany reinsurance agreements.Separate
Accounts' funds may not meet their stated objectives.
RESULTS OF OPERATIONS
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- ---------- ----------
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2002 2001
---------------- ---------------
Net investment income $ 3,1152,953 $ 2,932 $ 9,148 $ 8,8873,137
Realized capital gains and losses - - (1,352) -
Other expense - 1 - 20450 (844)
Income tax expense 1,088 1,025 2,722 3,102
-------- -------- ---------- ----------1,189 800
------- -------
Net income $ 2,0272,214 $ 1,906 $ 5,074 $ 5,765
======== ======== ========== ==========1,493
======= =======
The Company has reinsurance agreements under whichwhereby premiums, contract charges,
credited interest, policy benefits and policy
related transactionsexpenses are transferredceded to ALIC. The Company also hasALIC and certain
non-affiliates, and reflected net of such reinsurance agreements with third parties.in the condensed
statements of operations. The Company's results of operations include net
investment income and realized capital gains and losses earned on the assets of
the Company that are not transferred under the reinsurance agreements.
Certain
non-investment related expenses which are not transferred under reinsurance
agreements are presented in other expenses.
98
ITEM 2. MANAGEMENTMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE
MONTH PERIODS
ENDED SEPTEMBER 30,MARCH 31, 2002 AND 2001 AND 2000
Net income for the third quarterfirst three months of 20012002 increased 6.4%48.3% to $2.0$2.2
million compared to the same period in 2000,last year, due to an increaserealized capital gains
during the first three months of 2002 partially offset by a decrease in net
investment income.
Net investment income for the ninefirst three months of 20012002 decreased 12.0%5.9% to
$5.1$3.0 million compared to the same period in 2000,last year, due to an increase in realized capital
losses. Netlower investment
income increased 6.2% to $3.1 million for the third
quarter of 2001 and 2.9% to $9.1 million for the first nine months of 2001
primarily attributable to higher investment balances at amortized costyields partially offset by increased investment expenses comparedbalances. Investment balances,
excluding Separate Accounts and unrealized gains and losses on fixed income
securities, increased 5.3% to the same periods in 2000.$189.2 million at March 31, 2002 from $179.8
million at March 31, 2001. This increase was due to positive cash flows from
operations.
Realized capital losses,gains, after-tax, were $879$293 thousand for the first ninethree
months of 2001 and zero2002 compared to realized capital losses of $549 thousand for the third quarter. There were no realizedsame
period last year. Realized capital gains and losses forresult from the same periods last year.sale of
fixed income securities. Period to period fluctuations in realized capital gains
and losses are largely the result of timing of sales decisions reflecting management's
decision on positioning the portfolio, as well as
valuation assessments of individual securities,
and overall market conditions.conditions and write-downs when an assessment is made by the
Company that a decline in value of a security is other than temporary.
FINANCIAL POSITION
(in thousands)
September 30,
2001
-------------------
Fixed income securities (1) $ 175,548
Short-term 20,525
------------------
Total investments $ 196,073
==================
Reinsurance recoverable from ALIC, net $ 9,155,419
==================
Separate Accounts assets and liabilities $ 1,398,192
==================
Contractholder funds $ 8,898,368
==================
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Fixed income securities (1) $ 169,370 $ 186,709
Short-term investments 24,965 6,856
----------- -----------
Total investments $ 194,335 $ 193,565
=========== ===========
Cash $ 85,128 $ 43,796
=========== ===========
Reinsurance recoverable from ALIC, net $ 9,943,065 $ 9,564,440
=========== ===========
Contractholder funds $ 9,638,144 $ 9,287,599
=========== ===========
Reserve for life-contingent contract benefits $ 769,994 $ 724,044
=========== ===========
Separate Accounts assets and liabilities $ 1,621,150 $ 1,565,708
=========== ===========
(1) Fixed income securities are carried at fair value. Amortized cost for these
securities was $165,391$164.3 million and $179.1 million at September 30, 2001.March 31, 2002 and December
31, 2001, respectively.
Total investments were $196.1$194.3 million at September 30, 2001March 31, 2002 compared to $181.4$193.6
million at December 31, 2000.2001. The increase was due to positive cash flows
generated from operations and an increaseoffset in part by fewer unrealized net capital gains during
the first nine months of 2001.on fixed
income securities. Unrealized net capital gains on fixed income securities were
$10.2 million and $3.2$5.1 million at September 30, 2001 andMarch 31, 2002 compared to $7.6 million at December 31, 2000, respectively.2001.
Investments at September 30, 2001,March 31, 2002, excluding Separate Accounts and unrealized gains and losses on fixed income
securities, grew 4.4%1.8% from December 31, 2000.2001.
At September 30, 2001, substantially allMarch 31, 2002, 97.9% of the Company's fixed income securities
portfolio iswas rated investment grade, which is defined by the Company as a
security having a National Association of Insurance Commissioners ("NAIC")
rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company
internal rating.
The ratings of securitiesAt March 31, 2002, cash was $85.1 million compared to $43.8 million at
December 31, 2001. Cash increased due to a change in the Comapny's portfolio are influenced by many
factors, including the impact of economic environment on individual securities.
A fluctuation in these ratings could materially impact the results of
operations, liquidity or financial position of the Company. The Company closely
monitors its fixed income securities portfoliossettlement process for
rating changes or other
declines in value that are other than temporary. Fixed income securities are
placed on non-accrual status when they are in default or when the timing or
receipt of principal or interest payments are in doubt. Write downs of fixed
income securities are recorded when the decline in value is considered to be
other than temporary.
During the nine months ended September 30, 2001,intercompany balances.
At March 31, 2002, Contractholder funds increased $740.9 million as compared to $9.64 billion from
$9.29 billion at December 31, 2000 balances. The increase
resulted primarily2001 as the result of additional deposits from
sales of market value adjusted annuity contractsfixed annuities and credited interest credited on market value adjusted annuity and fixed annuity contracts,that were partially offset by fixed annuity surrenders
and withdrawals. As the Company's
interest-sensitive life policies and annuity contracts in-force grow and age,
the dollar amountReserves for life-contingent contract benefits increased $46.0
million to $770.0 million at March 31, 2002 resulting from increased sales of
surrenders and withdrawals will likely increase. While the
overall amount of surrenders may increase in the future, a significant increase
in the level of surrenders relative to total contractholder account balances is
not anticipated. The increase interm products that was partially offset by benefits paid. Reinsurance
recoverable from ALIC increased correspondingly by $378.6 million due to the
increase in contractholder funds.
Separate Accounts assets and liabilities increased 3.5% to $1.62 billion
at March 31, 2002 as compared to the December 31, 2001 balance. The increases
were primarily attributable to additional sales of $788.5
million resultsvariable annuity contracts
and transfers from the fixed account option contract benefit obligations ceded to ALIC.
10variable Separate
Accounts funds partially offset by surrenders and withdrawals and expense
charges.
9
ITEM 2. MANAGEMENTMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE
MONTH PERIODS
ENDED SEPTEMBER 30,MARCH 31, 2002 AND 2001
CAPITAL RESOURCES AND 2000
Separate Account assets and liabilities decreased 15.2%LIQUIDITY
CAPITAL RESOURCES
The company's capital resources consist of shareholder's equity. The
following table summarizes the capital resources:
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2002 2001
---- ----
Common stock and retained income $ 185,887 $ 183,673
Other comprehensive income 3,307 4,930
---------- -----------
Total shareholder's equity $ 189,194 $ 188,603
========== ===========
SHAREHOLDER'S EQUITY
Shareholder's equity increased for March 31, 2002 due to $1.40 billion at
September 30, 2001 as compared to the December 31, 2000 balance. The decreases
were primarily attributable to unrealized losses in the Separate Accounts
investment portfolios resulting from stock market volatility as well as
surrenders and withdrawals,net income
partially offset by salesa decrease in unrealized net capital gains and losses.
DEBT
The Company had no outstanding debt at March 31, 2002 and December 31,
2001. The Company has entered into an intercompany loan agreement with the
Corporation. The amount of variable annuity
contracts.funds available to the Company is at the discretion
of the Corporation. The maximum amount of loans the Corporation will have
outstanding to all its eligible subsidiaries at any given point in time is
limited to $1.00 billion. No amounts were outstanding under the intercompany
loan agreement at March 31, 2002 and December 31, 2001. The Corporation uses
commercial paper borrowings and can use bank lines of credit to fund
intercompany borrowings.
FINANCIAL RATINGS AND STRENGTHS
Financial strength ratings have become an increasingly important factor
in establishing the competitive position of insurance companies and, generally,
may be expected to have an effect on an insurance company's sales. On an ongoing
basis, rating agencies review the financial performance and condition of
insurers. A multiple level downgrade, while not expected, could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company shares its financial strength ratings with its parent,
ALIC, due to the 100% reinsurance agreements. The Company's current financial
strength ratings are listed below:
RATING AGENCY RATING RATING STRUCTURE
------------- ------ ----------------
Moody's Investors Service, Inc. Aa2 Second highest of nine ratings
("Excellent") categories and mid-range within the
category based on modifiers (e.g.,
Aa1, Aa2 and Aa3 are "Excellent")
Standard & Poor's Ratings Services AA+ Second highest of nine ratings
("Very Strong") categories and highest within the
category based on modifiers (e.g.,
AA+, AA and AA- are "Very Strong")
A.M. Best Company, Inc. A+ Highest of nine ratings categories
("Superior") and second highest within the
category based on modifiers (e.g.,
A++ and A+ are "Superior" while A
and A- are "Excellent")
In February 2002, Standard & Poor's affirmed its December 31, 2001
ratings. Standard & Poor's revised its outlook for ALIC and its rated
subsidiaries and affiliates to "negative" from "stable". This revision is part
of an ongoing life insurance industry review recently initiated by Standard &
Poor's. Moody's and A.M. Best reaffirmed their ratings and outlook for the
Company and ALIC.
LIQUIDITY AND CAPITAL RESOURCES
Under the terms of reinsurance agreements, certain premiums and deposits,
excluding those relating to Separate Accounts, are transferred primarily to
ALIC, which maintains the investment portfolios supporting the Company's
products. Payments of policyholder claims, benefits, contract maturities,
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
contract surrenders and withdrawals and certain operating costs, excluding those
relating to Separate Accounts, are also reimbursed primarily by ALIC, under the
terms of the reinsurance agreements. The Company continues to have primary
liability as a direct insurer for risks reinsured. The Company's ability to meet
liquidity demands is dependent on ALIC's ability to meet those demands. ALIC's
claims-paying abilityfinancial strength was rated Aa2, AA+, and A+ by Moody's, Standard & Poor's and
A.M. Best, respectively, at September 30, 2001.March 31, 2002.
The primary sources of funds for the remainder of the Company's fundsCompany are collection of principal
and interest from the investment portfolio, and capital contributions from ALIC.ALIC and
intercompany loans from the Corporation. The primary uses for the remainder of the Company'sthese funds are to
purchase investments, pay costs associated with the maintenance of the Company's
investment portfolio, income taxes, dividends to ALIC, and to pay shareholder dividends.
At September 30, 2001 the Moody's, Standard and Poor's and A.M. Best
claims-paying ratings forrepayment of
intercompany loans from the Company were Aa2, AA+ and A+, respectively.Corporation.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This document contains "forward-looking statements" that anticipate
results based on management's plans that are subject to uncertainty. These statements
are made subject to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995.
Forward-looking statements do not relate strictly to historical or
current facts and may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "estimates," "intends," "believes," "likely""likely,"
and other words with similar meanings. These statements may address, among other
things, our strategy for growth, product development, regulatory approvals,
market position, expenses, financial results and reserves. Forward-looking
statements are based on management's current expectations of future events. We
cannot guarantee that any forward-looking statement will be accurate. However,
we believe that our forward-looking statements are based on reasonable, current
expectations and assumptions. We assume no obligation to update any
forward-looking statements as a result of new information or future events or
developments.
If the expectations or assumptions underlying our forward-looking
statements prove inaccurate or if risks or uncertainties arise, actual results
could differ materially from those communicated in ourthese forward-looking
statements. In addition to the normal risks of business, the Company is subject
to significant risk factors, including those listed below which apply to it as
an insurance business.business and a provider of other financial services.
o There is uncertainty involved in estimating the availability of reinsurance
and the collectibility of reinsurance and recoverables. This uncertainty
arises from a number of factors, including whether losses meet the
qualifying conditions of the reinsurance contracts and if the reinsurers
have the financial capacity and willingness to pay.
o InCurrently, the wakeCorporation is examining the potential exposure, if any, of
the September 11 attack on the World Trade Center in New
York City and the Pentagon in Washington D.C., and the plane crash in
Pennsylvania, insurers are evaluating the possibility of excludingits insurance operations from acts of terrorism from certain typesterrorism. The Corporation is also
examining how best to address this exposure, if any, considering the
interests of policyholders, shareholders, the lending community, regulators
and others. The Company generally does not have exclusions for terrorist
events included in its life insurance policies. In the event that a
terrorist act occurs, the Company may be adversely impacted, depending on
the nature of the event. With respect to the Company's investment
portfolio, in the event that commercial insurance coverage for terrorism
becomes unavailable or very expensive, there could be significant adverse
impacts on some portion of the Company's investment portfolio, particularly in sectors
such as airlines and real estate. For example, commercial mortgages or certain debt obligations
might be adversely affected due to the inability to obtain coverage to
restore the related real estate or other property, thereby creating the
potential for increased default risk.
11
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH AND NINE
MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
o Changes in market interest rates can have adverse effects on the Company's
investment portfolio and investment income, product sales and results of
operations.income. Increasing market interest
rates have an adverse impact on the value of the investment portfolio, for
example, by decreasing unrealized capital gains on fixed income securities.
In addition, increases in market interest rates as compared to rates
offered on some of the Company's products could make those products less
attractive and lead to lower sales and/or increase the level of surrenders
on these products. Declining market interest rates could have an adverse
impact on the Company's investment income as the Company reinvests proceeds
from positive cash flows from operations and proceeds from maturing and
called investments into new investments that could be yielding less than
the portfolio's average rate.
Changes in market rates of interest as
compared to rates offered on some of the Company's products could make
those products less attractive if competitive investment margins are not
maintained. This could lead to lower sales and/or changes in the level of
surrenders on these products. The Company seeks to limit its exposure in
this area by offering a diverse group of products, periodically reviewing
and revising crediting rates and providing surrender charges in the event
of early withdrawal.
o The impact of decreasing Separate Accounts balances as a result of
fluctuatingresulting from volatile
market conditions, underlying fund performance and sales management
performance could cause contract charges cededrealized by the Company, as well
as ALIC, to decrease.decrease and lead to an increase of exposure to pay guaranteed
minimum income and death benefits.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o The Company amortizes deferred policy acquisition costs ("DAC") related to
contractholder funds in proportion to gross profits over the estimated
lives of the contract periods. Periodically, the Company updates the
assumptions underlying the gross profits, which include estimated future
fees, investment margins and expenses, in order to reflect actual
experience. Updates to these assumptions result in adjustments to the
cumulative amortization of DAC. These adjustments may have a material
effect on results of operations. DAC and any related adjustments are ceded
to ALIC.
o In order to manage interest rate risk, from time to time the Company
adjusts the effective duration of the assets ofin the investment portfolio is adjusted.portfolio. Those
adjustments may have an impact on the value of the investment portfolio and
on investment income.
o It is possible that the assumptions and projections used by the Company in
establishing prices for the guaranteed minimum death benefits and
guaranteed minimum income benefits on variable annuities, particularly
assumptions and projections about investment performance, do not accurately
anticipate the level of costs the Company will ultimately incur and cede to
ALIC in providing those benefits.
o Management believes the reserves for life-contingent contract benefits are
adequate to cover ultimate policy benefits, despite the underlying risks
and uncertainties associated with their determination when payments will
not occur until well into the future. Reserves are based on many
assumptions and estimates, including estimated premiums received over the
assumed life of the policy, the timing of the event covered by the
insurance policy, the amount of contract benefits to be paid and the
investment returns on the assets purchased with the premium received. The
Company periodically reviews and revises its estimates. If future
experience differs from assumptions, it may have a material impact on
results of operations.operations ceded to ALIC.
o DeferredUnder current U.S. tax law and regulations, deferred and immediate
annuities and interest-sensitive life insurance, including interest-sensitive products,
receive favorable policyholder taxation under current tax laws and regulations.treatment. Any legislative or regulatory
changes that adversely alter this treatment are likely to negatively affect
the demand for these products. Additionally,In addition, recent changes in the federal
estate tax laws will affect the demand for the types of life insurance products which are used
to address a
customer'sin estate planning needs may be impacted to the extent any
legislative changes to the current estate tax laws occur.planning.
o The Company distributes some of its products under agreements with other members of
the financial services industry that are not affiliated with the Company.
Termination of one or more of these agreements due to, for example, changes
in control or other factors of any of these entities, could have a detrimental effect on the
Company's sales. This risk may be exacerbated bydue to the enactment of the
Gramm-Leach-Bliley Act of 1999, which eliminateseliminated many federal and state law
barriers to affiliations among banks, securities firms, insurers and other
financial service providers.
o While positive operating cash flows are expected to continue to meet the
Corporation's liquidity requirements, the Corporation's liquidity could be
constrained by a catastrophe which results in extraordinary losses, a
downgrade of the Corporation's current long-term debt rating of A1 and A+
(from Moody's and Standard & Poor's, respectively) to non-investment grade
status of below Baa3/BBB-, a downgrade in AIC's financial strength rating
from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best,
respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's
financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard &
Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a
downgrade of the Corporation's ratings, ALIC and its rated subsidiaries
could also experience a similar downgrade.
o The events of September 11 and the resulting disruption in the financial
markets revealed weaknesses in the physical and operational infrastructure
that underlies the U.S. and worldwide financial systems. Those weaknesses
did not impair the Company's liquidity in the wake of September 11.
However, if an event of similar or greater magnitude occurs in the future
and if the weaknesses in the physical and operational infrastructure of the
U.S. and worldwide financial systems are not remedied, the Company could
encounter significant difficulties in transferring funds, buying and
selling securities and engaging in other financial transactions that
support its liquidity.
o Financial strength ratings have become an increasingly important factor in
establishing the competitive position of insurance companies and,
generally, may be expected to have an effect on an insurance company's
sales.business. On an ongoing basis, rating agencies review the financial
performance and condition of insurers. A multiple level downgrade of either
the Company or ALIC, while not expected, could have a material adverse
effect on the Company's or ALIC's business,sales, including the competitiveness of the
Company's product offerings, its ability to market products, and its
financial condition and results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS
ENDED MARCH 31, 2002 AND 2001
o State insurance regulatory authorities require insurance companies to
maintain specified levels of statutory capital and surplus. In addition,
competitive pressures require the Company to maintain financial strength
ratings. These restrictions affect the Company's ability to pay shareholder
dividends orto ALIC and to use its capital in other ways.
o A numberFollowing enactment of enacted and pending legislative measures may lead to increased
consolidation and increased competition in the financial services industry.
o At the federal level, these measures include the recently enacted Gramm-Leach-Bliley Act of 1999, which eliminated many federal
legislation that allows mergers that combine commercial banks, insurers and
state law barriers to affiliations among banks,
securities firms, state insurance regulators have been collectively
participating in a reexamination of the regulatory framework that currently
governs the United States insurance business in an effort to determine the
proper role of state insurance regulation in the U. S. financial services
industry. We cannot predict whether any state or federal measures will be
adopted to change the nature or scope of the regulation of the insurance
business or what affect any such measures would have on the Company.
o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial
banks, insurers and othersecurities firms under one holding company. Until
passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had
limited the ability of banks to engage in securities-related businesses and
the Bank Holding Company Act of 1956 had restricted banks from being
affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act,
bank holding companies may acquire insurers and insurance holding companies
may acquire banks. In addition, grand-fathered unitary thrift holding
companies, including The Allstate Corporation, may engage in activities
that are not financial service providers.in nature. The ability of banks to affiliate with
insurers may materially adversely affect all of the Company's product lines
by substantially increasing the number, size and financial strength of
potential competitors.
o At the state level, these measures include legislation to permitIn some states, mutual insurance companies tocan convert to a hybrid
structure known as a mutual holding company, thereby allowingcompany. This process converts
insurance companies owned by their policyholders to become stock insurance
companies owned (through one or more intermediate holding companies)
partially by their policyholders and partially by stockholders. Also, several large
mutual life insurers have used or are expected to use existing state
laws and regulations governingsome
states permit the conversion of mutual insurance companies into stock
insurance companies (demutualization). o In addition, stateThe ability of mutual insurance
regulators are reexamining the regulatory
framework that currently governs the United States insurance business.
They are engaged in an effortcompanies to determine the proper roleconvert to mutual holding companies or to demutualize may
materially adversely affect all of the
state insurance regulationour product lines by substantially
increasing competition for capital in the United States financial services industry following the enactment of the Graham-Leach-Bliley Act. The
Company cannot predict whether any state or federal measures will be
adopted to change the nature or scope of the regulation of the
insurance business or what effect any such measures would have on the
Company.
12industry.
13
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The discussion "Regulation and Legal Proceedings" in Part I, Item 1,
Note 4 of this Form 10-Q is incorporated herein by reference.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K
(a) Exhibits
required by Item 601An Exhibit Index has been filed as part of Regulation S-K
(2) None
(3) (i) Articles of Incorporation*
(ii) By-laws*
(4) Lincoln Benefit Life Company Flexible Premium Deferred
Annuity Contract and Application**
(10) Reinsurance Agreement between Lincoln Benefit Life Company
and Allstate Life Insurance Company*
(11) None
(15) None
(18) None
(19) None
(22) None
(23) (a) Consent of Independent Public Accountants***
(b) Consent of Attorneys***
(24) None
(99) Nonethis report on page E-1
(b) Reports on 8-K
No reports on Form 8-K
were filed during the third quarter of
2001.
*Incorporated herein by reference to the Registration Statement on Form N-4 for
Lincoln Benefit Life Variable Annuity Account (File No. 333-50545, 811-07924)
filed April 21, 1998.
**Incorporated herein by reference to the Registration Statement on Form N-4 for
Lincoln Benefit Life Variable Annuity Account (File No. 333-50545, 811-07924)
filed April 21, 1998. Incorporated herein by reference to the Registration
Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account (File
No. 333-50737, 811-07924) filed April 22, 1998. Incorporated by reference to the
Registration Statement on Form N-4 for Lincoln Benefit Life Variable Annuity
Account (File No. 333-82427, 811-07924) filed July 8, 1999.
***Incorporated herein by reference to the Post-effective Amendment #2 to
Registration Statement on Form S-3 for Lincoln Benefit life Company (File No.
333-59765) filed April 28, 2000. Incorporated herein by reference to the
Post-effective Amendment #2 to Registration Statement on Form S-3 for Lincoln
Benefit Life Company (File No. 333-59769) filed April 28, 2000. Incorporated
herein by reference to Post-effective Amendment No. 1 to the Registration
Statement on Form S-3 for Lincoln Benefit Life Company (File No. 333-88045)
filed April 5, 2000.
13None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrationregistrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the 14th day of November, 2001.authorized.
Dated May 13, 2002. LINCOLN BENEFIT LIFE COMPANY
- --------------------------------------------------------------
(Registrant)
/s/ B. Eugene Wraith
- ----------------------- PRESIDENT,THOMAS J. WILSON, II
Thomas J. Wilson, II
CHAIRMAN AND CHIEF OPERATING
B. EUGENE WRAITHEXECUTIVE OFFICER
AND DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)(Authorized Officer of Registrant)
/s/ Robert L. Vance
- ------------------------------ Vice President & Assistant Treasurer
Robert L. Vance
(Principal Financial Officer)
- ----------------------------- ControllerSAMUEL H. PILCH
Samuel H. Pilch
GROUP VICE PRESIDENT AND CONTROLLER
(Chief Accounting Officer)
(Principal Accounting Officer)15
Exhibit Index
Exhibit No. Description
3(i) Amended and Restated Articles of Incorporation of Lincoln Benefit Life Company
dated September 26, 2000.
3(ii) Amended and Restated By-Laws of Lincoln Benefit Life Company dated July 23,
1997. Incorporated herein by reference to Exhibit 6(b) to Lincoln Benefit Life
Variable Life Account Registration Statement No. 333-47717 on Form S-6 filed
March 11, 1998.
10.1 Service and Expense Agreement among Allstate Insurance
Company and The Allstate Corporation and Certain
Insurance Subsidiaries dated January 1, 1999.
Incorporated herein by reference to Exhibit 10.2 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.2 Investment Management Agreement and Amendment to Certain Service and Expense
Agreements Among Allstate Investments, LLC and Allstate Insurance Company and The
Allstate Corporation and Certain Affiliates effective as of January 1, 2002.
Incorporated herein by reference to Exhibit 10.3 to Northbrook Life Insurance
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.3 Tax Sharing Agreement dated as of November 12, 1996
among The Allstate Corporation and certain affiliates.
Incorporated herein by reference to Exhibit 10.4 to
Northbrook Life Insurance Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.4 Cash Management Services Master Agreement between
Allstate Insurance Company and Allstate Bank (fka
Allstate Federal Savings Bank) dated March 16, 1999.
10.5 Amendment No.1 to Cash Management Services Master Agreement effective January 5,
2001.
E-1