POS AM 1 dposam.txt LBL CONSULTANT I As Filed with the Securities and Exchange Commission on April 14, 2010 File No.333-158192 ================================================================================ 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 (Primary Standard (I.R.S.Employer jurisdiction of Industrial Identification No.) incorporation or Classification Code organization) Number) ---------- 2940 South 84th St., Lincoln, Nebraska 68506 1-800-865-5237 (Address of registrant's principal executive offices) JAN FISCHER-WADE, ESQ. LINCOLN BENEFIT LIFE COMPANY 2940 South 84th St. LINCOLN, NE 68506 1-800-865-5237 (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] Smaller reporting company [ ] (Do not check if a 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 CONSULTANT I 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: 5801 SW 6TH AVE., TOPEKA, KS 66606-0001 MAILING ADDRESS: P.O. BOX 758561, TOPEKA, KS 66675-8566 TELEPHONE NUMBER: 1-800-457-7617 FAX NUMBER: 1-785-228-4584 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. 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 49 investment options, each of which is a Sub-Account of the Lincoln Benefit Life Variable Annuity Account ("Separate Account"). Each Sub-Account invests exclusively in shares of Portfolios in one of the following underlying Funds: AIM VARIABLE INSURANCE FUNDS (INVESCO OPPENHEIMER VARIABLE ACCOUNT FUNDS VARIABLE INSURANCE FUNDS) (SERIES I) (SERVICE SHARES) THE ALGER PORTFOLIOS (CLASS O) PIMCO VARIABLE INSURANCE TRUST (ADMINISTRATIVE SHARES) DWS VARIABLE SERIES I (CLASS A) PUTNAM VARIABLE TRUST (CLASS IB) DWS VARIABLE SERIES II (CLASS A) T. ROWE PRICE EQUITY SERIES, INC. (I) FEDERATED INSURANCE SERIES T. ROWE PRICE INTERNATIONAL SERIES, FIDELITY(R) VARIABLE INSURANCE INC. (I) PRODUCTS (INITIAL CLASS) THE UNIVERSAL INSTITUTIONAL FUNDS, JANUS ASPEN SERIES (INSTITUTIONAL INC. (CLASS I) SHARES AND SERVICE SHARES) VAN KAMPEN LIFE INVESTMENT TRUST LEGG MASON PARTNERS VARIABLE EQUITY (CLASS II) TRUST (CLASS I) WELLS FARGO VARIABLE TRUST FUNDS MFS(R) VARIABLE INSURANCE TRUST/(SM) /(INITIAL CLASS) -------------------------------------------------------------------------------- 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. THE DATE OF THIS PROSPECTUS IS MAY 1, 2010. -------------------------------------------------------------------------------- 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. You may not purchase a Contract if either you or the Annuitant are older than 90 years before we receive your application. Your Contract Value will vary daily as a function of the investment performance of the Sub-Accounts 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 Sub-Accounts. Benefits provided by this Contract, when based on the Fixed Account, are subject to a Market Value Adjustment, which may result in an upwards or downwards adjustment in withdrawal benefits, death benefits, settlement values, transfers to the Sub-Accounts. 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. 1 PROSPECTUS 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, 2010. 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 47 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 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 1-202-551-8090 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). PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR YOUR FUTURE REFERENCE. 2 PROSPECTUS TABLE OF CONTENTS -------------------------------------------------------------------------------- DEFINITIONS 4 -------------------------------------------------------------------- FEE TABLES 5 -------------------------------------------------------------------- QUESTIONS AND ANSWERS ABOUT YOUR CONTRACT 7 -------------------------------------------------------------------- CONDENSED FINANCIAL INFORMATION 11 -------------------------------------------------------------------- DESCRIPTION OF THE CONTRACTS 11 -------------------------------------------------------------------- Summary 11 -------------------------------------------------------------------- Contract Owner 11 -------------------------------------------------------------------- Annuitant 11 -------------------------------------------------------------------- Modification of the Contract 11 -------------------------------------------------------------------- Assignment 11 -------------------------------------------------------------------- Free Look Period 11 -------------------------------------------------------------------- PURCHASES AND CONTRACT VALUE 12 -------------------------------------------------------------------- Minimum Purchase Payment 12 -------------------------------------------------------------------- Automatic Payment Plan 12 -------------------------------------------------------------------- Allocation of Purchase Payments 12 -------------------------------------------------------------------- Contract Value 12 -------------------------------------------------------------------- Separate Account Accumulation Unit Value 13 -------------------------------------------------------------------- Transfer During Accumulation Period 13 -------------------------------------------------------------------- Market Timing & Excessive Trading 13 -------------------------------------------------------------------- Trading Limitations 14 -------------------------------------------------------------------- Automatic Dollar Cost Averaging Program 15 -------------------------------------------------------------------- Portfolio Rebalancing 15 -------------------------------------------------------------------- THE INVESTMENT AND FIXED ACCOUNT OPTIONS 16 -------------------------------------------------------------------- Separate Account Investments 16 -------------------------------------------------------------------- The Portfolios 16 -------------------------------------------------------------------- Voting Rights 19 -------------------------------------------------------------------- Additions, Deletions, and Substitutions of Securities 19 -------------------------------------------------------------------- The Fixed Account 20 -------------------------------------------------------------------- General 20 -------------------------------------------------------------------- Guaranteed Maturity Fixed Account Option 20 -------------------------------------------------------------------- Market Value Adjustment 21 -------------------------------------------------------------------- Dollar Cost Averaging Fixed Account Option 22 -------------------------------------------------------------------- ANNUITY BENEFITS 22 -------------------------------------------------------------------- Annuity Date 22 -------------------------------------------------------------------- Annuity Options 22 -------------------------------------------------------------------- Other Options 23 -------------------------------------------------------------------- Annuity Payments: General 23 -------------------------------------------------------------------- Variable Annuity Payments 23 -------------------------------------------------------------------- Fixed Annuity Payments 24 -------------------------------------------------------------------- Transfers During the Annuity Period 24 --------------------------------------------------------------------
Death Benefit During Annuity Period 24 ------------------------------------------------------------- Certain Employee Benefit Plans 24 ------------------------------------------------------------- OTHER CONTRACT BENEFITS 24 ------------------------------------------------------------- Death Benefit 24 ------------------------------------------------------------- Beneficiary 28 ------------------------------------------------------------- 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 31 ------------------------------------------------------------- Administrative Charges 32 ------------------------------------------------------------- Contract Maintenance Charge 32 ------------------------------------------------------------- Administrative Expense Charge 32 ------------------------------------------------------------- Transfer Fee 32 ------------------------------------------------------------- Sales Charges 32 ------------------------------------------------------------- Premium Taxes 34 ------------------------------------------------------------- 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 38 ------------------------------------------------------------- Tax Qualified Contracts 38 ------------------------------------------------------------- DESCRIPTION OF LINCOLN BENEFIT LIFE COMPANY AND THE SEPARATE ACCOUNT 43 ------------------------------------------------------------- Lincoln Benefit Life Company 43 ------------------------------------------------------------- Separate Account 43 ------------------------------------------------------------- State Regulation of Lincoln Benefit 43 ------------------------------------------------------------- Financial Statements 44 ------------------------------------------------------------- ADMINISTRATION 44 ------------------------------------------------------------- DISTRIBUTION OF CONTRACTS 44 ------------------------------------------------------------- LEGAL PROCEEDINGS 44 ------------------------------------------------------------- LEGAL MATTERS 45 ------------------------------------------------------------- ABOUT LINCOLN BENEFIT LIFE COMPANY 45 ------------------------------------------------------------- REGISTRATION STATEMENT 45 ------------------------------------------------------------- TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION 46 ------------------------------------------------------------- APPENDIX A ACCUMULATION UNIT VALUES 47 ------------------------------------------------------------- APPENDIX B ILLUSTRATION OF A MARKET VALUE ADJUSTMENT -------------------------------------------------------------
-------------------------------------------------------------------------------- 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. -------------------------------------------------------------------------------- 3 PROSPECTUS DEFINITIONS -------------------------------------------------------------------------------- Please refer to this list for the meaning of the following terms: ACCUMULATION PERIOD - The period, beginning on the Issue Date, during which Contract Value builds up under Your Contract. ACCUMULATION UNIT - A unit of measurement which we use to calculate Contract Value. ANNUITANT - The living person on whose life the annuity benefits under a Contract are based. ANNUITIZATION - The process to begin annuity payments under the Contract. 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(s) designated to receive any death benefits under the Contract. 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) 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 Sub-Accounts 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 Sub-Account, or each anniversary of that date. 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 Sub-Accounts 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 Sub-Account. 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 Sub- Accounts 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. SUB-ACCOUNT - 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. 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 Sub-Accounts 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 Sub- Accounts to which Your Contract Value has been allocated. WITHDRAWAL CHARGE - The contingent deferred sales charge that may be required upon some withdrawals. 4 PROSPECTUS FEE TABLES -------------------------------------------------------------------------------- THE FOLLOWING TABLES DESCRIBE THE FEES AND EXPENSES THAT YOU WILL PAY WHEN BUYING, OWNING, AND SURRENDERING THE CONTRACT. THE FIRST TABLE DESCRIBES 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. Maximum Contingent Deferred Sales Charge - Withdrawal Charge (as a percentage of Purchase Payments) - 7%
CONTRIBUTION YEAR APPLICABLE CHARGE 1-2 7% 3-4 6% 5 5% 6 4% 7 3% 8 + 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 THAT YOU OWN THE CONTRACT, NOT INCLUDING PORTFOLIO FEES AND EXPENSES. Annual Contract Maintenance Charge $35.00 Separate Account Annual Expenses (as a percentage of daily net asset value deducted from each of the Sub-Accounts of the Separate Account) Base Contract (without optional riders) Mortality and Expense Risk Charge 1.15% Administrative Expense Charge 0.10% ------ Total Separate Account Annual Expenses 1.25% Base Contract (with Enhanced Death Benefit Rider) Mortality and Expense Risk Charge 1.35% Administrative Expense Charge 0.10% ------ Total Separate Account Annual Expenses 1.45% Base Contract (with Enhanced Income Benefit Rider) Mortality and Expense Risk Charge 1.50% Administrative Expense Charge 0.10% ------ Total Separate Account Annual Expenses 1.60% Base Contract (with Enhanced Death and Income Benefit Riders) Mortality and Expense Risk Charge 1.55% Administrative Expense Charge 0.10% ------ Total Separate Account Annual Expenses 1.65% Base Contract (with Enhanced Death and Income Benefit Riders II) Mortality and Expense Risk Charge 1.70% Administrative Expense Charge 0.10% ------ Total Separate Account Annual Expenses 1.80% THE NEXT TABLE SHOWS THE MINIMUM AND MAXIMUM TOTAL ANNUAL 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 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 IS CONTAINED IN THE PROSPECTUS FOR EACH PORTFOLIO.
Minimum Maximum ------------------------------------------------------------------------------ Total Annual Portfolio 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) (without waivers or reimbursements) 0.10% 2.27% ------------------------------------------------------------------------------
(1)Expenses are shown as a percentage of Portfolio average daily net assets before any waiver or reimbursement as of December 31, 2009. 5 PROSPECTUS 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 expenses 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 you 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 and Income Benefit Riders II (with total Separate Account expenses of 1.80%). 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 $1,005 $1,752 $2,513 $4,271 --------------------------------------------------------------------------------- Costs Based on Minimum Annual Portfolio Expenses $ 794 $1,125 $1,482 $2,285 ---------------------------------------------------------------------------------
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 $410 $1,242 $2,088 $4,271 --------------------------------------------------------------------------------- Costs Based on Minimum Annual Portfolio Expenses $199 $ 615 $1,057 $2,285 ---------------------------------------------------------------------------------
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 AND INCOME BENEFIT RIDERS II (TOTAL SEPARATE ACCOUNT EXPENSES OF 1.80%). IF THESE RIDERS WERE NOT ELECTED, THE EXPENSE FIGURES SHOWN WOULD BE SLIGHTLY LOWER. THE EXAMPLES REFLECT THE FREE WITHDRAWAL AMOUNTS, IF ANY, AND AN ANNUAL CONTRACT MAINTENANCE CHARGE OF $35. 6 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 Sub- Accounts of the Separate Account or allocated to the Fixed Account, as you instruct us. You may allocate your Contract Value to up to twenty-one options under the Contract, counting each Sub-Account 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 Sub- Accounts and the amount of interest we credit to the Fixed Account. Each Sub-Account 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 Sub-Accounts. 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 zero to thirty years; . a joint and full survivorship annuity, with payments guaranteed for zero to thirty 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 youngest Annuitant's 90th 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 Sub-Accounts 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 Sub-Accounts 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 $1,200 in Purchase Payments during the first Contract Year. Purchase Payments must be at least $100, unless you enroll in an automatic payment plan. Your periodic payments in an automatic payment plan must be at least $25 per month. We may lower these minimums at our sole discretion. The maximum age of the oldest Contract Owner and Annuitant cannot exceed age 90 as of the date we receive the completed application. 4. WHAT ARE MY INVESTMENT CHOICES UNDER THE CONTRACT? You can allocate and reallocate your investment among the Sub-Accounts, each of which in turn invests in a single Portfolio. Under the Contract, the Separate Account currently invests in the Portfolios described in "The Investment and Fixed Account Options: Separate Account Investments." 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 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 Sub- Account(s) and the Fixed Account(s). Loan payments may not be allocated to the Fixed Account(s). You may 7 PROSPECTUS not transfer amounts into the DCA Fixed Account. The minimum amount that may be transferred into any one of the Guarantee 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. 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 Sub-Accounts 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 Sub-Accounts 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 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 Sub-Accounts; 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; 2) it is necessary to meet IRS minimum withdrawal requirements; or 3) it is a transfer that is part of a Dollar Cost Averaging program. 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 Sub-Accounts. 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, 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 1.15% of average daily net assets and an administrative expense charge at an annual rate of .10% of average daily net assets. If you select one of our optional enhanced benefit riders, 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. 8 PROSPECTUS TRANSFER FEE. Although we currently are not charging a transfer fee, the Contract permits us to charge you up to $10 per transfer for each transfer after the first transfer in each month. 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 Charge applies to each Purchase Payment for seven complete years from the date of the Payment (each a "Contribution Year") as follows:
CONTRIBUTION YEAR APPLICABLE CHARGE ----------------- ----------------- 1-2 7% 3-4 6% 5 5% 6 4% 7 3% 8+ 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 Charges 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 seven years; plus (b) an amount equal to your total Purchase Payments made more than seven 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; 2) become unemployed; or 3) 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 adviser 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 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, 9 PROSPECTUS 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 by a withdrawal adjustment; 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 seven increased by the total Purchase Payments since that anniversary and reduced by a withdrawal adjustment. 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 Sub-Accounts 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. TRANSFERS. During the Accumulation Period, you may transfer Contract Value among the Sub-Accounts and from the Sub-Accounts to the Fixed Account. You may not make a transfer, however, that would result in your allocating your Contract Value to 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 Sub-Account of your choosing, including other Sub-Accounts or the Fixed Account. Transfers from the Dollar Cost Averaging Fixed Account may be made monthly only. Transfers from Sub-Accounts may be made monthly, quarterly, or annually. Under the Portfolio Rebalancing Program, you can maintain the percentage of your Contract Value allocated to each Sub-Account 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 Sub- Accounts or from the Sub-Accounts 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 and, in most states, we will pay you an amount equal to the Contract Value on the date we receive the Contract from you. 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 758565, Topeka, KS 66675-8565, or call us at (800) 457-7617. 10 PROSPECTUS CONDENSED FINANCIAL INFORMATION Attached as Appendix A is a table showing selected information concerning Accumulation Unit Values for each Sub-Account for 2000 through 2009. Accumulation Unit Value is the unit of measure that we use to calculate the value of your interest in a Sub-Account. Accumulation Unit Value does not reflect the deduction of certain charges that are subtracted from your Contract Value, such as the Contract Administration Charge. The Separate Account's financial statements, which are comprised of the financial statements of the underlying sub-accounts, as of December 31, 2009, are included in the Statement of Additional Information. Lincoln Benefit's financial statements as of December 31, 2009, are included in the Statement of Additional Information. 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 Sub-Accounts to which you allocate your Purchase Payments and your Contract Value, as well as to reflect 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 cannot exceed age 90 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 Contract 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 a non-Qualified contract is held by a non-living person, any change in the Annuitant will be treated as the death of the Annuitant and will activate the distribution requirements outlined in the Death Benefit section. 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 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. 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 and, in most states, we will pay you an amount equal to the Contract Value on the date we receive the Contract from you. The Contract Value at that time may be more or less than your Purchase Payments. 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 Sub-Accounts and the Fixed Account Options as you specified in your application. However, we reserve the right in the future to delay allocating your Purchase 11 PROSPECTUS Payments to the Sub-Accounts you have selected or to the Fixed Account until 20 days after the Issue Date or, if 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 Fidelity Money Market Sub-Account. 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 $1,200. 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 $100 or more. Subsequent Purchase Payments made as part of an Automatic Payment Plan, however, may be as small as $25 per month. However, each purchase payment made to the Dollar Cost Averaging Fixed Account must be at least $1,200. If we receive purchase payments designated for the Dollar Cost Averaging Fixed Account that are lower than the required minimum of $1,200, or purchase payments designated for the Guaranteed Maturity Fixed Account Option that are lower than $500, such amounts will be allocated to the Fidelity Money Market Portfolio. We may lower these minimums if we choose. We may refuse any Purchase Payment at any time. We may apply certain limitations, restrictions, and/or underwriting standards as a condition of acceptance of purchase payments. AUTOMATIC PAYMENT PLAN. You may make scheduled Purchase Payments of $25 or more per month by automatic payment through your bank account. Call or write us for an enrollment form. ALLOCATION OF PURCHASE PAYMENTS. Your Purchase Payments are allocated to the Sub-Account(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. You initially may allocate your Purchase Payments to up to twenty-one options, counting each Sub-Account 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. You may add or delete Sub-Accounts and/or the Fixed Account from your allocation instructions, but we will not execute instructions that would cause you to have Contract Value in more than twenty-one options. In the future, we may waive this limit. 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 Sub-Accounts 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. There may be circumstances where the New York Stock Exchange is open, however, due to inclement weather, natural disaster or other circumstances beyond our control, our offices may be closed or our business processing capabilities may be restricted. Under those circumstances, your Contract Value may fluctuate based on changes in the Accumulation Unit Values, but you may not be able to transfer Contract Value, or make a purchase or redemption request. With respect to any purchase payment that is pending investment in our Variable Account, we may hold the amount temporarily in a suspense account and may earn interest on amounts held in that suspense account. You will not be credited with any interest on amounts held in that suspense account. 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 Fidelity Money Market Sub-Account. If we exercise that right and your state's free look period is ten days, we will transfer your Purchase Payments to your specified Sub-Accounts 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 Sub-Account to allocate to your Contract by dividing that portion of your Purchase Payment allocated to a Sub-Account by that Sub-Account'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 12 PROSPECTUS in the Sub-Accounts 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 Sub-Account will rise or fall to reflect changes in the share price of the Portfolio in which the Sub-Account 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 Sub-Account. We also determine a separate set of Accumulation Unit Values reflecting the cost of the enhanced benefit riders described beginning on page 26. 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 Sub-Account. We determine the Accumulation Unit Value for each Sub-Account 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 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 Sub- Account and, therefore, your Contract Value. TRANSFER DURING ACCUMULATION PERIOD. During the Accumulation Period, you may transfer Contract Value among the Fixed Account and the Sub-Accounts 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-one 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. Requests received before 4:00 p.m. will be effected on that day at that day's price. Requests received 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. If you transfer an amount from the Fixed Account to a Sub-Account 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 21. 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. We may charge you the transfer fee described on page 5, although we currently are waiving it. At any time, without notice, we may suspend, modify or terminate your privilege to make transfers via the phone, 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 Variable Sub-Accounts in any Contract year, or to refuse any Variable Sub-Account transfer request. We also reserve the right to restrict such transfers in any manner reasonably designed to prevent transfers that we consider disadvantageous to the 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. MARKET TIMING & EXCESSIVE TRADING The Contracts/Policies are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of Variable Sub-Accounts and can disrupt management of a Portfolio and raise its expenses, which can impair Portfolio performance and adversely affect your Contract/Policy Value. Our policy is not to accept knowingly any money intended for the purpose of market timing or excessive trading. Accordingly, you should not invest in the Contract/Policy if your purpose is to engage in market timing or excessive trading, and you should refrain from such practices if you currently own a Contract/Policy. We seek to detect market timing or excessive trading activity by reviewing trading activities. Portfolios also may report suspected market-timing or excessive trading activity to us. If, in our judgment, we determine that the transfers are part of a market timing strategy or are otherwise harmful to the underlying Portfolio, we will impose the trading limitations as described below under "Trading Limitations." Because there is no universally accepted definition of what constitutes market timing or 13 PROSPECTUS excessive trading, we will use our reasonable judgment based on all of the circumstances. While we seek to deter market timing and excessive trading in Variable Sub-Accounts, because our procedures involve the exercise of reasonable judgment, we may not identify or prevent some market timing or excessive trading. Moreover, imposition of trading limitations is triggered by the detection of market timing or excessive trading activity, and the trading limitations are not applied prior to detection of such trading activity. Therefore, our policies and procedures do not prevent such trading activity before it is detected. As a result, some investors may be able to engage in market timing and excessive trading, while others are prohibited, and the Portfolio may experience the adverse effects of market timing and excessive trading described above. TRADING LIMITATIONS We reserve the right to limit transfers among the investment alternatives in any Contract/Policy year, require that all future transfer requests be submitted through U.S. Postal Service First Class Mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery, or to refuse any transfer request, if: . we believe, in our sole discretion, that certain trading practices, such as excessive trading, by, or on behalf of, one or more Contract/Policy Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Sub-Account or on the share prices of the corresponding Portfolio or otherwise would be to the disadvantage of other Contract/Policy 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 excessive trading or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Portfolio shares. In making the determination that trading activity constitutes market timing or excessive trading, we will consider, among other things: . the total dollar amount being transferred, both in the aggregate and in the transfer request; . the number of transfers you make over a period of time and/or the period of time between transfers (note: one set of transfers to and from a Variable Sub-Account in a short period of time can constitute market timing); . whether your transfers follow a pattern that appears designed to take advantage of short term market fluctuations, particularly within certain Variable Sub-Account underlying Portfolios that we have identified as being susceptible to market timing activities (e.g., International, High Yield, and Small Cap Variable Sub-Accounts); . whether the manager of the underlying Portfolio has indicated that the transfers interfere with Portfolio management or otherwise adversely impact the Portfolio; and . the investment objectives and/or size of the Variable Sub-Account underlying Portfolio. We seek to apply these trading limitations uniformly. However, because these determinations involve the exercise of discretion, it is possible that we may not detect some market timing or excessive trading activity. As a result, it is possible that some investors may be able to engage in market timing or excessive trading activity, while others are prohibited, and the Portfolio may experience the adverse effects of market timing and excessive trading described above. If we determine that a Contract/Policy Owner has engaged in market timing or excessive trading activity, we will require that all future transfer requests be submitted through U.S. Postal Service First Class Mail thereby refusing to accept transfer requests via telephone, facsimile, Internet, or overnight delivery. If we determine that a Contract/Policy Owner continues to engage in a pattern of market timing or excessive trading activity we will restrict that Contract/Policy Owner from making future additions or transfers into the impacted Variable Sub-Account(s) or will restrict that Contract/Policy Owner from making future additions or transfers into the class of Variable Sub-Account(s) if the Variable Sub-Accounts(s) involved are vulnerable to arbitrage market timing trading activity (e.g., International, High Yield, and Small Cap Variable Sub-Accounts). In our sole discretion, we may revise our Trading Limitations at any time as necessary to better deter or minimize market timing and excessive trading or to comply with regulatory requirements. SHORT TERM TRADING FEES The underlying Portfolios are authorized by SEC regulation to adopt and impose redemption fees if a Portfolio's Board of Directors determines that such fees are necessary to minimize or eliminate short-term transfer activity that can reduce or dilute the value of outstanding shares issued by the Portfolio. The Portfolio will set the parameters relating to the redemption fee and such parameters may vary by Portfolio. If a Portfolio elects to adopt and charge redemption fees, these fees will be passed on to the Contract/Policy Owner(s) responsible for the short-term transfer activity generating the fee. We will administer and collect redemption fees in connection with transfers between the Variable Sub- Accounts and forward these fees to the Portfolio. Please consult the Portfolio's prospectus for more complete information regarding the fees and charges associated with each Portfolio. 14 PROSPECTUS 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 Sub-Account of your choosing. The interval between transfers from the Dollar Cost Averaging Fixed Account may be monthly only. The interval between transfers from Sub-Accounts 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. We may change this minimum or grant exceptions. 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 Fidelity Money Market Variable Sub-Account in equal monthly payments. You may not use the Dollar Cost Averaging program to transfer amounts from the Guaranteed Maturity Fixed Account Option. 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 Sub-Account with more volatile performance experience is unlikely to produce the desired effects of dollar cost averaging as would transfers from a less volatile Sub-Account. You may not use Dollar Cost Averaging and Portfolio Rebalancing at the same time. PORTFOLIO REBALANCING. Portfolio Rebalancing allows you to maintain the percentage of your Contract Value allocated to each Sub-Account at a pre-set level. Over time, the variations in each Sub-Account'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. You may choose to have rebalances made monthly, quarterly, semi-annually, or annually. We will not charge a transfer fee for Portfolio Rebalancing. A one-time request to rebalance the amounts allocated to the Sub- Accounts is not part of a Portfolio Rebalancing program and is subject to all of the requirements that are applicable to transfers. We will automatically terminate this program if you request any transfers outside the Portfolio Rebalancing program. If you wish to resume 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 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 twenty-five days 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 Sub-Accounts 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. 15 PROSPECTUS THE INVESTMENT AND FIXED ACCOUNT OPTIONS -------------------------------------------------------------------------------- SEPARATE ACCOUNT INVESTMENTS THE PORTFOLIOS. Each of the Sub-Accounts 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 Sub-Accounts may grow in value, decline in value, or grow less than you expect, depending on the investment performance of the Portfolios in which those Sub- Accounts 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 Sub-Accounts of the Separate Account.
PORTFOLIO EACH PORTFOLIO SEEKS INVESTMENT ADVISER ---------------------------------------------------------------------------------------------------------------------------- AIM VARIABLE INSURANCE FUNDS (INVESCO VARIABLE INSURANCE FUNDS) ---------------------------------------------------------------------------------------------------------------------------- Invesco V.I. Basic Value Fund - Series Long-term growth of capital INVESCO ADVISERS, INC. I/(1)/ ---------------------------------------------------------------------------------------------------------------------------- THE ALGER PORTFOLIOS ---------------------------------------------------------------------------------------------------------------------------- Alger LargeCap Growth Portfolio - Class Long-term capital appreciation I-2/(2)/ ------------------------------------------------------------------------------------------------ Alger Income & Growth Portfolio - To provide a high level of dividend income. Its Class I-2/(2)/ secondary goal is to provide capital appreciation. FRED ALGER MANAGEMENT, INC. ------------------------------------------------------------------------------------------------ Alger Capital Appreciation Portfolio - Long-term capital appreciation Class I-2/(2)/ ------------------------------------------------------------------------------------------------ Alger MidCap Growth Portfolio - Long-term capital appreciation Class I-2/(2)/ ------------------------------------------------------------------------------------------------ Alger SmallCap Growth Portfolio - Long-term capital appreciation Class I-2/(2)/ ------------------------------------------------------------------------------------------------ DWS VARIABLE SERIES I ---------------------------------------------------------------------------------------------------------------------------- DWS Bond VIP - Class A To maximize total return consistent with preservation of capital and prudent investment management, by investing for both current income and capital appreciation DEUTSCHE INVESTMENT ------------------------------------------------------------------------------------------------MANAGEMENT AMERICAS INC. DWS Global Opportunities VIP - Class A Above-average capital appreciation over the long term ------------------------------------------------------------------------------------------------ DWS Growth & Income VIP - Class A Long-term growth of capital, current income and growth of income ------------------------------------------------------------------------------------------------ DWS International VIP - Class A Long-term growth of capital ------------------------------------------------------------------------------------------------ DWS VARIABLE SERIES II ---------------------------------------------------------------------------------------------------------------------------- DWS Balanced VIP - Class A High total return, a combination of income and DEUTSCHE INVESTMENT capital appreciation MANAGEMENT AMERICAS INC. ---------------------------------------------------------------------------------------------------------------------------- FEDERATED INSURANCE SERIES ---------------------------------------------------------------------------------------------------------------------------- Federated Capital Income Fund II High current income and moderate capital FEDERATED EQUITY appreciation MANAGEMENT COMPANY OF PENNSYLVANIA ---------------------------------------------------------------------------------------------------------------------------- Federated Fund for U.S. Government Current income Securities II FEDERATED INVESTMENT ------------------------------------------------------------------------------------------------MANAGEMENT COMPANY Federated High Income Bond Fund II High current income ------------------------------------------------------------------------------------------------
16 PROSPECTUS
PORTFOLIO EACH PORTFOLIO SEEKS INVESTMENT ADVISER --------------------------------------------------------------------------------------------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS --------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Asset Manager(SM) High total return with reduced risk over the long Portfolio - Initial Class term by allocating its assets among stocks, bonds, and short-term instruments. -------------------------------------------------------------------------------------------------- Fidelity VIP Contrafund(R) Portfolio - Long-term capital appreciation. Initial Class --------------------------------------------------------------------------------------------------FIDELITY MANAGEMENT & Fidelity VIP Equity-Income Portfolio - Reasonable Income. The fund will also consider the RESEARCH COMPANY Initial Class potential for capital appreciation. The fund's goal is to achieve a yield which exceeds the composite yield on the securities comprising the Standard & Poor's 500(SM) Index (S&P 500(R) ). -------------------------------------------------------------------------------------------------- Fidelity VIP Growth Portfolio - Initial To achieve capital appreciation. Class -------------------------------------------------------------------------------------------------- Fidelity VIP Index 500 Portfolio - Investment results that correspond to the total return Initial Class of common stocks publicly traded in the United States, as represented by the Standard & Poor's 500(SM) Index (S&P 500(R) ). -------------------------------------------------------------------------------------------------- Fidelity VIP Money Market Portfolio - As high a level of current income as is consistent with Initial Class preservation of capital and liquidity. -------------------------------------------------------------------------------------------------- Fidelity VIP Overseas Portfolio - Long-term growth of capital. Initial Class -------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES --------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series Balanced Portfolio - Long-term capital growth, consistent with Institutional Shares preservation of capital and balanced by current income. -------------------------------------------------------------------------------------------------- Janus Aspen Series Flexible Bond To obtain maximum total return, consistent with Portfolio - Institutional Shares preservation of capital. JANUS CAPITAL MANAGEMENT --------------------------------------------------------------------------------------------------LLC Janus Aspen Series Overseas Portfolio - Long-term growth of capital. Service Shares -------------------------------------------------------------------------------------------------- Janus Aspen Series Janus Portfolio - Long-term growth of capital Institutional Shares -------------------------------------------------------------------------------------------------- Janus Aspen Series Enterprise Portfolio Long-term growth of capital - Institutional Shares -------------------------------------------------------------------------------------------------- Janus Aspen Series Worldwide Portfolio Long-term growth of capital in a manner consistent - Institutional Shares with the preservation of capital. -------------------------------------------------------------------------------------------------- LEGG MASON PARTNERS VARIABLE EQUITY TRUST --------------------------------------------------------------------------------------------------------------------------- Legg Mason ClearBridge Variable Large Long-term growth of capital with current income as a LEGG MASON PARTNERS FUND Cap Value Portfolio - Class I/(3)/ secondary objective ADVISOR, LLC --------------------------------------------------------------------------------------------------------------------------- MFS(R) VARIABLE INSURANCE TRUST/(SM)/ --------------------------------------------------------------------------------------------------------------------------- MFS Growth Series - Initial Class Capital appreciation -------------------------------------------------------------------------------------------------- MFS Investors Trust Series - Initial Capital appreciation Class --------------------------------------------------------------------------------------------------MFS(TM) INVESTMENT MFS New Discovery Series - Initial Class Capital appreciation MANAGEMENT -------------------------------------------------------------------------------------------------- MFS Research Series - Initial Class Capital appreciation -------------------------------------------------------------------------------------------------- MFS Total Return Series - Initial Class Total return -------------------------------------------------------------------------------------------------- OPPENHEIMER VARIABLE ACCOUNT FUNDS --------------------------------------------------------------------------------------------------------------------------- Oppenheimer Main Street Small Cap Capital appreciation. OPPENHEIMERFUNDS, INC. Fund(R) /VA - Service Shares --------------------------------------------------------------------------------------------------------------------------- PIMCO VARIABLE INSURANCE TRUST --------------------------------------------------------------------------------------------------------------------------- PIMCO VIT Foreign Bond Portfolio (U.S. Maximum total return, consistent with preservation Dollar- Hedged) - Administrative Shares of capital and prudent investment management. PACIFIC INVESTMENT --------------------------------------------------------------------------------------------------MANAGEMENT COMPANY LLC PIMCO VIT Total Return Portfolio - Maximum total return, consistent with preservation Administrative Shares of capital and prudent investment management. -------------------------------------------------------------------------------------------------- PUTNAM VARIABLE TRUST --------------------------------------------------------------------------------------------------------------------------- Putnam VT International Value Fund - Capital growth. Current income is a secondary PUTNAM INVESTMENT Class IB/(4)/ objective. MANAGEMENT, LLC ---------------------------------------------------------------------------------------------------------------------------
17 PROSPECTUS
PORTFOLIO EACH PORTFOLIO SEEKS INVESTMENT ADVISER ----------------------------------------------------------------------------------------------------------------------------- T. ROWE PRICE EQUITY SERIES, INC. ----------------------------------------------------------------------------------------------------------------------------- T. Rowe Price Equity Income Portfolio - Substantial dividend income as well as long-term I growth of capital through investments in the common stocks of established companies. T. ROWE PRICE ASSOCIATES, ------------------------------------------------------------------------------------------------INC. T. Rowe Price Mid-Cap Growth Portfolio Long-term capital appreciation by investing in - I/(5)/ mid-cap stocks with potential for above-average earnings growth. ------------------------------------------------------------------------------------------------ T. Rowe Price New America Growth Long-term growth of capital by investing primarily in Portfolio - I the common stocks of growth companies. ------------------------------------------------------------------------------------------------ T. ROWE PRICE INTERNATIONAL SERIES, INC. ----------------------------------------------------------------------------------------------------------------------------- T. Rowe Price International Stock Long-term growth of capital through investments T. ROWE PRICE INTERNATIONAL, Portfolio - I primarily in the common stocks of established INC. non-U.S. companies. ----------------------------------------------------------------------------------------------------------------------------- THE UNIVERSAL INSTITUTIONAL FUNDS, INC. ----------------------------------------------------------------------------------------------------------------------------- UIF U.S. Mid Cap Value Portfolio, Above-average total return over a market cycle of MORGAN STANLEY INVESTMENT Class I/(7)/ three to five years by investing in common stocks MANAGEMENT, INC./(6)/ and other equity securities. ----------------------------------------------------------------------------------------------------------------------------- VAN KAMPEN LIFE INVESTMENT TRUST ----------------------------------------------------------------------------------------------------------------------------- Van Kampen LIT Mid Cap Growth Capital growth Portfolio, Class II/(8)/ VAN KAMPEN ASSET ------------------------------------------------------------------------------------------------MANAGEMENT Van Kampen LIT Growth and Income Long-term growth of capital and income. Portfolio, Class II/(8)/ ------------------------------------------------------------------------------------------------ WELLS FARGO VARIABLE TRUST FUNDS ----------------------------------------------------------------------------------------------------------------------------- Wells Fargo Advantage VT Discovery Fund Long-term capital appreciation. WELLS FARGO FUNDS MANAGEMENT, LLC ------------------------------------------------------------------------------------------------SUB-ADVISOR: WELLS CAPITAL Wells Fargo Advantage VT Opportunity Long-term capital appreciation. MANAGEMENT INCORPORATED Fund(SM) ------------------------------------------------------------------------------------------------
(1) Effective April 30, 2010, AIM V.I. Basic Value Fund changed its name to Invesco V.I. Basic Value Fund. (2) Effective November 20, 2009, the following Portfolios changed their names: PREVIOUS NAME NEW NAME ----------------------------------------------------------------------------- Alger American LargeCap Growth Portfolio Alger LargeCap Growth Portfolio ----------------------------------------------------------------------------- Alger American Income & Growth Portfolio Alger Income & Growth Portfolio ----------------------------------------------------------------------------- Alger American Capital Appreciation Portfolio Alger Capital Appreciation Portfolio ----------------------------------------------------------------------------- Alger American MidCap Growth Portfolio Alger MidCap Growth Portfolio ----------------------------------------------------------------------------- Alger American SmallCap Growth Portfolio Alger SmallCap Growth Portfolio ----------------------------------------------------------------------------- Class I-2 shares were designated as Class O shares prior to September 23, 2009. (3) Effective April 30, 2010, Legg Mason ClearBridge Variable Investors Portfolio changed its name to Legg Mason ClearBridge Variable Large Cap Value Portfolio. (4) Effective February 1, 2010, Putnam VT International Growth and Income Fund changed its name to Putnam VT International Value Fund. (5) Effective May 1, 2004, the T. Rowe Price Mid-Cap Growth Portfolio - I is no longer available for new investments. If you are currently invested in the Variable Sub-account that invests in this Portfolio you may continue your investment. If, prior to May 1, 2004, you enrolled in one of our automatic transaction programs, such as automatic additions, portfolio rebalancing, or dollar cost averaging, we will continue to effect automatic transactions into the Variable Sub-Account in accordance with that program. Outside of these automatic transaction programs, additional allocations will not be allowed. (6) Morgan Stanley Investment Management Inc., the adviser to the UIF Portfolios, does business in certain instances using the name Van Kampen. (7) Subject to shareholder approval, the following portfolio of The Universal Institutional Funds, Inc. will be reorganized into a corresponding fund of the AIM Variable Insurance Funds (Invesco Variable Insurance Funds). It is anticipated that the reorganization will occur in the second quarter of 2010. The portfolio and its corresponding acquiring fund is shown below: REORGANIZING PORTFOLIO ACQUIRING FUND ----------------------------------------------------------------------------- THE UNIVERSAL INSTITUTIONAL FUNDS, AIM VARIABLE INSURANCE FUNDS INC: (INVESCO VARIABLE INSURANCE FUNDS): ----------------------------------------------------------------------------- UIF U.S. Mid Cap Value Portfolio - Invesco Van Kampen V.I. Mid Cap Value Class I Fund - Series I ----------------------------------------------------------------------------- (8) Subject to shareholder approval, certain portfolios of the Van Kampen Life Investment Trust will be reorganized into corresponding funds of the AIM Variable Insurance Funds (Invesco Variable Insurance Funds). It is anticipated that the reorganization will occur in the second quarter of 2010. Each such portfolio and its corresponding acquiring fund is shown below: REORGANIZING PORTFOLIOS ACQUIRING FUNDS ----------------------------------------------------------------------------- VAN KAMPEN LIFE INVESTMENT TRUST: AIM VARIABLE INSURANCE FUNDS (INVESCO VARIABLE INSURANCE FUNDS): ----------------------------------------------------------------------------- Van Kampen LIT Mid Cap Growth Invesco Van Kampen V.I. Mid Cap Portfolio - Class II Growth Fund - Series II ----------------------------------------------------------------------------- Van Kampen LIT Growth and Income Invesco Van Kampen V.I. Growth and Portfolio - Class II Income Fund - Series II ----------------------------------------------------------------------------- Each Portfolio is subject to certain investment restrictions and policies which may not be changed 18 PROSPECTUS 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 Sub-Account are separate and are credited to or charged against the particular Sub-Account without regard to income, gains or losses from any other Sub-Account or from any other part of our business. We will use the net Purchase Payments you allocate to a Sub-Account 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 advisers 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. Certain 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 Sub-Accounts 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 adviser 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 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 Sub-Accounts: (a) to operate the Separate Account in any form permitted by law; 19 PROSPECTUS (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 Sub-Account to another, or from any Sub-Account to our general account; (d) to add, combine, or remove Sub-Accounts 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 1-800-457-7617 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: EXAMPLE Purchase Payment $ 10,000 Guarantee Period 5 years Effective Annual Rate 4.50%
End of Contract Year ------------------------------------------------------ Year 1 Year 2 Year 3 Year 4 Year 5 ---------------------------------------------------------------------------------------------- Beginning Contract Value $10,000.00 X (1 + Effective Annual Rate) X 1.045 ---------- $10,450.00 Contract Value at end of Contract Year $10,450.00 X (1 + Effective Annual Rate) X 1.045 ---------- $10,920.25 Contract Value at end of Contract Year $10,920.25 X (1 + Effective Annual Rate) X 1.045 ---------- $11,411.66 Contract Value at end of Contract Year $11,411.66 X (1 + Effective Annual Rate) X 1.045 ---------- $11,925.19 Contract Value at end of Contract Year $11,925.19 X (1 + Effective Annual Rate) X 1.045 ---------- $12,461.82
Total Interest Credited During Guarantee Period = $2,461.82 ($12,461.82 - $10,000) 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. 20 PROSPECTUS 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 1-800-457-7617. 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 Sub-Accounts. 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 selected length until you direct us in writing to stop. We may stop offering this program at any time. MARKET VALUE ADJUSTMENT. 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 20; 2) when you transfer funds from the Guaranteed Maturity Fixed Account Option to the Sub-Accounts; 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; 2) you make a withdrawal to satisfy the IRS' required minimum distribution rules for this Contract; or 3) it is a transfer that is part of a Dollar Cost Averaging program. 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 21 PROSPECTUS 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. 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 Sub-Accounts or the Guaranteed Maturity Fixed Account Option. We will follow your instructions in transferring amounts from this option to the Sub-Accounts or the Guaranteed Maturity Fixed Account Option on a monthly basis only, as described in "Automatic Dollar Cost Averaging Program" on page 15 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 on or immediately following the later of the 10th Contract Anniversary or the youngest Annuitant's 90th 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). If your Contract was purchased by a Qualified Plan, we may require you to annuitize by the date required by the Tax Code. 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. The three Annuity Options are: OPTION A: LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as the Annuitant lives. If the Annuitant dies before we have made all of the guaranteed income payments, we will continue to pay income payments to the Beneficiary until the guaranteed number of payments has been paid. The number of months guaranteed may be 0 months, or range from 60 to 360 months. OPTION B: JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS. Under this plan, we make periodic income payments for at least as long as either the Annuitant or the joint Annuitant is alive. If both the Annuitant and the joint Annuitant die before we have made all of the guaranteed income payments, we will continue to pay income payments to the Beneficiary until the guaranteed number of payments has been paid. The number of months guaranteed may be 0 months, or range from 60 to 360 months. 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. If you elected Variable Annuity payments, the lump sum payment will depend on: . the investment results of the Sub-Accounts you have selected, . the Contract Value at the time you elected annuitization, and 22 PROSPECTUS . 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. If you choose Income Plan A or B, or, if available, another Income Plan with payments that continue for the life of the Annuitant or joint Annuitant, we may require proof of age and sex of the Annuitant or joint Annuitant before starting income payments, and proof that the Annuitant or joint Annuitant are alive before we make each payment. Please note that under such Income Plans, if you elect to take no minimum guaranteed payments, it is possible that the payee could receive only 1 income payment if the Annuitant and any joint Annuitant both die before the second income payment, or only 2 income payments if they die before the third income payment, and so on. 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 30 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" beginning on page 23. 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 Sub-Accounts prior to the Annuity Date. If you do not tell us how to allocate your Contract Value among Fixed and 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 Sub-Accounts 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 Sub-Accounts 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 23 PROSPECTUS 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 Sub-Accounts. 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 any applicable 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 Sub-Accounts so as to change the relative weighting of the Sub-Accounts on which your Variable Annuity payments will be based. In addition, you will have a limited ability to make transfers from the Sub-Accounts 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 Sub-Accounts or make transfers from the Sub-Accounts 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 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 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. 24 PROSPECTUS 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 seventh Contract Anniversary and each subsequent Contract Anniversary evenly divisible by seven, 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 on page 26, you may add optional riders that in some circumstances may increase the Death Benefit under your contract. DEATH BENEFIT PAYMENTS 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 (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. (b) 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 Sub-Accounts. This excess will be allocated in proportion to your Contract Value in those Sub-Accounts 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 Sub-Account. 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 Sub-Accounts; (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 Sub-Accounts 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 25 PROSPECTUS 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 Sub-Account 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 13 and Transfer Fees 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 the death of the Contract 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 Sub-Account. The Beneficiary may exercise all rights as set forth in Transfer During the Accumulation Period on page 13 and Transfer Fees 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. 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. We offer different optional riders under this Contract. If you elect an optional rider, we will charge you a higher mortality and expense charge. We may discontinue offering one or more Riders at any time. The benefits under the Riders are described below. The benefits in the riders discussed below may not be available in all states. For example, the Enhanced Death Benefit, Enhanced Income Benefit and all versions of the Enhanced Death and Income Benefit riders issued in Washington state do not contain the Enhanced Death Benefit B or Enhanced Income Benefit B provisions that are described below. Further they may be offered in certain states 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. ENHANCED DEATH BENEFIT RIDER: When you purchase your Contract, you may select the Enhanced Death Benefit Rider. This Rider is available if the oldest Owner or Annuitant is age 80 or less at issue. If you are not an individual, the Enhanced Death Benefit applies only to the Annuitant's death. As described below, we will charge a higher mortality and expense risk charge if you select this Rider. 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, defined below. ENHANCED INCOME BENEFIT RIDER: When you purchase your Contract you may select the Enhanced Income Benefit Rider if available in your state. Lincoln Benefit Life no longer offers this Rider in most states. This Rider is available if the oldest Owner or Annuitant is age 75 or less at issue. If you select this Rider, you may be able to receive higher annuity payments in certain circumstances. As described below, we will charge a higher mortality and expense risk charge if you select this Rider. The Enhanced Income Benefit under this Rider is equal to the greater of Enhanced Income Benefit A or Enhanced Income Benefit B, defined below, on the Annuity Date. We will not increase or decrease the Enhanced Income Benefit amount by any Market Value Adjustment. To be eligible for the Enhanced Income Benefit, you must select an Annuity Date that is: (a) on or after the tenth Contract Anniversary; (b) before the Annuitant's age 90; and (c) within a 30-day period on or following a Contract Anniversary. On the Annuity Date, you may apply the Enhanced Income Benefit to an Annuity Option that provides for fixed payments on the basis guaranteed in the Contract for either a single life with a period certain, or joint lives with a period certain of at least: (a) 10 years, if the youngest Annuitant's age is 80 or less on the Annuity Date; or (b) 5 years, if the youngest Annuitant's age is greater than 80 on the Annuity Date. 26 PROSPECTUS If you wish to select a different Annuity Option, you must apply the Annuitized Value and not the Enhanced Income Benefit. The Enhanced Income Benefit under this Rider only applies to the determination of income payments under the income options described above. It is not a guarantee of Contract Value or performance. The benefit does not enhance the amounts paid in partial withdrawals, surrenders or death benefits. In addition, under some circumstances, you will receive higher initial income payments by applying your Contract Annuitized Value to one of the standard Annuity Options instead of utilizing this optional benefit. If you surrender your Contract, you will not receive any benefit under this Rider. ENHANCED INCOME BENEFIT A. At issue, the Enhanced Income Benefit A is equal to the initial purchase payment. After issue, Enhanced Income Benefit A is recalculated as follows: . When you make a Purchase Payment, we will increase the Enhanced Income Benefit A by the amount of your Purchase Payment; . When you make a withdrawal, we will decrease Enhanced Income Benefit A by a withdrawal adjustment as defined below; . On each Contract Anniversary, the Enhanced Income Benefit A is equal to the greater of the Contract Value or the most recently calculated Enhanced Income Benefit A. If you do not make any additional Purchase Payments or withdrawals, the Enhanced Income Benefit A will be the greatest of all Contract Anniversary Contract Values prior to the date we calculate the Enhanced Income Benefit. We will continuously adjust Enhanced Income Benefit A; as described above, until the oldest Contract Owner's 85th birthday, or if the Contract Owner is not a living individual, the oldest Annuitant's 85th birthday. Thereafter, we will adjust Enhanced Income Benefit A only for Purchase Payments and withdrawals. ENHANCED INCOME BENEFIT B. Enhanced Income Benefit B is equal to your total Purchase Payments reduced by any withdrawal adjustments, accumulated daily at an effective annual interest rate of 5% per year, until the earlier of: (a) the date we determine the income benefit; (b) the first day of the month following the oldest Contract Owner's 85th birthday, or the first day of the month following the oldest Annuitant's 85th birthday, if the Contract Owner is not a living individual. The withdrawal adjustment is equal to (a) divided by (b), with the result multiplied by (c) where, (a) is the withdrawal amount; (b) is the Contract Value immediately prior to the withdrawal; (c) is the most recently calculated Enhanced Income Benefit A or B, as applicable. ENHANCED DEATH AND INCOME BENEFIT RIDER II: When you purchase your Contract and if available in your state, you may select the Enhanced Death and Income Benefit Rider II. Lincoln Benefit Life no longer offers this Rider in most states. This Rider is available if the oldest Owner or Annuitant is age 75 or less at issue. This Rider provides the same Enhanced Death Benefit as the Enhanced Death Benefit Rider. In addition, this Rider may enable you to receive higher annuity payments in certain circumstances. As described below, we will charge a higher mortality and expense risk charge if you select this Rider. The Enhanced Income Benefit under this Rider is equal to the greater of Enhanced Death Benefit A or Enhanced Death Benefit B, defined below, on the Annuity Date. We will not increase or decrease the Enhanced Income Benefit amount by any Market Value Adjustment. To be eligible for the Enhanced Income Benefit, you must select an Annuity Date that is: (a) on or after the tenth Contract Anniversary; (b) before the Annuitant's age 90; and (c) within a 30-day period on or following a Contract Anniversary. On the Annuity Date, you may apply the Enhanced Income Benefit to an Annuity Option that provides for fixed payments on the basis guaranteed in the contract for either a single life with a period certain, or joint lives with a period certain of at least: (a) 10 years, if the youngest Annuitant's age is 80 or less on the Annuity Date; or (b) 5 years, if the youngest Annuitant's age is greater than 80 on the Annuity Date. If you wish to select a different Annuity Option, you must apply the Annuitized Value and not the Enhanced Income Benefit. ENHANCED DEATH AND INCOME BENEFIT RIDER. This Rider was previously available if the oldest Owner or Annuitant is age 75 or less at issue. This rider is no longer available. This Rider provides the same Enhanced Death Benefit as the Enhanced Death Benefit Rider. In addition, this Rider may enable you to receive higher annuity payments in certain circumstances. As described below, we will charge a higher mortality and expense risk charge if you select this Rider. The Enhanced Income Benefit under this Rider is equal to the value of the Enhanced Death Benefit on the Annuity Date. We will not increase or decrease the Enhanced Income Benefit amount by any Market Value Adjustment. To be eligible for the Enhanced Income 27 PROSPECTUS Benefit, you must select an Annuity Date that is on or after the tenth Contract Anniversary, but before the Annuitant's age 90. On the Annuity Date, you may apply the Enhanced Income Benefit to an Annuity Option that provides for payments guaranteed for either a single life with a period certain or joint lives with a period certain of at least: (a) 10 years, if the youngest Annuitant's age is 80 or less on the Annuity Date; or (b) at least 5 years, if the youngest Annuitant's age is greater than 80 on the Annuity Date. If you wish to select a different Annuity Option, you must apply the Annuitized Value and not the Enhanced Income Benefit. 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 greatest of the Contract Value on the Issue Date and all Contract Anniversaries prior to the date we calculate any death benefit. We will continuously adjust Enhanced Death Benefit A as described above until the oldest Contract Owner's 85th birthday or, if the Contract Owner is not a living individual, the Annuitant's 85th 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 your total Purchase Payments, reduced by any withdrawal adjustments, accumulated daily at an effective annual rate of 5% per year, until the earlier of: (a) the date we determine the death benefit, (b) the first day of the month following the oldest Contract Owner's 85th birthday; or (c) the first day of the month following the oldest Annuitant's 85th birthday, if the Contract Owner is not a living individual. 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 that 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 (c) = the most recently calculated Enhanced 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 Beneficiaries are deceased at the time a Contract Owner, or 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, the remaining Beneficiaries in that class will divide the deceased Beneficiary's share in proportion to the original shares 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. 28 PROSPECTUS 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. 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. Any change is subject to any payment we make or other action we take before we accept the changes. 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 half 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. 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 Sub-Account. If your loan amount is greater than your Contract Value in the Sub-Accounts, 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 Sub-Accounts 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 Sub-Accounts 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 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 Sub-Accounts. 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; 4) the amount applied on the Annuity Date to provide annuity payments; and 5) the amount applied on the Annuity Date to provide annuity payments under the Enhanced Income Benefit Rider, Enhanced Death and Income Benefit Rider, or the Enhanced Death and Income Benefit Rider II. 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 Sub-Account(s) in the proportion that you have selected for Purchase Payments. Allocations of loan payments are not permitted to the Fixed Accounts (Guaranteed Maturity 29 PROSPECTUS 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 Fidelity Money Market Sub-Account. 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 and 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 21. 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 Sub-Account. 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 distribution of earnings. 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. 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. 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. For partial withdrawals, you may allocate the amount among the Sub-Accounts and the Fixed Accounts. If we do not receive allocation instructions from you, we usually will allocate the partial withdrawal proportionately among the Sub-Accounts and the Guaranteed Maturity Fixed Account Options based upon the balance of the Sub-Accounts 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 also will deduct a contract maintenance charge of $35, unless we have waived the contract maintenance charge on your Contract as described on page 31. 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. 30 PROSPECTUS 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; 5) or 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 Sub-Account 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 Sub-Accounts 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 adviser. 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, if applicable, for premium taxes; 2) as charges against the assets of the Separate Account for administrative expenses and for the assumption of mortality and expense risks; and 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 pages 5, 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 Sub-Account during each Valuation Period. The mortality and expense risk charge is equal, on an annual basis, to 1.15% of the average net asset value of each Sub-Account. 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 24. 31 PROSPECTUS 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 1.35% of average net asset value of each Sub-Account. If you select the Enhanced Income Rider, your mortality and expense risk charge will be 1.50% of average daily net asset value of each Sub-Account. If you select the Enhanced Death and Income Benefit Rider, your mortality and expense risk charge will be 1.55% of average daily net asset value of each Sub-Account. If you select the Enhanced Death and Income Benefit Rider II, your mortality and expense risk charge will be 1.70% of average daily net asset value of each Sub-Account. We charge a higher mortality and expense risk charge for the Riders to compensate us for the additional risk that we accept by providing the Riders. We will calculate a separate Accumulation Unit Value for the base Contract, and for Contracts with each type of 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 Sub-Accounts to which you have allocated your Contract Value, and redeem Accumulation Units accordingly. We will waive this charge if you pay more than $50,000 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 and 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 Sub-Account during each Valuation Period. This charge is equal, on an annual basis, to 0.10% of the average net asset value of the Sub-Accounts. 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, permits us to charge a transfer fee of $10 on the second and each subsequent transaction in each calendar month in which transfer(s) are effected between Subaccount(s) and/or the Fixed Account. We will notify you if we begin to charge this fee. 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 seven 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 and Second 7% Third and Fourth 6% Fifth 5% Sixth 4% Seventh 3% Eighth and later 0%
When we calculate the Withdrawal Charge, we do not take any applicable Market Value Adjustment into consideration. Beginning on January 1, 2004, 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; SECOND. "Old Purchase Payments" - Purchase Payments received by us more than seven years before the date of withdrawal that have not been previously withdrawn; 32 PROSPECTUS THIRD. Any additional amounts available as a "Free Withdrawal," as described on page 33; FOURTH. "New Purchase Payments" - Purchase Payments received by us less than seven 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 plan under our prototype as described on page 42; . withdrawals taken to satisfy IRS minimum distribution rules; . withdrawals that qualify for one of the waiver benefits described on pages 33-34; and . withdrawal under Contracts issued to employees of Lincoln Benefit Life Company or its affiliates, Surety Life Insurance Company and Allstate Financial Services, L.L.C., or to their spouses or minor children if those 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 may waive withdrawal charges if this Contract is surrendered, and the entire proceeds of the surrender are directly used to purchase a new Contract also issued by us or any affiliated company. Such waivers will be granted on a non-discriminatory basis. 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 35. You should consult your own tax counsel or other tax advisers 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. 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 35. WAIVER BENEFITS GENERAL. If approved in your state, we will offer the three 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 adviser 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 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 if the Owner is not a living person, are diagnosed with a 33 PROSPECTUS terminal illness. We may require confirmation of the diagnosis as provided in the Contract. UNEMPLOYMENT WAIVER BENEFIT. Under this benefit, we will waive any Withdrawal Charge and Market Value Adjustment on one partial or full withdrawal from your Contract, if you meet the following requirements: 1) you become unemployed at least 1 year after the Issue Date; 2) you receive unemployment compensation for at least 30 consecutive days as a result of that unemployment; and 3) you claim this benefit within 180 days of your initial receipt of unemployment compensation. You may exercise this benefit once before the Annuity Date. 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 1-800-457-7617. 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 Sub-Accounts to which you allocate your Contract value. For a summary of current estimates of those charges and expenses, see page 5. For more detailed information about those charges and expenses, please refer to the prospectuses for the appropriate Portfolios. We receive compensation from the investment advisers or administrators or the Portfolios in connection with administrative service and cost savings experienced by the investment advisers or administrators. We collect this compensation under agreements between us and the Portfolio's investment adviser, administrators or distributors, and is calculated based on a percentage of the average assets allocated to the Portfolio. 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 35 PROSPECTUS the separate account investments may cause a Contract 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 36 PROSPECTUS Contract owned by a non-natural person will be treated as the death of the Contract Owner. We administer certain spousal rights under the Contract and related tax reporting in accordance with our understanding of the Defense of Marriage Act (which defines a "marriage" as a legal union between a man and a woman and a "spouse" as a person of the opposite sex). Depending on the state in which your Contract is issued, we may offer certain spousal benefits to civil union couples or same-sex marriage spouses. You should be aware, however, that federal tax law does not recognize civil unions or same-sex marriages. Therefore, we cannot permit a civil union partner or same-sex spouse to continue the Contract within the meaning of the tax law upon the death of the first partner under the Contract's "spousal continuance" provision. Civil union couples and same-sex marriage spouses should consider that limitation before selecting a spousal benefit under the Contract. 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 total 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 (as defined by the Code) 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 rulings that permit partial exchanges of annuity contracts. Effective June 30, 2008, a partial exchange, of a deferred annuity contract for another deferred annuity contract, will qualify for tax-deferral only if no amount is withdrawn or surrendered from either contract for a period of 12 months. The 12 month period begins on the date when exchange proceeds are treated as premiums paid for the recipient contract. Withdrawals from, annuitizations, taxable Owner or Annuitant changes, or surrenders of either contract within the 12 month period will retroactively negate the partial exchange, unless one of the following applies: . the contract owner reaches 59 1/2, becomes totally disabled, dies, obtains a divorce or suffers a loss of employment after the partial exchange was completed and prior to the withdrawal, annuitization, Owner or Annuitant change, or surrender; . if the annuity is owned by an entity, the annuitant dies after the partial exchange was completed and prior to the withdrawal, annuitization, Owner or Annuitant change or surrender; . the withdrawal is allocable to investment in the Contract before August 14, 1982; or, . the annuity is a qualified funding asset within the meaning of Code section 130(d). If a partial exchange is retroactively negated, the amount originally transferred to the recipient contract is treated as a withdrawal from the source contract, taxable to the extent of any gain in that contract on the date of the exchange. An additional 10% tax penalty may also apply if the Contract Owner is under age 59 1/2. Your Contract may not permit partial exchanges. 37 PROSPECTUS 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 or no U.S. taxpayer identification number is provided 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, Code Section 1441 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. We require an original IRS Form W-8BEN at issue to certify the owners' foreign status. 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 fully 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 from 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 an annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as or in connection with: . Individual Retirement Annuities (IRAs) under Code Section 408(b); . Roth IRAs under Code Section 408A; . Simplified Employee Pension (SEP IRA) under Code Section 408(k); . Savings Incentive Match Plans for Employees (SIMPLE IRA) under Code Section 408(p); . Tax Sheltered Annuities under Code Section 403(b); . Corporate and Self Employed Pension and Profit Sharing Plans under Code Section 401; and . State and Local Government and Tax-Exempt Organization Deferred Compensation Plans under Code Section 457. 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. If you use the Contract within an employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waiver of charges, death benefits, Payout Start Dates, income payments, and other Contract features. In addition, adverse tax consequences may result if Qualified Plan limits on distributions and other conditions are not met. Please consult your Qualified Plan administrator for more information. Lincoln Benefit no longer issues deferred annuities to employer sponsored qualified retirement plans. 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 qualified retirement plan. Please refer to your Endorsement for IRAs or 403(b) plans, if applicable, for additional information on your death settlement options. In the case of certain Qualified 38 PROSPECTUS Plans, the terms of the Qualified Plan Endorsement and 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 generally 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. REQUIRED MINIMUM DISTRIBUTIONS. Generally, Tax Qualified Contracts (excluding Roth IRAs) 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. Effective December 31, 2005, the IRS requires annuity contracts to include the actuarial present value of other benefits for purposes of calculating the required minimum distribution amount. These other benefits may include accumulation, income, or death benefits. 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 TSA or employer sponsored qualified retirement plan. Lincoln Benefit reserves the right to limit the availability of the Contract for use with any of the Qualified Plans listed above. 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 (as defined by the Code) 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 (does not apply to 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), . made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs), and . from an IRA or attributable to elective deferrals under a 401(k) plan, 403(b) annuity, or certain similar arrangements made to individuals who (because of their being members of a reserve component) are ordered or called to active duty after Sept. 11, 2001, for a period of more than 179 days or for an indefinite period; and made during the period beginning on the date of the order or call to duty and ending at the close of the active duty period. 39 PROSPECTUS 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, or if no U.S. taxpayer identification number is provided, 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 Tax Qualified Contracts, 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. With respect to any Contract held under a Section 457 plan or by the trustee of a Section 401 Pension or Profit Sharing Plan, we will not issue payments directly to a plan participant or beneficiary. Consequently, the obligation to comply with the withholding requirements described above will be the responsibility of the plan. 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, Code Section 1441 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. We require an original IRS Form W-8BEN at issue to certify the owners' foreign status. 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 fully 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. CHARITABLE IRA DISTRIBUTIONS. The Pension Protection Act of 2006 included a charitable giving incentive permitting tax-free IRA distributions for charitable purposes. The Emergency Economic Stabilization Act of 2008 extended this provision for two years. For distributions in tax years beginning after 2005 and before 2010, the Act provides an exclusion from gross income, up to $100,000, for otherwise taxable IRA distributions from a traditional or Roth IRA that are qualified charitable distributions. To constitute a qualified charitable distribution, the distribution must be made (1) directly by the IRA trustee to certain qualified charitable organizations and (2) on or after the date the IRA owner attains age 70 1/2. Distributions that are excluded from income under this provision are not taken into account in determining the individual's deduction, if any, for charitable contributions. The IRS has indicated that an IRA trustee is not responsible for determining whether a distribution to a charity is one that satisfies the requirements for the new income tax exclusion added by the Pension Protection 40 PROSPECTUS Act. As a result the general rules for reporting IRA distributions apply. INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408(b) 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 can be contributed and on the time when distributions may commence. Certain distributions from other types of qualified retirement plans may be "rolled over" on a tax-deferred basis into an Individual Retirement Annuity. ROTH INDIVIDUAL RETIREMENT ANNUITIES. Code Section 408A 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. A traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. For distributions after 2007, the Pension Protection Act of 2006 allows distributions from qualified retirement plans including tax sheltered annuities and governmental Section 457 plans to be rolled over directly into a Roth IRA, subject to the usual rules that apply to conversions from a traditional IRA into a Roth IRA. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. Prior to January 1, 2010, income and filing status limitations applied to rollovers from non-Roth accounts to a Roth IRA. Effective January 1, 2005, the IRS requires conversions of annuity contracts to include the actuarial present value of other benefits for purposes of valuing the taxable amount of the conversion. ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL IRAS). 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. If you have a contract issued as an IRA under Code Section 408(b) and request to change the ownership to an IRA custodian permitted under Section 408, we will treat a request to change ownership from an individual to a custodian as an indirect rollover. We will send a Form 1099R to report the distribution and the custodian should issue a Form 5498 for the contract value contribution. 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 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. (SEP IRA) Code Section 408(k) 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). Code Section 408(p) allows 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. SIMPLE IRA plans must include the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2007 (EGTRRA) to avoid adverse tax consequences. If your current SIMPLE IRA plan uses IRS Model Form 5304-SIMPLE with a revision date of March 2002 or later, then your plan is up to date. If your plan has a revision date prior to March 2002, please consult with your tax or legal advisor to determine the action you need to take in order to comply with this requirement. 41 PROSPECTUS 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. Code Section 403(b) 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 funds in 403(b) contracts that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). CAUTION: Under recent IRS regulations we can accept contributions, transfers and rollovers only if we have entered into an information-sharing agreement, or its functional equivalent, with the applicable employer or its plan administrator. Unless your contract is grandfathered from certain provisions in these regulations, we will only process certain transactions (e.g, transfers, withdrawals, hardship distributions and, if applicable, loans) with employer approval. This means that if you request one of these transactions we will not consider your request to be in good order, and will not therefore process the transaction, until we receive the employer's approval in written or electronic form. CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS. Section 401(a) of the Code permits corporate employers to establish various types of tax favored retirement plans for employees. Self-employed individuals may establish tax favored retirement plans for themselves and their employees (commonly referred to as "H.R.10" or "Keogh"). Such retirement plans may permit the purchase of annuity contracts. Lincoln Benefit no longer issues annuity contracts to employer sponsored qualified retirement plans. There are two owner types for contracts intended to qualify under Section 401(a): a qualified plan fiduciary or an annuitant owner. . A qualified plan fiduciary exists when a qualified plan trust that is intended to qualify under Section 401(a) of the Code is the owner. The qualified plan trust must have its own tax identification number and a named trustee acting as a fiduciary on behalf of the plan. The annuitant should be the person for whose benefit the contract was purchased. . An annuitant owner exists when the tax identification number of the owner and annuitant are the same, or the annuity contract is not owned by a qualified plan trust. The annuitant should be the person for whose benefit the contract was purchased. If a qualified plan fiduciary is the owner of the contract, the qualified plan must be the beneficiary so that death benefits from the annuity are distributed in accordance with the terms of the qualified plan. Annuitant owned contracts require that the beneficiary be the annuitant's spouse (if applicable), which is consistent with the required IRS language for qualified plans under Section 401(a). A completed Annuitant Owned Qualified Plan Designation of Beneficiary form is required in order to change the beneficiary of an annuitant owned Qualified Plan contract. STATE AND LOCAL GOVERNMENT AND TAX-EXEMPT ORGANIZATION DEFERRED COMPENSATION PLANS. Section 457 of the Code permits employees of state and local governments and tax-exempt organizations to defer a portion of their compensation without paying current taxes. The employees must be participants in an eligible deferred compensation plan. In eligible governmental plans, all assets and income must be held in a trust/custodial account/annuity contract for the exclusive benefit of the participants and their beneficiaries. To the extent the Contracts are used in connection with a non-governmental eligible plan, employees are considered general creditors of the employer and the employer as owner of the Contract has the sole right to the proceeds of the Contract. Under eligible 457 plans, contributions made for the benefit of the employees will not be includible in the employees' gross income until distributed from the plan. Lincoln Benefit no longer issues annuity contracts to 457 plans. 42 PROSPECTUS DESCRIPTION OF LINCOLN BENEFIT LIFE COMPANY AND THE SEPARATE ACCOUNT -------------------------------------------------------------------------------- LINCOLN BENEFIT LIFE COMPANY Lincoln Benefit 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 S. 84th Street , Lincoln, NE 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 ("Allstate"), a stock property-liability insurance company incorporated under the laws of the State of Illinois. All of the capital stock issued and outstanding of Allstate Insurance Company is owned by Allstate Insurance Holdings, LLC, which is wholly owned by The Allstate Corporation. 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 will 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 agreement 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. 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 agreement. These assets represent our general account and are invested and managed by Allstate Life. While the reinsurance agreement provides 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. Effective June 1, 2006, Allstate Life entered into an agreement ("the Agreement") with Prudential Financial, Inc. and its subsidiary, The Prudential Insurance Company of America ("PICA") pursuant to which Allstate Life sold, through a combination of coinsurance and modified coinsurance reinsurance, substantially all of its variable annuity business, including that of its subsidiary Lincoln Benefit. Pursuant to the Agreement Allstate Life and PICA also entered into an administrative services agreement which provides that PICA or an affiliate administer the Variable Account and the Contracts. The benefits and provisions of the Contracts have not been changed by these transactions and agreements. None of the transactions or agreements have changed the fact that we are primarily liable to you under your Contract. 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 Sub-Accounts. The assets of each Sub-Account are invested in the shares of one of the Portfolios. We do not guarantee the investment performance of the Separate Account, its Sub-Accounts 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 1-800-457-7617. We have reproduced the Table of Contents of the Statement of Additional Information on page 47. 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 43 PROSPECTUS 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. FINANCIAL STATEMENTS. The financial statements of Lincoln Benefit and the financial statements of the Separate Account, which are comprised of the financial statements of the underlying Sub-Accounts, are set forth in the Statement of Additional Information. ADMINISTRATION We have primary responsibility for all administration of the Contracts and the Variable Account. We entered into an administrative services agreement with The Prudential Insurance Company of America ("PICA") whereby, PICA or an affiliate provides administrative services to the Variable Account and the Contracts on our behalf. In addition, PICA entered into a master services agreement with se/2/, inc., of 5801 SW 6th Avenue, Topeka, Kansas 66636, whereby se/2/, inc. provides certain business process outsourcing services with respect to the Contracts. se/2/, inc. may engage other service providers to provide certain administrative functions. These service providers may change over time, and as of December 31, 2009, consisted of the following: Keane Worldzen, Inc. (administrative services) located at 625 North Michigan Avenue, Suite 1100, Chicago, IL 60611; RR Donnelly Global Investment Markets (compliance printing and mailing) located at 111 South Wacker Drive, Chicago, IL 60606; Jayhawk File Express, LLC (file storage and document destruction) located at 601 E. 5th Street, Topeka, KS 66601-2596; Co-Sentry.net, LLC (back-up printing and disaster recovery) located at 9394 West Dodge Rd, Suite 100, Omaha, NE 68114; Convey Compliance Systems, Inc. (withholding calculations and tax statement mailing) located at 3650 Annapolis Lane, Suite 190, Plymouth, MN 55447; Spangler Graphics, LLC (compliance mailings) located at 29305 44th Street, Kansas City, KS 66106; Veritas Document Solutions, LLC (compliance mailings) located at 913 Commerce Ct, Buffalo Grove, IL 60089; Records Center of Topeka, a division of Underground Vaults & Storage, Inc. (back-up tapes storage) located at 1540 NW Gage Blvd. #6, Topeka, KS 66618; EquiSearch Services, Inc. (lost shareholder search) located at 11 Martime Avenue, Suite 665, White Plains, NY 10606; ZixCorp Systems, Inc. (email encryption) located at 2711 N. Haskell Ave., Suite 2300, Dallas, TX 75204; DST Systems, Inc. (FAN mail, positions, prices) located at 333 West 11 Street, 5th Floor, Kansas City, MO 64105. In administering the Contracts, the following services are provided, among others: . maintenance of Contract Owner records; . Contract Owner services; . calculation of unit values; . maintenance of the Variable Account; and . preparation of Contract Owner reports. We will send you Contract statements at least annually. We will also send you transaction confirmations. 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 or a confirmation. 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 6% 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 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 Financial Industry Regulatory Authority. 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. Lincoln Benefit and ALFS have also entered into wholesaling agreements with certain independent contractors and their broker-dealers. Under these agreements, compensation based on a percentage of premium payments and/or Contract values is paid to the wholesaling broker-dealer for the wholesaling activities of their registered representative. LEGAL PROCEEDINGS There are no pending legal proceedings affecting the Separate Account. Lincoln Benefit is engaged in routine 44 PROSPECTUS 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 Susan L. Lees, General Counsel of Lincoln Benefit. 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. ABOUT LINCOLN BENEFIT LIFE COMPANY 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. The variable annuities described in this prospectus fall 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. 45 PROSPECTUS TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION PAGE ------------------------------------------------------------ THE CONTRACT ------------------------------------------------------------ Annuity Payments ------------------------------------------------------------ Initial Monthly Annuity Payment ------------------------------------------------------------ Subsequent Monthly Payments ------------------------------------------------------------ Transfers After Annuity Date ------------------------------------------------------------ Annuity Unit Value ------------------------------------------------------------ Illustrative Example of Annuity Unit Value Calculation ------------------------------------------------------------ Illustrative Example of Variable Annuity Payments ------------------------------------------------------------ EXPERTS ------------------------------------------------------------ FINANCIAL STATEMENTS ------------------------------------------------------------
46 PROSPECTUS APPENDIX A -------------------------------------------------------------------------------- ACCUMULATION UNIT VALUES Appendix A presents the Accumulation Unit Values and number of Accumulation Units outstanding for each Sub-Account since the Sub-Accounts were first offered under the Contracts. This Appendix includes Accumulation Unit Values representing the highest and lowest available combinations of Contract charges that affect Accumulation Unit Values for each Contract. The Statement of Additional Information, which is available upon request without charge, contains the Accumulation Unit Values for all other available combinations of Contract charges that affect Accumulation Unit Values for each Contract. Please contact us at 1-800-457-7617 to obtain a copy of the Statement of Additional Information. The LBL Consultant Variable Annuity I Contracts and all of the Variable Sub-Accounts shown below were first offered under the Contracts on September 9, 1998, except for the Oppenheimer Main Street Small Cap/VA - Service Shares Sub-Account, PIMCO VIT Foreign Bond (U.S. Dollar-Hedged) - Administrative Shares Sub-Account, PIMCO VIT Total Return - Administrative Shares Sub-Account, Premier VIT OpCap Balanced Sub-Account, Premier VIT NACM Small Cap Portfolio Class 1 Sub-Account, Putnam VT International Growth and Income - Class IB Sub-Account, Van Kampen LIT Mid Cap Growth, Class II Sub-Account, Van Kampen LIT Growth and Income, Class II Sub-Account which were first offered under the Contracts on May 1, 2002; the AIM V.I. Basic Value - Series I Sub- Account, Legg Mason ClearBridge Variable Investors Portfolio - Class I - Class I Sub-Account, UIF U.S. Mid Cap Value, Class I Sub-Account which were first offered under the Contracts on April 30, 2004; the Wells Fargo Advantage VT Discovery Sub-Account, Wells Fargo Advantage VT Opportunity Sub-Account which were first offered under the Contracts on April 8, 2005; and the DWS Balanced - Class A Sub-Account which was first offered under the Contracts on April 29, 2005 and Janus Aspen Overseas Portfolio - Service Share Sub-Account which was first offered under the Contracts on April 30, 2008. An "Accumulation Unit Value" is a unit of measure used to calculate the value or a Contract Owner's interest in a Sub-Account 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 Contract Maintenance Charge. On April 24, 2009, the Premier VIT OpCap Balanced Portfolio liquidated and the Sub-Account is no longer available for investment. However, accumulation unit values for the Sub-Account are included in the tables below because the Sub-Account was available during part of the period ending December 31, 2009. On April 30, 2009, the Ridgeworth Classic Large Cap Growth Stock Fund and the Ridgeworth Classic Large Cap Value Equity Fund liquidated and the Sub-Accounts are no longer available for investment. However, accumulation unit values for the Sub-Accounts are included in the tables below because the Sub-Accounts were available during part of the period ending December 31, 2009. The name of the following Sub-Accounts changed since December 31, 2009. The name shown in the tables of Accumulation Units correspond to the name of the Sub-Accounts as of December 31, 2009: SUB-ACCOUNT NAME AS OF DECEMBER 31, 2009 (AS APPEARS IN THE FOLLOWING TABLES OF ACCUMULATION SUB-ACCOUNT NAME AS OF UNIT VALUES) MAY 1, 2010 --------------------------------------------------- AIM V.I. Basic Value Fund Invesco V.I. Basic Value Fund Alger American LargeCap Alger LargeCap Growth Growth Portfolio Portfolio Alger American Income & Alger Income & Growth Growth Portfolio Portfolio Alger American Capital Alger Capital Appreciation Portfolio Appreciation Portfolio Alger American MidCap Alger MidCap Growth Growth Portfolio Portfolio Alger American SmallCap Alger SmallCap Growth Growth Portfolio Portfolio Legg Mason ClearBridge Legg Mason ClearBridge Variable Investors Variable Large Cap Value Portfolio Portfolio Putnam VT International Putnam VT International Growth and Income Fund Value Fund 47 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------------------------ AIM V.I. BASIC VALUE FUND--SERIES I 2004 $10.000 $10.821 269,780 2005 $10.821 $11.301 253,928 2006 $11.301 $12.634 235,944 2007 $12.634 $12.669 199,610 2008 $12.669 $6.034 176,998 2009 $6.034 $8.820 148,589 ------------------------------------------------------------------------------------------------------------------------ ALGER LARGE CAP GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN LARGECAP GROWTH PORTFOLIO--CLASS O 2000 $15.750 $13.260 1,121,843 2001 $13.260 $11.540 996,256 2002 $11.540 $7.640 734,340 2003 $7.640 $10.198 807,544 2004 $10.198 $10.625 719,914 2005 $10.625 $11.756 607,853 2006 $11.756 $12.208 452,187 2007 $12.208 $14.460 340,976 2008 $14.460 $7.689 252,531 2009 $7.689 $11.206 202,899 ------------------------------------------------------------------------------------------------------------------------ ALGER INCOME & GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN INCOME & GROWTH PORTFOLIO--CLASS O 2000 $16.170 $15.770 853,586 2001 $15.770 $13.340 888,850 2002 $13.340 $9.078 781,602 2003 $9.078 $11.641 775,012 2004 $11.641 $12.398 686,795 2005 $12.398 $12.665 553,769 2006 $12.665 $13.673 412,877 2007 $13.673 $14.870 289,123 2008 $14.870 $8.889 189,627 2009 $8.889 $11.603 144,735 ------------------------------------------------------------------------------------------------------------------------ ALGER CAPITAL APPRECIATION PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN CAPITAL APPRECIATION PORTFOLIO--CLASS O 2000 $22.520 $16.720 682,579 2001 $16.720 $13.880 560,418 2002 $13.880 $9.061 474,441 2003 $9.061 $12.055 518,914 2004 $12.055 $12.881 454,884 2005 $12.881 $14.559 380,525 2006 $14.559 $17.148 318,953 2007 $17.148 $22.613 307,354 2008 $22.613 $12.252 182,353 2009 $12.252 $18.283 147,379
48 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ----------------------------------------------------------------------------------------------------------------------- ALGER MID CAP GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN MIDCAP GROWTH PORTFOLIO--CLASS O 2000 $15.100 $16.280 613,187 2001 $16.280 $15.030 515,103 2002 $15.030 $10.457 410,450 2003 $10.457 $15.264 559,837 2004 $15.264 $17.040 571,188 2005 $17.040 $18.482 583,687 2006 $18.482 $20.104 495,198 2007 $20.104 $26.119 395,122 2008 $26.119 $10.741 307,529 2009 $10.741 $16.093 251,589 ----------------------------------------------------------------------------------------------------------------------- ALGER SMALLCAP GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN SMALLCAP GROWTH--CLASS O 2000 $16.020 $11.520 249,260 2001 $11.520 $8.020 328,999 2002 $8.020 $5.842 283,731 2003 $5.842 $8.212 468,871 2004 $8.212 $9.454 355,278 2005 $9.454 $10.913 404,918 2006 $10.913 $12.935 399,147 2007 $12.935 $14.976 268,659 2008 $14.976 $7.898 187,715 2009 $7.898 $11.349 171,410 ----------------------------------------------------------------------------------------------------------------------- DWS BALANCED VIP--CLASS A 2005 $10.000 $10.602 449,167 2006 $10.602 $11.543 346,262 2007 $11.543 $11.950 249,164 2008 $11.950 $8.576 165,654 2009 $8.576 $10.454 114,278 ----------------------------------------------------------------------------------------------------------------------- DWS BOND VIP--CLASS A 2000 $9.970 $10.880 155,500 2001 $10.880 $11.360 507,663 2002 $11.360 $12.081 558,679 2003 $12.081 $12.535 493,622 2004 $12.535 $13.046 507,579 2005 $13.046 $13.219 458,975 2006 $13.219 $13.671 362,090 2007 $13.671 $14.064 339,879 2008 $14.064 $11.560 255,646 2009 $11.560 $12.566 186,602
49 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ----------------------------------------------------------------------------------------- DWS GLOBAL OPPORTUNITIES VIP--CLASS A 2000 $17.650 $16.510 114,023 2001 $16.510 $12.290 103,294 2002 $12.290 $9.724 130,916 2003 $9.724 $14.317 193,561 2004 $14.317 $17.440 176,147 2005 $17.440 $20.357 193,166 2006 $20.357 $24.544 166,415 2007 $24.544 $26.499 131,794 2008 $26.499 $13.094 97,138 2009 $13.094 $19.164 83,558 ----------------------------------------------------------------------------------------- DWS GROWTH & INCOME VIP--CLASS A 2000 $11.020 $10.660 192,522 2001 $10.660 $9.340 218,214 2002 $9.340 $7.087 201,541 2003 $7.087 $8.871 178,003 2004 $8.871 $9.651 150,151 2005 $9.651 $10.109 139,183 2006 $10.109 $11.345 102,347 2007 $11.345 $11.355 73,259 2008 $11.355 $6.918 49,772 2009 $6.918 $9.164 38,191 ----------------------------------------------------------------------------------------- DWS INTERNATIONAL VIP--CLASS A 2000 $15.840 $12.250 113,301 2001 $12.250 $8.360 100,581 2002 $8.360 $6.743 105,081 2003 $6.743 $8.507 114,835 2004 $8.507 $9.790 121,969 2005 $9.790 $11.232 127,476 2006 $11.232 $13.967 127,598 2007 $13.967 $15.805 113,896 2008 $15.805 $8.083 101,279 2009 $8.083 $10.658 69,353 ----------------------------------------------------------------------------------------- FEDERATED CAPITAL INCOME FUND II 2000 $11.180 $10.060 401,376 2001 $10.060 $8.570 420,723 2002 $8.570 $8.959 460,608 2003 $8.959 $7.668 309,555 2004 $7.668 $8.325 297,389 2005 $8.325 $8.738 271,194 2006 $8.738 $9.980 220,546 2007 $9.980 $10.253 154,739 2008 $10.253 $8.062 102,548 2009 $8.062 $10.213 101,513
50 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------- FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II 2000 $10.080 $11.050 406,015 2001 $11.050 $11.670 1,994,814 2002 $11.670 $12.572 2,695,911 2003 $12.572 $12.710 1,589,894 2004 $12.710 $13.005 1,136,236 2005 $13.005 $13.104 879,855 2006 $13.104 $13.478 722,780 2007 $13.478 $14.146 603,659 2008 $14.146 $14.568 494,396 2009 $14.568 $15.136 374,113 ------------------------------------------------------------------------------------------------------- FEDERATED HIGH INCOME BOND FUND II 2000 $9.950 $8.940 340,164 2001 $8.940 $8.950 785,823 2002 $8.950 $6.435 296,496 2003 $6.435 $10.814 707,583 2004 $10.814 $11.797 729,703 2005 $11.797 $11.960 606,875 2006 $11.960 $13.088 539,007 2007 $13.088 $13.368 432,506 2008 $13.368 $9.770 344,383 2009 $9.770 $14.748 260,044 ------------------------------------------------------------------------------------------------------- FIDELITY VIP ASSET MANAGER PORTFOLIO--INITIAL CLASS 2000 $11.850 $11.250 278,326 2001 $11.250 $10.650 334,328 2002 $10.650 $9.601 371,447 2003 $9.601 $11.186 420,226 2004 $11.186 $11.652 437,716 2005 $11.652 $11.973 433,897 2006 $11.973 $12.690 338,607 2007 $12.690 $14.474 252,896 2008 $14.474 $10.189 202,629 2009 $10.189 $12.992 144,646 ------------------------------------------------------------------------------------------------------- FIDELITY VIP CONTRAFUND PORTFOLIO--INITIAL CLASS 2000 $14.060 $12.970 1,001,494 2001 $12.970 $11.240 1,006,844 2002 $11.240 $10.060 1,084,534 2003 $10.060 $12.763 1,311,861 2004 $12.763 $14.555 1,438,118 2005 $14.555 $16.809 1,469,954 2006 $16.809 $18.546 1,308,454 2007 $18.546 $21.536 1,005,803 2008 $21.536 $12.226 742,971 2009 $12.226 $16.386 631,023
51 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------- FIDELITY VIP EQUITY-INCOME PORTFOLIO--INITIAL CLASS 2000 $11.370 $12.180 1,208,699 2001 $12.180 $11.430 1,289,762 2002 $11.430 $9.375 1,218,166 2003 $9.375 $12.067 1,403,132 2004 $12.067 $13.291 1,384,897 2005 $13.291 $13.896 1,176,532 2006 $13.896 $16.496 941,565 2007 $16.496 $16.539 684,837 2008 $16.539 $9.366 412,487 2009 $9.366 $12.044 308,304 ------------------------------------------------------------------------------------------------------- FIDELITY VIP GROWTH PORTFOLIO--INITIAL CLASS 2000 $15.780 $13.870 1,300,830 2001 $13.870 $11.280 1,366,004 2002 $11.280 $7.786 1,121,334 2003 $7.786 $10.215 1,141,572 2004 $10.215 $10.429 1,091,575 2005 $10.429 $10.897 953,608 2006 $10.897 $11.500 769,995 2007 $11.500 $14.418 618,823 2008 $14.418 $7.523 492,708 2009 $7.523 $9.531 405,357 ------------------------------------------------------------------------------------------------------- FIDELITY VIP INDEX 500 PORTFOLIO--INITIAL CLASS 2000 $13.520 $12.110 1,795,382 2001 $12.110 $10.510 2,032,615 2002 $10.510 $8.073 1,782,207 2003 $8.073 $10.237 1,907,842 2004 $10.237 $11.183 1,817,054 2005 $11.183 $11.578 1,583,665 2006 $11.578 $13.233 1,319,112 2007 $13.233 $13.778 1,041,479 2008 $13.778 $8.572 756,199 2009 $8.572 $10.718 592,792 ------------------------------------------------------------------------------------------------------- FIDELITY VIP MONEY MARKET PORTFOLIO--INITIAL CLASS 2000 $10.540 $11.070 2,194,471 2001 $11.070 $11.390 2,969,960 2002 $11.390 $11.436 3,542,199 2003 $11.436 $11.406 2,015,425 2004 $11.406 $11.401 1,544,840 2005 $11.401 $11.601 1,335,848 2006 $11.601 $12.017 1,166,577 2007 $12.017 $12.487 1,221,039 2008 $12.487 $12.705 1,305,720 2009 $12.705 $12.637 985,343
52 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period -------------------------------------------------------------------------------------------------------------------- FIDELITY VIP OVERSEAS PORTFOLIO--INITIAL CLASS 2000 $14.790 $11.810 132,253 2001 $11.810 $9.200 137,725 2002 $9.200 $7.240 200,173 2003 $7.240 $10.251 294,264 2004 $10.251 $11.504 402,967 2005 $11.504 $13.526 394,476 2006 $13.526 $15.773 366,639 2007 $15.773 $18.273 327,028 2008 $18.273 $10.141 276,821 2009 $10.141 $12.672 211,336 -------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES BALANCED PORTFOLIO--INSTITUTIONAL SHARES 2000 $14.630 $14.120 1,595,397 2001 $14.120 $13.290 1,044,409 2002 $13.290 $7.762 94,361 2003 $7.762 $13.832 1,496,830 2004 $13.832 $14.825 1,365,759 2005 $14.825 $15.805 1,195,782 2006 $15.805 $17.282 970,410 2007 $17.282 $18.865 747,492 2008 $18.865 $15.679 535,796 2009 $15.679 $19.493 427,444 -------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES FLEXIBLE BOND PORTFOLIO--INSTITUTIONAL SHARES 2000 $10.290 $10.800 218,753 2001 $10.800 $11.490 418,584 2002 $11.490 $12.280 1,721,351 2003 $12.280 $13.166 584,216 2004 $13.166 $13.519 527,949 2005 $13.519 $13.619 492,874 2006 $13.619 $14.017 393,774 2007 $14.017 $14.816 327,277 2008 $14.816 $15.514 272,856 2009 $15.514 $17.346 231,270 -------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES FOREIGN STOCK PORTFOLIO--SERVICE SHARES 2002 $10.000 $7.675 1,378,111 2003 $7.675 $10.226 58,782 2004 $10.226 $11.939 152,105 2005 $11.939 $12.526 114,760 2006 $12.526 $14.605 84,464 2007 $14.605 $17.055 73,894 2008 $17.055 $16.058 0
53 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period --------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN JANUS PORTFOLIO--INTERNATIONAL SHARES FORMERLY, JANUS ASPEN SERIES LARGE CAP GROWTH PORTFOLIO--INSTITUTIONAL SHARES 2000 $16.860 $14.230 1,955,539 2001 $14.230 $10.570 1,856,493 2002 $10.570 $12.531 623,206 2003 $12.531 $9.984 1,211,583 2004 $9.984 $10.306 1,041,507 2005 $10.306 $10.614 860,239 2006 $10.614 $11.676 645,480 2007 $11.676 $13.270 469,901 2008 $13.270 $7.900 371,128 2009 $7.900 $10.637 290,538 --------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN ENTERPRISE PORTFOLIO--INSTITUTIONAL SHARES FORMERLY, JANUS ASPEN SERIES MID CAP GROWTH PORTFOLIO--INSTITUTIONAL SHARES 2000 $27.320 $18.390 1,027,581 2001 $18.390 $11.000 926,849 2002 $11.000 $7.827 694,192 2003 $7.827 $10.443 656,913 2004 $10.443 $12.453 642,333 2005 $12.453 $13.812 539,509 2006 $13.812 $15.497 434,028 2007 $15.497 $18.677 344,083 2008 $18.677 $10.380 288,564 2009 $10.380 $14.846 221,943 --------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN WORLDWIDE PORTFOLIO--INSTITUTIONAL SHARES FORMERLY, JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO--INSTITUTIONAL SHARES 2000 $17.350 $14.450 2,485,879 2001 $14.450 $11.070 2,316,369 2002 $11.070 $8.143 1,719,720 2003 $8.143 $9.971 1,479,355 2004 $9.971 $10.318 1,193,225 2005 $10.318 $10.788 997,853 2006 $10.788 $12.594 775,658 2007 $12.594 $13.634 562,020 2008 $13.634 $7.451 410,898 2009 $7.451 $10.132 336,082 --------------------------------------------------------------------------------------------------------------------------- LEGG MASON CLEARBRIDGE VARIABLE INVESTORS PORTFOLIO--CLASS I FORMERLY, LEGG MASON PARTNERS VARIABLE INVESTORS PORTFOLIO--CLASS I 2004 $10.000 $10.954 60,840 2005 $10.954 $11.525 49,518 2006 $11.525 $13.461 49,417 2007 $13.461 $13.811 35,322 2008 $13.811 $8.781 26,875 2009 $8.781 $10.796 20,239 --------------------------------------------------------------------------------------------------------------------------- LSA BALANCED 2002 $10.000 $8.678 2,230 2003 $8.678 $11.074 83,852
54 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period --------------------------------------------------------------------------------------------- MFS GROWTH--INITIAL CLASS 2000 $20.500 $16.280 274,444 2001 $16.280 $10.690 331,023 2002 $10.690 $6.994 247,624 2003 $6.994 $8.995 248,807 2004 $8.995 $10.035 231,814 2005 $10.035 $10.821 202,017 2006 $10.821 $11.531 165,550 2007 $11.531 $13.798 126,996 2008 $13.798 $8.528 102,015 2009 $8.528 $11.594 78,308 --------------------------------------------------------------------------------------------- MFS INVESTORS TRUST SERIES--INITIAL CLASS 2000 $11.800 $11.630 217,691 2001 $11.630 $9.660 295,343 2002 $9.660 $7.536 269,101 2003 $7.536 $9.091 270,484 2004 $9.091 $9.998 244,156 2005 $9.998 $10.596 207,370 2006 $10.596 $11.824 171,767 2007 $11.824 $12.880 126,138 2008 $12.880 $8.512 100,457 2009 $8.512 $10.668 84,052 --------------------------------------------------------------------------------------------- MFS NEW DISCOVERY SERIES--INITIAL CLASS 2000 $19.440 $18.820 219,172 2001 $18.820 $17.650 188,675 2002 $17.650 $11.918 183,131 2003 $11.918 $15.738 224,760 2004 $15.738 $16.556 232,616 2005 $16.556 $17.209 188,078 2006 $17.209 $19.241 161,666 2007 $19.241 $19.479 139,957 2008 $19.479 $11.671 119,273 2009 $11.671 $18.809 94,439 --------------------------------------------------------------------------------------------- MFS RESEARCH SERIES--INITIAL CLASS 2000 $13.570 $12.750 240,203 2001 $12.750 $9.920 207,793 2002 $9.920 $7.389 186,178 2003 $7.389 $9.100 190,978 2004 $9.100 $10.412 189,969 2005 $10.412 $11.085 142,585 2006 $11.085 $12.095 119,287 2007 $12.095 $13.521 86,910 2008 $13.521 $8.534 55,904 2009 $8.534 $11.002 49,781
55 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period -------------------------------------------------------------------------------------------------------------- MFS TOTAL RETURN SERIES--INITIAL CLASS 2000 $10.800 $12.380 207,489 2001 $12.380 $12.250 436,363 2002 $12.250 $11.473 642,776 2003 $11.473 $13.180 943,486 2004 $13.180 $14.490 1,033,566 2005 $14.490 $14.714 970,559 2006 $14.714 $16.260 802,883 2007 $16.260 $16.734 661,560 2008 $16.734 $12.868 464,793 2009 $12.868 $15.000 347,219 -------------------------------------------------------------------------------------------------------------- OPPENHEIMER MAIN STREET SMALL CAP FUND/VA - SERVICE SHARES 2002 $10.000 $7.847 97,205 2003 $7.847 $11.178 214,471 2004 $11.178 $13.157 347,171 2005 $13.157 $14.256 305,883 2006 $14.256 $16.144 279,529 2007 $16.144 $15.720 219,803 2008 $15.720 $9.625 151,992 2009 $9.625 $13.011 120,823 -------------------------------------------------------------------------------------------------------------- PIMCO VIT FOREIGN BOND PORTFOLIO (U.S. DOLLAR-HEDGED)-- ADMINISTRATIVE SHARES 2002 $10.000 $10.565 75,670 2003 $10.565 $10.669 337,271 2004 $10.669 $11.122 347,113 2005 $11.122 $11.550 338,440 2006 $11.550 $11.657 247,334 2007 $11.657 $11.929 175,543 2008 $11.929 $11.501 185,837 2009 $11.501 $13.133 139,898 -------------------------------------------------------------------------------------------------------------- PIMCO VIT TOTAL RETURN PORTFOLIO--ADMINISTRATIVE SHARES 2002 $10.000 $10.557 539,429 2003 $10.557 $10.951 1,001,817 2004 $10.951 $11.343 1,060,049 2005 $11.343 $11.476 1,156,641 2006 $11.476 $11.771 944,261 2007 $11.771 $12.643 737,286 2008 $12.643 $13.088 699,373 2009 $13.088 $14.744 709,743 -------------------------------------------------------------------------------------------------------------- PREMIER VIT OPCAP BALANCED PORTFOLIO 2004 $10.000 $10.812 129,223 2005 $10.812 $10.971 113,375 2006 $10.971 $12.005 99,054 2007 $12.005 $11.330 58,167 2008 $11.330 $7.700 43,630 2009 $7.700 $7.432 0
56 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ---------------------------------------------------------------------------------------------------------------------- PREMIER VIT NACM SMALL CAP PORTFOLIO CLASS 1 FORMERLY, PREMIER VIT OPCAP SMALL CAP PORTFOLIO 2002 $10.000 $7.200 88,999 2003 $7.200 $10.143 236,796 2004 $10.143 $11.809 274,798 2005 $11.809 $11.669 207,018 2006 $11.669 $14.300 198,198 2007 $14.300 $14.203 142,608 2008 $14.203 $8.186 108,005 2009 $8.186 $9.344 85,491 ---------------------------------------------------------------------------------------------------------------------- PUTNAM VT INTERNATIONAL GROWTH AND INCOME FUND--CLASS IB 2002 $10.000 $8.198 38,105 2003 $8.198 $11.161 43,231 2004 $11.161 $13.335 89,040 2005 $13.335 $15.027 123,886 2006 $15.027 $18.881 158,576 2007 $18.881 $19.952 125,260 2008 $19.952 $10.636 74,027 2009 $10.636 $13.254 56,664 ---------------------------------------------------------------------------------------------------------------------- RIDGEWORTH LARGE CAP GROWTH STOCK FUND 2000 $10.080 $10.260 23,194 2001 $10.260 $9.590 42,077 2002 $9.590 $7.397 56,403 2003 $7.397 $8.653 63,977 2004 $8.653 $9.123 60,421 2005 $9.123 $8.929 57,402 2006 $8.929 $9.773 67,263 2007 $9.773 $11.125 88,003 2008 $11.125 $6.517 81,011 2009 $6.517 $6.634 0 ---------------------------------------------------------------------------------------------------------------------- RIDGEWORTH LARGE CAP VALUE EQUITY FUND 2000 $8.640 $9.420 10,105 2001 $9.420 $9.200 196,823 2002 $9.200 $7.540 104,266 2003 $7.540 $9.168 53,974 2004 $9.168 $10.439 192,125 2005 $10.439 $10.696 91,183 2006 $10.696 $12.937 142,829 2007 $12.937 $13.229 83,673 2008 $13.229 $8.781 59,269 2009 $8.781 $8.309 0
57 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period -------------------------------------------------------------------------------------------------- T. ROWE PRICE EQUITY INCOME PORTFOLIO--I 2000 $11.050 $12.330 261,772 2001 $12.330 $12.360 581,145 2002 $12.360 $10.602 608,043 2003 $10.602 $13.140 744,659 2004 $13.140 $14.913 895,153 2005 $14.913 $15.306 874,317 2006 $15.306 $17.984 762,467 2007 $17.984 $18.339 575,733 2008 $18.339 $11.571 402,473 2009 $11.571 $14.353 288,947 -------------------------------------------------------------------------------------------------- T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO--I 2000 $14.570 $11.520 65,454 2001 $11.520 $8.850 92,572 2002 $8.850 $7.137 99,915 2003 $7.137 $9.201 173,635 2004 $9.201 $10.338 264,060 2005 $10.338 $11.847 255,863 2006 $11.847 $13.934 244,192 2007 $13.934 $15.553 191,891 2008 $15.553 $7.879 149,103 2009 $7.879 $11.858 116,835 -------------------------------------------------------------------------------------------------- T. ROWE PRICE MID-CAP GROWTH PORTFOLIO--I 2000 $14.060 $14.910 344,756 2001 $14.910 $14.590 368,137 2002 $14.590 $11.345 436,260 2003 $11.345 $15.505 619,155 2004 $15.505 $18.121 586,887 2005 $18.121 $20.534 504,417 2006 $20.534 $21.626 404,390 2007 $21.626 $25.097 295,779 2008 $25.097 $14.931 222,831 2009 $14.931 $21.476 160,985 -------------------------------------------------------------------------------------------------- T. ROWE PRICE NEW AMERICA GROWTH PORTFOLIO--I 2000 $12.520 $11.050 100,767 2001 $11.050 $9.620 108,815 2002 $9.620 $6.813 165,424 2003 $6.813 $9.090 155,957 2004 $9.090 $9.995 173,326 2005 $9.955 $10.271 157,832 2006 $10.271 $10.888 129,696 2007 $10.888 $12.233 117,852 2008 $12.233 $7.461 92,406 2009 $7.461 $11.035 64,870
58 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY MORTALITY & EXPENSE = 1.15
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------------------------ VAN KAMPEN LIT MID CAP GROWTH PORTFOLIO, CLASS II 2004 $10.000 $11.156 44,940 2005 $11.156 $12.242 49,948 2006 $12.242 $12.686 45,228 2007 $12.686 $14.732 39,490 2008 $14.732 $7.735 29,220 2009 $7.735 $11.945 38,907 ------------------------------------------------------------------------------------------------------------------------ VAN KAMPEN LIT GROWTH AND INCOME PORTFOLIO, CLASS II 2002 $10.000 $8.163 36,430 2003 $8.163 $10.293 152,145 2004 $10.293 $11.600 354,336 2005 $11.600 $12.570 434,444 2006 $12.570 $14.397 396,566 2007 $14.397 $14.576 306,627 2008 $14.576 $9.758 199,062 2009 $9.758 $11.960 183,308 ------------------------------------------------------------------------------------------------------------------------ UIF U.S. MID CAP VALUE PORTFOLIO, CLASS I 2004 $10.000 $11.333 309,322 2005 $11.333 $12.570 353,741 2006 $12.570 $14.984 276,970 2007 $14.984 $15.958 210,481 2008 $15.958 $9.252 158,166 2009 $9.252 $12.720 131,570 ------------------------------------------------------------------------------------------------------------------------ WELLS FARGO ADVANTAGE VT DISCOVERY FUND 2005 $10.000 $11.481 293,780 2006 $11.481 $12.999 225,795 2007 $12.999 $15.702 161,353 2008 $15.702 $8.628 115,632 2009 $8.628 $11.956 82,156 ------------------------------------------------------------------------------------------------------------------------ WELLS FARGO ADVANTAGE VT OPPORTUNITY FUND 2005 $10.000 $11.040 510,068 2006 $11.040 $12.235 431,405 2007 $12.235 $12.884 339,846 2008 $12.884 $7.622 257,232 2009 $7.622 $11.120 196,311 ------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN OVERSEAS PORTFOLIO--SERVICE SHARES FORMERLY, JANUS ASPEN INTERNATIONAL GROWTH--SERVICE SHARES 2008 $10.000 $7.495 62,852 2009 $7.495 $13.254 86,323
* The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.15% and an administrative expense charge of 0.10%. 59 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------------------------ AIM V.I. BASIC VALUE FUND--SERIES I 2004 $10.000 $10.781 244,914 2005 $10.781 $11.197 251,607 2006 $11.197 $12.450 294,765 2007 $12.450 $12.415 241,174 2008 $12.415 $5.881 236,766 2009 $5.881 $8.549 231,753 ------------------------------------------------------------------------------------------------------------------------ ALGER LARGE CAP GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN LARGECAP GROWTH PORTFOLIO--CLASS O 2000 $10.000 $8.160 11,130 2001 $8.160 $7.070 97,242 2002 $7.070 $4.651 108,296 2003 $4.651 $6.175 308,042 2004 $6.175 $6.398 439,952 2005 $6.398 $7.041 492,261 2006 $7.041 $7.271 413,156 2007 $7.271 $8.565 371,317 2008 $8.565 $4.529 324,912 2009 $4.529 $6.565 298,212 ------------------------------------------------------------------------------------------------------------------------ ALGER INCOME & GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN INCOME & GROWTH PORTFOLIO--CLASS O 2000 $10.000 $9.280 32,338 2001 $9.280 $7.810 92,660 2002 $7.810 $5.284 202,665 2003 $5.284 $6.738 354,359 2004 $6.738 $7.137 396,418 2005 $7.137 $7.252 381,157 2006 $7.252 $7.786 339,270 2007 $7.786 $8.421 308,605 2008 $8.421 $5.006 254,925 2009 $5.006 $6.499 249,853 ------------------------------------------------------------------------------------------------------------------------ ALGER CAPITAL APPRECIATION PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN CAPITAL APPRECIATION PORTFOLIO--CLASS O 2000 $10.000 $7.680 62,468 2001 $7.680 $6.340 136,468 2002 $6.340 $4.116 264,242 2003 $4.116 $5.447 542,296 2004 $5.447 $5.788 727,607 2005 $5.788 $6.506 721,253 2006 $6.506 $7.621 732,706 2007 $7.621 $9.995 759,050 2008 $9.995 $5.385 521,910 2009 $5.385 $7.992 457,894
60 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ----------------------------------------------------------------------------------------------------------------------- ALGER MID CAP GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN MIDCAP GROWTH PORTFOLIO--CLASS O 2000 $10.000 $9.440 123,576 2001 $9.440 $8.670 107,872 2002 $8.670 $5.996 295,309 2003 $5.996 $8.703 836,891 2004 $8.703 $9.663 999,864 2005 $9.663 $10.424 1,007,060 2006 $10.424 $11.277 894,467 2007 $11.277 $14.569 822,716 2008 $14.569 $5.959 721,972 2009 $5.959 $8.878 656,392 ----------------------------------------------------------------------------------------------------------------------- ALGER SMALLCAP GROWTH PORTFOLIO--CLASS I-2 FORMERLY, ALGER AMERICAN SMALLCAP GROWTH--CLASS O 2000 $10.000 $7.220 5,134 2001 $7.220 $4.990 116,699 2002 $4.990 $3.619 128,015 2003 $3.619 $5.060 283,201 2004 $5.060 $5.793 359,793 2005 $5.793 $6.651 408,709 2006 $6.651 $7.840 400,994 2007 $7.840 $9.027 386,201 2008 $9.027 $4.734 324,933 2009 $4.734 $6.765 302,059 ----------------------------------------------------------------------------------------------------------------------- DWS BALANCED VIP--CLASS A 2005 $10.000 $10.562 140,966 2006 $10.562 $11.437 117,438 2007 $11.437 $11.776 108,626 2008 $11.776 $8.404 99,008 2009 $8.404 $10.189 96,552 ----------------------------------------------------------------------------------------------------------------------- DWS BOND VIP--CLASS A 2000 $10.000 $10.190 24,670 2001 $10.610 $11.020 60,002 2002 $11.020 $11.655 89,305 2003 $11.655 $12.026 179,258 2004 $12.026 $12.447 242,774 2005 $12.447 $12.544 235,908 2006 $12.544 $12.902 203,670 2007 $12.902 $13.200 192,164 2008 $13.200 $10.790 162,984 2009 $10.790 $11.665 139,150
61 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ----------------------------------------------------------------------------------------- DWS GLOBAL OPPORTUNITIES VIP--CLASS A 2000 $10.000 $9.120 11,777 2001 $9.120 $6.750 24,877 2002 $6.750 $5.313 51,809 2003 $5.313 $7.780 159,642 2004 $7.780 $9.425 254,808 2005 $9.425 $10.942 309,298 2006 $10.942 $13.120 368,488 2007 $13.120 $14.087 319,396 2008 $14.087 $6.922 292,135 2009 $6.922 $10.076 295,598 ----------------------------------------------------------------------------------------- DWS GROWTH & INCOME VIP--CLASS A 2000 $10.000 $9.590 3,100 2001 $9.590 $8.350 23,428 2002 $8.350 $6.305 37,769 2003 $6.305 $7.849 76,611 2004 $7.849 $8.492 99,749 2005 $8.492 $8.847 85,054 2006 $8.847 $9.874 79,081 2007 $9.874 $9.829 76,673 2008 $9.829 $5.955 67,583 2009 $5.955 $7.846 85,215 ----------------------------------------------------------------------------------------- DWS INTERNATIONAL VIP--CLASS A 2000 $10.000 $8.710 4,151 2001 $8.710 $5.910 18,248 2002 $5.910 $4.740 36,822 2003 $4.740 $5.948 144,072 2004 $5.948 $6.808 174,503 2005 $6.808 $7.768 190,759 2006 $7.768 $9.606 229,934 2007 $9.606 $10.810 202,975 2008 $10.810 $5.498 253,788 2009 $5.498 $7.210 164,420 ----------------------------------------------------------------------------------------- FEDERATED CAPITAL INCOME FUND II 2000 $10.000 $9.140 689 2001 $9.140 $7.740 1,970 2002 $7.740 $9.115 92,428 2003 $9.115 $6.855 51,656 2004 $6.855 $7.401 76,744 2005 $7.401 $7.726 76,010 2006 $7.726 $8.776 100,300 2007 $8.776 $8.966 65,968 2008 $8.966 $7.012 98,652 2009 $7.012 $8.834 87,864
62 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------- FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II 2000 $10.000 $10.610 230 2001 $10.610 $11.150 69,662 2002 $11.150 $11.942 408,779 2003 $11.942 $12.006 580,553 2004 $12.006 $12.218 605,532 2005 $12.218 $12.243 530,059 2006 $12.243 $12.523 381,051 2007 $12.523 $13.072 721,964 2008 $13.072 $13.388 610,475 2009 $13.388 $13.834 473,221 ------------------------------------------------------------------------------------------------------- FEDERATED HIGH INCOME BOND FUND II 2000 $10.000 $9.190 597 2001 $9.190 $9.150 52,109 2002 $9.150 $5.784 24,658 2003 $5.784 $10.941 246,278 2004 $10.941 $11.870 444,657 2005 $11.870 $11.968 439,857 2006 $11.968 $13.026 430,206 2007 $13.026 $13.231 379,607 2008 $13.231 $9.617 307,223 2009 $9.617 $14.437 275,990 ------------------------------------------------------------------------------------------------------- FIDELITY VIP ASSET MANAGER PORTFOLIO--INITIAL CLASS 2000 $10.000 $9.590 299 2001 $9.590 $9.030 33,474 2002 $9.030 $8.095 73,114 2003 $8.095 $9.379 116,121 2004 $9.379 $9.716 181,632 2005 $9.716 $9.929 176,415 2006 $9.929 $10.466 129,882 2007 $10.466 $11.872 125,667 2008 $11.872 $8.311 130,724 2009 $8.311 $10.540 122,598 ------------------------------------------------------------------------------------------------------- FIDELITY VIP CONTRAFUND PORTFOLIO--INITIAL CLASS 2000 $10.000 $9.380 19,089 2001 $9.380 $8.080 104,405 2002 $8.080 $7.195 348,537 2003 $7.195 $9.078 888,353 2004 $9.078 $10.296 1,158,838 2005 $10.296 $11.826 1,260,810 2006 $11.826 $12.977 1,273,768 2007 $12.977 $14.986 1,188,207 2008 $14.986 $8.461 1,080,956 2009 $8.461 $11.277 1,046,007
63 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------- FIDELITY VIP EQUITY-INCOME PORTFOLIO--INITIAL CLASS 2000 $10.000 $11.040 4,932 2001 $11.040 $10.300 75,559 2002 $10.300 $8.405 174,403 2003 $8.405 $10.759 306,020 2004 $10.759 $11.786 434,981 2005 $11.786 $12.255 395,964 2006 $12.255 $14.468 396,481 2007 $14.468 $14.426 349,218 2008 $14.426 $8.125 273,985 2009 $8.125 $10.390 270,828 ------------------------------------------------------------------------------------------------------- FIDELITY VIP GROWTH PORTFOLIO--INITIAL CLASS 2000 $10.000 $8.390 52,890 2001 $8.390 $6.790 98,555 2002 $6.790 $4.659 305,305 2003 $4.659 $6.080 625,498 2004 $6.080 $6.173 939,071 2005 $6.173 $6.415 831,880 2006 $6.415 $6.732 682,021 2007 $6.732 $8.394 682,803 2008 $8.394 $4.356 663,776 2009 $4.356 $5.488 676,234 ------------------------------------------------------------------------------------------------------- FIDELITY VIP INDEX 500 PORTFOLIO--INITIAL CLASS 2000 $10.000 $9.040 102,744 2001 $9.040 $7.800 312,663 2002 $7.800 $5.960 365,351 2003 $5.960 $7.516 978,400 2004 $7.516 $8.166 1,444,339 2005 $8.166 $8.407 1,362,101 2006 $8.407 $9.557 1,346,569 2007 $9.557 $9.896 1,295,792 2008 $9.896 $6.123 1,150,557 2009 $6.123 $7.614 1,043,678 ------------------------------------------------------------------------------------------------------- FIDELITY VIP MONEY MARKET PORTFOLIO--INITIAL CLASS 2000 $10.000 $10.230 30,553 2001 $10.230 $10.470 140,649 2002 $10.470 $10.456 310,441 2003 $10.456 $10.373 819,516 2004 $10.373 $10.311 618,241 2005 $10.311 $10.435 694,730 2006 $10.435 $10.750 725,670 2007 $10.750 $11.108 714,035 2008 $11.108 $11.240 1,173,850 2009 $11.240 $11.119 894,758
64 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period -------------------------------------------------------------------------------------------------------------------- FIDELITY VIP OVERSEAS PORTFOLIO--INITIAL CLASS 2000 $10.000 $8.440 6,868 2001 $8.440 $6.540 58,855 2002 $6.540 $5.119 109,892 2003 $5.119 $7.208 235,043 2004 $7.208 $8.045 382,839 2005 $8.045 $9.406 426,944 2006 $9.406 $10.909 513,031 2007 $10.909 $12.569 470,601 2008 $12.569 $6.937 476,598 2009 $6.937 $8.620 469,624 -------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES BALANCED PORTFOLIO--INSTITUTIONAL SHARES 2000 $10.000 $9.620 43,584 2001 $9.620 $9.000 199,196 2002 $9.000 $8.273 356,912 2003 $8.273 $9.267 699,022 2004 $9.267 $9.878 705,500 2005 $9.878 $10.473 691,502 2006 $10.473 $11.389 664,165 2007 $11.389 $12.364 559,884 2008 $12.364 $10.220 522,134 2009 $10.220 $12.636 495,193 -------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES FLEXIBLE BOND PORTFOLIO--INSTITUTIONAL SHARES 2000 $10.000 $10.400 25 2001 $10.400 $11.010 104,700 2002 $11.010 $11.943 114,051 2003 $11.943 $12.480 254,643 2004 $12.480 $12.743 312,969 2005 $12.743 $12.767 291,063 2006 $12.767 $13.069 350,195 2007 $13.069 $13.738 380,041 2008 $13.738 $14.306 355,482 2009 $14.306 $15.908 323,948 -------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES FOREIGN STOCK PORTFOLIO--SERVICE SHARES 2002 $10.000 $7.734 36,688 2003 $7.734 $10.132 37,023 2004 $10.132 $11.765 71,988 2005 $11.765 $12.276 79,929 2006 $12.276 $14.235 72,800 2007 $14.235 $16.532 78,321 2008 $16.532 $15.537 0
65 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period --------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN JANUS PORTFOLIO--INTERNATIONAL SHARES FORMERLY, JANUS ASPEN SERIES LARGE CAP GROWTH PORTFOLIO--INSTITUTIONAL SHARES 2000 $10.000 $8.320 98,273 2001 $8.320 $6.150 116,481 2002 $6.150 $4.441 162,987 2003 $4.441 $5.746 251,235 2004 $5.746 $5.898 275,805 2005 $5.898 $6.042 257,364 2006 $6.042 $6.610 266,266 2007 $6.610 $7.471 225,942 2008 $7.471 $4.423 195,932 2009 $4.423 $5.923 193,524 --------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN ENTERPRISE PORTFOLIO--INSTITUTIONAL SHARES FORMERLY, JANUS ASPEN SERIES MID CAP GROWTH PORTFOLIO--INSTITUTIONAL SHARES 2000 $10.000 $6.650 272,048 2001 $6.650 $3.960 266,218 2002 $3.960 $2.799 307,400 2003 $2.799 $3.715 412,644 2004 $3.715 $4.405 466,868 2005 $4.405 $4.860 505,828 2006 $4.860 $5.423 510,006 2007 $5.423 $6.499 505,513 2008 $6.499 $3.592 433,329 2009 $3.592 $5.110 419,789 --------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN WORLDWIDE PORTFOLIO--INSTITUTIONAL SHARES FORMERLY, JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO--INSTITUTIONAL SHARES 2000 $10.000 $8.190 66,346 2001 $8.190 $6.240 167,331 2002 $6.240 $4.564 245,789 2003 $4.564 $5.558 365,025 2004 $5.558 $5.719 414,342 2005 $5.719 $5.947 364,847 2006 $5.947 $6.905 335,256 2007 $6.905 $7.434 327,739 2008 $7.434 $4.040 279,358 2009 $4.040 $5.464 445,607 --------------------------------------------------------------------------------------------------------------------------- LEGG MASON CLEARBRIDGE VARIABLE INVESTORS PORTFOLIO--CLASS I FORMERLY, LEGG MASON PARTNERS VARIABLE INVESTORS PORTFOLIO--CLASS I 2004 $10.000 $10.913 47,102 2005 $10.913 $11.419 45,145 2006 $11.419 $13.264 47,405 2007 $13.264 $13.534 46,980 2008 $13.534 $8.557 42,904 2009 $8.557 $10.464 43,855 --------------------------------------------------------------------------------------------------------------------------- LSA BALANCED 2002 $10.000 $8.646 2,157 2003 $8.646 $10.973 46,166
66 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period --------------------------------------------------------------------------------------------- MFS GROWTH--INITIAL CLASS 2000 $10.000 $8.150 66,991 2001 $8.150 $5.330 107,324 2002 $5.330 $3.465 123,692 2003 $3.465 $4.432 227,669 2004 $4.432 $4.917 274,686 2005 $4.917 $5.273 269,766 2006 $5.273 $5.588 247,942 2007 $5.588 $6.650 220,878 2008 $6.650 $4.087 314,346 2009 $4.087 $5.527 175,017 --------------------------------------------------------------------------------------------- MFS INVESTORS TRUST SERIES--INITIAL CLASS 2000 $10.000 $9.850 3,223 2001 $9.850 $8.130 22,985 2002 $8.130 $6.308 52,812 2003 $6.308 $7.567 121,843 2004 $7.567 $8.276 136,211 2005 $8.276 $8.724 135,382 2006 $8.724 $9.682 134,594 2007 $9.682 $10.488 127,128 2008 $10.488 $6.893 180,349 2009 $6.893 $8.591 197,186 --------------------------------------------------------------------------------------------- MFS NEW DISCOVERY SERIES--INITIAL CLASS 2000 $10.000 $8.970 113,237 2001 $8.970 $8.360 118,208 2002 $8.360 $5.615 205,837 2003 $5.615 $7.374 477,819 2004 $7.374 $7.715 623,501 2005 $7.715 $7.975 560,525 2006 $7.975 $8.868 514,110 2007 $8.868 $8.928 480,804 2008 $8.928 $5.320 407,025 2009 $5.320 $8.527 412,667 --------------------------------------------------------------------------------------------- MFS RESEARCH SERIES--INITIAL CLASS 2000 $10.000 $8.870 6,208 2001 $8.870 $6.860 23,332 2002 $6.860 $5.084 32,958 2003 $5.084 $6.227 50,336 2004 $6.227 $7.085 53,593 2005 $7.085 $7.502 52,102 2006 $7.502 $8.141 49,634 2007 $8.141 $9.050 50,049 2008 $9.050 $5.681 46,891 2009 $5.681 $7.284 43,067
67 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------------- MFS TOTAL RETURN SERIES--INITIAL CLASS 2000 $10.000 $11.200 8,401 2001 $11.200 $11.030 60,889 2002 $11.030 $10.273 250,026 2003 $10.273 $11.736 454,021 2004 $11.736 $12.832 590,723 2005 $12.832 $12.959 622,265 2006 $12.959 $14.243 569,919 2007 $14.243 $14.577 589,170 2008 $14.577 $11.148 454,138 2009 $11.148 $12.923 417,681 ------------------------------------------------------------------------------------------------------------- OPPENHEIMER MAIN STREET SMALL CAP FUND/VA--SERVICE SHARES 2002 $10.000 $7.818 41,593 2003 $7.818 $11.076 193,863 2004 $11.076 $12.965 323,468 2005 $12.965 $13.972 312,606 2006 $13.972 $15.735 325,308 2007 $15.735 $15.238 316,074 2008 $15.238 $9.278 291,787 2009 $9.278 $12.473 266,203 ------------------------------------------------------------------------------------------------------------- PIMCO VIT FOREIGN BOND PORTFOLIO (U.S. DOLLAR-HEDGED)-- ADMINISTRATIVE SHARES 2002 $10.000 $10.526 4,596 2003 $10.526 $10.571 79,683 2004 $10.571 $10.960 100,873 2005 $10.960 $11.319 106,489 2006 $11.319 $11.362 99,214 2007 $11.362 $11.563 106,231 2008 $11.563 $11.086 122,885 2009 $11.086 $12.591 135,635 ------------------------------------------------------------------------------------------------------------- PIMCO VIT TOTAL RETURN PORTFOLIO--ADMINISTRATIVE SHARES 2002 $10.000 $10.518 85,455 2003 $10.518 $10.851 428,033 2004 $10.851 $11.178 604,097 2005 $11.178 $11.247 614,406 2006 $11.247 $11.473 512,461 2007 $11.473 $12.255 483,376 2008 $12.255 $12.616 572,089 2009 $12.616 $14.135 536,002 ------------------------------------------------------------------------------------------------------------- PREMIER VIT OPCAP BALANCED PORTFOLIO 2004 $10.000 $10.772 91,944 2005 $10.772 $10.870 106,673 2006 $10.870 $11.829 97,834 2007 $11.829 $11.102 94,157 2008 $11.102 $7.504 80,619 2009 $7.504 $7.230 0
68 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ---------------------------------------------------------------------------------------------------------------------- PREMIER VIT NACM SMALL CAP PORTFOLIO CLASS 1 FORMERLY, PREMIER VIT OPCAP SMALL CAP PORTFOLIO 2002 $10.000 $7.173 8,929 2003 $7.173 $10.051 172,641 2004 $10.051 $11.637 244,720 2005 $11.637 $11.436 236,295 2006 $11.436 $13.938 205,170 2007 $13.938 $13.767 172,785 2008 $13.767 $7.892 167,008 2009 $7.892 $8.958 160,896 ---------------------------------------------------------------------------------------------------------------------- PUTNAM VT INTERNATIONAL GROWTH AND INCOME FUND--CLASS IB 2002 $10.000 $8.168 6,727 2003 $8.168 $11.059 39,731 2004 $11.059 $13.141 58,105 2005 $13.141 $14.727 61,333 2006 $14.727 $18.403 109,461 2007 $18.403 $19.339 175,336 2008 $19.339 $10.253 80,251 2009 $10.253 $12.707 72,272 ---------------------------------------------------------------------------------------------------------------------- RIDGEWORTH LARGE CAP GROWTH STOCK FUND 2000 $10.000 $9.630 903 2001 $9.630 $8.950 7,596 2002 $8.950 $6.870 31,178 2003 $6.870 $7.992 54,246 2004 $7.992 $8.380 63,858 2005 $8.380 $8.157 58,249 2006 $8.157 $8.879 51,761 2007 $8.879 $10.052 47,830 2008 $10.052 $5.856 43,139 2009 $5.856 $5.951 0 ---------------------------------------------------------------------------------------------------------------------- RIDGEWORTH LARGE CAP VALUE EQUITY FUND 2000 $10.000 $11.700 1,615 2001 $11.700 $11.360 18,026 2002 $11.360 $9.262 19,587 2003 $9.262 $11.201 30,898 2004 $11.201 $12.683 100,258 2005 $12.683 $12.925 68,271 2006 $12.925 $15.546 93,618 2007 $15.546 $15.810 49,278 2008 $15.810 $10.437 30,278 2009 $10.437 $9.859 0
69 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period -------------------------------------------------------------------------------------------------- T. ROWE PRICE EQUITY INCOME PORTFOLIO--I 2000 $10.000 $11.520 113 2001 $11.520 $11.480 47,501 2002 $11.480 $9.895 228,732 2003 $9.895 $12.073 526,597 2004 $12.073 $13.627 761,565 2005 $13.627 $13.909 796,314 2006 $13.909 $16.254 661,730 2007 $16.254 $16.483 601,481 2008 $16.483 $10.343 537,201 2009 $10.343 $12.759 523,378 -------------------------------------------------------------------------------------------------- T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO--I 2000 $10.000 $8.550 5,575 2001 $8.550 $6.530 16,460 2002 $6.530 $5.239 39,170 2003 $5.239 $6.716 110,909 2004 $6.716 $7.505 176,753 2005 $7.505 $8.554 203,771 2006 $8.554 $10.006 257,698 2007 $10.006 $11.107 256,965 2008 $11.107 $5.596 188,929 2009 $5.596 $8.375 202,112 -------------------------------------------------------------------------------------------------- T. ROWE PRICE MID-CAP GROWTH PORTFOLIO--I 2000 $10.000 $10.060 6,092 2001 $10.060 $9.790 82,744 2002 $9.790 $7.569 231,318 2003 $7.569 $10.288 574,018 2004 $10.288 $11.957 675,635 2005 $11.957 $13.476 621,478 2006 $13.476 $14.114 575,076 2007 $14.114 $16.289 538,625 2008 $16.289 $9.638 472,274 2009 $9.638 $13.787 438,741 -------------------------------------------------------------------------------------------------- T. ROWE PRICE NEW AMERICA GROWTH PORTFOLIO--I 2000 $10.000 $9.010 0 2001 $9.010 $7.800 14,973 2002 $7.800 $5.489 80,509 2003 $5.489 $7.284 84,065 2004 $7.284 $7.933 120,707 2005 $7.933 $8.140 126,892 2006 $8.140 $8.581 132,467 2007 $8.581 $9.589 126,622 2008 $9.589 $5.816 125,436 2009 $5.816 $8.555 120,111
70 PROSPECTUS LBL CONSULTANT I VARIABLE ANNUITY--PROSPECTUS ACCUMULATION UNIT VALUE AND NUMBER OF ACCUMULATION UNITS OUTSTANDING FOR EACH VARIABLE SUB-ACCOUNT* BASIC POLICY PLUS DEATH BENEFIT AND INCOME BENEFIT RIDER II MORTALITY & EXPENSE = 1.7
Number of Accumulation Accumulation Units For the Year Unit Value Unit Value Outstanding Ending at Beginning at End at End Sub-Accounts December 31 of Period of Period of Period ------------------------------------------------------------------------------------------------------------------------ VAN KAMPEN LIT MID CAP GROWTH PORTFOLIO, CLASS II 2004 $10.000 $11.114 77,019 2005 $11.114 $12.130 52,894 2006 $12.130 $12.500 60,010 2007 $12.500 $14.437 59,849 2008 $14.437 $7.538 46,687 2009 $7.538 $11.577 51,595 ------------------------------------------------------------------------------------------------------------------------ VAN KAMPEN LIT GROWTH AND INCOME PORTFOLIO, CLASS II 2002 $10.000 $8.133 12,359 2003 $8.133 $10.199 106,750 2004 $10.199 $11.431 238,529 2005 $11.431 $12.319 277,577 2006 $12.319 $14.033 291,195 2007 $14.033 $14.129 213,247 2008 $14.129 $9.407 187,559 2009 $9.407 $11.466 182,380 ------------------------------------------------------------------------------------------------------------------------ UIF U.S. MID CAP VALUE PORTFOLIO, CLASS I 2004 $10.000 $11.290 220,091 2005 $11.290 $12.455 280,918 2006 $12.455 $14.765 311,438 2007 $14.765 $15.638 269,763 2008 $15.638 $9.017 244,967 2009 $9.017 $12.329 201,588 ------------------------------------------------------------------------------------------------------------------------ WELLS FARGO ADVANTAGE VT DISCOVERY FUND 2005 $10.000 $11.435 177,119 2006 $11.435 $12.876 174,427 2007 $12.876 $15.468 167,923 2008 $15.468 $8.453 150,363 2009 $8.453 $11.648 130,113 ------------------------------------------------------------------------------------------------------------------------ WELLS FARGO ADVANTAGE VT OPPORTUNITY FUND 2005 $10.000 $10.996 449,486 2006 $10.996 $12.120 420,788 2007 $12.120 $12.692 391,679 2008 $12.692 $7.467 344,261 2009 $7.467 $10.835 303,876 ------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN OVERSEAS PORTFOLIO--SERVICE SHARES FORMERLY, JANUS ASPEN INTERNATIONAL GROWTH--SERVICE SHARES 2008 $10.000 $7.225 81,678 2009 $7.225 $12.707 127,139
* The Accumulation Unit Values in this table reflect a mortality and expense risk charge of 1.70% and an administrative expense charge of 0.10%. 71 PROSPECTUS LBL3055-7 [LOGO] 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 Cost of printing and engraving..... $4,000.00 Legal fees......................... $ 0 Accounting fees.................... $ 3,000 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 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. 333-50545, 811-07924) filed April 21, 1998 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. 333-50545, 811-07924) filed April 21, 1998 5(a) Opinion and Consent of Counsel regarding legality. Incorporated herein by reference to Post-Effective Amendment to Form S-1 on Form S-3 for Lincoln Benefit Life Company (File No. 333-59765) filed April 28, 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. 333-158192) 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 Registered 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. 333-158192 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. 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. (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; (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 April 14, 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 by the following persons and in the capacities indicated on April 14, 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