0001193125-11-095428.txt : 20110413 0001193125-11-095428.hdr.sgml : 20110413 20110412192533 ACCESSION NUMBER: 0001193125-11-095428 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20110413 DATE AS OF CHANGE: 20110412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN BENEFIT LIFE CO CENTRAL INDEX KEY: 0000910739 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 470766853 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 333-158180 FILM NUMBER: 11755897 BUSINESS ADDRESS: STREET 1: P O BOX 80469 STREET 2: 2940 SOUTH 84TH ST CITY: LINCOLN STATE: NE ZIP: 68501 BUSINESS PHONE: 4024794061 MAIL ADDRESS: STREET 1: PO BOX 80469 STREET 2: 206 S 13TH STREET CITY: LINCOLN STATE: NE ZIP: 68501 POS AM 1 dposam.txt LBL LIFE ADVANTAGE As Filed with the Securities and Exchange Commission on April 12, 2011 File No. 333-158180 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM S-1 POST-EFFECTIVE AMENDMENT NO. 3 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 1-800-525-9287 (Address of registrant's principal executive offices) JAN FISCHER-WADE LINCOLN BENEFIT LIFE COMPANY 2940 South 84th St. LINCOLN, NE 68506 1-800-525-9287 (Name of agent for service) Approximate date of commencement of proposed sale to the Public: As soon as practicable after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] (Do not check if a smaller reporting company) Smaller reporting company [ ] CALCULATION OF REGISTRATION FEE
Proposed maximum Proposed maximum Title of securities Amount to be offering price aggregate offering Amount of to be registered registered (1) per unit price (1) registration fee (2) ------------------- -------------- ---------------- ------------------ -------------------- Deferred annuity N/A (1) N/A N/A interests and participating interests therein
(1) The Contract does not provide for a predetermined amount or number of units. (2) By filing dated March 24, 2009, Lincoln Benefit Life Company registered $12,000,000 ($12 million) in market value adjusted annuity contract securities and paid a filing fee of $669.60 therefor. In this Registration Statement, Registrant continues that offering. 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. Neither the Securities and Exchange Commission nor any State securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. Contingent on regulatory approval, ALFS, Inc ("ALFS") is expected to merge into Allstate Distributors, LLC ("ADLLC"), effective April 29, 2011. At that time, ALFS will assign its rights and delegate its duties as principal underwriter to ADLLC. This change will have no effect on Lincoln Benefit's obligations to you under your Contract. Contingent on regulatory approval, ADLLC serves as distributor of the securities registered herein. The securities offered herein are sold on a continuous basis, and there is no specific end date for the offering. ADLLC, an affiliate of Lincoln Benefit, is a wholly owned subsidiary of Allstate Life Insurance Company. ADLLC 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. ADLLC is not required to sell any specific number or dollar amount of securities, but will use its best efforts to sell the securities offered. LINCOLN BENEFIT LIFE COMPANY Supplement Dated May 1, 2011 To the following Prospectuses, as supplemented CONSULTANT SOLUTIONS (CLASSIC, PLUS, ELITE, SELECT) PROSPECTUS DATED MAY 1, 2011 CONSULTANT I PROSPECTUS DATED MAY 1, 2011 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 3(c) Risk Factors............................................................... 1 Item 11(a) Description of Business.................................................... 8 Item 11(b) Description of Property.................................................... 10 Item 11(c) Legal Proceedings.......................................................... 10 Item 11(e) Financial Statements and Notes to Financial Statements..................... 10 Item 11(f) Selected Financial Data.................................................... 44 Item 11(h) Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 44 Item 11(j) Quantitative and Qualitative Disclosures About Market Risk................. 59 Item 11(k) Directors, Executive Officers, Promoters and Control Persons............... 59 Item 11(l) Executive Compensation..................................................... 61 Item 11(m) Security Ownership of Certain Beneficial Owners and Management............. 87 Item 11(n) Transactions with Related Persons, Promoters and Certain Control Persons... 89 Other Information...................................................................... 91
ITEM 3(C). RISK FACTORS This document contains "forward-looking statements" that anticipate results based on our estimates, assumptions and plans that are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments. These forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "seeks," "expects," "will," "should," "anticipates," "estimates," "intends," "believes," "likely," "targets" and other words with similar meanings. These statements may address, among other things, our strategy for growth, product development, investment results, regulatory approvals, market position, expenses, financial results, litigation and reserves. We believe that these statements are based on reasonable estimates, assumptions and plans. However, if the estimates, assumptions or plans underlying the forward-looking statements prove inaccurate or if other risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below, which apply to us as an insurer and a provider of other financial services. These risks constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995 and readers should carefully review such cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and historical trends. These cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in this document, in our filings with the Securities and Exchange Commission ("SEC") or in materials incorporated therein by reference. CHANGES IN UNDERWRITING AND ACTUAL EXPERIENCE COULD MATERIALLY AFFECT PROFITABILITY OF BUSINESS CEDED TO ALLSTATE LIFE INSURANCE COMPANY ("ALIC") Our product pricing includes long-term assumptions regarding investment returns, mortality, morbidity, persistency and operating costs and expenses of the business, which is ceded to ALIC. We establish target returns for each product based upon these factors and the average amount of capital that we and ALIC must hold to support in-force contracts taking into account rating agencies and regulatory requirements. We monitor and manage our pricing and overall sales mix to achieve target new business returns on a portfolio basis, which could result in the discontinuation or de-emphasis of products or distribution relationships and a decline in sales. Profitability from new business emerges over a period of years depending on the nature and life of the product and is subject to variability as actual results may differ from pricing assumptions. Additionally, many of our products have fixed or guaranteed terms that limit our ability to increase revenues or reduce benefits, including credited interest, once the product has been issued. ALIC's profitability depends on the adequacy of investment spreads, the management of market and credit risks associated with investments, the sufficiency of premiums and contract charges to cover mortality and morbidity benefits, the persistency of policies to ensure recovery of acquisition expenses, and the management of operating costs and expenses within anticipated pricing allowances. Legislation and regulation of the insurance marketplace and products could also affect the profitability of our business ceded to ALIC. CHANGES IN RESERVE ESTIMATES MAY ADVERSELY AFFECT OUR OPERATING RESULTS CEDED TO ALIC The reserve for life-contingent contract benefits is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, persistency and expenses. We periodically review the adequacy of these reserves on an aggregate basis and if future experience differs significantly from assumptions, adjustments to reserves may be required which could have a material adverse effect on our operating results ceded to ALIC. CHANGES IN MARKET INTEREST RATES MAY LEAD TO A SIGNIFICANT DECREASE IN THE SALES AND PROFITABILITY OF SPREAD-BASED PRODUCTS CEDED TO ALIC Our ability to manage our spread-based products, such as fixed annuities, is dependent upon maintaining profitable spreads between investment yields and interest crediting rates on business ceded to ALIC. When market interest rates decrease or remain at relatively low levels, proceeds from investments that have matured or have been prepaid or sold may be reinvested at lower yields, reducing investment spread. Lowering interest crediting rates on some products in such an environment can partially offset decreases in investment yield. However, these changes could be limited by market conditions, regulatory minimum rates or contractual minimum rate guarantees on many contracts and may not match the timing or magnitude of changes in investment yields. Decreases in the interest crediting rates offered on products could make those products less attractive, leading to lower sales and/or changes in the level of policy loans, surrenders and withdrawals. Non-parallel shifts in interest rates, such as increases in short-term rates without accompanying increases in medium- and long-term rates, can influence customer demand for fixed annuities, which could impact the level and profitability of new customer deposits. Increases in market interest rates can also have negative effects on the business ceded to ALIC, for example by increasing the attractiveness of other investments to our customers, which can lead to higher surrenders at a time when our fixed income investment asset values are lower as a result 2 of the increase in interest rates. This could lead to the sale of fixed income securities at a loss. For certain products, principally fixed annuity and interest-sensitive life products, the earned rate on assets could lag behind rising market yields. We may react to market conditions by increasing crediting rates, which could narrow spreads and reduce profitability on the business ceded to ALIC. A LOSS OF KEY PRODUCT DISTRIBUTION RELATIONSHIPS COULD MATERIALLY AFFECT SALES, RESULTS OF OPERATIONS AND CASH FLOWS CEDED TO ALIC Certain products are distributed under agreements with other members of the financial services industry that are not affiliated with us. Termination of one or more of these agreements due to, for example, a change in control of one of these distributors or market conditions that make it difficult to achieve our target return on certain products, resulting in relatively uncompetitive pricing, or a decision by us to discontinue selling products through a distribution channel, could have a detrimental effect on our sales, results of operations or cash flows ceded to ALIC if it were to result in an elevated level of surrenders of in-force contracts sold through terminated distribution relationships. CHANGES IN TAX LAWS MAY DECREASE SALES AND PROFITABILITY OF PRODUCTS CEDED TO ALIC Under current federal and state income tax law, certain products we offer, primarily life insurance and annuities, receive favorable tax treatment. This favorable treatment may give certain of our products a competitive advantage over noninsurance products. Congress from time to time considers legislation that would reduce or eliminate the favorable policyholder tax treatment currently applicable to life insurance and annuities. Congress also considers proposals to reduce the taxation of certain products or investments that may compete with life insurance or annuities. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of our products making them less competitive. Such proposals, if adopted, could have a material adverse effect on ALIC's profitability and financial condition or our ability to sell such products and could result in the surrender of some existing contracts and policies. In addition, changes in the federal estate tax laws could negatively affect the demand for the types of life insurance used in estate planning. RISKS RELATING TO INVESTMENTS WE ARE SUBJECT TO MARKET RISK AND DECLINES IN CREDIT QUALITY WHICH MAY ADVERSELY IMPACT INVESTMENT INCOME, CAUSE ADDITIONAL REALIZED LOSSES, AND CAUSE INCREASED UNREALIZED LOSSES We are subject to the risk that we will incur losses due to adverse changes in interest rates or credit spreads. We are subject to risks associated with potential declines in credit quality related to specific issuers or specific industries and a general weakening in the economy, which are typically reflected through credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically defined as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks. Credit spreads vary (i.e. increase or decrease) in response to the market's perception of risk and liquidity in a specific issuer or specific sector and are influenced by the credit ratings, and the reliability of those ratings, published by external rating agencies. A decline in market interest rates or credit spreads could have an adverse effect on our investment income as we invest cash in new investments that may earn less than the portfolio's average yield. In a declining interest rate environment, borrowers may prepay or redeem securities more quickly than expected as they seek to refinance at lower rates. An increase in market interest rates or credit spreads could have an adverse effect on the value of our investment portfolio by decreasing the fair values of the fixed income securities that comprise a substantial majority of our investment portfolio. A decline in the quality of our investment portfolio as a result of adverse economic conditions or otherwise could cause additional realized losses on securities. 3 DETERIORATING FINANCIAL PERFORMANCE IMPACTING SECURITIES COLLATERALIZED BY RESIDENTIAL AND COMMERCIAL MORTGAGE LOANS MAY LEAD TO WRITE-DOWNS AND IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION Changes in residential or commercial mortgage delinquencies, loss severities or recovery rates, declining residential or commercial real estate prices and the quality of service provided by service providers on securities in our portfolio could lead us to determine that write-downs are necessary in the future. CONCENTRATION OF OUR INVESTMENT PORTFOLIO IN ANY PARTICULAR SEGMENT OF THE ECONOMY MAY HAVE ADVERSE EFFECTS ON OUR OPERATING RESULTS AND FINANCIAL CONDITION The concentration of our investment portfolio in any particular industry, collateral types, group of related industries or geographic sector could have an adverse effect on our investment portfolio and consequently on our results of operations and financial condition. Events or developments that have a negative impact on any particular industry, group of related industries or geographic region may have a greater adverse effect on the investment portfolio to the extent that the portfolio is concentrated rather than diversified. THE DETERMINATION OF THE AMOUNT OF REALIZED CAPITAL LOSSES RECORDED FOR IMPAIRMENTS OF OUR INVESTMENTS IS HIGHLY SUBJECTIVE AND COULD MATERIALLY IMPACT OUR OPERATING RESULTS AND FINANCIAL CONDITION The determination of the amount of realized capital losses recorded for impairments vary by investment type and is based upon our periodic evaluation and assessment of known and inherent risks associated with the respective asset class. 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 our results of operations. The assessment of whether other-than-temporary impairments have occurred is based on our case-by-case evaluation of the underlying reasons for the decline in fair value. There can be no assurance that we have accurately assessed the level of or amounts recorded for other-than-temporary impairments taken in our financial statements. Furthermore, historical trends may not be indicative of future impairments and additional impairments may need to be recorded in the future. THE DETERMINATION OF THE FAIR VALUE OF OUR FIXED INCOME SECURITIES IS HIGHLY SUBJECTIVE AND COULD MATERIALLY IMPACT OUR OPERATING RESULTS AND FINANCIAL CONDITION In determining fair values we generally utilize market transaction data for the same or similar instruments. The degree of management judgment involved in determining fair values is inversely related to the availability of market observable information. The fair value of assets may differ from the actual amount received upon sale of 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 assets' fair values. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of accumulated other comprehensive income in shareholder's equity. Changing market conditions could materially effect the determination of the fair value of securities and unrealized net capital gains and losses could vary significantly. Determining fair value is highly subjective and could materially impact our operating results and financial condition. RISKS RELATING TO THE INSURANCE INDUSTRY OUR FUTURE RESULTS ARE DEPENDENT IN PART ON OUR ABILITY TO SUCCESSFULLY OPERATE IN AN INSURANCE INDUSTRY THAT IS HIGHLY COMPETITIVE The insurance industry is highly competitive. Our competitors include other insurers and, because many of our products include a savings or investment component, securities firms, investment advisers, mutual funds, banks and other financial institutions. Many of our competitors have well-established national reputations and market similar products. Because of the competitive nature of the insurance industry, including competition for producers such as exclusive and independent agents, there can be no assurance that we will continue to 4 effectively compete with our industry rivals, or that competitive pressures will not have a material adverse effect on our business or operating results ceded to ALIC. Furthermore, certain competitors operate using a mutual insurance company structure and therefore may have dissimilar profitability and return targets. Our ability to successfully operate may also be impaired if we are not effective in filling critical leadership positions, in developing the talent and skills of our human resources, in assimilating new executive talent into our organization, or in deploying human resource talent consistently with our business goals. DIFFICULT CONDITIONS IN THE ECONOMY GENERALLY COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS As with most businesses, we believe difficult conditions in the economy, such as significant negative macroeconomic trends, including relatively high and sustained unemployment, reduced consumer spending, lower home prices, and substantial increases in delinquencies on consumer debt, including defaults on home mortgages, and the relatively low availability of credit could have an adverse effect on our business and operating results. General economic conditions could adversely affect us in the form of consumer behavior and pressure investment results. Consumer behavior changes could include decreased demand for our products. In addition, holders of some of our interest-sensitive life insurance and annuity products may engage in an elevated level of discretionary withdrawals of contractholder funds. Our investment results could be adversely affected as deteriorating financial and business conditions affect the issuers of the securities in our investment portfolio. THERE CAN BE NO ASSURANCE THAT ACTIONS OF THE U.S. FEDERAL GOVERNMENT, FEDERAL RESERVE AND OTHER GOVERNMENTAL AND REGULATORY BODIES FOR THE PURPOSE OF STABILIZING THE FINANCIAL MARKETS AND STIMULATING THE ECONOMY WILL ACHIEVE THE INTENDED EFFECT In response to the financial crises affecting the banking system, the financial markets and the broader economy in recent years, the U.S. federal government, the Federal Reserve and other governmental and regulatory bodies have taken actions such as purchasing mortgage-backed and other securities from financial institutions, investing directly in banks, thrifts and bank and savings and loan holding companies and increasing federal spending to stimulate the economy. There can be no assurance as to the long term impact such actions will have on the financial markets or on economic conditions, including potential inflationary affects. Continued volatility and any further economic deterioration could materially and adversely affect our business, financial condition and results of operations. LOSSES FROM LITIGATION MAY BE MATERIAL TO OUR OPERATING RESULTS OR CASH FLOWS CEDED TO ALIC As is typical for a large company, our ultimate parent The Allstate Corporation and its subsidiaries are involved in various legal actions, including class action litigation challenging a range of company practices and coverage provided by our insurance products. In the event of an unfavorable outcome in one or more of these matters, the ultimate liability may be in excess of amounts currently reserved and may be material to our operating results or cash flows ceded to ALIC for a particular annual period. WE ARE SUBJECT TO EXTENSIVE REGULATION AND POTENTIAL FURTHER RESTRICTIVE REGULATION MAY INCREASE OUR OPERATING COSTS AND LIMIT OUR GROWTH As an insurance company with separate accounts that are regulated as investment companies, we are subject to extensive laws and regulations. These laws and regulations are complex and subject to change. Moreover, they are administered and enforced by a number of different governmental authorities, including state insurance regulators, state securities administrators, the SEC, the FINRA, the U.S. Department of Justice, and state attorneys general, each of which exercises a degree of interpretive latitude. Consequently, we are subject to the risk that compliance with any particular regulator's or enforcement authority's interpretation of a legal issue may not result in compliance with another's interpretation of the same issue, particularly when compliance is judged in hindsight. In addition, there is risk that any particular regulator's or enforcement authority's interpretation of a 5 legal issue may change over time to our detriment, or that changes in the overall legal environment may, even absent any particular regulator's or enforcement authority's interpretation of a legal issue changing, cause us to change our views regarding the actions we need to take from a legal risk management perspective, thus necessitating changes to our practices that may, in some cases, limit our ability to grow and improve the profitability of our business ceded to ALIC. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. For example, state insurance laws and regulations are generally intended to protect or benefit purchasers or users of insurance products. In many respects, these laws and regulations limit our ability to grow and improve the profitability of our business ceded to ALIC. In recent years, the state insurance regulatory framework has come under public scrutiny and members of Congress have discussed proposals to provide for federal chartering of insurance companies. We can make no assurances regarding the potential impact of state or federal measures that may change the nature or scope of insurance regulation. REGULATORY REFORMS, AND THE MORE STRINGENT APPLICATION OF EXISTING REGULATIONS, MAY MAKE IT MORE EXPENSIVE FOR US TO CONDUCT OUR BUSINESS The federal government has enacted comprehensive regulatory reforms for financial services entities. As part of a larger effort to strengthen the regulation of the financial services market, certain reforms are applicable to the insurance industry, including the establishment of a Federal Insurance Office within the Department of Treasury. These regulatory reforms and any additional legislation or regulatory requirements imposed upon us in connection with the federal government's regulatory reform of the financial services industry and any more stringent enforcement of existing regulations by federal authorities, may make it more expensive for us to conduct our business. REINSURANCE MAY BE UNAVAILABLE AT CURRENT LEVELS AND PRICES, WHICH MAY LIMIT OUR ABILITY TO WRITE NEW BUSINESS Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be made that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as is currently available. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient and at prices that we consider acceptable, either ALIC would have to accept an increase in exposure risk, or we would have to reduce our insurance writings, or develop or seek other alternatives. REINSURANCE SUBJECTS US TO THE CREDIT RISK OF OUR REINSURERS AND MAY NOT BE ADEQUATE TO PROTECT US AGAINST LOSSES ARISING FROM CEDED INSURANCE, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS CEDED TO ALIC The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, or their affiliates, have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Our inability to collect a material recovery from a reinsurer could have a material adverse effect on operating results ceded to ALIC. A LARGE SCALE PANDEMIC, THE CONTINUED THREAT OF TERRORISM OR ONGOING MILITARY ACTIONS MAY HAVE AN ADVERSE EFFECT ON THE LEVEL OF CLAIM LOSSES WE INCUR AND CEDE TO ALIC, THE VALUE OF OUR INVESTMENT PORTFOLIO, OUR COMPETITIVE POSITION, MARKETABILITY OF PRODUCT OFFERINGS, LIQUIDITY AND OPERATING RESULTS A large scale pandemic, the continued threat of terrorism, within the United States and abroad, or ongoing military and other actions and heightened security measures in response to these types of threats, may cause 6 significant volatility and losses in our investment portfolio from declines in the equity markets and from interest rate changes in the United States, Europe and elsewhere, and result in loss of life, disruptions to commerce and reduced economic activity. Some of the assets in our investment portfolio may be adversely affected by reduced economic activity caused by a large scale pandemic or the continued threat of terrorism. Additionally, a large scale pandemic or terrorist act could have a material adverse effect on the sales, profitability, competitiveness, marketability of product offerings, liquidity, and operating results. A DOWNGRADE IN ALIC'S FINANCIAL STRENGTH RATINGS MAY HAVE AN ADVERSE EFFECT ON OUR COMPETITIVE POSITION, THE MARKETABILITY OF OUR PRODUCT OFFERINGS, AND OUR LIQUIDITY, OPERATING RESULTS CEDED TO ALIC AND FINANCIAL CONDITION Financial strength ratings are important factors in establishing the competitive position of insurance companies and generally have an effect on an insurance company's business. On an ongoing basis, rating agencies review the financial performance and condition of insurers and could downgrade or change the outlook on an insurer's ratings due to, for example, a change in an insurer's statutory capital; a change in a rating agency's determination of the amount of risk-adjusted capital required to maintain a particular rating; an increase in the perceived risk of an insurer's investment portfolio; a reduced confidence in management or a host of other considerations that may or may not be under the insurer's control. The insurance financial strength ratings of ALIC from A.M. Best, Standard & Poor's and Moody's are subject to continuous review, and the retention of current ratings cannot be assured. A downgrade in any of these ratings could have a material adverse effect on our sales, our competitiveness, the marketability of our product offerings, and our liquidity and operating results ceded to ALIC. CHANGES IN ACCOUNTING STANDARDS ISSUED BY THE FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") OR OTHER STANDARD-SETTING BODIES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION Our financial statements are subject to the application of generally accepted accounting principles, which are periodically revised, interpreted and/or expanded. Accordingly, we are required to adopt new guidance or interpretations, or could be subject to existing guidance as we enter into new transactions, which may have a material adverse effect on our results of operations and financial condition that is either unexpected or has a greater impact than expected. For a description of changes in accounting standards that are currently pending and, if known, our estimates of their expected impact, see Note 2 of the financial statements. THE CHANGE IN OUR UNRECOGNIZED TAX BENEFIT DURING THE NEXT 12 MONTHS IS SUBJECT TO UNCERTAINTY We have disclosed our estimate of net unrecognized tax benefits and the reasonably possible increase or decrease in its balance during the next 12 months in Note 10 of the financial statements. However, actual results may differ from our estimate for reasons such as changes in our position on specific issues, developments with respect to the governments' interpretations of income tax laws or changes in judgment resulting from new information obtained in audits or the appeals process. THE OCCURRENCE OF EVENTS UNANTICIPATED IN OUR DISASTER RECOVERY SYSTEMS AND MANAGEMENT CONTINUITY PLANNING OR A SUPPORT FAILURE FROM EXTERNAL PROVIDERS DURING A DISASTER COULD IMPAIR OUR ABILITY TO CONDUCT BUSINESS EFFECTIVELY The occurrence of a disaster such as a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations ceded to ALIC and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems. In the event that a significant number of our managers could be unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised. 7 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 16 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 13,000 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 2009 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 2009 ordinary life insurance in force and 21/st/ largest on the basis of 2009 statutory admitted assets. 8 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 interest-sensitive, traditional and variable life insurance, and fixed annuities including deferred and immediate. We sell products through multiple intermediary distribution channels, including Allstate exclusive agencies and exclusive financial specialists and independent agents (including master brokerage agencies). Through March 31, 2010, we also sold products through broker-dealers. Although we continue to service in force contracts sold through this distribution channel, we no longer solicit new sales through direct relationships with 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. The market for life insurance, retirement and investment products continues to be highly fragmented and competitive. As of December 31, 2010, there were approximately 470 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 have 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. Assets that support general account product liabilities are owned and managed by ALIC under the terms of the reinsurance agreements. 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, statutory accounting methods, corporate governance, the nature and amount of investments, claims practices, participation in guaranty funds, reserve adequacy, insurer solvency, transactions with affiliates, the payment of dividends, and underwriting standards. For 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 Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. Hundreds of regulations must be promulgated and implemented pursuant to this new law, and we cannot predict what the final regulations will require but do not expect a material impact on Lincoln Benefit's operations. The new law also creates the Federal Office of Insurance ("FIO") within the Treasury Department. The FIO will monitor the insurance industry, provide advice to the new Financial Stability Oversight Council, represent the U.S. on international insurance matters and study the current regulatory system and submit a report to Congress 9 in 2012. 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 insurance 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 heading "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, ----------------------- 2010 2009 2008 ($ IN THOUSANDS) ------- ------- ------- REVENUES Net investment income............................. $12,067 $11,783 $13,940 Realized capital gains and losses................. 694 1,480 5,952 ------- ------- ------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE.. 12,761 13,263 19,892 Income tax expense................................ 4,451 4,634 6,918 ------- ------- ------- NET INCOME........................................ 8,310 8,629 12,974 ------- ------- ------- OTHER COMPREHENSIVE INCOME (LOSS), AFTER-TAX Change in unrealized net capital gains and losses. 4,584 5,783 (4,351) ------- ------- ------- COMPREHENSIVE INCOME.............................. $12,894 $14,412 $ 8,623 ======= ======= =======
See notes to financial statements. 10 LINCOLN BENEFIT LIFE COMPANY STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, ----------------------- 2010 2009 ($ IN THOUSANDS, EXCEPT PAR VALUE DATA) ----------- ----------- ASSETS Investments Fixed income securities, at fair value (amortized cost $304,848 and $299,787).................................................................. $ 320,456 $ 308,343 Short-term, at fair value (amortized cost $11,593 and $8,557)................ 11,593 8,557 ----------- ----------- Total investments........................................................ 332,049 316,900 Cash............................................................................ 3,550 10,063 Reinsurance recoverable from Allstate Life Insurance Company.................... 18,365,058 18,689,074 Reinsurance recoverable from non-affiliates..................................... 1,906,574 1,766,824 Other assets.................................................................... 105,159 110,400 Separate accounts............................................................... 2,017,185 2,039,647 ----------- ----------- TOTAL ASSETS............................................................. $22,729,575 $22,932,908 =========== =========== LIABILITIES Contractholder funds............................................................ $17,247,071 $17,633,027 Reserve for life-contingent contract benefits................................... 3,011,317 2,805,387 Unearned premiums............................................................... 19,478 21,656 Deferred income taxes........................................................... 5,833 3,300 Payable to affiliates, net...................................................... 4,931 14,749 Current income taxes payable.................................................... 4,386 4,656 Other liabilities and accrued expenses.......................................... 93,507 97,513 Separate accounts............................................................... 2,017,185 2,039,647 ----------- ----------- TOTAL LIABILITIES........................................................ 22,403,708 22,619,935 ----------- ----------- 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................................................................. 133,222 124,912 Accumulated other comprehensive income: Unrealized net capital gains and losses...................................... 10,145 5,561 ----------- ----------- Total accumulated other comprehensive income............................. 10,145 5,561 ----------- ----------- TOTAL SHAREHOLDER'S EQUITY............................................... 325,867 312,973 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............................... $22,729,575 $22,932,908 =========== ===========
See notes to financial statements. 11 LINCOLN BENEFIT LIFE COMPANY STATEMENTS OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, --------------------------- 2010 2009 2008 ($ 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........................ 124,912 116,283 103,309 Net income........................................ 8,310 8,629 12,974 -------- -------- -------- Balance, end of year.............................. 133,222 124,912 116,283 -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of year........................ 5,561 (222) 4,129 Change in unrealized net capital gains and losses. 4,584 5,783 (4,351) -------- -------- -------- Balance, end of year.............................. 10,145 5,561 (222) -------- -------- -------- TOTAL SHAREHOLDER'S EQUITY........................ $325,867 $312,973 $298,561 ======== ======== ========
See notes to financial statements. 12 LINCOLN BENEFIT LIFE COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------- 2010 2009 2008 ($ IN THOUSANDS) -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................................ $ 8,310 $ 8,629 $ 12,974 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization and other non-cash items.............................. 1,241 932 143 Realized capital gains and losses.................................. (694) (1,480) (5,952) Changes in: Policy benefit and other insurance reserves.................... 4,240 19,349 (5,052) Income taxes................................................... (205) (2,174) 2,065 Receivable/payable to affiliates, net.......................... (9,818) (21,280) 14,117 Other operating assets and liabilities......................... (943) 369 (24,195) -------- --------- -------- Net cash provided by (used in) operating activities......... 2,131 4,345 (5,900) -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of fixed income securities........................ 27,166 46,330 101,584 Collections on fixed income securities................................ 38,691 35,334 7,693 Purchases of fixed income securities.................................. (71,478) (151,234) (64,497) Change in short-term investments, net................................. (3,023) 72,143 (54,347) -------- --------- -------- Net cash (used in) provided by investing activities......... (8,644) 2,573 (9,567) -------- --------- -------- NET (DECREASE) INCREASE IN CASH....................................... (6,513) 6,918 (15,467) CASH AT BEGINNING OF YEAR............................................. 10,063 3,145 18,612 -------- --------- -------- CASH AT END OF YEAR................................................... $ 3,550 $ 10,063 $ 3,145 ======== ========= ========
See notes to financial statements. 13 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 interest-sensitive, traditional and variable life insurance and fixed annuities including deferred and immediate. 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 2010, the top geographic locations for statutory premiums and annuity considerations were California, Florida and Texas. 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, and independent agents (including master brokerage agencies). 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. Furthermore, federal and state laws and regulations affect the taxation of insurance companies and life insurance and annuity products. Congress from time to time considers legislation that would reduce or eliminate the favorable policyholder tax treatment currently applicable to life insurance and annuities. Congress also considers proposals to reduce the taxation of certain products or investments that may compete with life insurance or annuities. Legislation that increases the taxation on insurance products or reduces the taxation on competing products could lessen the advantage or create a disadvantage for certain of the Company's products 14 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) making them less competitive. Such proposals, if adopted, 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, residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS") and asset-backed securities ("ABS"). 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 RMBS, CMBS and ABS 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 in earnings when a security's fair value is less than its amortized cost and 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 a fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income ("OCI"). 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 15 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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 surrender of the contract prior to contractually specified dates. 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 balances for contract maintenance, administration, mortality, expense and surrender of the contract prior to the contractually specified dates. 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 benefits and contractholder funds are reported separately in the Statements of Financial Position. Reinsurance does not extinguish the Company's primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers and establishes allowances for uncollectible reinsurance as appropriate. 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. 16 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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. A deferred tax asset valuation allowance is established when there is uncertainty that such assets will be realized. 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. ADOPTED ACCOUNTING STANDARD DISCLOSURES ABOUT FAIR VALUE MEASUREMENTS In January 2010, the Financial Accounting Standards Board ("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 17 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) measurements that fall in either Level 2 or Level 3 are also required. The Company adopted the provisions of the new guidance as of December 31, 2010, 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, the adoption had no impact on the Company's results of operations or financial position. PENDING ACCOUNTING STANDARD CONSOLIDATION ANALYSIS CONSIDERING INVESTMENTS HELD THROUGH SEPARATE ACCOUNTS In April 2010, the FASB issued guidance clarifying that an insurer is not required to combine interests in investments held in a qualifying separate account with its interests in the same investments held in the general account when performing a consolidation evaluation. The guidance is effective for fiscal years beginning after December 15, 2010 with early adoption permitted. The adoption of this guidance is not expected to have a material 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 $204.8 million, $202.9 million and $227.0 million in 2010, 2009 and 2008, 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 products sold by the Company. In return for these services, the Company recorded expense of $6.9 million, $4.6 million and $5.1 million in 2010, 2009 and 2008, 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 commission and other distribution expenses of $8.5 million, $9.1 million and $18.4 million in 2010, 2009 and 2008, respectively, that were ceded to ALIC. REINSURANCE The following table summarizes amounts that were ceded to ALIC and reported net in the Statements of Operations and Comprehensive Income under the reinsurance agreements:
2010 2009 2008 ($ IN THOUSANDS) ---------- ---------- ---------- Premiums and contract charges.............. $ 782,113 $ 734,369 $ 691,267 Interest credited to contractholder funds, contract benefits and expenses........... 1,683,487 1,621,011 1,468,505
18 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Reinsurance recoverables due from ALIC totaled $18.37 billion and $18.69 billion as of December 31, 2010 and 2009, 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 $1 billion. The Corporation may use commercial paper borrowings, bank lines of credit and repurchase agreements to fund intercompany borrowings. The Company had no amounts outstanding under the intercompany loan agreement as of December 31, 2010 and 2009. 4. INVESTMENTS FAIR VALUES The amortized cost, gross unrealized gains and losses and fair value for fixed income securities are as follows:
GROSS UNREALIZED AMORTIZED --------------- FAIR COST GAINS LOSSES VALUE ($ IN THOUSANDS) --------- ------- ------- -------- DECEMBER 31, 2010 U.S. government and agencies..... $ 70,426 $ 3,513 $ (383) $ 73,556 Municipal........................ 2,999 177 -- 3,176 Corporate........................ 154,261 9,345 (19) 163,587 Foreign government............... 4,998 92 -- 5,090 RMBS............................. 55,376 2,429 (3) 57,802 CMBS............................. 8,523 427 (87) 8,863 ABS.............................. 8,265 117 -- 8,382 -------- ------- ------- -------- Total fixed income securities. $304,848 $16,100 $ (492) $320,456 ======== ======= ======= ======== 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) $308,343 ======== ======= ======= ========
19 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) SCHEDULED MATURITIES The scheduled maturities for fixed income securities are as follows as of December 31, 2010:
AMORTIZED FAIR COST VALUE ($ IN THOUSANDS) --------- -------- Due in one year or less................ $ 4,501 $ 4,585 Due after one year through five years.. 151,933 159,481 Due after five years through ten years. 76,126 81,207 Due after ten years.................... 8,647 8,999 -------- -------- 241,207 254,272 RMBS and ABS........................... 63,641 66,184 -------- -------- Total............................... $304,848 $320,456 ======== ========
Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on RMBS and ABS, they are not categorized by contractual maturity. CMBS are categorized by contractual maturity because they generally are not subject to prepayment risk. NET INVESTMENT INCOME Net investment income for the years ended December 31 is as follows:
2010 2009 2008 ($ IN THOUSANDS) ------- ------- ------- Fixed income securities.............. $12,480 $12,098 $13,302 Short-term and other investments..... 21 107 992 ------- ------- ------- Investment income, before expense. 12,501 12,205 14,294 Investment expense................ (434) (422) (354) ------- ------- ------- Net investment income......... $12,067 $11,783 $13,940 ======= ======= =======
REALIZED CAPITAL GAINS AND LOSSES The Company recognized net realized capital gains of $694 thousand, $1.5 million and $6.0 million in 2010, 2009 and 2008, respectively. Realized capital gains and losses in 2010 and 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 were included in accumulated other comprehensive income as of December 31, 2010 and 2009. Gross gains of $652 thousand, $1.5 million and $8.2 million were realized on sales of fixed income securities during 2010, 2009 and 2008, respectively. There were no gross losses realized on sales of fixed income securities in 2010 and 2008. Gross losses of $3 thousand were realized on sales of fixed income securities during 2009. 20 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) UNREALIZED NET CAPITAL GAINS AND LOSSES Unrealized net capital gains and losses included in accumulated other comprehensive income are as follows:
GROSS UNREALIZED FAIR --------------- UNREALIZED NET VALUE GAINS LOSSES GAINS (LOSSES) ($ IN THOUSANDS) -------- ------- ------- -------------- DECEMBER 31, 2010 Fixed income securities............................... $320,456 $16,100 $ (492) $15,608 Short-term investments................................ 11,593 -- -- -- ------- Unrealized net capital gains and losses, pre-tax... 15,608 Deferred income taxes.............................. (5,463) ------- Unrealized net capital gains and losses, after-tax. $10,145 ======= GROSS UNREALIZED FAIR --------------- UNREALIZED NET VALUE GAINS LOSSES GAINS (LOSSES) -------- ------- ------- -------------- 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 =======
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:
2010 2009 2008 ($ IN THOUSANDS) ------- ------- ------- Fixed income securities................................. $ 7,052 $ 8,895 $(6,691) Short-term investments.................................. -- 2 (2) ------- ------- ------- Total................................................ 7,052 8,897 (6,693) Deferred income taxes................................... (2,468) (3,114) 2,342 ------- ------- ------- Increase (decrease) in unrealized net capital gains and losses................................................ $ 4,584 $ 5,783 $(4,351) ======= ======= =======
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 the 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 considered 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 21 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security's original or current effective rate, as appropriate, and compares this to 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 related to other factors recognized in other comprehensive income. The Company's portfolio monitoring process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and 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 and future earnings potential of the issue or issuer. Some of the factors considered in evaluating whether a decline in fair value is other than temporary are: 1) 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; 2) the specific reasons that a security is in an unrealized loss position, including overall market conditions which could affect liquidity; and 3) the length of time and extent to which the fair value has been less than amortized cost. 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) --------- ------- ---------- --------- ------ ---------- ---------- DECEMBER 31, 2010 U.S. government and agencies. 1 $ 9,546 $(383) -- $ -- $ -- $ (383) Corporate.................... 1 4,968 (19) -- -- -- (19) RMBS......................... 3 385 (3) -- -- -- (3) CMBS......................... -- -- -- 1 1,916 (87) (87) -- ------- ----- -- ------ ----- ------- Total..................... 5 $14,899 $(405) 1 $1,916 $ (87) $ (492) == ======= ===== == ====== ===== ======= 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) == ======= ===== == ====== ===== =======
As of December 31, 2010, all of the 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 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. 22 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Unrealized losses on investment grade securities are principally related to widening credit spreads or rising interest rates since the time of initial purchase. As of December 31, 2010, the Company has not made the 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. MUNICIPAL BONDS The principal geographic distribution of municipal bond issuers represented in the Company's municipal bond portfolio included 84% and 16% in Washington and Puerto Rico, respectively, as of December 31, 2010 and 83% and 17% in Washington and Puerto Rico, respectively, as of December 31, 2009. CONCENTRATION OF CREDIT RISK As of December 31, 2010, the Company is not exposed to any credit concentration risk of a single issuer and its affiliates greater than 10% of the Company's shareholder's equity. OTHER INVESTMENT INFORMATION As of December 31, 2010, fixed income securities and short-term investments with a carrying value of $10.0 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. 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 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 23 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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. The Company has two types of situations where investments are classified as Level 3 in the fair value hierarchy. The first is where quotes continue to be received from independent third-party valuation service providers and all significant inputs are market observable; however, there has been a significant decrease in the volume and level of activity for the asset when compared to normal market activity such that the degree of market observability has declined to a point where categorization as a Level 3 measurement is considered appropriate. The indicators considered in determining whether a significant decrease in the volume and level of activity for a specific asset has occurred include the level of new issuances in the primary market, trading volume in the secondary market, the level of credit spreads over historical levels, applicable bid-ask spreads, and price consensus among market participants and other pricing sources. The second situation where the Company classifies securities in Level 3 is where specific inputs significant to the fair value estimation models are not market observable. This relates to the Company's use of broker quotes. 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. For the majority of Level 2 and Level 3 valuations, a combination of the market and income approaches is used. 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: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. MUNICIPAL: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. CORPORATE, INCLUDING PRIVATELY PLACED: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. Also included are 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 24 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) discounted cash flow model include an interest rate yield 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. FOREIGN GOVERNMENT: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. RMBS--U.S. GOVERNMENT SPONSORED ENTITIES ("U.S. AGENCY"), PRIME RESIDENTIAL MORTGAGE-BACKED SECURITIES ("PRIME") AND ALT-A RESIDENTIAL MORTGAGE-BACKED SECURITIES ("ALT-A"); ABS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads. CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, collateral performance and credit spreads. . SHORT-TERM: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. For certain short-term investments, amortized cost is used as the best estimate of fair value. 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. RMBS--PRIME AND ALT-A: Valued based on non-binding broker quotes. CMBS: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, collateral performance and credit spreads. 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 life and 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 primarily use stochastically determined cash flows based on the contractual elements of embedded derivatives, projected option cost and applicable market data, such as interest rate yield curves and equity index volatility assumptions. These are categorized as Level 3 as a result of the significance of non-market observable inputs. 25 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, 2010:
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) 2010 ($ IN THOUSANDS) ---------------- ----------- ------------ ------------- ASSETS: Fixed income securities: U.S. government and agencies.............. $ 31,007 $ 42,549 $ -- $ 73,556 Municipal................................. -- 3,176 -- 3,176 Corporate................................. -- 162,735 852 163,587 Foreign government........................ -- 5,090 -- 5,090 RMBS...................................... -- 50,922 6,880 57,802 CMBS...................................... -- 6,947 1,916 8,863 ABS....................................... -- 8,382 -- 8,382 ---------- -------- --------- ---------- Total fixed income securities......... 31,007 279,801 9,648 320,456 Short-term investments....................... 11,543 50 -- 11,593 Separate account assets...................... 2,017,185 -- -- 2,017,185 ---------- -------- --------- ---------- TOTAL RECURRING BASIS ASSETS.......... 2,059,735 279,851 9,648 2,349,234 ---------- -------- --------- ---------- TOTAL ASSETS AT FAIR VALUE................... $2,059,735 $279,851 $ 9,648 $2,349,234 ========== ======== ========= ========== % of total assets at fair value.............. 87.7% 11.9% 0.4% 100.0% LIABILITIES: Contractholder funds: Derivatives embedded in life and annuity contracts............................... $ -- $ -- $(494,149) $ (494,149) ---------- -------- --------- ---------- TOTAL LIABILITIES AT FAIR VALUE.............. $ -- $ -- $(494,149) $ (494,149) ========== ======== ========= ========== % of total liabilities at fair value......... -- % -- % 100.0% 100.0%
26 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, 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 life and 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%
27 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2010.
TOTAL REALIZED AND UNREALIZED GAINS (LOSSES) INCLUDED IN: ----------------------------- PURCHASES, OCI ON SALES, BALANCE AS OF STATEMENT OF ISSUANCES AND TRANSFERS TRANSFERS BALANCE AS OF DECEMBER 31, NET FINANCIAL SETTLEMENTS, INTO OUT OF DECEMBER 31, 2009 INCOME/(1)/ POSITION NET LEVEL 3 LEVEL 3 2010 ($ IN THOUSANDS) ------------- ---------- ------------ ------------- --------- --------- ------------- ASSETS Fixed income securities: Corporate................ $ 1,089 $ (1) $ -- $ 7,740 $ -- $ (7,976) $ 852 RMBS..................... -- (17) 131 9,459 -- (2,693) 6,880 CMBS..................... 1,158 -- 758 -- -- -- 1,916 -------- ------- ---- ------- --------- -------- --------- TOTAL RECURRING LEVEL 3 ASSETS......... $ 2,247 $ (18) $889 $17,199 $ -- $(10,669) $ 9,648 ======== ======= ==== ======= ========= ======== ========= LIABILITIES Contractholder funds: Derivatives embedded in life and annuity contracts............... $(15,526) $(4,877) $ -- $ -- $(473,746) $ -- $(494,149) -------- ------- ---- ------- --------- -------- --------- TOTAL RECURRING LEVEL 3 LIABILITIES.... $(15,526) $(4,877) $ -- $ -- $(473,476) $ -- $(494,149) ======== ======= ==== ======= ========= ======== =========
-------- /(1)/The amount above attributable to fixed income securities is reported in the Statements of Operations and Comprehensive Income as net investment income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company's reinsurance agreements. Transfers between level categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company's independent third-party valuation service provider and as a result the price is stale or has been replaced with a broker quote, the security is transferred into Level 3. Transfers in and out of level categorizations are reported as having occurred at the beginning of the quarter in which 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 Level 3 rollforward table. There were no transfers between Level 1 and Level 2 during 2010. Transfers out of Level 3 during 2010, including those related to Corporate fixed income securities and RMBS, included situations where a broker quote was used in a prior period and a fair value quote became available from the Company's independent third-party valuation service provider in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant. Transfers into Level 3 during 2010 also included derivatives embedded in equity-indexed life and annuity contracts due to refinements in the valuation modeling resulting in an increase in significance of non-market observable inputs. 28 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table provides the total gains and (losses) included in net income during 2010 for Level 3 assets still held as of December 31, 2010.
($ IN THOUSANDS) ASSETS Fixed income securities: Corporate.......................................... $ (2) RMBS............................................... (11) CMBS............................................... (1) ------- TOTAL RECURRING LEVEL 3 ASSETS................. $ (14) ======= LIABILITIES Contractholder funds: Derivatives embedded in life and annuity contracts. $(4,877) ------- TOTAL RECURRING LEVEL 3 LIABILITIES............ $(4,877) =======
The amounts in the table above represent losses included in net income during 2010 for the period of time that the asset was determined to be in Level 3. The amounts attributable to fixed income securities are reported in the Statements of Operations and Comprehensive Income in net investment income. The amount attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company's reinsurance agreements. The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2009.
TOTAL GAINS TOTAL REALIZED AND (LOSSES) UNREALIZED GAINS INCLUDED IN (LOSSES) INCLUDED IN: NET INCOME - ---------------------- PURCHASES, FOR FINANCIAL OCI ON SALES, NET TRANSFERS INSTRUMENTS BALANCE AS OF STATEMENT OF ISSUANCES AND IN AND/ BALANCE AS OF STILL HELD AS OF DECEMBER 31, NET FINANCIAL SETTLEMENTS, OR (OUT) DECEMBER 31, DECEMBER 31, 2008 INCOME/(1)/ POSITION NET OF LEVEL 3 2009 2009/(2)/ ($ 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 life and 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 $(2) thousand in net investment income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company's reinsurance agreements. /(2)/The amount above attributable to fixed income securities is reported as a component of net investment income in the Statements of Operations and Comprehensive Income. The amount above attributable to derivatives embedded in life and annuity contracts is reported as a component of contract benefits and is ceded in accordance with the Company's reinsurance agreements. 29 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table presents the rollforward of Level 3 assets and liabilities held at fair value on a recurring basis during the year ended December 31, 2008.
TOTAL GAINS TOTAL REALIZED AND (LOSSES) UNREALIZED GAINS (LOSSES) INCLUDED IN INCLUDED IN: NET INCOME ------------------------ PURCHASES, FOR FINANCIAL OCI ON SALES, INSTRUMENTS BALANCE AS OF STATEMENT OF ISSUANCES AND BALANCE AS OF STILL HELD AS OF JANUARY 1, NET FINANCIAL SETTLEMENTS, DECEMBER 31, DECEMBER 31, 2008 INCOME/(1)/ POSITION NET 2008 2008/(2)/ ($ 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 life and 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 life and 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 life and 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, 2010 and 2009, 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 $12.69 billion and $11.66 billion, respectively, as of December 31, 2010 and were $13.64 billion and $12.64 billion, respectively, as of December 31, 2009. The fair value of contractholder funds on investment contracts is based on the terms of the underlying contracts utilizing prevailing market rates for similar contracts adjusted for the Company's own credit risk. Deferred annuities included in contractholder funds are valued using discounted cash flow models which incorporate market value margins, which are based on the cost of holding economic capital, and the Company's own credit risk. Immediate annuities without life contingencies are valued at the present value of future benefits using market implied interest rates which include the Company's own credit risk. 6. DERIVATIVE FINANCIAL INSTRUMENTS The Company has derivatives embedded in non-derivative host contracts that are required to be separated from the host contracts and accounted for at fair value. The Company does not use derivatives for trading purposes. The Company's embedded derivatives are equity options in life and annuity product contracts, which provide equity returns to contractholders; and guaranteed minimum accumulation and withdrawal benefits in variable annuity contracts. 30 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table provides a summary of the volume and fair value positions of embedded derivative financial instruments as well as their reporting location in the Statement of Financial Position as of December 31, 2010. None of these derivatives are designated as accounting hedging instruments.
VOLUME - FAIR NOTIONAL VALUE, GROSS GROSS BALANCE SHEET LOCATION AMOUNT NET ASSET LIABILITY ($ IN THOUSANDS) ---------------------- ---------- --------- ----- --------- Equity index and forward starting options in life and annuity product contracts... Contractholder funds $4,351,559 $(473,746) $-- $(473,746) Guaranteed accumulation benefits.......... Contractholder funds 228,195 (18,422) -- (18,422) Guaranteed withdrawal benefits............ Contractholder funds 32,473 (1,981) -- (1,981) ---------- --------- --- --------- TOTAL DERIVATIVES......................... $4,612,227 $(494,149) $-- $(494,149) ========== ========= === =========
The following table provides a summary of the volume and fair value positions of embedded derivative financial instruments as well as their reporting location in the Statement of Financial Position as of December 31, 2009. None of these derivatives are designated as accounting hedging instruments.
VOLUME - FAIR NOTIONAL VALUE, GROSS GROSS BALANCE SHEET LOCATION AMOUNT NET ASSET LIABILITY ($ IN THOUSANDS) ---------------------- ---------- --------- ----- --------- Equity index and forward starting 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) ========== ========= === =========
For the year ended December 31, 2010 gains and losses from valuation and settlements on embedded derivative financial instruments recorded in interest credited to contractholder funds and contract benefits were $31.0 million and $(4.9) million, respectively, which in turn were ceded to ALIC. For the year ended December 31, 2009 gains and losses from valuation and settlements on embedded derivative financial instruments recorded in interest credited to contractholder funds and contract benefits were $(166.3) million and $21.0 million, respectively, which in turn were ceded to ALIC. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS There were no off-balance-sheet financial instruments as of December 31, 2010 or 2009. 7. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS As of December 31, the reserve for life-contingent contract benefits consists of the following:
2010 2009 ($ IN THOUSANDS) ---------- ---------- Traditional life insurance..................... $1,363,098 $1,280,461 Immediate fixed annuities...................... 680,467 686,057 Accident and health insurance.................. 961,030 831,211 Other.......................................... 6,722 7,658 ---------- ---------- Total reserve for life-contingent contract benefits.................................. $3,011,317 $2,805,387 ========== ==========
31 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table highlights the key assumptions generally used in calculating the reserve for life-contingent contract benefits:
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD ------------------------- ------------------------ ------------------------ ------------------------ Traditional life Actual company Interest rate Net level premium insurance experience plus loading assumptions range from reserve method using the 4.0% to 8.0% Company's withdrawal experience rates Immediate fixed annuities 1983 individual annuity Interest rate Present value of mortality table with assumptions range from expected future benefits internal modifications; 1.2% to 8.8% based on historical 1983 individual annuity experience mortality table; Annuity 2000 mortality table with internal modifications Accident and health Actual company Unearned premium; insurance experience plus loading additional contract reserves for mortality risk Other: Variable annuity 100% of Annuity 2000 Interest rate Projected benefit ratio guaranteed minimum mortality table assumptions range from applied to cumulative death benefits 4.2% to 5.2% assessments
As of December 31, contractholder funds consist of the following:
2010 2009 ($ IN THOUSANDS) ----------- ----------- Interest-sensitive life insurance..... $ 4,314,502 $ 3,844,319 Investment contracts: Fixed annuities.................... 12,728,648 13,675,700 Other investment contracts......... 203,921 113,008 ----------- ----------- Total contractholder funds..... $17,247,071 $17,633,027 =========== ===========
32 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following table highlights the key contract provisions relating to contractholder funds:
PRODUCT INTEREST RATE WITHDRAWAL/SURRENDER CHARGES ------------------------------------- ------------------------------------- ---------------------------------- Interest-sensitive life insurance Interest rates credited range from 0% Either a percentage of account to 11.5% for equity-indexed life balance or dollar amount (whose returns are indexed to the S&P grading off generally over 20 500) and 2.7% to 6.0% for all other years products Fixed annuities Interest rates credited range from 0% Either a declining or a level to 8.8% for immediate annuities; 0% percentage charge generally to 14.0% for equity-indexed annuities over nine years or less. (whose returns are indexed to the S&P Additionally, approximately 500); and 1.0% to 8.5% for all other 19.0% of fixed annuities are products subject to market value adjustment for discretionary withdrawals. Other investment contracts: Guaranteed minimum income, Interest rates used in establishing Withdrawal and surrender accumulation and withdrawal reserves range from 1.8% to 10.3% charges are based on the terms benefits on variable annuities and of the related interest-sensitive secondary guarantees on life insurance or fixed annuity interest-sensitive life insurance contract. and fixed annuities
Contractholder funds activity for the years ended December 31 is as follows:
2010 2009 ($ IN THOUSANDS) ----------- ----------- Balance, beginning of year........... $17,633,027 $17,787,376 Deposits............................. 1,521,086 1,751,516 Interest credited.................... 743,075 821,046 Benefits............................. (504,789) (523,905) Surrenders and partial withdrawals... (1,811,355) (1,826,122) Contract charges..................... (471,729) (417,398) Net transfers from separate accounts. 18,788 14,400 Other adjustments.................... 118,968 26,114 ----------- ----------- Balance, end of year................. $17,247,071 $17,633,027 =========== ===========
33 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The table below presents information regarding the Company's variable annuity contracts with guarantees. The Company's variable annuity contracts may offer more than one type of guarantee in each contract; therefore, the sum of amounts listed exceeds the total account balances of variable annuity contracts' separate accounts with guarantees.
DECEMBER 31, ------------------- 2010 2009 ($ IN MILLIONS) --------- --------- IN THE EVENT OF DEATH Separate account value............................... $ 1,318.1 $ 1,405.4 Net amount at risk/(1)/.............................. $ 126.3 $ 213.1 Average attained age of contractholders.............. 57 years 57 years AT ANNUITIZATION (INCLUDES INCOME BENEFIT GUARANTEES) Separate account value............................... $ 252.8 $ 263.7 Net amount at risk/(2)/.............................. $ 40.9 $ 75.9 Weighted average waiting period until annuitization options available.................................. 3 years 3 years FOR CUMULATIVE PERIODIC WITHDRAWALS Separate account value............................... $ 33.1 $ 37.8 Net amount at risk/(3)/.............................. $ 0.3 $ 0.6 ACCUMULATION AT SPECIFIED DATES Separate account value............................... $ 233.7 $ 236.8 Net amount at risk/(4)/.............................. $ 18.9 $ 26.9 Weighted average waiting period until guarantee date............................................... 9 years 10 years
-------- /(1)/Defined as the estimated current guaranteed minimum death benefit in excess of the current account balance as of 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 as of 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, 2010, liabilities for guarantees included reserves for variable annuity death benefits of $6.7 million, variable annuity income benefits of $19.8 million, variable annuity accumulation benefits of $18.4 million, variable annuity withdrawal benefits of $2.0 million and interest-sensitive life and fixed annuity guarantees of $163.7 million. As of December 31, 2009, liabilities for guarantees included reserves for variable annuity death benefits of $7.7 million, variable annuity income benefits of $24.7 million, variable annuity accumulation benefits of $13.7 million, variable annuity withdrawal benefits of $1.8 million and interest-sensitive life and fixed annuity guarantees of $72.8 million. 8. REINSURANCE The Company has reinsurance agreements under which it reinsures all of its business to ALIC or other non-affiliated reinsurers. Under the agreements, premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are reinsured. The Company purchases reinsurance to limit aggregate and single losses on large risks. The Company cedes a portion of the mortality risk on certain life policies under coinsurance agreements to a pool of twelve non-affiliated reinsurers. 34 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) As of December 31, 2010, 90.6% of the total reinsurance recoverables were related to ALIC and 9.4% were related to non-affiliated reinsurers. At both December 31, 2010 and 2009, 97% of the Company's non-affiliated reinsurance recoverables are due from companies rated A or better by S&P. The effects of reinsurance on premiums and contract charges for the years ended December 31 are as follows:
2010 2009 2008 ($ IN THOUSANDS) ---------- ---------- ---------- PREMIUMS AND CONTRACT CHARGES Direct................................ $1,228,272 $1,194,526 $1,138,747 Assumed............................... 7,465 7,849 8,576 Ceded: Affiliate.......................... (782,113) (734,369) (691,267) Non-affiliate...................... (453,624) (468,006) (456,056) ---------- ---------- ---------- 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:
2010 2009 2008 ($ IN THOUSANDS) ----------- ----------- ----------- INTEREST CREDITED TO CONTRACTHOLDER FUNDS, CONTRACT BENEFITS AND EXPENSES Direct..................................... $ 2,186,031 $ 2,159,262 $ 2,065,299 Assumed.................................... 8,153 11,101 8,922 Ceded: Affiliate............................... (1,683,487) (1,621,011) (1,468,505) Non-affiliate........................... (510,697) (549,352) (605,716) ----------- ----------- ----------- Interest credited to contractholder funds, contract benefits and expenses, net of reinsurance.............................. $ -- $ -- $ -- =========== =========== ===========
9. 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, 2010. 35 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, regulate the nature of and amount of investments, 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 which may include 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 may include punitive or treble 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. When specific monetary demands are made, they are often set just below a state court jurisdictional limit in order to seek the maximum amount available in state court, regardless of the specifics of the case, while still avoiding the risk of removal to federal court. In the Company's experience, monetary demands in pleadings 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. 36 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) . For the reasons specified above, it is 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. . 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. In January 2010, the cases were assigned to a new judge for further proceedings in the trial court. . 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 37 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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. In January 2010, the case was assigned to a new judge for further proceedings in the trial court. In these agency program reorganization 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 pending from time to time that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of a number of lawsuits and proceedings, some of which involve claims for substantial or indeterminate amounts. These actions are based on a variety of issues and target a range of the Company's practices. The outcome of these disputes is currently unpredictable. However, based on information currently known to it and the existence of the reinsurance agreements with ALIC, management believes that the ultimate outcome of all matters described in this "Other Matters" subsection, in excess of amounts currently reserved, 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 through 2006 and the statute of limitations has expired on years prior to 2005. 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 as of December 31, 2010 or 2009, 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. 38 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The components of the deferred income tax assets and liabilities as of December 31 are as follows:
2010 2009 ($ IN THOUSANDS) ------- ------- DEFERRED ASSETS Tax credit carryforward................... $ 7 $ -- ------- ------- Total deferred assets.................. 7 -- ------- ------- DEFERRED LIABILITIES Unrealized net capital gains........... (5,463) (2,995) Other liabilities...................... (377) (305) ------- ------- Total deferred liabilities......... (5,840) (3,300) ------- ------- Net deferred liabilities........ $(5,833) $(3,300) ======= =======
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company's assessment that the deductions ultimately recognized for tax purposes will be fully utilized. The components of income tax expense for the years ended December 31 are as follows:
2010 2009 2008 ($ IN THOUSANDS) ------ ------ ------ Current..................... $4,386 $4,447 $7,054 Deferred.................... 65 187 (136) ------ ------ ------ Total income tax expense. $4,451 $4,634 $6,918 ====== ====== ======
As of December 31, 2010, the Company has tax credit carryforwards of $7 thousand which will be available to offset future tax liabilities. These carryforwards will expire at the end of 2029 and 2030. The Company paid income taxes of $4.7 million, $6.8 million and $4.9 million in 2010, 2009 and 2008, 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:
2010 2009 2008 ---- ---- ---- Statutory federal income tax rate. 35.0% 35.0% 35.0% Other............................. (0.1) (0.1) (0.2) ---- ---- ---- Effective income tax rate......... 34.9% 34.9% 34.8% ==== ==== ====
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. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. 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. 39 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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 2010, 2009, and 2008 was $8.7 million, $8.5 million and $7.8 million, respectively. Statutory capital and surplus was $310.8 million and $306.0 million as of December 31, 2010 and 2009, 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. The maximum amount of dividends that the Company can pay during 2011 without prior approval of the Nebraska Department of Insurance is $31.1 million. The Company did not pay any dividends in 2010. 12. OTHER COMPREHENSIVE INCOME The components of other comprehensive income (loss) on a pre-tax and after-tax basis for the years ended December 31 are as follows:
2010 -------------------------- PRE-TAX TAX AFTER-TAX ($ IN THOUSANDS) ------- ------- --------- Unrealized net holding gains arising during the period................. $ 7,746 $(2,711) $ 5,035 Less: reclassification adjustment of realized capital gains and losses. 694 (243) 451 ------- ------- ------- Unrealized net capital gains and losses................................ 7,052 (2,468) 4,584 ------- ------- ------- Other comprehensive income............................................. $ 7,052 $(2,468) $ 4,584 ======= ======= ======= 2009 -------------------------- PRE-TAX TAX AFTER-TAX ------- ------- --------- 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 $(4,351) ======= ======= =======
40 LINCOLN BENEFIT LIFE COMPANY SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2010
AMOUNT AT WHICH SHOWN IN AMORTIZED FAIR THE BALANCE COST VALUE SHEET ($ IN THOUSANDS) --------- -------- ----------- TYPE OF INVESTMENT Fixed maturities: Bonds: United States government, government agencies and authorities..... $ 70,426 $ 73,556 $ 73,556 States, municipalities and political subdivisions................. 2,999 3,176 3,176 Foreign governments............................................... 4,998 5,090 5,090 Public utilities.................................................. 14,013 15,063 15,063 All other corporate bonds......................................... 140,248 148,524 148,524 Asset-backed securities............................................... 8,265 8,382 8,382 Residential mortgage-backed securities................................ 55,376 57,802 57,802 Commercial mortgage-backed securities................................. 8,523 8,863 8,863 -------- -------- -------- Total fixed maturities............................................ 304,848 320,456 320,456 Short-term investments................................................... 11,593 11,593 11,593 -------- -------- -------- Total investments................................................. $316,441 $332,049 $332,049 ======== ======== ========
41 LINCOLN BENEFIT LIFE COMPANY SCHEDULE IV--REINSURANCE
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES/(1)/ COMPANIES AMOUNT TO NET ($ IN THOUSANDS) ------------ ------------- ---------- ------ ---------- YEAR ENDED DECEMBER 31, 2010 Life insurance in force.......... $358,242,997 $364,544,022 $6,301,025 $-- -- % ============ ============ ========== === Premiums and contract charges: Life and annuities............ $ 1,111,971 $ 1,119,436 $ 7,465 $-- -- % Accident and health insurance. 116,301 116,301 -- -- -- % ------------ ------------ ---------- --- $ 1,228,272 $ 1,235,737 $ 7,465 $-- -- % ============ ============ ========== === 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 insurance. 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 insurance. 121,408 121,408 -- -- -- % ------------ ------------ ---------- --- $ 1,138,747 $ 1,147,323 $ 8,576 $-- -- % ============ ============ ========== ===
-------- /(1)/No reinsurance or coinsurance income was netted against premiums ceded in 2010, 2009 and 2008. 42 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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, 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. /s/ Deloitte & Touche LLP Chicago, Illinois March 11, 2011 43 ITEM 11(F).SELECTED FINANCIAL DATA LINCOLN BENEFIT LIFE COMPANY 5-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2010 2009 2008 2007 2006 ($ IN THOUSANDS) ----------- ----------- ----------- ----------- ----------- OPERATING RESULTS Net investment income................ $ 12,067 $ 11,783 $ 13,940 $ 14,257 $ 13,948 Realized capital gains and losses.... 694 1,480 5,952 (417) (1,255) Total revenues....................... 12,761 13,263 19,892 13,840 12,693 Net income........................... 8,310 8,629 12,974 9,005 8,260 FINANCIAL POSITION Investments.......................... $ 332,049 $ 316,900 $ 310,031 $ 301,201 $ 276,322 Total assets......................... 22,729,575 22,932,908 22,655,371 23,700,007 23,862,919 Reserve for life-contingent contract benefits and contractholder funds.............................. 20,258,388 20,438,414 20,368,562 20,169,001 20,322,077 Shareholder's equity................. 325,867 312,973 298,561 289,938 276,626
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 contract charges 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. 44 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 asset values are based on unadjusted quoted prices for identical assets in an active market that we can access. LEVEL 2:Financial asset 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. LEVEL 3:Financial asset 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. 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. We obtain or calculate only one single quote or price for each financial 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 models, 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 45 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 measured 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 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 fixed income securities, for which 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. 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 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 the issuer, and call provisions. Our internally assigned credit ratings are developed at a more detailed level than externally published ratings and allow for a more precise match of 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 value by comparing information obtained from our valuation service providers to other third party valuation sources for selected securities. We perform ongoing price validation procedures such as 46 back-testing of actual sales, which corroborate the various inputs used in internal pricing models 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, 2010 and 2009, we did not alter fair values provided by our valuation service providers or brokers or substitute them with an internal pricing model. The following table identifies fixed income and short-term investments as of December 31, 2010 by source of value determination:
FAIR PERCENT VALUE TO TOTAL ($ IN THOUSANDS) -------- -------- Fair value based on internal sources......... $ 12,444 3.7% Fair value based on external sources/(1)/.... 319,605 96.3 -------- ----- Total........................................ $332,049 100.0% ======== =====
-------- /(1)/Includes $6.9 million that are 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 a write-down is recorded due to an other-than-temporary decline in fair value. 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 the 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 considered 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 47 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 and future earnings potential of the issue or issuer, expected defaults, expected recoveries, the value of underlying collateral, vintage, geographic concentration, available reserves or escrows, current subordination levels, third party guarantees and other credit enhancements. 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 will 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 portion of the unrealized loss related to factors other than credit remains classified in accumulated other comprehensive income. If we determine that the fixed income security does not have sufficient cash flow or other information to estimate a recovery value for the security, we may conclude that the entire decline in fair value is deemed to be credit related and the loss is recorded in earnings. 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 basis. 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 securities are 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 other-than-temporary 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 other-than-temporary impairments may have a material effect on the amounts presented within the financial statements. 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 products include interest-sensitive, traditional and variable life insurance and fixed annuities such as deferred and immediate annuities. Our products are sold through multiple distribution channels including Allstate exclusive agencies, which include exclusive financial specialists, and independent agents (including master brokerage agencies). 48 NET INCOME Net income for the years ended December 31 is presented in the following table:
2010 2009 2008 ($ IN THOUSANDS) ------- ------- ------- Net investment income............. $12,067 $11,783 $13,940 Realized capital gains and losses. 694 1,480 5,952 Income tax expense................ (4,451) (4,634) (6,918) ------- ------- ------- Net income........................ $ 8,310 $ 8,629 $12,974 ======= ======= =======
We have reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are ceded to ALIC and other non-affiliated reinsurers, and are reflected net of such reinsurance in the Statements of Operations and Comprehensive Income. Our results of operations include net investment income and realized capital gains and losses recognized in connection with the assets that are not transferred under the reinsurance agreements. NET INCOME decreased 3.7% in 2010 compared to 2009 and 33.5% in 2009 compared to 2008. The decrease in 2010 was due to lower net realized capital gains. The decrease in 2009 was due to lower net realized capital gains and lower net investment income. INCOME TAX EXPENSE decreased 3.9% in 2010 compared to 2009 and 33.0% in 2009 compared to 2008. These changes were due to the proportional change in the income on which the income tax expense was determined. FINANCIAL POSITION The financial position for the years ended December 31 is presented in the following table:
2010 2009 ($ IN THOUSANDS) ----------- ----------- Fixed income securities/(1)/.................. $ 320,456 $ 308,343 Short-term/(2)/............................... 11,593 8,557 ----------- ----------- Total investments.......................... $ 332,049 $ 316,900 =========== =========== Cash.......................................... $ 3,550 $ 10,063 Reinsurance recoverable from ALIC............. 18,365,058 18,689,074 Reinsurance recoverable from non-affiliates... 1,906,574 1,766,824 Contractholder funds.......................... 17,247,071 17,633,027 Reserve for life-contingent contract benefits. 3,011,317 2,805,387 Separate accounts assets and liabilities...... 2,017,185 2,039,647
-------- /(1)/Fixed income securities are carried at fair value. Amortized cost basis for these securities was $304.8 million and $299.8 million as of December 31, 2010 and 2009, respectively. /(2)/Short-term investments are carried at fair value. Amortized cost basis for these securities was $11.6 million and $8.6 million as of December 31, 2010 and 2009, respectively. Total investments increased to $332.0 million as of December 31, 2010 from $316.9 million as of December 31, 2009 primarily due to purchases of fixed income securities and increased net unrealized capital gains on fixed income securities. 49 FIXED INCOME SECURITIES by type are listed in the table below.
PERCENT TO PERCENT TO FAIR VALUE AS OF TOTAL FAIR VALUE AS OF TOTAL DECEMBER 31, 2010 INVESTMENTS DECEMBER 31, 2009 INVESTMENTS ($ IN THOUSANDS) ----------------- ----------- ----------------- ----------- U.S. government and agencies........... $ 73,556 22.1% $ 81,551 25.7% Municipal.............................. 3,176 1.0 3,095 1.0 Corporate.............................. 163,587 49.3 137,573 43.4 Foreign government..................... 5,090 1.5 -- -- Residential mortgage-backed securities ("RMBS")............................. 57,802 17.4 67,975 21.4 Commercial mortgage-backed securities ("CMBS")............................. 8,863 2.7 9,704 3.1 Asset-backed securities ("ABS")........ 8,382 2.5 8,445 2.7 -------- ---- -------- ---- Total fixed income securities.......... $320,456 96.5% $308,343 97.3% ======== ==== ======== ====
As of December 31, 2010, all of the fixed income securities portfolio was rated investment grade, which is defined as a security having a rating of Aaa, Aa, A or Baa from Moody's, a rating of AAA, AA, A or BBB from Standard & Poor's ("S&P"), Fitch, Dominion, or Realpoint, a rating of aaa, aa, a, or bbb from A.M. Best, or a comparable internal rating if an externally provided rating is not available. The following table summarizes the fair value and unrealized net capital gains and losses for fixed income securities by credit rating as of December 31, 2010.
AAA AA A -------------------- ------------------ -------------------- FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) ($ IN THOUSANDS) -------- ----------- ------- ----------- -------- ----------- U.S. government and agencies........... $ 73,556 $3,130 $ -- $ -- $ -- $ -- Municipal Tax exempt.......................... -- -- 509 9 -- -- Taxable............................. -- -- 2,667 168 -- -- Corporate Public.............................. 3,094 99 32,761 1,740 102,130 6,641 Privately placed.................... 5,079 79 15,824 639 -- -- Foreign government..................... -- -- 5,090 92 -- -- RMBS U.S. government sponsored entities ("U.S. Agency")................... 48,133 2,292 -- -- -- -- Prime residential mortgage-backed securities ("Prime").............. 2,789 5 -- -- 4,180 77 Alt-A residential mortgage-backed... securities ("Alt-A")................ -- -- -- -- 2,700 52 CMBS................................... 6,947 427 1,916 (87) -- -- ABS.................................... -- -- 8,382 117 -- -- -------- ------ ------- ------ -------- ------ Total fixed income securities.......... $139,598 $6,032 $67,149 $2,678 $109,010 $6,770 ======== ====== ======= ====== ======== ======
50
BAA TOTAL ------------------ -------------------- FAIR UNREALIZED FAIR UNREALIZED VALUE GAIN/(LOSS) VALUE GAIN/(LOSS) ------ ----------- -------- ----------- U.S. government and agencies.. $ -- $ -- $ 73,556 $ 3,130 Municipal Tax exempt................. -- -- 509 9 Taxable.................... -- -- 2,667 168 Corporate Public..................... 4,699 128 142,684 8,608 Privately placed........... -- -- 20,903 718 Foreign government............ -- -- 5,090 92 RMBS U.S. Agency................ -- -- 48,133 2,292 Prime...................... -- -- 6,969 82 Alt-A...................... -- -- 2,700 52 CMBS.......................... -- -- 8,863 340 ABS........................... -- -- 8,382 117 ------ ---- -------- ------- Total fixed income securities. $4,699 $128 $320,456 $15,608 ====== ==== ======== =======
RMBS, CMBS AND ABS are structured securities that are primarily collateralized by residential and commercial real estate loans and other consumer or corporate borrowings. The cash flows from the underlying collateral paid to the securitization trust are generally applied in a pre-determined order and are designed so that each security issued by the trust, typically referred to as a "class", qualifies for a specific original rating. 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 principal repayments on the underlying collateral and retains this priority until the class is paid in full. 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. The payment priority and class subordination included in these securities serves as credit enhancement for holders of the senior or top portions of the structures. These securities continue to retain the payment priority features that existed at the origination of the securitization trust. Other forms of credit enhancement may include structural features embedded in the securitization trust, such as overcollateralization, excess spread and bond insurance. The underlying 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, Prime and Alt-A, totaled $57.8 million, with 100% rated investment grade, as of December 31, 2010. 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 residential mortgage loans. The credit risk associated with our RMBS portfolio is mitigated due to the fact that 83.3% of the portfolio consists of securities that were issued by or have underlying collateral guaranteed by U.S. government agencies. CMBS totaled $8.9 million, with 100% rated investment grade, as of December 31, 2010. The CMBS portfolio is subject to credit risk, but unlike certain other structured securities, is generally not subject to prepayment risk due to protections within the underlying commercial mortgage loans. All of the CMBS investments are traditional conduit transactions collateralized by commercial mortgage loans, broadly diversified across property types and geographical area. 51 ABS totaled $8.4 million, with 100% rated investment grade, as of December 31, 2010. Credit risk is managed by monitoring the performance of the underlying collateral. Many of the securities in the ABS portfolio have credit enhancement with features such as overcollateralization, subordinated structures, reserve funds, guarantees and/or insurance. SHORT-TERM INVESTMENTS Our short-term investment portfolio was $11.6 million and $8.6 million as of December 31, 2010 and 2009, respectively. UNREALIZED NET CAPITAL GAINS totaled $15.6 million as of December 31, 2010 compared to $8.6 million as of December 31, 2009. The improvement since December 31, 2009 was primarily a result of declining risk-free interest rates and tightening of credit spreads in certain sectors. The following table presents unrealized net capital gains and losses, pre-tax and after-tax as of December 31.
2010 2009 ($ IN THOUSANDS) ------- ------- U.S. government and agencies....................... $ 3,130 $ 1,569 Municipal.......................................... 177 96 Corporate.......................................... 9,326 6,107 Foreign government................................. 92 -- RMBS............................................... 2,426 1,649 CMBS............................................... 340 (816) ABS................................................ 117 (49) ------- ------- Unrealized net capital gains and losses, pre-tax... 15,608 8,556 Deferred income taxes.............................. (5,463) (2,995) ------- ------- Unrealized net capital gains and losses, after-tax. $10,145 $ 5,561 ======= =======
The unrealized net capital gain for the fixed income portfolio totaled $15.6 million and comprised $16.1 million of gross unrealized gains and $492 thousand of gross unrealized losses as of December 31, 2010. This is compared to unrealized net capital gain for the fixed income portfolio totaling $8.6 million, comprised of $9.93 million of gross unrealized gains and $1.37 million of gross unrealized losses as of December 31, 2009. 52 Gross unrealized gains and losses as of December 31, 2010 on fixed income securities by type and sector are provided in the table below.
AMORTIZED GROSS UNREALIZED COST AS A FAIR VALUE PAR AMORTIZED --------------- FAIR PERCENT OF AS A PERCENT OF VALUE COST GAINS LOSSES VALUE PAR VALUE PAR VALUE ($ IN THOUSANDS) -------- --------- ------- ------ -------- ---------- --------------- Corporate: Consumer goods (cyclical and non-cyclical)........ $ 56,050 $ 56,363 $ 3,573 $ (19) $ 59,917 100.6% 106.9% Financial services......... 19,000 19,000 872 -- 19,872 100.0 104.6 Banking.................... 17,000 16,994 1,103 -- 18,097 100.0 106.5 Energy..................... 16,000 16,098 719 -- 16,817 100.6 105.1 Utilities.................. 14,000 14,013 1,050 -- 15,063 100.1 107.6 Capital goods.............. 11,000 11,110 1,046 -- 12,156 101.0 110.5 Transportation............. 7,350 7,565 374 -- 7,939 102.9 108.0 Basic industry............. 7,000 7,123 372 -- 7,495 101.8 107.1 Technology................. 6,000 5,995 236 -- 6,231 99.9 103.9 -------- -------- ------- ----- -------- Total corporate fixed income portfolio................... 153,400 154,261 9,345 (19) 163,587 100.6 106.6 -------- -------- ------- ----- -------- U.S. government and agencies.................... 67,320 70,426 3,513 (383) 73,556 104.6 109.3 Municipal..................... 3,000 2,999 177 -- 3,176 100.0 105.9 Foreign government............ 5,000 4,998 92 -- 5,090 100.0 101.8 RMBS.......................... 55,362 55,376 2,429 (3) 57,802 100.0 104.4 CMBS.......................... 8,500 8,523 427 (87) 8,863 100.3 104.3 ABS........................... 8,070 8,265 117 -- 8,382 102.4 103.9 -------- -------- ------- ----- -------- Total fixed income securities. $300,652 $304,848 $16,100 $(492) $320,456 101.4 106.6 ======== ======== ======= ===== ========
The consumer goods sector had the only gross unrealized losses in our corporate fixed income securities portfolio as of December 31, 2010. In general, credit spreads remain wider than at initial purchase for most of the securities with gross unrealized losses. We have a comprehensive portfolio monitoring process to identify and evaluate each fixed income security that may be other-than-temporarily impaired. The process includes a quarterly review of all securities to identify instances where the fair value of a security compared to its amortized cost is below established thresholds. The process also includes the monitoring of other impairment indicators such as ratings, ratings downgrades and 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 as of December 31, 2010 were included in our portfolio monitoring process for determining whether declines in value were other than temporary. The extent and duration of a decline in fair value for fixed income securities have become less indicative of actual credit deterioration with respect to an issue or issuer. While we continue to use declines in fair value and the length of time a security is in an unrealized loss position as indicators of potential credit deterioration, our determination of whether a security's decline in fair value is other than temporary has placed greater emphasis on our analysis of the underlying credit and collateral and related estimates of future cash flows. As of December 31, 2010, all of the $492 thousand of unrealized losses are related to fixed income securities with an unrealized loss position less than 20% of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other-than-temporarily impaired. As of December 31, 2010, we 53 do not have the intent to sell and it is not more likely than not we will be required to sell these securities before the recovery of their amortized cost basis. We also monitor the quality of our fixed income portfolio by categorizing certain investments as "problem," "restructured," or "potential problem." Problem fixed income securities are in default with respect to principal or interest and/or are investments issued by companies that have gone into bankruptcy subsequent to our acquisition. Fixed income securities are categorized as restructured when the debtor is experiencing financial difficulty and we grant a concession. Potential problem fixed income securities are current with respect to contractual principal and/or interest, but because of other facts and circumstances, we have concerns regarding the borrower's ability to pay future principal and interest according to the original terms, which causes us to believe these investments may be classified as problem or restructured in the future. As of December 31, 2010 and 2009, we did not have any fixed income securities categorized as problem, restructured or potential problem. NET INVESTMENT INCOME The following table presents net investment income for the years ended December 31.
2010 2009 2008 ($ IN THOUSANDS) ------- ------- ------- Fixed income securities........... $12,480 $12,098 $13,302 Short-term and other investments.. 21 107 992 ------- ------- ------- Investment income, before expense. 12,501 12,205 14,294 Investment expense................ (434) (422) (354) ------- ------- ------- Net investment income............. $12,067 $11,783 $13,940 ======= ======= =======
Net investment income increased 2.4% or $284 thousand in 2010 compared to 2009, after decreasing 15.5% or $2.2 million in 2009 compared to 2008. The 2010 increase was primarily due to higher average investment balances. The 2009 decrease was primarily due to lower yields. REALIZED CAPITAL GAINS AND LOSSES The following table presents realized capital gains and losses and the related tax effect for the years ended December 31.
2010 2009 2008 ($ IN THOUSANDS) ----- ------ ------- Realized capital gains and losses, pre-tax... $ 694 $1,480 $ 5,952 Income tax expense........................... (243) (518) (2,083) ----- ------ ------- Realized capital gains and losses, after-tax. $ 451 $ 962 $ 3,869 ===== ====== =======
Net realized capital gains in 2010 comprised entirely of gross gains of $694 thousand. Net realized capital gains of $1.5 million in 2009 comprised gross gains of $1.5 million and gross losses of $8 thousand. The net realized capital gains in 2010, 2009 and 2008 were related to sales of investments. CASH As of December 31, 2010, our cash balance was $3.6 million compared to $10.1 million as of December 31, 2009. Fluctuations in our cash flows generally result from differences in the timing of reinsurance payments to and from ALIC and changes in short-term investments. 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 54 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. As of December 31, 2010, contractholder funds decreased to $17.25 billion from $17.63 billion as of December 31, 2009 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 $3.01 billion as of December 31, 2010 from $2.81 billion as of December 31, 2009 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 $324.0 million and reinsurance recoverables from non-affiliates increased $139.8 million. We purchase reinsurance after evaluating the financial condition of the reinsurer, as well as the terms and price of coverage. As of December 31, 2010, 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, 2010. 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 our 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. 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 100 basis points, the fair value of an asset with a duration of 5 is expected to decrease in value by 5%. Our asset duration was 3.4 and 3.7 as of December 31, 2010 and 2009, 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 55 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 preceding assumptions relate primarily to mortgage-backed securities, and municipal and corporate obligations. Based upon the information and assumptions used in the duration calculation, and interest rates in effect as of December 31, 2010, 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, which is the same amount as December 31, 2009. 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 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 5%. Spread duration is calculated similarly to interest rate duration. As of December 31, 2010, the spread duration of assets was 3.5, compared to 3.6 as of December 31, 2009. Based upon the information and assumptions we use in this spread duration calculation, and spreads in effect as of December 31, 2010, 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 $10.1 million, compared to $8.4 million as of December 31, 2009. 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. As of December 31, 2010 and 2009, we had separate accounts assets related to variable annuity and variable life contracts with account values totaling $2.02 billion and $2.04 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 reinsurance agreements with The Prudential Insurance Company of America, a subsidiary of Prudential Financial Inc. 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. As of December 31, 2010 and 2009 we had $4.38 billion and $4.16 billion, respectively, in equity-indexed annuity liabilities that provide customers with interest crediting rates based on the performance of the S&P 500. All contract charges and fees, and liabilities and benefits related to equity-indexed annuity liabilities are ceded to ALIC in accordance with the reinsurance agreements, thereby limiting our equity risk exposure. 56 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES consist of shareholder's equity. The following table summarizes our capital resources as of December 31.
2010 2009 2008 ($ IN THOUSANDS) -------- -------- -------- Common stock, retained income and additional capital paid-in............................. $315,722 $307,412 $298,783 Accumulated other comprehensive income (loss). 10,145 5,561 (222) -------- -------- -------- Total shareholder's equity.................... $325,867 $312,973 $298,561 ======== ======== ========
SHAREHOLDER'S EQUITY increased in 2010 due to net income and increased unrealized net capital gains. Shareholder's equity increased in 2009, due to net income and a favorable change in unrealized net capital gains and losses. 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 as of December 31, 2010.
RATING AGENCY RATING ------------- ---------------- A.M. Best Company, Inc....................... A+ ("Superior") Standard & Poor's Ratings Services........... A+ ("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. 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. As of December 31, 2010, 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. 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 57 . 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 $2.1 million, $4.3 million and $(5.9) million in 2010, 2009 and 2008, 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 pay during 2011 without prior approval of the Nebraska Department of Insurance is $31.1 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. 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 58 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(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. ROBERT K. BECKER, 55, has been Senior Vice President since March 2010. Mr. Becker is also the Chairman of the Board, Chief Executive Officer and Manager of Allstate Financial Services, LLC ("AFS, LLC") and Vice President of Allstate Life Insurance Company. Mr. Becker is responsible for Allstate's broker dealer operations as well as recruiting, training and product strategy for registered representatives of AFS, LLC and third party relationships. At Allstate since 2000, Mr. Becker has progressed through various roles, including Regional Financial Services Manager, Regional Distribution Leader and Assistant Field Vice President. Prior to joining Allstate, Mr. Becker spent over 20 years with MetLife Insurance Company, where he held various leadership positions. Mr. Becker's professional designations include LUTCF, CLU, ChFC, CFP, and CLTC. Currently, Mr. Becker also serves as a director with Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Mr. Becker has proven leadership experience with using excellent customer service to grow business in a competitive environment. ANURAG CHANDRA, 33, has been a director and Senior Vice President since March 2011. Mr. Chandra is also a Senior Vice President of Allstate Life Insurance Company. Mr. Chandra has broad responsibilities for driving long-term strategy and for improving the operational base for the Allstate Financial group of companies. More specifically, Mr. Chandra will have direct accountability for product development, underwriting, wholesaling and asset liability management. Prior to joining Allstate in January 2011, Mr. Chandra was an executive vice president and chief operating officer for HealthMarkets, Inc. Under his leadership, the company transformed from a niche individual health insurance manufacturer to one of the largest independent distributors in the United States. Prior to that role, Mr. Chandra was a principal at Aquiline Capital Partners, a global private equity firm that took advantage of market conditions to launch successful new insurance and financial services companies. Mr. Chandra has also held senior operating and strategic development roles at Nationwide Financial Services and Conseco/Bankers Life and Casualty. Currently, Mr. Chandra also serves as a director for Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Mr. Chandra has extensive experience with the day-to-day management of company operations. LAWRENCE W. DAHL, 51, 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. 59 Mr. Dahl has also earned a JURIS DOCTOR degree and a Certified Public Account designation. 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, 55, 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 Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Mr. Easley possesses extensive insurance business, product and liability management experience. SUSAN L. LEES, 53, 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 Allstate Life Insurance Company, 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, 45, 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 Allstate Life Insurance Company, which is affiliated with Lincoln Benefit. Mr. Pintozzi has extensive experience in corporate and insurance company finance and accounting. MATTHEW E. WINTER, 54, 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 and Allstate Life Insurance Company, each of which is affiliated with Lincoln Benefit. Mr. Winter was also a 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. 60 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. Each year the Compensation and Succession Committee (the "Committee") of the Allstate Board of Directors and members of Allstate management review the overall design of Allstate's executive compensation program to ensure compensation is aligned with both annual and long-term performance. At target levels of performance, annual and long-term incentive awards are designed to constitute a significant percentage of an executive's total core compensation and provide a strong link to Allstate's performance. Additionally, the delivery of the largest portion of incentive compensation through stock options provides even greater alignment with stockholder interests because the stock price must appreciate from the date of grant for any value to be delivered to executives. Allstate has made changes to its executive compensation program for 2011. Allstate has eliminated any excise tax gross-ups in new change-in-control agreements. Allstate has also made changes to the annual incentive program for 2011 to continue to better align executive compensation with enterprise performance. The key program change, which will apply to all bonus eligible employees across the enterprise, will be to reduce the number of measures and provide for greater use of enterprise-wide corporate goals. Allstate believes this action will focus employees on those goals which will more effectively drive sustainable long-term growth for stockholders. 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 our 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 our 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. 61 Allstate's executive compensation program has been designed around these beliefs and includes programs and practices that ensure alignment between the interests of its stockholders and executives and delivery of compensation consistent with the corresponding level of performance. These objectives are balanced with the goal of attracting, motivating, and retaining highly talented executives to compete in our complex and highly regulated industry. Some of Allstate's key practices we believe support this approach include: . Providing a significant portion of executive pay through stock options, creating direct alignment with stockholder interests. . Establishment of stock ownership guidelines for senior executives that drive further alignment with stockholder interests. Each named executive officer, except Mr. Dahl, is required to hold four times salary. . Stock option repricing is not permitted. . A robust governance process for the design, approval, administration, and review of our overall compensation program. . Utilization of annual incentive plan caps to limit maximum award opportunities and support enterprise risk management strategies. . Inclusion of a clawback feature in the Annual Executive Incentive Plan and the 2009 Equity Incentive Plan that provides the ability to recover compensation from Allstate executive officers in the event of certain financial restatements. . Incorporation of discretion in the annual executive incentive plan to allow for the adjustment of awards to reflect individual performance. Allstate's philosophy and practices have provided us with the tools to create an effective executive compensation program as detailed below. NAMED EXECUTIVES This CD&A describes the executive compensation program at Allstate and specifically describes total 2010 compensation for the following named executives of Lincoln Benefit*: . Matthew E. Winter--Chairman of the Board and Chief Executive Officer . John C. Pintozzi--Senior Vice President and Chief Financial Officer . Lawrence W. Dahl--President and Chief Operating Officer . Matthew S. Easley--Senior Vice President . Robert K. Becker--Senior Vice President * Reflects titles in effect as of December 31, 2010. 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 2010, the Committee considered compensation data for the peer companies listed on page 56 for Mr. Winter, as well as proxy information from select S&P 100 companies with fiscal 2009 revenue of between $15 and $60 billion with which Allstate competes for executive talent. Towers Watson, an independent compensation consultant, recommended 62 modifications to the peer insurance companies that Allstate uses in benchmarking compensation for certain executives for 2010. The Committee approved removing from the peer insurance companies Cincinnati Financial Corporation due to its relative size and CNA Financial Corporation because it is closely held. ACE Ltd, AFLAC Inc., and Manulife Financial Corporation were added to augment the peer insurance companies with similarly sized insurers. With respect to the named executives other than Mr. Winter, Allstate management considered compensation surveys 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 2009 Towers Perrin Diversified Insurance Survey, and the Towers Perrin Compensation Data Bank. The Diversified Insurance Survey includes 18 insurance organizations with assets ranging from $848 million to $108 billion. The Towers Perrin Compensation Data Bank provides compensation data on 90 of the Fortune 100 companies. The Mercer Property & Casualty Insurance Company Survey includes compensation data for 27 property and casualty insurance companies with at least $2 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. PEER INSURANCE COMPANIES ACE Ltd.* Manulife Financial Corporation* AFLAC Inc.* MetLife Inc. The Chubb Corporation The Progressive Corporation The Hartford Financial Services Prudential Financial, Inc. Group, Inc. Lincoln National Corporation The Travelers Companies, Inc. -------- * Added in 2010 CORE ELEMENTS OF EXECUTIVE COMPENSATION PROGRAM Allstate's executive compensation program design balances fixed and variable compensation elements and provides alignment with both short and long term business goals through annual and long-term incentives. Allstate's incentives are designed to balance overall corporate, business unit, and individual performance with respect to measures Allstate believes correlate to the creation of stockholder value and align with Allstate's strategic vision and operating priorities. The following table lists the core elements of Allstate's executive compensation program.
POTENTIAL FOR VARIABILITY WITH CORE ELEMENT PURPOSE PERFORMANCE ------------ -------------------------------------- ---------------- Annual salary Provides a base level of competitive Low cash compensation for executive talent Annual cash incentive awards Reward performance on key strategic, High operational, and financial measures over the year Long-term equity incentive awards Align the interests of executives Moderate to High with long-term shareholder value and retain executive talent
63 SALARY Mr. Winter's salary was set by the Allstate Board of Directors based on the Committee's recommendation. The salaries of the other named executives are set by Allstate management. In recommending executive base salary levels, Allstate uses the 50/th/ percentile of its peer insurance companies for Mr. Winter and the 50/th/ percentile of insurance and general industry data for the other named executives 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 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 using the average enterprise-wide merit increase as a guideline. . The base salaries for each named executive were reviewed in February of 2010. Allstate established a new base salary for each named executive other than Mr. Winter based on individual performance and in line with the enterprise-wide merit increase. . Allstate did not adjust the base salary for Mr. Winter, which had just been established in the last quarter of 2009 when he joined the corporation. INCENTIVE COMPENSATION The Committee approves performance measures and goals for cash incentive awards during the first quarter of the year. The performance measures and goals are aligned with Allstate's objectives and tied to its strategic vision and its operating priorities. They are designed to reward Allstate executives for actual performance, to reflect objectives that will require significant effort and skill to achieve, and to drive Allstate stockholder value. After the end of the year for annual cash incentive awards and 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 all cash incentive awards for Allstate executive officers. The Committee may adjust the amount of an annual cash incentive award but has no authority to increase the amount of an award payable to Mr. Winter above the described plan limits. Allstate management approves the actual amount of cash incentive awards to the other named executives. Allstate pays the cash incentive awards in March, after the end of the year for the annual cash incentive awards and after the end of the three-year cycle for the long-term cash incentive awards. Long-term cash incentives have been discontinued, and the last three year cycle ended in 2010. Typically the Committee also approves grants of equity awards on an annual basis during a meeting in the first quarter. By making these awards and approving performance measures and goals for the annual cash incentive awards during the first quarter, Allstate is able to balance these elements of core compensation to align with its business goals. ANNUAL CASH INCENTIVE AWARDS In 2010 Allstate executives had the opportunity to earn an annual cash incentive award based on the achievement of performance measures over a one-year period. The annual incentive plans are designed to provide all of the named executives with cash awards based on a combination of corporate and business unit performance measures for each of Allstate's main business units: Allstate Protection, Allstate Financial, and Allstate Investments. Lincoln Benefit is part of Allstate Financial. The maximum amount of Mr. Winter's award was the lesser of a stockholder approved maximum under the Annual Executive Incentive Plan of $8.5 million or 25% of the 1.0% of Operating Income pool. Operating Income is defined under the "Performance Measures" caption on page 78. Although these limits established the 64 maximum annual cash incentive awards that could be paid to Mr. Winter, the Committee retained complete discretion to pay any lesser amount. Mr. Winter's actual award was based on the achievement of certain performance measures as detailed below, including assessments of his individual performance and overall corporate and Allstate Financial business unit performance. None of the named executives other than Mr. Winter participate in the Operating Income pool. For 2010, the Committee adopted corporate and Allstate Financial business unit level annual performance measures and weighted them as applied to Mr. Winter in accordance with his responsibility for Allstate's overall corporate performance and the performance of the Allstate Financial business unit. Allstate management utilized the same performance measures and weighting with respect to each of the named executives other than Mr. Winter. Each measure is assigned a weight expressed as a percentage of the total annual cash incentive award opportunity, with all weights adding to 100%. The following table lists the performance measures and related target goals for 2010 as well as the weighting factors and the 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 our historical performance and plans to drive projected performance. A description of each performance measure is provided under the "Performance Measures" caption on page 78. ANNUAL CASH INCENTIVE AWARD PERFORMANCE MEASURES, TARGET, AND WEIGHTING/(1)/
ACHIEVEMENT RELATIVE TO THRESHOLD, PERFORMANCE TARGET, MEASURE WEIGHTING TARGET ACTUAL/(2)/ MAXIMUM GOALS ----------- --------- ------------- ------------- --------------- CORPORATE-LEVEL PERFORMANCE MEASURE........... 20% Adjusted Operating Income Per Diluted $4.30 $3.00 Between Share.................................... threshold and target ALLSTATE FINANCIAL PERFORMANCE MEASURES....... 80% Adjusted Operating Income.................. $425 million $474 million Exceeded maximum Adjusted Operating Return on Equity........ 6.6% 7.7% Exceeded maximum Allstate Exclusive Agency Proprietary and $256 million $262 million Between target AWD Weighted Sales....................... and maximum Allstate Financial Portfolio Excess Total 55 63 Between target Return (in basis points)................. and maximum
-------- /(1)/Information regarding Allstate's performance measures is disclosed in the limited context of its annual cash incentive awards and should not be understood to be statements of Allstate management's expectations or estimates of results or other guidance. Allstate specifically cautions investors not to apply these statements to other contexts. /(2)/Stated as a percentage of target goals with a range from 0% to 250%, the actual performance comprises 54% for Adjusted Operating Income Per Diluted Share performance, and 189% for Allstate Financial performance. The weighted results stated as a percentage of the target goals for all named executives was 162%. 65 Target award opportunities approved by Allstate 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. In setting target incentive levels for named executives, Allstate 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. As a result of leveraging external market data, Mr. Winter had the highest target award opportunity of 125%, followed by Mr. Pintozzi with a target award opportunity of 60%, followed by Messrs. Easley and Becker with a target award opportunity of 50%, followed by Mr. Dahl with a target award opportunity of 35%. In calculating the annual cash incentive awards, Allstate 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 Allstate, the amount of each named executive's 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 50% to percentage of salary** 100% and relative to target and maximum on a range of 100% to 250%*
-------- * Actual performance below threshold results in 0% ** Base salary, as adjusted by any merit and promotional increases granted during the year on a prorated basis. Following the end of the performance year, the performance of each named executive was evaluated. Based on a subjective evaluation of each executive's contributions and performance individual adjustments were made to the formula driven annual incentive amounts. The recommendations were considered and approved by the Committee for Mr. Winter and by Allstate management for the other named executives. 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 Allstate grants larger equity awards to executives with the broadest scope of responsibility, consistent with Allstate's philosophy 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. However, from time to time, larger equity awards are granted to attract new executives. Allstate annually reviews the mix of equity incentives provided to the named executives. The mix consisted of 65% stock options and 35% restricted stock units for Mr. Winter. Other employees eligible for equity incentive awards, including the named executives other than Mr. Winter, had the choice of receiving the value of their equity incentive awards in the following proportions between stock options and restricted stock units: . 25% stock options and 75% restricted stock units; . 65% stock options and 35% restricted stock units; . 50% stock options and 50% restricted stock units; or . 75% stock options and 25% restricted stock units 66 The elections are reflected in the Grants of Plan-Based Awards at Fiscal Year-End 2010 table. Stock options, which are performance-based, require growth in the Allstate stock price to deliver any value to an executive. The restricted stock units provide alignment with Allstate stockholder interests along with providing an effective retention tool. STOCK OPTIONS Stock options represent the opportunity to buy shares of Allstate's stock at a fixed exercise price at a future date. Allstate uses them to align the interests of Allstate's executives with long-term stockholder value, as the stock price must appreciate from the date of grant for any value to be delivered to executives. Key elements: . Under Allstate's 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, 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. . The options granted to the named executives in 2010 become exercisable in three installments, 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates, 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 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 Allstate's executives and Allstate's 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 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 2010 vest in three installments, 50% on the second anniversary of the grant date and 25% on each of the third and fourth anniversary dates, except in certain change-in-control situations or under other special circumstances approved by Allstate. . The restricted stock units granted to the named executives in 2010 include the right to receive previously accrued dividend equivalents when the underlying restricted stock unit vests. TIMING OF EQUITY AWARDS AND GRANT PRACTICES The Committee grants equity incentive awards to current employees 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. Equity incentive awards to employees other than Allstate executive officers also may be granted by an equity award committee which currently consists of Allstate's chief executive officer. The equity award committee may grant restricted stock units and stock options in connection with new hires and 67 promotions and in recognition of achievements. The grant date for awards other than annual awards is fixed as the first business day of a month following the committee action. STOCK OWNERSHIP GUIDELINES Because Allstate believes management's interests must be linked with those of Allstate's stockholders, Allstate instituted stock ownership guidelines in 1996 that require each of the named executives, other than Mr. Dahl, to own common stock, including restricted stock units, worth a multiple of base salary, as of March 1 following the fifth year after assuming a senior management position. Unexercised stock options do not count towards meeting the stock ownership guidelines. For the named executives, the goal is four times salary. Mr. Winter has until March 2015 to meet his goal. Messrs. Easley and Pintozzi have met their respective goals. Mr. Becker has until March 2014 to meet his goal. After a named executive meets the guideline for the position, if the value of his or her 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, an executive in that situation may not sell shares acquired upon the exercise of an option or conversion of an equity award except to satisfy tax withholding obligations, until the value of his or her 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 There were no pay-outs on any long-term cash incentive awards for the 2008-2010 cycle, the final cycle under the Long-Term Executive Incentive Compensation Plan. Long-term cash incentive awards were originally designed to reward executives for collective results attained over a three-year performance cycle. Only Messrs. Pintozzi and Easley were eligible for these awards. There were three performance measures for the 2008-2010 cycle: average adjusted return on equity relative to peers, which was weighted at 50% of the potential award, Allstate Protection growth in policies in force, and Allstate Financial return on total capital, both weighted at 25% of the potential award. The Allstate Protection growth in policies in force measure had target set at 5.0%, with actual performance of -5.9%. The Allstate Financial return on total capital measure had target set at 9.5%, with actual performance of -12.6%. 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 78. The average adjusted return on equity relative to peers measure compared Allstate's performance to a group of other insurance companies. If the average adjusted return on equity had exceeded the average risk free rate of return on three-year Treasury notes over the three-year cycle, plus 200 basis points, Allstate's ranked position relative to the peer group would have determined the percentage of the total target award for this performance measure to be paid. However, the average adjusted return on equity did not exceed the average risk free rate of return, plus 200 basis points, resulting in no payout. 68 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 ALL FULL-TIME OFFICERS AND REGULAR NAMED AND CERTAIN PART-TIME BENEFIT OR PERQUISITE EXECUTIVES 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 and financial planning services........................ (check mark) (check mark)/(4)/ Mobile phones, ground transportation and personal use of aircraft/(5)/. (check mark) (check mark)
-------- /(1)/Allstate contributed $.50 for every dollar of basic pre-tax deposits made in 2010 on the first 3 percent of eligible pay and $.25 for every dollar of basic pre-tax deposits made in 2010 on the next 2 percent of eligible pay for eligible participants, including the named executives. /(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)/All officers are eligible for tax preparation services. Financial planning services were provided to Mr. Winter only. /(5)/Ground transportation is available to Mr. Winter. In limited circumstances approved by Allstate's CEO, Mr. Winter is permitted to use Allstate's corporate aircraft for personal purposes. Mr. Winter did not use the corporate aircraft for personal purposes in 2010. Mobile 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 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 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 our 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 Since a change-in-control or other triggering event may never occur, Allstate does not view change-in-control benefits or post-termination benefits as compensation. Consistent with Allstate compensation objectives, Allstate offers these benefits to attract, motivate, and retain certain 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 Allstate's executives and Allstate stockholders. Allstate's change-in-control 69 agreements entered into prior to January 1, 2011, provide an excise tax gross-up to mitigate the possible disparate tax treatment for similarly situated employees. However, starting in 2011, new change-in-control agreements will not include an excise tax gross-up provision. Of the named executives, Messrs. Winter, Pintozzi, and Easley are subject to change-in-control agreements. As part of the change-in-control benefits, executives with change-in-control agreements receive previously deferred compensation and equity awards that might otherwise be eliminated by new directors elected in connection with a change-in-control, and also receive certain protections for cash incentive awards and benefits if an executive's employment is terminated within a two-year period after a change-in-control. The change-in-control and post-termination 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. A larger group of management employees is eligible to receive many of the post-termination benefits described in that section. EXECUTIVE COMPENSATION TABLES 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 and 2010, allocated to Lincoln Benefit in a manner consistent with the allocation of compensation expenses under the Service and Expense Agreement.
CHANGE IN PENSION VALUE AND NONQUALIFIED NON-EQUITY DEFERRED STOCK OPTION INCENTIVE PLAN COMPENSATION ALL OTHER SALARY BONUS AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL NAME/(1)/ YEAR ($)/(2)/ ($) ($)/(3)/ ($)/(4)/ ($)/(5)/ ($)/(6)/ ($)/(7)/ ($) -------- ---- ------- ----- ------- ------- -------------- ------------- ------------ --------- Matthew E. Winter........... 2010 172,200 0 210,943 391,756 347,930 1,100/(8)/ 10,082 1,134,011 (CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER) -- John C. Pintozzi............ 2010 130,757 0 94,860 94,859 157,535 8,735/(9)/ 7,528 494,274 (SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER) 2009 120,224 7,436 55,594 106,439 75,456 10,673 9,053 384,875 Lawrence W. Dahl............ 2010 274,586 0 53,428 17,810 137,159 136,233/(10)/ 36,639 655,855 (PRESIDENT--CHIEF OPERATING OFFICER) 2009 253,299 0 25,195 48,246 113,091 235,494 97,306 772,631 Matthew S. Easley........... 2010 121,588 0 87,172 29,058 94,335 6,276/(11)/ 9,496 347,925 (SENIOR VICE PRESIDENT) 2009 114,709 0 45,652 87,398 72,160 6,064 8,708 334,691 Robert K. Becker............ 2010 89,294 0 18,609 55,811 81,067 35,616/(12)/ 6,763 287,160 (SENIOR VICE PRESIDENT)
-------- /(1)/Messrs. Winter and Becker were not named executives for fiscal year 2009. /(2)/Reflects amounts for 2009 that were paid in 2009 which, due to the timing of Allstate's payroll cycle, included amounts earned in 2008. /(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 2010 to each named executive is provided in the Grants of Plan-Based Awards table on page 66. 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. 70 /(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:
2010 2009 ------------- ------------- Weighted average expected term............... 7.8 years 8.1 years Expected volatility.......................... 23.7 - 52.3% 26.3 - 79.2% Weighted average volatility.................. 35.1% 38.3% Expected dividends........................... 2.4 - 2.8% 2.6% Weighted average expected dividends.......... 2.6% 2.6% Risk-free rate............................... 0.1 - 3.9% 0.0 - 3.7%
The number of options granted in 2010 to each named executive is provided in the Grants of Plan-Based Awards table on page 66. /(5)/Amounts earned under the annual incentive 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 2010 and 2009 and payable under these plans in 2011 and 2010, respectively. The break-down for each component is as follows:
ANNUAL CASH LONG-TERM INCENTIVE CASH INCENTIVE NAME YEAR AWARD AMOUNT CYCLE AWARD AMOUNT ---- ---- ------------ --------- -------------- Mr. Winter... 2010 $347,930 2008-2010 $ 0 Mr. Pintozzi. 2010 $157,535 2008-2010 $ 0 2009 $ 54,970 2007-2009 $20,486 Mr. Dahl..... 2010 $137,159 2008-2010 $ 0 2009 $ 50,748* 2007-2009 $ 0 Mr. Easley... 2010 $ 94,335 2008-2010 $ 0 2009 $ 52,444 2007-2009 $19,716 Mr. Becker... 2010 $ 81,067 2008-2010 $ 0
----- * In 2009, 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 annuity deposits sold by one of Lincoln Benefit's distribution channels. Payments related to the Sales Incentive Plan totaled $62,343 for 2009. Mr. Dahl did not participate in the Sales Incentive Plan in 2010. No other named executives of Lincoln Benefit participated in 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 2010 and 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 our Deferred Compensation Plan does not provide above-market earnings. The pension plan measurement date is December 31. (See note 16 to Allstate's audited financial statements for 2010.) /(7)/The "All Other Compensation for 2010--Supplemental Table" provides details regarding the amounts for 2010 for this column. /(8)/Reflects increases in the actuarial value of the benefits provided to Mr. Winter pursuant to the SRIP of $1,100. /(9)/Reflects increases in the actuarial value of the benefits provided to Mr. Pintozzi pursuant to the ARP and SRIP of $4,396 and $4,339, respectively. /(10)/Reflects increases in the actuarial value of the benefits provided to Mr. Dahl pursuant to the ARP and SRIP of $82,402 and $53,831, respectively. /(11)/Reflects increases in the actuarial value of the benefits provided to Mr. Easley pursuant to the ARP and SRIP of $3,098 and $3,178, respectively. /(12)/Reflects increases in the actuarial value of the benefits provided to Mr. Becker pursuant to the ARP and SRIP of $23,305 and $12,311, respectively. 71 ALL OTHER COMPENSATION FOR 2010--SUPPLEMENTAL TABLE (In dollars) The following table describes the incremental cost of other benefits provided in 2010 that are included in the "All Other Compensation" column.
TOTAL 401(K) PTO ALL OTHER NAME MATCH/(1)/ PAYOUT OTHER/(2)/ COMPENSATION ---- --------- ------ --------- ------------ Mr. Winter... 2010 1,400 0 8,682 10,082 Mr. Pintozzi. 2010 2,009 0 5,519 7,528 Mr. Dahl..... 2010 4,900 21,539 10,200 36,639 Ms. Easley... 2010 2,009 0 7,487 9,496 Mr. Becker... 2010 1,986 0 4,777 6,763
-------- /(1)/Each of the named executives participated in our 401(k) plan during 2010. The amount shown is the amount allocated to their accounts as employer matching contributions. Mr. Winter will not be vested in the employer matching contribution until he has completed three years of vesting service. /(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. There was no incremental cost for the use of mobile phones. 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 2010 and so no incremental cost is reflected in the table. 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 for the payment to Mr. Dahl, in accordance with Nebraska law, of $21,539 for paid time off accrued but not taken in 2010. 72 GRANTS OF PLAN-BASED AWARDS AT FISCAL YEAR-END 2010/(1)/ The following table provides information about non-equity incentive plan awards and equity awards granted to our named executives during the fiscal year 2010 to the extent the expense for such awards was allocated to Lincoln Benefit under the Service and Expense Agreement.
ALL OTHER ALL OTHER STOCK OPTION ESTIMATED FUTURE PAYOUTS AWARDS: AWARDS: EXERCISE UNDER NON-EQUITY INCENTIVE NUMBER OF NUMBER OF OR BASE PLAN AWARDS/(2)/ SHARES OF SECURITIES PRICE OF --------------------------- STOCK OR UNDERLYING OPTION GRANT THRESHOLD TARGET MAXIMUM UNITS OPTIONS AWARDS NAME DATE PLAN NAME ($) ($) ($) (#) (#) ($/SHR)/(3)/ ---- -------------- ----------------------- --------- ------- --------- --------- ---------- ----------- Mr. Winter... -- Annual cash incentive 107,625 215,250 1,104,233 Feb. 22, 2010 Restricted stock units 6,716 Feb. 22, 2010 Stock options 39,571 $31.41 Mr. Pintozzi. -- Annual cash incentive 39,219 78,439 196,097 Feb. 22, 2010 Restricted stock units 3,020 Feb. 22, 2010 Stock options 9,582 $31.41 Mr. Dahl..... -- Annual cash incentive 48,006 96,012 240,029 Feb. 22, 2010 Restricted stock units 1,701 Feb. 22, 2010 Stock options 1,799 $31.41 Mr. Easley... -- Annual cash incentive 36,475 72,949 182,373 Feb. 22, 2010 Restricted stock units 2,775 Feb. 22, 2010 Stock options 2,935 $31.41 Mr. Becker... -- Annual cash incentive 22,307 44,613 111,533 Feb. 22, 2010 Restricted stock units 592 Feb. 22, 2010 Stock options 5,638 $31.41
GRANT DATE FAIR VALUE ($)/(4)/ ------------------- STOCK OPTION NAME AWARDS AWARDS ---- -------- -------- Mr. Winter... $210,943 $391,756 Mr. Pintozzi. $ 94,860 $ 94,859 Mr. Dahl..... $ 53,428 $ 17,810 Mr. Easley... $ 87,172 $ 29,058 Mr. Becker... $ 18,609 $ 55,811
-------- /(1)/Awards under the annual executive incentive plans and the 2009 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 fifty percent of target, as the minimum amount payable if threshold performance is achieved. If threshold is not achieved the payment to named executives would be zero. The target amount is based upon achievement of certain performance measures set forth in the "Annual Cash Incentive Awards" section. The maximum amount payable to Mr. Winter is the lesser of a stockholder approved maximum under the Annual Executive Incentive Plan of $8.5 million or 25% of the award pool. The award pool is equal to 1.0% of Operating Income. None of the other named executives participate in the operating income pool. A description of the Operating Income performance measure is provided under the "Performance Measures" caption on page 78. /(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)/The aggregate grant date fair value of restricted stock units was $31.41 and for stock option awards was $9.90 for 2010, computed in accordance with FASB ASC 718. The assumptions used in the valuation are discussed in footnotes 3 and 4 to the Summary Compensation Table on pages 63 and 64. 73 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2010 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2010 The following table summarizes the outstanding equity awards of the named executives as of December 31, 2010, allocated in a manner consistent with the allocation of compensation expenses to Lincoln Benefit under the Service and Expense Agreement for 2010. 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 2010 under the Service and Expense Agreement.
OPTION AWARDS/(1)/ STOCK AWARDS ------------------------------------------------------------------------ ------------------------------------ NUMBER OF SHARES OR UNITS NUMBER OF NUMBER OF OF STOCK MARKET VALUE SECURITIES SECURITIES THAT OF SHARES OR UNDERLYING UNDERLYING HAVE UNITS OF OPTION UNEXERCISED UNEXERCISED OPTION OPTION NOT STOCK THAT GRANT OPTIONS (#) OPTIONS (#) EXERCISE EXPIRATION STOCK AWARD VESTED HAVE NOT NAME DATE EXERCISABLE/(2)/ UNEXERCISABLE/(3)/ PRICE DATE GRANT DATE (#)/(4)/ VESTED/(5)/ ---- -------------- --------------- ----------------- -------- -------------- -------------- -------- ------------ Mr. Winter... Nov. 2, 2009 2,406 7,219 $29.64 Nov. 2, 2019 Nov. 2, 2009 1,694 $ 54,019 Feb. 22, 2010 0 39,571 $31.41 Feb. 22, 2020 Feb. 22, 2010 6,716 $214,100 AGGREGATE MARKET VALUE ------------ $268,119 Mr. Pintozzi. Sep. 30, 2002 513 0 $35.17 Sep. 30, 2012 Feb. 7, 2003 1,435 0 $31.78 Feb. 7, 2013 Feb. 6, 2004 2,041 0 $45.96 Feb. 6, 2014 Feb. 22, 2005 5,616 0 $52.57 Feb. 22, 2015 Feb. 21, 2006 5,562 0 $53.84 Feb. 21, 2016 Feb. 21, 2006 3,690 0 $53.84 Feb. 21, 2016 Feb. 20, 2007 4,094 1,365 $62.24 Feb. 20, 2017 Feb. 20, 2007 753 $ 23,998 Feb. 26, 2008 4,872 4,872 $48.82 Feb. 26, 2018 Feb. 26, 2008 1,057 $ 33,710 Feb. 27, 2009 2,542 15,312 $16.83 Feb. 27, 2019 Feb. 27, 2009 3,592 $114,526 Feb. 22, 2010 0 9,582 $31.41 Feb. 22, 2020 Feb. 22, 2010 3,020 $ 96,279 AGGREGATE MARKET VALUE ------------ $268,513 Mr. Dahl..... May 15, 2001 4,224 0 $42.00 May 15, 2011 Feb. 7, 2002 5,868 0 $33.38 Feb. 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 3,418 0 $53.84 Feb. 21, 2016 Feb. 20, 2007 2,154 719 $62.24 Feb. 20, 2017 Feb. 20, 2007 397 $ 12,656 Feb. 26, 2008 2,747 2,747 $48.82 Feb. 26, 2018 Feb. 26, 2008 596 $ 19,001 Feb. 27, 2009 1,127 6,382 $16.83 Feb. 27, 2019 Feb. 27, 2009 1,497 $ 47,724 Feb. 22, 2010 0 1,799 $31.41 Feb. 22, 2020 Feb. 22, 2010 1,701 $ 54,228 AGGREGATE MARKET VALUE ------------ $133,609
74
OPTION AWARDS/(1)/ STOCK AWARDS ------------------------------------------------------------------------ ------------------------------------ NUMBER OF SHARES OR UNITS NUMBER OF NUMBER OF OF STOCK MARKET VALUE SECURITIES SECURITIES THAT OF SHARES OR UNDERLYING UNDERLYING HAVE UNITS OF OPTION UNEXERCISED UNEXERCISED OPTION OPTION NOT STOCK THAT GRANT OPTIONS (#) OPTIONS (#) EXERCISE EXPIRATION STOCK AWARD VESTED HAVE NOT NAME DATE EXERCISABLE/(2)/ UNEXERCISABLE/(3)/ PRICE DATE GRANT DATE (#)/(4)/ VESTED/(5)/ ---- -------------- --------------- ----------------- -------- -------------- -------------- -------- ------------ Mr. Easley. May 9, 2005 6,150 0 $57.04 May 9, 2015 Feb. 21, 2006 5,274 0 $53.84 Feb. 21, 2016 Feb. 21, 2006 3,690 0 $53.84 Feb. 21, 2016 Feb. 20, 2007 3,940 1,314 $62.24 Feb. 20, 2017 Feb. 20, 2007 724 $ 23,096 Feb. 26, 2008 4,712 4,712 $48.82 Feb. 26, 2018 Feb. 26, 2008 1,023 $ 32,599 Feb. 27, 2009 4,191 12,573 $16.83 Feb. 27, 2019 Feb. 27, 2009 2,950 $ 94,044 Feb. 22, 2010 0 2,935 $31.41 Feb. 22, 2020 Feb. 22, 2010 2,775 $ 88,476 AGGREGATE MARKET VALUE ------------ $238,215 Mr. Becker. Feb. 6, 2004 595 0 $45.96 Feb. 6, 2014 Feb. 22, 2005 465 0 $52.57 Feb. 22, 2015 Feb. 21, 2006 561 0 $53.84 Feb. 21, 2016 Feb. 20, 2007 410 137 $62.24 Feb. 20, 2017 Feb. 20, 2007 76 $ 2,418 Feb. 26, 2008 501 501 $48.82 Feb. 26, 2018 Feb. 26, 2008 109 $ 3,464 Feb. 27, 2009 1,190 3,569 $16.83 Feb. 27, 2019 Feb. 27, 2009 838 $ 26,704 Feb. 22, 2010 0 5,638 $31.41 Feb. 22, 2020 Feb. 22, 2010 592 $ 18,887 AGGREGATE MARKET VALUE ------------ $ 51,473
-------- /(1)/The options granted in 2010 vest in three installments of 50% on the second anniversary date and 25% on each of the third and fourth anniversaries dates. The other 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 aggregate value and aggregate number of exercisable in-the-money options as of December 31, 2010, for each of the named executives is as follows: Mr. Winter $5,391 (2,406 aggregate number exercisable), Mr. Pintozzi $38,401 (3,977 aggregate number exercisable), Mr. Dahl $17,281 (4,327 aggregate number exercisable), Mr. Easley $63,069 (4,191 aggregate number exercisable), and Mr. Becker $17,907 (1,190 aggregate number exercisable) /(3)/The aggregate value and aggregate number of unexercisable in-the-money options as of December 31, 2010, for each of the named executives is as follows: Mr. Winter $34,770 (46,791 aggregate number exercisable), Mr. Pintozzi $234,947 (24,894 aggregate number unexercisable), Mr. Dahl $96,895 (8,181 aggregate number unexercisable), Mr. Easley $190,598 (15,508 aggregate number unexercisable), and Mr. Becker $56,370 (9,207 aggregate number unexercisable). /(4)/The restricted stock unit awards granted in 2010 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. The other restricted stock unit awards vest in one installment on the fourth anniversary of the grant date, unless otherwise noted. /(5)/Amount is based on the closing price of Allstate common stock of $31.88 on December 31, 2010. OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2010 The following table summarizes the options exercised by the named executives during 2010 and the restricted stock and restricted stock unit awards that vested during 2010, allocated in a manner consistent with the allocation of compensation expenses to Lincoln Benefit under the Service and Expense Agreement for 2010. 75 OPTION EXERCISES AND STOCK VESTED AT FISCAL YEAR-END 2010
OPTION AWARDS (AS OF 12/31/10) STOCK AWARDS -------------------------------- ------------------------------- NUMBER OF SHARES NUMBER OF SHARES ACQUIRED ON VALUE REALIZED ACQUIRED ON VALUE REALIZED NAME EXERCISE (#) ON EXERCISE ($) VESTING (#) ON VESTING ($) ---- ---------------- --------------- ---------------- -------------- Mr. Winter... 0 $ 0 $ 0 $ 0 Mr. Pintozzi. 2,562 $36,015 1,087 $33,921 Mr. Dahl..... 4,851 $33,820 516 $16,110 Mr. Easley... 0 $ 0 1,043 $32,551 Mr. Becker... 0 $ 0 84 $ 2,637
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 2010 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 2010. PENSION BENEFITS
NUMBER OF PRESENT YEARS VALUE OF PAYMENTS CREDITED ACCUMULATED DURING LAST NAME PLAN NAME SERVICE (#) BENEFIT/(1)(2)/ ($) FISCAL YEAR ($) ---- ------------------------------------ ----------- ----------------- --------------- Mr. Winter/(3)/. Allstate Retirement Plan 1.2 0 0 Supplemental Retirement Income Plan 1.2 1,100 0 Mr. Pintozzi.... Allstate Retirement Plan 8.3 19,939 0 Supplemental Retirement Income Plan 8.3 20,553 0 Mr. Dahl........ Allstate Retirement Plan 23.9 522,155 0 Supplemental Retirement Income Plan 23.9 437,358 0 Mr. Easley...... Allstate Retirement Plan 5.7 10,343 0 Supplemental Retirement Income Plan 5.7 15,229 0 Mr. Becker...... Allstate Retirement Plan 10.0 116,258 0 Supplemental Retirement Income Plan 10.0 90,137 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. Accrued benefits were calculated as of December 31, 2010, and used to calculate the Present Value of Accumulated Benefits at December 31, 2010. December 31 is our pension plan measurement date used for financial statement reporting purposes. The amounts listed in this column are based on the following assumptions: . Discount rate of 6%, 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 76 next 15 years, and 7% for all years after 20 and the 2011 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 2011 Internal Revenue Service 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 2010.) . Based on guidance provided by the Securities and Exchange Commission, we have assumed normal retirement age which is age 65 under both the ARP and SRIP, regardless of any announced or anticipated retirements. . No assumption for early termination, disability, or pre-retirement mortality. /(2)/The figures shown in the table above reflect the present value of the current accrued pension benefits calculated using the assumptions described in the preceding footnote. If the named executives' employment terminated on December 31, 2010, the present value of the non-qualified pension benefits for each named executive earned through December 31, 2010, is shown in the following table:
LUMP SUM NAME PLAN NAME AMOUNT ($) ---- ------------------------------------ ---------- Mr. Winter... Supplemental Retirement Income Plan 1,159 Mr. Pintozzi. Supplemental Retirement Income Plan 22,528 Mr. Dahl..... Supplemental Retirement Income Plan 660,832 Mr. Easley... Supplemental Retirement Income Plan 15,895 Mr. Becker... Supplemental Retirement Income Plan 118,725
The amount shown is based on the lump sum methodology (i.e., interest rate and mortality table) used by the Allstate pension plans in 2011, as required under the Pension Protection Act. Specifically, the interest rate for 2011 is based on 20% of the average August 30-year Treasury Bond rate from the prior year and 80% of the average corporate bond segmented yield curve from August of the prior year. The mortality table for 2011 is the 2011 combined static Pension Protection Act funding mortality table with a blend of 50% males and 50% females, as required under the Internal Revenue Code. /(3)/Mr. Winter is not currently vested in the Allstate Retirement Plan or the Supplemental Retirement Income Plan. 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. Winter, Pintozzi, and Easley 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. Mr. Dahl and Mr. Becker earn 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) 77 . 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 Mr. Dahl earned benefits between January 1, 1978, and December 31, 1988, one component of his 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. 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
PAY CREDIT VESTING SERVICE % --------------- ---------- 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%
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 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. For final average pay benefits, 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. 78 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. Payments from the SRIP are paid in the form of a lump sum using the same interest rate and mortality assumptions used under the ARP. TIMING OF PAYMENTS The earliest retirement age that a named executive may retire with unreduced retirement benefits under the ARP and SRIP 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, none of the named executives are eligible for an early retirement benefit. 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 reaching age 50 if disabled, following early retirement at age 55 or older with 20 years of service, or following death in accordance with the terms of the SRIP. 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 following death in accordance with the terms of the SRIP. 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. . Mr. Winter's SRIP benefit is not currently vested but would become payable following death. Mr. Winter will turn 65 on January 22, 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 Post 409A 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. . Mr. Becker's Pre 409A SRIP Benefit would become payable as early as January 1, 2021, but is immediately payable upon death or disability. Mr. Becker's Post 409A Benefit would be paid on January 1, 2011, or immediately upon death. Mr. Becker will turn 65 on July 9, 2020. 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 79 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 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 2010. NON-QUALIFIED DEFERRED COMPENSATION AT FISCAL YEAR-END 2010
EXECUTIVE REGISTRANT AGGREGATE AGGREGATE AGGREGATE CONTRIBUTIONS CONTRIBUTIONS EARNINGS WITHDRAWALS/ BALANCE IN LAST FY IN LAST FY IN LAST FY DISTRIBUTIONS AT LAST FYE NAME ($) ($) ($)/(1)/ ($) ($)/(2)/ ---- ------------- ------------- ---------- ------------- ----------- Mr. Winter... 0 0 0 0 0 Mr. Pintozzi. 0 0 0 0 0 Mr. Dahl..... 0 0 0 0 0 Ms. Easley... 0 0 0 0 0 Mr. Becker... 0 0 0 0 0
-------- /(1)/Aggregate earnings were not included in the named executive's prior year compensation. /(2)/There are no amounts reported in the Aggregate Balance at Last FYE column that were reported in the 2010 or 2009 Summary Compensation Tables. 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 2010), 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 in 2010 under the Deferred Compensation Plan are Stable Value, S&P 500, International Equity, Russell 2000, and Bond Funds--options available in 2010 under our 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 our 401(k) plan, no above-market earnings are paid. Similar to participants in our 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 409A balances and Post 409A balances. A named executive may elect to begin receiving a distribution of a Pre 409A 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 409A 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 409A deferrals into the plan. The distribution options available to the Post 409A balances are similar to those available to the Pre 409A 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. 80 POTENTIAL PAYMENTS AS A RESULT OF TERMINATION OR CHANGE-IN-CONTROL The following table lists the compensation and benefits that Allstate would pay or provide to the named executives in various scenarios involving a termination of employment, other than compensation and benefits generally available to all salaried employees. COMPENSATION ELEMENTS
NON- QUALIFIED BASE SEVERANCE ANNUAL RESTRICTED PENSION TERMINATION SCENARIOS SALARY PAY INCENTIVE STOCK OPTIONS STOCK UNITS BENEFITS/(1)/ --------------------- ------------ ----------------- -------------- ---------------- ------------- -------------- VOLUNTARY TERMINATION... Ceases None Forfeited Unvested are Forfeited Distributions immediately unless forfeited, commence terminated vested expire per plan on last day at the earlier of fiscal of three year months or normal expiration INVOLUNTARY Ceases None Forfeited Unvested are Forfeited Distributions TERMINATION/(3)/....... immediately unless forfeited, commence terminated vested expire per plan on last day at the earlier of fiscal of three year months or normal expiration RETIREMENT/(4)/......... Ceases None Pro rated for Continue to RSUs Distributions Immediately the year vest upon continue to commence based on normal or vest upon per plan actual health normal performance retirement; retirement. for the year unvested Forfeited in forfeited upon early early retirement. retirement. All expire at earlier of five years or normal expiration TERMINATION DUE TO Ceases Lump sum Pro rated at Vest Vest Immediately CHANGE IN CONTROL/(5)/. Immediately equal to a target immediately immediately payable multiple of (reduced by upon a change upon a upon a salary, a any actually in control change in change in multiple of paid) control control annual incentive at target and pension enhancement/(6)/ DEATH................... One month None Pro rated for Vest Vest Distributions salary paid year based immediately immediately commence upon death on actual and expire at per plan performance earlier of two for the year years or normal expiration
HEALTH, WELFARE AND DEFERRED OTHER TERMINATION SCENARIOS COMPENSATION/(2)/ BENEFITS --------------------- ------------------ ---------------- VOLUNTARY TERMINATION... Distributions None commence per participant election INVOLUNTARY Distributions None TERMINATION/(3)/....... commence per participant election RETIREMENT/(4)/......... Distributions None commence per participant election TERMINATION DUE TO Immediately Outplacement CHANGE IN CONTROL/(5)/. payable upon a services change in control provided; continuation coverage subsidized/(7)/ DEATH................... Payable within None 90 days
81
NON- QUALIFIED BASE SEVERANCE ANNUAL RESTRICTED PENSION DEFERRED TERMINATION SCENARIOS SALARY PAY INCENTIVE STOCK OPTIONS STOCK UNITS BENEFITS/(1)/ COMPENSATION/(2)/ --------------------- ------------ --------- -------------- --------------- ----------- ------------ ---------------- DISABILITY....... Ceases None Pro rated for Vest Forfeited Participant Distributions Immediately year based immediately may commence per on actual and expire at request participant performance earlier of two payment if election for the year years or age 50 or normal older expiration
HEALTH, WELFARE AND OTHER TERMINATION SCENARIOS BENEFITS --------------------- ------------- DISABILITY....... Supplemental Long Term Disability benefits
-------- /(1)/See the section titled Pension Benefits for further detail on non-qualified pension benefits and timing of payments. /(2)/See the Non-Qualified Deferred Compensation section for additional information on the Deferred Compensation Plan and distribution options available. /(3)/Examples of "Involuntary Termination" independent of a change-in-control include performance-related terminations; terminations for employee dishonesty and violation of Allstate rules, regulations, or policies; and terminations resulting from lack of work, rearrangement of work, and reduction in force. /(4)/Retirement for purposes of the annual cash incentive plans is defined as voluntary termination on or after the date the named executive attains age 55 with at least 20 years of service. The "normal retirement date" under the equity 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. The "early retirement date" is the date the named executive attains age 55 with 20 years of service. /(5)/Of the named executives, only Messrs. Winter, Pintozzi, and Easley are subject to change-in-control agreements. 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 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. 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. During the two-year period following a change-in-control, the change-in-control agreements provide for a minimum salary, annual 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. 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. /(6)/For those named executives subject to change-in-control agreements, severance benefits would be payable if the 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. Mr. Winter's cash severance payment would be three times salary and three times annual incentive at target. Messrs. Pintozzi's and Easley's cash severance payments would be two times their respective salary and two times their respective annual incentive at target. For the named executives subject to change-in-control agreements, the pension enhancement is 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 two years (three years for Mr. Winter) greater than the named executive's actual age, (iii) accrued a number of years of service that is two years (three years for Mr. Winter) 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 two times base salary (three for Mr. Winter), two (three for Mr. Winter) times annual incentive cash compensation calculated at target, plus the 2010 annual incentive cash award as covered compensation in equal monthly installments during the two-year period following the named executive's termination date (a three-year period applies to Mr. Winter); and (b) the lump-sum values of the maximum annuity benefits vested and payable to 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. /(7)/For the named executives subject to change-in-control agreements, if the named executive's employment is terminated by reason of death during the two-year period commencing on the date of a change-in-control, 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 at Allstate. In the event of termination by reason 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. In addition, such survivor or disability benefits shall not be materially less favorable, in the aggregate, than the most favorable benefits in effect during the 90-day period preceding the change-in-control. 82 ESTIMATE OF POTENTIAL PAYMENTS UPON TERMINATION/(1)/ The table below describes the amount of compensation payable to each named executive or the value of benefits provided to the named executives, calculated in a manner consistent with the allocation of compensation expenses to Lincoln Benefit under the Service and Expense Agreement for 2010, that exceed the compensation or benefits generally available to all salaried employees in each termination scenario. The "Total" column in the following table does not reflect compensation or benefits previously accrued or earned by the named executives such as deferred compensation and non-qualified pension benefits. The payment of the 2010 annual cash incentive award and any 2010 salary earned but not paid in 2010 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, 2010, employment termination date.
RESTRICTED STOCK STOCK OPTIONS-- UNITS-- WELFARE EXCISE TAX UNVESTED UNVESTED BENEFITS AND REIMBURSEMENT AND AND OUTPLACEMENT AND TAX SEVERANCE ACCELERATED ACCELERATED SERVICES GROSS-UP/(2)/ TOTAL NAME ($) ($) ($) ($) ($) ($) ---- --------- ----------- ----------- ------------ ------------- --------- MR. WINTER Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0 Involuntary Termination................... 0 0 0 0 0 Termination due to Change-in-Control/(4)/. 1,202,254 34,770 268,119 10,263/(5)/ 448,200 1,963,606 Death..................................... 34,770 268,119 0 0 302,889 Disability................................ 34,770 0 637,274/(6)/ 0 672,044 MR. PINTOZZI Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0 Involuntary Termination................... 0 0 0 0 0 Termination due to Change-in-Control/(4)/. 442,285 234,947 268,513 13,593/(5)/ 0 959,338 Death..................................... 0 234,947 268,513 0 0 503,460 Disability................................ 0 234,947 0 707,459/(6)/ 0 942,406 MR. DAHL Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0 Involuntary Termination................... 0 0 0 0 0 Termination due to Change-in-Control/(4)/. 0 96,895/(7)/ 133,609/(7)/ 0 0 230,504 Death..................................... 96,895 133,609 0 0 230,504 Disability................................ 96,895 0 703,387/(6)/ 0 800,282 MR. EASLEY Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0 Involuntary Termination................... 0 0 0 0 0 Termination due to Change-in-Control/(4)/. 381,650 190,598 238,215 12,614/(5)/ 0 823,077 Death..................................... 190,598 238,215 0 0 428,813 Disability................................ 190,598 0 397,373/(6)/ 0 587,971 MR. BECKER Voluntary Termination/Retirement/(3)/..... 0 0 0 0 0 0 Involuntary Termination................... 0 0 0 0 0 Termination due to Change-in-Control/(4)/. 0 56,370/(7)/ 51,473/(7)/ 0 0 107,843 Death..................................... 0 56,370 51,473 0 0 107,843 Disability................................ 0 56,370 0 186,591/(6)/ 0 242,961
-------- /(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 also made available to all salaried employees. /(2)/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. 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. Allstate believes providing an excise tax gross-up mitigates the possible disparate tax treatment for similarly situated employees and is appropriate in this limited circumstance to prevent the intended value of a benefit from being significantly and arbitrarily reduced. However, starting in 2011, new change-in-control agreements will not include an excise tax gross-up provision. 83 /(3)/As of December 31, 2010 none of the named executives was eligible to retire in accordance with Allstate's policy or the terms of any of the Allstate compensation and benefit plans including the equity incentive plans. /(4)/The values in this change-in-control row represent amounts paid if both the change-in-control and termination occur on December 31, 2010. If there was a change-in-control that did not result in a termination, the amounts payable to each named executive would be as follows:
STOCK OPTIONS-- TOTAL-- UNVESTED AND RESTRICTED STOCK UNITS-- UNVESTED AND ACCELERATED UNVESTED AND ACCELERATED ACCELERATED NAME ($) ($) ($) ---- --------------- ------------------------ ------------ Mr. Winter... 34,770 268,119 302,889 Mr. Pintozzi. 234,947 268,513 503,460 Mr. Dahl..... 96,895 133,609 230,504 Mr. Easley... 190,598 238,215 428,813 Mr. Becker... 56,370 51,473 107,843
A change-in-control also would accelerate the distribution of non-qualified deferred compensation and SRIP benefits for Messrs. Winter, Pintozzi, and Easley. Within five business days after the effective date of a change-in-control, each named executive subject to a change-in-control agreement would receive any deferred compensation account balances and a lump sum payment equal to the present value of the named executive's SRIP benefit. Please see the Non-Qualified Deferred Compensation at Fiscal Year End 2010 table and footnote 2 to the Pension Benefits table in the Retirement Benefits section for details regarding the applicable amounts for each named executive. /(5)/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 for Mr. Winter is $20,000 and $15,000 for Messrs. Pintozzi and Easley. /(6)/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, 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 full present value of the monthly benefit payable until age 65. /(7)/Messrs. Dahl and Becker did not have change-in control agreements in place. However, pursuant to the terms of their equity awards unvested stock options and restricted stock units would have become immediately payable upon a change-in control. RISK MANAGEMENT AND COMPENSATION 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 Allstate financially strong, and that they avoid providing incentives for employees to engage in unnecessary and excessive risk taking. Allstate believes that executive compensation has to be examined in the larger context of an effective risk management framework and strong internal controls. 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 of Allstate employs an independent executive compensation consultant each year to assess Allstate's executive pay levels, practices, and overall program design. A review and assessment of potential compensation-related risks was conducted by Allstate management and reviewed by the Chief Risk Officer. Performance related incentive plans were analyzed using a process developed in conjunction with our independent executive compensation consultant. The 2010 risk assessment specifically noted that our 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. . utilize a full range of performance measures that Allstate believes correlate to long-term Allstate shareholder value creation. 84 . incorporate strong governance practices, including paying cash incentive awards only after a review of executive and corporate performance. . enable the use of negative discretion to adjust annual incentive compensation payments when formulaic payouts are not warranted due to other circumstances. Furthermore, to ensure Allstate's compensation programs do not motivate imprudent risk taking, awards to Allstate executive officers, including Mr. Winter, made after May 19, 2009, under the 2009 Equity Incentive Plan and awards made under the Annual Executive Incentive Plan are subject to clawback in the event of certain financial restatements. PERFORMANCE MEASURES Information regarding our performance measures is disclosed in the limited context of Allstate's 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 2010 and its long-term cash incentive awards for the 2008-2010 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 our 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 our executives have little influence or control, such as capital market conditions. ANNUAL CASH INCENTIVE AWARDS FOR 2010 OPERATING INCOME: This measure is used to assess financial performance. This measure is equal to net income adjusted to exclude the after tax effects of the items listed below: . 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. . 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. CORPORATE MEASURE 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. . 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. 85 . 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. 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 exclude the after tax effects of restructuring and related charges and the potential amount by which 2010 guaranty fund assessments related to insured solvencies exceed $6 million. For disclosure of the Allstate Financial segment measure see footnote 18 to Allstate's audited financial statements. ADJUSTED OPERATING RETURN ON EQUITY: This is a measure Allstate management uses to assess profitability and capital efficiency. This measure is calculated using adjusted operating income, as defined above, as the numerator, and Allstate Financial's adjusted average subsidiary shareholder's equity as the denominator. Adjusted subsidiary shareholder's equity is the sum of subsidiaries' shareholder's equity for Allstate Life Insurance Company, Allstate Bank, a proportionate share of American Heritage Life Investment Corporation and certain other minor entities and excludes the effect of unrealized net capital gains and losses, net of tax and deferred acquisition costs. The average adjusted shareholder's equity is calculated by dividing the sum of Allstate Financial's adjusted shareholder's equity at year-end 2009 and at the end of each quarter of 2010 by five. ALLSTATE EXCLUSIVE AGENCY PROPRIETARY AND AWD WEIGHTED SALES: This operating measure is used to quantify the current year sales of financial products through Allstate's Exclusive Agency proprietary distribution channel, including agencies and direct, and the Allstate Workplace Division. The measure is calculated by applying a percentage or factor against the premium or deposits of life insurance, annuities and Allstate Workplace Division products that vary based on the relative expected profitability of the specific product. For non-Allstate Workplace Division proprietary products sold through Allstate Financial Services channel, the percentage or factors are consistent with those used for production credits by Allstate Protection. ALLSTATE FINANCIAL PORTFOLIO RELATIVE TOTAL RETURN: PORTFOLIO RELATIVE TOTAL RETURN: Management uses the three following measures to assess the value of active portfolio management relative to the total return of a market based benchmark. The measure is calculated as the difference, in basis points, of the specific portfolio total return over a designated benchmark. 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 our audited financial statements for our methodologies for estimating the fair value of our investments.) In general, total return represents the annualized increase or decrease, expressed as a percentage, in the value of the portfolio. Time weighted returns are utilized. The designated benchmark is a composite of pre-determined, customized indices which reflect the investment risk parameters established in investment policies by the boards of the relevant subsidiaries, weighted in proportion to our investment plan, in accordance with our investment policy. The specific measures and investments included are listed below: . PROPERTY LIABILITY PORTFOLIO RELATIVE TOTAL RETURN: Total return for Property-liability investments and Kennett investments. . ALLSTATE FINANCIAL PORTFOLIO RELATIVE TOTAL RETURN: Total return for Allstate Financial investments. 86 . ALLSTATE PENSION PLANS PORTFOLIO RELATIVE TOTAL RETURN: Total return for the Allstate Retirement Plan and Agents Pension Plan investments. 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. 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 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 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, net 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.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF TITLE OF CLASS 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, power of shares owned by Northbrook, IL 60062 Allstate Life Insurance Company N/A The Allstate Corporation Indirect voting and investment N/A 2775 Sanders Road, power of shares owned by Northbrook, IL 60062 Allstate Life Insurance Company
87 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 May 9, 2011 and restricted stock units for which restrictions expire on or prior to May 9, 2011. 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 March 10, 2011. As of March 10, 2010, none of these shares were pledged as security. COMMON STOCK SUBJECT TO OPTIONS EXERCISABLE AND RESTRICTED STOCK UNITS FOR WHICH RESTRICTIONS EXPIRE ON OR PRIOR AMOUNT AND NATURE OF TO MAY 9, 2011 - BENEFICIAL OWNERSHIP OF INCLUDED IN ALLSTATE COMMON STOCK COLUMN (A) NAME OF BENEFICIAL OWNER (A) (B) ------------------------ ------------------------ ------------------------ Anurag Chandra........... 0 0 Robert K. Becker......... 17,535 12,162 Lawrence W. Dahl......... 34,755 33,178 Matthew S. Easley........ 95,825 89,126 Susan L. Lees............ 39,344 27,732 John C. Pintozzi......... 102,679 97,514 Matthew E. Winter........ 8539 8385 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP................ 281,142 255,935 88 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.
APPROXIMATE DOLLAR VALUE OF THE AMOUNT INVOLVED IN RELATED PERSON(S) INVOLVED IN THE TRANSACTION/1/ AND THE TRANSACTION, PER FISCAL THE APPROXIMATE DOLLAR VALUE OF THE AMOUNT OF THE TRANSACTION DESCRIPTION YEAR RELATED PERSON'S INTEREST IN THE TRANSACTION ($) ----------------------- ----------------------- --------------------------------------------------- ($) ALIC AIC ALLCORP Investment Management Agreement 2008 131,668,584 68,941,225/2/ 51,404,171 677,981 among Allstate Investments, LLC, Allstate Insurance Company, The 2009 142,073,012 76,392,634/2/ 54,248,353 1,151,990 Allstate Corporation and certain affiliates effective January 1, 2007. 2010 130,793,008 73,282,918/2/ 47,445,127 687,957 Tax Sharing Agreement among The 2008 465,439,826/3/ (109,322,083) 633,316,282 (121,960,368) Allstate Corporation and certain affiliates dated as of November 12, 2009 (1,173,212,154)/3/ (534,572,879) (467,570,173) (121,813,486) 1996, as supplemented by Supplemental Intercompany Tax Sharing Agreement 2010 (113,770,599)/3/ (621,234,096) 647,559,256 (146,676,325) between Allstate Life Insurance Company and Lincoln Benefit Life Company effective December 21, 2000. Cash Management Services Master 2008 1,338,376/4/ 198,098/5/ 816,143/5/ N/A Agreement between Allstate Insurance 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 2010 967,620/4/ 76,166/5/ 694,117/5/ 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/ Each identified Related Person is a Party to the transaction. /5/ Total fees collected for all bank accounts covered under the transaction. 89
APPROXIMATE DOLLAR VALUE OF THE AMOUNT INVOLVED IN RELATED PERSON(S) INVOLVED IN THE TRANSACTION/1/ AND THE TRANSACTION, PER FISCAL THE APPROXIMATE DOLLAR VALUE OF THE AMOUNT OF THE TRANSACTION DESCRIPTION YEAR RELATED PERSON'S INTEREST IN THE TRANSACTION ($) ----------------------- ------------------------ ------------------------------------------------- ($) ALIC AIC ALLCORP Amended and Restated Service and 2008 3,295,180,640 215,640,945/2/ 2,186,281,461/2/ 5,351,262/2/ Expense Agreement between Allstate 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 2010 3,619,106,706 175,950,701/2/ 1,823,391,816/2/ 4,191,150/2/ 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 Lincoln 2008 766,582,944/6/ 766,582,944/6/ N/A N/A Benefit Life Company and Allstate Life Insurance Company: Coinsurance 2009 873,759,209/6/ 873,759,209/6/ Agreement effective December 31, 2001; Modified Coinsurance Agreement 2010 888,764,276/6/ 888,764,276/6/ effective December 31, 2001; Modified Coinsurance Agreement effective December 31, 2001. Intercompany Loan Agreement among 2008 400,040,660 50,014,792/7/ 1,732,736 400,040,660 The Allstate Corporation, Allstate Life Insurance Company, Lincoln Benefit Life 2009 86,111,674 0/8/ 86,111,674 86,111,674 Company and other certain subsidiaries of The Allstate Corporation dated 2010 149,971,764 149,971,764 149,971,764 149,971,764 February 1, 1996. Agreement for the Settlement of State and 2008 2,089,067 356,331/9/ 1,732,736 N/A Local Tax Credits among Allstate Insurance Company and certain affiliates 2009 941,379 193,504/9/ 441,024 effective January 1, 2007. 2010 835,435 236,540/9/ 474,132
-------- /1/ Each identified Related Person is a Party to the transaction. /2/ Gross amount of expense received under the transaction. /6/ Net reinsurance income. /7/ Amounts loaned and repaid. /8/ No loans outstanding at year end. /9/ Value of transfer transactions. 90 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, 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 A section entitled "Experts" is added to your prospectus as follows: 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. Such financial statements and financial statement schedules are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. PRINCIPAL UNDERWRITER Contingent on regulatory approval, ALFS, Inc ("ALFS") is expected to merge into Allstate Distributors, LLC ("ADLLC"), effective April 29, 2011. At that time, ALFS will assign its rights and delegate its duties as principal underwriter to ADLLC. This change will have no effect on Lincoln Benefit's obligations to you under your Contract. The section of your prospectus concerning the principal underwriter is amended accordingly. Contingent on regulatory approval, ADLLC serves as distributor of the securities registered herein. The securities offered herein are sold on a continuous basis, and there is no specific end date for the offering. 91 ADLLC, an affiliate of Lincoln Benefit, is a wholly owned subsidiary of Allstate Life Insurance Company. ADLLC 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. ADLLC is not required to sell any specific number or dollar amount of securities, but will use its best efforts to sell the securities offered. 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, 2010, consisted of the following: Keane BPO, LLC (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. 92 Supplement, dated October 18, 2010, to the Prospectus for your Variable Annuity Issued by ALLSTATE LIFE INSURANCE COMPANY ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK LINCOLN BENEFIT LIFE COMPANY This supplement amends the prospectus for your Variable Annuity contract issued by Allstate Life Insurance Company or Allstate Life Insurance Company of New York or Lincoln Benefit Life Company, as applicable. Effective as of November 19, 2010 (the Closure Date), the following variable sub-accounts available in the above-referenced Variable Annuities will be closed to all contract owners except those contract owners who have contract value invested in the variable sub-accounts as of the Closure Date: Invesco V.I. Capital Appreciation Fund--Series I Invesco V.I. Capital Appreciation Fund--Series II Contract owners who have contract value invested in these variable sub-accounts as of the Closure Date may continue to submit additional investments into the variable sub-accounts thereafter, although they will not be permitted to invest in the variable sub-accounts if they withdraw or otherwise transfer their entire contract value from the variable sub-accounts following the Closure Date. Contract owners who do not have contract value invested in the variable sub-accounts as of the Closure Date will not be permitted to invest in these variable sub-accounts thereafter. Dollar cost averaging and/or auto-rebalancing, if elected by a contract owner, will not be affected by the closure. If you have any questions, please contact your financial representative or our Variable Annuity Service Center at (800) 457-7617. Our representatives are available to assist you from 7:30 a.m. to 5 p.m. Central time. Please read the prospectus supplement carefully and then file it with your important papers. No other action is required of you. Supplement Dated December 31, 2009 To the Prospectus for Your Variable Annuity Issued By Allstate Life Insurance Company Allstate Life Insurance Company of New York Lincoln Benefit Life Company This supplement amends the prospectus for your variable annuity contract issued by Allstate Life Insurance Company, Allstate Life Insurance Company of New York, or Lincoln Benefit Life Company. The following provision is added to your prospectus: WRITTEN REQUESTS AND FORMS IN GOOD ORDER. Written requests must include sufficient information and/or documentation, and be sufficiently clear, to enable us to complete your request without the need to exercise discretion on our part to carry it out. You may contact our Customer Service Center to learn what information we require for your particular request to be in "good order." Additionally, we may require that you submit your request on our form. We reserve the right to determine whether any particular request is in good order, and to change or waive any good order requirements at any time. If you have any questions, please contact your financial representative or call our Customer Service Center at 1-800-457-7617. If you own a Putnam contract, please call 1-800-390-1277. For future reference, please keep this supplement together with your prospectus. Lincoln Benefit Life Company Supplement dated August 14, 2009 To the following Prospectuses, as supplemented: Consultant Solutions, Prospectus Dated May 1, 2009 Consultant I, Prospectus Dated May 1, 2009 LBL Advantage, Prospectus Dated May 1, 2004 Consultant II, Prospectus Dated May 1, 2004 Premier Planner, Prospectus Dated May 1, 2004 This prospectus supplement amends certain disclosure contained in the prospectuses referenced above for your variable annuity contract issued by Lincoln Benefit Life Company ("Lincoln Benefit"). The "Annual Reports and Other Documents" section is deleted and replaced with the following: INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Securities and Exchange Commission ("SEC") recently adopted rule 12h-7 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule 12h-7 exempts an insurance company from filing reports under the Exchange Act when the insurance company issues certain types of insurance products that are registered under the Securities Act of 1933 and such products are regulated under state law. Each of the variable annuities described in the prospectuses referenced above fall within the exemption provided under rule 12h-7. Lincoln Benefit is hereby providing notice that it is electing to rely on the exemption provided under rule 12h-7 effective as of the date of this prospectus supplement or as soon as possible thereafter, and will be suspending filing reports under the Exchange Act. The SEC allows us to "incorporate by reference" information that we file with the SEC into this prospectus supplement which means that incorporated documents are considered part of this prospectus supplement. We can disclose important information to you by referring you to those documents. This prospectus supplement incorporates by reference our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 18, 2009, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 12, 2009. Lincoln Benefit will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference into the prospectus but not delivered with the prospectus. Such information will be provided upon written or oral request at no cost to the requester by writing to Lincoln Benefit, P.O. Box 758565, Topeka, KS 66675-8565 or by calling 1-800- 457- 7617. The public may read and copy any materials that Lincoln Benefit files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC (see http://www.sec.gov). Lincoln Benefit Life Company LBL Advantage Consultant II Premier Planner Supplement, dated May 1, 2009 This supplement amends certain disclosure contained in the prospectus for certain annuity contracts issued by Lincoln Benefit Life Company. Under the "More Information" section, the subsection entitled "Legal Matters" is deleted and replaced with the following: LEGAL MATTERS Certain matters of state law pertaining to the Contracts, including the validity of the Contracts and Lincoln Benefit Life Company's right to issue such Contracts under applicable state insurance law, have been passed upon by Susan L. Lees, General Counsel of Lincoln Benefit Life Company. The "Annual Reports and Other Documents" section is deleted and replaced with the following: ANNUAL REPORTS AND OTHER DOCUMENTS Lincoln Benefit Life Company ("Lincoln Benefit") incorporates by reference into the prospectus its latest annual report on Form 10-K filed pursuant to Section 13(a) or Section 15(d) of the Exchange Act since the end of the fiscal year covered by its latest annual report, including filings made on Form 10-Q and Form 8-K. In addition, all documents subsequently filed by Lincoln Benefit pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act also are incorporated into the prospectus by reference. Lincoln Benefit will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference into the prospectus but not delivered with the prospectus. Such information will be provided upon written or oral request at no cost to the requester by writing to Lincoln Benefit, P.O. Box 758565, Topeka, KS 66675-8565 or by calling 1-800- 457-7617. Lincoln Benefit files periodic reports as required under the Securities Exchange Act of 1934. The public may read and copy any materials that Lincoln Benefit files with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC (see http://www.sec.gov). Lincoln Benefit Life Company Lincoln Benefit Life Variable Annuity Account Supplement, dated March 31, 2008, to the LBL Advantage Variable Annuity Prospectus and the LBL Premier Planner Variable Annuity Prospectus This supplement amends certain disclosure contained in the above-referenced prospectus for certain variable annuity contracts issued by Lincoln Benefit Life Company. We have received notice that the Board of Trustees of the Rydex Variable Trust has approved the following fund name change: Effective April 1, 2008, the name of the Rydex VT OTC Fund will be changed to the Rydex VT NASDAQ-100 (R) Fund. Due to this name change, the corresponding Rydex VT OTC Sub-Account available for your product will change its name to the Rydex VT NASDAQ-100 (R) Sub-Account effective April 1, 2008. The name change does not in any way affect the investment objective of the Fund, which remains unchanged, or the manner in which the investment advisor manages the fund. Please keep this supplement for future reference together with your prospectus. Lincoln Benefit Life Company Lincoln Benefit Life Variable Annuity Account Supplement, dated February 26, 2007 to The LBL Advantage Variable Annuity Prospectus dated May 1, 2004 The Premier Planner Variable Annuity Prospectus dated May 1, 2004 This supplement amends certain disclosures contained in the above-referenced prospectuses for certain variable annuity contracts issued by Lincoln Benefit Life Company. We have received notice that the Board of Trustees ("Board") of the Legg Mason Variable Portfolios has approved the reorganization, on or about April 27, 2007 ("Conversion Date"), of the Legg Mason Partners Variable All Cap Portfolio - Class II into the Legg Mason Partners Variable Fundamental Value Portfolio - Class I, which will be added as an investment choice to your contract as of April 27, 2007. To reflect the change in the underlying Portfolio, we will transfer any Contract Value you have in the Legg Mason Partners Variable All Cap Portfolio - Class II Sub-Account ("All Cap Sub-Account) into the Legg Mason Partners Variable Fundamental Value Portfolio - Class I Sub-Account ("Fundamental Value Sub-Account"). Contract owners will receive a confirmation of the transaction reflecting this change. Salomon Brothers Asset Management Inc. is the investment advisor for the Legg Mason Partners Variable Fundamental Value Portfolio - Class I. The investment objective for this Portfolio is: Long-term capital growth with current income as a secondary consideration. If you currently have allocations made to the All Cap Sub-Account through automatic additions, automatic portfolio rebalancing, dollar cost averaging or systematic withdrawal programs, any future allocations will be made to the Fundamental Value Sub-Account as of the Conversion Date. For additional information on how to transfer to another investment alternative, or how to make a change to your current allocation(s), please contact your financial representative or call our Customer Service Center at 1-800-865-5237. Please keep this supplement for future reference together with your prospectuses. Lincoln Benefit Life Company Lincoln Benefit Life Variable Annuity Account Supplement, dated January 14, 2005, to The LBL Advantage Variable Annuity Prospectus dated May 1, 2004 This supplement amends certain disclosure contained in the above-referenced prospectus for certain variable annuity contracts issued by Lincoln Benefit Life Company. We have received notice that the Board of Trustees ("Board") of PIMCO Advisors VIT has approved the liquidation, on or about April 29, 2005 (the "Closing Date"), of the PEA Science and Technology Portfolio (the "PEA Portfolio"). The Board based its decision, in part, upon the fact that the PEA Portfolio is relatively small in asset size and has failed to garner significant exposure in the variable contract market. In addition, the Board believes the outlook for future growth of the PEA Portfolio is not encouraging. Due to the liquidation of the PEA Portfolio, we will no longer accept new premiums for investment in, nor will we permit transfers to, the PEA Science and Technology Portfolio Sub-Account ("PEA Sub-Account") on or after April 29, 2005. Because the PEA Sub-Account will no longer be offered as an investment alternative as of the Closing Date, you may wish to transfer, prior to April 29, 2005, some or all of your interest in the PEA Sub-Account to the other investment alternatives currently offered by your Contract. Any value remaining in the PEA Sub-Account will be transferred automatically, as of the Closing Date, to the PIMCO VIT Money Market Sub-Account, an investment alternative already available under your Contract. These transfers are not subject to a transfer fee. If you currently have allocations made to the PEA Sub-Account through automatic additions, automatic portfolio rebalancing, dollar cost averaging or systematic withdrawal programs, your allocation in the PEA Sub-Account will also need to be changed in these programs. If you do not change this allocation to other investment alternatives currently available under your Policy, any allocation to the PEA Sub-Account will be automatically allocated, as of the Closing Date, to the PIMCO VIT Money Market Sub-Account. If your interest in the PEA Sub-Account is transferred automatically on the Closing Date to the PIMCO VIT Money Market Sub-Account, for 60 days following the Closing Date, you may transfer your interest in the PIMCO VIT Money Market Sub-Account to any other investment alternative(s) available under your Contract. This transfer is not subject to a transfer fee. We will send you a confirmation that shows the amount that we credited to the PIMCO VIT Money Market Sub-Account or to the investment alternative that you chose and the date of the transaction. For additional information on how to transfer to another investment alternative, or how to make a change to your current allocation(s), please contact your financial representative or call our Customer Service Center at the number listed below. Attached, as Appendix A, is a list of the Portfolios and Fixed Account Investment Alternatives currently available under your Contract. Please keep this supplement for future reference together with your prospectuses. Number for Customer Service Center: 1-800-865-5237 Appendix A The LBL Advantage Variable Annuity contract offers a variety of Investment Alternatives that encompass investment choices ranging from aggressive to conservative. Below is a listing of the Portfolios and Fixed Account Investment Alternatives currently available. Also included is the investment objective for each Portfolio. For more complete information about each Portfolio, including expenses and risks associated with the Portfolio, please refer to the relevant prospectus for the Portfolio. PORTFOLIOS AIM V.I. Basic Value Fund - Series I Seeks long-term growth of capital. AIM V.I. Dent Demographics Trends Fund - Series I Seeks long-term growth of capital. Alger American Growth Portfolio - Class S Seeks long-term capital appreciation. Fidelity VIP Equity-Income Portfolio - Service Class 2 Seeks reasonable income. Fidelity VIP Growth Portfolio - Service Class 2 Seeks capital appreciation. Fidelity VIP Investment Grade Bond Portfolio - Service Class 2 Seeks as high a level of current income as is consistent with the preservation of capital. Fidelity VIP Overseas Portfolio - Service Class 2 Seeks long-term growth of capital. Janus Aspen Series Capital Appreciation Portfolio: Institutional Shares Seeks long-term growth of capital. Janus Aspen Series Foreign Stock Portfolio: Service Shares Seeks long-term growth of capital. Janus Aspen Series Worldwide Growth Portfolio: Service Shares Seeks long-term growth of capital in a manner consistent with the preservation of capital. Lazard Emerging Markets Portfolio Seeks long-term capital appreciation MFS New Discovery Series - Service Class Seeks capital appreciation. MFS Utilities Series - Service Class Seeks capital growth and current income. Oppenheimer Main Street Small Cap Fund/VA - Service Shares Seeks capital appreciation. Oppenheimer International Growth Fund/VA - Service Shares Seeks capital appreciation. PAVIT OpCap Balanced Portfolio Seeks growth of capital and investment income. PAVIT OpCap Small Cap Portfolio Seeks capital appreciation. PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares Seeks to maximize total return, consistent with preservation of capital and prudent investment management. PIMCO VIT Money Market Portfolio - Administrative Shares Seeks to obtain maximum current income consistent with preservation of capital and daily liquidity. PIMCO VIT Real Return Portfolio - Administrative Shares Seeks maximum real return, consistent with preservation of real capital and prudent investment management. PIMCO VIT Total Return Portfolio - Administrative Shares Seeks to maximize total return, consistent with preservation of capital and prudent investment management. Putnam VT High Yield Fund - Class IB Seeks high current income. Capital growth is a secondary goal when consistent with achieving high current income. The fund seeks its goal by investing at least 80% in U.S. corporate rated below investment grade (junk bonds) and that have intermediate to long-term maturities (three years or longer.) Putnam VT International Growth and Income Fund - Class IB Seeks capital growth. Current income is a secondary objective. Rydex VT OTC Fund Seeks investment results that correspond to a benchmark for over-the-counter securities. The Portfolio's current benchmark is the NASDAQ 100 Index. Rydex VT Sector Rotation Fund Seeks long-term capital appreciation. Salomon Brothers Variable All Cap Fund - Class I Seeks capital appreciation. Salomon Brothers Variable Investors Fund - Class I Seeks long-term growth of capital with current income as a secondary objective. Scudder VIT EAFE Equity Index Fund - Class B Seeks to replicate as closely as possible before deduction of expenses, performance of the MSCI EAFE Index which emphasizes stocks of companies in major markets in Europe, Australia, and the Far East. Scudder VIT Equity 500 Index Fund - Class B Seeks to replicate as closely as possible before deduction of expenses, performance of the S&P 500 Index which emphasizes stocks of large U.S. companies. Scudder VIT Small Cap Index Fund - Class B Seeks to replicate as closely as possible before deduction of expenses, the performance of the Russell 2000 Index which emphasizes stocks of small U.S. companies. Van Kampen UIF Equity Growth Portfolio, Class I Seeks long-term capital appreciation by investing primarily in growth-oriented equity securities of large capitalization companies. Van Kampen UIF High Yield Portfolio, Class I Seeks above-average total return over a market cycle of three to five years by investing primarily in high yield securities (commonly referred to as "junk bonds"). Van Kampen UIF U.S. Mid Cap Value Portfolio, Class I Seeks above-average total return over a market cycle of three to five years by investing in common stocks and other equity securities. Van Kampen UIF U.S. Real Estate Portfolio, Class II Seeks to provide above-average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. Van Kampen LIT Aggressive Growth Portfolio, Class II Seeks capital growth. Van Kampen LIT Growth and Income Portfolio, Class II Seeks long-term growth of capital and income. Fixed Account Options Standard Fixed Account Guaranteed Maturity Fixed Account THE LBL ADVANTAGE VARIABLE ANNUITY Prospectus dated May 1, 2004 Lincoln Benefit Life Company ("LINCOLN BENEFIT" "WE", OR "US") is offering the LBL Advantage Variable Annuity, a group and individual flexible premium deferred variable annuity contract ("CONTRACT"). This prospectus contains information about the Contract that you should know before investing. Please keep it for future reference. The Contract currently offers 40 "INVESTMENT ALTERNATIVES" The investment alternatives include 3 fixed account options ("FIXED ACCOUNT OPTIONS") and 37 variable subaccounts ("VARIABLE SUBACCOUNTS") of the Lincoln Benefit Life Variable Annuity Account ("VARIABLE ACCOUNT"). Each Variable Subaccount invests exclusively in shares of the portfolios ("PORTFOLIOS") of the following underlying funds ("FUNDS"): AIM VARIABLE INSURANCE FUNDS PIMCO ADVISERS VIT THE ALGER AMERICAN FUND PIMCO VARIABLE INSURANCE TRUST FIDELITY(R) VARIABLE INSURANCE PUTNAM VARIABLE TRUST PRODUCTS THE RYDEX VARIABLE TRUST JANUS ASPEN SERIES SALOMON BROTHERS VARIABLE SERIES FUNDS LAZARD RETIREMENT SERIES, INC. INC MFS(R) VARIABLE INSURANCE TRUST(SM) SCUDDER INVESTMENTS VIT FUNDS OPPENHEIMER VARIABLE ACCOUNT FUNDS THE UNIVERSAL INSTITUTIONAL FUNDS, INC. PANORAMA SERIES FUND, INC. VAN KAMPEN LIFE INVESTMENT TRUST Each Fund has multiple Portfolios. Not all of the Funds and/or Portfolios, however, may be available with your Contract. You should check with your representative for further information on the availability of Funds and/or Portfolios. Your annuity application will list all available Portfolios. Lincoln Benefit has filed a Statement of Additional Information, dated May 1, 2004, with the Securities and Exchange Commission ("SEC"). It contains more information about the Contract and is incorporated herein by reference, which means it is legally a part of this prospectus. Its table of contents appears on page 58 of this prospectus. For a free copy, please write or call us at the address or telephone number above, or go to the SEC's Web site (http://www.sec.gov). You can find other information and documents about us, including documents that are legally part of this prospectus, at the SEC's Web site. EFFECTIVE MAY 1, 2004, THIS CONTRACT IS NO LONGER BEING OFFERED FOR SALE. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE SECURITIES DESCRIBED IN THIS PROSPECTUS, NOR HAS IT PASSED ON THE ACCURACY OR THE ADEQUACY OF THIS PROSPECTUS. ANYONE IMPORTANT WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. NOTICES THE CONTRACTS MAY BE DISTRIBUTED THROUGH BROKER-DEALERS THAT HAVE RELATIONSHIPS WITH BANKS OR OTHER FINANCIAL INSTITUTIONS OR BY EMPLOYEES OF SUCH BANKS. HOWEVER, THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY SUCH INSTITUTIONS OR ANY FEDERAL REGULATORY AGENCY. INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT FDIC INSURED. 1 PROSPECTUS TABLE OF CONTENTS PAGE ---- OVERVIEW Important Terms 3 The Contract At A Glance 4 How the Contract Works 5 Expense Table 6 Financial Information 9 CONTRACT FEATURES The Contract 10 Purchases 11 Contract Value 12 Investment Alternatives The Variable Subaccounts 14 The Fixed Account Options 15 Transfers 18 Expenses 20 Access To Your Money 22 Contract Loans for 403(b) Contracts 23 Income Payments 24 PAGE ---- Death Benefits 27 Other Information More Information: 31 Lincoln Benefit Life Company 31 The Variable Account 31 The Portfolios 32 The Contract 32 Non-Qualified Annuities Held Within A Qualified Plan 33 Legal Matters 33 Taxes 34 Annual Reports and Other Documents 40 APPENDIX A - ACCUMULATION UNIT VALUES 41 APPENDIX B - MARKET VALUE ADJUSTMENT EXAMPLE 49 APPENDIX C - CALCULATION OF ENHANCED EARNINGS DEATH BENEFIT AMOUNT 51 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 53 2 PROSPECTUS IMPORTANT TERMS This prospectus uses a number of important terms that you may not be familiar with. The index below identifies the page that describes each term. The first use of each term in this prospectus appears in highlights. PAGE ---- Accumulation Phase 7 Accumulation Unit 14 Accumulation Unit Value 14 Anniversary Values 33 Annuitant 12 Automatic Additions Program 13 Automatic Portfolio Rebalancing Program 23 Beneficiary 12 Cancellation Period 14 Contingent Beneficiary 12 *Contract 12 Contract Anniversary 6 Contract Owner ("You") 12 Contract Value 6 Contract Year 4 Death Benefit Anniversary 31 Dollar Cost Averaging Program 23 Due Proof of Death 31 Enhanced Earnings Death Benefit Rider 32 Enhanced Death Benefit Rider 32 Fixed Account Options 19 Free Withdrawal Amount 24 Funds 1 Guarantee Periods 20 Guaranteed Income Benefit 29 PAGE ---- Guaranteed Maturity Fixed Account 19 Income Base 30 Income Benefit Rider 29 Income Plan 28 In-Force Premium 33 Investment Alternatives 16 Issue Date 7 Lincoln Benefit ("We" or "Us") 1 Loan Account 27 Market Value Adjustment 21 Payout Phase 7 Payout Start Date 28 Portfolios 36 Primary Beneficiary 12 Rider Date 32 SEC 1 Settlement Value 31 Systematic Withdrawal Program 26 Tax Qualified Contracts 41 Valuation Date 14 Variable Account 35 Variable Subaccount 16 * In certain states the Contract is available only as a group Contract. If you purchase a group Contract, we will issue you a certificate that represents your ownership and that summarizes the provisions of the group Contract. References to "Contract" in this prospectus include certificates, unless the context requires otherwise. 3 PROSPECTUS THE CONTRACT AT A GLANCE The following is a snapshot of the Contracts. Please read the remainder of this prospectus for more information. FLEXIBLE PAYMENTS You can purchase a Contract with as little as $10,000. You can add to your Contract as often and as much as you like, but each payment must be at least $100 unless you enroll in an automatic payment plan, in which case each payment must be at least $50. -------------------------------------------------------------------------------- RIGHT TO CANCEL You may cancel your Contract within 20 days of receipt or any longer period as your state may require ("CANCELLATION PERIOD"). Upon cancellation, we will return your purchase payments adjusted, to the extent federal or state law permits, to reflect the investment experience of any amounts allocated to the Variable Account. 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. -------------------------------------------------------------------------------- EXPENSES You will bear the following expenses: . Total Variable Account annual fees equal to 1.35% of average daily net assets (1.60% if you select the ENHANCED DEATH BENEFIT RIDER, 1.55% if you elect the INCOME BENEFIT RIDER, and 1.80% if you select both the Enhanced Death Benefit and the Income Benefit Riders). . If you select the ENHANCED EARNINGS DEATH BENEFIT RIDER, you would pay an additional annual fee of up to 0.35% of average daily net assets (depending on the oldest Contract owner's age on the date we issue the Rider). For more information about Variable Account expenses, see "EXPENSES" below. . Withdrawal charges ranging from 0% to 8% of purchase payment withdrawn (with certain exceptions) . Transfer fee of up to 0.50% of the transfer amount, but not less than $25, after 12th transfer in any CONTRACT YEAR (fee currently waived) . State premium tax (if your state imposes one). In addition, each Portfolio pays expenses that you will bear indirectly if you invest in a Variable Subaccount. -------------------------------------------------------------------------------- INVESTMENT The Contract offers 40 Investment Alternatives ALTERNATIVES including: . 3 Fixed Account Options (which credit interest at rates we guarantee) . 37 Variable Subaccounts investing in Portfolios offering professional money management by these investment advisers: . A I M Advisors, Inc. . Deutsche Asset Management Inc. . Fred Alger Management, Inc. . Fidelity Management & Research Company . Janus Capital Management LLC . Lazard Asset Management LLC . MFS(TM) Investment Management . OpCap Advisors LLC . OppenheimerFunds, Inc. . Pacific Investment Management Company LLC . Putnam Investment Management, LLC . Rydex Investments . Salomon Brothers Asset Management Inc . Van Kampen* . Van Kampen Asset Management To find out current rates being paid on the fixed account options or how the Variable Subaccounts have performed, call us at 1-800-865-5237. * Morgan Stanley Invesement Management Inc., the adviser to the UIF Portfolios, does business in certain instances as Van Kampen. -------------------------------------------------------------------------------- SPECIAL SERVICES For your convenience, we offer these special services: . AUTOMATIC PORTFOLIO REBALANCING PROGRAM . AUTOMATIC ADDITIONS PROGRAM . DOLLAR COST AVERAGING PROGRAM . SYSTEMATIC WITHDRAWAL PROGRAM -------------------------------------------------------------------------------- INCOME PAYMENTS You can choose fixed income payments, variable income payments, or a combination of the two. You can receive your income payments in one of the following ways: . life income with guaranteed payments . a "joint and survivor" life income with guaranteed payments . guaranteed payments for a specified period (5 to 30 years) We offer an optional Income Benefit Rider. -------------------------------------------------------------------------------- DEATH BENEFITS If you or the ANNUITANT (if the Contract Owner is a non-living person) die before the PAYOUT START DATE, we will pay the death benefit described in the Contract. We offer an Enhanced Death Benefit Rider and Enhanced Earnings Death Benefit Rider. The Enhanced Earnings Death Benefit Rider is not available for purchase with any IRA at this time. -------------------------------------------------------------------------------- TRANSFERS Before the Payout Start Date, you may transfer your Contract value ("CONTRACT VALUE") among the investment alternatives, with certain restrictions. We do not currently impose a fee upon transfers. However, we reserve the right to charge up to 0.50% of the transfer amount, but not less than $25 per transfer after the 12th transfer in each "Contract Year", which we measure from the date we issue your Contract or a Contract anniversary ("CONTRACT ANNIVERSARY"), which is the anniversary of your Contract's Issue Date. -------------------------------------------------------------------------------- WITHDRAWALS You may withdraw some or all of your Contract Value at any time prior to the Payout Start Date. In general, you must withdraw at least $50 at a time. Full or partial withdrawals are available under limited circumstances on or after the Payout Start Date. 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. A withdrawal charge and a MARKET VALUE ADJUSTMENT also may apply. 4 PROSPECTUS HOW THE CONTRACT WORKS The Contract basically works in two ways. First, the Contract can help you (we assume you are the CONTRACT OWNER) save for retirement because you can invest in up to 40 investment alternatives and generally pay no federal income taxes on any earnings until you withdraw them. The income on qualified plan and IRA investments is tax deferred and variable annuities held by such plans do not receive any additional tax deferral. See "TAX QUALIFIED CONTRACTS" on page 41. You do this during what we call the "ACCUMULATION PHASE" of the Contract. The Accumulation Phase begins on the date we issue your Contract (we call that date the "ISSUE DATE") and continues until the Payout Start Date, which is the date we apply your money to provide income payments. During the Accumulation Phase, you may allocate your purchase payments to any combination of the Variable Subaccounts and/or Fixed Account Options. If you invest in any of the three Fixed Account Options, you will earn a fixed rate of interest that we declare periodically. If you invest in any of the Variable Subaccounts, your investment return will vary up or down depending on the performance of the corresponding Portfolios. Second, the Contract can help you plan for retirement because you can use it to receive retirement income for life and/ or for a pre-set number of years, by selecting one of the income payment options (we call these "INCOME PLANS") described on page 28. You receive income payments during what we call the "PAYOUT PHASE" of the Contract, which begins on the Payout Start Date and continues until we make the last payment required by the Income Plan you select. During the Payout Phase, if you select a fixed income payment option, we guarantee the amount of your payments, which will remain fixed. If you select a variable income payment option, based on one or more of the Variable Subaccounts, the amount of your payments will vary up or down depending on the performance of the corresponding Portfolios. The amount of money you accumulate under your Contract during the Accumulation Phase and apply to an Income Plan will determine the amount of your income payments during the Payout Phase. The timeline below illustrates how you might use your Contract.
Issue Payout Start Date Accumulation Phase Date Payout Phase --------------------------------------------------------------------------------------------------> You buy You save for retirement You elect to receive You can receive Or you can receive a Contract income payments or income payments income payments receive a lump sum for a set period for life payment
As the Contract Owner, you exercise all of the rights and privileges provided by the Contract. If you die, any surviving Contract Owner or, if none, the BENEFICIARY will exercise the rights and privileges provided by the Contract. SEE"The Contract." In addition, if you die before the Payout Start Date, we will pay a death benefit to any surviving Contract Owner, or if there is none, to your Beneficiary. SEE "Death Benefits." Please call us at 1-800-865-5237 if you have any questions about how the Contract works. 5 PROSPECTUS EXPENSE TABLE THE FOLLOWING TABLES LIST THE EXPENSES AND FEES THAT YOU WILL BEAR DIRECTLY OR INDIRECTLY WHEN YOU BUY, OWN, OR SURRENDER A 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 PORTFOLIOS. THE TABLES AND THE EXAMPLES THAT FOLLOW DO NOT REFLECT PREMIUM TAXES THAT MAY BE IMPOSED BY THE STATE WHERE YOU RESIDE. FOR MORE INFORMATION ABOUT VARIABLE ACCOUNT EXPENSES, SEE "EXPENSES," BELOW. FOR MORE INFORMATION ABOUT PORTFOLIO EXPENSES, PLEASE REFER TO THE ACCOMPANYING PROSPECTUSES FOR THE FUNDS. CONTRACT OWNER TRANSACTION EXPENSES Withdrawal Charge (as a percentage of purchase payments)*
Number of Complete Years Since We Received the Purchase Payment Being Withdrawn: -------------------------------------------------------------------------------------------------------- Contract: 0 1 2 3 4 5 6 7 8+ Applicable Charge: 8% 7% 7% 6% 6% 5% 4% 3% 0% All Contracts: -------------------------------------------------------------------------------------------------------- Transfer Fee up to 0.50% of the amount transferred**
* Each Contract Year, you may withdraw the greater of earnings not previously withdrawn or 15% of your New Purchase Payments (as defined in "Withdrawal Charge" below) without incurring a withdrawal charge. You may withdraw any Purchase Payment made more than 8 years before the withdrawal, which have not been previously withdrawn, without paying the charge. ** Applies solely to the thirteenth and subsequent transfers within a Contract Year, excluding transfers due to dollar cost averaging and automatic portfolio rebalancing. We are currently waiving the transfer fee. THE TABLE BELOW DESCRIBES THE FEES AND EXPENSES THAT YOU WILL PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT, NOT INCLUDING PORTFOLIO FEES AND EXPENSES. VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE DEDUCTED FROM EACH VARIABLE SUBACCOUNT)
Mortality and Expense Risk Administrative Total Variable Account Charge Expense Charge* Annual Expense ----------------------------------------------------------------------------------------------- Without the Enhanced Death Benefit or Income 1.25% 0.10% 1.35% Benefit Riders ----------------------------------------------------------------------------------------------- With the Enhanced Death 1.50% 0.10% 1.60% Benefit Rider ----------------------------------------------------------------------------------------------- With the Income Benefit 1.45% 0.10% 1.55% Rider ----------------------------------------------------------------------------------------------- With the Income Benefit and Enhanced Death 1.70% 0.10% 1.80% Benefit Riders -----------------------------------------------------------------------------------------------
If you elect the Enhanced Earnings Death Benefit Rider, your Total Variable Account Annual Expenses will be increased, based on the oldest Contract Owner's age on the date we issue the Rider, as follows: Age Annual Charge --------------------- 0-55 0.15% --------------------- 56-65 0.25% --------------------- 66-75 0.35% --------------------- THE TABLE BELOW SHOWS THE MINIMUM AND MAXIMUM TOTAL OPERATING EXPENSES CHARGED BY THE PORTFOLIOS THAT YOU MAY PAY PERIODICALLY DURING THE TIME THAT YOU OWN THE CONTRACT. ADVISERS AND/OR OTHER SERVICE PROVIDERS OF CERTAIN PORTFOLIOS MAY HAVE AGREED TO WAIVE THEIR FEES AND/OR REIMBURSE PORTFOLIO EXPENSES IN ORDER TO KEEP THE PORTFOLIOS' EXPENSES BELOW SPECIFIED LIMITS. THE RANGE OF EXPENSES SHOWN IN THIS TABLE DOES NOT SHOW THE EFFECT 6 PROSPECTUS OF ANY SUCH FEE WAIVER OR EXPENSE REIMBURSEMENT. MORE DETAIL CONCERNING EACH PORTFOLIO'S FEES AND EXPENSES APPEARS IN THE PROSPECTUS FOR EACH PORTFOLIO. TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES
---------------------------------------------------------------------------- Minimum Maximum ---------------------------------------------------------------------------- Total Annual Portfolio Operating Expenses/(1)/ (expenses that are deducted from Portfolio assets, including any management fees, distribution and/or service (12b-1) fees, and other expenses) 0.50% 4.31% ----------------------------------------------------------------------------
(1) EXPENSES ARE SHOWN AS A PERCENTAGE OF PORTFOLIO AVERAGE DAILY NET ASSETS, BEFORE ANY WAIVER OR REIMBURSEMENT, AS OF DECEMBER 31, 2003. EXAMPLES 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, Variable Account annual expenses, and Portfolio fees and expenses and assume 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, and .. 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 Income Benefit, Enhanced Death Benefit, and Enhanced Earnings Death Benefit Riders (assuming Contract Owner is age 66-75 on rider issue date and with total Variable Account expenses of 2.15%.) THE EXAMPLE DOES NOT INCLUDE ANY TAXES OR TAX PENALTIES YOU MAY BE REQUIRED TO PAY IF YOU SURRENDER YOUR CONTRACT. 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.
1 Year 3 Years 5 Years 10 Years ---------------------------------------------------------------------------------------- Costs Based on Maximum Annual Portfolio Expenses $1,257 $2,464 $3,629 $6,157 ---------------------------------------------------------------------------------------- Costs Based on Minimum Annual Portfolio Expenses $ 867 $1,343 $1,846 $3,012 ----------------------------------------------------------------------------------------
7 PROSPECTUS 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 $662 $1,954 $3,204 $6,157 ---------------------------------------------------------------------------------------- Costs Based on Minimum Annual Portfolio Expenses $272 $ 833 $1,421 $3,012 ----------------------------------------------------------------------------------------
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 INCOME BENEFIT AND ENHANCED DEATH BENEFIT RIDERS (TOTAL VARIABLE ACCOUNT EXPENSES OF 2.15%).IF THESE RIDERS WERE NOT ELECTED, THE EXPENSE FIGURES SHOWN ABOVE WOULD BE SLIGHTLY LOWER. The Examples reflect the Free Withdrawal Amounts, if applicable. 8 PROSPECTUS FINANCIAL INFORMATION To measure the value of your investment in the Variable Subaccounts during the Accumulation Phase, we use a unit of measure we call the "ACCUMULATION UNIT". Each Variable Subaccount has a separate value for its Accumulation Units which we call "ACCUMULATION UNIT VALUE." Accumulation Unit Value is analogous to, but not the same as, the share price of a mutual fund. Because we deduct Rider charges directly from the Variable Subaccounts, we calculate separate Accumulation Unit Values for the base Contract and for Contracts issued with various combinations of optional Riders. Accumulation Unit Values for the lowest and highest charges available are shown in Appendix A to this prospectus. The Statement of Additional Information contains the Accumulation Unit Values for all other available combinations of charges. Please contact us to obtain a copy of the Statement of Additional Information. To obtain a fuller picture of each Variable Subaccount's finances, please refer to the Variable Account's financial statements contained in the Statement of Additional Information. The financial statements of Lincoln Benefit also appear in the Statement of Additional Information. 9 PROSPECTUS THE CONTRACT CONTRACT OWNER The LBL Advantage Variable Annuity is a contract between you, the Contract Owner, and Lincoln Benefit, a life insurance company. As the Contract Owner, you may exercise all of the rights and privileges provided to you by the Contract. That means it is up to you to select or change (to the extent permitted): .. the investment alternatives during the Accumulation and Payout Phases, .. the amount and timing of your purchase payments and withdrawals, .. the programs you want to use to invest or withdraw money, .. the income payment plan you want to use to receive retirement income, .. the Annuitant (either yourself or someone else) on whose life the income payments will be based, .. the Beneficiary or Beneficiaries who will receive the benefits that the Contract provides when the last surviving Contract Owner dies, and .. any other rights that the Contract provides. If you die, any surviving Contract Owner, or, if none, the Beneficiary, may exercise the rights and privileges provided to them by the Contract. The Contract cannot be jointly owned by both a non-living person and a living person. 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 Benefits section. The maximum age of the oldest Contract Owner and Annuitant cannot exceed 90 as of the date we receive the completed application. You may change the Contract Owner at any time. We will provide a change of ownership form to be signed by you and filed with us. After we accept the form, the change of ownership will be effective as of the date you signed the form. Until we receive your written notice to change the Contract Owner, we are entitled to rely on the most recent ownership information in our files. We will not be liable as to any payment or settlement made prior to receiving the written notice. Accordingly, if you wish to change the Contract Owner, you should deliver your written notice to us promptly. Each change is subject to any payment made by us or any other action we take before we accept the change. 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. The Income Benefit Rider terminates upon changes of the Annuitant. The Enhanced Earnings Death Benefit Rider terminates upon changes of the Owner or, if the Owner is a non-living person, the Annuitant. 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. Qualified plans may limit or modify your rights and privileges under the Contract. Variable Annuities held by Qualified Plans do not receive any additional tax deferral. ANNUITANT The Annuitant is the individual whose life determines the amount and duration of income payments (other than under Income Plans with guaranteed payments for a specified period). You initially designate an Annuitant in your application. You may change the Annuitant at any time prior to the Payout Start Date (only if the Contract Owner is a living person). Once we accept a change, it takes effect as of the date you signed the request. Each change is subject to any payment we make or other action we take before we accept it. If the Contract is a non-qualified Contract, you may designate a joint Annuitant, who is a second person on whose life income payments depend. We permit joint Annuitants only during the Payout Phase. If the sole surviving Annuitant dies prior to the Payout Start Date, the new Annuitant will be: (i) the youngest Contract Owner; otherwise, (ii) the youngest Beneficiary. BENEFICIARY The Beneficiary is the person who may elect to receive the death benefit or become the new Contract owner subject to the Death of Owner provision if the sole surviving Contract owner dies before the Payout Start Date. If the sole surviving Contract Owner dies after the Payout Start Date, the PRIMARY BENEFICIARY, or if none surviving, the CONTINGENT BENEFICIARY, will receive any guaranteed income payments scheduled to continue. You may name one or more primary Beneficiaries when you apply for a Contract. The primary Beneficiary is the person who may elect to receive the death benefit or become the new Contract Owner if the sole surviving Contract Owner dies before the Payout Start Date. You may also name one or more Contingent Beneficiaries who will receive any Death Benefit or Guaranteed Income Benefit if no Beneficiary survives the sole surviving Contract Owner. You may change or add Beneficiaries at any time, unless you have designated an irrevocable Beneficiary. We will provide a change of Beneficiary form to be signed by you and filed with us. After we accept the form, the change of Beneficiary will be effective as of the date you signed the form. Until we receive your written notice to change a Beneficiary, we are entitled to rely on the most recent Beneficiary information in our files. We will not be liable 10 PROSPECTUS as to any payment or settlement made prior to receiving the written notice. Accordingly, if you wish to change your Beneficiary, you should deliver your written notice to us promptly. Each change is subject to any payment made by us or any other action we take before we accept the change. 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. If there is more than one Beneficiary and one of the Beneficiaries is a corporation or other type of non-living person, all beneficiaires 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 requst, the change or restriction wll 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. If you did not name a Beneficiary or, unless otherwise provided in the Beneficiary designation, if a named Beneficiary is no longer living and there are no other surviving Beneficiaries or Contingent Beneficiaries, the new Beneficiary will be: .. your spouse or, if he or she is no longer alive, .. your surviving children equally, or if you have no surviving children, .. your estate. If one or more Beneficiaries survive you (or survives the Annuitant, if the Contract Owner is not a living person), we will divide the death benefit among the surviving Beneficiaries according to your most recent written instructions. If you have not given us written instructions, we will pay the death benefit in equal amounts to the surviving Beneficiaries. 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 may not change the terms of the Contract without your consent, except to conform the Contract to applicable law or changes in the law. If a provision of the Contract is inconsistent with state law, we will follow state law. ASSIGNMENT We will honor an assignment of an interest in a Contract as collateral or security for a loan. No Beneficiary may assign benefits under the Contract until they are payable to the Beneficiary. We will not be bound by any assignment until the assignor signs it and files it with us. We are not responsible for the validity of any assignment. Federal law prohibits or restricts the assignment of benefits under many types of Qualified Plans and other types of retirement plans and the terms of such plans may themselves contain restrictions on assignments. An assignment may also result in taxes or tax penalties. YOU SHOULD CONSULT AN ATTORNEY BEFORE TRYING TO ASSIGN YOUR CONTRACT. PURCHASES MINIMUM PURCHASE PAYMENTS Your initial purchase payment must be at least $10,000. All subsequent purchase payments must be $100 or more unless part of an automatic additions program. 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 a Guarantee Period that are lower than $500, such amounts will be allocated to the PIMCO Money Market Portfolio. You may make purchase payments at any time prior to the Payout Start Date. We reserve the right to limit the maximum amount of purchase payments we will accept. The most we will accept without our prior approval is $1,000,000. We also reserve the right to reject any application. AUTOMATIC ADDITIONS PROGRAM You may make subsequent purchase payments of $50 or more by automatically transferring money from your bank account. Consult your representative for more detailed information. ALLOCATION OF PURCHASE PAYMENTS At the time you apply for a Contract, you must decide how to allocate your purchase payments among the investment alternatives. The allocation you specify on 11 PROSPECTUS your application will be effective immediately. All allocations must be in whole percents that total 100% or in whole dollars. You can change your allocations by notifying us in writing. We will allocate your purchase payments to the investment alternatives according to your most recent instructions on file with us. Unless you notify us in writing otherwise, we will allocate subsequent purchase payments according to the allocation for the previous purchase payment. We will effect any change in allocation instructions at the time we receive written notice of the change in good order. We will credit the initial purchase payment that accompanies your completed application to your Contract within 2 business days after we receive the payment at our home office. If your application is incomplete, we will ask you to complete your application within 5 business days. If you do so, we will credit your initial purchase payment to your Contract within that 5 business day period. If you do not, we will return your purchase payment at the end of the 5 business day period unless you expressly allow us to hold it until you complete the application. We will credit subsequent purchase payments to the Contract at the close of the business day on which we receive the purchase payment at our home office. We are open for business each day Monday through Friday that the New York Stock Exchange is open for business, except for certain days immediately preceding or following certain national holidays when the New York Stock Exchange is open for business. Each day that the New York Stock Exchange is open for business is referred to as a VALUATION DATE. We determine the number of Accumulation Units for each Variable Subaccount to allocate to your contract by dividing that portion of your Purchase Payment allocated to a Variable Subaccount by that Variable Subaccount's Accumulation Unit Value on the Valuation Date when the allocation occurs. Our business day closes when the New York Stock Exchange closes, usually 4 p.m. Eastern Time (3 p.m. Central Time). If we receive your purchase payment after 3 p.m. Central Time on any Valuation Date, we will credit your purchase payment using the Accumulation Unit Values computed on the next Valuation Date. RIGHT TO CANCEL You may cancel the Contract by returning it to us within the Cancellation Period, which is the 20 day period after you receive the Contract, or a longer period should your state require it. You may return it by delivering it or mailing it to us. If you exercise this "RIGHT TO CANCEL," the Contract terminates and we will pay you the full amount of your purchase payments allocated to the Fixed Account. We also will return your purchase payments allocated to the Variable Account adjusted, to the extent federal or state law permits, to reflect investment gain or loss that occurred from the date of allocation through the date of cancellation. Some states may require us to return a greater amount to you. 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. In states where we are required to refund purchase payments, we reserve the right during the Cancellation Period to invest any purchase payments you allocated to a Variable Subaccount to the Money Market Variable Subaccount available under the Contract. We will notify you if we do so. At the end of the Cancellation Period, we will allocate the amount in the Money Market Variable Subaccount to the Variable Subaccount as you originally designated. CONTRACT VALUE Your Contract Value at any time during the Accumulation Phase is equal to the sum of the value of your Accumulation Units in the Variable Subaccounts you have selected, plus the value of your investment in the Fixed Account Options. ACCUMULATION UNITS To determine the number of Accumulation Units of each Variable Subaccount to credit to your Contract, we divide (i) the amount of the purchase payment or transfer you have allocated to a Variable Subaccount by (ii) the Accumulation Unit Value of that Variable Subaccount next computed after we receive your payment or transfer. For example, if we receive a $10,000 purchase payment allocated to a Variable Subaccount when the Accumulation Unit Value for the Subaccount is $10, we would credit 1,000 Accumulation Units of that Variable Subaccount to your Contract. Withdrawals and transfers from a Variable Subaccount would, of course, reduce the number of Accumulation Units of that Subaccount allocated to your Contract. ACCUMULATION UNIT VALUE As a general matter, the Accumulation Unit Value for each Variable Subaccount will rise or fall to reflect: .. changes in the share price of the Portfolio in which the Variable Subaccount invests, and .. the deduction of 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, and transfer fees (currently waived) separately for each Contract. They do not affect Accumulation Unit Value. Instead, we obtain payment of those charges and fees by redeeming Accumulation Units. For details on how we calculate 12 PROSPECTUS Accumulation Unit Value, please refer to the Statement of Additional Information. We determine a separate Accumulation Unit Value for each Variable Subaccount on each Valuation Date. We also determine a separate set of Accumulation Unit Values reflecting the cost of the Enhanced Death Benefit Rider, the Income Benefit Rider, the Enhanced Death Benefit Rider with the Income Benefit Rider, and the Enhanced Earnings Death Benefit Rider. YOU SHOULD REFER TO THE PROSPECTUSES FOR THE FUNDS THAT ACCOMPANY THIS PROSPECTUS FOR A DESCRIPTION OF HOW THE ASSETS OF EACH PORTFOLIO ARE VALUED, SINCE THAT DETERMINATION DIRECTLY BEARS ON THE ACCUMULATION UNIT VALUE OF THE CORRESPONDING VARIABLE SUBACCOUNT AND, THEREFORE, YOUR CONTRACT VALUE. 13 PROSPECTUS INVESTMENT ALTERNATIVES: THE VARIABLE SUBACCOUNTS You may allocate your purchase payments to up to 37 Variable Subaccounts. Each Variable Subaccount invests in the shares of a corresponding Portfolio. Each Portfolio has its own investment objective(s) and policies. We briefly describe the Portfolios below. For more complete information about each Portfolio, including expenses and risks associated with the Portfolio, please refer to the accompanying prospectuses for the Funds. You should carefully review the Fund prospectuses before allocating amounts to the Variable Subaccounts. PORTFOLIO PORTFOLIO OBJECTIVE INVESTMENT ADVISOR -------------------------------------------------------------------------------- AIM VARIABLE INSURANCE FUNDS (8) -------------------------------------------------------------------------------- AIM V.I. Basic Value Long-term growth of capital A I M ADVISORS, INC. Fund - Series I (1) -------------------------------------------------------- AIM V.I. Dent Long-term growth of capital Demographic Trends Fund - Series I -------------------------------------------------------------------------------- THE ALGER AMERICAN FUND -------------------------------------------------------------------------------- Alger American Growth Long-term capital FRED ALGER Portfolio - Class S appreciation MANAGEMENT, INC. -------------------------------------------------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS -------------------------------------------------------------------------------- Fidelity VIP Reasonable income FIDELITY MANAGEMENT & Equity-Income RESEARCH COMPANY Portfolio - Service Class 2 -------------------------------------------------------- Fidelity VIP Growth Capital appreciation Portfolio - Service Class 2 -------------------------------------------------------- Fidelity VIP Investment As high a level of current Grade Bond Portfolio - income as is consistent Service Class 2 with the preservation of capital -------------------------------------------------------- Fidelity VIP Overseas Long-term growth of capital. Portfolio - Service Class 2 -------------------------------------------------------------------------------- JANUS ASPEN SERIES -------------------------------------------------------------------------------- Janus Aspen Series Long-term growth of capital JANUS CAPITAL Capital Appreciation MANAGEMENT LLC Portfolio: Institutional Shares (2) -------------------------------------------------------- Janus Aspen Series Long-term growth of capital Foreign Stock Portfolio: Service Shares (3) -------------------------------------------------------- Janus Aspen Series Long-term growth of capital Worldwide Growth in a manner consistent with Portfolio: Service the preservation of Shares capital. -------------------------------------------------------------------------------- LAZARD RETIREMENT SERIES, INC. -------------------------------------------------------------------------------- Lazard Emerging Markets Long-term capital LAZARD ASSET Portfolio appreciation MANAGEMENT LLC -------------------------------------------------------------------------------- MFS(R) VARIABLE INSURANCE TRUST(SM) -------------------------------------------------------------------------------- MFS New Discovery Capital appreciation MFS(TM) INVESTMENT Series - Service Class MANAGEMENT -------------------------------------------------------- MFS Utilities Series - Capital growth and current Service Class income -------------------------------------------------------------------------------- OPPENHEIMER VARIABLE ACCOUNT FUNDS -------------------------------------------------------------------------------- Oppenheimer Main Street Capital appreciation OPPENHEIMERFUNDS, Small Cap Fund/VA - INC. Service Shares -------------------------------------------------------------------------------- PANORAMA SERIES FUND, INC. -------------------------------------------------------------------------------- Oppenheimer Capital appreciation OPPENHEIMERFUNDS, International Growth INC. Fund/VA - Service Shares -------------------------------------------------------------------------------- PIMCO ADVISERS VIT -------------------------------------------------------------------------------- PAVIT OpCap Balanced Growth of capital and OPCAP ADVISORS LLC Portfolio (1) investment income -------------------------------------------------------- PAVIT PEA Science and Capital appreciation Technology Portfolio -------------------------------------------------------- PAVIT OpCap Small Cap Capital appreciation Portfolio -------------------------------------------------------------------------------- PIMCO VARIABLE INSURANCE TRUST -------------------------------------------------------------------------------- PIMCO Foreign Bond To maximize total return, PACIFIC INVESTMENT Portfolio (U.S. consistent with MANAGEMENT COMPANY Dollar-Hedged) - preservation of capital and LLC Administrative Shares prudent investment management -------------------------------------------------------- PIMCO Money Market To obtain maximum current Portfolio - income consistent with Administrative Shares preservation of capital and daily liquidity. -------------------------------------------------------- PIMCO Real Return Seeks maximum real return, Portfolio - consistent with Administrative Shares preservation of real capital and prudent investment management. -------------------------------------------------------- PIMCO Total Return To maximize total return, Portfolio - consistent with Administrative Shares preservation of capital and prudent investment management. -------------------------------------------------------------------------------- PUTNAM VARIABLE TRUST -------------------------------------------------------------------------------- Putnam VT High Yield High current income. Capital PUTNAM INVESTMENT Fund - Class IB growth is a secondary goal MANAGEMENT, LLC when consistent with achieving high current income. The fund seeks its goal by investing at least 80% in U.S. corporate rated below investment grade (junk bonds) and that have intermediate to long-term maturities (three years or longer.) -------------------------------------------------------- Putnam VT International Capital growth. Current Growth and Income Fund income is a secondary - Class IB objective. -------------------------------------------------------------------------------- THE RYDEX VARIABLE TRUST -------------------------------------------------------------------------------- Rydex VT OTC Fund Investment results that RYDEX INVESTMENTS correspond to a benchmark for over-the-counter securities. The Portfolio's current benchmark is the NASDAQ 100 Index. -------------------------------------------------------- Rydex VT Sector Long-term capital Rotation Fund appraciation. -------------------------------------------------------------------------------- SALOMON BROTHERS VARIABLE SERIES FUNDS INC -------------------------------------------------------------------------------- Salomon Brothers Capital appreciation SALOMON BROTHERS Variable All Cap Fund ASSET MANAGEMENT INC - Class I (formerly Capital Fund) Class I -------------------------------------------------------- Salomon Brothers Long-term growth of capital Variable Investors with current income as a Fund - Class I (1) secondary objective -------------------------------------------------------------------------------- SCUDDER INVESTMENTS VIT FUNDS -------------------------------------------------------------------------------- Scudder VIT EAFE Equity To replicate as closely as DEUTSCHE ASSET Index Fund - Class B possible before deduction MANAGEMENT, INC. of expenses, performance of the MSCI EAFE Index which emphasizes stocks of companies in major markets in Europe, Australia, and the Far East. -------------------------------------------------------- Scudder VIT Equity 500 To replicate as closely as Index Fund - Class B possible before deduction of expenses, performance of the S&P 500 Index which emphasizes stocks of large U.S. companies. -------------------------------------------------------- Scudder VIT Small Cap To replicate as closely as Index Fund - Class B possible before deduction of expenses, the performance of the Russell 2000 Index which emphasizes stocks of small U.S. companies. -------------------------------------------------------------------------------- THE UNIVERSAL INSTITUTIONAL FUNDS, INC. -------------------------------------------------------------------------------- Van Kampen UIF Seeks long-term capital VAN KAMPEN (6) Equity Growth appreciation by investing Portfolio, Class I (4) primarily in growth-oriented equity securities of large capitalization companies. -------------------------------------------------------- Van Kampen UIF Above-average total return High Yield Portfolio, over a market cycle of Class I three to five years by investing primarily in high yield securities (commonly referred to as "junk bonds"). -------------------------------------------------------- Van Kampen UIF Seeks above-average total U.S. Mid Cap Value return over a market cycle Portfolio, Class I (5) of three to five years by investing in common stocks and other equity securities. -------------------------------------------------------- Van Kampen UIF Seeks to provide U.S. Real Estate above-average current Portfolio, Class II income and long-term capital appreciation by investing primarily in equity securities of com[panies in the U.S. real estate industry, including real estate investment trusts. -------------------------------------------------------------------------------- VAN KAMPEN LIFE INVESTMENT TRUST -------------------------------------------------------------------------------- Van Kampen LIT Capital Growth VAN KAMPEN ASSET Aggressive Growth MANAGEMENT Portfolio, Class II (7) -------------------------------------------------------- Van Kampen LIT Long-term growth of capital Growth & Income and income Portfolio, Class II -------------------------------------------------------------------------------- (1) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I. Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund - Class I, respectively. (2) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares. (3) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service Shares changed its name to the Janus Aspen Foreign Stock Portfolio - Service Shares. (4) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA Capital Growth Fund were merged into the Van Kampen UIF Equity Growth Portfolio, Class I. (5) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value Portfolio, Class I. (6) Morgan Stanley Investment Management Inc., the investment adviser to the UIF Portfolios, does business in certain instances as Van Kampen. (7) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class II. (8) A Fund's objective may be changed by the Fund's Board of Trustees without shareholder approval. SOME OF THE PORTFOLIOS HAVE NAMES SIMILAR TO RETAIL MUTUAL FUNDS. HOWEVER, THE PORTFOLIOS MAY BE MANAGED BY A DIFFERENT PORTFOLIO MANAGER. MOREOVER, THE PORTFOLIOS ARE LIKELY TO DIFFER FROM RETAIL MUTUAL FUNDS IN ASSETS, CASH FLOW, AND TAX MATTERS. ACCORDINGLY, A PORTFOLIO'S SECURITY HOLDINGS MAY DIFFER FROM THOSE OF A SIMILARLY NAMED RETAIL MUTUAL FUND, AND INVESTMENT RESULTS OF A PORTFOLIO CAN BE EXPECTED TO BE HIGHER OR LOWER THAN THE INVESTMENT RESULTS OF SIMILARLY NAMED RETAIL MUTUAL FUNDS. 14 PROSPECTUS INVESTMENT ALTERNATIVES: THE FIXED ACCOUNT OPTIONS You may allocate all or a portion of your purchase payments to the Fixed Account. You may choose from among 3 Fixed Account Options, including 2 dollar cost averaging options and the option to invest in one or more GUARANTEE PERIODS included in the GUARANTEED MATURITY FIXED ACCOUNT. We may offer additional Fixed Account options in the future. We will credit a minimum annual interest rate of 3% to money you allocate to any of the Dollar Cost Averaging Fixed Account Options. The Fixed Account Options may not be available in all states. Please consult with your representative for current information. The Fixed Account supports our insurance and annuity obligations. The Fixed Account consists of our general account assets other than those in segregated asset accounts. We have sole discretion to invest the assets of the Fixed Account, subject to applicable law. Any money you allocate to a Fixed Account Option does not entitle you to share in the investment experience of the Fixed Account. Loan Payments may not be allocated to the Fixed Account(s). DOLLAR COST AVERAGING FIXED ACCOUNT OPTIONS SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. You may establish a Short Term Dollar Cost Averaging Program by allocating purchase payments to THE SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION ("SHORT TERM DCA FIXED ACCOUNT OPTION"). Each purchase payment allocated to the Short Term DCA Fixed Account Option must be at least $1,200. We will credit interest to purchase payments you allocate to this Option for up to six months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Short Term DCA Fixed Account Option. However, you may not choose less than 3 or more than 6 equal monthly installments. Further, you must transfer each purchase payment and all its earnings out of this Option by means of dollar cost averaging within 6 months. If you discontinue the Dollar Cost Averaging Program before the end of the transfer period, we will transfer the remaining balance in this Option to the Money Market Variable Subaccount unless you request a different investment alternative. At the end of the transfer period, any residual amount will be transferred to the Money Market Variable Subaccount. No transfers are permitted into the Short Term DCA Fixed Account. 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 date of payment, we will transfer the payment plus associated interest to the Money Market Variable Subaccount in equal monthly installments. EXTENDED SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION. You may establish an Extended Short Term Dollar Cost Averaging Program by allocating purchase payments to THE EXTENDED SHORT TERM DOLLAR COST AVERAGING FIXED ACCOUNT OPTION ("EXTENDED SHORT TERM DCA FIXED ACCOUNT OPTION"). Each purchase payment allocated to the Extended Short Term DCA Fixed Account Option must be at least $1,200. We will credit interest to purchase payments you allocate to this Option for up to twelve months at the current rate in effect at the time of allocation. We will credit interest daily at a rate that will compound at the annual interest rate we guaranteed at the time of allocation. We will follow your instructions in transferring amounts monthly from the Extended Short Term DCA Fixed Account Option. However, you may not choose less than 7 or more than 12 equal monthly installments. Further, you must transfer each purchase payment and all its earnings out of this Option by means of dollar cost averaging within 12 months. If you discontinue the Dollar Cost Averaging Program before the end of the transfer period, we will transfer the remaining balance in this Option to the Money Market Variable Subaccount unless you request a different investment alternative. At the end of the transfer period, any residual amount will be transferred to the Money Market Variable Subaccount. No transfers are permitted into the Extended Short Term DCA Fixed Account. 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 date of payment, we will transfer the payment plus associated interest to the Money Market Variable Subaccount in equal monthly installments. INVESTMENT RISK We bear the investment risk for all amounts allocated to the Short Term DCA Fixed Account Option and the Extended Short Term DCA Fixed Account Option. That is because we guarantee the current rates we credit to the amounts you allocate to either of these Options, which will never be less than the minimum guaranteed rate in the Contract. We determine, in our sole discretion, the amount of interest credited in excess of the guaranteed rate. We may declare more than one interest rate for different monies based upon the date of allocation to the Short Term DCA Fixed Account Option and the Extended Short Term DCA Fixed Account Option. For current interest rate information, please contact your representative or our customer support unit at 1-800-865-5237. 15 PROSPECTUS GUARANTEE PERIODS Each payment or transfer allocated to a Guarantee Period earns interest at a specified rate that we guarantee for a period of years. Guarantee Periods may range from 1 to 10 years. We are currently offering Guarantee Periods of 1, 3, 5, 7, and 10 years in length. In the future we may offer Guarantee Periods of different lengths or stop offering some Guarantee Periods. You select the Guarantee Period for each payment or transfer. If you do not select a Guarantee Period, we will assign the same period(s) you selected for your most recent purchase payment(s). Each payment or transfer allocated to a Guarantee Period must be at least $500. We reserve the right to limit the number of additional purchase payments that you may allocate to this Option. INTEREST RATES. We will tell you what interest rates and Guarantee Periods we are offering at a particular time. We will not change the interest rate that we credit 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. 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 investment returns available at the time of the determination. In addition, we may consider various other factors in determining interest rates including regulatory and tax requirements, our sales commission and administrative expenses, general economic trends, and competitive factors. WE 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. For current interest rate information, please contact your representative or Lincoln Benefit at 1-800-865-5237. HOW WE CREDIT INTEREST. We will credit interest daily to each amount allocated to a Guarantee Period at a rate that compounds to the annual interest rate that we declared at the beginning of the applicable Guarantee Period. The following example illustrates how a purchase payment allocated to a Guaranteed Period would grow, given an assumed Guarantee Period and annual interest rate: Purchase Payment......................... $10,000 Guarantee Period......................... 5 years Annual Interest 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 + Annual Interest Rate) 1.045 ---------- $10,450.00 Contract Value at end of Contract Year..... $10,450.00 x (1 + Annual Interest Rate) 1.045 ---------- $10,920.25 Contract Value at end of Contract Year..... $10,920.25 x (1 + Annual Interest Rate) 1.045 ---------- $11,411.66 Contract Value at end of Contract Year..... $11,411.66 x (1 + Annual Interest Rate) 1.045 ---------- $11,925.19 Contract Value at end of Contract Year..... $11,925.19 x (1 + Annual Interest Rate) 1.045 ---------- $12,461.82
TOTAL INTEREST CREDITED DURING GUARANTEE PERIOD = $2,461.82 ($12,461.82 - $10,000.00) This example assumes no withdrawals during the entire 5-year Guarantee Period. If you were to make a withdrawal, you may be required to pay a withdrawal charge. In addition, the amount withdrawn may be increased or decreased by a Market Value Adjustment that reflects changes in interest rates since the time you invested the amount withdrawn. The hypothetical interest rate is for illustrative purposes only and is not intended to predict future interest rates to be declared under the Contract. Actual interest rates declared for any given Guarantee Period may be more or less than shown above. RENEWALS. Prior to the end of each Guarantee Period, we will mail you a notice asking you what to do with your money, including the accrued interest. During the 30-day period after the end of the Guarantee Period, you may: 16 PROSPECTUS 1. Take no action. We will automatically apply your money to a new Guarantee Period of the same length as the expiring Guarantee Period. The new Guarantee Period will begin on the day the previous Guarantee Period ends. The new interest rate will be our current declared rate for a Guarantee Period of that length; or 2. Instruct us to apply your money to one or more new Guarantee Periods of your choice. 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 your money to one or more Variable Subaccounts of the Variable Account. 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 your money. You may be required to pay a withdrawal charge, but we will not adjust the amount withdrawn to include a Market Value Adjustment. You may also be required to pay premium taxes and income tax withholding, if applicable. We will pay interest from the day the Guarantee Period expired until the date of withdrawal. The interest will be the rate for the shortest Guarantee Period then being offered. Amounts not withdrawn will be applied to a new Guarantee Period of the same length as the previous Guarantee Period. The new Guarantee Period will begin on the day the previous Guarantee Period ends. MARKET VALUE ADJUSTMENT. All withdrawals and transfers from a Guarantee Period, other than those taken during the 30-day period after such Guarantee Period expires, are subject to a Market Value Adjustment. A Market Value Adjustment also may apply upon payment of a death benefit and when you apply amounts currently invested in a Guarantee Period to an Income Plan (unless paid or applied during the 30-day period after such Guarantee Period expires). We also will not apply a Market Value Adjustment to a withdrawal you make: .. that qualifies for one of the waivers as described on pages 25, .. to satisfy the IRS minimum distribution rules for the Contract, or .. a single withdrawal made by a surviving spouse made within one year after continuing the Contract. We apply the Market Value Adjustment to reflect changes in interest rates from the time you first allocate money to a Guarantee Period to the time you remove it from that Guarantee Period. We calculate the Market Value Adjustment by comparing the TREASURY RATE for a maturity equal to the Guarantee Period at its inception to the Treasury Rate for a maturity equal to the Guarantee Period when you remove your money. "Treasury Rate" means the U.S. Treasury Note Constant Maturity Yield as reported in Federal Reserve Bulletin Release H.15. The Market Value Adjustment may be positive or negative, depending on changes in interest rates. As such, you bear the investment risk associated with changes in interest rates. If interest rates increase significantly, the Market Value Adjustment and any withdrawal charge, premium taxes, and income tax withholding (if applicable) could reduce the amount you receive upon full withdrawal from a Guaranteed Period to an amount that is less than the purchase payment applied to that period plus interest earned under the Contract. Generally, if the original Treasury Rate at the time you allocate money to a Guarantee Period is higher than the applicable current Treasury Rate for a period equal to the Guarantee Period, then the Market Value Adjustment will result in a higher amount payable to you, transferred or applied to an Income Plan. Conversely, if the Treasury Rate at the time you allocate money to a Guarantee Period is lower than the applicable Treasury Rate for a period equal to the Guarantee Period, then the Market Value Adjustment will result in a lower amount payable to you, transferred or applied to an Income Plan. For example, assume that you purchase a Contract and you select an initial Guarantee Period of 5 years and the 5-year Treasury Rate for that duration is 4.50%. Assume that at the end of 3 years, you make a partial withdrawal. If, at that later time, the current 5-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. Conversely, if the current 5-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. 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. 17 PROSPECTUS INVESTMENT ALTERNATIVES: TRANSFERS TRANSFERS DURING THE ACCUMULATION PHASE During the Accumulation Phase, you may transfer Contract Value among the investment alternatives. You may not transfer Contract Value to either the Short Term Dollar Cost Averaging Fixed Account or the Extended Short Term Dollar Cost Averaging Fixed Account Options. You may request transfers in writing on a form that we provided or by telephone according to the procedure described below. The minimum amount that you may transfer into a Guarantee Period is $500. We currently do not assess, but reserve the right to assess, a charge of.50% of the transfer amount but not less than $25, on each transfer in excess of 12 per Contract Year. All transfers to or from more than one Portfolio on any given day counts as one transfer. 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. The Contract permits us to defer transfers from the Fixed Account for up to six months from the date we receive your request. If we decide to postpone transfers for 30 days or more, we will pay interest as required by applicable law. Any interest would be payable from the date we receive the transfer request to the date we make the transfer. If you transfer an amount from a Guarantee Period other than during the 30-day period after such Guarantee Period expires, we will increase or decrease the amount by a Market Value Adjustment. We reserve the right to waive any transfer restrictions. TRANSFERS DURING THE PAYOUT PHASE During the Payout Phase, you may make transfers among the Variable Subaccounts so as to change the relative weighting of the Variable Subaccounts on which your variable income payments will be based. You may make up to 12 transfers per Contract Year. You may not convert any portion of your fixed income payments into variable income payments. After 6 months from the Payout Start Date, you may make transfers from the Variable Subaccounts to increase the proportion of your income payments consisting of fixed income payments. TELEPHONE TRANSFERS You may make transfers by telephone. To give a third party authorization, you must first send us a completed authorization form. The cut off time for telephone transfer requests is 3:00 p.m. Central Time. Calls completed before 3:00 p.m. will be effected on that day at that day's price. Calls completed after 3:00 p.m. will be effected on the next day on which the NYSE is open for business, at that day's price. At any time, without notice, we may suspend, modify or terminate your privilege to make transfers via the telephone, or via other electronic or automated means previously approved by the Company, including, but not limited to, automated telephone services, facsimile machine, e-mail and electronic services via online access. Among other things, we reserve the right to limit the number of such transfers among the Variable Subaccounts in any Contract year, or to refuse any Variable Subaccount transfer request. We also reserve the right to restrict such transfers in any manner reasonably designed to prevent transfers that we consider disadvantageous to other Contract owners. We use procedures that we believe provide reasonable assurance that the telephone 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 are intended for long-term investment. Market timing and excessive trading can potentially dilute the value of Variable Subaccounts and can disrupt management of a Portfolio and raise its expenses, which can impair Portfolio performance. 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 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. 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 we identify a pattern of market-timing or excessive trading activity, we will make further inquiry and may, depending on the circumstances, impose trading limitations as described below under "Trading Limitations" consistent with applicable law and the Contract. Because there is no universally accepted definition of what constitutes market timing or 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 Subaccounts, not all market timing or excessive trading is identifiable or preventable. Therefore, we cannot guarantee that we can prevent such trading activity in all cases or before it occurs. TRADING LIMITATIONS. We reserve the right to limit transfers among the investment alternatives in any Contract Year, or to refuse any transfer request, if: 18 PROSPECTUS .. we believe. in our sole discretion, that certain trading practices, such as excessive trading or market timing ("Prohibited Trading Practices"), by, or on behalf of one or more Contract Owners, or a specific transfer request or group of transfer requests, may have a detrimental effect on the Accumulation Unit Values of any Variable Subaccount or on the share prices of the corresponding Portfolio or otherwise would be to the disadvantage of other Contract Owners; or .. we are informed by one or more of the Portfolios that they intend to restrict the purchase, exchange, or redemption of Portfolio shares because of Prohibited Trading Practices or because they believe that a specific transfer or group of transfers would have a detrimental effect on the prices of Portfolio shares. We may apply the restrictions in any manner reasonably designed to prevent transfers that we consider disadvantageous to other Contract Owners. DOLLAR COST AVERAGING PROGRAM Through our Dollar Cost Averaging Program, you may automatically transfer a fixed dollar amount every month from any Variable Subaccount, the Short Term Dollar Cost Averaging Fixed Account, or the Extended Short Term Dollar Cost Averaging Fixed Account, to any of the other Variable Subaccounts or the Guarantee Periods. You may not use the Dollar Cost Averaging Program to transfer amounts from the Guarantee Periods. This program is available only during the Accumulation Phase. We will not charge a transfer fee for transfers made under this Program, nor will such transfers count against the 12 transfers you can make each Contract Year without paying a transfer fee. The theory of Dollar Cost Averaging is that if purchases of equal dollar amounts are made at fluctuating prices, the aggregate average cost per unit will be less than the average of the unit prices on the same 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. You may not use Dollar Cost Averaging and Portfolio Rebalancing at the same time. Call or write us for instructions on how to enroll. AUTOMATIC PORTFOLIO REBALANCING PROGRAM Once you have allocated your money among the Variable Subaccounts, the performance of each Subaccount may cause a shift in the percentage you allocated to each Subaccount. If you select our Automatic Portfolio Rebalancing Program, we will automatically rebalance the Contract Value in each Variable Subaccount and return it to the desired percentage allocations. We will not include money you allocate to the Fixed Account Options in the Automatic Portfolio Rebalancing Program. We will rebalance your account monthly, quarterly, semi-annually, or annually, depending on your instructions. We will transfer amounts among the Variable Subaccounts to achieve the percentage allocations you specify. You can change your allocations at any time by contacting us in writing or by telephone. The new allocation will be effective with the first rebalancing that occurs after we receive your request. We are not responsible for rebalancing that occurs prior to receipt of your request. Example: Assume that you want your initial purchase payment split among 2 Variable Subaccounts. You want 40% to be in the Fidelity Growth Portfolio Variable Subaccount and 60% to be in the OpCap Balanced portfolio Variable Subaccount. Over the next 2 months the bond market does very well while the stock market performs poorly. At the end of the first quarter, the Fidelity Growth Portfolio Variable Subaccount now represents 50% of your holdings because of its increase in value. If you choose to have your holdings rebalanced quarterly, on the first day of the next quarter, we would sell some of your units in the Fidelity Growth Portfolio Variable Subaccount and use the money to buy more units in the OpCap Balanced portfolio Variable Subaccount so that the percentage allocations would again be 40% and 60% respectively. The Automatic Portfolio Rebalancing Program is available only during the Accumulation Phase. The transfers made under the Program do not count towards the 12 transfers you can make without paying a transfer fee, and are not subject to a transfer fee. A one-time request to rebalance the amounts allocated to the Subaccounts is not part of a Portfolio Rebalancing program and is subject to all of the requirements that are applicable to transfers made during the Accumulation Phase. We will automatically terminate this program if you request any transfer outside the Automatic Portfolio Rebalancing Program. 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 not use Dollar Cost Averaging and Portfolio Rebalancing at the same time. 19 PROSPECTUS EXPENSES As a Contract Owner, you will bear, directly or indirectly, the charges and expenses described below. MORTALITY AND EXPENSE RISK CHARGE We deduct a mortality and expense risk charge daily at an annual rate of 1.25% of the average daily net assets you have invested in the Variable Subaccounts (1.50% if you select the Enhanced Death Benefit Rider; 1.45% if you select the Income Benefit Rider; and 1.70% if you select both the Enhanced Death Benefit Rider and the Income Benefit Rider), and an additional charge ranging from 0.15% to 0.35% for the Enhanced Earnings Death Benefit described below. The mortality and expense risk charge is for the insurance benefits available with your Contract (including our guarantee of annuity rates and the death benefits), for certain expenses of the Contract, and for assuming the risk (expense risk) that the current charges will be sufficient in the future to cover the cost of administering the Contract. If the charges under the Contract are not sufficient, then we will bear the loss. We charge an additional amount for the Enhanced Death Benefit Rider, the Income Benefit Rider and the Enhanced Earnings Death Benefit Rider compensate us for the additional risk that we accept by providing these Riders. We guarantee that we will not raise the mortality and expense risk charge. We assess the mortality and expense risk charge during both the Accumulation Phase and the Payout Phase. After the Payout Start Date, mortality and expense risk charges for the Enhanced Death Benefit, the Income Benefit, and the Enhanced Earnings Death Benefit will cease. ENHANCED EARNINGS DEATH BENEFIT RIDER CHARGE If you elect the Enhanced Earnings Death Benefit Rider, we will increase the Mortality and Expense charge during the Accumulation Phase by the annual rates shown below based on the oldest Contract Owner's age on the Rider Date. AGE ANNUAL CHARGE ----- ------------ 0-55 0.15% 56-65 0.25% 66-75 0.35% ADMINISTRATIVE EXPENSE CHARGE We deduct an administrative expense charge daily at an annual rate of 0.10% of the average daily net assets you have invested in the Variable Subaccounts. We intend this charge to cover actual administrative expenses that exceed the revenues from the contract maintenance charge. There is no necessary relationship between the amount of administrative charge imposed on a given Contract and the amount of expenses that may be attributed to that Contract. We assess this charge each day during the Accumulation Phase and the Payout Phase. We guarantee that we will not raise this charge. TRANSFER FEE We do not currently impose a fee upon transfers among the investment alternatives. However, we reserve the right to charge up to 0.50% of the transfer amount, but not less than $25, per transfer after the 12th transfer in each Contract Year. We will not charge a transfer fee on transfers that are part of a Dollar Cost Averaging or Automatic Portfolio Rebalancing Program. WITHDRAWAL CHARGE We may assess a withdrawal charge of up to 8% of the purchase payment(s) you withdraw. The charge declines to 0% over an 8 year period that begins on the day we receive your payment. A schedule showing how the charge declines is shown on page 8. Beginning on January 1, 2004, if you make a withdrawal before the Payout Start Date, we will apply the withdrawal charge percentage in effect on the date of the withdrawal, or the withdrawal charge penalty in effect on the following day, whichever is lower. Any Purchase Payments older than 8 years old, which have not been previously withdrawn, may be withdrawn without paying the withdrawal charge. During each Contract year, you can also withdraw the greater of earnings not previously withdrawn or 15% of your New Purchase Payments without paying the charge. New Purchase Payments are Purchase Payments received by us less than 8 years prior to withdrawal. Unused portions of this "FREE WITHDRAWAL AMOUNT" are not carried forward to future Contract Years. We will deduct withdrawal charges, if applicable, from the amount paid. For purposes of calculating the withdrawal charge, the Contract Value is deemed to be withdrawn in the following order: FIRST. Earnings - The amount of Contract Value in excess of all purchase payments that have not previously been withdrawn; SECOND. Old Purchase Payments - Purchase payments received by us more than eight years prior to the date of withdrawal which have not been previously withdrawn; THIRD. New Purchase Payments that are not subject to a withdrawal charge; and FOURTH. New Purchase Payments that are subject to a withdrawal charge. For federal income tax purposes, withdrawals are considered to have come first from earnings, which means you pay taxes on the earnings portion of your withdrawal. Free withdrawal amounts are not cumulative. 20 PROSPECTUS We do not apply a withdrawal charge in the following situations: .. on the Payout Start Date (a withdrawal charge may apply if you terminate income payments to be received for a specified period); .. withdrawals taken to satisfy IRS minimum distribution rules for the Contract; or .. withdrawals that qualify for one of the waivers as described below. 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 also may be subject to tax penalties or income tax and a Market Value Adjustment. 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 your own tax counsel or other tax advisers regarding any withdrawals. CONFINEMENT WAIVER.We will waive the withdrawal charge and any Market Value Adjustment on all withdrawals taken prior to the Payout Start Date under your Contract if the following conditions are satisfied: 1. You or the Annuitant, if the Contract Owner is not a living person, are confined to a long term care facility or a hospital for at least 90 consecutive days. You or the Annuitant must enter the long term care facility or hospital at least 30 days after the Issue Date; 2. You request the withdrawal and provide written proof of the stay no later than 90 days following the end of your or the Annuitant's stay at the long term care facility or hospital; and 3. A physician must have prescribed the stay and the stay must be medically necessary (as defined in the Contract). You may not claim this benefit if you, the Annuitant, or a member of your or the Annuitant's immediate family, is the physician prescribing your or the Annuitant's stay in a long term care facility. TERMINAL ILLNESS WAIVER. We will waive the withdrawal charge and any Market Value Adjustment on all withdrawals taken prior to the Payout Start Date under your Contract if: 1. you or the Annuitant (if the Contract Owner is not a living person) are first diagnosed with a terminal illness at least 30 days after the Issue Date; and 2. you claim this benefit and deliver adequate proof of diagnosis to us. UNEMPLOYMENT WAIVER. We will waive the withdrawal charge and any Market Value Adjustment on one partial or a full withdrawal taken prior to the Payout Start Date under your Contract, if you meet the following requirements: 1. you or the Annuitant, if the Contract Owner is not a living person, become unemployed at least one year after the Issue Date; 2. you or the Annuitant, if the Contract Owner is not a living person, receive unemployment compensation as defined in the Contract for at least 30 days as a result of that unemployment; and 3. you or the Annuitant, if the Contract Owner is not a living person, claim this benefit within 180 days of your or the Annuitant's initial receipt of unemployment compensation. Please refer to your Contract for more detailed information about the terms and conditions of these waivers. The laws of your state may limit the availability of these waivers and may also change certain terms and/or benefits available under the waivers. You should consult your Contract for further details on these variations. Also, even if you do not need to pay our withdrawal charge or a Market Value Adjustment because of these waivers, 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. PREMIUM TAXES Some states and other governmental entities (e.g., municipalities) charge premium taxes or similar taxes. We are responsible for paying these taxes and will deduct them from your Contract Value. Some of these taxes are due when the Contract is issued, others are due when income payments begin or upon surrender. Our current practice is not to charge anyone for these taxes until income payments begin or when a total withdrawal occurs, including payment upon death. At our discretion, we may discontinue this practice and deduct premium taxes from the purchase payments. Premium taxes generally range from 0% to 4%, depending on the state. At the Payout Start Date, if applicable, we deduct the charge for premium taxes from each investment alternative in the proportion that the Contract Owner's value in the investment alternative bears to the total Contract Value. DEDUCTION FOR VARIABLE 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 Variable Account. We will deduct for any taxes we incur as a result of the operation of the Variable Account, whether or not we previously made a provision for taxes and whether or not 21 PROSPECTUS it was sufficient. Our status under the Internal Revenue Code is briefly described in the Statement of Additional Information. OTHER EXPENSES Each Portfolio deducts advisory fees and other expenses from its assets. You indirectly bear the charges and expenses of the Portfolios whose shares are held by the Variable Subaccounts. These fees and expenses are described in the accompanying prospectuses for the Funds. For a summary of current estimates of those charges and expenses, see page 9. We may receive compensation from the investment advisers or administrators of the Portfolios in connection with the administrative services we provide to the Portfolios. ACCESS TO YOUR MONEY You can withdraw some or all of your Contract Value at any time prior to the Payout Start Date. The amount payable upon withdrawal is the Contract Value (or portion thereof) next computed after we receive the request for a withdrawal at our home office, adjusted by any Market Value Adjustment less any withdrawal charges, income tax withholding, and any premium taxes. We will pay withdrawals from the Variable Account within 7 days of receipt of the request, subject to postponement in certain circumstances. You can withdraw money from the Variable Account or the Fixed Account Options. To complete a partial withdrawal from the Variable Account, we will cancel Accumulation Units in an amount equal to the withdrawal and any applicable withdrawal charge and premium taxes. You must name the investment alternative from which you are taking the withdrawal. If none is specified, we will deduct your withdrawal pro-rata from the Variable Subaccounts according to the value of your investments therein. In general, you must withdraw at least $50 at a time. You also may withdraw a lesser amount if you are withdrawing your entire investment in a Variable Subaccount. If you request a total withdrawal, we may require you to return your Contract to us. 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. POSTPONEMENT OF PAYMENTS We may postpone the payment of any amounts due from the Variable Account under the Contract if: 1. The New York Stock Exchange is closed for other than usual weekends or holidays, or trading on the Exchange is otherwise restricted; 2. An emergency exists as defined by the SEC; or 3. The SEC permits delay for your protection. In addition, we may delay payments or transfers from the Fixed Account Options for up to 6 months (or shorter period if required by law). If we delay payment for 30 days or more, we will pay interest as required by law. SYSTEMATIC WITHDRAWAL PROGRAM If your Contract is a non-qualified contract or IRA, you may choose to receive systematic withdrawal payments on a monthly, quarterly, semi-annual, or annual basis at any time prior to the Payout Start Date. The minimum amount of each systematic withdrawal is $50. Systematic withdrawals will be deducted from the Variable Subaccounts and Fixed Account balances, excluding the Dollar Cost Averaging Fixed Account Options, on a pro rata basis. At our discretion, systematic withdrawals may not be offered in conjunction with the Dollar Cost Averaging Program or Automatic Portfolio Rebalancing Program. Depending on fluctuations in the value of the Variable Subaccounts and the value of the Fixed Account Options, systematic withdrawals may reduce or even exhaust the Contract Value. For income tax purposes, withdrawals are generally made from earnings first. 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. Please consult your tax advisor before taking any withdrawal. We will make systematic withdrawal payments to you or your designated payee. At our discretion, 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. MINIMUM CONTRACT VALUE If your request for a partial withdrawal would reduce your Contract Value to less than $2,000, we may treat it as a request to withdraw your entire Contract Value. Your Contract will terminate if you withdraw all of your Contract Value. We will, however, ask you to confirm your withdrawal request before terminating your Contract. Before terminating any Contract whose value has been reduced by withdrawals to less than $2,000, we will inform you in writing of our intention to terminate your Contract and give you at least 30 days in which to make an additional Purchase Payment to restore your Contract Value to the contractual minimum of $2,000. If we terminate your Contract, we will distribute to you its Contract Value, adjusted by any applicable Market Value Adjustment, less withdrawal and other charges and applicable taxes. 22 PROSPECTUS CONTRACT LOANS FOR 403(B) CONTRACTS Subject to the restrictions described below, we will make loans to the Contract Owner of a Contract used in connection with a Tax Sheltered Annuity Plan ("TSA Plan") under Section 403(b) of the Internal Revenue Code. Such loans are not available in Vermont. Loans are not available under non-qualified Contracts. We will only make loans after the right to cancel period and before the Payout Start Date. All loans are subject to the terms of the Contract, the relevant qualified plan, and the Internal Revenue 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 amount available for full withdrawal under your Contract on the date of the loan. In addition, you may not borrow a loan if the total of the requested loan and all of your 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 amount available for full withdrawal. The minimum loan amount is $1,000. To request a Contract loan, write to us at the address given on the first page of the prospectus. You alone are responsible for ensuring that your loan and repayments comply with tax requirements. Loans made before the Payout Start Date are generally treated as distributions under the Contract, and may be subject to withholding and tax penalties for early distributions. Some of these requirements are stated in Section 72 of the Internal Revenue 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 Variable Account and/or the Fixed Account Options to the LOAN ACCOUNT as collateral for the loan. The Loan Account is an account established for amounts transferred from the Variable Subaccounts or Fixed Account as security for an outstanding Contract loan. We will transfer to the Loan Account amounts from the Variable Account in proportion to the assets in each Subaccount. If your loan amount is greater than your Contract Value in the Subaccounts, we will transfer the remaining required collateral from the Guaranteed Maturity Fixed Account Options. If your loan amount is greater than your contract value in the Subaccounts and the Guaranteed Maturity Fixed Account Options, we will transfer the remaining required collateral from the Dollar Cost Averaging Fixed Account Options. We will not charge a Withdrawal Charge on the loan or on the transfer from the Subaccounts or the Fixed Account. We may, however, apply a Market Value Adjustment to a transfer from the Fixed Account to the Loan Account. If we do, we will increase or decrease the amount remaining in the Fixed Account by the amount of the Market Value Adjustment, so that the net amount transferred to the Loan Account will equal the desired loan amount. We will charge a Withdrawal Charge and apply a Market Value Adjustment, if applicable, on a distribution to repay the loan in full, in the event of loan default. We will credit interest to the amounts in the Loan Account. The annual interest rate credited to the Loan Account will be the greater of: (a) 3%; or (b) the loan interest rate minus 2.25%. The value of the amounts in the Loan Account are not affected by the changes in the value of the Subaccounts. When you take out a loan, we will set the loan interest rate. That rate will apply to your loan until it is repaid. From time to time, we may change the loan interest rate applicable to new loans. We also reserve the right to change the terms of new loans. We will subtract the outstanding Contract loan balance, including accrued but unpaid interest, from: (1) the Death Proceeds; (2) full withdrawal proceeds; (3) the amount available for partial withdrawal; (4) the amount applied on the Payout Start Date to provide income payments. Usually you must repay a Contract loan within five years of the date the loan is made. Scheduled payments must be level, amortized over the repayment period, and made at least quarterly. We may permit a repayment period of 15 or 30 years if the loan proceeds are used to acquire your principal residence. We may also permit other repayment periods. You must mark your loan repayments as such. We will assume that any payment received from you is a Purchase Payment, unless you tell us otherwise. Generally, loan payments are allocated to the Subaccount(s) in the proportion that you have selected for your most recent Purchase Payment. Allocations of loan payments are not permitted to the Fixed Accounts (Guaranteed Maturity Fixed Account and Dollar Cost Averaging Fixed Account Option). If your Purchase Payment allocation includes any of the Fixed Accounts, the percentages allocated to the Fixed Accounts will be allocated instead to the PIMCO Money Market Subaccount. If you do not make a loan payment when due, we will continue to charge interest on your loan. We also will declare the entire loan in default. We will subtract the defaulted loan balance plus accrued interest from any future distribution under the Contract and keep it in 23 PROSPECTUS payment of your loan. Any defaulted amount plus interest will be treated as a distribution for tax purposes (as permitted by law). As a result, you may be required to pay taxes on the defaulted amount, incur the early withdrawal tax penalty. Until we are permitted by law to extinguish a defaulted loan, we will continue to charge interest and add unpaid interest to your outstanding loan balance. If the total loan balance exceeds the amount available for full withdrawal, 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. INCOME PAYMENTS PAYOUT START DATE You select the Payout Start Date in your application. The Payout Start Date is the day that we apply your money to an Income Plan. The Payout Start Date must be: .. at least 30 days after the Issue Date; and .. no later than the day the Annuitant reaches age 90, or the 10th Contract Anniversary, if later. You may change the Payout Start Date at any time by notifying us in writing of the change at least 30 days before the scheduled Payout Start Date. Absent a change, we will use the Payout Start Date stated in your Contract. INCOME PLANS An Income Plan is a series of scheduled payments to you or someone you designate. You may choose and change your choice of Income Plan until 30 days before the Payout Start Date. If you do not select an Income Plan, we will make income payments in accordance with Income Plan 1 with guaranteed payments for 10 years. Three Income Plans are available under the Contract. Each is available to provide: .. fixed income payments; .. variable income payments; or .. a combination of the two. A portion of each payment will be considered taxable and the remaining portion will be a non-taxable return of your investment in the Contract, which is also called the "basis." Once the investment in the Contract is depleted, all remaining payments will be fully taxable. If the Contract is tax-qualified, generally, all payments will be fully taxable. Taxable payments taken prior to age 59 1/2 may be subject to an additional 10% federal tax penalty. The three Income Plans are: INCOME PLAN 1 - 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 the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 2 - 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 the remainder of the guaranteed income payments as required by the Contract. INCOME PLAN 3 - GUARANTEED PAYMENTS FOR A SPECIFIED PERIOD (5 YEARS TO 30 YEARS). Under this plan, we make periodic income payments for the period you have chosen. These payments do not depend on the Annuitant's life. You may elect to receive guaranteed payments for periods ranging from 5 to 30 years. Income payments for less than 120 months may be subject to a withdrawal charge. We will deduct the mortality and expense risk charge from the Variable Subaccount assets that support variable income payments even though we may not bear any mortality risk. The length of any guaranteed payment period under your selected Income Plan generally will affect the dollar amounts of each income payment. As a general rule, longer guarantee periods result in lower income payments, all other things being equal. For example, if you choose an Income Plan with payments that depend on the life of the Annuitant but with no minimum specified period for guaranteed payments, the income payments generally will be greater than the income payments made under the same Income Plan with a minimum specified period for guaranteed payments. If you choose Income Plan 1 or 2, 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. Generally, you may not make withdrawals after the Payout Start Date. One exception to this rule applies if you are receiving income payments that do not depend on the life of the Annuitant (such as under Income Plan 3). 24 PROSPECTUS In that case you may terminate all or part of the income payments at any time and withdraw their value, subject to withdrawal charges. For Variable Amount Income Payments, the value you may withdraw is equal to the present value of the Variable Amount Income Payments being terminated, calculated using a discount rate equal to the assumed investment rate that was used in determining the initial variable payment. For Fixed Amount Income Payments, the value you may withdraw is equal to the present value of the Fixed Amount Income Payments being terminated, calculated using a discount rate equal to the applicable current interest rate. The applicable current interest rate is the rate we are using on the date we receive your withdrawal request to determine income payments for a new Income Plan with a payment period equal to the remaining payment period of the income payments being terminated. The value you may withdraw may be higher or lower than it would have been using the interest rate that was initially used to calculate your Fixed Account Income Payments and your total payments (withdrawal amount plus income payments already received) may be more or less than the amount applied to your Income Plan. We deduct applicable premium taxes from the Contract Value at the Payout Start Date. We may make other Income Plans available. You must apply at least the Contract Value in the Fixed Account on the Payout Start Date to fixed income payments. If you wish to apply any portion of your Fixed Account balance to provide variable income payments, you should plan ahead and transfer that amount to the Variable Subaccounts prior to the Payout Start Date. If you do not tell us how to allocate your Contract Value among fixed and variable income payments, we will apply your Contract Value in the Variable Account to variable income payments and your Contract Value in the Fixed Account to fixed income payments. We will apply your Contract Value, adjusted by any applicable Market Value Adjustment, less applicable taxes to your Income Plan on the Payout Start Date. If the amount available to apply under an Income Plan is less than $2,000, or not enough to provide an initial payment of at least $50, and state law permits, we may: .. pay you the Contract Value, adjusted by any applicable Market Value Adjustment and less any applicable taxes, in a lump sum instead of the periodic payments you have chosen; or .. reduce the frequency of your payments so that each payment will be at least $50. VARIABLE INCOME PAYMENTS The amount of your variable income payments depends upon the investment results of the Variable Subaccounts you select, the premium taxes you pay, the age and sex of the Annuitant, and the Income Plan you choose. We guarantee that the payments will not be affected by (a) actual mortality experience and (b) the amount of our administration expenses. We cannot predict the total amount of your variable income payments. Your variable income payments may be more or less than your total purchase payments because (a) variable income payments vary with the investment results of the underlying Portfolios; and (b) the Annuitant could live longer or shorter than we expect based on the tables we use. In calculating the amount of the periodic payments in the annuity tables in the Contract, we assumed an annual investment rate of 3%. If the actual net investment return of the Variable Subaccounts you choose is less than this assumed investment rate, then the dollar amount of your variable income payments will decrease. The dollar amount of your variable income payments will increase, however, if the actual net investment return exceeds the assumed investment rate. The dollar amount of the variable income payments stays level if the net investment return equals the assumed investment rate. Please refer to the Statement of Additional Information for more detailed information as to how we determine variable income payments. FIXED INCOME PAYMENTS We guarantee income payment amounts derived from any Fixed Account Option for the duration of the Income Plan. We calculate the fixed income payments by: 1. adjusting the portion of the Contract Value in any Fixed Account Option on the Payout Start Date by any applicable Market Value Adjustment; 2. deducting any applicable premium tax; and 3. applying the resulting amount to the greater of (a) the appropriate value from the income payment table in your Contract or (b) such other value as we are offering at that time. We may defer making fixed income payments for a period of up to 6 months or any shorter time state law may require. If we defer payments for 30 days or more, we will pay interest as required by law from the date we receive the withdrawal request to the date we make payment. INCOME BENEFIT RIDER The Income Benefit Rider is no longer available. For Contract Owners and Annuitants up to and including age 75. This Rider guarantees that the amount of income payments you receive will not be less than those determined by applying the Income Base, less any applicable taxes, to the minimum guaranteed rate (rather than to any current rates we may be offering) for the Income Plan you select ("Guaranteed Income Benefit"). This Rider does not affect the amounts paid as a death benefit, partial withdrawal or surrender. The Rider is optional, has additional charges and may not be available in all states. 25 PROSPECTUS QUALIFICATIONS. To qualify for the income benefit payments under this Rider, you must meet the following requirements as of the Payout Start Date: .. You must elect a Payout Start Date that is on or after the 10th anniversary of the Rider Date; .. The Payout Start Date must be prior to the oldest Annuitant's 90th birthday; .. The Payout Start Date must occur during the 30 day period following a Contract Anniversary; .. You must elect to receive fixed income payments, which will be calculated using the guaranteed payout rates listed in your Contract; and .. The Income Plan you selected must provide for payments guaranteed for either a single life or joint lives with a specified period of at least: .. 10 years, if the youngest Annuitant's age is 80 or less on the Payout Start Date, or .. 5 years, if the youngest Annuitant's age is greater than 80 on the Payout Start Date. .. Of course, if your Contract Value, applied to the then current payout rates offered by Lincoln Benefit, generates higher income payments than those provided under the Income Benefit Rider, you will receive the higher payment amount. You may also elect to apply your Contract Value to any other income plan that we offer at that time. The Income Benefit Rider will no longer be in effect and the mortality and expense charge for the Rider will end upon the change of the named Annuitant for reasons other than death. We may discontinue offering these options at any time. INCOME BASE The Income Base is used solely for the purpose of calculating the GUARANTEED INCOME BENEFIT under this Rider ("Guaranteed Income Benefit") and does not provide a Contract Value or guarantee performance of any investment option. On the date we issue the Rider ("Rider Date"), the Income Base is equal to the Contract Value. After the Rider Date, the Income Base plus any subsequent purchase payments and less a withdrawal adjustment (described below) for any subsequent withdrawal will accumulate daily at a rate equivalent to 5% per year until the earlier of the Payout Start Date, or the first day of the month after the oldest Contract Owner's (or Annuitant's, if the Contract Owner is not a living person) 85th birthday. The maximum Income Base is 200% of: .. the Contract Value on the Rider Date; plus .. any subsequent purchase payments; less .. any subsequent withdrawal adjustments. WITHDRAWAL ADJUSTMENT The withdrawal adjustment is equal to (a) divided by (b), with the result multiplied by (c) where: (a) = the withdrawal amount (b) = the Contract Value immediately prior to the withdrawal, and (c) = the most recently calculated Income Base The Guaranteed Income Benefit amount is determined by applying the Income Base less any applicable taxes to the guaranteed rates for the Income Plan you elect. The Income Plan you elect must satisfy the conditions described above. On the Payout Start Date, the income payment will be the greater of the guaranteed Income Benefit or the Income Payment provided in the Payout Phase section. 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. 26 PROSPECTUS DEATH BENEFITS WE WILL PAY A DEATH BENEFIT PRIOR TO THE PAYOUT START DATE ON: 1. the death of any Contract Owner or, 2. the death of the Annuitant, if the Contract Owner is not a living person. We will pay the death benefit to the new Contract Owner as determined immediately after the death. The new Contract Owner would be a surviving Contract Owner or, if none, the Beneficiaries. If the Contract Owner is not a living person, in the case of the death of the Annuitant, we will pay the death benefit to the current Contract Owner. A claim for a distribution on death must include DUE PROOF OF DEATH. Where there are multiple Beneficiaries, we will value the Death Benefit at the time the first Beneficiary submits a complete claim for payment of the Death Benefit. We will accept the following documentation as "Due Proof of Death": .. a certified copy of a death certificate, .. a certified copy of a decree of a court of competent jurisdiction as to the finding of death, or .. any other proof acceptable to us. Your beneficiary should submit a complete claim for payment of the Death Benefit within 180 days of the relevant death in order to claim the standard or enhanced Death Benefit. If your beneficiary does not submit a complete claim for payment of the Death Benefit within 180 days of the relevant death, the beneficiary will be paid the Contract Value which may be adjusted as described in "Death Benefit Payments" on page 34. 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. DEATH BENEFIT AMOUNT Prior to the Payout Start Date, if we receive a complete request for payment of the Death Benefit within 180 days of the date of death, the standard Death Benefit is equal to the greatest of: .. the sum of all Purchase Payments reduced by withdrawal adjustments. The withdrawal adjustment for Purchase Payments 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; and (c) is the sum of all prior purchase payments adjusted by any prior withdrawals; or .. the Contract Value on the date we determine the Death Benefit, or .. the SETTLEMENT VALUE (that is, the amount payable on a full withdrawal of Contract Value, i.e., the Contract Value adjusted by any market value adjustment, less any applicable withdrawal charge or premium tax) on the date we determine the Death Benefit, or .. the Contract Value on each DEATH BENEFIT ANNIVERSARY prior to the date we determine the Death Benefit, increased by any purchase payment made since that Death Benefit Anniversary and reduced by an adjustment for any withdrawals since that Death Benefit Anniversary. In other words, for each Death Benefit Anniversary that occurs prior to the date we determine the Death Benefit, we will calculate an amount equal to the Contract Value on that Death Benefit Anniversary, plus any purchase payments made since that Death Benefit Anniversary, and minus an adjustment for any withdrawals made since that Death Benefit Anniversary. (The calculation of the withdrawal adjustment is described on page 33.) If there are multiple Death Benefit Anniversaries, we will make multiple calculations. The highest result will be compared to the other three values listed above in order to determine the Death Benefit. "Death Benefit Anniversaries" occur every 7th Contract anniversary until the oldest Contract Owner's 80th birthday, or the Annuitant's 80th birthday if the Contract Owner is not a living person. The Contract Anniversary immediately following the oldest Contract Owner's 80th birthday, or the Annuitant's 80th birthday if the Contract Owner is not a living person, will also be a Death Benefit Anniversary and is the final Death Benefit Anniversary. The Death Benefit Anniversary 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; and (c) is the Contract Value on the Death Benefit Anniversary adjusted by any prior purchase payments or withdrawals made since that Anniversary. We will determine the value of the Death Benefit as of the end of the Valuation Date on which we receive a complete request for payment of the death benefit. If we receive a request after 3:00 p.m. Central Time on a Valuation Date, we will process the request as of the end of the following Valuation Date. 27 PROSPECTUS ENHANCED DEATH BENEFIT RIDER The Enhanced Death Benefit Rider is an optional benefit that you may elect if the Contract Owners and Annuitants are not older than age 80 on the date we receive the application, or the date we receive the written request to add this Rider, whichever is later. If the Contract Owner is a living individual, the Enhanced Death Benefit applies only upon the death of the Contract Owner. If the Contract Owner is not a living individual, the Enhanced Death Benefit applies only upon the death of the Annuitant. For Contracts with the Enhanced Death Benefit Rider, the death benefit will be the greatest of the standard death benefit above, or the Enhanced Death Benefit. The Enhanced Death Benefit is equal to the greater of Enhanced Death Benefit A or Enhanced Death Benefit B. Enhanced Death Benefit A or B may not be available in all states. This rider will automatically terminate on the Payout Start Date. The Enhanced Death Benefit will never be greater than the maximum death benefit allowed by any state nonforfeiture laws that govern the Contract. The Enhanced Death Benefit Rider and the mortality and expense charge for the Rider will terminate upon the change of Contract Owner (or the Annuitant if the Contract Owner is not a living person) for reasons other than death. ENHANCED DEATH BENEFIT A. On the date we issue the Rider ("RIDER DATE"), Enhanced Death Benefit A is equal to the Contract Value on that date. After the Rider Date, Enhanced Death Benefit A is the greatest of the ANNIVERSARY VALUES as of the date we determine the death benefit. The "Anniversary Value" is equal to the Contract Value on a Contract Anniversary, increased by purchase payments made since that Anniversary and reduced by a withdrawal adjustment, as described below, for any partial withdrawals since that Anniversary. We will calculate Anniversary Values for each Contract Anniversary up until the earlier of: .. the date we determine the death benefit; or .. the first Contract Anniversary following the oldest Contract Owner's or, if the Contract Owner is not a living person, the Annuitant's 80th birthday, or the first day of the 61st month following the Rider Date, whichever is later. After age 80, or the first day of the 61st month following the Rider Date, whichever is later, we will recalculate the Enhanced Death Benefit A only for purchase payments and withdrawals. The withdrawal adjustment is equal to (a) divided by (b), and the result multiplied by (c) where: (a) = is the withdrawal amount, (b) = is the Contract Value immediately prior to the withdrawal, and (c) = the most recently calculated Enhanced Death Benefit A. ENHANCED DEATH BENEFIT B. The Enhanced Death Benefit B on the Rider Date is equal to the Contract Value on that date. After the Rider Date, the Enhanced Death Benefit B, plus any subsequent purchase payments and less a withdrawal adjustment, as described below, will accumulate daily at a rate equivalent to 5% per year until the earlier of: .. the date we determine the death benefit; or .. the first day of the month following the oldest Contract Owner's or, if the Contract Owner is not a living person, the Annuitant's 80th birthday, or the first day of the 61st month following the Rider Date, whichever is later. After age 80, or the first day of the 61st month following the Rider Date, whichever is later, we will recalculate the Enhanced Death Benefit B only for purchase payments and withdrawals. The maximum amount of Enhanced Death Benefit B is 200% of: .. the Contract Value on the Rider Date; plus .. any subsequent purchase payments; less .. any subsequent withdrawal adjustments. The withdrawal adjustment is equal to (a) divided by (b), and the result multiplied by (c) where: (a) = the withdrawal amount, (b) = is the Contract Value immediately prior to the withdrawal, and (c) = is the most recently calculated Enhanced Death Benefit B. ENHANCED EARNINGS DEATH BENEFIT RIDER For Contract Owners and Annuitants up to and including age 75, the Enhanced Earnings Death Benefit Rider is an optional benefit that you may elect. If the Contract Owner is a living person, the Enhanced Earnings Death Benefit Rider applies only upon the death of the Contract Owner. If the Contract Owner is not a living person, the Enhanced Earnings Death Benefit Rider applies only upon the death of the Annuitant. The Enhanced Earnings Death Benefit Rider and the annual charge for the Rider will terminate upon the change of Contract Owner (or the Annuitant if the Contract Owner is not a living person) for reasons other than death. The Rider may not be available in all states. We may discontinue the offering of the Rider at any time. This rider will automatically terminate on the Payout Start Date. Under the Enhanced Earnings Death Benefit Rider, the Enhanced Earnings Death Benefit is determined as follows: If the oldest Contract Owner, or the Annuitant if the Contract Owner is not a living person, is age 55 or younger on the date we receive the completed application, or we receive written request to add this 28 PROSPECTUS rider, whichever is later, the Enhanced Earnings Death Benefit will be: .. the lesser of 100% of IN-FORCE PREMIUM (excluding purchase payments made after the Rider Date and in the twelve month period immediately preceding the death of the Contract Owner, or the Annuitant if the Contract Owner is not a living person) or 50% of In-Force Earnings, calculated as of the date we receive due proof of death. If the oldest Contract Owner, or the Annuitant if the Contract Owner is not a living person, is between the ages of 56 and 65 on the date we receive the completed application or the date we receive the written request to add this rider, whichever is later, the Enhanced Earnings Death Benefit will be: .. the lesser of 80% of the In-Force Premium (excluding purchase payments made after the Rider Date and in the twelve month period immediately preceding the death of the Contract Owner, or the Annuitant if the Contract Owner is not a living person) or 40% of In-Force Earning, calculated as of the date we receive due proof of death. If the oldest Contract Owner, or the Annuitant if the Contract Owner is not a living person, is between the ages of 66 and 75 on the date we receive the completed application or the date we receive the written request to add this rider, whichever is later, the Enhanced Earnings Death Benefit will be: .. the lesser of 50% of In-Force Premium (excluding purchase payments made after the Rider Date and in the twelve month period immediately preceding the death of the Contract Owner, or the Annuitant if the Contract Owner is not a living person) or 25% of In-Force Earnings, calculated as of the date we receive due proof of death. For purpose of calculating the Enhanced Earnings Death Benefit, the following definitions apply: .. In-Force Earnings is the greater of (a) the current Contract Value less the In-Force Premium; or (b) zero. .. In-Force Premiums are defined as follows: .. If the Rider Date is the same as the Issue Date of the Contract: .. The sum of all the purchase payments less the sum of all the Excess-of-Earnings Withdrawals. .. If the Rider Date is later than the Contract issue date: .. The Contract Value as of Rider Date plus all the purchase payments made after the Rider Date less the sum of all the Excess-of-Earnings Withdrawals after the Rider Date Excess-of-Earnings Withdrawals are defined as follows: .. For each withdrawal, this amount is equal to the amount, if any, by which the withdrawal exceeds the In-Force Earnings immediately prior to the withdrawal. We will calculate the Enhanced Earnings Death Benefit Rider as of the date we receive Due Proof of Death. We will pay the Enhanced Earnings Death Benefit with the death benefit as described under "Death Benefit Payments" below. The value of the Enhanced Earnings Death Benefit largely depends on the amount of earnings that accumulate under your Contract. If you expect to withdraw the earnings from your Contract Value, electing the Enhanced Earnings Death Benefit Rider may not be appropriate. For purposes of calculating the Enhanced Earnings Death Benefit, earnings are considered to be withdrawn first before purchase payments. Your financial advisor can help you decide if the Enhanced Earnings Death Benefit Rider is right for you. For examples of how the death benefit is calculated under the Enhanced Earnings Death Benefit Rider, see Appendix C. DEATH BENEFIT PAYMENTS 1. If the sole new Contract Owner is your spouse: (a) Your spouse may elect, within 180 days of the date of your death, to receive the Death Benefit described above in a lump sum. (b) Your spouse may elect, within 180 days of the date of your death, to receive an amount equal to the Death Benefit paid out through an Income Plan. Payments from the Income Plan must begin within one year of your date of death. The payments must be: (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. If your spouse chooses to continue the Contract or, does not elect one of the options above within 180 days of your death, the Contract will continue in the Accumulation Phase as if no death has occurred. If the Contract continues in the Accumulation Phase, the following conditions apply: (a) On the date the Contract is continued, the Contract Value will be the Death Benefit as determined as of the Valuation Date on which we received due proof of death (the next Valuation Date, if we receive due proof of death after 3 p.m. Central Time). Unless otherwise instructed by the continuing spouse, the excess, if any, of the Death Benefit amount over the Contract Value will be allocated to the Subaccounts. This excess will be allocated in proportion to your Contract Value in those Subaccounts as of the end of the Valuation Period during which we receive the complete request for payment of the 29 PROSPECTUS Death Benefit, except that any portion of this excess attributable to the Fixed Account Options will be allocated to the Money Market Subaccount. Within 30 days of the date the Contract is continued, your surviving spouse may choose one of the following transfers without incurring a transfer fee: (i) transfer all or a portion of the excess among the Subaccounts; (ii) transfer all or a portion of the excess into the Guaranteed Maturity Fixed Account and begin a new Guarantee Period; or (iii) transfer all or a portion of the excess into a combination of Subaccounts, or the Guaranteed Maturity Fixed Account. Any such transfer does not count as one of the free transfers allowed each Contract Year 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 death without incurring a Withdrawal Charge or Market Value Adjustment. After the Contract is continued, prior to the Payout Start Date, the Death Benefit of the continued Contract will be the greatest of: (a) the sum of all purchase payments reduced by any withdrawal adjustments; or (b) the Contract Value on the date we determine the Death Benefit; or (c) the Settlement Value on the date we determine the Death Benefit; or (d) the Contract Value on each Death Benefit Anniversary prior to the date we determine the Death Benefit, increased by any Purchase Payments made since that Death Benefit Anniversary and reduced by an adjustment for any withdrawals, as defined in the Death Benefit provision. Please see DEATH BENEFIT AMOUNT on page 32 for a detailed explanation of how these amounts are calculated. Only one spousal continuation is allowed under the Contract. 2. If the new Contract Owner is not your spouse but is a living person, the new Contract Owner has the following options: (a) The new Contract Owner may elect, within 180 days of the date of your death, to receive the Death Benefit in a lump sum. (b) The new Contract Owner may elect, within 180 days of the date of your death, to receive an amount equal to the Death Benefit paid out through an Income Plan. Payments from the annuity option must begin within one year of your date of death. The Payments must be: (i) over the life of the new Contract Owner, or for a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Contract Owner; or (ii) over the life of the new Contract Owner with a guaranteed number of payments from 5 to 30 years but not to exceed the life expectancy of the new Contract Owner. (c) If the New Owner does not elect one of the options above within 180 days of death, then the New Owner must receive the Contract Value payable within 5 years of your date of death. Under this option, if the Settlement Value is greater than the Contract Value as determined as of the Valuation Date on which we received a complete request for settlement, which includes Due Proof of Death (the next Valuation Date, if we receive Due Proof of Death after 3:00 p.m. Central Time), we will allocate the excess to the Variable Subaccount selected by the New Owner. In the absence of instructions, we will allocate that amount to the Money Market Variable Subaccount. Until the Contract Value is withdrawn, it will vary in accordance with the investment options selected by the New Owner, and the New Owner may exercise all rights as set forth in the TRANSFERS section during this 5-year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived for any withdrawals made during this 5-year period. If the New Owner dies prior to receiving all of the Contract Value, then the New Owner's named beneficiary(ies) will receive the greater of the Settlement Value or the remaining Contract Value. This amount must be received as a lump sum within 5 years of the date of the original Owner's death. 3. If the new Contract Owner is a non-Living Person, the new Contract Owner has the following options: (a) The non-living Contract Owner may elect, within 180 days of your death, to receive the Death Benefit in a lump sum. (b) If the New Owner does not elect the option above, then the New Owner must receive the Contract Value payable within 5 years of your date of death. Under this option, if the Settlement Value is greater than the Contract Value as determined as of the Valuation Date on which we received Due Proof of Death (the next Valuation Date, if we receive Due Proof of Death after 3:00 pm Central Time), we will allocate the excess to the Variable Subaccount selected by the New Owner. In the absence of instructions, we will allocate that amount to the Money Market Variable Subaccount. Until the Contract Value is withdrawn, it will vary in accordance with the investment options selected by the New Owner, and the New Owner may exercise all rights as set forth in the Transfers provision during this 5-year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived during this 5-year period. 30 PROSPECTUS We reserve the right to offer additional options upon Death of Owner. Under any of these options, all ownership rights, subject to any restrictions previously placed upon the Beneficiary, are available to the New Owner. If any new Contract Owner is not a Living Person, all new Contract Owners will be considered to be non-Living Persons for the above purposes. We reserve the right to waive or extend the 180-day limit on a non-discriminatory basis. DEATH OF ANNUITANT If the Annuitant who is not also the Contract Owner dies prior to the Payout Start Date, the Contract Owner must elect one of the following options: 1. If the Contract Owner is a Living Person, the Contract will continue with a new Annuitant as described on page 12. 2. If the Contract Owner is not a Living Person: (a) The non-living Contract Owner may elect, within 180 days of the Annuitant's date of death, to receive the Death Benefit in a lump sum; or (b) If the Contract Owner does not elect the above option, then the Owner must receive the Contract Value payable within 5 years of the Annuitant's date of death. Under this option, if the Settlement Value is greater than the Contract Value as determined as of the Valuation Date on which we received Due Proof of Death (the next Valuation Date, if we receive Due Proof of Death after 3:00 pm Central Time), we will allocate the excess to the Variable Subaccount selected by the New Owner. In the absence of instructions, we will allocate that amount to the Money Market Variable Subaccount. Until the Contract Value is withdrawn, it will vary in accordance with the investment options selected by the New Owner, and the Contract Owner may then exercise all rights as set forth in the TRANSFERS section during this 5-year period. No additional purchase payments may be added to the Contract under this election. Withdrawal Charges will be waived during this 5-year period. If the non-living Contract Owner does not make one of the above described elections, the Settlement Value must be withdrawn by a non-living Contract Owner on or before the mandatory distribution date 5 years after the Annuitant's death. We reserve the right to waive or extend the 180-day limit on a non-discriminatory basis. MORE INFORMATION LINCOLN BENEFIT LIFE COMPANY. Lincoln Benefit Life Company is a stock life insurance company organized under the laws of the state of Nebraska in 1938. Our legal domicile and principal business address is 2940 South 84th Street, Lincoln, Nebraska, 68506-4142. Lincoln Benefit is a wholly owned subsidiary of Allstate Life Insurance Company ("Allstate Life" or "ALIC"), a stock life insurance company incorporated under the laws of the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a stock property-liability insurance company incorporated under the laws of Illinois. All outstanding capital stock of Allstate is owned by The Allstate Corporation ("Allstate"). We are authorized to conduct life insurance and annuity business in the District of Columbia, Guam, U.S. Virgin Islands and all states except New York. We intend to market the Contract everywhere we conduct variable annuity business. The Contracts offered by this prospectus are issued by us and will be funded in the Variable Account and/or the Fixed Account. Under our reinsurance agreements with Allstate Life, substantially all contract related transactions are transferred to Allstate Life and substantially all of the assets backing our reinsured liabilities are owned by Allstate Life. These assets represent our general account and are invested and managed by Allstate Life. Accordingly, the results of operations with respect to applications received and contracts issued by Lincoln Benefit are not reflected in our financial statements. The amounts reflected in our financial statements relate only to the investment of those assets of Lincoln Benefit that are not transferred to Allstate Life under the reinsurance agreements. While the reinsurance agreements provide us with financial backing from Allstate Life, it does not create a direct contractual relationship between Allstate Life and you. Under the Company's reinsurance agreements with ALIC, the Company reinsures all reserve liabilities with ALIC except for variable contracts. The Company's variable contract assets and liabilities are held in legally-segregated, unitized Variable Accounts and are retained by the Company. However, the transactions related to such variable contracts such as premiums, expenses and benefits are transferred to ALIC. THE VARIABLE ACCOUNT Lincoln Benefit established the Lincoln Benefit Life Variable Annuity Account in 1992. We have registered the Variable Account with the SEC as a unit investment trust. The SEC does not supervise the management of the Variable Account or Lincoln Benefit. We own the assets of the Variable Account. The Variable Account is a segregated asset account under Nebraska law. That means we account for the Variable Account's income, gains and losses separately from the results of our 31 PROSPECTUS other operations. It also means that only the assets of the Variable Account that are in excess of the reserves and other Contract liabilities with respect to the Variable Account are subject to liabilities relating to our other operations. Our obligations arising under the Contracts are general corporate obligations of Lincoln Benefit. The Variable Account consists of Variable Subaccounts. Each Variable Subaccount invests in a corresponding Portfolio. We may add new Variable Subaccounts or eliminate one or more of them, if we believe marketing, tax, or investment conditions so warrant. We may also add other Variable Subaccounts that may be available under other variable annuity contracts. We do not guarantee the investment performance of the Variable Account, its Subaccounts or the Portfolios. We may use the Variable Account to fund our other annuity contracts. We will account separately for each type of annuity contract funded by the Variable Account. THE PORTFOLIOS DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. We automatically reinvest all dividends and capital gains distributions from the Portfolios in shares of the distributing Portfolio at their net asset value. VOTING PRIVILEGES. As a general matter, you do not have a direct right to vote the shares of the Portfolios held by the Variable Subaccounts to which you have allocated your Contract Value. Under current law, however, you are entitled to give us instructions on how to vote those shares on certain matters. Based on our present view of the law, we will vote the shares of the Portfolios that we hold directly or indirectly through the Variable Account in accordance with instructions that we receive from Contract Owners entitled to give such instructions. As a general rule, before the Payout Start Date, the Contract Owner or anyone with a voting interest is the person entitled to give voting instructions. The number of shares that a person has a right to instruct will be determined by dividing the Contract Value allocated to the applicable Variable Subaccount by the net asset value per share of the corresponding Portfolio as of the record date of the meeting. After the Payout Start Date the person receiving income payments has the voting interest. The payee's number of votes will be determined by dividing the reserve for such Contract allocated to the applicable Variable Subaccount by the net asset value per share of the corresponding Portfolio. The votes decrease as income payments are made and as the reserves for the Contract decrease. We will vote shares attributable to Contracts for which we have not received instructions, as well as shares attributable to us, in the same proportion as we vote shares for which we have received instructions, unless we determine that we may vote such shares in our own discretion. We will apply voting instructions to abstain on any item to be voted upon on a pro-rata basis to reduce the votes eligible to be cast. We reserve the right to vote Portfolio shares as we see fit without regard to voting instructions to the extent permitted by law. 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 we send to you. CHANGES IN PORTFOLIOS. If the shares of any of the Portfolios are no longer available for investment by the Variable Account or if, in our judgment, further investment in such shares is no longer desirable in view of the purposes of the Contract, we may eliminate that Portfolio and substitute shares of another eligible investment fund. Any substitution of securities will comply with the requirements of the Investment Company Act of 1940. We also may add new Variable Subaccounts that invest in additional underlying funds. We will notify you in advance of any change. CONFLICTS OF INTEREST. 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. The boards of directors of these Portfolios monitor for possible conflicts among separate accounts buying shares of the Portfolios. Conflicts could develop for a variety of reasons. For example, differences in treatment under tax and other laws or the failure by a separate account to comply with such laws could cause a conflict. To eliminate a conflict, a Portfolio's board of directors may require a separate account to withdraw its participation in a Portfolio. A Portfolio's net asset value could decrease if it had to sell investment securities to pay redemption proceeds to a separate account withdrawing because of a conflict. THE CONTRACT DISTRIBUTION. 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 7.5% of all Purchase Payments (on a present value basis). From time to time, we may offer additional sales incentives of up to 1.5% of Purchase Payments and other cash bonuses to broker-dealers who maintain certain sales volume levels. ALFS, Inc. ("ALFS") located at 3100 Sanders Road, Northbrook, IL 60062-7154 serves as distributor of the Contracts. ALFS, an affiliate of Lincoln Benefit, is a wholly owned subsidiary of Allstate Life Insurance Company. ALFS is a registered broker dealer under the Securities and Exchange Act of 1934, as amended, and is a member of the National Association of Securities Dealers, Inc. Lincoln Benefit does not pay ALFS a commission for distribution of the Contracts. The 32 PROSPECTUS 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. ADMINISTRATION. We have primary responsibility for all administration of the Contracts and the Variable Account. We provide the following administrative services, among others: .. issuance of the Contracts; .. maintenance of Contract Owner records; .. Contract Owner services; .. calculation of unit values; .. maintenance of the Variable Account; and .. preparation of Contract Owner reports. We will send you Contract statements and transaction confirmations at least annually. You should notify us promptly in writing of any address change. You should read your statements and confirmations carefully and verify their accuracy. You should contact us promptly if you have a question about a periodic statement. We will investigate all complaints and make any necessary adjustments retroactively, but you must notify us of a potential error within a reasonable time after the date of the questioned statement. If you wait too long, we reserve the right to make the adjustment as of the date that we receive notice of the potential error. We also will provide you with additional periodic and other reports, information and prospectuses as may be required by federal securities laws. NON-QUALIFIED ANNUITIES HELD WITHIN A QUALIFIED PLAN If you use the Contract within a employer sponsored qualified retirement plan, the plan may impose different or additional conditions or limitations on withdrawals, waivers of withdrawal 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. LEGAL MATTERS All matters of Nebraska law pertaining to the Contract, including the validity of the Contract and our right to issue the Contract under Nebraska law, have been passed upon by William F. Emmons, Vice President, Assistant General Counsel and Assistant Secretary of Lincoln Benefit. 33 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 Variable 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 Variable Account are automatically applied to increase reserves under the Contract. Under existing federal income tax law, Lincoln Benefit believes that the Variable 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 Variable 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 Variable Account, then Lincoln Benefit may impose a charge against the Variable 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 Variable Account are "adequately diversified" according to Treasury Department regulations, and .. Lincoln Benefit is considered the owner of the Variable 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 surviving Contract Owner. Since the trust will be the surviving Contract Owner in all cases, the Death Benefit will be payable to the trust notwithstanding any beneficiary designation on the annuity contract. A trust, 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 Variable Account must be "adequately diversified" consistent with standards under Treasury Department regulations. If the investments in the Variable 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 34 PROSPECTUS announced that the regulations do not provide guidance concerning circumstances in which investor control of 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 Variable Account. If this occurs, income and gain from the Variable 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 Variable 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. WITHDRAWALS AFTER THE PAYOUT START DATE. Federal tax law is unclear regarding the taxation of any additional withdrawal received after the Payout Start Date. It is possible that a greater or lesser portion of such a payment could be taxable than the amount we determine. DISTRIBUTION AT DEATH RULES. In order to be considered an annuity contract for federal income tax purposes, the Contract must provide: .. if any Contract Owner dies on or after the Payout Start Date but before the entire interest in the Contract has been distributed, the remaining portion of such interest must be distributed at least as rapidly as under the method of distribution being used as of the date of the Contract Owner's death; .. if any Contract Owner dies prior to the Payout Start Date, the entire interest in the Contract will be distributed within 5 years after the date of the Contract Owner's death. These requirements are satisfied if any portion of the Contract Owner's interest that is payable to (or for the benefit of) a designated Beneficiary is distributed over the life of such Beneficiary (or over a period not extending beyond the life expectancy of the Beneficiary) and the distributions begin within 1 year of the Contract Owner's death. If the Contract Owner's designated Beneficiary is the surviving spouse of the Contract Owner, the Contract may be continued with the surviving spouse as the new Contract Owner. .. if the Contract Owner is a non-natural person, then the Annuitant will be treated as the Contract Owner for purposes of applying the distribution at death rules. In addition, a change in the Annuitant on a Contract owned by a non-natural person will be treated as the death of the Contract Owner. TAXATION OF ANNUITY DEATH BENEFITS. Death Benefit amounts are included in income as follows: .. if distributed in a lump sum, the amounts are taxed in the same manner as a full withdrawal, or .. if distributed under an Income Plan, the amounts are taxed in the same manner as annuity payments. PENALTY TAX ON PREMATURE DISTRIBUTIONS. A 10% penalty tax applies to the taxable amount of any 35 PROSPECTUS premature distribution from a non-Qualified Contract. The penalty tax generally applies to any distribution made prior to the date you attain age 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or becoming totally disabled, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made under an immediate annuity, or .. attributable to investment in the Contract before August 14, 1982. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS. With respect to non-Qualified Contracts using substantially equal periodic payments or immediate annuity payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the Contract Owner's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. TAX FREE EXCHANGES UNDER INTERNAL REVENUE CODE SECTION 1035. A 1035 exchange is a tax-free exchange of a non-qualified life insurance contract, endowment contract or annuity contract into a non-Qualified annuity contract. The contract owner(s) must be the same on the old and new contract. Basis from the old contract carries over to the new contract so long as we receive that information from the relinquishing company. If basis information is never received, we will assume that all exchanged funds represent earnings and will allocate no cost basis to them. PARTIAL EXCHANGES. The IRS has issued a ruling that permits partial exchanges of annuity contracts. Under this ruling, if you take a withdrawal from a receiving or relinquishing annuity contract within 24 months of the partial exchange, then special aggregation rules apply for purposes of determining the taxable amount of a distribution. The IRS has issued limited guidance on how to aggregate and report these distributions. The IRS is expected to provide further guidance, as a result, it is possible that the amount we calculate and report to the IRS as taxable could be different. TAXATION OF OWNERSHIP CHANGES. If you transfer a non-Qualified Contract without full and adequate consideration to a person other than your spouse (or to a former spouse incident to a divorce), you will be taxed on the difference between the Contract Value and the investment in the Contract at the time of transfer. Any assignment or pledge (or agreement to assign or pledge) of the Contract Value is taxed as a withdrawal of such amount or portion and may also incur the 10% penalty tax. AGGREGATION OF ANNUITY CONTRACTS. The Code requires that all non-Qualified deferred annuity contracts issued by Lincoln Benefit (or its affiliates) to the same Contract Owner during any calendar year be aggregated and treated as one annuity contract for purposes of determining the taxable amount of a distribution. INCOME TAX WITHHOLDING Generally, Lincoln Benefit is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% of the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Lincoln Benefit is required to withhold federal income tax using the wage withholding rates for all annuitized distributions. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Section 1441 of the Code provides that Lincoln Benefit as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a completed Form W-8BEN. A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all 36 PROSPECTUS countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. TAX QUALIFIED CONTRACTS The income on tax sheltered annuity (TSA) and IRA investments is tax deferred, and the income on variable annuities held by such plans does not receive any additional tax deferral. You should review the annuity features, including all benefits and expenses, prior to purchasing a variable annuity as a TSA or IRA. Tax Qualified Contracts are contracts purchased as investments as: .. Individual Retirement Annuities (IRAs) under Section 408(b) of the Code; .. Roth IRAs under Section 408A of the Code; .. Simplified Employee Pension (SEP IRA) under Section 408(k) of the Code; .. Savings Incentive Match Plans for Employees (SIMPLE IRA) under Section 408(p) of the Code; and .. Tax Sheltered Annuities under Section 403(b) of the Code. Lincoln Benefit reserves the right to limit the availability of the Contract for use with any of the retirement plans listed above or to modify the Contract to conform with tax requirements. The tax rules applicable to participants with tax qualified annuities vary according to the type of contract and the terms and conditions of the endorsement. Adverse tax consequences may result from certain transactions such as excess contributions, premature distributions, and, distributions that do not conform to specified commencement and minimum distribution rules. Lincoln Benefit can issue an individual retirement annuity on a rollover or transfer of proceeds from a decedent's IRA, TSA, or employer sponsored retirement plan under which the decedent's surviving spouse is the beneficiary. Lincoln Benefit does not offer an individual retirement annuity that can accept a transfer of funds for any other, non-spousal, beneficiary of a decedent's IRA, TSA, or employer sponsored retirement plan. In the case of certain qualified plans, the terms of the plans may govern the right to benefits, regardless of the terms of the Contract. TAXATION OF WITHDRAWALS FROM AN INDIVIDUALLY OWNED TAX QUALIFIED CONTRACT. If you make a partial withdrawal under a Tax Qualified Contract other than a Roth IRA, the portion of the payment that bears the same ratio to the total payment that the investment in the Contract (i.e., nondeductible IRA contributions) bears to the Contract Value, is excluded from your income. We do not keep track of nondeductible contributions, and all tax reporting of distributions from Tax Qualified Contracts other than Roth IRAs will indicate that the distribution is fully taxable. "Qualified distributions" from Roth IRAs are not included in gross income. "Qualified distributions" are any distributions made more than five taxable years after the taxable year of the first contribution to any Roth IRA and which are: .. made on or after the date the Contract Owner attains age 59 1/2, .. made to a beneficiary after the Contract Owner's death, .. attributable to the Contract Owner being disabled, or .. made for a first time home purchase (first time home purchases are subject to a lifetime limit of $10,000). "Nonqualified distributions" from Roth IRAs are treated as made from contributions first and are included in gross income only to the extent that distributions exceed contributions. All tax reporting of distributions from Roth IRAs will indicate that the taxable amount is not determined. REQUIRED MINIMUM DISTRIBUTIONS. Generally, IRAs (excluding Roth IRAs) and TSAs require minimum distributions upon reaching age 70 1/2. Failure to withdraw the required minimum distribution will result in a 50% tax penalty on the shortfall not withdrawn from the Contract. Not all income plans offered under the Contract satisfy the requirements for minimum distributions. Because these distributions are required under the Code and the method of calculation is complex, please see a competent tax advisor. THE DEATH BENEFIT AND TAX QUALIFIED CONTRACTS. Pursuant to the Code and IRS regulations, an IRA (e.g., traditional IRA, Roth IRA, SEP IRA and SIMPLE IRA) may not invest in life insurance contracts. However, an IRA may provide a death benefit that equals the greater of the purchase payments or the Contract Value. The Contract offers a death benefit that in certain circumstances may exceed the greater of the purchase payments or the Contract Value. We believe that the Death Benefits offered by your Contract do not constitute life insurance under these regulations. It is also possible that certain death benefits that offer enhanced earnings could be characterized as an incidental death benefit. If the death benefit were so characterized, this could result in current taxable income to a Contract Owner. In addition, there are limitations on the amount of incidental death benefits that may be provided under qualified plans, such as in connection with a 403(b) plan. Lincoln Benefit reserves the right to limit the availability of the Contract for use with any of the qualified plans listed above. 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 37 PROSPECTUS 59 1/2. However, no penalty tax is incurred on distributions: .. made on or after the date the Contract Owner attains age 59 1/2, .. made as a result of the Contract Owner's death or total disability, .. made in substantially equal periodic payments over the Contract Owner's life or life expectancy, or over the joint lives or joint life expectancies of the Contract Owner and the Beneficiary, .. made after separation from service after age 55 (applies only for IRAs), .. made pursuant to an IRS levy, .. made for certain medical expenses, .. made to pay for health insurance premiums while unemployed (applies only for IRAs), .. made for qualified higher education expenses (applies only for IRAs), and .. made for a first time home purchase (up to a $10,000 lifetime limit and applies only for IRAs). During the first 2 years of the individual's participation in a SIMPLE IRA, distributions that are otherwise subject to the premature distribution penalty, will be subject to a 25% penalty tax. You should consult a competent tax advisor to determine how these exceptions may apply to your situation. SUBSTANTIALLY EQUAL PERIODIC PAYMENTS ON TAX QUALIFIED CONTRACTS. With respect to Tax Qualified Contracts using substantially equal periodic payments as an exception to the penalty tax on premature distributions, any additional withdrawal or other material modification of the payment stream would violate the requirement that payments must be substantially equal. Failure to meet this requirement would mean that the income portion of each payment received prior to the later of 5 years or the taxpayer's attaining age 59 1/2 would be subject to a 10% penalty tax unless another exception to the penalty tax applied. The tax for the year of the modification is increased by the penalty tax that would have been imposed without the exception, plus interest for the years in which the exception was used. A material modification does not include permitted changes described in published IRS rulings. You should consult a competent tax advisor prior to creating or modifying a substantially equal periodic payment stream. INCOME TAX WITHHOLDING ON TAX QUALIFIED CONTRACTS. Generally, Lincoln Benefit is required to withhold federal income tax at a rate of 10% from all non-annuitized distributions that are not considered "eligible rollover distributions." The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold the required 10% from the taxable amount. In certain states, if there is federal withholding, then state withholding is also mandatory. Lincoln Benefit is required to withhold federal income tax at a rate of 20% on all "eligible rollover distributions" unless you elect to make a "direct rollover" of such amounts to an IRA or eligible retirement plan. Eligible rollover distributions generally include all distributions from employer sponsored retirement plans, including TSAs but excluding IRAs, with the exception of: .. required minimum distributions, or, .. a series of substantially equal periodic payments made over a period of at least 10 years, or, .. a series of substantially equal periodic payments made over the life (joint lives) of the participant (and beneficiary), or, .. hardship distributions. For all annuitized distributions that are not subject to the 20% withholding requirement, Lincoln Benefit is required to withhold federal income tax using the wage withholding rates. The customer may elect out of withholding by completing and signing a withholding election form. If no election is made, we will automatically withhold using married with three exemptions as the default. If no U.S. taxpayer identification number is provided, we will automatically withhold using single with zero exemptions as the default. In certain states, if there is federal withholding, then state withholding is also mandatory. Election out of withholding is valid only if the customer provides a U.S. residence address and taxpayer identification number. Generally, Section 1441 of the Code provides that Lincoln Benefit as a withholding agent must withhold 30% of the taxable amounts paid to a non-resident alien. A non-resident alien is someone other than a U.S. citizen or resident alien. Withholding may be reduced or eliminated if covered by an income tax treaty between the U.S. and the non-resident alien's country of residence if the payee provides a U.S. taxpayer identification number on a completed Form W-8BEN. A U.S. taxpayer identification number is a social security number or an individual taxpayer identification number ("ITIN"). ITINs are issued by the IRS to non-resident alien individuals who are not eligible to obtain a social security number. The U.S. does not have a tax treaty with all countries nor do all tax treaties provide an exclusion or lower withholding rate for annuities. INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity (IRA). Individual Retirement Annuities are subject to limitations on the amount that can be contributed and on the time when distributions may commence. Certain distributions from other types of qualified plans may be "rolled over" on a tax-deferred basis into an Individual Retirement Annuity. 38 PROSPECTUS ROTH INDIVIDUAL RETIREMENT ANNUITIES. Section 408A of the Code permits eligible individuals to make nondeductible contributions to an individual retirement program known as a Roth Individual Retirement Annuity. Roth Individual Retirement Annuities are subject to limitations on the amount that can be contributed and on the time when distributions may commence. Subject to certain limitations, a traditional Individual Retirement Account or Annuity may be converted or "rolled over" to a Roth Individual Retirement Annuity. The income portion of a conversion or rollover distribution is taxable currently, but is exempted from the 10% penalty tax on premature distributions. ANNUITIES HELD BY INDIVIDUAL RETIREMENT ACCOUNTS (COMMONLY KNOWN AS CUSTODIAL IRAS) Internal Revenue Code Section 408 permits a custodian or trustee of an Individual Retirement Account to purchase an annuity as an investment of the Individual Retirement Account. If an annuity is purchased inside of an Individual Retirement Account, then the Annuitant must be the same person as the beneficial owner of the Individual Retirement Account. Generally, the death benefit of an annuity held in an Individual Retirement Account must be paid upon the death of the Annuitant. However, in most states, the Contract permits the custodian or trustee of the Individual Retirement Account to continue the Contract in the accumulation phase, with the Annuitant's surviving spouse as the new Annuitant, if the following conditions are met: 1) The custodian or trustee of the Individual Retirement Account is the owner of the annuity and has the right to the death proceeds otherwise payable under the annuity contract; 2) The deceased Annuitant was the beneficial owner of the Individual Retirement Account; 3) We receive a complete request for settlement for the death of the Annuitant; and 4) The custodian or trustee of the Individual Retirement Account provides us with a signed certification of the following: (a) The Annuitant's surviving spouse is the sole beneficiary of the Individual Retirement Account; (b) The Annuitant's surviving spouse has elected to continue the Individual Retirement Account as his or her own Individual Retirement Account; and (c) The custodian or trustee of the Individual Retirement Account has continued the Individual Retirement Account pursuant to the surviving spouse's election. SIMPLIFIED EMPLOYEE PENSION IRA. Section 408(k) of the Code allows eligible employers to establish simplified employee pension plans for their employees using individual retirement annuities. These employers may, within specified limits, make deductible contributions on behalf of the employees to the individual retirement annuities. Employers intending to use the Contract in connection with such plans should seek competent tax advice. SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA). Section 408(p) of the Code allow eligible employers with 100 or fewer employees to establish SIMPLE retirement plans for their employees using individual retirement annuities. In general, a SIMPLE IRA consists of a salary deferral program for eligible employees and matching or nonelective contributions made by employers. Employers intending to purchase the Contract as a SIMPLE IRA should seek competent tax and legal advice. TO DETERMINE IF YOU ARE ELIGIBLE TO CONTRIBUTE TO ANY OF THE ABOVE LISTED IRAS (TRADITIONAL, ROTH, SEP, OR SIMPLE), PLEASE REFER TO IRS PUBLICATION 590 AND YOUR COMPETENT TAX ADVISOR. TAX SHELTERED ANNUITIES. Section 403(b) of the Code provides tax-deferred retirement savings plans for employees of certain non-profit and educational organizations. Under Section 403(b), any contract used for a 403(b) plan must provide that distributions attributable to salary reduction contributions made after 12/31/88, and all earnings on salary reduction contributions, may be made only on or after the date the employee: .. attains age 59 1/2, .. severs employment, .. dies, .. becomes disabled, or .. incurs a hardship (earnings on salary reduction contributions may not be distributed on account of hardship). These limitations do not apply to withdrawals where Lincoln Benefit is directed to transfer some or all of the Contract Value to another 403(b) plan. Generally, we do not accept Employee Retirement Income Security Act of 1974 (ERISA) funds in 403(b) contracts. 39 PROSPECTUS ANNUAL REPORTS AND OTHER DOCUMENTS Lincoln Benefit's annual report on Form 10-K for the year ended December 31, 2003, is incorporated herein by reference, which means that it is legally a part of this prospectus. After the date of this prospectus and before we terminate the offering of the securities under this prospectus, all documents or reports we file with the SEC under the Exchange Act of 1934 are also incorporated herein by reference, which means that they also legally become a part of this prospectus. Statements in this prospectus, or in documents that we file later with the SEC and that legally become a part of this prospectus, may change or supersede statements in other documents that are legally part of this prospectus. We file our Exchange Act documents and reports, including our annual and quarterly reports on Form 10-K and Form 10-Q electronically on the SEC's "EDGAR" system using the identifying number CIK No. 0000910739. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. the address of the site is http:// www.sec.gov. You also can view these materials at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on the operations of SEC's Public Reference Room, call 1-800-SEC-0330. If you have received a copy of this prospectus, and would like a free copy of any document incorporated herein by reference (other than exhibits not specifically incorporated by reference into the text of such documents), please write or call us at Lincoln Benefit Life Company, P.O. Box 80469, Lincoln, Nebraska, 68501-0469 or 800-865-5237. 40 PROSPECTUS APPENDIX A ACCUMULATION UNIT VALUES The Accumulation Unit Value is a unit of measure used to calculate the value of a Contract Owner's interest in a Variable Subaccount for any Valuation Period. An Accumulation Unit Value does not reflect deduction of certain charges under the Contract that are deducted from your Contract Value, such as the Administrative Expense Charge. The beginning value for 2001 reflects the Accumulation Unit Value as of August 10, 2001, the effective date of the Registration Statement for this Contract. We maintain different Accumulation Unit Values for Base Contracts with different combinations of optional riders because the charges deducted from the Subaccounts are different. This Appendix includes Accumulation Unit Values reflecting the highest and lowest available Contract charge combinations. The Statement of Additional Information, which is available upon request without charge, contains the Accumulation Unit Values for all the other available combinations of optional riders. A brief explanation of how performance of the Subaccounts is calculated may also be found in the Statement of Additional Information. Please contact us at 1-800-865-5237 to obtain a copy of the Statement of Additional Information. BASE POLICY WITH NO OPTIONAL RIDERS
Year ending December 31, ----------------------------- 2001 2002 2003 FUND -------------------------------------------------------------------------- AIM Basic Value Fund (2) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- AIM Dent Demographics Trends Fund Accumulation Unit Value Beginning $ 10.00 $ 9.77 $ 6.537 Accumulation Unit Value Ending $ 9.77 $ 6.537 $ 8.865 Number of Units Outstanding at End of 6,717 37,747 49,569 Year -------------------------------------------------------------------------- Alger American Growth Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 12.361 Number of Units Outstanding at End of -- -- 16,344 Year -------------------------------------------------------------------------- Fidelity Equity-Income Accumulation Unit Value Beginning $ 10.00 $ 9.63 $ 7.873 Accumulation Unit Value Ending $ 9.63 $ 7.873 $ 10.099 Number of Units Outstanding at End of 7,233 176,376 291,454 Year -------------------------------------------------------------------------- Fidelity VIP Growth P Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 12.461 Number of Units Outstanding at End of -- -- 42,866 Year -------------------------------------------------------------------------- Fidelity Investment Grade Bond Accumulation Unit Value Beginning $ 10.00 $ 10.15 $ 11.021 Accumulation Unit Value Ending $ 10.15 $ 11.021 $ 11.409 Number of Units Outstanding at End of 10,192 204,156 340,857 Year -------------------------------------------------------------------------- Fidelity Overseas Accumulation Unit Value Beginning $ 10.00 $ 9.35 $ 7.339 Accumulation Unit Value Ending $ 9.35 $ 7.339 $ 10.356 Number of Units Outstanding at End of 110 2,203 46,826 Year -------------------------------------------------------------------------- Janus Aspen Series Capital Appreciation P (3) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- Janus Aspen Series Foreign Stock (4) Accumulation Unit Value Beginning $ 10.00 $ 10.69 $ 9.136 Accumulation Unit Value Ending $ 10.69 $ 9.136 $ 12.021 Number of Units Outstanding at End of 391 14,107 26,635 Year -------------------------------------------------------------------------- Janus Aspen Series Worldwide Growth Accumulation Unit Value Beginning $ 10.00 $ 9.63 $ 7.060 Accumulation Unit Value Ending $ 9.63 $ 7.060 $ 8.614 Number of Units Outstanding at End of 3,165 97,061 77,756 Year -------------------------------------------------------------------------- Lazard Retirement Emerging Markets Accumulation Unit Value Beginning $ 10.00 $ 9.92 $ 9.639 Accumulation Unit Value Ending $ 9.92 $ 9.639 $ 14.544 Number of Units Outstanding at End of 0 4,579 9,947 Year -------------------------------------------------------------------------- LSA Aggressive Growth Fund (7) AAccumulation Unit Value Beginning $ 10.00 $ 9.41 $ 6.348 Accumulation Unit Value Ending $ 9.41 $ 6.348 $ 8.686 Number of Units Outstanding at End of 649 22,935 45,902 Year --------------------------------------------------------------------------
41 PROSPECTUS LSA Balanced Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.64 $ 7.768 Accumulation Unit Value Ending $ 9.64 $ 7.768 $ 9.902 Number of Units Outstanding at End of 18,088 152,064 238,048 Year -------------------------------------------------------------------------- LSA Basic Value Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.60 $ 7.416 Accumulation Unit Value Ending $ 9.60 $ 7.416 $ 9.761 Number of Units Outstanding at End of 13,440 193,154 241,742 Year -------------------------------------------------------------------------- LSA Blue Chip Fund (5) Accumulation Unit Value Beginning $ 10.00 $ 9.76 $ 7.103 Accumulation Unit Value Ending $ 9.76 $ 7.103 $ 8.776 Number of Units Outstanding at End of 3,387 91,543 224,286 Year -------------------------------------------------------------------------- LSA Capital Appreciation Fund (3) Accumulation Unit Value Beginning $ 10.00 $ 10.03 $ 7.059 Accumulation Unit Value Ending $ 10.03 $ 7.059 $ 9.077 Number of Units Outstanding at End of 2,459 53,255 107,302 Year -------------------------------------------------------------------------- LSA Disciplined Equity Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.59 -- Accumulation Unit Value Ending $ 9.59 $ 7.073 -- Number of Units Outstanding at End of 1,065 64,810 -- Year -------------------------------------------------------------------------- LSA Diversified Mid Cap Fund (6) Accumulation Unit Value Beginning $ 10.00 $ 10.00 $ 7.962 Accumulation Unit Value Ending $ 10.00 $ 7.962 $ 10.432 Number of Units Outstanding at End of 9,409 97,423 130,830 Year -------------------------------------------------------------------------- LSA Emerging Growth Equity Fund (7) Accumulation Unit Value Beginning $ 10.00 $ 10.06 $ 5.768 Accumulation Unit Value Ending $ 10.06 $ 5.768 $ 8.361 Number of Units Outstanding at End of 352 17,828 26,548 Year -------------------------------------------------------------------------- LSA Equity Growth Fund (2) (3) Accumulation Unit Value Beginning $ 10.00 $ 9.97 $ 6.901 Accumulation Unit Value Ending $ 9.97 $ 6.901 $ 8.405 Number of Units Outstanding at End of 1,703 27,593 109,311 Year -------------------------------------------------------------------------- LSA Capital Growth Fund (3) Accumulation Unit Value Beginning $ 10.00 $ 9.68 $ 7.225 Accumulation Unit Value Ending $ 9.68 $ 7.225 $ 8.806 Number of Units Outstanding at End of 856 31,959 53,695 Year -------------------------------------------------------------------------- LSA Mid Cap Value Fund (6) Accumulation Unit Value Beginning $ 10.00 $ 10.66 $ 9.731 Accumulation Unit Value Ending $ 10.66 $ 9.731 $ 13.418 Number of Units Outstanding at End of 7,420 82,491 122,723 Year -------------------------------------------------------------------------- LSA Value Equity Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.62 $ 7.389 Accumulation Unit Value Ending $ 9.62 $ 7.389 $ 9.508 Number of Units Outstanding at End of 2,032 38,421 98,093 Year -------------------------------------------------------------------------- MFS New Discovery Series Accumulation Unit Value Beginning $ 10.00 $ 10.35 $ 6.963 Accumulation Unit Value Ending $ 10.35 $ 6.963 $ 9.166 Number of Units Outstanding at End of 1,040 63,132 81,084 Year -------------------------------------------------------------------------- MFS Utilities Series Accumulation Unit Value Beginning $ 10.00 $ 8.96 $ 6.813 Accumulation Unit Value Ending $ 8.96 $ 6.813 $ 9.112 Number of Units Outstanding at End of 12,557 38,681 50,267 Year -------------------------------------------------------------------------- PAVIT OpCap Balanced (2) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- PAVIT PEA Science and Technology Accumulation Unit Value Beginning $ 10.00 $ 9.59 $ 4.768 Accumulation Unit Value Ending $ 9.59 $ 4.768 $ 7.683 Number of Units Outstanding at End of 906 18,884 56,004 Year -------------------------------------------------------------------------- PAVIT OpCap SmallCap Accumulation Unit Value Beginning $ 10.00 $ 10.09 $ 7.802 Accumulation Unit Value Ending $ 10.09 $ 7.802 $ 10.980 Number of Units Outstanding at End of 536 34,675 59,114 Year -------------------------------------------------------------------------- Oppenheimer International Growth Accumulation Unit Value Beginning $ 10.00 $ 9.11 $ 6.781 Accumulation Unit Value Ending $ 9.11 $ 6.781 $ 9.735 Number of Units Outstanding at End of 1,054 23,843 23,597 Year --------------------------------------------------------------------------
42 PROSPECTUS Oppenheimer Main Street Small Cap Fund/VA Accumulation Unit Value Beginning $ 10.00 $ 10.30 $ 8.545 Accumulation Unit Value Ending $ 10.30 $ 8.545 $ 12.160 Number of Units Outstanding at End of 2,185 52,157 87,171 Year -------------------------------------------------------------------------- PIMCO Foreign Bond (U.S. Dollar-Hedged) Accumulation Unit Value Beginning $ 10.00 $ 10.12 $ 10.806 Accumulation Unit Value Ending $ 10.12 $ 10.806 $ 10.901 Number of Units Outstanding at End of 575 49,021 71,226 Year -------------------------------------------------------------------------- PIMCO Money Market Accumulation Unit Value Beginning $ 10.00 $ 10.04 $ 10.048 Accumulation Unit Value Ending $ 10.04 $ 10.048 $ 9.983 Number of Units Outstanding at End of 23,597 289,545 388,312 Year -------------------------------------------------------------------------- PIMCO Real Return (1) Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 10.482 Number of Units Outstanding at End of -- -- 22,724 Year -------------------------------------------------------------------------- PIMCO Total Return Accumulation Unit Value Beginning $ 10.00 $ 10.15 $ 10.919 Accumulation Unit Value Ending $ 10.15 $ 10.919 $ 11.314 Number of Units Outstanding at End of 22,113 370,770 504,244 Year -------------------------------------------------------------------------- Putnam High Yield Fund Accumulation Unit Value Beginning $ 10.00 $ 9.89 $ 9.683 Accumulation Unit Value Ending $ 9.89 $ 9.683 $ 12.088 Number of Units Outstanding at End of 4,328 49,831 121,267 Year -------------------------------------------------------------------------- Putnam International Growth and Income Fund Accumulation Unit Value Beginning $ 10.00 $ 9.44 $ 8.034 Accumulation Unit Value Ending $ 9.44 $ 8.034 $ 10.925 Number of Units Outstanding at End of 935 19,992 36,251 Year -------------------------------------------------------------------------- Rydex VT OTC Fund Accumulation Unit Value Beginning $ 10.00 $ 9.80 $ 5.913 Accumulation Unit Value Ending $ 9.80 $ 5.913 $ 8.483 Number of Units Outstanding at End of 577 23,308 31,257 Year -------------------------------------------------------------------------- Rydex VT Sector Rotation Fund (1) Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 12.471 Number of Units Outstanding at End of -- -- 1,384 Year -------------------------------------------------------------------------- Salomon Brothers Variable All Cap Fund Accumulation Unit Value Beginning $ 10.00 $ 9.68 $ 7.159 Accumulation Unit Value Ending $ 9.68 $ 7.159 $ 9.819 Number of Units Outstanding at End of 1,864 101,018 82,721 Year -------------------------------------------------------------------------- Salomon Brothers Variable Investors Fund (2) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- Scudder VIT EAFE Equity Index Fund (1) Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 13.170 Number of Units Outstanding at End of -- -- 1,561 Year -------------------------------------------------------------------------- Scudder VIT Equity 500 Index Fund (1) Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 12.119 Number of Units Outstanding at End of -- -- 27,529 Year -------------------------------------------------------------------------- Scudder VIT Small Cap Index Fund (1) Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 13.867 Number of Units Outstanding at End of -- -- 10,762 Year -------------------------------------------------------------------------- Van Kampen UIF Equity Growth (5) (9) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- Van Kampen UIF High Yield (9) Accumulation Unit Value Beginning $ 10.00 $ 9.49 $ 8.683 Accumulation Unit Value Ending $ 9.49 $ 8.683 $ 10.768 Number of Units Outstanding at End of 7,458 45,587 70,594 Year --------------------------------------------------------------------------
43 PROSPECTUS Van Kampen UIF U.S. Mid Cap Value (6) (9) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- Van Kampen LIT Aggressive Growth Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of -- -- -- Year -------------------------------------------------------------------------- Van Kampen LIT Growth & Income (7) Accumulation Unit Value Beginning $ 10.00 $ 9.64 $ 8.108 Accumulation Unit Value Ending $ 9.64 $ 8.108 $ 10.212 Number of Units Outstanding at End of 8,115 139,022 223,485 Year -------------------------------------------------------------------------- Van Kampen UIF U.S. Real Estate (1) (9) Accumulation Unit Value Beginning -- -- $ 10.000 Accumulation Unit Value Ending -- -- $ 12.780 Number of Units Outstanding at End of -- -- 9,773 Year --------------------------------------------------------------------------
(1) First offered May 1, 2003. (2) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I. Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund - Class I, respectively. Accordingly, on 4/30/04, we transferred the value of the LSA Balanced Variable Sub-Account and the LSA Value Equity Variable Sub-Account to the PAVIT OpCap Balanced Variable Sub-Account, AIM V.I. Basic Value Variable Sub-Account and the Salomon Brothers Variable Investors Variable Sub-Account, respectively. 44 PROSPECTUS (3) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares. Accordingly, on 4/30/04, we transferred the value of the LSA Capital Appreciation Variable Sub-Account to the Janus Aspen Series Capital Appreciation Variable Sub-Account. (4) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service Shares changed its name to the Janus Aspen Foreign Stock Portfolio - Service Shares. We have made a corresponding change in the name of the Variable Sub-Account that invests in this Portfolio. (5) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA Capital Growth Fund were merged into the Van Kampen UIF Equity Growth Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of the LSA Blue Chip Variable Sub-Account, LSA Equity Growth Variable Sub-Account and LSA Capital Growth Variable Sub-Account to the Van Kampen UIF Equity Growth Variable Sub-Account. (6) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of the LSA Diversified Mid-Cap Growth Variable Sub-Account and the LSA MidCap Value Variable Sub-Account to the Van Kampen UIF U.S. Mid Cap Value Variable Sub-Account. (7) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class II. Accordingly, on 4/30/04, we transferred the value of the LSA Aggressive Growth Variable Sub-Account and the LSA Emerging Growth Variable Sub-Account to the Van Kampen LIT Aggressive Growth Variable Sub-Account. (8) Effective 5/1/04, the PIMCO VIT Foreign Bond Portfolio - Administrative Shares changed its name to PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares (9) Morgan Stanley Investment Management, Inc., the adviser to the UIF Portfolios, does business in certain instances usingthe name Van Kampen. BASE POLICY WITH ENHANCED DEATH BENEFIT RIDER, INCOME BENEFIT RIDER AND ENHANCED EARNINGS DEATH BENEFIT RIDER (66-75)
Year ending December 31, ----------------------------- 2001 2002 2003 FUND -------------------------------------------------------------------------- AIM Basic Value Fund (2) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- AIM Dent Demographics Trends Fund Accumulation Unit Value Beginning $ 10.00 $ 9.74 $ 6.464 Accumulation Unit Value Ending $ 9.74 $ 6.464 $ 8.695 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- Alger American Growth (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 12.294 Number of Units Outstanding at End of Year -- -- 2,501 -------------------------------------------------------------------------- Fidelity VIP Equity-Income Accumulation Unit Value Beginning $ 10.00 $ 9.60 $ 7.786 Accumulation Unit Value Ending $ 9.60 $ 7.786 $ 9.906 Number of Units Outstanding at End of Year 0 4,628 5,624 -------------------------------------------------------------------------- Fidelity VIP Growth (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 12.394 Number of Units Outstanding at End of Year -- -- 1,046 -------------------------------------------------------------------------- Fidelity VIP Investment Grade Bond Accumulation Unit Value Beginning $ 10.00 $ 10.12 $ 10.898 Accumulation Unit Value Ending $ 10.12 $ 10.898 $ 11.191 Number of Units Outstanding at End of Year 0 2,777 3,709 -------------------------------------------------------------------------- Fidelity VIP Overseas Accumulation Unit Value Beginning $ 10.00 $ 9.32 $ 7.257 Accumulation Unit Value Ending $ 9.32 $ 7.257 $ 10.158 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- Janus Aspen Series Capital Appreciation (3) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- Janus Aspen Series Foreign Stock (4) Accumulation Unit Value Beginning $ 10.00 $ 10.66 $ 9.034 Accumulation Unit Value Ending $ 10.66 $ 9.034 $ 11.791 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- Janus Aspen Series Worldwide Growth Accumulation Unit Value Beginning $ 10.00 $ 9.60 $ 6.982 Accumulation Unit Value Ending $ 9.60 $ 6.982 $ 8.449 Number of Units Outstanding at End of Year 0 0 0 --------------------------------------------------------------------------
45 PROSPECTUS Lazard Emerging Markets Accumulation Unit Value Beginning $ 10.00 $ 9.89 $ 9.532 Accumulation Unit Value Ending $ 9.89 $ 9.532 $ 14.265 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Aggressive Growth Fund (7) Accumulation Unit Value Beginning $ 10.00 $ 9.38 $ 6.277 Accumulation Unit Value Ending $ 9.38 $ 6.277 $ 8.519 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Balanced Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.61 $ 7.681 Accumulation Unit Value Ending $ 9.61 $ 7.681 $ 9.712 Number of Units Outstanding at End of Year 0 790 1,466 -------------------------------------------------------------------------- LSA Basic Value Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.57 $ 7.333 Accumulation Unit Value Ending $ 9.57 $ 7.333 $ 9.574 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Blue Chip Fund (5) Accumulation Unit Value Beginning $ 10.00 $ 9.73 $ 7.024 Accumulation Unit Value Ending $ 9.73 $ 7.024 $ 8.608 Number of Units Outstanding at End of Year 0 0 756 -------------------------------------------------------------------------- LSA Capital Appreciation Fund (3) Accumulation Unit Value Beginning $ 10.00 $ 10.00 $ 6.980 Accumulation Unit Value Ending $ 10.00 $ 6.980 $ 8.903 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Disciplined Equity Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.56 -- Accumulation Unit Value Ending $ 9.56 $ 6.961 -- Number of Units Outstanding at End of Year 0 0 -- -------------------------------------------------------------------------- LSA Diversified Mid Cap Fund (6) Accumulation Unit Value Beginning $ 10.00 $ 9.96 $ 7.866 Accumulation Unit Value Ending $ 9.96 $ 7.866 $ 10.232 Number of Units Outstanding at End of Year 0 0 630 -------------------------------------------------------------------------- LSA Emerging Growth Equity Fund (7) Accumulation Unit Value Beginning $ 10.00 $ 10.03 $ 5.704 Accumulation Unit Value Ending $ 10.03 $ 5.704 $ 8.201 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Equity Growth Fund (2) (3) Accumulation Unit Value Beginning $ 10.00 $ 9.94 $ 6.824 Accumulation Unit Value Ending $ 9.94 $ 6.824 $ 8.244 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Capital Growth Fund (3) Accumulation Unit Value Beginning $ 10.00 $ 9.66 $ 7.142 Accumulation Unit Value Ending $ 9.66 $ 7.142 $ 8.637 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Mid Cap Value Fund (6) Accumulation Unit Value Beginning $ 10.00 $ 10.63 $ 9.602 Accumulation Unit Value Ending $ 10.63 $ 9.602 $ 13.162 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- LSA Value Equity Fund (2) Accumulation Unit Value Beginning $ 10.00 $ 9.59 $ 7.306 Accumulation Unit Value Ending $ 9.59 $ 7.306 $ 9.326 Number of Units Outstanding at End of Year 0 0 1,401 -------------------------------------------------------------------------- MFS New Discovery Series Accumulation Unit Value Beginning $ 10.00 $ 10.32 $ 6.886 Accumulation Unit Value Ending $ 10.32 $ 6.886 $ 8.990 Number of Units Outstanding at End of Year 0 0 370 -------------------------------------------------------------------------- MFS Utilities Series Accumulation Unit Value Beginning $ 10.00 $ 8.93 $ 6.737 Accumulation Unit Value Ending $ 8.93 $ 6.737 $ 8.937 Number of Units Outstanding at End of Year 0 0 399 -------------------------------------------------------------------------- PAVIT OpCap Balanced (2) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- PAVIT PEA Science and Technology Accumulation Unit Value Beginning $ 10.00 $ 9.56 $ 4.715 Accumulation Unit Value Ending $ 9.56 $ 4.715 $ 7.536 Number of Units Outstanding at End of Year 0 0 4,942 -------------------------------------------------------------------------- PAVIT OpCap SmallCap Accumulation Unit Value Beginning $ 10.00 $ 10.06 $ 7.715 Accumulation Unit Value Ending $ 10.06 $ 7.715 $ 10.770 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- Oppenheimer International Growth Accumulation Unit Value Beginning $ 10.00 $ 9.08 $ 6.705 Accumulation Unit Value Ending $ 9.08 $ 6.705 $ 9.549 Number of Units Outstanding at End of Year 0 0 387 -------------------------------------------------------------------------- Oppenheimer Main Street Small Cap Fund/VA Accumulation Unit Value Beginning $ 10.00 $ 10.27 $ 8.450 Accumulation Unit Value Ending $ 10.27 $ 8.450 $ 11.927 Number of Units Outstanding at End of Year 0 0 0 --------------------------------------------------------------------------
46 PROSPECTUS PIMCO Foreign Bond (U.S. Dollar-Hedged) (8) Accumulation Unit Value Beginning $ 10.00 $ 10.09 $ 10.686 Accumulation Unit Value Ending $ 10.09 $ 10.686 $ 10.692 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- PIMCO Money Market Accumulation Unit Value Beginning $ 10.00 $ 10.01 $ 9.936 Accumulation Unit Value Ending $ 10.01 $ 9.936 $ 9.792 Number of Units Outstanding at End of Year 0 0 1,275 -------------------------------------------------------------------------- PIMCO Real Return (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 10.425 Number of Units Outstanding at End of Year -- -- 1,193 -------------------------------------------------------------------------- PIMCO Total Return Accumulation Unit Value Beginning $ 10.00 $ 10.12 $ 10.797 Accumulation Unit Value Ending $ 10.12 $ 10.797 $ 11.098 Number of Units Outstanding at End of Year 0 2,792 7,241 -------------------------------------------------------------------------- Putnam High Yield Fund Accumulation Unit Value Beginning $ 10.00 $ 9.86 $ 9.576 Accumulation Unit Value Ending $ 9.86 $ 9.576 $ 11.857 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- Putnam International Growth and Income Fund Accumulation Unit Value Beginning $ 10.00 $ 9.42 $ 7.944 Accumulation Unit Value Ending $ 9.42 $ 7.944 $ 10.716 Number of Units Outstanding at End of Year 0 0 0 -------------------------------------------------------------------------- Rydex OTC Fund Accumulation Unit Value Beginning $ 10.00 $ 9.77 $ 5.847 Accumulation Unit Value Ending $ 9.77 $ 5.847 $ 8.321 Number of Units Outstanding at End of Year 0 0 1,833 -------------------------------------------------------------------------- Rydex Sector Rotation Fund (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 12.403 Number of Units Outstanding at End of Year -- -- 0 -------------------------------------------------------------------------- Salomon Brothers Variable All Cap Fund Accumulation Unit Value Beginning $ 10.00 $ 9.65 $ 7.079 Accumulation Unit Value Ending $ 9.65 $ 7.079 $ 9.631 Number of Units Outstanding at End of Year 0 0 678 -------------------------------------------------------------------------- Salomon Brothers Variable Investors Fund (2) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- Scudder VIT EAFE Equity Index Fund (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 13.099 Number of Units Outstanding at End of Year -- -- 0 -------------------------------------------------------------------------- Scudder VIT Equity 500 Index Fund (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 12.053 Number of Units Outstanding at End of Year -- -- 0 -------------------------------------------------------------------------- Scudder VIT Small Cap Index Fund (1) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 13.792 Number of Units Outstanding at End of Year -- -- 0 -------------------------------------------------------------------------- Van Kampen LIT Aggressive Growth (7) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- Van Kampen LIT Growth & Income Accumulation Unit Value Beginning $ 10.00 $ 9.61 $ 8.017 Accumulation Unit Value Ending $ 9.61 $ 8.017 $ 10.016 Number of Units Outstanding at End of Year 0 0 357 -------------------------------------------------------------------------- Van Kampen UIF Equity Growth (5) (9) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- Van Kampen UIF High Yield (9) Accumulation Unit Value Beginning $ 10.00 $ 9.46 $ 8.556 Accumulation Unit Value Ending $ 9.46 $ 8.556 $ 10.562 Number of Units Outstanding at End of Year 0 0 3,961 -------------------------------------------------------------------------- Van Kampen UIF U.S. Mid Cap Value (6) (9) Accumulation Unit Value Beginning -- -- -- Accumulation Unit Value Ending -- -- -- Number of Units Outstanding at End of Year -- -- -- -------------------------------------------------------------------------- Van Kampen UIF U.S. Real Estate (1) (9) Accumulation Unit Value Beginning -- -- $ 10.00 Accumulation Unit Value Ending -- -- $ 12.711 Number of Units Outstanding at End of Year -- -- 0 --------------------------------------------------------------------------
(1) First offered May 1, 2003. (2) Effective 4/30/04, the LSA Balance Fund, LSA Basic Value Fund and LSA Value Equity Fund were merged into the PAVIT OpCap Balanced Portfolio, AIM V.I. Basic Value Fund - Series I and Salomon Brothers Variable Investors Fund - Class I, respectively. Accordingly, on 4/30/04, 47 PROSPECTUS we transferred the value of the LSA Balanced Variable Sub-Account and the LSA Value Equity Variable Sub-Account to the PAVIT OpCap Balanced Variable Sub-Account, AIM V.I. Basic Value Variable Sub-Account and the Salomon Brothers Variable Investors Variable Sub-Account, respectively. (3) Effective 4/30/04, the LSA Capital Appreciation Fund was merged into the Janus Aspen Series Capital Appreciation Portfolio - Institutional Shares. Accordingly, on 4/30/04, we transferred the value of the LSA Capital Appreciation Variable Sub-Account to the Janus Aspen Series Capital Appreciation Variable Sub-Account. (4) Effective 5/1/04 the Janus Aspen Series International Portfolio - Service Shares changed its name to the Janus Aspen Foreign Stock Portfolio - Service Shares. We have made a corresponding change in the name of the Variable Sub-Account that invests in this Portfolio. (5) Effective 4/30/04, the LSA Blue Chip Fund, LSA Equity Growth Fund and LSA Capital Growth Fund were merged into the Van Kampen UIF Equity Growth Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of the LSA Blue Chip Variable Sub-Account, LSA Equity Growth Variable Sub-Account and LSA Capital Growth Variable Sub-Account to the Van Kampen UIF Equity Growth Variable Sub-Account. (6) Effective 4/30/04, the LSA Diversified Mid-Cap Growth Fund and LSA MidCap Value Fund were merged into the Van Kampen UIF U.S. Mid Cap Value Portfolio, Class I. Accordingly, on 4/30/04, we transferred the value of the LSA Diversified Mid-Cap Growth Variable Sub-Account and the LSA MidCap Value Variable Sub-Account to the Van Kampen UIF U.S. Mid Cap Value Variable Sub-Account. (7) Effective 4/30/04, the LSA Aggressive Growth Fund and LSA Emerging Growth Fund were merged into the Van Kampen LIT Aggressive Growth Portfolio, Class II. Accordingly, on 4/30/04, we transferred the value of the LSA Aggressive Growth Variable Sub-Account and the LSA Emerging Growth Variable Sub-Account to the Van Kampen LIT Aggressive Growth Variable Sub-Account. (8) Effective 5/1/04, the PIMCO VIT Foreign Bond Portfolio - Administrative Shares changed its name to PIMCO VIT Foreign Bond Portfolio (U.S. Dollar-Hedged) - Administrative Shares (9) Morgan Stanley Investment Management, Inc., the adviser to the UIF Portfolios, does business in certain instances usingthe name Van Kampen. 48 PROSPECTUS APPENDIX B MARKET VALUE ADJUSTMENT The Market Value Adjustment is based on the following: I = the Treasury Rate for a maturity equal to the Guarantee Period for the week preceding the establishment of the Guarantee Period; J = the Treasury Rate for a maturity equal to the term length of the Guarantee Period Account for the week preceding the date amounts are transferred or withdrawn from the Guarantee Period Account, the date we determine the Death Proceeds, or the Payout Start Date, as the case may be ("Market Value Adjustment Date"). N = the number of whole and partial years from the date we receive the withdrawal, transfer, or death benefit request, or from the Payout State Date to the end of the Guarantee Period. Treasury Rate means the U.S. Treasury Note Constant Maturity yield as reported in Federal Reserve Bulletin Release H.15. The Market Value Adjustment factor is determined from the following formula: ..9 X [I-(J +.0025)] X N To determine the Market Value Adjustment, we will multiply the Market Value Adjustment factor by the amount transferred, withdrawn, paid as a death benefit, or applied to an Income Plan from a Guarantee Period at any time other than during the 30-day period after such Guarantee Period expires. EXAMPLES OF MARKET VALUE ADJUSTMENT Purchase Payment: $10,000 allocated to a Guarantee Period Guarantee Period: 5 years Interest Rate: 4.50% Full Withdrawal: End of Contract Year 3 I (5-Year Treasury Rate): 4.50% NOTE: These examples assume that premium taxes are not applicable and that previous withdrawals have not been taken. EXAMPLE 1: (ASSUMES DECLINING INTEREST RATES) Step 1: Calculate Contract Value at End of Contract Year 3: = $10,000.00 X (1.045)/3/ = 11,411.66 Step 2: Calculate the Free Withdrawal Amount: = .15 X ($10,000.00) = $1,500.00 (GREATER THAN $1,411.66 EARNINGS IN THE CONTRACT) Step 3: Calculate the Withdrawal Charge: Under the Contract, earnings are deemed to be withdrawn before Purchase Payments. Accordingly, in this example, the amount of the Purchase Payment eligible for free withdrawal would equal the Free Withdrawal Amount less the interest credited or 88.34 ( 1,500.00 - 1,411.66) Therefore, the Withdrawal Charge would be = .07 X ($10,000 - $88.34) = $693.82 Step 4: Calculate the Market Value Adjustment: I = 4.50% J = 4.20% (5-Year Treasury Rate at time of withdrawal) 730 DAYS N = --------- = 2 365 DAYS Market Value Adjustment Factor: .9 X [I - (J + .0025)] X N =.9 X [.045 - (.042 +.0025)] X 2 =.0009 Market Value Adjustment = Market Value Adjustment Factor X Amount Subject To Market Value Adjustment: = .0009 X $11,411.66 = $10.27 Step 5: Calculate the amount received by Contract Owner as a result of full withdrawal at the end of Contract Year 3: = $11,411.66 - $693.82 + $10.27 = $10,728.11 49 PROSPECTUS EXAMPLE 2: (ASSUMES RISING INTEREST RATES) Step 1: Calculate Contract Value at End of Contract Year 3: = $10,000.00 X (1.045)/3/ = $11,411.66 Step 2: Calculate The Free Withdrawal Amount: = .15 X ($10,000.00) = $1,500.00 (GREATER THAN $1,411.66 IN EARNINGS) Step 3: Calculate the Withdrawal Charge: As above, in this example, the amount of the Purchase Payment eligible for free withdrawal would equal the Free Withdrawal Amount less the interest credited or 88.34 (1,500 - 1,411.66). Therefore, the Withdrawal Charge would be = .07 X ($10,000.00 - $88.34) = $693.82 Step 4: Calculate the Market Value Adjustment: (5-Year Treasury Rate at time of withdrawal) J = 4.80% 730 DAYS N = ---------- = 2 365 DAYS MARKET VALUE ADJUSTMENT FACTOR: .9 X [I - (J +.0025)] X N =.9 X [(.045 - (.048 +.0025)] X (2) = -.0099 MARKET VALUE ADJUSTMENT = MARKET VALUE ADJUSTMENT FACTOR X AMOUNT SUBJECT TO MARKET VALUE ADJUSTMENT: = -.0099 X $11,411.66 = -( $112.98) Step 5: Calculate the amount received by Contract Owner as a result of full withdrawal at the end of Contract Year 3: = $11,411.66 - $693.82 - $112.98 = $10,604.86 50 PROSPECTUS APPENDIX C CALCULATION OF ENHANCED EARNINGS DEATH BENEFIT AMOUNT EXAMPLE 1: In this example, assume that the oldest Contract Owner is age 55 at the time the Contract is issued and elects the Enhanced Earnings Death Benefit Rider when the Contract is issued. The Contract Owner makes an initial purchase payment of $100,000. After four years, the Contract Owner dies. On the date Lincoln Benefit receives Due Proof Of Death, the Contract Value is $125,000. Prior to his death, the Contract Owner did not make any additional purchase payments or take any withdrawals. Excess of Earnings Withdrawals = 0 Purchase Payments in the 12 months after the = 0 Rider Date and prior to Death In-Force Premium = $100,000 ($100,000 + 0 - 0) In-Force Earnings = $25,000 ($125,000 - $100,000) ENHANCED EARNINGS PROTECTION DEATH BENEFIT = 50% * $25,000 = $12,500 Since 50% of In-Force Earnings is less than 100% of the In-Force Premium (excluding purchase payments in the 12 months prior to death), the In-Force Earnings are used to compute the Enhanced Earnings Death Benefit amount. EXAMPLE 2: ELECTED WHEN CONTRACT WAS ISSUED WITH SUBSEQUENT WITHDRAWALS In the second example, assume the same facts as above, except that the Contract Owner has taken a withdrawal of $10,000 during the second year of the Contract. At the time the withdrawal is taken, the Contract Value is $105,000. Here, $5,000 of the withdrawal is in excess of the In-Force Earnings at the time of the withdrawal. The Contract Value on the date Lincoln Benefit receives Due Proof of Death will be assumed to be $114,000. Excess-of-Earnings Withdrawals = $5,000 ($10,000 - $5,000) Purchase payments in the 12 months after the = 0 Rider Date and prior to Death In-Force Premium = $95,000 ($100,000 + 0 -$5,000) In-Force Earnings = $19,000 ($114,000 - $95,000) Enhanced Earnings Death Benefit = 50% x $19,000 = $9,500 Since 50% of In-Force Earnings is less than 100% of the In-Force Premium (excluding purchase payments in the 12 months after the Rider Date and prior to death), the In-Force Earnings are used to compute the Enhanced Earnings Death Benefit amount. EXAMPLE 3. This third example is intended to illustrate the effect of adding the Enhanced Earnings Death Benefit Rider after the Contract has been issued and the effect of later purchase payments. In this example, assume that the oldest Contract Owner is age 65 on the Rider Date. At the time the Contract is issued, the Contract Owner makes a purchase payment of $100,000. After two years pass, the Contract Owner elects to add the Enhanced Earnings Death Benefit Rider. On the date this Rider is added, the Contract Value is $110,000. Two years later, the Contract Owner withdraws $50,000. Immediately prior to the withdrawal, the Contract Value is $130,000. Another two years later, the Contract Owner makes an additional purchase payment of $40,000. Two years later, the Contract Owner dies with a Contract Value of $140,000 on the date Lincoln Benefit receives Due Proof of Death. Excess-of-Earnings Withdrawals = $30,000 ($50,000 - $20,000) Purchase payments in the 12 months after the Rider Date and prior to Death = 0 In-Force Premium = $120,000 ($110,000 + $40,000 - $30,000) In-Force Earnings = $20,000 ($140,000 - $120,000) Enhanced Earnings Death Benefit = 40% of $20,000 = $8,000 In this example, In-Force Premium is equal to the Contract Value on the date the Rider was issued plus the additional purchase payment and minus the Excess-of-Earnings Withdrawal. 51 PROSPECTUS Since 40% of In-Force Earnings is less than 80% of the In-Force Premium (excluding purchase payments in the 12 months after the Rider Date and prior to death), the In-Force Earnings are used to compute the Enhanced Earnings Death Benefit amount. 52 PROSPECTUS STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS DESCRIPTION ADDITIONS, DELETIONS OR SUBSTITUTIONS OF INVESTMENTS THE CONTRACT Purchases of Contract Tax-free Exchanges (1035 Exchanges, Rollovers and Transfers) Calculation of Accumulation Unit Values Net Investment Factor Calculation of Variable Income Payments Calculation of Annuity Unit Values GENERAL MATTERS Incontestability Settlements Safekeeping of the Variable Account's Assets Premium Taxes Tax Reserves EXPERTS FINANCIAL STATEMENTS APPENDIX A ACCUMULATION UNIT VALUES 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. 53 PROSPECTUS PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Registrant anticipates that it will incur the following approximate expenses in connection with the issuance and distribution of the securities to be registered: Registration fees $ 0.00 Cost of printing and engraving $4,000.00 Legal fees $ 0 Accounting fees $3,000.00 Mailing fees $6,500.00 Item 14. Indemnification of Directors and Officers The Articles of Incorporation of Lincoln Benefit Life Company (Registrant) provide for the indemnification of its directors and officers against expenses, judgments, fines and amounts paid in settlement as incurred by such person, so long as such person shall not have been adjudged to be liable for negligence or misconduct in the performance of a duty to the Company. This right of indemnity is not exclusive of other rights to which a director or officer may otherwise be entitled. The By-Laws of Allstate Distributors, LLC (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 gross negligence, or from the reckless disregard by the latter of its duties and obligations under the Underwriting Agreement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the forgoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suite or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 15. RECENT SALES OF UNREGISTERED SECURITIES During the period beginning on December 1, 2008 and ending on March 26, 2009, the Registrant inadvertently sold participating interests in existing deferred annuity contracts pursuant to registration statements on Form S-3 that were not in compliance with Rule 415(a)(5) under the Securities Act of 1933. The aggregate amount of securities sold was $13,933,172. Purchasers, however, did receive all material information relating to the security prior to sale, including the prospectus from the existing registration statement. When the technical violation was discovered, the Registrant filed new registration statements on Form S-3 with the Commission to comply with the requirements of Rule 415(a)(5) for continuous offering. These registration statements were declared effective on March 27, 2009 (SEC File Nos. 333-158172, 333-158176, 333-158180, 333-158181, 333-158192). Although the legal effect of a violation of Rule 415(a)(5) is not entirely clear, the Registrant may have been deemed to have inadvertently sold unregistered securities during the time period noted above. New procedures have been implemented to ensure timely submission of future registration statement filings. Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 16(a) Exh. No. Description 1 Form of Principal Underwriting Agreement. Incorporated herein by reference to Post-Effective Amendment No. 1 to the Registration Statement on 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 the Registration Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account (File No. 333-61146, 811-07924) filed May 17, 2001 4(b) Form of Application. Incorporated herein by reference to the Registration Statement on Form N-4 for Lincoln Benefit Life Variable Annuity Account (File No. 333-61146, 811-07924) filed May 17, 2001 5(a) Opinion and Consent of Counsel regarding legality. Incorporated herein by reference to the Registration Statement on Form S-3 for Lincoln Benefit Life Company (File No. 333-66452) filed August 1, 2001. 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. 333-158180) 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) 10.24 Form of Assignment & Delegation of Administrative Services Agreements, Underwriting Agreements, and Selling Agreements between ALFS, Inc. and Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Charter National Life Insurance Company, Intramerica Life Insurance Company, Allstate Distributors, LLC & Lincoln Benefit Life Company. Filed herewith. 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, Samuel H. Pilch, and John Pintozzi. Incorporated herein by reference to the Registration Statement on Form S-3 File No. 333-158180 dated March 24, 2009. 24(b) Power of Attorney for Matthew E. Winter. Incorporated herein by reference to Exhibit 24(b) to the Registration Statement on Form S-1 for Lincoln Benefit Life Company (File No. 333-158180) filed on April 8, 2010. 24(c) Power of Attorney for Anurag Chandra. 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; (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted in directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES As required by the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lincoln and State of Nebraska on the 12th day of April, 2011. LINCOLN BENEFIT LIFE COMPANY (Registrant) By: /s/ Susan L. Lees ------------------------------------- Susan L. Lees Director, Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following directors and principal officers of Lincoln Benefit Life Company in the capacities indicated on the 12th day of April, 2011. (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, Chairman of the Board and ------------------------------------ Chief Executive Officer Matthew E. Winter */ Anurag Chandra Director and Senior Vice President ------------------------------------ Anurag Chandra * By Susan L. Lees, pursuant to Power of Attorney. EXHIBITS Exhibit No. Description ----------- ----------- 10.24 Form of Assignment & Delegation of Administrative Services Agreements, Underwriting Agreements, and Selling Agreements between ALFS, Inc. and Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Charter National Life Insurance Company, Intramerica Life Insurance Company, Allstate Distributors, LLC & Lincoln Benefit Life Company 23 Consent of Independent Registered Public Accounting Firm 24(c) Power of Attorney for Anurag Chandra EX-10.24 2 dex1024.txt FORM OF ASSIGNMENT & DELEGATION OF AGREEMENTS ASSIGNMENT & DELEGATION OF ADMINISTRATIVE SERVICES AGREEMENTS, UNDERWITING AGREEMENTS, AND SELLING AGREEMENTS BETWEEN ALFS, INC. AND ALLSTATE LIFE INSURANCE COMPANY, ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK, CHARTER NATIONAL LIFE INSURANCE COMPANY, INTRAMERICA LIFE INSURANCE COMPANY, ALLSTATE DISTRIBUTORS, LLC, ALLSTATE FINANCIAL SERVICES, LLC & LINCOLN BENEFIT LIFE COMPANY, This agreement (hereinafter "Agreement") entered into this __ day of ______, 2011 between ALFS, Inc. (hereinafter "ALFS") and Allstate Life Insurance Company (hereinafter "ALIC"), Allstate Life Insurance Company of New York (hereinafter "ALNY"), Allstate Distributors, LLC (hereinafter "ADLLC" ), Charter National Life Insurance Company (hereinafter "Charter"), Intramerica Life Insurance Company (hereinafter "Intramerica"), Allstate Financial Services, LLC (hereinafter "AFS") and Lincoln Benefit Life Company (hereinafter "LBL"). Collectively, ALFS, ALIC, ALNY, ADLLC, Charter, Intramerica, AFS, and LBL shall be referenced herein as "the Parties." WHEREAS, ALIC has decided, in order to streamline corporate structure, enhance administrative simplicity, and better reflect ALIC's business strategy, to merge ALFS into ADLLC on or about April 29, 2011; and WHEREAS, both ALFS and ADLLC are registered broker-dealers subject to the jurisdiction of the Financial Industry Regulatory Authority ("FINRA"); and WHEREAS, the merger must be submitted for review to FINRA; and WHEREAS, the Parties have previously entered into various administrative service agreements, principal underwriting agreements, selling agreements, information sharing, and wholesaling agreements (collectively "Agreements"); and WHEREAS, the Parties agree that ALFS should assign ALFS' rights and delegate ALFS' duties to ADLLC under the Agreements; and WHEREAS, ADLLC agrees to accept assignment of ALFS' rights and duties to ADLLC under the Agreements; and WHEREAS, the Parties agree that such assignment and delegation under the Agreements should be documented, NOW, THEREFORE, in consideration of the premises and mutual promises contained herein the Parties hereto agree as follows: I. AGREEMENTS: ASSIGNMENT & DELEGATION: A. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Administrative Agreement between Allstate Life Insurance Company ("ALIC"), ALFS, Inc. and Allstate Life Insurance Company of New York ("ALNY") dated June 1, 1993, for the provision of personnel services and assumption of financial and administrative responsibility by ALIC and ALNY. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment or rights and delegation of duties. B. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Administrative Services Agreement between ALFS, Inc. and Allstate Life Insurance Company, Lincoln Benefit Life Company and Charter National Life Insurance Company (the "Companies") effective January 1, 2000, whereby the Companies assume from ALFS financial and administrative responsibility for expenses and services, including but not limited to rent of premises, utilities, employee compensation (including taxes and benefits), computer hardware/software, postage, printing, office supplies, telephone, travel, financial, accounting, legal, regulatory, marketing and administrative services in connection with the marketing and distribution by ALFS of certain variable insurance contracts on behalf of the Companies. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. C. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Administrative Services Agreement Administrative Services Agreement between Allstate Life Insurance Company of New York ("ALNY") and ALFS, Inc. ("ALFS") effective January 1, 2002, wherein ALFS will serve as an underwriter and distributor of variable insurance contracts issued by ALNY. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. D. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Amended and Restated Principal Underwriting Agreement between Allstate Life Insurance Company ("ALIC") and ALFS, Inc. ("ALFS") effective June 1, 2006, wherein the Principal Underwriting Agreement between ALIC and ALFS effective May 1, 1999, with respect to variable annuity contracts is amended and restated concerning compensation. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. E. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Amended and Restated Principal Underwriting Agreement between Lincoln Benefit Life Company ("LBL") and ALFS, Inc. ("ALFS") effective June 1, 2006, wherein the Principal Underwriting Agreement between LBL and ALFS effective November 25, 1998, with respect to variable annuity contracts is amended and restated by revising Schedule A. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. F. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Principal Underwriting Agreement between Lincoln Benefit Life Company ("LBL") and ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.) ("ALFS"), effective November 25, 1998, that establishes ALFS as the principal underwriter of LBL's variable universal life. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. G. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Executive Wholesaling Agreement between Lincoln Benefit Life Company ("LBL") and ALFS, Inc. ("ALFS") effective December 19, 2005, wherein LBL and ALFS authorizes a third party to solicit sales of certain registered life insurance and annuity contracts and to recommend the contracts to registered representatives of such third parties. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. H. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Information Sharing Agreement (the "Agreement") between Allstate Insurance Company ("AIC") and certain affiliates, effective May 1, 2009, setting forth the terms and conditions under which customer information, owned by a party to the Agreement, may be accessed for marketing purposes by another party to the Agreement in order to comply with certain provisions of The Fair and Accurate Credit Transaction Act of 2003. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. I. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Investment Management Agreement among Allstate Investments, LLC ("AILLC"), Allstate Insurance Company, The Allstate Corporation and certain of its non-insurance and insurance subsidiaries (collectively, the "Allstate Affiliates") effective January 1, 2007, (the "Agreement") whereby AILLC will render investment management services and advice to the Allstate Affiliates. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. J. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Marketing Agreement between Allstate Life Insurance Company, in its capacity as successor in interest to Glenbrook Life and Annuity Company ("ALIC"), ALFS, Inc. ("ALFS") and Allstate Financial Services, LLC ("AFS") effective June 10, 2003, wherein ALIC and ALFS authorize AFS to solicit sales of certain insurance products and group and individual insurance contracts/policies and certificates participating therein. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. K. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Master Wholesaling Agreement between Lincoln Benefit Life Company ("LBL") and ALFS, Inc. ("ALFS") effective December 16, 2005, wherein LBL and ALFS authorizes a third party to solicit sales of certain registered life insurance and annuity contracts and to recommend the contracts to registered representatives of such third parties. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. L. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Principal Underwriting Agreement between Allstate Life Insurance Company ("ALIC") and ALFS, Inc. ("ALFS") effective January 1, 2005, (the "Agreement"), wherein ALIC grants to ALFS the right to be and ALFS agrees to serve as Principal Underwriter for the sale of variable insurance products and other insurance and investment products during the term of the Agreement. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. M. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Selling Agreement (the "Agreement") between Lincoln Benefit Life Company ("LBL"), ALFS, Inc. and Allstate Financial Services, LLC ("AFS") effective August 2, 1999, whereby AFS will train and perform certain administrative responsibilities and duties in connection with sales of certain variable insurance contracts/policies as reflected in the Agreement. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. N. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Selling Agreement between Allstate Life Insurance Company of New York ("ALNY"), ALFS, Inc. ("ALFS"), and Allstate Financial Services, LLC ("AFS") effective May 1, 2005, wherein ALFS, as appointed by ALNY, is the underwriter of certain insurance products and group and individual insurance contracts/policies and certificates participating therein (the "Contracts"), and AFS will solicit sales of the Contracts on behalf of ALFS. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. O. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Selling Agreement among Allstate Life Insurance Company ("ALIC"), ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.) ("ALFS") and Allstate Financial Services, LLC (f/k/a LSA Securities, Inc.) ("AFS") effective July 26, 1999, pursuant to which ALIC and ALFS authorize AFS to supervise solicitations of certain variable contracts/policies by AFS' registered representatives who are licensed insurance agents. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. P. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Underwriting Agreement among Allstate Life Insurance Company ("ALIC") and Allstate Financial Advisors Separate Account I ("Separate Account") and ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.) ("ALFS") effective July 26, 1999, pursuant to which ALFS agrees to serve as principal underwriter and distributor on an agency basis for variable insurance contracts which will be issued by ALIC through the Separate Account. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. Q. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Underwriting Agreement between Allstate Life Insurance Company of New York and ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.) effective October 1, 1996, regarding the marketing and distribution of designated variable annuity insurance products. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. R. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Underwriting Agreement between Allstate Life Insurance Company, in its capacity as successor in interest to Glenbrook Life and Annuity Company, and ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.) ("ALFS") executed May 23, 1997, and effective January 1, 1997, regarding the distribution of variable life insurance contracts. The agreement establishes ALFS as the underwriter for products that require a registered broker-dealer to act as the principal underwriter. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. S. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Underwriting Agreement between Allstate Life Insurance Company, in its capacity as successor in interest to Glenbrook Life and Annuity Company, and ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.) ("ALFS") executed May 23, 1997, and effective January 1, 1997, regarding the distribution of variable annuity products. The agreement establishes ALFS as the underwriter for products that require a registered broker-dealer to act as the principal underwriter. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. T. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Selling Agreement (the "Agreement") and Addenda to the Agreement between Allstate Life Insurance Company, in its capacity as successor in interest to Glenbrook Life and Annuity Company ("ALIC"), ALFS, Inc. ("ALFS") and Allstate Financial Services, LLC ("AFS") effective May 17, 2001, December 31, 2001, and November 18, 2002, respectively, wherein ALIC and ALFS desire to authorize AFS to solicit sales of certain insurance products and group and individual insurance contracts/policies and certificates participating therein. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. U. ALFS hereby assigns ALFS' rights and delegates ALFS' duties to ADLLC and ADLLC accepts such assignment of rights and delegation of duties under the Administrative Services Agreement between Intramerica Life Insurance Company ("Intramerica") and ALFS, Inc. ("ALFS") effective January 1, 2002, wherein ALFS will serve as an underwriter and distributor of variable insurance contracts issued by Intramerica. Intramerica will assume financial and administrative responsibility for the expenses and services incurred by ALFS in connection with the contracts. To the extent that the contract contains anti-assignment or assignment/termination provisions, such provisions are waived by this assignment of rights and delegation of duties. II. MISCELLANEOUS A. No amendment to this Agreement shall be effective unless made in writing and executed by the Parties thereto. B. ADLLC's duties and obligations under any other agreement not specifically listed herein shall be deemed to have been assigned and delegated from ALFS to ADLLC and accepted by ADLLC. C. Should any provision of this Agreement be held unenforceable, those provisions not affected by the determination of unenforceability shall remain in full force and effect. D. This Agreement will be construed in accordance with the laws of the State of Illinois E. This Agreement may be executed by the Parties in counterparts, each of which shall be deemed an original. F. The descriptive headings of this Agreement are intended for reference only and will not affect the construction or interpretation of this Agreement IN WITNESS WHEREOF the Parties have caused this Agreement to be executed by their duly authorized officers on the date first above written. ALLSTATE LIFE INSURANCE COMPANY By: ----------------------------- Title: ----------------------------- Date: ----------------------------- ALLSTATE DISTRIBUTORS, LLC By: ----------------------------- Title: ----------------------------- Date: ----------------------------- ALFS, INC. By: ----------------------------- Title: ----------------------------- Date: ----------------------------- ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK By: ----------------------------- Title: ----------------------------- Date: ----------------------------- CHARTER NATIONAL LIFE INSURANCE COMPANY By: ----------------------------- Title: ----------------------------- Date: ----------------------------- INTRAMERICA LIFE INSURANCE COMPANY By: ----------------------------- Title: ----------------------------- Date: ----------------------------- LINCOLN BENEFIT LIFE COMPANY By: ----------------------------- Title: ----------------------------- Date: ----------------------------- ALLSTATE FINANCIAL SERVICES, LLC By: ----------------------------- Title: ----------------------------- Date: ----------------------------- EX-23 3 dex23.txt CONSENT OF INDEPENDENT REGSITERED PUBLIC ACCOUNTING FIRM Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the use in this Post-Effective Amendment No. 3 to Registration Statement No. 333-158180 on Form S-1 of our report dated March 11, 2011 relating to the financial statements and financial statement schedules of Lincoln Benefit Life Company, appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the heading "Experts" appearing in the Other Information section in such Prospectus. /s/ Deloitte & Touche LLP Chicago, Illinois April 11, 2011 EX-24.(C) 4 dex24c.txt POWER OF ATTORNEY FOR ANURAG CHANDRA Exhibit 24(c) DURABLE POWER OF ATTORNEY WITH RESPECT TO LINCOLN BENEFIT LIFE COMPANY (REGISTRANT) The undersigned Director of Lincoln Benefit Life Company constitutes and appoints Susan L. Lees and Matthew E. Winter and each of them (with full power to each of them to act alone), as his true and lawful attorney-in-fact and agent, in any and all capacities, to sign the following registration statements: File No. 333-158172, 333-158192, 333-158180, 333-158181, and 333-165963 of Lincoln Benefit Life Company, and any amendments thereto, and to file the same, with exhibits and other documents in connection therewith, with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable. I hereby ratify and confirm each and every act that said attorney- in-fact and agent may lawfully do or cause to be done by virtue hereof. My subsequent disability or incapacity shall not affect this Power of Attorney. April 6, 2011 /s/Anurag Chandra --------------------------------------- Anurag Chandra Director and Senior Vice President