0001193125-11-124058.txt : 20110503
0001193125-11-124058.hdr.sgml : 20110503
20110503164313
ACCESSION NUMBER: 0001193125-11-124058
CONFORMED SUBMISSION TYPE: 424B3
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20110503
DATE AS OF CHANGE: 20110503
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: 424B3
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-158181
FILM NUMBER: 11805949
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
424B3
1
d424b3.txt
LBL PREMIER PLANNER
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 63 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 85. 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 85.
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 85.
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 73. 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 73.
/(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 85.
/(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 70 and 71.
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