UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF

THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 333-111553

 

LINCOLN BENEFIT LIFE COMPANY

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: 800-525-9287

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No x

 

As of August 8, 2008, the Registrant had 25,000 common shares, $100 par value, outstanding, all of which are held by Allstate Life Insurance Company.

 

 

 

LINCOLN BENEFIT LIFE COMPANY

INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2008

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2008 and 2007 (unaudited)	1
	Condensed Statements of Financial Position as of June 30, 2008 (unaudited) and December 31, 2007	2
	Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2008 and 2007 (unaudited)	3
	Notes to Condensed Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 6.	Exhibits	24

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LINCOLN BENEFIT LIFE COMPANY

 

CONDENSED STATEMENTS OF OPERATIONS

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ in thousands)		2008			2007			2008			2007
		(unaudited)						(unaudited)
Revenues
Net investment income		$	3,427		$	3,549		$	7,067		$	7,133
Realized capital gains and losses		(91		)	(405		)	(345		)	(405		)
Income from operations before income tax expense		3,336			3,144			6,722			6,728
Income tax expense		1,171			1,098			2,332			2,350
Net income		$	2,165		$	2,046		$	4,390		$	4,378

 

See notes to condensed financial statements.

 

1

 

LINCOLN BENEFIT LIFE COMPANY

 

CONDENSED STATEMENTS OF FINANCIAL POSITION

 

		June 30,			December 31,
($ in thousands, except par value data)		2008			2007
		(Unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $266,113 and $266,792)		$	269,754		$	273,144
Equity securities, at fair value (cost $4,997)		5,140			—
Short-term		30,449			28,057
Total investments		305,343			301,201
Cash		16,234			18,612
Reinsurance recoverable from Allstate Life Insurance Company		18,755,610			18,777,851
Reinsurance recoverable from non-affiliates		1,520,743			1,422,931
Other assets		103,112			112,285
Separate Accounts		2,659,733			3,067,127
Total assets		$	23,360,775		$	23,700,007
Liabilities
Contractholder funds		$	17,791,647		$	17,820,885
Reserve for life-contingent contract benefits		2,444,364			2,348,116
Unearned premiums		24,219			25,819
Deferred income taxes		1,580			2,479
Payable to affiliates, net		58,897			21,912
Current income taxes payable		7,147			4,815
Other liabilities and accrued expenses		80,530			118,916
Separate Accounts		2,659,733			3,067,127
Total liabilities		23,068,117			23,410,069
Commitments and Contingent Liabilities (Note 4)
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		107,699			103,309
Accumulated other comprehensive income:
Unrealized net capital gains and losses		2,459			4,129
Total accumulated other comprehensive income		2,459			4,129
Total shareholder’s equity		292,658			289,938
Total liabilities and shareholder’s equity		$	23,360,775		$	23,700,007

 

See notes to condensed financial statements.

 

2

 

LINCOLN BENEFIT LIFE COMPANY

 

CONDENSED STATEMENTS OF CASH FLOWS

 

		Six Months Ended  June 30,
($ in thousands)		2008			2007
		(Unaudited)
Cash flows from operating activities
Net income		$	4,390		$	4,378
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items		59			45
Realized capital gains and losses		345			405
Changes in:
Reserve for life-contingent contract benefits and contractholder funds, net of reinsurance recoverables		(8,561		)	(8,985		)
Income taxes		2,332			2,350
Receivable/payable to affiliates, net		36,985			30,621
Other operating assets and liabilities		(30,881		)	(33,797		)
Net cash provided by (used in) operating activities		4,669			(4,983		)
Cash flows from investing activities
Proceeds from sales of fixed income securities		13,677			5,176
Proceeds from sales of equity securities		6,896			—
Collections on fixed income securities		7,054			11,164
Purchases of fixed income securities		(19,990		)	(8,013		)
Purchases of equity securities		(2,512		)	—
Change in short-term investments		(12,172		)	(14,742		)
Net cash used in investing activities		(7,047		)	(6,415		)
Net decrease in cash		(2,378		)	(11,398		)
Cash at beginning of period		18,612			23,352
Cash at end of period		$	16,234		$	11,954

 

3

 

LINCOLN BENEFIT LIFE COMPANY

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

 

1.  General

 

Basis of Presentation

 

The accompanying condensed 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”), a wholly owned subsidiary of The Allstate Corporation (the “Corporation”).

 

The condensed financial statements and notes as of June 30, 2008, and for the three-month and six-month periods ended June 30, 2008 and 2007 are unaudited.  The condensed financial statements reflect all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods.  These condensed financial statements and notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

 

Adopted accounting standards

 

Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”)

 

In October 2005, the American Institute of Certified Pubic Accountants (“AICPA”) issued SOP 05-1.   SOP 05-1 provides accounting guidance for deferred policy acquisition costs (“DAC”) associated with internal replacements of insurance and investment contracts other than those set forth in Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”.  SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs through the exchange of an existing contract for a new contract, or by amendment, endorsement or rider to an existing contract, or by the election of a feature or coverage within an existing contract.  The Company adopted the provisions of SOP 05-1 on January 1, 2007 for internal replacements occurring in fiscal years beginning after December 15, 2006.  The adoption of SOP 05-1 did not have any effect on the results of operations or financial position of the Company.

 

Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 and FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (“FIN 48”)

 

The FASB issued FIN 48 in July 2006 and the related staff position in May 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize the tax benefit of uncertain tax positions only when it is more likely than not, based on the position’s technical merits, that the position would be sustained upon examination by the respective taxing authorities.  The tax benefit is measured as the largest benefit that is more than fifty-percent likely of being realized upon final settlement with the respective taxing authorities.  On January 1, 2007, the Company adopted the provisions of FIN 48, which were effective for fiscal years beginning after December 15, 2006. No cumulative effect of a change in accounting principle or adjustment to the liability for unrecognized tax benefits was recognized as a result of the adoption of FIN 48.  Accordingly, the adoption of FIN 48 did not have an effect on the results of operations or financial position of the Company.

 

SFAS No. 157, Fair Value Measurements (“SFAS No. 157”)

 

In September 2006, the FASB issued SFAS No. 157, which redefines fair value 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, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (“GAAP”), and expands disclosures about fair value measurements.  SFAS No. 157 establishes a three-level hierarchy for fair value measurements based upon the nature of the inputs to the valuation of an asset or liability.  SFAS No. 157 applies where other accounting pronouncements require or permit fair value measurements.  In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which permits the deferral of the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and liabilities, except those that are recognized or

 

4

 

disclosed at fair value in the financial statements on a recurring basis.  The Company adopted the provisions of SFAS No. 157 for financial assets and liabilities recognized or disclosed at fair value on a recurring and non-recurring basis as of January 1, 2008.  Consistent with the provisions of FSP 157-2, the Company decided to defer the adoption of SFAS No. 157 for non-financial assets and liabilities measured at fair value on a non-recurring basis until January 1, 2009.  The adoption of SFAS No. 157 did not have a material effect on the Company’s results of operations or financial position (see Note 2).

 

SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS No. 159”)

 

In February 2007, the FASB issued SFAS No. 159, which provides reporting entities, on an ongoing basis, an option to report selected financial assets, including investment securities, and financial liabilities, including most insurance contracts, at fair value through earnings.  SFAS No. 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement alternatives for similar types of financial assets and liabilities.  The standard also requires additional information to aid financial statement users’ understanding of the impacts of a reporting entity’s decision to use fair value on its earnings and requires entities to display, on the face of the statement of financial position, the fair value of those assets and liabilities for which the reporting entity has chosen to measure at fair value.  SFAS No. 159 was effective as of the beginning of a reporting entity’s first fiscal year beginning after November 15, 2007.  The Company did not apply the fair value option to any existing financial assets or liabilities as of January 1, 2008.  Consequently, the initial adoption of SFAS No. 159 had no impact on the Company’s results of operations or financial position.

 

Pending accounting standard

 

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS No. 161”)

 

In March 2008, the FASB issued SFAS No. 161, which amends and expands the disclosure requirements for derivatives currently accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”.  The new disclosures are designed to enhance the understanding of how and why an entity uses derivative instruments and how derivative instruments affect an entity’s financial position, results of operations, and cash flows.  The standard requires, on a quarterly basis, quantitative disclosures about the potential cash outflows associated with the triggering of credit-related contingent features, if any; tabular disclosures about the classification and fair value amounts of derivative instruments reported in the statement of financial position; disclosure of the location and amount of gains and losses on derivative instruments reported in the statement of operations; and qualitative information about how and why an entity uses derivative instruments and how derivative instruments and related hedged items affect the entity’s financial statements.  SFAS No. 161 is effective for fiscal periods beginning after November 15, 2008, and is to be applied on a prospective basis only.  SFAS No. 161 affects disclosures and therefore will not impact the Company’s results of operations or financial position.

 

5

 

2.  Fair Value of Financial Assets and Financial Liabilities

 

The measurement basis for a significant amount of the Company’s financial assets is fair value. Financial instruments measured at fair value on a recurring basis include:

 

Financial Assets   Investments including U.S. treasuries, money market funds, corporates, municipals, U.S. government and agencies, commercial mortgage-backed securities (“CMBS”), mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), and separate account assets.

 

Financial Liabilities   Derivatives embedded in certain contractholder liabilities.

 

SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company adopted the provisions of SFAS No. 157 as of January 1, 2008 for its financial assets and financial liabilities that are measured at fair value. SFAS No. 157:

 

·                  Defines fair value 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, and establishes a framework for measuring fair value;

 

·                  Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation as of the measurement date;

 

·                  Expands disclosures about financial instruments measured at fair value.

 

In determining fair value, the Company principally uses the market approach which generally utilizes market 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.  SFAS No. 157 establishes a hierarchy for inputs used in determining fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available.  Certain financial assets are not carried at fair value on a recurring basis and thus are only categorized in the fair value hierarchy when held at fair value on a non-recurring basis.

 

Observable inputs are those used by market participants in valuing financial instruments that are developed based on market data obtained from independent sources.  In the absence of observable inputs, unobservable inputs reflect the Company’s estimates of the assumptions market participants would use in valuing financial assets and financial liabilities and are developed based on the best information available in the circumstances.

 

Pursuant to SFAS No. 157, fair value is a market-based measure, considered from the perspective of a market participant who owns an asset or owes a liability.  Accordingly, when market observable data is not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the measurement date.  The Company uses prices and inputs that are current as of the measurement date, including during periods of market disruption.  In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments.  This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3.

 

Financial assets and financial liabilities recorded on the Condensed Statements of Financial Position at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:

 

Level 1         Financial assets and financial 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         Financial assets and financial 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 non-active markets; or

 

c)  Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability

 

Level 3         Financial assets and financial 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.  These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

 

6

 

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, inputs used to measure fair value fall into different levels of the fair value hierarchy.  In those instances, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities on a Recurring Basis

 

Level 1 Measurements

 

Fixed Income Securities:  U.S. Treasuries are in Level 1 and 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.

 

Equity Securities; Separate Account Assets:  Comprise actively traded mutual funds that have 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:

 

Corporate, including privately placed:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Also includes privately placed securities totaling $6.5 million that are valued based on market-observable external ratings from independent third party rating agencies.

 

Municipal:  Externally rated municipals are valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

 

U.S. Government and Agencies:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.

 

CMBS:  Valuation is principally based on inputs including quoted prices for identical or similar assets in markets that are not active and are categorized as Level 2.

 

MBS; ABS:  Valued based on inputs including quoted prices for identical or similar assets in markets that are not active.  Other ABS are categorized as Level 3.

 

Contractholder Funds:  Derivatives embedded in certain annuity contracts are valued based on internal models that rely on inputs such as interest rate yield curves and equity index volatility assumptions that are market observable for substantially the full term of the contract.  The valuation techniques are widely accepted in the financial services industry and do not include significant judgment.

 

Level 3 Measurements

 

Fixed Income Securities

 

ABS:  Principally valued based on inputs including quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements.  Due to the reduced availability of actual market prices or relevant observable inputs as a result of the decrease in liquidity that has been experienced in the market for these securities, they are categorized as Level 3.

 

Contractholder Funds:  Derivatives embedded in annuity contracts are valued internally using models widely accepted in the financial services industry that determine a single best estimate of fair value for a block of contractholder liabilities that contain certain embedded derivatives.  The models use stochastically determined cash flows based on the contractual elements of embedded derivatives and other applicable market data.  These are categorized as Level 3 as a result of the significance of non-market observable inputs.

 

7

 

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008:

 

		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs			Other Valuations and				Balance as of
($ in thousands)		(Level 1)			(Level 2)			(Level 3)			Netting				June 30, 2008
Financial assets:
Fixed income securities		$	46,048		$	216,219		$	7,487						$	269,754
Equity securities		5,140			—			—							5,140
Short–term investments		30,399			—			—							30,399
Total recurring basis assets		81,587			216,219			7,487							305,293
Valued at cost											$	50			50
Total investments		81,587			216,219			7,487			50				305,343
Separate account assets		2,659,733			—			—			—				2,659,733
Total financial assets		$	2,741,320		$	216,219		$	7,487		$	50			$	2,965,076
% of total financial assets		92.4		%	7.3		%	0.3		%	—			%	100.0		%
Financial liabilities:
Contractholder funds:
Derivatives embedded in annuity contracts		$	—		$	(44,578	)	$	(2,301	)	$		—		$	(46,879	)
Total financial liabilities		$	—		$	(44,578	)	$	(2,301	)	$	—			$	(46,879	)
% of total financial liabilities		—		%	95.1		%	4.9		%	—			%	100.0		%

 

As required by SFAS No. 157, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety.  Thus, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3).  Gains and losses for such assets and liabilities categorized within the Level 3 table may include changes in fair value that are attributable to both observable inputs (Level 1 and Level 2) and unobservable inputs (Level 3).

 

The following table provides a summary of changes in fair value during the three-month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

 

					Total realized and unrealized Gains (Losses) included in:									Net						Total Gains (Losses) included in Net Income for
($ in thousands)		Balance as of March 31, 2008			Net Income (1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Transfers In and/or (Out) of Level 3			Balance as of June 30, 2008			Instruments Still Held at June 30, 2008
Financial assets
Fixed income securities		$	11,967		$	185		$	(436	)	$	(4,229	)	$	—		$	7,487		$	(3	)
Total recurring level 3 financial assets		$	11,967		$	185		$	(436	)	$	(4,229	)	$	—		$	7,487		$	(3	)
Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts		$	(1,235	)	$	(1,107	)	$	—		$	41		$	—		$	(2,301	)	$	(1,107	)
Total recurring level 3 financial liabilities		$	(1,235	)	$	(1,107	)	$	—		$	41		$	—		$	(2,301	)	$	(1,107	)

 

(1)          The amounts above attributable to fixed income securities total $185 thousand and are reported in the Condensed Statements of Operations as follows:  $188 thousand in realized capital gains and losses, and $(3) thousand in net investment income.  The amounts above attributable to derivatives embedded in annuity contracts are reported as a component of contract benefits and are ceded in accordance with the Company’s reinsurance agreements.

 

8

 

The following table provides a summary of changes in fair value during the six-month period ended June 30, 2008 of Level 3 financial assets and financial liabilities held at fair value on a recurring basis at June 30, 2008.

 

					Total realized and unrealized Gains (Losses) included in:									Net						Total Gains (Losses) included in Net Income for
($ in thousands)		Balance as of January 1, 2008			Net Income (1)			OCI on Statement of Financial Position			Purchases, Sales, Issuances and Settlements, net			Transfers In and/or (Out) of Level 3			Balance as of June 30, 2008			Instruments Still Held at June 30, 2008
Financial assets
Fixed income securities		$	11,984		$	182		$	(258	)	$	(4,421	)	$	—		$	7,487		$	(3	)
Total recurring level 3 financial assets		$	11,984		$	182		$	(258	)	$	(4,421	)	$	—		$	7,487		$	(3	)
Financial liabilities
Contractholder funds:
Derivatives embedded in annuity contracts		$	(256	)	$	(2,086	)	$	—		$	41		$	—		$	(2,301	)	$	(2,086	)
Total recurring level 3 financial liabilities		$	(256	)	$	(2,086	)	$	—		$	41		$	—		$	(2,301	)	$	(2,086	)

 

(1)          The amounts above attributable to fixed income securities total $182 thousand and are reported in the Condensed Statements of Operations as follows:  $185 thousand in realized capital gains and losses, and $(3) thousand in net investment income.  The amounts above attributable to derivatives embedded in annuity contracts are reported as a component of contract benefits and are ceded in accordance with the Company’s reinsurance agreements.

 

3.  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 continues to have primary liability as the direct insurer for risks reinsured.

 

Investment income earned on the assets which support contractholder funds and the reserve for life-contingent contract benefits is not included in the condensed financial statements as those assets are owned and managed by ALIC or third party reinsurers under terms of the reinsurance agreements.  The timing of the transfer of funds under the reinsurance agreements may result in fluctuations in net cash provided by operating activities in the Condensed Statements of Cash Flows.

 

The effects of reinsurance on premiums and contract charges are as follows:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ in thousands)		2008			2007			2008			2007
Premiums and contract charges
Direct		$	284,543		$	254,267		$	550,334		$	500,903
Assumed-non-affiliate		2,011			2,179			3,943			4,097
Ceded
Affiliate		(177,022		)	(153,682		)	(333,819		)	(305,116		)
Non-affiliate		(109,532		)	(102,764		)	(220,458		)	(199,884		)
Premiums and contract charges, net of reinsurance		$	—		$	—		$	—		$	—

 

9

 

The effects of reinsurance on interest credited to contractholder funds, contract benefits and expenses are as follows:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ in thousands)		2008			2007			2008			2007
Interest credited to contractholder funds, contract benefits and expenses
Direct		$	430,243		$	553,466		$	789,040		$	1,009,069
Assumed-non-affiliate		2,237			2,916			4,143			5,640
Ceded
Affiliate		(274,227		)	(400,948		)	(496,933		)	(750,374		)
Non-affiliate		(158,253		)	(155,434		)	(296,250		)	(264,335		)
Interest credited to contractholder funds, contract benefits and expenses, net of reinsurance		$	—		$	—		$	—		$	—

 

4.  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 June 30, 2008.

 

Regulation

 

The Company is subject to changing social, economic and regulatory conditions.  From time to time regulatory authorities or legislative bodies seek to impose additional regulations regarding agent and broker compensation and otherwise expand overall regulation of insurance products and the insurance industry.  The ultimate changes and eventual effects of these initiatives 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” sub-section 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.

 

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·                  The outcome on these matters may also 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.

 

·                  In the lawsuits, plaintiffs seek a variety of remedies including equitable relief in the form of injunctive and other remedies and monetary relief in the form of contractual and extra-contractual damages.  In some cases, the monetary damages sought include punitive damages.  Often specific information about the relief sought, such as the amount of damages, is not available because plaintiffs have not requested specific relief in their pleadings.  In Allstate’s experience, when specific monetary demands are made in pleadings, they bear little relation to the ultimate loss, if any, to the Company.

 

·                  In connection with regulatory examinations and proceedings, government authorities may seek various forms of relief, including penalties, restitution and changes in business practices.  The Company may not be advised of the nature and extent of relief sought until the final stages of the examination or proceeding.

 

·                  For the reasons specified above, it is often not possible to make meaningful estimates of the amount or range of loss that could result from the matters described below in the “Proceedings” subsection.  The Company reviews these matters on an on-going basis and follows the provisions of SFAS No. 5, “Accounting for Contingencies” 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 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 have 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 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 Court along with the merits of the appeal.

 

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·                  The EEOC also filed another lawsuit in 2004 alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization (the “EEOC II” suit).  In EEOC II, in 2006, the court granted partial summary judgment to the EEOC.  Although the court did not determine that AIC was liable for age discrimination under the ADEA, it determined that the rehire policy resulted in a disparate impact, reserving for trial the determination on whether AIC had reasonable factors other than age to support the rehire policy.  In June 2008, the Eighth Circuit Court of Appeals affirmed summary judgment in the EEOC’s favor.  AIC filed a petition for rehearing en banc.

 

·                  AIC is also defending a certified class action filed by former employee agents who terminated their employment prior to the agency program reorganization.  Plaintiffs allege that they were constructively discharged so that Allstate could avoid paying ERISA and other benefits offered under the reorganization.  They claim that the constructive discharge resulted from the implementation of agency standards, including mandatory office hours and a requirement to have licensed staff available during business hours.  The court approved the form of class notice which was sent to approximately 1,800 potential class members in November 2007.  Fifteen individuals opted out.  AIC’s motions for judgment on the pleadings were partially granted.  In May 2008, the Court granted summary judgment in AIC’s favor on all class claims.  Plaintiffs moved for reconsideration and in the alternative to decertify the class.  AIC opposed this motion and filed a motion for summary judgment with respect to the remaining non-class claim.

 

·                  A putative nationwide class action has also been filed by former employee agents alleging various violations of ERISA, including a worker classification issue.  These plaintiffs are challenging certain amendments to the Agents Pension Plan and are seeking to have exclusive agent independent contractors treated as employees for benefit purposes.  This matter was dismissed with prejudice by the trial court, was the subject of further proceedings on appeal, and was reversed and remanded to the trial court in 2005.  In June 2007, the court granted AIC’s motion to dismiss the case.  Following plaintiffs’ filing of a notice of appeal, the Third Circuit issued an order in December 2007 stating that the notice of appeal was not taken from a final order within the meaning of the federal law and thus not appealable at this time.  In March 2008, the Third Circuit decided that the appeal should not summarily be dismissed and that the question of whether the matter is appealable at this time will be addressed by the Court along with the merits of the appeal.

 

In all of these various matters, plaintiffs seek compensatory and punitive damages, and equitable relief.  AIC has been vigorously defending these lawsuits and other matters related to its agency program reorganization.

 

Other Matters

 

Various other legal, governmental, and regulatory actions, including state market conduct exams, and other governmental and regulatory inquiries are currently pending that involve the Company and specific aspects of its conduct of business. Like other members of the insurance industry, the Company is the target of a number of lawsuits and 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, 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.

 

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5.   Other Comprehensive Income

 

The components of other comprehensive (loss) income on a pre-tax and after-tax basis are as follows:

 

		Three months ended June 30,
		2008									2007
								After-									After-
($ in thousands)		Pre-tax			Tax			tax			Pre-tax			Tax			tax
Unrealized holding losses arising during the period		$	(6,034	)	$	2,112		$	(3,922	)	$	(4,987	)	$	1,746		$	(3,241	)
Less: reclassification adjustment of realized capital gains and losses		(91		)	32			(59		)	(405		)	142			(263		)
Unrealized net capital gains and losses		(5,943		)	2,080			(3,863		)	(4,582		)	1,604			(2,978		)
Other comprehensive loss		$	(5,943	)	$	2,080		(3,863		)	$	(4,582	)	$	1,604		(2,978		)
Net income								2,165									2,046
Comprehensive loss								$	(1,698	)							$	(932	)

 

		Six months ended June 30,
		2008									2007
								After-									After-
($ in thousands)		Pre-tax			Tax			tax			Pre-tax			Tax			tax
Unrealized holding losses arising during the period		$	(2,914	)	$	1,020		$	(1,894	)	$	(4,050	)	$	1,418		$	(2,632	)
Less: reclassification adjustment of realized capital gains and losses		(345		)	121			(224		)	(405		)	142			(263		)
Unrealized net capital gains and losses		(2,569		)	899			(1,670		)	(3,645		)	1,276			(2,369		)
Other comprehensive loss		$	(2,569	)	$	899		(1,670		)	$	(3,645	)	$	1,276		(2,369		)
Net income								4,390									4,378
Comprehensive income								$	2,720								$	2,009

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007

 

OVERVIEW

 

The following discussion highlights significant factors influencing the condensed financial position and results of operations of Lincoln Benefit Life Company (referred to in this document as “we”, “our”, “us”, or the “Company”).  It should be read in conjunction with the condensed financial statements and notes thereto found under Part I. Item 1. contained herein, and with the discussion, analysis, financial statements and notes thereto in Part I. Item 1. and Part II. Item 7. and Item 8. of the Lincoln Benefit Life Company Annual Report on Form 10-K for 2007.  We operate as a single segment entity based on the manner in which we use financial information to evaluate performance and to determine the allocation of resources.

 

OPERATIONS

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ in thousands)		2008			2007			2008			2007
Net investment income		$	3,427		$	3,549		$	7,067		$	7,133
Realized capital gains and losses		(91		)	(405		)	(345		)	(405		)
Income tax expense		(1,171		)	(1,098		)	(2,332		)	(2,350		)
Net income		$	2,165		$	2,046		$	4,390		$	4,378

 

We have reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and substantially all expenses are ceded to Allstate Life Insurance Company (“ALIC”) and certain non-affiliated reinsurers, and reflected net of such reinsurance in the Condensed Statements of Operations.  Our results of operations include net investment income and realized capital gains and losses on our assets that are not transferred under the reinsurance agreements.

 

Net income increased 5.8% in the second quarter and 0.3% in the first six months of 2008 compared to the same periods in 2007.  The increase in both periods was the result of a decline in net realized capital losses partially offset by lower net investment income.

 

Net investment income decreased 3.4% in the second quarter of 2008 and 0.9% in the first six months of 2008 compared to the same periods in 2007.  The decline in both periods was due to lower yields on short-term investments partially offset by higher average investment balances.

 

Net realized capital losses decreased 77.5% in the second quarter of 2008 and 14.8% in the first six months of 2008 compared to the same periods in 2007, due to net gains on dispositions of fixed income securities in the current year periods compared to net losses in the prior year periods, partially offset by net losses in the current year periods on equity securities.

 

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FINANCIAL POSITION

 

		June 30,			December 31,
($ in thousands)		2008			2007
Fixed income securities (1)		$	269,754		$	273,144
Equity securities (2)		5,140			—
Short-term		30,449			28,057
Total investments		$	305,343		$	301,201
Cash		$	16,234		$	18,612
Reinsurance recoverable from ALIC		18,755,610			18,777,851
Reinsurance recoverable from non-affiliates		1,520,743			1,422,931
Contractholder funds		17,791,647			17,820,885
Reserve for life-contingent contract benefits		2,444,364			2,348,116
Separate Accounts assets and liabilities		2,659,733			3,067,127
Total shareholder’s equity		292,658			289,938

 

(1)         Fixed income securities are carried at fair value.  Amortized cost basis for these securities was $266.1 million and $266.8 million at June 30, 2008 and December 31, 2007, respectively.

(2)         Equity securities are carried at fair value.  Cost basis for these securities was $5.0 million at June 30, 2008.

 

Total investments increased to $305.3 million at June 30, 2008 from $301.2 million at December 31, 2007 due primarily to the investment of cash flows from operating activities, partially offset by lower unrealized net capital gains on fixed income securities.

 

At June 30, 2008, all securities in the fixed income securities portfolio were rated investment grade, which is defined as a security having a rating from the National Association of Insurance Commissioners (“NAIC”) of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody’s or a rating of AAA, AA, A or BBB from Standards and Poor’s (“S&P”), Fitch or Dominion or a rating of aaa, a or bbb from A.M. Best; or a comparable internal rating if an externally provided rating is not available.

 

Unrealized net capital gains totaled $3.8 million as of June 30, 2008, compared to unrealized net capital gains of $6.4 million at December 31, 2007.

 

Unrealized net capital gains on fixed income securities of $3.7 million as of June 30, 2008 comprised $6.4 million of unrealized gains and $2.7 million of unrealized losses.  Unrealized net capital gains on fixed income securities of $6.4 million at December 31, 2007 comprised $7.7 million of unrealized gains and $1.3 million of unrealized losses.  Unrealized capital gains on equity securities of $143 thousand were comprised solely of unrealized gains.  There were no unrealized capital gains and losses on equity securities at December 31, 2007.

 

Of the gross unrealized losses in the fixed income portfolio at June 30, 2008, $1.1 million or 40.8% were related to securities in our corporate fixed income securities portfolio and were primarily comprised of losses on securities in the banking, consumer goods, transportation and capital goods sectors.  The gross unrealized losses in these sectors were primarily related to changes in interest rates and credit spreads, and company specific conditions.  Of the remaining $1.6 million of unrealized losses, $816 thousand were related to mortgage-backed securities and $783 thousand were related to commercial mortgage-backed securities.  These losses are believed to be the result of liquidity declines in the financial markets.

 

We have a comprehensive portfolio monitoring process to identify and evaluate, on a case-by-case basis, fixed income and equity securities whose carrying value may be other-than-temporarily impaired.  The process includes a quarterly review of all securities using a screening process to identify situations where the fair value, compared to amortized cost for fixed income securities, and cost for equity securities is below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings, ratings downgrades or payment defaults.  The securities identified, in addition to other securities for which we may have a concern, are evaluated based on facts and circumstances for inclusion on our watch-list.  All investments in an unrealized loss position at June 30, 2008 were included in our portfolio monitoring process for determining whether declines in value were other-than-temporary.  We also conduct a portfolio review to recognize impairment on securities in an unrealized loss position for

 

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which we do not have the intent and ability to hold until recovery as a result of approved programs involving the disposition of investments for reasons such as changes in economic and market outlooks, duration, revisions to strategic asset allocations, liquidity actions and federal income tax planning strategies for capital gain (loss) carryback and carryforward, as well as changes in intent to hold certain investments by portfolio managers.

 

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.  Restructured fixed income securities have rates and terms that are not consistent with market rates or terms prevailing at the time of the restructuring.  Potential problem fixed income investments 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, which causes us to believe these investments may be classified as problem or restructured in the future.

 

As of June 30, 2008 and December 31, 2007, we had no securities categorized as “problem”, “restructured” or “potential problem.”

 

Net Investment Income The following table presents net investment income.

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ in thousands)		2008			2007			2008			2007
Fixed income securities		$	3,369		$	3,358		$	6,721		$	6,707
Equity securities		(29		)	—			67			—
Short-term		203			275			482			595
Investment income, before expense		3,543			3,633			7,270			7,302
Investment expense		(116		)	(84		)	(203		)	(169		)
Net investment income		$	3,427		$	3,549		$	7,067		$	7,133

 

Net Realized Capital Gains and Losses The following table presents realized capital gains and losses and the related tax effect.

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
($ in thousands)		2008			2007			2008			2007
Realized capital gains and losses, pre-tax		$	(91	)	$	(405	)	$	(345	)	$	(405	)
Income tax benefit		32			142			121			142
Realized capital gains and losses, after-tax		$	(59	)	$	(263	)	$	(224	)	$	(263	)

 

The above table includes realized capital gains and losses on fixed income and equity securities as a result of sales, changes in our intent to continue holding fixed income securities in an unrealized loss position until they recover in value, and other transactions such as calls and prepayments.  We may sell impaired fixed income or equity securities that were in an unrealized loss position at the previous reporting date, or other investments where the fair value has declined below the carrying value, in situations where new factors such as negative developments, including subsequent credit deterioration and subsequent deterioration in the economy or capital markets, developments in the financial and real estate industries, liquidity needs, investment risk mitigation strategies, and other new facts and circumstances that would cause a change in our previous intent to hold a security to recovery or maturity.

 

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