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, 2006

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)

Nebraska	7-0221457
(State of Incorporation)	(I.R.S. Employer Identification No.)
2940 South 84th Street
Lincoln, Nebraska	68506
(Address of principal executive offices)	(Zip code)

 

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, 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer	Accelerated filer	Non-accelerated filer
	o	o	x

 

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

 

None of the common equity of the registrant is held by non-affiliates.  Therefore, the aggregate market value of common equity held by non-affiliates of the registrant is zero.

As of August 8, 2006, 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, 2006

 

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2006 and 2005 (unaudited)	3
	Condensed Statements of Financial Position as of June 30, 2006 (unaudited) and December 31, 2005	4
	Condensed Statements of Cash Flows for the Six-Month Periods Ended June 30, 2006 and 2005 (unaudited)	5
	Notes to Condensed Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4.	Controls and Procedures	15
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 6.	Exhibits	16

 

 

2

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)		2006			2005			2006			2005
		(unaudited)						(unaudited)
Revenues
Net investment income		$	3,568		$	3,429		$	6,957		$	6,790
Realized capital gains and losses		(847		)	(22		)	(847		)	(117		)
Income from operations before income tax expense		2,721			3,407			6,110			6,673
Income tax expense		950			1,191			2,133			2,331
Net income		$	1,771		$	2,216		$	3,977		$	4,342

 

See notes to condensed financial statements.

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LINCOLN BENEFIT LIFE COMPANY

CONDENSED STATEMENTS OF FINANCIAL POSITION

 

		June 30,			December 31,
($ in thousands, except par value data)		2006			2005
		(Unaudited)
Assets
Investments
Fixed income securities, at fair value (amortized cost $271,728 and $266,457)		$	264,965		$	267,545
Short-term		8,528			3,824
Total investments		273,493			271,369
Cash		35,116			8,349
Reinsurance recoverable from Allstate Life Insurance Company		18,691,877			18,350,983
Reinsurance recoverable from non-affiliates		1,092,567			1,019,850
Receivable from affiliates		—			10,394
Deferred income taxes		2,157			—
Other assets		90,635			96,059
Separate Accounts		2,874,282			2,718,509
Total assets		$	23,060,127		$	22,475,513
Liabilities
Contractholder funds		$	17,785,053		$	17,462,104
Reserve for life-contingent contract benefits		1,985,918			1,892,194
Current income taxes payable		6,903			4,769
Unearned premiums		26,278			26,992
Deferred income taxes		—			591
Payable to affiliates, net		9,019			—
Other liabilities and accrued expenses		104,549			101,103
Separate Accounts		2,874,282			2,718,509
Total liabilities		22,792,002			22,206,262
Commitments and Contingent Liabilities (Note 3)
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		90,021			86,044
Accumulated other comprehensive income:
Unrealized net capital gains and losses		(4,396		)	707
Total accumulated other comprehensive income		(4,396		)	707
Total shareholder’s equity		268,125			269,251
Total liabilities and shareholder’s equity		$	23,060,127		$	22,475,513

 

See notes to condensed financial statements.

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LINCOLN BENEFIT LIFE COMPANY

CONDENSED STATEMENTS OF CASH FLOWS

 

		Six Months Ended June 30,
(in thousands)		2006			2005
		(Unaudited)
Cash flows from operating activities
Net income		$	3,977		$	4,342
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and other non-cash items		247			225
Realized capital gains and losses		847			117
Changes in:
Reserve for life-contingent contract benefits and contractholder funds, net of reinsurance recoverables		3,062			826
Income taxes payable		2,133			2,331
Receivable/payable to affiliates, net		19,413			19,743
Other operating assets and liabilities		4,495			(10,449		)
Net cash provided by operating activities		34,174			17,135
Cash flows from investing activities
Fixed income securities
Proceeds from sales		10,877			3,099
Investment collections		6,790			7,793
Investment purchases		(20,370		)	(43,288		)
Change in short-term investments		(4,704		)	25,855
Net cash used in investing activities		(7,407		)	(6,541		)
Net increase in cash		26,767			10,594
Cash at beginning of period		8,349			10,532
Cash at end of period		$	35,116		$	21,126

 

See notes to condensed financial statements.

5

 

LINCOLN BENEFIT LIFE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)

1. 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, 2006, and for the three-month and six-month periods ended June 30, 2006 and 2005, 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, 2005.  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

Financial Accounting Standards Board Staff Position No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”   (“FSP FAS 115-1”)

The Company adopted Financial Accounting Standards Board (“FASB”) FSP FAS 115-1 as of January 1, 2006.  FSP 115-1 nullifies the guidance in paragraphs 10-18 of Emerging Issues Task Force Issue No. 03-1 (“EITF Issue 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and references existing other than temporary impairment guidance.  FSP FAS 115-1 clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell the security has not been made, and also provides guidance on the subsequent accounting for income recognition on an impaired debt security.  The adoption of FSP FAS 115-1 was required on a prospective basis and did not have a material effect on the results of operations or financial position of the Company.

Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS No.  154”)

The Company adopted SFAS No. 154 on January 1, 2006.  SFAS No. 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”.  SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless determination of either the period specific effects or the cumulative effect of the change is impracticable or otherwise promulgated.  The Company had no accounting changes or error corrections affected by the new standard.

Pending accounting standards

Statement of Position 05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”

In October 2005, the AICPA issued SOP 05-1.   SOP 05-1 provides accounting guidance for deferred policy acquisition costs associated with internal replacements of insurance and investment contracts other than those already described in 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 by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract.  The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006.  The Company is currently assessing the impact of the SOP on its results of operations and financial position.  Any impact resulting from the adoption of SOP 05-1 on the Company’s results of operations will be ceded to ALIC under the terms of the reinsurance agreements.

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Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”)

In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48 requires an entity to recognize the benefit of 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.   FIN 48 is effective for fiscal years beginning after December 15, 2006.  FIN 48 is not expected to have a material effect on the results of operations or financial position of the Company.

2. 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 certain 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)		2006			2005			2006			2005
Premiums and contract charges
Direct		$	233,381		$	203,888		$	453,545		$	401,596
Assumed - non-affiliate		2,900			1,477			4,921			2,603
Ceded
Affiliate		(140,091		)	(105,622		)	(264,971		)	(222,455		)
Non-affiliate		(96,190		)	(99,743		)	(193,495		)	(181,744		)
Premiums and contract charges, net of reinsurance		$	—		$	—		$	—		$	—

 

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

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(in thousands)		2006			2005			2006			2005
Interest credited to contractholder funds, contract benefits and certain other expenses
Direct		$	419,324		$	451,593		$	899,481		$	1,036,412
Assumed-non-affiliate		2,827			1,698			4,877			3,118
Ceded
Affiliate		(316,823		)	(343,655		)	(676,774		)	(797,967		)
Non-affiliate		(105,328		)	(109,636		)	(227,584		)	(241,563		)
Interest credited to contractholder funds, contract benefits and certain other expenses, net of reinsurance		$	—		$	—		$	—		$	—

 

3. Guarantees and Contingent Liabilities

Guarantees

In the normal course of business, the Company provides standard indemnifications to counterparties in contracts 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 were 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, 2006.

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.

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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 but not limited to, 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 and, in some cases, the timing of their resolutions relative to other similar matters involving other companies; 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.

·                  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 our 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 quarter 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 include a lawsuit filed in December 2001 by the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging retaliation under federal civil rights laws, a class action filed in August

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2001 by former employee agents alleging retaliation and age discrimination under the Age Discrimination in Employment Act, breach of contract and ERISA violations, and a lawsuit filed in October 2004 by the EEOC alleging age discrimination with respect to a policy limiting the rehire of agents affected by the agency program reorganization.  AIC is also defending a certified class action filed by former employee agents who terminated their employment prior to the agency program reorganization.  These plaintiffs have asserted breach of contract and ERISA claims and are seeking actual damages including benefits under Allstate employee benefit plans and payments provided in connection with the reorganization, as well as punitive damages.  In late March 2004, in the first EEOC lawsuit and class action lawsuit, 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 “concluded 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.  The case otherwise remains pending.  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 April 2005.  In these 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. In addition, AIC has been defending certain matters relating to its life agency program reorganization announced in 2000. These matters have been the subject of an investigation by the EEOC with respect to allegations of age discrimination and retaliation.  A conciliation agreement relating to certain of these matters has been entered into between AIC and the EEOC.   The outcome of these disputes is currently uncertain.

Other Matters

The Corporation and some of its subsidiaries, including the Company, have received interrogatories and demands for information from regulatory and enforcement authorities relating to various insurance products and practices.  The areas of inquiry include variable annuity market timing and late trading.  The Corporation and some of its subsidiaries, including the Company, have also received interrogatories and demands for information from authorities seeking information relevant to on-going investigations into the possible violation of antitrust or insurance laws by unnamed parties and, in particular, seeking information as to whether any person engaged in activities for the purpose of price fixing, market allocation, or bid rigging. The Company believes that these inquiries are similar to those made to many financial services companies as part of industry-wide investigations by various authorities into the practices, policies and procedures relating to insurance and financial services products.   The Corporation and its subsidiaries have responded and will continue to respond to these inquiries.

Various other legal and regulatory actions 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 condition of the Company.

 

10

4. Other Comprehensive (Loss) Income

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

		Three Months Ended June 30,
(in thousands)		2006									2005
								After-									After-
		Pretax			Tax			tax			Pretax			Tax			tax
Unrealized holding (losses) gains arising during the period		$	(3,306	)	$	1,157		$	(2,149	)	$	5,995		$	(2,097	)	$	3,898
Less: reclassification adjustment of realized capital gains and losses		(832		)	291			(541		)	(22		)	8			(14		)
Other comprehensive (loss) income		$	(2,474	)	$	866		(1,608		)	$	6,017		$	(2,105	)	3,912
Net income								1,771									2,216
Comprehensive income								$	163								$	6,128

 

		Six Months Ended June 30,
(in thousands)		2006									2005
								After-									After-
		Pretax			Tax			Tax			Pretax			Tax			Tax
Unrealized holding (losses) gains arising during the period		$	(8,683	)	$	3,039		$	(5,644	)	$	447		$	(156	)	$	291
Less: reclassification adjustment of realized capital gains and losses		(832		)	291			(541		)	(117		)	41			(76		)
Other comprehensive (loss) income		$	(7,851	)	$	2,748		(5,103		)	$	564		$	(197	)	367
Net income								3,977									4,342
Comprehensive (loss) income								$	(1,126	)							$	4,709

 

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2006 AND 2005

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”, “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 2005.  We operate as a single segment entity, consistent with the way in which we use financial information to evaluate performance and to determine the allocation of resources.

OPERATIONS

 

We have reinsurance agreements whereby all premiums, contract charges, interest credited to contractholder funds, contract benefits and certain 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.

On June 1, 2006, ALIC, its subsidiary, Allstate Life Insurance Company of New York, and The Allstate Corporation completed the disposal of substantially all of their variable annuity business pursuant to a definitive agreement with Prudential Financial, Inc. and its subsidiary, The Prudential Insurance Company of America (“collectively Prudential”), which was entered into on March 8, 2006. The disposal was effected through a combination of coinsurance and modified coinsurance reinsurance agreements. The Company is not a direct participant in this agreement and its reinsurance agreements with ALIC remain unchanged.

Net income decreased 20.1% in the second quarter and 8.4% in the first six months of 2006 compared to the same periods in 2005.  The declines were due to higher net realized capital losses, partially offset by increased net investment income.

Net investment income increased 4.1% in the second quarter and 2.5% in the first six months of 2006 compared to the same periods of 2005 due to higher average portfolio balances.

Net realized capital losses increased $825 thousand and $730 thousand in the second quarter and first six months of 2006, respectively, when compared to 2005 due to higher losses on dispositions of fixed income securities.

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FINANCIAL POSITION

 

 

(1)             Fixed income securities are carried at fair value.  Amortized cost basis for these securities was $271.7 million and $266.5 million at June 30, 2006 and December 31, 2005, respectively.

Total investments increased to $273.5 million at June 30, 2006 from $271.4 million at December 31, 2005 due to positive cash flows from operating activities, partially offset by an unfavorable change in unrealized capital gains and losses on fixed income securities.       

At June 30, 2006, 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 S&P, Fitch or Dominion; or a comparable internal rating if an externally provided rating is not available.

The unrealized net capital losses on fixed income securities at June 30, 2006 were $6.8 million, compared to unrealized net capital gains of $1.1 million at December 31, 2005.  The net unrealized losses were comprised of $9.5 million of unrealized losses and $2.7 million of unrealized gains at June 30, 2006.  The unrealized gains at December 31, 2005 were comprised of $5.3 million of unrealized gains and $4.2 million of unrealized losses. 

Of the total gross unrealized losses at June 30, 2006, $3.8 million or 40.2% were related to securities in our corporate fixed income securities portfolio and are believed to be a result of a rising interest rate environment or company specific issues.  These losses were primarily comprised of losses in the consumer goods, financial services and utilities sectors. Of the remaining $5.7 million of unrealized losses, $3.1 million or 54.4% were related to securities in our U.S. government and government agencies portfolio and are believed to be interest rate related.

Our portfolio monitoring process identifies and evaluates, on a case-by-case basis, fixed income 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 those securities whose fair value compared to amortized cost is below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings downgrades or payment defaults.  As a result of approved programs involving the disposition of investments such as changes in duration and revisions to strategic asset allocations, and certain dispositions anticipated by portfolio managers, we also conduct a portfolio review to recognize impairment on securities in an unrealized loss position for which we do not have the intent and ability to hold until recovery.  All securities in an unrealized loss position at June 30, 2006 were included in our portfolio monitoring process for determining which declines in value were not other-than-temporary.

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 securities in default with respect to principal or interest and/or securities issued by companies that have gone into bankruptcy subsequent to our acquisition of the security.  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 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

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principal and interest, which causes us to believe these securities may be classified as problem or restructured in the future.

 

As of June 30, 2006 and December 31, 2005, we had no securities categorized as “problem”, “restructured” or “potential problem”.

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

 

Dispositions in the above table include sales and other transactions such as calls and prepayments.  We may sell fixed income securities during the period in which fair value has declined below amortized cost.  In certain situations, new factors such as negative developments, subsequent credit deterioration, relative value opportunities, market liquidity concerns and portfolio reallocations can subsequently change our previous intent to continue holding a security.

Reinsurance recoverable, Contractholder funds and Reserve for life-contingent contract benefits

Contractholder funds increased $322.9 million to $17.79 billion at June 30, 2006, from $17.46 billion at December 31, 2005 as a result of new and additional deposits on fixed annuities and interest-sensitive life products and interest credited to contractholder funds, partially offset by surrenders, withdrawals and benefit payments.  The reserve for life-contingent contract benefits increased $93.7 million to $1.99 billion at June 30, 2006 resulting from sales of immediate annuities with life contingencies and other life-contingent products, partially offset by benefits paid and policy lapses.  Reinsurance recoverable from ALIC and reinsurance recoverable from non-affiliates increased correspondingly by $340.9 million and $72.7 million, respectively.

We purchase reinsurance after evaluating the financial condition of the reinsurer, as well as the terms and price of coverage.  We reinsure certain of our risks to non-affiliated reinsurers under yearly renewable term and coinsurance agreements.  Yearly renewable term and coinsurance agreements result in the passing of the agreed-upon portion of risk to the reinsurers in exchange for negotiated reinsurance premium payments.

CAPITAL RESOURCES AND LIQUIDITY

Capital Resources consist of shareholder’s equity.  The following table summarizes our capital resources:

(in thousands)		June 30, 2006			December 31, 2005
Common stock, additional capital paid-in and retained income		$	272,521		$	268,544
Accumulated other comprehensive income		(4,396		)	707
Total shareholder’s equity		$	268,125		$	269,251

 

Shareholder’s equity declined in the first six months of 2006 due to an unfavorable change in unrealized capital gains and losses, partially offset by net income.

Financial Ratings and Strength  We share the insurance financial strength ratings of our parent, ALIC, as our business is reinsured to ALIC.  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, Allstate Insurance Company’s (“AIC”) ratings and other factors.  There have been no changes to ALIC’s insurance financial strength ratings since December 31, 2005.

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Item 4.                      Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934.  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based upon this evaluation, the principal executive officer and the principal financial officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that material information required to be disclosed in our reports filed with or submitted to the Securities and Exchange Commission under the Securities Exchange Act is made known to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting.  During the fiscal quarter ended June 30, 2006, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

Information required for this Part II, Item 1, is incorporated by reference to the discussion under the heading “Regulation” and under the heading “Legal and regulatory proceedings and inquires” in Note 3 of the Company’s Condensed Financial Statements in Part I, Item 1, of this Form 10-Q.

Item 1A. 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, 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. Risk factors which could cause actual results to differ materially from those suggested by such forward-looking statements include but are not limited to those discussed or identified in this document, in our public filings with the Securities and Exchange Commission, and those in Part I, Item 1A of Lincoln Benefit Life Company Annual Report on Form 10-K for 2005, which are hereby incorporated herein by reference.  There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

Item 6. Exhibits

(a)  Exhibits

An Exhibit Index has been filed as part of this report on page E-1.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Lincoln Benefit Life Company
	(Registrant)
August 8, 2006
	By	/s/ Samuel H. Pilch
	Samuel H. Pilch
	Controller
	(chief accounting officer and duly authorized officer of the registrant)

 

 

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Exhibit No.			Description
10.1			Administrative Services Agreement between Lincoln Benefit Life Company and Allstate Life Insurance Company effective June 1, 2006.
31.1			Rule 15d-14(a) Certification of Principal Executive Officer
31.2			Rule 15d-14(a) Certification of Principal Financial Officer
32			Section 1350 Certifications

 

 

E-1