10-Q 1 lbl1q.txt LINCOLN BENEFIT LIFE COMPANY 10Q 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: March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 333-66452 LINCOLN BENEFIT LIFE COMPANY (Exact name of registrant as specified in its charter) Nebraska 47-0221457 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2940 South 84th Street Lincoln, Nebraska 68506-4142 (Address of principal executive offices) (zip code) Registrant's telephone number, including are code: 1-800-525-9287 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 As of April 30, 2002, Registrant had 25,000 shares of common capital stock outstanding, par value $100 per share all of which shares are held by Allstate Life Insurance Company. LINCOLN BENEFIT LIFE COMPANY INDEX TO QUARTERLY REPORT ON FORM 10-Q MARCH 31, 2002

PART 1. FINANCIAL INFORMATION Item 1. Condensed Statements of Operations for the Three Months Ended March 31, 2002 and 2001 (unaudited) 3 Condensed Statements of Financial Position as of March 31, 2002 (unaudited) and December 31, 2001 4 Condensed Statements of Cash Flows for the Three Month Periods Ended March 31, 2002 and 2001 (unaudited) 5 Notes to Condensed Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 Signature Page 15

2 PART 1. FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS LINCOLN BENEFIT LIFE COMPANY CONDENSED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, (IN THOUSANDS) 2002 2001 ---- ---- (unaudited) REVENUES Net investment income $ 2,953 $ 3,137 Realized capital gains and losses 450 (844) ------- ------- INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE 3,403 2,293 Income tax expense 1,189 800 ------- ------- NET INCOME $ 2,214 $ 1,493 ======= =======

See notes to condensed financial statements. 3 LINCOLN BENEFIT LIFE COMPANY CONDENSED STATEMENTS OF FINANCIAL POSITION

MARCH 31, DECEMBER 31, 2002 2001 ---- ---- (IN THOUSANDS, EXCEPT PAR VALUE DATA) (unaudited) ASSETS Investments Fixed income securities, at fair value (amortized cost $164,283 and $179,124) $ 169,370 $ 186,709 Short-term 24,965 6,856 ------------ ------------ Total investments 194,335 193,565 Cash 85,128 43,796 Reinsurance recoverable from Allstate Life Insurance Company, net 9,943,065 9,564,440 Reinsurance recoverable from non-affiliates, net 473,752 458,563 Receivable from affiliate, net - 17,027 Other assets 3,142 2,924 Separate Accounts 1,621,150 1,565,708 ------------ ------------ TOTAL ASSETS $ 12,320,572 $ 11,846,023 ============ ============ LIABILITIES Contractholder funds $ 9,638,144 $ 9,287,599 Reserve for life-contingent contract benefits 769,994 724,044 Current income taxes payable 4,865 3,645 Deferred income taxes 5,281 6,187 Payable to affiliates, net 27,441 - Other liabilities and accrued expenses 64,503 70,237 Separate Accounts 1,621,150 1,565,708 ------------ ------------ TOTAL LIABILITIES 12,131,378 11,657,420 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 4) SHAREHOLDER'S EQUITY Common stock, $100 par value, 30,000 shares authorized, 25,000 shares issued and outstanding 2,500 2,500 Additional capital paid-in 126,750 126,750 Retained income 56,637 54,423 Accumulated other comprehensive income: Unrealized net capital gains and losses 3,307 4,930 ------------ ------------ Total accumulated other comprehensive income 3,307 4,930 ------------ ------------ TOTAL SHAREHOLDER'S EQUITY 189,194 188,603 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 12,320,572 $ 11,846,023 ============ ============

See notes to condensed financial statements. 4 LINCOLN BENEFIT LIFE COMPANY CONDENSED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, --------- (IN THOUSANDS) 2002 2001 ---- ---- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,214 $ 1,493 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, amortization and other non-cash items (71) (130) Realized capital gains and losses (450) 844 Changes in: Life-contingent contract benefits and contractholder funds, net of reinsurance recoverables 2,681 3,237 Income taxes payable 1,189 801 Receivable/payable to affiliates, net 44,468 (9,874) Other operating assets and liabilities (6,053) 15,265 ------- ------- Net cash provided by operating activities 43,978 11,636 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Fixed income securities Proceeds from sales 11,087 3,175 Investment collections 6,289 1,944 Investments purchases (1,913) (8,245) Change in short-term investments, net (18,109) 793 ------- ------- Net cash used in investing activities (2,646) (2,333) ------- ------- NET INCREASE IN CASH 41,332 9,303 CASH AT BEGINNING OF PERIOD 43,796 76 ------- ------- CASH AT END OF PERIOD $ 85,128 $ 9,379 ======== =======

See notes to condensed financial statements. 5 LINCOLN BENEFIT LIFE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENS (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 March 31, 2002, and for the three month periods ended March 31, 2002 and 2001, 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 Lincoln Benefit Life Company Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. To conform with the 2002 presentation, certain prior year amounts have been reclassified. 2. REINSURANCE The Company has reinsurance agreements whereby premiums, contract charges, credited interest, policy benefits and expenses are ceded to ALIC and certain non-affiliates, and reflected net of such reinsurance in the condensed statements of operations. Reinsurance recoverable and the related reserve for life-contingent contract benefits and contractholder funds are reported separately in the condensed statements of financial position. 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 Company's condensed financial statements as those assets are owned and managed by ALIC under terms of the reinsurance agreements. The following table summarizes amounts ceded to ALIC and non-affiliates under reinsurance agreements. The effects of reinsurance on premiums written and earned and contract charges are as follows:

THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- (IN THOUSANDS) PREMIUMS AND CONTRACT CHARGES Direct $ 145,809 $ 101,071 Assumed - 1 Ceded Affiliate (88,485) (57,653) Non-affiliate (57,324) (43,419) --------- --------- Premiums and contract charges, net of reinsurance $ - $ - ========= ========= The effects of reinsurance on credited interest, policy benefits and other expenses are as follows: THREE MONTHS ENDED MARCH 31, (IN THOUSANDS) 2002 2001 ---- ---- CREDITED INTEREST, POLICY BENEFITS AND OTHER EXPENSES Direct $ 284,327 $ 188,695 Assumed - - Ceded Affiliate (207,318) (135,747) Non-affiliate (77,009) (52,948) --------- --------- Credited interest, policy benefits and other expenses, net of reinsurance $ - $ - ========= =========

6 LINCOLN BENEFIT LIFE COMPANY NOTES TO CONDENSED FINANCIAL STATEMENS (UNAUDITED) 3. COMPREHENSIVE INCOME The components of other comprehensive income on a pretax and after-tax basis are as follows:

THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------ (IN THOUSANDS) 2002 2001 --------------------------------- ----------------------------- After- After- Pretax Tax tax Pretax Tax tax ------ --- ----- ------ --- ------ UNREALIZED CAPITAL GAINS AND LOSSES: Unrealized holding (losses) gains arising during the period $ (2,048) $ 717 $ (1,331) $ 1,845 $ (646) $ 1,199 Less: reclassification adjustments 450 (158) 292 (844) 295 (549) -------- ------ -------- ------- ------ ------- Unrealized net capital (losses) gains (2,498) 875 (1,623) 2,689 (941) 1,748 -------- ------ --------- ------- ------ ------- Other comprehensive (loss) income $ (2,498) $ 875 (1,623) $ 2,689 $ (941) 1,748 ======== ======= ======= ====== Net income 2,214 1,493 -------- ------- Comprehensive income $ 591 $ 3,241 ========= =======

4. REGULATION AND LEGAL PROCEEDINGS The Company's business is subject to the effects of a changing social, economic and regulatory environment. State and federal regulatory initiatives have varied and have included employee benefit regulations, removal of barriers preventing banks from engaging in the securities and insurance businesses, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles and the overall expansion of regulation. The ultimate changes and eventual effects, if any, of these initiatives are uncertain. From time to time the Company is involved in pending and threatened litigation in the normal course of its business in which claims for monetary damages are asserted. In the opinion of management, the ultimate liability, if any, in one or more of these actions in excess of amounts currently reserved is not expected to have a material effect on the results of operations, liquidity or financial position of the Company. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 The following discussion highlights significant factors influencing results of operations and changes in financial position of Lincoln Benefit Life Company (the "Company"). It should be read in conjunction with the condensed financial statements and related 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 Items 7 and 8 of the Lincoln Benefit Life Company Annual Report on Form 10-K for the year ended December 31, 2001. OVERVIEW The Company, a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is a wholly owned subsidiary of Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"), markets a diversified group of products to meet consumer's lifetime needs in the areas of protection and retirement solutions through independent insurance agents and broker/dealers, including master brokerage agencies. Products distributed through independent insurance agents include term life insurance; whole life; universal life; variable universal life; single premium life; fixed annuities, including market value adjusted annuities and equity-indexed annuities; immediate annuities; variable annuities and long-term care products. Variable annuities and variable universal life products are also distributed through independent broker/dealers. ALFS, Inc. ("ALFS") is the principal underwriter for certain Lincoln Benefit products, such as variable universal life, variable annuities and market value adjusted annuities. ALFS is a wholly owned subsidiary of ALIC and is a registered broker/dealer under the Securities Exchange Act of 1934. The Company has identified itself as a single segment entity. The assets and liabilities related to variable contracts are legally segregated and reflected as Separate Accounts. The assets of the Separate Accounts are carried at fair value. Separate Accounts liabilities represent the contractholders' claims to the related assets and are carried at the fair value of the assets. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contractholders and therefore, are not included in the Company's condensed statements of operations. Revenues to the Company from the Separate Accounts consist of contract maintenance and administration fees and mortality, surrender and expense charges all of which are ceded to ALIC. Absent any contract provision wherein the Company guarantees either a minimum return of account value upon death or annuitization, variable annuity and variable life contractholders bear the investment risk that the Separate Accounts' funds may not meet their stated objectives. RESULTS OF OPERATIONS

(IN THOUSANDS) THREE MONTHS ENDED MARCH 31, ----------------------------------- 2002 2001 ---------------- --------------- Net investment income $ 2,953 $ 3,137 Realized capital gains and losses 450 (844) Income tax expense 1,189 800 ------- ------- Net income $ 2,214 $ 1,493 ======= =======

The Company has reinsurance agreements whereby premiums, contract charges, credited interest, policy benefits and expenses are ceded to ALIC and certain non-affiliates, and reflected net of such reinsurance in the condensed statements of operations. The Company's results of operations include net investment income and realized capital gains and losses earned on the assets of the Company that are not transferred under the reinsurance agreements. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 Net income for the first three months of 2002 increased 48.3% to $2.2 million compared to the same period last year, due to realized capital gains during the first three months of 2002 partially offset by a decrease in net investment income. Net investment income for the first three months of 2002 decreased 5.9% to $3.0 million compared to the same period last year, due to lower investment yields partially offset by increased investment balances. Investment balances, excluding Separate Accounts and unrealized gains and losses on fixed income securities, increased 5.3% to $189.2 million at March 31, 2002 from $179.8 million at March 31, 2001. This increase was due to positive cash flows from operations. Realized capital gains, after-tax, were $293 thousand for the first three months of 2002 compared to realized capital losses of $549 thousand for the same period last year. Realized capital gains and losses result from the sale of fixed income securities. Period to period fluctuations in realized capital gains and losses are the result of timing of sales decisions reflecting management's decision on positioning the portfolio, assessments of individual securities, overall market conditions and write-downs when an assessment is made by the Company that a decline in value of a security is other than temporary. FINANCIAL POSITION

(IN THOUSANDS) MARCH 31, DECEMBER 31, 2002 2001 ---- ---- Fixed income securities (1) $ 169,370 $ 186,709 Short-term investments 24,965 6,856 ----------- ----------- Total investments $ 194,335 $ 193,565 =========== =========== Cash $ 85,128 $ 43,796 =========== =========== Reinsurance recoverable from ALIC, net $ 9,943,065 $ 9,564,440 =========== =========== Contractholder funds $ 9,638,144 $ 9,287,599 =========== =========== Reserve for life-contingent contract benefits $ 769,994 $ 724,044 =========== =========== Separate Accounts assets and liabilities $ 1,621,150 $ 1,565,708 =========== ===========

(1) Fixed income securities are carried at fair value. Amortized cost for these securities was $164.3 million and $179.1 million at March 31, 2002 and December 31, 2001, respectively. Total investments were $194.3 million at March 31, 2002 compared to $193.6 million at December 31, 2001. The increase was due to positive cash flows generated from operations offset in part by fewer unrealized gains on fixed income securities. Unrealized net capital gains on fixed income securities were $5.1 million at March 31, 2002 compared to $7.6 million at December 31, 2001. Investments at March 31, 2002, excluding unrealized gains on fixed income securities, grew 1.8% from December 31, 2001. At March 31, 2002, 97.9% of the Company's fixed income securities portfolio was rated investment grade, which is defined by the Company as a security having a National Association of Insurance Commissioners ("NAIC") rating of 1 or 2, a Moody's rating of Aaa, Aa, A or Baa, or a comparable Company internal rating. At March 31, 2002, cash was $85.1 million compared to $43.8 million at December 31, 2001. Cash increased due to a change in the settlement process for intercompany balances. At March 31, 2002, Contractholder funds increased to $9.64 billion from $9.29 billion at December 31, 2001 as the result of additional deposits from fixed annuities and credited interest that were partially offset by surrenders and withdrawals. Reserves for life-contingent contract benefits increased $46.0 million to $770.0 million at March 31, 2002 resulting from increased sales of term products that was partially offset by benefits paid. Reinsurance recoverable from ALIC increased correspondingly by $378.6 million due to the increase in contractholder funds. Separate Accounts assets and liabilities increased 3.5% to $1.62 billion at March 31, 2002 as compared to the December 31, 2001 balance. The increases were primarily attributable to additional sales of variable annuity contracts and transfers from the fixed account option contract to variable Separate Accounts funds partially offset by surrenders and withdrawals and expense charges. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 CAPITAL RESOURCES AND LIQUIDITY CAPITAL RESOURCES The company's capital resources consist of shareholder's equity. The following table summarizes the capital resources:

MARCH 31, DECEMBER 31, (IN THOUSANDS) 2002 2001 ---- ---- Common stock and retained income $ 185,887 $ 183,673 Other comprehensive income 3,307 4,930 ---------- ----------- Total shareholder's equity $ 189,194 $ 188,603 ========== ===========

SHAREHOLDER'S EQUITY Shareholder's equity increased for March 31, 2002 due to net income partially offset by a decrease in unrealized net capital gains and losses. DEBT The Company had no outstanding debt at March 31, 2002 and December 31, 2001. The Company has entered into an intercompany loan agreement with the Corporation. The amount of funds available to the Company is at the discretion of the Corporation. The maximum amount of loans the Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. No amounts were outstanding under the intercompany loan agreement at March 31, 2002 and December 31, 2001. The Corporation uses commercial paper borrowings and can use bank lines of credit to fund intercompany borrowings. FINANCIAL RATINGS AND STRENGTHS Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies and, generally, may be expected to have an effect on an insurance company's sales. On an ongoing basis, rating agencies review the financial performance and condition of insurers. A multiple level downgrade, while not expected, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company shares its financial strength ratings with its parent, ALIC, due to the 100% reinsurance agreements. The Company's current financial strength ratings are listed below:

RATING AGENCY RATING RATING STRUCTURE ------------- ------ ---------------- Moody's Investors Service, Inc. Aa2 Second highest of nine ratings ("Excellent") categories and mid-range within the category based on modifiers (e.g., Aa1, Aa2 and Aa3 are "Excellent") Standard & Poor's Ratings Services AA+ Second highest of nine ratings ("Very Strong") categories and highest within the category based on modifiers (e.g., AA+, AA and AA- are "Very Strong") A.M. Best Company, Inc. A+ Highest of nine ratings categories ("Superior") and second highest within the category based on modifiers (e.g., A++ and A+ are "Superior" while A and A- are "Excellent")

In February 2002, Standard & Poor's affirmed its December 31, 2001 ratings. Standard & Poor's revised its outlook for ALIC and its rated subsidiaries and affiliates to "negative" from "stable". This revision is part of an ongoing life insurance industry review recently initiated by Standard & Poor's. Moody's and A.M. Best reaffirmed their ratings and outlook for the Company and ALIC. LIQUIDITY Under the terms of reinsurance agreements, premiums and deposits, excluding those relating to Separate Accounts, are transferred primarily to ALIC, which maintains the investment portfolios supporting the Company's products. Payments of policyholder claims, benefits, contract maturities, 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 contract surrenders and withdrawals and certain operating costs, excluding those relating to Separate Accounts, are also reimbursed primarily by ALIC, under the terms of the reinsurance agreements. The Company continues to have primary liability as a direct insurer for risks reinsured. The Company's ability to meet liquidity demands is dependent on ALIC's ability to meet those demands. ALIC's financial strength was rated Aa2, AA+, and A+ by Moody's, Standard & Poor's and A.M. Best, respectively, at March 31, 2002. The primary sources of funds for the Company are collection of principal and interest from the investment portfolio, capital contributions from ALIC and intercompany loans from the Corporation. The primary uses of these funds are to purchase investments, pay costs associated with the maintenance of the Company's investment portfolio, income taxes, dividends to ALIC, and the repayment of intercompany loans from the Corporation. FORWARD-LOOKING STATEMENTS AND RISK FACTORS This document contains "forward-looking statements" that anticipate results based on management's plans are subject to uncertainty. These statements are made subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not relate strictly to historical or current facts and may be identified by their use of words like "plans," "expects," "will," "anticipates," "estimates," "intends," "believes," "likely," 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 and reserves. Forward-looking statements are based on management's current expectations of future events. We cannot guarantee that any forward-looking statement will be accurate. However, we believe that our forward-looking statements are based on reasonable, current expectations and assumptions. We assume no obligation to update any forward-looking statements as a result of new information or future events or developments. If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those communicated in these forward-looking statements. In addition to the normal risks of business, the Company is subject to significant risk factors, including those listed below which apply to it as an insurance business and a provider of other financial services. o There is uncertainty involved in estimating the availability of reinsurance and the collectibility of reinsurance and recoverables. This uncertainty arises from a number of factors, including whether losses meet the qualifying conditions of the reinsurance contracts and if the reinsurers have the financial capacity and willingness to pay. o Currently, the Corporation is examining the potential exposure, if any, of its insurance operations from acts of terrorism. The Corporation is also examining how best to address this exposure, if any, considering the interests of policyholders, shareholders, the lending community, regulators and others. The Company generally does not have exclusions for terrorist events included in its life insurance policies. In the event that a terrorist act occurs, the Company may be adversely impacted, depending on the nature of the event. With respect to the Company's investment portfolio, in the event that commercial insurance coverage for terrorism becomes unavailable or very expensive, there could be significant adverse impacts on some portion of the Company's portfolio, particularly in sectors such as airlines and real estate. For example, certain debt obligations might be adversely affected due to the inability to obtain coverage to restore the related real estate or other property, thereby creating the potential for increased default risk. o Changes in market interest rates can have adverse effects on the Company's investment portfolio and investment income. Increasing market interest rates have an adverse impact on the value of the investment portfolio, for example, by decreasing unrealized capital gains on fixed income securities. In addition, increases in market interest rates as compared to rates offered on some of the Company's products could make those products less attractive and lead to lower sales and/or increase the level of surrenders on these products. Declining market interest rates could have an adverse impact on the Company's investment income as the Company reinvests proceeds from positive cash flows from operations and proceeds from maturing and called investments into new investments that could be yielding less than the portfolio's average rate. o The impact of decreasing Separate Accounts balances resulting from volatile market conditions, underlying fund performance and sales management performance could cause contract charges realized by the Company, as well as ALIC, to decrease and lead to an increase of exposure to pay guaranteed minimum income and death benefits. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 o The Company amortizes deferred policy acquisition costs ("DAC") related to contractholder funds in proportion to gross profits over the estimated lives of the contract periods. Periodically, the Company updates the assumptions underlying the gross profits, which include estimated future fees, investment margins and expenses, in order to reflect actual experience. Updates to these assumptions result in adjustments to the cumulative amortization of DAC. These adjustments may have a material effect on results of operations. DAC and any related adjustments are ceded to ALIC. o In order to manage interest rate risk, from time to time the Company adjusts the effective duration of assets in the investment portfolio. Those adjustments may have an impact on the value of the investment portfolio and on investment income. o It is possible that the assumptions and projections used by the Company in establishing prices for the guaranteed minimum death benefits and guaranteed minimum income benefits on variable annuities, particularly assumptions and projections about investment performance, do not accurately anticipate the level of costs the Company will ultimately incur and cede to ALIC in providing those benefits. o Management believes the reserves for life-contingent contract benefits are adequate to cover ultimate policy benefits, despite the underlying risks and uncertainties associated with their determination when payments will not occur until well into the future. Reserves are based on many assumptions and estimates, including estimated premiums received over the assumed life of the policy, the timing of the event covered by the insurance policy, the amount of contract benefits to be paid and the investment returns on the assets purchased with the premium received. The Company periodically reviews and revises its estimates. If future experience differs from assumptions, it may have a material impact on results of operations ceded to ALIC. o Under current U.S. tax law and regulations, deferred and immediate annuities and life insurance, including interest-sensitive products, receive favorable policyholder tax treatment. Any legislative or regulatory changes that adversely alter this treatment are likely to negatively affect the demand for these products. In addition, recent changes in the federal estate tax laws will affect the demand for the types of life insurance used in estate planning. o The Company distributes its products under agreements with other members of the financial services industry that are not affiliated with the Company. Termination of one or more of these agreements due to, for example, changes in control of any of these entities, could have a detrimental effect on the Company's sales. This risk may be exacerbated due to the enactment of the Gramm-Leach-Bliley Act of 1999, which eliminated many federal and state law barriers to affiliations among banks, securities firms, insurers and other financial service providers. o While positive operating cash flows are expected to continue to meet the Corporation's liquidity requirements, the Corporation's liquidity could be constrained by a catastrophe which results in extraordinary losses, a downgrade of the Corporation's current long-term debt rating of A1 and A+ (from Moody's and Standard & Poor's, respectively) to non-investment grade status of below Baa3/BBB-, a downgrade in AIC's financial strength rating from Aa2, AA and A+ (from Moody's, Standard & Poor's and A.M. Best, respectively) to below Baa/BBB/B, or a downgrade in ALIC's or the Company's financial strength rating from Aa2, AA+ and A+ (from Moody's, Standard & Poor's and A.M. Best, respectively) to below Aa3/AA-/A-. In the event of a downgrade of the Corporation's ratings, ALIC and its rated subsidiaries could also experience a similar downgrade. o The events of September 11 and the resulting disruption in the financial markets revealed weaknesses in the physical and operational infrastructure that underlies the U.S. and worldwide financial systems. Those weaknesses did not impair the Company's liquidity in the wake of September 11. However, if an event of similar or greater magnitude occurs in the future and if the weaknesses in the physical and operational infrastructure of the U.S. and worldwide financial systems are not remedied, the Company could encounter significant difficulties in transferring funds, buying and selling securities and engaging in other financial transactions that support its liquidity. o Financial strength ratings have become an increasingly important factor in establishing the competitive position of insurance companies and, generally, may be expected to have an effect on an insurance company's business. On an ongoing basis, rating agencies review the financial performance and condition of insurers. A multiple level downgrade of either the Company or ALIC, while not expected, could have a material adverse effect on the Company's sales, including the competitiveness of the Company's product offerings, its ability to market products, and its financial condition and results of operations. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001 o State insurance regulatory authorities require insurance companies to maintain specified levels of statutory capital and surplus. In addition, competitive pressures require the Company to maintain financial strength ratings. These restrictions affect the Company's ability to pay shareholder dividends to ALIC and to use its capital in other ways. o Following enactment of the Gramm-Leach-Bliley Act of 1999, federal legislation that allows mergers that combine commercial banks, insurers and securities firms, state insurance regulators have been collectively participating in a reexamination of the regulatory framework that currently governs the United States insurance business in an effort to determine the proper role of state insurance regulation in the U. S. financial services industry. We cannot predict whether any state or federal measures will be adopted to change the nature or scope of the regulation of the insurance business or what affect any such measures would have on the Company. o The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act, the Glass Steagall Act of 1933 had limited the ability of banks to engage in securities-related businesses and the Bank Holding Company Act of 1956 had restricted banks from being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act, bank holding companies may acquire insurers and insurance holding companies may acquire banks. In addition, grand-fathered unitary thrift holding companies, including The Allstate Corporation, may engage in activities that are not financial in nature. The ability of banks to affiliate with insurers may materially adversely affect all of the Company's product lines by substantially increasing the number, size and financial strength of potential competitors. o In some states, mutual insurance companies can convert to a hybrid structure known as a mutual holding company. This process converts insurance companies owned by their policyholders to become stock insurance companies owned (through one or more intermediate holding companies) partially by their policyholders and partially by stockholders. Also, some states permit the conversion of mutual insurance companies into stock insurance companies (demutualization). The ability of mutual insurance companies to convert to mutual holding companies or to demutualize may materially adversely affect all of our product lines by substantially increasing competition for capital in the financial services industry. 13 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The discussion "Regulation and Legal Proceedings" in Part I, Item 1, Note 4 of this Form 10-Q is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits An Exhibit Index has been filed as part of this report on page E-1 (b) Reports on Form 8-K None. 14 SIGNATURES 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. Dated May 13, 2002. LINCOLN BENEFIT LIFE COMPANY -------------------------------------------------------------- (Registrant) /s/THOMAS J. WILSON, II Thomas J. Wilson, II CHAIRMAN AND CHIEF EXECUTIVE OFFICER (Authorized Officer of Registrant) /s/SAMUEL H. PILCH Samuel H. Pilch GROUP VICE PRESIDENT AND CONTROLLER (Chief Accounting Officer) 15 Exhibit Index

Exhibit No. Description 3(i) Amended and Restated Articles of Incorporation of Lincoln Benefit Life Company dated September 26, 2000. 3(ii) Amended and Restated By-Laws of Lincoln Benefit Life Company dated July 23, 1997. Incorporated herein by reference to Exhibit 6(b) to Lincoln Benefit Life Variable Life Account Registration Statement No. 333-47717 on Form S-6 filed March 11, 1998. 10.1 Service and Expense Agreement among Allstate Insurance Company and The Allstate Corporation and Certain Insurance Subsidiaries dated January 1, 1999. Incorporated herein by reference to Exhibit 10.2 to Northbrook Life Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.2 Investment Management Agreement and Amendment to Certain Service and Expense Agreements Among Allstate Investments, LLC and Allstate Insurance Company and The Allstate Corporation and Certain Affiliates effective as of January 1, 2002. Incorporated herein by reference to Exhibit 10.3 to Northbrook Life Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.3 Tax Sharing Agreement dated as of November 12, 1996 among The Allstate Corporation and certain affiliates. Incorporated herein by reference to Exhibit 10.4 to Northbrook Life Insurance Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. 10.4 Cash Management Services Master Agreement between Allstate Insurance Company and Allstate Bank (fka Allstate Federal Savings Bank) dated March 16, 1999. 10.5 Amendment No.1 to Cash Management Services Master Agreement effective January 5, 2001.

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