- For investments: credit quality/experience, stability of long-term returns, cash flows and asset duration;
INVESTMENT FAIR VALUE AND IMPAIRMENT The fair value of our investments in fixed income securities is based on observable market quotations, other market observable data, or is derived from such quotations and market observable data. We utilize third party pricing services, brokers and internal valuation models to determine fair value. We gain assurance of the overall reasonableness and consistent application of the assumptions and methodologies and compliance with accounting standards for fair value determination through our ongoing monitoring of the fair values received or derived internally. Our exposure to changes in market conditions is discussed more fully in the Market Risk section of the MD&A.
Our models are based on discounted cash flow methodology and calculate a single best estimate of fair value for each security. Our internally developed pricing models, use credit ratings and liquidity risk associated with privately-placed securities, which are difficult to independently observe and verify. Inputs used in these fair value estimates include specific attributes of the security being valued including; coupon rate, weighted average life, an internal credit rating assigned by us, (which is generally consistent with any external ratings and those we use to report our holdings by credit rating), sector of the issuer, and call provisions. Our assumptions incorporate market information as of the measurement date that represents what we believe independent third parties would use to determine fair value, which include: interest rate yield curves, quoted market prices of comparable securities, credit spreads, estimated liquidity premiums and other applicable market data. Our assumption for liquidity risk associated with privately-placed securities reduces the value of these securities to reflect their reduced liquidity as compared to similar securities that are publicly traded. Additionally, no assumption is included in the valuation of privately placed securities for an increase to the value to reflect the generally enhanced structural features of the securities, such as covenants or change of control protection. However, judgment is required in developing these estimates and, as a result, the estimated fair value of these securities may differ from amounts that would be realized upon an orderly sale of the securities at the measurement date. The use of different assumptions may have a material effect on the estimated fair values.
INVESTMENTS ------------------- (IN THOUSANDS) CARRYING PERCENT VALUE TO TOTAL -------- -------- Fair value based on internal sources $ 1,500 0.5% Fair value based on external sources 271,644 90.2 -------- ----- Total fixed income 273,144 90.7 Short-term investments valued at amortized cost 28,057 9.3 -------- ----- Total $301,201 100.0% ======== =====
For our portfolio review evaluations, we ascertain whether there are any approved programs involving the disposition of investments such as changes in duration, revisions to strategic asset allocations and liquidity actions, as well as any dispositions anticipated by the portfolio managers. In these instances, we recognize impairments on securities designated as subject to these approved anticipated actions if the security is in an unrealized loss position. There are a number of assumptions and estimates inherent in evaluating impairments and determining if they are other-than-temporary, including: 1) our ability and intent to hold the investment for a period of time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of principal and interest; 3) the length of time and extent to which the fair value has been less than amortized cost; 4) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry conditions and trends, and implications of rating agency actions and offering prices; and 5) the specific reasons that a security is in a significant unrealized loss position, including market conditions which could affect liquidity. Additionally, once assumptions and estimates are made, any number of changes in facts and circumstances could cause us to subsequently determine that an impairment is other-than-temporary, including: 1) general economic conditions that are worse than previously forecasted or that have a greater adverse effect on a particular issuer or industry sector than originally estimated; 2) changes in the facts and circumstances related to a particular issue or issuer's ability to meet all of its contractual obligations; and 3) changes in facts and circumstances or new information obtained which causes a change in our ability or intent to hold a security to maturity or until it recovers in value. Changes in assumptions, facts and circumstances could result in additional charges to earnings in future periods to the extent that losses are realized. The charge to earnings, while potentially significant to net income, would not have a significant effect on shareholder's equity since the majority of our portfolio is designated as available-for-sale and carried at fair value and as a result, any related net unrealized loss would already be reflected as a component of accumulated other comprehensive income in shareholder's equity.
The determination of the amount of impairment is an inherently subjective process based on periodic evaluation of the factors described above. Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in impairments in results of operations as such evaluations are revised. The use of different methodologies and assumptions as to the determination of the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented within the financial statements.
For a more detailed discussion of the risks relating to changes in investment values and levels of investment impairment as well as the potential causes of such changes, see Note 4 of the financial statements and the Investments, Market Risk, and Forward-looking Statements and Risk Factors sections of this document.
We plan to continue offering a suite of products that provides financial protection primarily to middle market consumers and help them better prepare for retirement. Our products include fixed annuities including deferred, immediate and indexed; and interest-sensitive, traditional and variable life insurance. These products are sold through several distribution channels including Allstate exclusive agencies, which include exclusive financial specialists, independent agents (including master brokerage agencies), and broker-dealers.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- ($ IN THOUSANDS) 2007 2006 2005 ------- ------- ------- Net investment income $14,257 $13,948 $13,632 Realized capital gains and losses (417) (1,255) (174) Income tax expense (4,835) (4,433) (4,671) ------- ------- ------- Net income $ 9,005 $ 8,260 $ 8,787 ======= ======= =======
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"). 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 increased 9.0% in 2007 compared to 2006 and decreased 6.0% in 2006 compared to 2005. The increase in 2007 was due to lower net realized capital losses as well as higher net investment income, partially offset by higher income tax expense. The decrease in 2006 was due to higher net realized capital losses, partially offset by higher net investment income and lower income tax expense
INCOME TAX EXPENSE increased 9.1% in 2007 compared to 2006 and decreased 5.1% in 2006 compared to 2005. These changes were due to the proportional change in the income on which the income tax expense is determined.
2007 2006 ----------- ----------- Fixed income securities (1) $ 273,144 $ 268,058 Short-term 28,057 8,264 ----------- ----------- Total investments $ 301,201 $ 276,322 =========== =========== Cash $ 18,612 $ 23,352 Reinsurance recoverable from ALIC 18,777,851 19,131,870 Reinsurance recoverable from non-affiliates 1,422,931 1,203,864 Contractholder funds 17,820,885 18,195,622 Reserve for life-contingent contract benefits 2,348,116 2,126,455 Separate accounts assets and liabilities 3,067,127 3,097,550
- ---------- (1) Fixed income securities are carried at fair value. Amortized cost for these securities was $266.8 million and $268.3 million at December 31, 2007 and 2006, respectively.
Total investments increased to $301.2 million at December 31, 2007 from $276.3 million at December 31, 2006, primarily due to purchases of short-term investments and to a lesser extent, net unrealized capital gains on fixed income securities at December 31, 2007 compared to net unrealized capital losses at December 31, 2006.
FIXED INCOME SECURITIES See Note 4 of the financial statements for a table showing the amortized cost, unrealized gains, unrealized losses and fair value for each type of fixed income security for the years ended December 31, 2007 and 2006.
The following table shows fixed income securities by type at December 31,
($ IN THOUSAND) FAIR VALUE ------------------- 2007 2006 -------- -------- U.S. government and agencies $115,820 $117,963 Municipal 531 533 Corporate 84,812 73,381 Mortgage-backed securities 27,905 29,244 Commercial mortgage-backed securities 32,601 32,415 Asset-backed securities 11,475 14,522 -------- -------- Total fixed income securities $273,144 $268,058 ======== ========
U.S. GOVERNMENT AND AGENCIES comprised 42.4% of the fixed income securities portfolio and totaled $115.8 million at December 31, 2007, all of which were rated investment grade.
MUNICIPAL BONDS, including tax-exempt and taxable securities, totaled $531 thousand, all of which were rated investment grade at December 31, 2007. The municipal bond portfolio was insured by one bond insurer and accordingly has a Moody's equivalent rating of Aaa.
CORPORATE BONDS totaled $84.8 million, all of which were rated investment grade at December 31, 2007. As of December 31, 2007, corporate bonds included privately placed securities totaling $3.2 million from a single issuer. As of December 31, 2006, the portfolio did not contain any privately placed securities.
MORTGAGE-BACKED SECURITIES ("MBS") totaled $27.9 million, all of which were investment grade at December 31, 2007. The credit risk associated with MBS is mitigated due to the fact that 95.1% of the portfolio consists of securities that were issued by, or have underlying collateral that is guaranteed by U.S. government agencies or U.S. government sponsored entities ("U.S. Agency"). The MBS portfolio is subject to interest rate risk since price volatility and the ultimate realized yield are affected by the rate of prepayment of the underlying mortgages.
COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS") totaled $32.6 million at December 31, 2007. All of the CMBS investments are pools of commercial mortgages, broadly diversified across property types and geographical area. The CMBS portfolio is subject to credit risk, but unlike other structured products, is generally not subject to prepayment risk due to protections within the underlying commercial mortgages, whereby borrowers are effectively restricted from prepaying their mortgages due to changes in interest rates. Credit defaults can result in credit directed prepayments. All securities in the CMBS portfolio had a Moody's rating of Aaa or a Standard & Poor's rating of AAA, the highest rating category, at December 31, 2007.
NAIC FAIR PERCENT OF RATINGS MOODY'S EQUIVALENT VALUE TOTAL - ------- ------------------ ---------- ---------- 1 Aaa/Aa/A $264,190 96.7% 2 Baa 8,954 3.3 -------- ----- $273,144 100.0% ======== =====
SHORT-TERM INVESTMENTS Our short-term investment portfolio was $28.1 million and $8.3 million at December 31, 2007 and 2006, respectively. We invest available cash balances primarily in taxable short-term securities having a final maturity date or redemption date of less than one year.
UNREALIZED GAINS AND LOSSES See Note 4 of the financial statements for further disclosures regarding unrealized losses on fixed income securities and factors considered in determining whether securities are other-than-temporarily impaired. The unrealized net capital gains on fixed income securities at December 31, 2007 totaled $6.4 million, compared to unrealized net capital losses of $273 thousand at December 31, 2006. Gross unrealized gains and losses on fixed income securities by type and sector are provided in the table below.
GROSS UNREALIZED AMORTIZED ---------------- FAIR ($ IN THOUSANDS) COST GAINS LOSSES VALUE --------- ------ ------- -------- AT DECEMBER 31, 2007
Corporate: Financial services $ 21,272 $ 560 $ (22) $ 21,810 Capital goods 17,296 17 (288) 17,025 Consumer goods 17,139 165 (149) 17,155 Banking 13,119 167 (85) 13,201 Transportation 7,878 -- (203) 7,675 Utilities 4,106 -- (104) 4,002 Basic industry 2,994 6 (52) 2,948 Energy 994 2 -- 996 -------- ------ ------- -------- Total corporate fixed income portfolio 84,798 917 (903) 84,812
The capital goods, transportation and consumer goods sectors had the highest concentration of gross unrealized losses in our corporate fixed income securities portfolio at December 31, 2007. The gross unrealized losses in these sectors were primarily company specific and the result of widening credit spreads. Credit spreads are the additional yield on fixed income securities above the risk-free rate (typically defined as the yield on U.S. treasury securities) that market participants require to compensate them for assuming credit, liquidity and or repayment risks for fixed income securities with consistent terms. Credit spreads vary with the market's perception of risk and liquidity in specific fixed income markets. Credit spreads can widen (increase) or tighten (decrease) and may offset or add to the effects of risk-free interest rate changes in the valuation of fixed income securities from period to period.
All securities in an unrealized loss position at December 31, 2007 were included in our portfolio monitoring process for determining whether declines in value are other-than-temporary.
At December 31, 2007, all of the gross unrealized losses were related to investment grade fixed income securities. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in credit spreads, which reflect liquidity conditions of the related markets, since the securities were acquired.
PORTFOLIO MONITORING We have a comprehensive portfolio monitoring process to identify and evaluate, 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 situations where the 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. 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. 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 as a result of approved programs involving the disposition of investments such as changes in duration, revisions to strategic asset allocations and liquidity actions, as well as certain dispositions anticipated by portfolio managers. All investments in an unrealized loss position at December 31, 2007 were included in our portfolio monitoring process for determining whether declines in value were other-than-temporary.
We 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 or loan. 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 principal and interest, which causes us to believe these investments may be classified as problem or restructured in the future.
(IN THOUSANDS) 2007 2006 2005 -------- -------- -------- Fixed income securities $ 13,533 $ 13,495 $ 13,190 Short-term investments 1,117 762 689 -------- -------- -------- Investment income, before expense 14,650 14,257 13,879 Investment expense (393) (309) (247) -------- -------- -------- Net investment income $ 14,257 $ 13,948 $ 13,632 ======== ======== ========
NET REALIZED CAPITAL GAINS AND LOSSES The following table presents realized capital gains and the related tax effect for the years ended December 31.
(IN THOUSANDS) 2007 2006 2005 ------- ------- ------- Realized capital gains and losses, pretax $ (417) $(1,255) $ (174) Income tax benefit 146 438 60 ------- ------- ------- Realized capital gains and losses, after-tax $ (271) $ (817) $ (114) ======= ======= =======
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, subsequent credit deterioration, liquidity needs, and newly identified market opportunities cause a change in our previous intent to hold a security to recovery or maturity.
CASH At December 31, 2007, our cash balance was $18.6 million compared to $23.4 million at December 31, 2006. Fluctuations in our cash position generally result from differences in the timing of reinsurance payments to and from ALIC.
At December 31, 2007, contractholder funds decreased to $17.82 billion from $18.20 billion at December 31, 2006 as a result of new and additional deposits on fixed and variable annuities and interest-sensitive life policies as well as interest credited to contractholder funds being more than offset by surrenders, withdrawals and benefit payments. The reserve for life-contingent contract benefits increased to $2.35 billion at December 31, 2007 from $2.13 billion as of December 31, 2006 resulting primarily from sales of traditional life insurance products, partially offset by benefits paid and policy lapses. Reinsurance recoverables from ALIC and reinsurance recoverables from non-affiliates decreased by $354.0 million and increased by $219.1 million, respectively.
OVERVIEW Investment policies define the overall framework for managing market and other investment risks, including accountability and controls over risk management activities. These investment activities follow policies that have been approved by our board of directors. These investment policies specify the investment limits and strategies that are appropriate given our liquidity, surplus, product profile, and regulatory requirements. Executive oversight of investment activities is conducted primarily through our board of directors.
We manage our exposure to market risk through the use of asset allocation and duration limits and, as appropriate, through the use of stress tests. We have asset allocation limits that place restrictions on the total funds that may be invested within an asset class. We have duration limits on our investment portfolio, and, as appropriate, on individual components of the portfolio. These duration limits place restrictions on the amount of interest rate risk that may be taken. Comprehensive day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by investment policies.
EQUITY PRICE RISK is the risk that we will incur losses due to adverse changes in the general levels of the equity markets. At December 31, 2007 and 2006, we had separate account assets related to variable annuities and variable life contracts with account values totaling $3.07 billion and $3.10 billion, respectively. Equity risk exists for contract charges based on separate account balances and guarantees for death and/or income benefits provided by our variable products. All variable life and annuity contract charges and fees, liabilities and benefits, including guarantees for death and/or income are ceded to ALIC in accordance with the reinsurance agreements, thereby limiting our equity risk exposure. In 2006, ALIC disposed of substantially all of its variable annuity business through a reinsurance agreement with Prudential, and therefore mitigated this aspect of ALIC's risk. The Company was not a direct participant of this agreement and its reinsurance agreements with ALIC remain unchanged.
CAPITAL RESOURCES consist of shareholder's equity. The following table summarizes our capital resources at December 31.
SHAREHOLDER'S EQUITY increased $13.3 million 2007, due to net income of $9.0 million and a favorable change in unrealized capital gains and losses on fixed income securities totaling $4.3 million. Shareholder's equity increased $7.4 million during the year ended December 31, 2006 when compared to December 31, 2005, due to net income of $8.3 million partially offset by an unfavorable change in unrealized capital gains and losses on fixed income securities totaling $885 thousand.
State laws specify regulatory actions if an insurer's risk-based capital ("RBC"), a measure of an insurer's solvency, falls below certain levels. The NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest rate risks. At December 31, 2007, our RBC was above levels that would require regulatory actions.
Our ability to pay dividends is dependent on business conditions, income, cash requirements and other relevant factors. The payment of shareholder dividends without the prior approval of the state insurance regulator is limited by Nebraska law to formula amounts based on statutory surplus and statutory net income, as well as the timing and amount of dividends paid in the preceding twelve months. The maximum amount of dividends that we can distribute during 2008 without prior approval of the Nebraska Department of Insurance is $28.3 million.
We have an intercompany loan agreement with The Allstate Corporation. The amount of intercompany loans available to us is at the discretion of The Allstate Corporation. The maximum amount of loans The Allstate Corporation will have outstanding to all its eligible subsidiaries at any given point in time is limited to $1.00 billion. We had no amounts outstanding under the intercompany loan agreement at December 31, 2007 or 2006. The Corporation uses commercial paper borrowings and bank lines of credit to fund intercompany borrowings.
We are subject to extensive regulation and we are involved in various legal and regulatory actions, all of which have an effect on specific aspects of our business. For a detailed discussion of the legal and regulatory actions in which we are involved, see Note 8 of the financial statements.
The accompanying financial statements include the accounts of Lincoln Benefit Life Company (the "Company"), a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation (the "Corporation"). These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP").
The Company is authorized to sell life insurance, retirement and investment products in all states except New York, as well as in the District of Columbia, Guam and the U.S. Virgin Islands. For 2007, the top geographic locations for statutory premiums and annuity considerations were California, Florida, Texas and Pennsylvania. No other jurisdiction accounted for more than 5% of statutory premiums and annuity considerations. All statutory premiums and annuity considerations are ceded under reinsurance agreements.
The Company distributes its products through multiple distribution channels, including Allstate exclusive agencies, which include exclusive financial specialists, independent agents (including master brokerage agencies and workplace enrolling agents), and financial services firms, such as banks and broker-dealers.
Fixed income securities include bonds, commercial mortgage-backed securities, mortgage-backed securities and asset-backed securities. Fixed income securities may be sold prior to their contractual maturity, are designated as available for sale and are carried at fair value. The fair value of fixed income securities is based upon observable market quotations, other market observable data or is derived from such quotations and market observable data. The fair value of privately placed fixed income securities is generally based on widely accepted pricing valuation models, which are developed internally. The valuation models use security specific information such as the credit rating of the issuer, industry sector of the issuer, maturity, estimated duration, call provisions, sinking fund requirements, coupon rate, quoted market prices of comparable securities and estimated liquidity premiums to determine security specific credit spreads. These spreads are then adjusted for illiquidity based on historical analysis and broker surveys. The difference between amortized cost and fair value, net of deferred income taxes, is reflected as a component of accumulated other comprehensive income. Cash received from calls, principal payments and make-whole payments is reflected as a component of proceeds from sales and cash received from maturities and pay-downs is reflected as a component of investment collections within the Statements of Cash Flows.
Realized capital gains and losses may include gains and losses on investment dispositions and write-downs in value due to other-than-temporary declines in fair value. Dispositions may include sales, losses recognized in anticipation of dispositions and other transactions such as calls and prepayments. Realized capital gains and losses on investment dispositions are determined on a specific identification basis.
The income tax provision is calculated under the liability method. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are unrealized capital gains and losses on fixed income securities and differences in tax basis of investments. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized (see Note 9).
The reserve for life-contingent contract benefits payable under insurance policies including, traditional life insurance, life-contingent fixed annuities and voluntary health products, is computed on the basis of long-term actuarial assumptions of future investment yields, mortality, morbidity, policy terminations and expenses (see Note 6). These assumptions, which for traditional life insurance, life-contingent fixed annuities and voluntary health products are applied using the net level premium method, include provisions for adverse deviation and generally vary by characteristics such as type of coverage, year of issue and policy duration.
Contractholder funds represent interest-bearing liabilities arising from the sale of products, such as interest-sensitive life, fixed annuities, and variable annuity and life deposits allocated to fixed accounts. Contractholder funds are comprised primarily of deposits received and interest credited to the benefit of the contractholder less surrenders and withdrawals, mortality charges and administrative expenses (see Note 6). Contractholder funds also include reserves for secondary guarantees on interest-sensitive life insurance and certain fixed annuity contracts.
Separate accounts assets are carried at fair value. Separate accounts liabilities are carried at the account values, which are equal to the carrying value of the corresponding assets. The assets of the separate accounts are legally segregated and available only to settle separate account contract obligations. Separate accounts liabilities represent the contractholders' claims to the related assets. Investment income and realized capital gains and losses of the separate accounts accrue directly to the contractholders and therefore, are not included in the Company's Statements of Operations and Comprehensive Income. Deposits to and surrenders and withdrawals from the separate accounts are reflected in separate accounts liabilities and are not included in cash flows. Revenues to the Company from the separate accounts consist of contract charges for maintenance, administration, cost of insurance and surrender of the contract prior to the contractually specified date and are ceded to ALIC.
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 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")
FSP FAS 115-1 nullified the guidance in paragraphs 10-18 of Emerging Issues Task Force 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 income recognition for impaired debt securities. The Company adopted FSP FAS 115-1 as of January 1, 2006 on a prospective basis. The effect of adoption did not have a material effect on the results of operations or financial position of the Company.
The Company has a wholesaling and marketing support agreement with ALFS, Inc. ("ALFS"), an affiliated broker-dealer company, whereby ALFS underwrites and promotes the offer, sale and servicing of variable annuities issued by the Company and sold by AFS. In return for these services, the Company incurred commission expense of $333.5 thousand and $1.5 million for 2007 and 2006, respectively. This expense was ceded to ALIC under the terms of the reinsurance agreements.
($ IN THOUSANDS) YEAR ENDED DECEMBER 31, ------------------------------------ 2007 2006 2005 ---------- ---------- ---------- Premiums and contract charges $ 623,102 $ 546,554 $ 461,496 Interest credited to contractholder funds, contract benefits and expenses 1,421,831 1,487,799 1,483,707
Gross losses of $32 thousand, $1.3 million and $174 thousand were realized on sales of fixed income securities during 2007, 2006 and 2005, respectively. There were no gross gains realized on sales of fixed income securities during 2007, 2006 or 2005.
At December 31, 2007, fixed income securities and short-term investments with a carrying value of $9.8 million were on deposit with regulatory authorities as required by law.
Contractholder funds include interest-sensitive life insurance contracts and investment contracts. Interest-sensitive life insurance contracts are not considered financial instruments subject to fair value disclosure requirements. The fair value of investment contracts is based on the terms of the underlying contracts. Fixed annuities are valued at the account balance less surrender charges. Immediate annuities without life contingencies are valued at the present value of future benefits using current interest rates. Market value adjusted annuities' fair value is estimated to be the market adjusted surrender value. Equity-indexed annuity contracts' fair value approximates carrying value since the embedded equity options are carried at fair value in the financial statements. Separate accounts liabilities are carried at the account values, which are equal to the carrying value of the corresponding assets.
There were no off-balance-sheet financial instruments at December 31, 2007 or 2006.
($ IN THOUSANDS) 2007 2006 ---------- ---------- Immediate annuities $ 709,195 $ 722,539 Traditional life 1,045,153 932,866 Other 593,768 471,050 ---------- ---------- Total reserve for life-contingent contract benefits $2,348,116 $2,126,455 ========== ==========
($ IN THOUSANDS) 2007 2006 ----------- ----------- Balance, beginning of year $18,195,622 $17,462,104 Deposits 1,966,374 2,668,782 Interest credited 762,956 865,479 Benefits (572,506) (512,353) Surrenders and partial withdrawals (2,236,168) (1,962,149) Net transfers to separate accounts 2,834 (58,681) Contract charges (303,528) (255,710) Other adjustments 5,301 (11,850) ----------- ----------- Balance, end of year $17,820,885 $18,195,622 =========== ===========
($ IN THOUSANDS) 2007 2006 2005 ---------- --------- --------- PREMIUMS AND CONTRACT CHARGES
The Company leases certain office equipment. Total rent expense for all leases was $51 thousand, $57 thousand and $59 thousand in 2007, 2006 and 2005, respectively, and was ceded to ALIC under the terms of the reinsurance agreements.
Minimum rental commitments under operating leases with an initial or remaining term of more than one year as of December 31, 2007 are as follows:
In the normal course of business, the Company provides standard indemnifications to counterparties in contracts in connection with numerous transactions, including acquisitions and divestures. The types of indemnifications typically provided include indemnifications for breach 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, ceded to ALIC, was not material as of December 31, 2007.
- 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.
- 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 ongoing 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.
- 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. Responses to the order were filed in mid-December.
- 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. Responses to the order were filed in mid-December.
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.
The Internal Revenue Service ("IRS") is currently examining the Corporation's 2005 and 2006 federal income tax returns. The IRS has completed its examination of the Corporation's federal income tax returns through 2004 and the statute of limitations has expired on years prior to 2003.
The Company adopted the provisions of FIN 48 on January 1, 2007. The Company had no liability for unrecognized tax benefits at January 1, 2007 or December 31, 2007, and believes it is reasonably possible that the liability balance will not significantly increase or decrease within the next twelve months. No amounts have been accrued for interest or penalties.
2007 2006 ------- ----- ($ IN THOUSANDS) DEFERRED ASSETS Unrealized net capital losses $ -- $ 95 DEFERRED LIABILITIES Unrealized net capital gains (2,223) -- Difference in tax bases of investments (254) (229) Other liabilities (2) (1) ------- ----- Total deferred liabilities (2,479) (230) ------- ----- Net deferred liabilities $(2,479) $(135) ======= =====
The ability of the Company to pay dividends is dependent on business conditions, income, cash requirements of the Company and other relevant factors. The payment of shareholder dividends by the Company without the prior approval of the state insurance regulator is limited to formula amounts based on net income and capital and surplus, determined in conformity with statutory accounting practices, as well as the timing and amount of dividends paid in the preceding twelve months. The maximum amount of dividends that the Company can distribute during 2008 without prior approval of the Nebraska Department of Insurance is $28.3 million. In the twelve-month period beginning January 1, 2007, the Company did not pay any dividends.
------------------------- Pre- After- tax Tax tax ------ ------- ------ Unrealized holding losses arising during the period $6,211 $(2,173) $4,038 Less: reclassification adjustments (414) 145 (269) ------ ------- ------ Unrealized net capital gains and losses 6,625 (2,318) 4,307 ------ ------- ------ Other comprehensive income $6,625 $(2,318) $4,307 ====== ======= ======
------------------------ Pre- After- tax Tax tax ------- ---- ------- Unrealized holding losses arising during the period $(2,601) $910 $(1,691) Less: reclassification adjustments (1,240) 434 (806) ------- ---- ------- Unrealized net capital gains and losses (1,361) 476 (885) ------- ---- ------- Other comprehensive loss $(1,361) $476 $ (885) ======= ==== =======
We have audited the accompanying Statements of Financial Position of Lincoln Benefit Life Company (the "Company", an affiliate of The Allstate Corporation) as of December 31, 2007 and 2006, and the related Statements of Operations and Comprehensive Income, Shareholder's Equity, and Cash Flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.