LINCOLN BENEFIT LIFE CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

================================================================================

FORM 10-K

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

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

/ / 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 47-0221457
(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

Securities registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934: None

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 / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes / / 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 March 15, 2004, the Registrant had 25,000 common shares, $100 par value,
outstanding, all of which are held by Allstate Life Insurance Company.

Part III of this Form 10-K incorporates by reference certain information from
The Allstate Corporation's Notice of Annual Meeting and Proxy Statement dated
March 26, 2004, SEC File Number 1-11840.

TABLE OF CONTENTS

* Item prepared in accordance with General Instruction I(2) of Form
10-K
** Omitted pursuant to General Instruction I(2) of Form 10-K

PART I

ITEM 1. BUSINESS

Lincoln Benefit Life Company ("Lincoln Benefit", "we", "our" or "us") was
incorporated under the laws of the State of Nebraska in 1938. Lincoln Benefit is
a wholly owned subsidiary of Allstate Life Insurance Company ("ALIC"), a wholly
owned subsidiary of Allstate Insurance Company ("AIC"), a stock
property-liability insurance company organized under the laws of the State of
Illinois. All of the outstanding capital stock of Allstate Insurance Company is
owned by The Allstate Corporation (the "Corporation"), a publicly owned holding
company incorporated under the laws of the State of Delaware. The Corporation is
the largest publicly held personal lines insurer in the United States. Widely
known through the "You're In Good Hands With Allstate(R)" slogan, the
Corporation provides insurance products to more than 16 million households and
has approximately 12,900 exclusive agencies and exclusive financial specialists
in the United States and Canada. Allstate is the second-largest personal
property and casualty insurer in the United States on the basis of 2002
statutory premiums earned and the nation's 13th-largest life insurance business
on the basis of 2002 ordinary life insurance in force and 19th on the basis of
2002 statutory admitted assets.

We are authorized to sell life insurance, savings and retirement products
in all states except New York, as well as in the District of Columbia, Guam and
the U.S. Virgin Islands.

Our mission is to assist financial services professionals in meeting their
customers' financial protection, savings and retirement needs by providing
top-tier products delivered with reliable and efficient service. Our product
line includes a wide variety of financial protection, savings and retirement
products aimed at serving the financial needs of our customers. Products include
traditional life, interest-sensitive life, variable life and long-term care
insurance, and both variable and fixed annuities. Products are sold through a
variety of distribution channels including Allstate exclusive agencies,
independent agents (including master brokerage agencies) and broker/dealers.

We have reinsurance agreements with ALIC and non-affiliated reinsurers.
Under the agreements with ALIC, we reinsure all business to ALIC not reinsured
to non-affiliated reinsurers. Premiums, contract charges, interest credited to
contractholder funds, contract benefits and certain expenses of substantially
all general account contracts are reinsured with ALIC. In addition, we reinsure
all retained general account liabilities (that have not been ceded to
non-affiliated reinsurers) to ALIC via a 100% coinsurance agreement. Assets that
support these liabilities are owned and managed by ALIC. The obligations of ALIC
under the reinsurance agreements are to us. We continue to have primary
liability as the direct insurer for risks reinsured.

Separate accounts liabilities related to variable annuity and life
contracts are ceded to ALIC via a 100% modified coinsurance agreement whereby
assets are maintained in our legally segregated unitized separate accounts.
Contract charges assessed against the separate accounts assets and contract
benefits are ceded to ALIC.

In addition, we cede 90%, 80% or 60% of the mortality risk on certain life
policies, depending upon the issue year and product, to a pool of thirteen
non-affiliated reinsurers. Beginning in 1998, we cede mortality risk on new
business in excess of $2 million per life for individual coverage. For business
sold prior to 1998, we ceded mortality risk in excess of $350 thousand per life
for individual coverage.

The assets and liabilities relating to variable annuities and variable life
products are legally segregated and reflected as assets and liabilities of the
separate accounts in the financial statements. Assets of the separate accounts
are only available for the benefit of the holders of these products and are not
available to other creditors or policyholders with a claim solely against our
general account assets. Absent any contract provision specifying either a
guaranteed minimum return or account value upon death or annuitization, variable
annuity and variable life contractholders bear the investment risk that the
underlying mutual funds of the separate accounts may not meet their stated
investment objectives. The assets and liabilities relating to variable products
issued with fixed fund options are divided between the applicable separate
accounts for the variable portion of the product and the general account for the
fixed portion of the product.

The assets and liabilities relating to the other (non-variable) life
insurance and annuity products are reflected in our general account.

With regard to our personal life insurance, savings, retirement and
long-term care products, we compete principally on the basis of the scope of our
distribution systems, the breadth of our product offerings, the recognition of
our brand, our financial strength and ratings as well as those of ALIC, our
product features and prices, and the

2

level of customer service that we provide. In addition, with respect to variable
life and variable annuity products, we compete on the basis of the variety of
providers and choices of funds for our separate accounts and the management and
performance of those funds within our separate accounts.

The market for these products continues to be highly fragmented and
competitive. As of December 31, 2002, there were approximately 780 groups of
life insurance companies in the United States, most of which offered one or more
products similar to our personal life insurance, savings, retirement and
long-term care products. In some states, we compete with banks and savings and
loan associations in the sale of life insurance products. In addition, because
many of our personal life insurance, savings and retirement products include a
savings or investment component, our competition includes securities firms,
investment advisors, mutual funds, banks and other financial institutions.
Competitive pressure is growing due to several factors, including cross
marketing alliances between unaffiliated businesses and demutualization and
consolidation activity in the financial services industry.

Lincoln Benefit is subject to extensive regulation. In the U.S. the method,
extent and substance of such regulation varies by state but generally has its
source in statutes that delegate regulatory authority to a state regulatory
agency and define standards of conduct. In general, such regulation is intended
for the protection of insurance policyholders rather than security holders.
These rules have a substantial effect on our business and relate to a wide
variety of matters including insurance company licensing and examination, agent
licensing, price setting, trade practices, policy forms, accounting methods, the
nature and amount of investments, claims practices, participation in guaranty
funds, reserve adequacy, insurer solvency, transactions with affiliates, the
payment of dividends, and underwriting standards. For discussion of statutory
financial information, see Note 10 to the financial statements. For discussion
of regulatory contingencies, see Note 8 to the financial statements. Notes 10
and 8 are incorporated in this Part I, Item 1 by reference.

In recent years the state insurance regulatory framework has come under
increased federal scrutiny and legislation that would provide for federal
chartering of insurance companies has been proposed. In addition, state
legislators and insurance regulators continue to examine the appropriate nature
and scope of state insurance regulation. 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 effect any such measures would have on Lincoln
Benefit.

ITEM 2. PROPERTIES

We occupy office space in Lincoln, Nebraska that is owned by AIC. Expenses
associated with this facility are allocated to us on a direct basis. We also
lease office space in Lincoln for general operations, file storage and
information technology support.

ITEM 3. LEGAL PROCEEDINGS

Incorporated in this Item 3 by reference to the discussion under the
heading "Regulation and legal proceedings" in Note 8 to the financial
statements.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

There is no public trading market for our common stock. All of our
outstanding common stock is owned by our parent, ALIC. All of ALIC's outstanding
common stock is owned by AIC. All of the outstanding common stock of AIC is
owned by the Corporation. Within the past three years, no equity securities have
been sold or repurchased by us.

From January 1, 2002 through March 15, 2004, we paid no dividends on our
common stock to ALIC.

For additional information on dividends, including restrictions on the
payment of dividends, see the "Liquidity" subsection of the "Capital Resources
and Liquidity" section of our "Management's Discussion and Analysis of Financial
Condition and Results of Operations". These items are incorporated herein by
reference.

3

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION HIGHLIGHTS SIGNIFICANT FACTORS INFLUENCING THE
FINANCIAL POSITION AND RESULTS OF OPERATIONS OF LINCOLN BENEFIT (REFERRED TO IN
THIS DOCUMENT AS "WE", "OUR", "US" OR THE "COMPANY"). IT SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE
17. WE ARE MANAGED AS A SINGLE SEGMENT ENTITY.

The most important matters that we monitor to evaluate the financial
condition and performance of our company include:

- For operations: premiums and deposits; invested assets and face amount
of life insurance in force;
- For Investments: credit quality/experience, stability of long-term
returns, cash flows and asset and liability duration;
- For financial condition: our financial strength ratings.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

We have identified two accounting policies that require us to make
assumptions and estimates that are significant to the financial statements. It
is reasonably likely that changes in these assumptions and estimates could occur
from period to period and have a material impact on our financial statements. A
brief summary of each of these critical accounting policies follows. For a more
complete discussion of the effect of these policies on our financial statements,
and the judgments and estimates relating to these policies, see the referenced
sections of Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"). For a complete summary of our significant
accounting policies see Note 2 of the financial statements.

INVESTMENT VALUATION The fair value of publicly traded fixed income securities
is based on independent market quotations, whereas the fair value of
non-publicly traded securities is based on either widely accepted pricing
valuation models which use internally developed ratings and independent third
party data as inputs or independent third party pricing sources. Factors used in
our internally developed models, such as liquidity risk associated with
privately-placed securities are difficult to observe and to characterize.
Because of this, judgment is required in developing certain of these estimates
and, as a result, the estimated fair value of non-publicly traded securities may
differ from amounts that would be realized upon an immediate sale of the
securities.

Periodic changes in fair values of investments classified as available for
sale are reported as a component of accumulated other comprehensive income on
the Statements of Financial Position and are not reflected in the operating
results of any period until reclassified to net income upon the consummation of
a transaction, or when declines in fair values are deemed other than temporary.
The assessment of other than temporary impairment of a security's fair value is
performed on a case-by-case basis considering a wide range of factors. There are
a number of assumptions and estimates inherent when assessing impairments and
determining if they are other than temporary, including 1) our ability and
intent to retain 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 duration 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 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 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 later
determine that an impairment is other than temporary, including 1) general
economic conditions that are worse than assumed or that have a greater adverse
effect on a particular issuer than originally estimated; 2) changes in the facts
and circumstances related to a particular issuer's ability to meet all of its
contractual obligations; and 3) changes in facts and circumstances or new
information that we obtain 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 charges to earnings in
future periods to the extent that losses are realized. The charge to earnings,
while potentially significant to net income, would not have a significant effect
on shareholder's equity since our portfolio is held at fair value and as a
result, the related unrealized loss, net of tax, would already be reflected as
accumulated other comprehensive income in shareholder's equity.

For a more detailed discussion of the risks relating to changes in
investment values and levels of investment impairment, and the potential causes
of such changes, see Note 4 of the financial statements and the Financial
Position, Market Risk and Forward-looking Statements and Risk Factors sections
of the MD&A.

4

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS ESTIMATION Long-term actuarial
assumptions of future investment yields, mortality, morbidity, policy
terminations and expenses are used when estimating the reserve for
life-contingent contract benefits. These assumptions, which for traditional life
insurance are applied using the net level premium method, include provisions for
adverse deviation and generally vary by such characteristics as type of
coverage, year of issue and policy duration. Future investment yield assumptions
are determined at the time the policy is issued based upon prevailing investment
yields as well as estimated reinvestment yields. Mortality, morbidity and policy
termination assumptions are based on our experience and industry experience
prevailing at the time the policies are issued. Expense assumptions include the
estimated effects of inflation and expenses to be incurred beyond the
premium-paying period.

For further discussion of these policies see Note 6 of the financial
statements and the Forward-looking Statements and Risk Factors sections of the
MD&A.

OVERVIEW AND STRATEGY We are a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is a wholly owned subsidiary of Allstate
Insurance Company ("AIC"), a wholly owned subsidiary of The Allstate Corporation
(the "Corporation"). ALIC, along with its wholly owned subsidiaries, is a
leading provider of life insurance, annuities and other financial services to a
broad spectrum of individual and institutional customers.

Our mission is to assist financial services professionals in meeting their
customers' financial protection, savings and retirement needs by providing
top-tier products delivered with reliable and efficient service.

We will pursue the following to grow our business organically: develop
focused, top-tier products; deepen distribution partner relationships; improve
our cost structure and implement a systematic risk management program.

Our product line includes a wide variety of financial protection, savings
and retirement products aimed at serving the financial needs of our customers.
Products include traditional life, interest-sensitive life, variable life and
long-term care insurance, and both variable and fixed annuities. Products are
sold through a variety of distribution channels including Allstate exclusive
agencies, independent agents (including master brokerage agencies) and
broker/dealers.

RESULTS OF OPERATIONS

We have reinsurance agreements whereby premiums, contract charges, interest
credited to contractholder funds, contract benefits and certain expenses are
ceded to ALIC and other non-affiliated reinsurers, and are reflected net of such
reinsurance in the Statements of Operations and Comprehensive Income. Our
results of operations include net investment income and realized capital gains
and losses earned on the assets that are not transferred under the reinsurance
agreements.

NET INCOME increased 51.1% in 2003 compared to 2002 and decreased 30.1% in 2002
compared to 2001. The increase in 2003 was due to realized capital gains in 2003
compared to realized capital losses in 2002 partially offset by increased income
tax expense and decreased net investment income. The decrease in 2002 was due to
an increase in realized capital losses in 2002 compared to 2001 and decreased
net investment income.

NET INVESTMENT INCOME decreased 1.6% in 2003 compared to 2002 and 4.3% in 2002
compared to 2001. The decreases were due to lower portfolio yields. Investment
balances as of December 31, 2003, excluding unrealized net capital gains,
increased 7.0% from December 31, 2002 and were comparable as of December 31,
2002 and 2001. The lower portfolio yields were primarily due to purchases of
fixed income securities with yields lower than the current portfolio average.

NET REALIZED CAPITAL GAINS were $73 thousand in 2003 compared to realized
capital losses of $4.1 million and

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

$1.4 million in 2002 and 2001, respectively. In 2003, capital gains resulted
from sales of fixed income securities while in 2002, gains on sales of fixed
income securities of $239 thousand were more than offset by write-downs on fixed
income securities of $4.3 million. The realized capital losses in 2001 resulted
from sales of fixed income securities. Period to period fluctuations in realized
capital gains and losses are the result of timing of sales decisions reflecting
our decision on positioning the portfolio, assessments of individual securities,
overall market conditions and write-downs when we determine that a decline in
the value of a security is other than temporary.

FINANCIAL POSITION

(IN THOUSANDS)

(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $197.9 million and $182.8 million at December 31, 2003 and
2002, respectively.

Total investments increased to $210.2 million at December 31, 2003 from
$202.6 million at December 31, 2002 due to the investment of positive cash flows
from operations after settlement of December 31, 2002 payable to affiliates. At
December 31, 2003, unrealized gains on fixed income securities decreased to
$11.2 million from $16.6 million at December 31, 2002.

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 securities for the years ended December 31, 2003 and 2002.

U.S. government and agencies of the U.S. government securities were all
rated investment grade at December 31, 2003.

Municipal bonds, including tax-exempt and taxable securities, totaled $571
thousand and were rated Aaa at December 31, 2003 due to insurance by a bond
insurer.

Corporate bonds totaled $81.4 million and all were rated as investment
grade at December 31, 2003.

Mortgage-backed securities ("MBS") totaled $41.0 million at December 31,
2003. In our MBS portfolio, the credit risk is mitigated due to the fact that
51.7% 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. The MBS portfolio is also subject to interest
rate risk since price volatility and ultimate realized yield are affected by the
rate of repayment of the underlying mortgages. We attempt to limit interest rate
risk on these securities by investing a portion of the portfolio in securities
that provide prepayment protection. At December 31, 2003, approximately 5.7% of
the MBS portfolio was invested in planned amortization class bonds or the
equivalent. Though these security types offer greater relative prepayment
protection than other MBS securities, the degree of protection has been limited
in this interest rate environment. Based on market conditions and potential
changes in portfolio management objectives, the value of this protection and the
significance of these holdings relative to the entire portfolio may be reduced
in future periods.

Asset-backed securities ("ABS") totaled $15.4 million at December 31, 2003.
Our ABS portfolio is subject to credit and interest rate risk. Credit risk is
mitigated by monitoring the performance of the collateral. The entire ABS
portfolio had a Moody's rating of Aaa or a Standard & Poor's ("S&P") rating of
AAA, the highest rating

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

category. The ABS portfolio is also subject to interest rate risk since price
volatility and ultimate realized yield are affected by the rate of repayment of
the underlying assets. The entire ABS portfolio is invested in securitized
utilities receivables.

At December 31, 2003, our entire fixed income securities portfolio was
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 Moody's
equivalent rating of Aaa, Aa, A or Baa; an S&P equivalent rating of AAA, AA, A
or BBB; or a comparable internal rating.

The following table summarizes the credit quality of the fixed income
securities portfolio at December 31, 2003.

(IN THOUSANDS)

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 that they are not other than temporarily impaired. The
unrealized net capital gains on fixed income securities at December 31, 2003
were $11.2 million, a decrease of $5.5 million or 32.9% since December 31, 2002.
Gross unrealized losses were primarily concentrated in the corporate fixed
income portfolios and were comprised of securities in the following sectors.

The capital goods and transportation sectors had the highest concentration
of unrealized losses in our corporate fixed income securities portfolio at
December 31, 2003. The gross unrealized losses in these sectors are primarily
company specific or interest rate related. While we expect eventual recovery of
these securities and the related sectors, we included every security in our
portfolio monitoring process at December 31, 2003.

At December 31, 2003, all of the gross unrealized losses were related to
investment grade fixed income

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

securities. Unrealized losses on investment grade securities principally relate
to changes in interest rates or changes in sector-related credit spreads since
the securities were acquired.

The scheduled maturity dates for fixed income securities in an unrealized
loss position at December 31, 2003 is shown below. Actual maturities may differ
from those scheduled as a result of prepayments by the issuers.

(1) Because of the potential for prepayment, mortgage- and asset-backed
securities are not categorized based on their contractual maturities.

PORTFOLIO MONITORING We have a comprehensive portfolio monitoring process to
identify and evaluate 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. The securities identified, in addition
to other securities for which we may have concern, are evaluated based on facts
and circumstances for inclusion on our watch-list. The watch-list is reviewed in
detail to determine whether any other than temporary impairment exists.

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 serious concerns
regarding the borrower's ability to pay future principal and interest, which
causes us to believe these securities may be classified as problem or
restructured in the future.

As of December 31, 2003, we did not have any fixed income 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 for
the years ended December 31.

We recorded realized capital gains on fixed income securities of $73
thousand for the year ended December 31, 2003 resulting from sales of fixed
income securities. We recorded losses on fixed income securities of $4.1 million
for the year ended December 31, 2002, primarily related to the utility industry.

SHORT-TERM INVESTMENTS Our short-term investment portfolio was $1.1 million and
$3.2 million at December 31, 2003 and 2002, respectively. We invest available
cash balances primarily in taxable short-term securities having a final maturity
date or redemption date of one year or less.

CASH At December 31, 2003, the cash balance was $23.5 million compared to $130.2
million at December 31, 2002. The decrease is primarily a result of timing
differences between when deposits from fixed annuity sales were received in 2002
and when those deposits were transferred to ALIC under our reinsurance agreement
in 2003. As a result, there was a corresponding decrease in payable to
affiliates.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

REINSURANCE RECOVERABLE, CONTRACTHOLDER FUNDS AND RESERVE FOR LIFE-CONTINGENT
CONTRACT BENEFITS Under accounting principles generally accepted in the United
States of America ("GAAP"), when reinsurance contracts do not relieve the ceding
company of legal liability to contractholders, the ceding company is required to
report reinsurance recoverables arising from these contracts separately as
assets. The liabilities for the contracts are reported as contractholder funds,
reserves for life-contingent contract benefits, or separate accounts liabilities
depending on the characteristics of the contracts. We reinsure all reserve
liabilities with ALIC or other non-affiliated reinsurers. Reinsurance
recoverable and the related reserve for life-contingent contract benefits and
contractholder funds are reported separately in the Statements of Financial
Position, while the assets which support the separate accounts liabilities are
reflected as separate accounts assets.

At December 31, 2003, contractholder funds increased to $13.80 billion from
$11.66 billion at December 31, 2002 as the result of new and additional deposits
from fixed annuities and interest credited to contractholder funds partially
offset by surrenders, withdrawals and benefit payments. The reserve for
life-contingent contract benefits increased $393.6 million to $1.48 billion at
December 31, 2003 resulting from new sales of structured settlement and
immediate annuities 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 $2.42
billion and $123.4 million, respectively, due to the increase in contractholder
obligations discussed above.

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 a passing of the agreed-upon portion of risk to the reinsurer in exchange for
negotiated reinsurance premium payments.

Developments in the insurance industry have recently led to a decline in
the financial strength of some of our reinsurance carriers, causing amounts
recoverable from them to be considered a higher risk. There has also been recent
consolidation activity between reinsurers in the industry, which causes
reinsurance risk across the industry to be concentrated among fewer companies.
Additionally, one of our primary non-affiliated reinsurers has announced its
intention to no longer assume life reinsurance risks. As a result, we plan to
increase our reinsurance to ALIC.

We continuously monitor the creditworthiness of reinsurers in order to
determine our risk of recoverability on an individual and aggregate basis and
a provision for uncollectible reinsurance is recorded if needed. At December
31, 2003, all non-affiliated ceded premiums were reinsured under
uncollateralized reinsurance agreements with companies that had a financial
strength rating of A- or above, as measured by AM Best. In certain cases,
these ratings refer to the financial strength of the affiliated group or
parent company of the reinsurer.

SEPARATE ACCOUNTS Separate accounts assets and liabilities increased 35.3% to
$1.91 billion at December 31, 2003 compared to the December 31, 2002 balance.
The increase was primarily attributable to increases in the fair value of the
separate accounts fund values due to improved equity market conditions compared
to 2002, sales of variable annuity contracts and transfers from the general
account to the separate accounts funds, partially offset by surrenders and
withdrawals and expense charges.

The assets related to variable contracts are legally segregated and
reflected as separate accounts assets. 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 our Statements of Operations and Comprehensive Income. Our revenues
from the separate accounts consist of contract charges related to maintenance
and administration, mortality, early surrender and expenses, which are then
ceded to ALIC.

Absent any contract provision wherein we guarantee either a minimum return
of account value upon death or annuitization, variable annuity and variable life
insurance contractholders bear the investment risk that the underlying mutual
funds of the separate accounts may not meet their stated investment objectives.
The risk and associated cost of these contract guarantees are ceded to ALIC in
accordance with the reinsurance agreements.

9

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

MARKET RISK

Market risk is the risk that we will incur losses due to adverse changes in
equity prices or interest rates. Our primary market risk exposure is to changes
in interest rates. Although we also have certain exposures to changes in equity
prices in our equity indexed annuities and separate accounts liabilities, this
risk is transferred to ALIC in accordance with the reinsurance agreements.

OVERVIEW Investment guidelines define the overall framework for managing market
and other investment risks, including accountability and control over these risk
management activities. In addition, we follow guidelines that have been approved
by our board of directors and that specify the investment limits and strategies
that are appropriate given our liquidity, surplus, product, and regulatory
requirements. Executive oversight of investment risk management processes is
conducted primarily through the board of directors and investment committee.
Administration and detailed managerial oversight of investment risk, including
market risk, is provided through our credit and risk management committee
("CRMC"). We also have an enterprise-wide committee called the Enterprise Risk
Council ("ERC") that is responsible for assessing risks, including market and
other investment risks, on an integrated basis across subsidiaries and
organizations.

We manage our exposure to market risk through the use of asset allocation
limits 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 these portfolios.
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 the
investment guidelines.

INTEREST RATE RISK is the risk that we will incur an economic loss due to
adverse changes in interest rates. This risk arises as we invest funds in
interest-sensitive assets.

One of the measures used to quantify exposure is duration. Duration
measures the sensitivity of assets to changes in interest rates. For example, if
interest rates increase by 100 basis points the fair value of an asset with a
duration of 5 is expected to decrease in value by approximately 5%. Our asset
duration was approximately 5.0 and 3.9 at December 31, 2003 and 2002,
respectively.

To calculate duration, we project asset cash flows and calculate their net
present value using a risk-free market interest rate adjusted for credit
quality, sector attributes, liquidity and other specific risks. Duration is
calculated by revaluing these cash flows at alternative levels of interest rates
and determining the percentage change in aggregate fair value. The projections
include assumptions (based upon historical market experience and our experience)
that reflect the effect of changing interest rates on the prepayment, lapse,
leverage and/or option features of instruments, where applicable. Such
assumptions relate primarily to mortgage-backed securities, collateralized
mortgage obligations, and municipal and corporate obligations.

Based upon the information and assumptions we use in our duration
calculation and interest rates in effect at December 31, 2003, we estimate that
a 100 basis point immediate, parallel increase in interest rates ("rate shock")
would decrease the net fair value of the assets by approximately $10.5 million
compared to $7.8 million at December 31, 2002. The selection of a 100 basis
point immediate parallel change in interest rates should not be construed as our
prediction of future market events, but only as an illustration of the potential
impact of such an event.

To the extent that conditions differ from the assumptions we used in these
calculations, duration and rate shock measures could be significantly impacted.
Additionally, our calculation assumes that the current relationship between
short-term and long-term interest rates (the term structure of interest rates)
will remain constant over time. As a result, these calculations may not fully
capture the impact of non-parallel changes in the term structure of interest
rates and/or large changes in interest rates.

EQUITY PRICE RISK is the risk that we will incur economic losses due to adverse
changes in a mutual fund or stock index.

At December 31, 2003 and 2002, we had separate account assets with account
values totaling $1.91 billion and $1.41 billion, respectively. We earn contract
charges as a percentage of these account values. In the event of an immediate
decline of 10% in the account values due to equity market declines, we would
have earned approximately $2.4 million and $2.0 million less in fee income at
December 31, 2003 and 2002, respectively,

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

which would be ceded to ALIC.

Variable annuity contracts we sell have a guaranteed minimum death benefit
("GMDB") and customers may choose to purchase an enhanced GMDB or guaranteed
minimum income benefit ("GMIB") prior to 2004 and beginning in 2004, an
accumulation benefit ("GMAB") on certain contracts. These guarantees subject us
to additional equity risk because the beneficiary or contractholder may receive
a benefit that is greater than the current account value, which would be ceded
to ALIC. GMDBs are payable upon death, while GMIBs are payable on or after the
ten-year anniversary of the contract if the contractholder elects to receive a
defined stream of payments ("annuitize"). GMABs are payable on a date that is
pre-determined by the contractholder, between the eighth and twentieth year of
the contract. GMABs guarantee a return of up to 2.5 times (or 250%) of the
amount deposited in the contract, depending on the amount of time the contract
is in force and adherence to certain fund allocations. All variable annuity
contract charges and fees, liabilities and benefits, including the GMDBs, GMIBs
and GMABs are ceded to ALIC in accordance with the reinsurance agreement,
thereby limiting our equity risk exposure.

CAPITAL RESOURCES AND LIQUIDITY

CAPITAL RESOURCES consist of shareholder's equity. The following table
summarizes our capital resources at December 31:

SHAREHOLDER'S EQUITY increased $7.4 million during the year ended December 31,
2003 when compared to December 31, 2002, due to net income of $7.4 million and a
non-cash capital contribution of $3.6 million partially offset by a decrease in
unrealized net capital gains of $3.6 million. Shareholder's equity increased
during 2002, as well as 2001, due to net income of $4.9 million and $7.0
million, respectively, and an increase in unrealized net capital gains of $5.9
million and $2.8 million, respectively.

FINANCIAL RATINGS AND STRENGTH We share the insurance financial strength ratings
of our parent, ALIC, because business is reinsured to ALIC. Our insurance
financial strength was rated Aa2, AA, and A+(r) by Moody's, Standard & Poor's
and A.M. Best, respectively, at December 31, 2003.

Our ratings are influenced by many factors including our operating and
financial performance, asset quality, liquidity, asset/liability management,
overall portfolio mix, the amount of financial leverage (i.e., debt), exposure
to risks, as well as the current level of operating leverage. In February 2004,
A.M. Best revised the outlook to stable from positive for the insurance
financial strength ratings of ALIC and certain rated subsidiaries and
affiliates.

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 assessing RBC. The formula for calculating RBC
takes into account factors relating to insurance, business, asset and interest
rate risks. At December 31, 2003, our RBC was above levels that would require
regulatory actions.

The NAIC has also developed a set of financial relationships or tests known
as the Insurance Regulatory Information System to assist state regulators in
monitoring the financial condition of insurance companies and identifying
companies that require special attention or action from insurance regulatory
authorities. The NAIC analyzes financial data provided by insurance companies
using prescribed ratios, each with defined "usual ranges." Generally, regulators
will begin to monitor an insurance company if its ratios fall outside the usual
ranges for four or more of the ratios. If an insurance company has insufficient
capital, regulators may act to reduce the amount of insurance it can issue. Our
ratios are within these ranges.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

LIQUIDITY SOURCES AND USES Our potential sources of funds principally include
the following activities:

Receipt of insurance premiums
Contractholder fund deposits
Reinsurance recoveries
Receipts of principal and interest on investments
Sales of investments
Inter-company loans and tax refunds/settlements
Capital contributions from parent

Our potential uses of funds principally include the following activities:

Payment of contract benefits, maturities, surrenders and withdrawals
Reinsurance cessions and payments
Operating costs and expenses
Purchase of investments
Repayment of inter-company loans
Dividends to shareholder

Under the terms of reinsurance agreements, all premiums and deposits,
excluding those relating to variable contracts and those reinsured to
non-affiliated reinsurers, are transferred to ALIC, which maintains the
investment portfolios supporting our products. Payments of contractholder
claims, benefits (including GMDBs, GMIBs and GMABs beginning in 2004), contract
maturities, contract surrenders and withdrawals and certain operating costs
(excluding investment-related expenses), are also reimbursed by ALIC, under the
terms of the reinsurance agreements. We continue to have primary liability as a
direct insurer for risks reinsured. Our ability to meet liquidity demands is
dependent on ALIC's ability to meet those obligations under the reinsurance
program.

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
gain from operations, 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 2004 without prior approval of the Nebraska Department of Insurance is
$20.0 million.

We have entered into an intercompany loan agreement with the Corporation.
The amount of funds available to us 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 for the intercompany loan agreement at December 31,
2003 or 2002, respectively. The Corporation uses commercial paper borrowings and
bank lines of credit to fund intercompany borrowings.

Certain remote events and circumstances could constrain the Corporation's
liquidity. Those events and circumstances include, for example, a catastrophe
resulting in extraordinary losses, a downgrade in the Corporation's 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/A-, or a downgrade in ALIC's or our
financial strength ratings from Aa2, AA and A+ (from Moody's, Standard & Poor's
and A.M. Best, respectively) to below Aa3/AA-/A-. The rating agencies also
consider the interdependence of the Corporation's individually rated entities,
and therefore, a rating change in one entity could potentially affect the
ratings of other related entities.

12

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

CONTRACTUAL OBLIGATIONS Our contractual obligations as of December 31, 2003 and
the payments due by period are shown in the following table.

(1) ALIC closely manages the assets supporting payout annuities/structured
settlement liabilities because they are ceded to ALIC under the terms of
the reinsurance agreements.

REGULATION AND LEGAL PROCEEDINGS

REGULATION We are subject to changing social, economic and regulatory
conditions. Recent state and federal regulatory initiatives and proceedings have
included efforts to remove barriers preventing banks from engaging in the
securities and insurance businesses, change tax laws affecting the taxation of
insurance companies and the tax treatment of insurance products or competing
non-insurance products that may impact the relative desirability of various
personal investment products and otherwise expand overall regulation of
insurance products and the insurance industry. The ultimate changes and eventual
effects of these initiatives on our business, if any, are uncertain.

LEGAL PROCEEDINGS We are involved in various legal and regulatory actions that
could have an effect on specific aspects of our business. Like other members of
the insurance industry, we are the target of an increasing number of lawsuits,
some of which involve claims for substantial or indeterminate amounts. For a
description of these actions, see Note 8 of the financial statements.

PENDING ACCOUNTING STANDARDS

As of December 31, 2003, there are several pending and proposed accounting
standards that we have not implemented either because the standard has not been
finalized or the implementation date has not yet occurred. These standards
include Statement of Position 03-01 and Emerging Issues Task Force Topic number
03-01. For a discussion of these pending and proposed standards, see Note 2 of
the financial statements. The effect of implementing certain accounting
standards on our financial results and financial condition is often based in
part on market conditions at the time of implementation and other factors we are
unable to determine prior to implementation. For this reason, we are sometimes
unable to estimate the effect of certain pending accounting standards until the
relevant authoritative body finalizes these standards or until we implement
them.

FORWARD-LOOKING STATEMENTS AND 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. 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 (including the risks described below) and in our public filings with
the SEC.

In addition to the normal risks of business, we are subject to significant
risks and uncertainties, including those listed below, which apply to us as an
insurer and a provider of other financial services.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

RISKS RELATING TO THE COMPANY

CHANGES IN RESERVE ESTIMATES MAY REDUCE PROFITABILITY
Reserve for life-contingent contract benefits is computed on the basis of
long-term actuarial assumptions of future investment yields, mortality,
morbidity, policy terminations and expenses. We periodically review and revise
our estimates and if future experience differs from assumptions, adjustments to
reserves may be required which could have a material adverse effect on our
financial condition and operating results ceded to ALIC.

CHANGES IN MARKET INTEREST RATES MAY LEAD TO A SIGNIFICANT DECREASE IN THE SALES
AND PROFITABILITY OF SPREAD-BASED PRODUCTS CEDED TO ALIC
ALIC's ability to manage the investment margin for spread-based products is
dependent upon maintaining profitable spreads between investment yields and
interest crediting rates on business ceded to ALIC. As interest rates decrease
or remain at historically low levels, assets may be reinvested at lower yields,
reducing investment margin. For example, during 2003 the average pre-tax
investment yield on assets we retain declined to 6.1% from 6.4% in 2002. ALIC
manages the spread on the business assumed from us. Our ability to lower
interest crediting rates can offset decreases in investment margin on some
products. However, these changes could be limited by market conditions,
regulatory minimum rates or contractual minimum rate guarantees on many
contracts and may not match the timing or magnitude of changes in asset yields.
Decreases in the rates offered on products could make those products less
attractive, leading to lower sales and/or changes in the level of surrenders and
withdrawals for these products. Increases in market interest rates can also have
negative effects on the business ceded to ALIC, for example by increasing the
attractiveness of other investments, which can lead to higher surrenders at a
time when its investment asset values are lower as a result of the increase in
interest rates. Unanticipated surrenders could result in deferred policy
acquisition costs ("DAC") unlocking or affect the recoverability of DAC and
thereby increase expenses ceded to ALIC and reduce profitability of ALIC.

DECLINING EQUITY MARKETS MAY REDUCE BOTH SALES OF PRODUCTS AND INCOME FROM
CONTRACT CHARGES AND MAY ADVERSELY AFFECT OPERATING RESULTS AND FINANCIAL
CONDITION OF ALIC
Conditions in the United States and international stock markets affect our
sales of variable annuities. Recent allegations of improper or illegal trading
activities at large mutual fund complexes could affect the stock markets. In
general, sales of variable annuities decrease when stock markets are declining
over an extended period of time. The effect of decreasing separate accounts
balances resulting from volatile equity markets, lower underlying fund
performance or declining consumer confidence could cause contract charges earned
and ceded to ALIC to decrease. In addition, it is possible that the assumptions
and projections we use to establish prices for GMDB, GMIB and GMAB products,
particularly assumptions and projections about investment performance, do not
accurately reflect the level of costs that we will ultimately incur and cede to
ALIC in providing those benefits, resulting in adverse margin trends that may
have a material effect on ALIC's results of operations. These factors may result
in accelerated DAC amortization at ALIC and require increases in reserves, which
would reduce ALIC's statutory capital and surplus and/or net income. Poor fund
performance could also result in higher partial withdrawals of account value
which, for some contracts, do not reduce the GMDB by a proportional amount.

CHANGES IN ESTIMATES OF PROFITABILITY ON INTEREST-SENSITIVE PRODUCTS MAY HAVE AN
ADVERSE EFFECT ON RESULTS THROUGH INCREASED AMORTIZATION OF DAC FOR ALIC
DAC related to interest-sensitive life, variable annuity and investment
contracts is amortized in proportion to estimated gross profits over the
estimated lives of the contracts. Assumptions underlying estimated gross
profits, including those relating to margins from investment, mortality,
contract administration, surrender and other contract charges, are updated from
time to time in order to reflect actual and expected experience and its
potential effect on the valuation of DAC. Updates to these assumptions could
result in DAC unlocking, which in turn could adversely affect our operating
results ceded to ALIC.

A LOSS OF KEY PRODUCT DISTRIBUTION RELATIONSHIPS COULD MATERIALLY AFFECT SALES
Certain products are distributed under agreements with other members of the
financial services industry that are not affiliated with us. Termination of one
or more of these agreements due to, for example, a change in control of one of
these distributors, could have a detrimental effect on our sales. This risk may
be heightened by the enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB
Act"), which eliminated many federal and state law barriers to affiliations
among banks, securities firms, insurers and other financial service providers.

CHANGES IN TAX LAWS MAY DECREASE SALES AND PROFITABILITY OF PRODUCTS
Under current federal and state income tax law, certain products (primarily
life insurance and annuities) we offer receive favorable tax treatment. This
favorable treatment may give certain of our products a competitive

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

advantage over noninsurance products. Congress from time to time considers
legislation that would reduce or eliminate the favorable policyholder tax
treatment currently applicable to life insurance and annuities. Congress also
considers proposals to reduce the taxation of certain products or investments
that may compete with life insurance and annuities. One such proposal was
enacted in May 2003 when President Bush signed the Jobs and Growth Tax Relief
Reconciliation Act of 2003, which reduced the federal income tax rates
applicable to certain dividends and capital gains realized by individuals.
Legislation that increases the taxation on insurance products or reduces the
taxation on competing products could lessen the advantage of certain of our
products as compared to competing products. Such proposals, if adopted, could
have an adverse effect on our financial position or ability to sell such
products and could result in the surrender of some existing contracts and
policies. In addition, recent changes in the federal estate tax laws have
negatively affected the demand for the types of life insurance used in estate
planning.

RISKS RELATING TO THE INSURANCE INDUSTRY

OUR FUTURE RESULTS ARE DEPENDENT IN PART ON OUR ABILITY TO SUCCESSFULLY OPERATE
IN AN INSURANCE INDUSTRY THAT IS HIGHLY COMPETITIVE
The insurance industry is highly competitive. Many of our competitors have
well-established national reputations and market similar insurance products.
Because of the competitive nature of the insurance industry, including
competition for producers such as exclusive and independent agents, there can be
no assurance that we will continue to effectively compete with our industry
rivals, or that competitive pressure will not have a material adverse effect on
our business, operating results or financial condition. In addition, we may face
increased competition from banks. Until passage of the GLB Act, the ability of
banks to engage in securities-related businesses was limited and banks were
restricted from being affiliated with insurers. With the passage of the GLB Act,
mergers that combine commercial banks, insurers and securities firms under one
holding company are now permitted. The ability of banks to affiliate with
insurers may have a material adverse effect on all of our product lines by
substantially increasing the number, size and financial strength of potential
competitors. Furthermore, certain competitors operate using a mutual insurance
company structure and therefore, may have dissimilar profitability and return
targets.

CHANGING INTEREST RATES AND DECLINES IN CREDIT QUALITY MAY HAVE ADVERSE EFFECTS
A decline in market interest rates could have an adverse effect on our
investment income as we invest cash in new investments that may yield less than
the portfolio's average rate. In a declining interest rate environment,
borrowers may prepay or redeem securities we hold more quickly than expected as
they seek to refinance at lower rates. An increase in market interest rates
could have an adverse effect on the value of our investment portfolio, for
example, by decreasing the fair values of the fixed income securities that
comprise a substantial majority of our investment portfolio. Increases in
interest rates also may lead to an increase in surrenders and withdrawals that
generally would be funded at a time when fair values of fixed income securities
are lower. A decline in the quality of our investment portfolio as a result of
adverse economic conditions or otherwise could cause additional realized losses
on securities.

WE MAY SUFFER LOSSES FROM LITIGATION
As is typical for an insurance company, we are involved in a substantial
amount of litigation. Among other things, we, like other participants in the
insurance industry, have been subject in recent years to an increasing volume of
class action litigation challenging a range of industry practices. Our
litigation exposure could result in a material adverse effect on our financial
condition and operating results ceded to ALIC in a future period in the event of
an unexpected adverse outcome or if additional reserves are required to be
established for such litigation. For a description of our current material
litigation matters, see Note 8 of the financial statements.

WE ARE SUBJECT TO EXTENSIVE REGULATION AND POTENTIAL FURTHER RESTRICTIVE
REGULATION MAY INCREASE OUR OPERATING COSTS AND LIMIT OUR GROWTH
We are subject to extensive regulation by state insurance regulators. This
regulation is focused on the protection of policyholders and not investors. In
many cases, state regulations limit our ability to grow and improve the
profitability of our business. The laws regulating securities products and
activities are complex, numerous and subject to change. Further, in recent
years, the state insurance regulatory framework has come under increased federal
scrutiny, and proposals that would provide for optional federal chartering of
insurance companies have been discussed by members of Congress. We can make no
assurances as to whether further state or federal measures will be adopted to
change the nature or scope of the regulation of the insurance industry or as to
the effect that any such measures would have on us.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)

THE UNAVAILABILITY OF REINSURANCE MAY LIMIT OUR ABILITY TO WRITE NEW BUSINESS
Market conditions beyond our control determine the availability and cost of
the reinsurance we purchase. No assurances can be made that reinsurance will
remain continuously available to us to the same extent and on the same terms and
rates as are currently available. If we were unable to maintain our current
level of external reinsurance or purchase new reinsurance protection in amounts
that we consider sufficient and at prices that we consider acceptable, either
ALIC would have to accept an increase in net liability exposure or we would have
to reduce insurance writings.

REINSURANCE SUBJECTS US TO THE CREDIT RISK OF OUR REINSURERS AND MAY NOT BE
ADEQUATE TO PROTECT US AGAINST LOSSES ARISING FROM CEDED INSURANCE
The collectibility of reinsurance recoverables is subject to uncertainty
arising from a number of factors, including whether insured losses meet the
qualifying conditions of the reinsurance contract and whether reinsurers, or
their affiliates, have the financial capacity and willingness to make payments
under the terms of a reinsurance treaty or contract. Our inability to collect a
material recovery from a reinsurer could have a material adverse effect on our
operating results ceded to ALIC and financial condition.

THE CONTINUED THREAT OF TERRORISM AND ONGOING MILITARY ACTIONS MAY ADVERSELY
AFFECT THE LEVEL OF CLAIM EXPENSE WE INCUR AND THE VALUE OF OUR INVESTMENT
PORTFOLIO
The continued threat of terrorism, both within the United States and
abroad, and ongoing military and other actions and heightened security measures
in response to these types of threats, may cause significant volatility and
declines in the equity markets in the United States, Europe and elsewhere, and
result in loss of life, property damage, additional disruptions to commerce and
reduced economic activity. Some of the assets in our investment portfolio may be
adversely affected by declines in the equity markets and reduced economic
activity caused by the continued threat of terrorism. In the event that a
terrorist act occurs, we may be adversely affected, depending on the nature of
the event.

ANY DECREASE IN OUR FINANCIAL STRENGTH RATINGS MAY HAVE AN ADVERSE EFFECT ON OUR
COMPETITIVE POSITION
Financial strength ratings are important factors in establishing the
competitive position of insurance companies and generally will have an effect on
an insurance company's business. On an ongoing basis, rating agencies review the
financial performance and condition of insurers and could downgrade or change
the outlook on an insurer's ratings due to, for example, a decline in the value
of an insurer's investment portfolio or increased liabilities for variable
contracts arising from additional GMDB, GMIB or GMAB exposure resulting from
market declines. Currently, the insurance financial strength ratings of the
Corporation, AIC and ALIC are Aa2, AA and A+ (from Moody's, Standard & Poor's
and A.M. Best, respectively). Because these ratings are subject to periodic
review, the continued retention of these ratings cannot be assured. A multiple
level downgrade in the ratings of the Corporation, AIC or ALIC could have a
material adverse effect on our sales, including the competitiveness and
marketability of our product offerings, as well as our liquidity, financial
condition and operating results ceded to ALIC.

CHANGES IN ACCOUNTING STANDARDS ISSUED BY THE FASB OR OTHER STANDARD-SETTING
BODIES MAY ADVERSELY AFFECT OUR FINANCIAL STATEMENTS
Our financial statements are subject to the application of GAAP, which is
periodically revised and/or expanded. Accordingly, we are required to adopt new
or revised accounting standards issued from time to time by recognized
authoritative bodies, including the Financial Accounting Standards Board (the
"FASB"). It is possible that future changes we are required to adopt could
change the current accounting treatment that we apply to our financial
statements and that such changes could have a material adverse effect on our
financial condition and results ceded to ALIC. For a description of potential
changes in accounting standards that could affect us currently, see Note 2 of
the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated in this Item 7a by reference to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" Item 7.

16

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See notes to financial statements.

17

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF FINANCIAL POSITION

See notes to financial statements.

18

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY

See notes to financial statements.

19

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF CASH FLOWS

See notes to financial statements.

20

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

1. GENERAL

BASIS OF PRESENTATION

The accompanying financial statements include the accounts of Lincoln
Benefit Life Company ("Lincoln Benefit" or 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"). Management has identified the Company as a single segment
entity.

To conform to the 2003 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

NATURE OF OPERATIONS

The mission of Lincoln Benefit is to assist financial services
professionals in meeting their customers' financial protection, savings and
retirement needs by providing top-tier products delivered with reliable and
efficient service. The Company's product line includes a wide variety of
financial protection, savings and retirement products aimed at serving the
financial needs of the Company's customers. Products include traditional life,
interest-sensitive life, variable life and long-term care insurance, and both
variable and fixed annuities. Products are sold through a variety of
distribution channels including Allstate exclusive agencies, independent agents
(including master brokerage agencies) and broker/dealers. Although the Company
currently benefits from agreements with financial services entities that market
and distribute its products, change in control or other factors affecting these
non-affiliated entities with which the Company has distribution agreements could
negatively impact the Company's sales.

The Company is authorized to sell life insurance 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 2003, the top geographic locations for statutory
premiums and annuity considerations for the Company 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 monitors economic and regulatory developments that have the
potential to impact its business. Federal legislation has allowed banks and
other financial organizations to have greater participation in the securities
and insurance businesses. This legislation may present an increased level of
competition for sales of the Company's products. Furthermore, state and federal
laws and regulations affect the taxation of insurance companies and life
insurance and annuity products. Congress and various state legislatures have
considered proposals that, if enacted, could impose a greater tax burden on the
Company or could have an adverse impact on the tax treatment of some insurance
products offered by the Company, including favorable policyholder tax treatment
currently applicable to life insurance and annuities. Recent legislation that
reduced the federal income tax rates applicable to certain dividends and capital
gains realized by individuals, or other proposals, if adopted, that reduce the
taxation, or permit the establishment, of certain products or investments that
may compete with life insurance or annuities could have an adverse effect on the
Company's financial position or ability to sell such products. In addition,
recent changes in the federal estate tax laws have negatively affected the
demand for the types of life insurance used in estate planning.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed income securities include bonds, asset-backed and mortgage-backed
securities. Fixed income securities are carried at fair value and may be sold
prior to their contractual maturity ("available for sale"). The fair value of
publicly traded fixed income securities is based upon independent market
quotations.

21

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

Periodic changes in fair values, net of deferred income taxes, are reflected as
a component of other comprehensive income. Short-term investments are carried at
cost or amortized cost, which approximates fair value.

Investment income consists of interest and is recognized on an accrual
basis. Interest income on mortgage-backed and asset-backed securities is
determined using the effective yield method, based on estimated principal
repayments. Accrual of income is suspended for fixed income securities that are
in default or when the receipt of interest payments is in doubt.

Realized capital gains and losses include gains and losses on investment
dispositions, and write-downs in value due to other than temporary declines in
fair value. Realized capital gains and losses on investment dispositions are
determined on a specific identification basis.

The Company writes down, to fair value, any fixed income security that is
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired.

RECOGNITION OF PREMIUM REVENUES AND CONTRACT CHARGES, AND RELATED BENEFITS AND
INTEREST CREDITED

The Company has reinsurance agreements whereby all premiums, contract
charges, interest credited to contractholder funds, contract benefits and
certain expenses are ceded to ALIC and non-affiliated reinsurers (see Notes 3
and 7). These amounts are reflected net of such reinsurance in the Statements of
Operations and Comprehensive Income.

Traditional life insurance products consist principally of products with
fixed and guaranteed premiums and benefits, primarily term and whole life
insurance products. Premiums from these products are recognized as revenue when
due. Benefits are recognized in relation to such revenue so as to result in the
recognition of profits over the life of the policy and are reflected in contract
benefits.

Immediate annuities with life contingencies, including certain structured
settlement annuities, provide insurance protection over a period that extends
beyond the period during which premiums are collected. Gross premiums in excess
of the net premium on immediate annuities with life contingencies are deferred
and recognized over the contract period. Contract benefits are recognized in
relation to such revenue so as to result in the recognition of profits over the
life of the policy.

Interest-sensitive life contracts, such as universal life and single
premium life, are insurance contracts whose terms are not fixed and guaranteed.
The terms that may be changed include premiums paid by the contractholder,
interest credited to the contractholder account balance and any amounts assessed
against the contractholder account balance. Premiums from these contracts are
reported as contractholder fund deposits. Contract charges consist of fees
assessed against the contractholder account balance for cost of insurance
(mortality risk), contract administration and early surrender. These revenues
are recognized when assessed against the contractholder account balance.
Contract benefits include life-contingent benefit payments in excess of the
contractholder account balance.

Contracts that do not subject the Company to significant risk arising from
mortality or morbidity are referred to as investment contracts. Fixed annuities,
market value adjusted annuities, equity-indexed annuities, and immediate
annuities without life contingencies are considered investment contracts.
Deposits received for such contracts are reported as contractholder funds
deposits. Contract charges for investment contracts consist of fees assessed
against the contractholder account balance for contract administration and early
surrender. These revenues are recognized when assessed against the
contractholder account balance.

Interest credited to contractholder funds represents interest accrued or
paid for interest-sensitive life contracts and investment contracts. Crediting
rates for certain fixed rate annuities and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions
subject to contractually guaranteed minimum rates. Crediting rates for indexed
annuities and indexed life products are based on a specified interest rate
index, such as LIBOR or an equity index, such as the S&P 500.

Separate accounts products include variable annuities and variable life
insurance contracts. The assets supporting these products are legally segregated
and available only to settle separate accounts contract obligations. Deposits
received are reported as separate accounts liabilities. Contract charges for
these products consist of fees assessed against the contractholder account
values for contract maintenance,

22

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

administration, mortality, expense and early surrender. Contract benefits
incurred include guaranteed minimum death benefits paid on variable annuity
contracts.

REINSURANCE RECOVERABLE

The Company has reinsurance agreements whereby the Company cedes 90%, 80%
or 60% of the mortality risk on certain life policies, depending upon the issue
year and product, to a pool of thirteen non-affiliated reinsurers. The remaining
amounts are ceded to ALIC. Beginning in 1998, the Company cedes mortality risk
on new business in excess of $2 million per life for individual coverage. For
business sold prior to 1998, the Company ceded mortality risk in excess of $350
thousand per life for individual coverage.

Reinsurance recoverable and the related reserve for life-contingent
contract benefits and contractholder funds are reported separately in the
Statements of Financial Position. The Company continues to have primary
liability as the direct insurer for the 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 financial statements as those assets are owned and managed by ALIC
under terms of reinsurance agreements.

INCOME TAXES

The income tax provision is calculated under the liability method. Deferred
tax assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates. The principal assets and liabilities giving rise to such differences are
unrealized capital gains and losses on certain investments and differences in
the tax bases of investments. A deferred tax asset valuation allowance is
established when there is uncertainty that such assets would be realized.

SEPARATE ACCOUNTS

The Company issues variable annuities and variable life insurance
contracts, the assets and liabilities of which are legally segregated and
recorded as assets and liabilities of the 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 Statements of Operations and
Comprehensive Income. Revenues to the Company from the separate accounts consist
of contract charges for maintenance and administration services, mortality,
early surrender and expenses, which are ceded to ALIC. Deposits to the separate
accounts are not included in the Statements of Cash Flows.

Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death or annuitization, variable annuity
and variable life insurance contractholders bear the investment risk that the
separate accounts' funds may not meet their stated investment objectives. The
risk and associated cost of these contract guarantees are ceded to ALIC in
accordance with the reinsurance agreements.

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS

The reserve for life-contingent contract benefits, which relates to
traditional life insurance and immediate annuities with life contingencies, is
computed on the basis of long-term actuarial assumptions as to future investment
yields, mortality, morbidity, terminations and expenses. These assumptions,
which for traditional life insurance are applied using the net level premium
method, include provisions for adverse deviation and generally vary by such
characteristics as type of coverage, year of issue and policy duration. Detailed
reserve assumptions and reserve interest rates are outlined in Note 6.

CONTRACTHOLDER FUNDS

Contractholder funds arise from the issuance of interest-sensitive life
insurance policies and investment contracts. Deposits received are recorded as
interest-bearing liabilities. Contractholder funds are equal to deposits
received and interest credited to the benefit of the contractholder less
surrenders and withdrawals, mortality charges and administrative expenses.
Detailed information on crediting rates and surrender and withdrawal provisions
on contractholder funds is outlined in Note 6.

23

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

PENDING ACCOUNTING STANDARDS

STATEMENT OF POSITION 03-01, "ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES
FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS"
("SOP NO. 03-01")

In July 2003, the American Institute of Certified Public Accountants issued
SOP 03-01 which applies to several of the Company's insurance products and
product features. The effective date of the SOP is for fiscal years beginning
after December 15, 2003. A provision of the SOP requires the establishment of
reserves in addition to the account balance for contracts containing certain
features that provide guaranteed death or other insurance benefits and
guaranteed income benefits. These reserves are not currently established by the
Company. When established, these reserves will be ceded to ALIC under the terms
of the reinsurance agreements.

PROPOSED ACCOUNTING STANDARDS

EMERGING ISSUES TASK FORCE TOPIC NO. 03-01, "THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS" ("EITF NO. 03-01")

The Emerging Issues Task Force ("EITF") is currently deliberating EITF No.
03-01, which attempts to define other-than-temporary impairment and highlight
its application to investment securities accounted for under both SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115") and Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stocks"("APB No. 18"). The current issue
summary, which has yet to be finalized, proposes that if, at the evaluation
date, the fair value of an investment security is less than its carrying value
then an impairment exists for which a determination must be made as to whether
the impairment is other-than-temporary. If it is determined that an impairment
is other-than-temporary, then an impairment loss should be recognized equal to
the difference between the investment's carrying value and its fair value at the
reporting date. In recent deliberations, the EITF discussed different models to
assess whether impairment is other-than-temporary for different types of
investments (e.g. SFAS No. 115 marketable equity securities, SFAS No. 115 debt
securities, and equity and cost method investments subject to APB No. 18) and
subsequently decided to use a unified model. Due to the uncertainty of the final
model (or models) that may be adopted, the estimated impact to the Company's
Statements of Operations and Comprehensive Income and Financial Position is
presently not determinable. In November 2003, the EITF reached a consensus with
respect to certain disclosures effective for fiscal years ending after December
15, 2003. Quantitative and qualitative disclosures are required for fixed income
and marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115. The Company has included those disclosures
at December 31, 2003 (see Note 4).

3. RELATED PARTY TRANSACTIONS

BUSINESS OPERATIONS

The Company utilizes services provided by its affiliates, AIC, ALIC and
Allstate Investments LLC, and business facilities owned or leased and operated
by AIC in conducting its business activities. In addition, the Company shares
the services of employees with AIC. The Company reimburses its affiliates for
the operating expenses incurred on behalf of the Company. The Company is charged
for the cost of these operating expenses based on the level of services
provided. Operating expenses, including compensation and retirement and other
benefit programs, allocated to the Company were $112.6 million, $67.4 million
and $70.0 million in 2003, 2002 and 2001, respectively. Of these costs, the
Company retains investment related expenses on the invested assets of the
Company. All other costs are ceded to ALIC under reinsurance agreements.

BROKER/DEALER SERVICES

The Company receives underwriting and distribution services from
Allstate Financial Services, LLC ("AFS"), an affiliated broker/dealer
company, for certain variable annuity and variable life insurance contracts
sold by Allstate exclusive agencies. The Company recorded commission expense
for these services of $35.9 million, $33.0 million and $25.8 million for the
years ended December 31, 2003, 2002 and 2001, respectively, that was ceded
to ALIC under the terms of the reinsurance agreements.

During 2003, the Company entered into a service agreement with Allstate
Distributors, LLC

24

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

("ADLLC"), a broker/dealer affiliate of the Company, whereby ADLLC promotes
and markets the fixed and variable annuities sold by the Company to
unaffiliated financial services firms. In addition, ADLLC acts as the
underwriter of variable annuities sold by the Company. In return for these
services, the Company recorded commission expense of $138 thousand for the
year ended December 31, 2003 that was ceded to ALIC under the terms of the
reinsurance agreements.

REINSURANCE

The following table summarizes amounts that were ceded to ALIC under
reinsurance agreements:

STRUCTURED SETTLEMENT OBLIGATIONS

The Company received premiums of $3.2 million, $19.1 million and $1.5
million from AIC in 2003, 2002 and 2001, respectively, to assume certain
structured settlement obligations at prices determined based upon interest rates
in effect at the time of purchase. The Company subsequently ceded these premiums
to ALIC under the terms of its reinsurance agreements.

CAPITAL CONTRIBUTION

During the third quarter of 2003, the Executive Committee of ALIC
authorized the forgiveness of $3.6 million of intercompany debt that the Company
owed to ALIC. This transaction was recognized as a non-cash capital contribution
and reflected in additional capital paid-in on the Statements of Financial
Position.

INCOME TAXES

The Company is a party to a federal income tax allocation agreement with
the Corporation (Note 9).

DEBT

The Company has entered into an intercompany loan agreement with the
Corporation. The amount of funds available to the Company at a given point in
time is dependent upon the debt position of the Corporation. No amounts were
outstanding for the Company under the intercompany loan agreement during the
three years ended December 31, 2003.

25

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

4. INVESTMENTS

FAIR VALUES

The amortized cost, gross unrealized gains and losses, and fair value for
fixed income securities are as follows:

SCHEDULED MATURITIES

The scheduled maturities for fixed income securities are as follows at
December 31, 2003:

Actual maturities may differ from those scheduled as a result of
prepayments by the issuers. Because of the potential for prepayment on mortgage
and asset-backed securities, they are not categorized by contractual maturity.

NET INVESTMENT INCOME

Net investment income for the years ended December 31 is as follows:

26

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

REALIZED CAPITAL GAINS AND LOSSES, AFTER-TAX

Realized capital gains and losses by security type for the years ended
December 31 are as follows:

Realized capital gains and losses by transaction type for the years ended
December 31 are as follows:

Excluding the effects of calls and prepayments, gross gains of $289
thousand, $471 thousand and $123 thousand and gross losses of $216 thousand,
$232 thousand and $1.5 million were realized on sales of fixed income securities
during 2003, 2002 and 2001, respectively.

UNREALIZED NET CAPITAL GAINS AND LOSSES

Unrealized net capital gains and losses on fixed income securities included
in accumulated other comprehensive income at December 31, 2003 are as follows:

CHANGE IN UNREALIZED NET CAPITAL GAINS AND LOSSES

Change in unrealized net capital gains and losses for the years ended
December 31 is as follows:

PORTFOLIO MONITORING

Inherent in the Company's evaluation of a particular security are
assumptions and estimates about the operations of the issuer and its future
earnings potential. Some of the factors considered in evaluating whether a
decline in fair value is other than temporary are: 1) the Company's ability and
intent to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; 2) the recoverability of principal and interest;
3) the duration 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
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 access to liquidity.

27

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

At December 31, 2003, the Company has unrealized losses of $1.6 million
which relate to 22 holdings of fixed income securities with a fair value of
$44.1 million, all of which are investment grade and which have been in an
unrealized loss position for a period less than 12 months. Investment grade is
defined as a security having a rating from the National Association of Insurance
Commissioners ("NAIC") of 1 or 2; a Moody's rating of Aaa, Aa, A or Baa; a
Standard & Poor's ("S&P") rating of AAA, AA, A or BBB; or a comparable internal
rating. Unrealized losses on investment grade securities are principally related
to changes in interest rates or changes in issuer and sector related credit
spreads since the securities were acquired. As of December 31, 2003, the Company
has the intent and ability to hold these investments for a period of time
sufficient for them to recover in value.

SECURITIES ON DEPOSIT

At December 31, 2003, fixed income securities with a carrying value of $9.9
million were on deposit with regulatory authorities as required by law.

5. FINANCIAL INSTRUMENTS

In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverables, net) and liabilities (including reserve for
life-contingent contract benefits and deferred income taxes) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income
and cash, are generally of a short-term nature. Their carrying values are deemed
to approximate fair value.

FINANCIAL ASSETS

Fair values of publicly traded fixed income securities are based upon
quoted market prices or dealer quotes. Short-term investments are highly liquid
investments with maturities of less than one year whose carrying values are
deemed to approximate fair value. Separate accounts assets are carried in the
Statements of Financial Position at fair value based on quoted market prices.

FINANCIAL LIABILITIES

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 and immediate annuities without life contingencies are valued at the
present value of future benefits at 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 market value in the financial
statements. Separate accounts liabilities are carried at the fair value of the
underlying assets.

28

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

There were no off-balance-sheet financial instruments at December 31, 2003
or 2002.

6. RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS AND CONTRACTHOLDER FUNDS

At December 31, the reserve for life-contingent contract benefits consists
of the following:

The following table highlights the key assumptions generally used in
calculating the reserve for life-contingent contract benefits:

At December 31, contractholder funds consists of the following:

29

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

The following table highlights the key contract provisions relating to
contractholder funds:

Contractholder funds activity for the years ended December 31 is as
follows:

7. REINSURANCE

The Company has entered into 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
purchases reinsurance to limit aggregate and single losses on large risks. The
Company continues to have primary liability as the direct insurer for risks
reinsured. Estimating the amount of reinsurance recoverable is impacted by many
of the uncertainties involved in the establishment of loss reserves. The Company
cedes a portion of the mortality risk on certain life policies with a pool of
thirteen non-affiliated reinsurers.

Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. Except for ALIC, no single reinsurer had a
material obligation to the Company.

The effects of reinsurance on premiums and contract charges for the years
ended December 31 are as follows:

30

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

The effects of reinsurance on interest credited to contractholder funds,
contract benefits and certain expenses for the years ended December 31 are as
follows:

8. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES

LEASES

The Company leases certain office facilities and computer equipment. Total
rent expense for all leases was $879 thousand, $1.1 million and $1.1 million in
2003, 2002 and 2001, 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, 2003 are as follows:

GUARANTEES

The Company has issued universal life insurance contracts to third parties
who finance the premium payments on the universal life insurance contracts
through a commercial paper program. The Company has issued a repayment guarantee
on the outstanding commercial paper balance that is fully collateralized by the
cash surrender value of the universal life insurance contracts. At December 31,
2003, the amount due under the commercial paper program is $300 million and the
cash surrender value of the policies is $306 million. The repayment guarantee
expires April 30, 2006. These contracts are ceded to ALIC under the terms of the
reinsurance agreements.

In the normal course of business, the Company provides standard
indemnifications to counterparties in contracts in connection with numerous
transactions, including 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. Because the obligated amounts of the indemnifications
are not explicitly stated in many cases, 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.

In addition, the Company indemnifies its directors, officers and other
individuals serving at the request

31

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

of the Company as a director or officer to the extent provided in its charter
and by-laws. Since these indemnifications are generally not subject to
limitation with respect to duration or amount, the Company does not believe that
it is possible to determine the maximum potential amount due under these
indemnifications.

The aggregate liability balance related to all guarantees was not material
as of December 31, 2003.

REGULATION

The Company is subject to changing social, economic and regulatory
conditions. Recent state and federal regulatory initiatives and proceedings have
included efforts to remove barriers preventing banks from engaging in the
securities and insurance businesses, change tax laws affecting the taxation of
insurance companies and the tax treatment of insurance products or competing
non-insurance products that may impact the relative desirability of various
personal investment products and otherwise expand overall regulation of
insurance products and the insurance industry. The ultimate changes and eventual
effects of these initiatives on the Company's business, if any, are uncertain.

LEGAL 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 below.

AIC is defending various lawsuits involving worker classification issues.
These lawsuits include a number of putative class actions and one certified
class action challenging the overtime exemption claimed by AIC under the Fair
Labor Standards Act or state wage and hour laws. These class actions mirror
similar lawsuits filed recently against other carriers in the industry and other
employers. A putative nationwide class action filed by former employee agents
also includes a worker classification issue; these agents are challenging
certain amendments to the Agents Pension Plan and are seeking to have exclusive
agent independent contractors treated as employees for benefit purposes. AIC has
been vigorously defending these and various other worker classification
lawsuits. The outcome of these disputes is currently uncertain.

AIC is also defending certain matters relating to its agency program
reorganization announced in 1999. These matters include an investigation by the
U.S. Department of Labor and a lawsuit filed in December 2001 by the U.S. Equal
Employment Opportunity Commission ("EEOC") with respect to allegations of
retaliation under the Age Discrimination in Employment Act, the Americans with
Disabilities Act and Title VII of the Civil Rights Act of 1964. A putative
nationwide class action has also been filed by former employee agents alleging
various violations of ERISA, breach of contract and age discrimination. AIC has
been vigorously defending these lawsuits and other matters related to its agency
program reorganization. In addition, AIC is defending certain matters relating
to its life agency program reorganization announced in 2000. These matters
include an investigation by the EEOC with respect to allegations of age
discrimination and retaliation. AIC is cooperating fully with the agency
investigation and will continue to vigorously defend these and other claims
related to the life agency program reorganization. The outcome of these disputes
is currently uncertain.

The Company is currently defending a nationwide class action alleging,
among other things, breach of contract and breach of the implied covenant of
good faith and fair dealing as a result of a change in the rate and cap on an
annuity product. The court certified the class and entered summary judgment in
favor of the Company and against the certified class. Plaintiff filed notice of
appeal and the Company filed a cross appeal. The outcome of the appeal is
currently uncertain. The Company has been vigorously defending this suit.

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 an increasing
number of lawsuits, some of which involve claims for substantial or
indeterminate amounts. This litigation is based on a variety of issues including
insurance and claim settlement practices. The outcome of these disputes is
currently unpredictable. However, at this time, based on their present status
and the existence of the reinsurance agreement with ALIC, it is the opinion of
management that the ultimate liability, if any, in one or more of these other
actions in excess of amounts currently reserved is not

32

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

expected to have a material effect on the results of operations, liquidity or
financial position of the Company.

9. INCOME TAXES

The Company joins the Corporation and its other eligible domestic
subsidiaries (the "Allstate Group") in the filing of a consolidated federal
income tax return and is party to a federal income tax allocation agreement (the
"Allstate Tax Sharing Agreement"). Under the Allstate Tax Sharing Agreement, the
Company pays to or receives from the Corporation the amount, if any, by which
the Allstate Group's federal income tax liability is affected by virtue of
inclusion of the Company in the consolidated federal income tax return. The
Company has also entered into a supplemental tax sharing agreement with respect
to reinsurance ceded to ALIC to allocate the tax benefits and detriments related
to such reinsurance. Effectively, these agreements result in the Company's
annual income tax provision being computed as if the Company filed a separate
return, adjusted for the reinsurance ceded to ALIC.

The Internal Revenue Service ("IRS") has completed its review of the
Allstate Group's federal income tax returns through the 1996 tax year. Any
adjustments that may result from IRS examinations of tax returns are not
expected to have a material impact on the financial position, liquidity or
result of operations of the Company.

The components of the deferred income tax assets and liabilities at
December 31 are as follows:

(IN THOUSANDS)

The components of income tax expense for the years ended December 31 are as
follows:

The Company paid income taxes of $4.3 million, $8.0 million and $2.8
million in 2003, 2002 and 2001, respectively.

A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the years ended December 31 is as
follows:

Prior to January 1, 1984, the Company was entitled to exclude certain
amounts from taxable income and accumulate such amounts in a "policyholder
surplus" account. The balance in this account at

33

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

December 31, 2003, approximately $340 thousand, will result in federal income
taxes payable of $119 thousand if distributed by the Company. No provision for
taxes has been made as the Company has no plan to distribute amounts from this
account. No further additions to the account have been permitted since 1983.

10. STATUTORY FINANCIAL INFORMATION

The following table reconciles net income for the years ended December 31,
and shareholder's equity at December 31, as reported herein in conformity with
GAAP with total statutory net income and capital and surplus of the Company,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities:

The Company prepares its statutory-basis financial statements in conformity
with accounting practices prescribed or permitted by the State of Nebraska.
Effective January 1, 2001, the State of Nebraska required insurance companies
domiciled in its state to prepare statutory-basis financial statements in
conformity with the National Association of Insurance Commissioner ("NAIC")
Accounting Practices and Procedures Manual ("Codification"), subject to any
deviations prescribed or permitted by the State of Nebraska insurance
commissioner.

DIVIDENDS

The ability of the Company to pay dividends is dependent on business
conditions, income, cash requirements of the Company and other relevant factors.
The amount of dividends that can be paid to the shareholder without approval by
the state insurance regulator is limited by specific surplus and net income
criteria as provided in the dividend restriction provision of the Nebraska
Insurance Holding Company System laws. The maximum amount of dividends that the
Company can distribute during 2004 without prior approval of the Nebraska
Department of Insurance is $20.0 million.

RISK-BASED CAPITAL

The NAIC has a standard for assessing the solvency of insurance companies,
which is referred to as risk-based capital ("RBC"). The requirement consists of
a formula for determining each insurer's RBC and a model law specifying
regulatory actions if an insurer's RBC falls below specified levels. At December
31, 2003, RBC for the Company was above a level that would require regulatory
action.

34

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

11. OTHER COMPREHENSIVE INCOME

The components of other comprehensive income on a pretax and after-tax
basis for the years ended December 31 are as follows:

(IN THOUSANDS)

35

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
LINCOLN BENEFIT LIFE COMPANY:

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, 2003 and 2002, 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, 2003. Our audits also included Schedule I
- - Summary of Investments - Other Than Investments In Related Parties and
Schedule IV - Reinsurance. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, Schedule I - Summary of Investments - Other Than Investments in Related
Parties and Schedule IV - Reinsurance, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

/s/ Deloitte & Touche LLP

Chicago, Illinois
February 4, 2004

36

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

With the participation of our principal executive officer and principal
financial officer, we carried out an evaluation of the effectiveness of the
design and operation 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 timely alerting them to
material information required to be included in our periodic reports filed with
the Securities and Exchange Commission. However, the design of any system of
controls and procedures is based in part upon assumptions about the likelihood
of future events and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and are effective at the
"reasonable assurance" level.

During the fiscal quarter ended December 31, 2003, there have been 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.

PART III

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

(1), (2), (3), (4) AND (5)(ii) DISCLOSURE OF FEES -

The following fees have been, or will be, billed by Deloitte & Touche LLP,
the member firms of Deloitte & Touche Tohmatsu, and their respective affiliates,
for professional services rendered to us for the fiscal year ending December 31,
2003 and 2002.

(a) Fees for audits of annual financial statements including financial
statements for the separate accounts, reviews of quarterly financial
statements, statutory audits, consents and review of documents filed
with the Commission. These fees are ceded to ALIC under the Company's
reinsurance agreements with ALIC.

(5)(i) AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES -

The Audit Committee of The Allstate Corporation has established
pre-approval policies and procedures for itself and its consolidated
subsidiaries, including the registrant. Those policies and procedures are
incorporated into this Item 14.5(i) by reference to Appendix D to The Allstate
Corporation's Notice of Annual Meeting and Proxy Statement dated March 26, 2004.
The Board of Directors of ALIC has recently formed an audit committee, which
will be responsible for these matters in the future as they relate to ALIC and
its subsidiaries, including the registrant.

37

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) The following financial statements, notes thereto and related
information of Lincoln Benefit are included in Item 8.

Statements of Operations and Comprehensive Income
Statements of Financial Position
Statements of Shareholder's Equity
Statements of Cash Flows
Notes to Financial Statements
Independent Auditors' Report

(2) The following additional financial statement schedules are furnished
herewith pursuant to the requirements of Form 10-K.

All other schedules have been omitted because they are not applicable or
required or because the required information is included in the financial
statements or notes thereto.

(3) The following is a list of the exhibits filed as part of this Form
10-K.

38

10.4 Amendment No.1 to Cash Management Services Master Agreement
effective January 5, 2001. Incorporated herein by reference
to Exhibit 10.5 to Lincoln Benefit Life Company's Quarterly
Report on Form 10-Q for quarter ended March 31, 2002.

10.5 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 quarter ended
March 31, 2002.

10.6 Administrative Services Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company dated
October 1, 1996. Incorporated herein by reference to Exhibit
10.1 to Lincoln Benefit Life Company's Quarterly Report on
Form 10-Q for quarter ended June 30, 2002.

10.7 Administrative Services Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company effective
February 1, 1998. Incorporated herein by reference to
Exhibit 10.2 to Lincoln Benefit Life Company's Quarterly
Report on Form 10-Q for quarter ended June 30, 2002.

10.8 Service Agreement between Lincoln Benefit Life Company and
Allstate Financial Services, LLC effective April 1, 1998.
Incorporated herein by reference to Exhibit 10.3 to Lincoln
Benefit Life Company's Quarterly Report on Form 10-Q for
quarter ended June 30, 2002.

10.9 Administrative Services Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company,
effective September 1, 1998 and as amended effective June
19, 2000. Incorporated herein by reference to Exhibit 10.4
to Lincoln Benefit Life Company's Quarterly Report on Form
10-Q for quarter ended June 30, 2002.

10.10 Administrative Service Agreement between Lincoln Benefit
Life Company and ALFS, Inc., effective December 1, 1998.
Incorporated herein by reference to Exhibit 10.5 to Lincoln
Benefit Life Company's Quarterly Report on Form 10-Q for
quarter ended June 30, 2002.

10.11 Principal Underwriting Agreement between Lincoln Benefit
Life Company and ALFS, Inc., effective November 25, 1998.
(Variable Universal Life Account). Incorporated herein by
reference to Exhibit 10.6 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for quarter ended June 30,
2002.

10.12 Principal Underwriting Agreement between Lincoln Benefit
Life Company and ALFS, Inc., effective November 25, 1998.
(Variable Annuity Account). Incorporated herein by reference
to Exhibit 10.7 to Lincoln Benefit Life Company's Quarterly
Report on Form 10-Q for quarter ended June 30, 2002.

10.13 Selling Agreement between Lincoln Benefit Life Company,
ALFS, Inc. (f/k/a Allstate Life Financial Services, Inc.)
and Allstate Financial Services, LLC (f/k/a LSA Securities,
Inc.) effective August 2, 1999. Incorporated herein by
reference to Exhibit 10.8 to Allstate Life Insurance
Company's Annual Report on Form 10-K for 2003. (SEC File
No. 000-31248)

10.14 Coinsurance Agreement between Allstate Life Insurance
Company and Lincoln Benefit Life Company, effective December
31, 2001. Incorporated herein by reference to Exhibit 10.11
to Lincoln Benefit Life Company's Quarterly Report on Form
10-Q for quarter ended June 30, 2002.

10.15 Modified Coinsurance Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company,
effective December 31, 2001. Incorporated herein by
reference to Exhibit 10.12 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for quarter ended June 30,
2002.

10.16 Modified Coinsurance Agreement between Allstate Life
Insurance Company and Lincoln Benefit Life Company,
effective December 31, 2001. Incorporated herein by
reference to Exhibit 10.13 to Lincoln Benefit Life Company's
Quarterly Report on Form 10-Q for quarter ended June 30,
2002.

39

23 Independent Auditors' Consent.

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

(b) No reports on Form 8-K were filed during the fourth quarter of 2003.

(c) The exhibits are listed in Item 15. (a) (3) above.

(d) The financial statement schedules are listed in Item 15. (a) (2) above.

40

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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)

March 24, 2004 /s/ Samuel H. Pilch
--------------------
By: Samuel H. Pilch
(chief accounting officer and duly authorized officer
of the registrant)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

41

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

All of the outstanding common stock of the Company is owned by Allstate
Life Insurance Company. The Company has not provided any of the following items
to security holders:

(1) annual reports to security holders covering the registrant's last
fiscal year; or
(2) proxy statements, forms of proxy or other proxy soliciting
materials.

42

LINCOLN BENEFIT LIFE COMPANY
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENT
IN RELATED PARTIES
DECEMBER 31, 2003

S-1

LINCOLN BENEFIT LIFE COMPANY
SCHEDULE IV--REINSURANCE

(IN THOUSANDS)

S-2