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, 2004

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, 2005, the Registrant had 25,000 common shares, $100 par value,
outstanding, all of which are held by Allstate Life Insurance Company.

TABLE OF CONTENTS

* 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 stock life insurance company incorporated under the laws of the
State of Illinois. ALIC is 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" or "Allstate"), 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, Allstate provides
insurance products to more than 16 million households and has approximately
13,600 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 2003 statutory premiums
earned. In addition, it is the nation's 12th largest life insurance business
on the basis of 2003 ordinary life insurance in force and 19th largest on the
basis of 2003 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.

We provide life insurance, retirement and investment products to
individuals. Our mission is to assist financial services professionals in
meeting their clients' 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 current business profitably:
maintain and develop focused, top-tier products; deepen distribution partner
relationships; improve our cost structure; and advance our systematic risk
management program. Our retail products include interest-sensitive and
traditional life insurance, variable life insurance, variable and fixed
annuities and accident and health insurance. Products are sold through a variety
of distribution channels including Allstate exclusive agencies, independent
agents (including master brokerage agencies and workplace enrolling agents) and
broker/dealers.

We cede 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.

Under agreements with ALIC, all business not reinsured to non-affiliated
reinsurers is ceded to ALIC. Premiums, contract charges, interest credited to
contractholder funds, contract benefits and certain expenses of substantially
all general account contracts are reinsured by ALIC. Assets that support general
account product 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.

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

The market for life insurance, annuities and personal financial products
continues to be highly fragmented and competitive. As of December 31, 2004,
there were approximately 770 groups of life insurance companies in the United
States, most of which offered one or more similar products. In addition, because
many of these products include a savings or investment component, our
competition includes domestic and foreign 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, as well as consolidation activity in the financial
services industry.

1

Lincoln Benefit is subject to extensive regulation, primarily at the
state level. The method, extent and substance of such regulation varies by
state but generally has its source in statutes that establish standards and
requirements for conducting the business of insurance and that delegate
regulatory authority to a state regulatory agency. In general, such
regulation is intended for the protection of those who purchase or use our
insurance products. 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 and compensation, 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 of
the Financial Statements. For discussion of regulatory contingencies, see
Note 8 of 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. 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 specific
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

Information for Item 3 is incorporated by reference to the discussion under
the headings "Regulation" and "Legal proceedings" in Note 8 of our financial
statements.

PART II

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

No established public trading market exists 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, we have not sold
or repurchased any of our equity securities.

From January 1, 2003 through March 15, 2005, we paid no dividends on our
common stock to ALIC.

For additional information on dividends, including restrictions on the
payment of dividends, see the discussion under the heading "Dividends" in Note
10 of our financial statements, which is incorporated herein by reference.

2

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 LIFE COMPANY
(REFERRED TO IN THIS DOCUMENT AS "WE", "LINCOLN BENEFIT", "OUR", "US" OR THE
"COMPANY"). IT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND
RELATED NOTES FOUND UNDER PART II ITEM 8 HEREIN. 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, ceded to ALIC, and invested
assets;
- For Investments: credit quality/experience, stability of long-term
returns, cash flows and asset duration;
- For financial condition: our financial strength ratings and capital
position;
- For product distribution: profitably growing distribution partner
relationships and Allstate agent sales of our products and services,
which we cede to ALIC under the terms of the reinsurance agreements.

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.

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 in 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 a significant unrealized loss position, including market
conditions which could affect liquidity. Additionally, once assumptions and
estimates are made, any number of changes in facts and circumstances could cause
us to later determine that an impairment is other than temporary, including 1)
general economic conditions that are worse than previously 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 additional
charges to earnings in future periods to the extent that losses are realized.
The charge to earnings, while potentially significant to net income, would not
have a significant effect on shareholder's equity since 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.

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

3

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.

OPERATIONS

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" or "Allstate"). ALIC, along with Lincoln Benefit and its
other wholly owned subsidiaries provide life insurance, retirement and
investment products to individual customers.

Our mission is to assist financial services professionals in meeting their
clients' 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 current business profitably:
maintain and develop focused, top-tier products; deepen distribution partner
relationships; improve our cost structure; and advance our systematic risk
management program.

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 decreased 1.4% in 2004 compared to 2003 and increased 51.1% in 2003
compared to 2002. The decrease in 2004 was due to decreases in net investment
income and realized capital gains, partially offset by lower income tax expense.
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.

NET INVESTMENT INCOME decreased 1.7% in 2004 compared to 2003 and decreased 1.6%
in 2003 compared to 2002. The decrease in both periods was due to lower
portfolio yields, partially offset by higher portfolio balances resulting from
capital contributions from ALIC. Investment balances as of December 31, 2004,
increased 30.0% from December 31, 2003 and increased 3.8% as of December 31,
2003 compared to 2002. The lower portfolio yields were primarily due to
purchases, including reinvestment, of fixed income securities with yields lower
than the current portfolio average.

NET REALIZED CAPITAL GAINS decreased $68 thousand in 2004 compared to the same
period in 2003 primarily due to dispositions of fixed income securities. Net
realized capital gains were $73 thousand in 2003 compared to realized capital
losses of $4.1 million in 2002. The increase in 2003 was primarily due to
realized gains from dispositions of fixed income securities compared to recorded
write-downs in 2002. For further discussion of realized capital gains and losses
see Net Realized Capital Gains and Losses section of the MD&A.

4

FINANCIAL POSITION

(IN THOUSANDS)

(1) Fixed income securities are carried at fair value. Amortized cost for
these securities was $234.4 million and $197.9 million at December 31,
2004 and 2003, respectively.

Total investments increased to $273.2 million at December 31, 2004 from
$210.2 million at December 31, 2003 primarily due to a capital contribution from
ALIC. At December 31, 2004, unrealized gains on fixed income securities
decreased to $8.4 million from $11.2 million at December 31, 2003.

FIXED INCOME SECURITIES

See Note 4 of the financial statements for a table showing the amortized cost,
unrealized gains, unrealized losses and fair value for each type of fixed income
security for the years ended December 31, 2004 and 2003.

Municipal bonds, including tax-exempt and taxable securities, totaled $564
thousand at December 31, 2004, all of which were rated investment grade. The
municipal bond portfolio was insured by one bond insurer and accordingly had a
Moody's rating of Aaa.

Corporate bonds totaled $83.9 million and all were rated as investment
grade at December 31, 2004.

Mortgage-backed securities ("MBS") totaled $29.5 million at December 31,
2004, all of which were investment grade. In our MBS portfolio, the credit risk
associated with MBS is mitigated due to the fact that 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 subject to interest rate risk since price volatility and ultimate
realized yield are affected by the rate of prepayment of the underlying
mortgages. The current consistently low interest rate environment has resulted
in prepayments, which have eroded the prepayment protection in this portfolio
over recent years.

Commercial Mortgage-backed securities ("CMBS") totaled $26.5 million at
December 31, 2004. CMBS positions primarily represent pools of commercial
mortgages, broadly diversified across property types and geographical area. The
CMBS portfolio is subject to credit risk, but unlike other structured assets are
generally not subject to prepayment risk. Due to protections within the
underlying commercial mortgages, borrowers are restricted from prepaying their
mortgages due to changes in interest rates. Credit defaults can result in credit
directed prepayments. All securities in the CMBS portfolio had a Moody's rating
of Aaa or a Standard & Poor's ("S&P") rating of AAA, the highest rating
category, at December 31, 2004.

Asset-backed securities ("ABS") totaled $16.2 million at December 31, 2004.
Our ABS portfolio is subject to credit and interest rate risk. Credit risk is
managed by monitoring the performance of the collateral. In addition, many of
the securities in the ABS portfolio are credit enhanced with features such as
over-collateralization, subordinated debt, reserve funds, guarantees and/or
insurance. All securities in the ABS portfolio had a Moody's rating of Aaa or a
S&P's rating of AAA. A portion of the ABS portfolio is also subject to interest
rate risk since, for example, price volatility and ultimate realized yield are
affected by the rate of repayment of the underlying assets. The ABS portfolio
includes collateralized debt obligations and other bonds that are secured by a
variety of asset types, predominately rail roads.

At December 31, 2004, all securities in the fixed income portfolio were
rated investment grade, which is

5

defined as a security having a rating from The National Association of Insurance
Commissioners ("NAIC") of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody's or
a rating of AAA, AA, A or BBB from S&P, Fitch or Dominion; or a comparable
internal rating if an externally provided rating is not available.

The following table summarizes the credit quality of the fixed income
securities portfolio at December 31, 2004.

(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 whether they are not other than temporarily impaired.
The unrealized net capital gains on fixed income securities at December 31, 2004
totaled $8.4 million, a decrease of $2.8 million or 25.0% since December 31,
2003. Gross unrealized losses on fixed income securities are provided in the
table below.

The capital goods and transportation sectors had the highest concentration
of unrealized losses in our corporate fixed income securities portfolio at
December 31, 2004. 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, 2004.

6

The following table shows the composition by credit quality of fixed income
securities with gross unrealized losses at December 31, 2004.

At December 31, 2004, all of the gross unrealized losses were related to
investment grade fixed income securities. Unrealized losses on investment grade
securities principally relate to changes in interest rates or changes in
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, 2004 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 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, 2004, we did not have any fixed income securities
categorized as problem, restructured or potential problem.

7

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.

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

SHORT-TERM INVESTMENTS Our short-term investment portfolio was $30.4 million and
$1.1 million at December 31, 2004 and 2003, respectively. We invest available
cash balances primarily in taxable short-term securities having a final maturity
date or redemption date of less than one year.

CASH At December 31, 2004, the cash balance was $10.5 million compared to $23.5
million at December 31, 2003. The decrease is primarily a result of timing
differences between when deposits from fixed annuity sales were received and
when those deposits were transferred to ALIC under our reinsurance agreements.

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,
reserve 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, 2004, contractholder funds increased to $16.23 billion from
$13.80 billion at December 31, 2003 as a 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 $195.4 million to $1.67 billion at
December 31, 2004 resulting from sales of 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 $2.49 billion and $146.8 million,
respectively.

We purchase reinsurance after evaluating the financial condition of the
reinsurer, as well as the terms and price of coverage. We reinsure certain of
our risks to non-affiliated reinsurers under yearly renewable term and
coinsurance agreements. Yearly renewable term and coinsurance agreements result
in 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.
At December 31, 2004, approximately 99% of 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 S&P. In certain
cases, these ratings refer to the financial strength of the affiliated group or
parent company of the reinsurer.

8

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. No amounts have
been deemed unrecoverable in the three-years ended December 31, 2004.

SEPARATE ACCOUNTS Separate accounts assets and liabilities increased 23.9% to
$2.37 billion at December 31, 2004 compared to the December 31, 2003 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 2003, 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
or account value upon death, a specified contract anniversary date, or
annuitization, variable annuity and variable life insurance contractholders bear
the investment risk that the separate accounts' 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 reinsurance
agreements.

9

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 policies define the overall framework for managing market
and other investment risks, including accountability and control over these risk
management activities. In addition, we follow policies 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 profile, and
regulatory requirements. Oversight activities are conducted primarily through
our board of directors.

We manage our exposure to market risk through the use of asset allocation
and duration limits and, as appropriate, through the use of stress tests. We
have asset allocation limits that place restrictions on the total funds that may
be invested within an asset class. We have duration limits on our investment
portfolio, and, as appropriate, on individual components of the portfolio. These
duration limits place restrictions on the amount of interest rate risk that may
be taken. Comprehensive day-to-day management of market risk within defined
tolerance ranges occurs as portfolio managers buy and sell within their
respective markets based upon the acceptable boundaries established by the
investment policies.

INTEREST RATE RISK is the risk that we will incur 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 price sensitivity of assets to changes in interest rates. For
example, if interest rates increase by 100 basis points the fair value of an
asset exhibiting a duration of 5 is expected to decrease in value by
approximately 5%. Our asset duration was approximately 5.0 at both December 31,
2004 and December 31, 2003.

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 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, 2004, 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 $11.8 million
compared to $10.5 million at December 31, 2003. 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 the general levels of the equity markets.

At December 31, 2004 and 2003, we had separate account assets related to
variable annuities and variable life contracts with account values totaling
$2.37 billion and $1.91 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 $3.2 million and $2.4 million less in fee revenue at December 31,
2004 and 2003, respectively, 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, guaranteed
minimum income benefits ("GMIB") prior to 2004, a

10

TrueReturn(SM) guaranteed minimum accumulation benefit ("GMAB") beginning in
2004, and beginning in 2005, a SureIncome(SM) guaranteed minimum withdrawal
benefit ("GMWB"). These guarantees subject us to additional equity market risk
because the beneficiary or contractholder may receive a benefit that is greater
than their corresponding account value, which would be ceded to ALIC. GMDBs are
payable upon death. GMIBs may be exercised on or after the ten-year anniversary
(not prior to 2008) of the contract if the contractholder elects to receive a
defined stream of payments ("annuitize"). GMABs are credited to the
contractholder account on a contract anniversary date that is pre-determined by
the contractholder, between the eighth and twentieth year contract issue (not
prior to 2012). 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 allocation requirements. GMWB's will
be payable if the contractholder elects to take partial withdrawals. GMWB's
guarantee that the contractholder can take annual partial withdrawals up to 8%
of the amount deposited in the contract until their withdrawals total the
initial deposit. All variable annuity contract charges and fees, liabilities and
benefits, including the GMDBs, GMIBs, GMABs and GMWBs are ceded to ALIC in
accordance with the reinsurance agreements, 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 $55.2 million during the year ended December 31,
2004 when compared to December 31, 2003, due to net income of $7.3 million and a
cash capital contribution of $49.7 million partially offset by a decrease in
unrealized net capital gains of $1.8 million. Shareholder's equity increased
during 2003 due to net income of $7.4 million and non-cash capital contribution
of $3.6 million partially offset by a decrease in unrealized net capital gains
of $3.6 million.

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+g by Moody's, Standard & Poor's and
A.M. Best, respectively, at December 31, 2004.

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 2004, A.M. Best
revised the outlook to stable from positive for the insurance financial strength
ratings of the Company, ALIC and certain rated ALIC 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 annually assessing RBC. The formula for
calculating RBC takes into account factors relating to insurance, business,
asset and interest rate risks. At December 31, 2004, 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

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
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
Tax payments/settlements
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), contract maturities,
contract surrenders and withdrawals and certain operating costs (excluding
investment-related expenses), are also or will be 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
programs.

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 2005 without prior approval of the Nebraska Department of Insurance is
$25.3 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 Company under
the intercompany loan agreement at December 31, 2004 or 2003, 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

CONTRACTUAL OBLIGATIONS

Due to the reinsurance agreements that we have in place, our contractual
obligations are ceded to ALIC and other non-affiliated reinsurers.

REGULATION AND LEGAL PROCEEDINGS

We are subject to extensive regulation and we are involved in various
legal and regulatory actions, all of which have an effect on specific aspects of
our business. For a detailed discussion of the legal and regulatory actions in
which we are involved, see Note 8 of the financial statements.

PENDING ACCOUNTING STANDARDS

As of December 31, 2004, there are pending accounting standards that we
have not implemented either because the standard has not been finalized or
the implementation date has not yet occurred. For a discussion of these
pending 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 of the standard 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 Securities and Exchange Commission ("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.

CHANGES IN UNDERWRITING AND ACTUAL EXPERIENCE COULD MATERIALLY AFFECT
PROFITABILITY OF BUSINESS CEDED TO ALIC.

Our product pricing includes long-term assumptions regarding investment
returns, mortality, morbidity, persistency and operating costs and expenses of
the Company which are ceded to ALIC. Management establishes target returns for
each product based upon these factors and the average amount of regulatory and
rating agency capital that the Company must hold to support in-force contracts.
We monitor and manage our pricing and overall sales mix to achieve target
returns on a portfolio basis. Profitability from new business emerges over a
period of years depending on the nature and life of the product and is subject
to variability as actual results may differ from pricing assumptions.

ALIC's profitability depends on the adequacy of investment margins, the
management of market and credit risks associated with investments, our ability
to maintain premiums and contract charges at a level adequate to cover mortality
and morbidity benefits, the adequacy of contract charges on variable contracts
to cover the costs

13

of various product features, the persistency of policies to ensure recovery of
acquisition expenses, and the management of operating costs and expenses within
anticipated pricing allowances. Legislation and regulation of the insurance
marketplace and products could also affect ALIC's profitability.

CHANGES IN RESERVE ESTIMATES MAY REDUCE PROFITABILITY OF BUSINESS CEDED TO ALIC

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 the adequacy
of these reserves on an aggregate basis and if future experience differs
significantly 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 low levels, proceeds from investments that have matured, prepaid or
been sold may be reinvested at lower yields, reducing investment margin.
Lowering interest crediting rates can offset decreases in investment margin on
some products. However, these changes could be limited by market conditions,
regulatory 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 investment
asset values are lower as a result of the increase in interest rates. For
certain products, principally fixed annuity and interest-sensitive life
products, the earned rate on assets could lag behind market yields. ALIC may
react to market conditions by increasing crediting rates, which could narrow
spreads. 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 the 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 the
sale and profitability of variable annuities. 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, GMAB and GMWB 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. 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, VARIABLE PRODUCTS
AND INVESTMENT CONTRACTS 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 mortality, investment margin,
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 and the financial condition of 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.

14

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 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. 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 a material adverse effect on
ALIC's financial position or our ability to sell such products and could result
in the surrender of some existing contracts and policies. In addition, 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. Our competitors include other
insurers and, because many of our products include a savings or investment
component, securities firms, investment advisers, mutual funds, banks and other
financial institutions. 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. 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.

WE ARE SUBJECT TO MARKET RISK AND SO CHANGING INTEREST RATES AND DECLINES IN
CREDIT QUALITY MAY HAVE ADVERSE EFFECTS

Our investment portfolios are subject to market risk, the risk that we will
incur losses, due to adverse changes in interest rates. For additional
information on market risk, see the "Market Risk" section of MD&A.

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. 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.

CONCENTRATION OF OUR INVESTMENT PORTFOLIOS IN ANY PARTICULAR SEGMENT OF THE
ECONOMY MAY HAVE ADVERSE EFFECTS

The concentration of our investment portfolios in any particular industry,
group of related industries or geographic sector could have an adverse effect on
our investment portfolios and consequently on our results of operations and
financial position. Events or developments that have a negative impact on any
particular industry, group of related industries or geographic sector may have a
greater adverse effect on the investment portfolios to the extent that the
portfolios are concentrated rather than diversified.

WE MAY SUFFER LOSSES FROM LITIGATION

As is typical for a large insurance group, the Allstate group, is involved
in a substantial amount of litigation, including class action litigation
challenging a range of company practices. Our litigation exposure could result
in a material adverse effect on 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 legal proceedings, see Note 8 of the financial statements.

15

WE ARE SUBJECT TO EXTENSIVE REGULATION AND POTENTIAL FURTHER RESTRICTIVE
REGULATION MAY INCREASE OUR OPERATING COSTS AND LIMIT OUR GROWTH

As an insurance company, we are subject to extensive laws and
regulations. These laws and regulations are complex and subject to change.
Moreover, they are administered and enforced by a number of different
governmental authorities, including state insurance regulators, state
securities administrators, the SEC, the National Association of Securities
Dealers, the U.S. Department of Justice, and state attorneys general, each of
which exercises a degree of interpretive latitude. Consequently, we are
subject to the risk that compliance with any particular regulator's or
enforcement authority's interpretation of a legal issue may not result in
compliance with another regulator's or enforcement authority's interpretation
of the same issue, particularly when compliance is judged in hindsight. In
addition, there is risk that any particular regulator's or enforcement
authority's interpretation of a legal issue may change over time to our
detriment, or that changes in the overall legal environment may, even absent
any particular regulator's or enforcement authority's interpretation of a
legal issue changing, cause us to change our views regarding the actions we
need to take from a legal risk management perspective, thus necessitating
changes to our practices that may, in some cases, limit our ability to grow
and improve the profitability of our business ceded to ALIC. Furthermore, in
some cases, these laws and regulations are designed to protect the interests
of a specific constituency rather than a range of constituencies. For
example, state insurance laws and regulations are generally intended to
protect purchasers or users of insurance products, not holders of securities.
In many respects, these laws and regulations limit our ability to grow and
improve the profitability of business ceded to ALIC.

In recent years, the state insurance regulatory framework has come under
public scrutiny and members of Congress have discussed proposals to provide for
optional federal chartering of insurance companies. We can make no assurances
regarding the potential impact of state or federal measures that may change the
nature or scope of insurance regulation.

REINSURANCE MAY BE UNAVAILABLE AT HISTORICAL LEVELS AND PRICES WHICH 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 at prices that we consider acceptable, either ALIC
would have to accept an increase in net liability exposure or we would have to
reduce our 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
operating results ceded to ALIC.

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. Additionally, 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 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 change in an
insurer's statutory capital; a change in a rating agency's determination of the
amount of risk-adjusted capital required to maintain a particular rating; an
increase in the

16

perceived risk of an insurer's investment portfolio; a reduced confidence in
management or a host of other considerations that may or may not be under the
insurer's control. The insurance financial strength ratings of AIC, ALIC and
the Company are A+, AA and Aa2 (from A.M. Best, Standard & Poor's and
Moody's, respectively). Several other affiliates of the Corporation have been
assigned their own financial strength ratings by one or more rating agencies.
Because all of these ratings are subject to continuous review, the retention
of these ratings cannot be assured. A multiple level downgrade in any of
these ratings could have a material adverse effect on our sales, our
competitiveness and marketability of our product offerings impacting our
liquidity, 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 operating results and that which are
ceded to ALIC. For a description of potential changes in accounting standards
that could affect us currently, see Note 2 of the financial statements.

THE OCCURRENCE OF EVENTS UNANTICIPATED IN OUR DISASTER RECOVERY SYSTEMS AND
MANAGEMENT CONTINUITY PLANNING COULD IMPAIR OUR ABILITY TO CONDUCT BUSINESS
EFFECTIVELY

In the event of a disaster such as a natural catastrophe, an industrial
accident, a terrorist attack or war, events unanticipated in our disaster
recovery systems could have an adverse impact on our ability to conduct business
and on our results of operations ceded to ALIC and financial condition,
particularly if those events affect our computer-based data processing,
transmission, storage and retrieval systems. In the event that a significant
number of our managers could be unavailable in the event of a disaster, our
ability to effectively conduct our business could be severely compromised.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required for Item 7A is incorporated by reference to the
material under the caption "Market Risk" in Part II, Item 7 of this report.

17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

See notes to financial statements.

18

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF FINANCIAL POSITION

See notes to financial statements.

19

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY

See notes to financial statements.

20

LINCOLN BENEFIT LIFE COMPANY
STATEMENTS OF CASH FLOWS

See notes to financial statements.

21

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 2004 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 Company sells life insurance, retirement and investment products to
individual customers through several distribution channels. The principal
products are deferred and immediate fixed annuities, variable annuities,
interest sensitive-life and traditional life insurance, variable life insurance
and accident and health insurance.

The Company is authorized to sell life insurance, retirement and investment
products in all states except New York, as well as in the District of Columbia,
Guam and the U.S. Virgin Islands. For 2004, 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 the reinsurance agreements.

The Company distributes its products through multiple intermediary
distribution channels, including Allstate Exclusive Agencies, independent
agents, banks and broker-dealers. The Company sells products through
independent agents affiliated with master brokerage agencies. Although the
Company currently benefits from agreements with financial services entities
that market and distribute its products, change in control of these
non-affiliated entities could negatively impact the Company's sales.

The Company monitors economic and regulatory developments that have the
potential to impact its business. The ability of banks to affiliate with
insurers may have a material adverse effect on all of the Company's product
lines by substantially increasing the number, size and financial strength of
potential competitors. 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. 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 and ALIC's
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.

22

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVESTMENTS

Fixed income securities include bonds, mortgage-backed, commercial
mortgage-backed and asset-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. Periodic changes in fair values, net of
deferred income taxes, are reflected as a component of other comprehensive
income. Cash received from calls, principal payments and make-whole payments is
reflected as a component of proceeds from sales. Cash received from maturities
and pay-downs is reflected as a component of investment collections. 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, commercial 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, fixed income securities that are
classified as other than temporarily impaired in the period the security is
deemed to be other than temporarily impaired (see Note 4).

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 provide insurance protection
over a period that extends beyond the period during which premiums are
collected. Premiums from these products are recognized as revenue when due, at
the inception of the contract. Benefits and expenses are recognized in relation
to such revenue such that profits are recognized over the lives of the
contracts.

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,
including 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 maintenance,
administration and surrender of the contract prior to contractually specified
dates, and are recognized when assessed against contractholder account balance.
Certain variable annuity contracts include embedded derivatives that are
separated from the host instrument and accounted for as derivative financial
instruments

23

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

("subject to bifurcation"). The change in the fair value of derivatives embedded
in liabilities and subject to bifurcation is reported in contract benefits and
is ceded to ALIC under the reinsurance agreements.

Interest credited to contractholder funds represents interest accrued or
paid for interest-sensitive life contracts and investment contracts. Crediting
rates for certain fixed annuities and interest-sensitive life contracts are
adjusted periodically by the Company to reflect current market conditions
subject to contractually guaranteed minimum rates.

Separate account products include variable annuities and variable life
insurance contracts. The assets supporting these products are legally segregated
and available only to settle separate account 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, administration, mortality, expense and early
surrender. Contract benefits incurred include guaranteed minimum death, income
and accumulation benefits included on variable annuity and life insurance
contracts.

REINSURANCE RECOVERABLES

The Company has reinsurance agreements whereby the Company cedes 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,
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. The remaining amounts are ceded to ALIC.

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 the reinsurance agreements.

The Company has a reinsurance treaty through which it cedes guaranteed
minimum accumulation benefits ("GMAB's") to ALIC. The terms of this reinsurance
treaty meet the definition of a derivative under Statement of Financial
Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities". Accordingly, the treaty is recorded in the Statement of
Financial Position at fair value.

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 fixed income securities. A deferred tax
asset valuation allowance is established when there is uncertainty that such
assets would be realized.

RESERVE FOR LIFE-CONTINGENT CONTRACT BENEFITS

The reserve for life-contingent contract benefits, which relates to
traditional life, immediate annuities with life contingencies and accident and
health insurance, 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 represent interest-bearing liabilities arising from
the sale of products, such as interest-sensitive life, fixed annuities and
variable annuity and life deposits allocated to fixed accounts. Contractholder
funds are comprised primarily of deposits received and interest credited to the
benefit of the contractholder less surrenders and withdrawals, mortality charges
and administrative expenses. Contractholder funds also include reserves for
secondary guarantees on interest-sensitive life and certain

24

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

fixed annuity contracts. Detailed information on crediting rates and surrender
and withdrawal provisions on contractholder funds is outlined in Note 6.

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, administration, cost of insurance and
surrender of the contract prior to the contractually specified dates and are
ceded to ALIC. Deposits to the separate accounts are not included in cash flows.

Absent any contract provision wherein the Company guarantees either a
minimum return or account value upon death, a specified contract anniversary
date 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.

LIABILITIES FOR VARIABLE CONTRACT GUARANTEES

The Company offers various guarantees to variable annuity contractholders
including a return of no less than (a) total deposits made on the contract less
any customer withdrawals, (b) total deposits made on the contract less any
customer withdrawals plus a minimum return or (c) the highest contract value on
a specified anniversary date minus any customer withdrawals following the
contract anniversary. These guarantees include benefits that are payable in the
event of death (death benefits), upon annuitization (income benefits), or at
specified dates during the accumulation period (accumulation benefits).
Liabilities for variable contract guarantees related to death benefits are
included in the reserve for life-contingent contract benefits and the
liabilities related to the income and accumulation benefits are included in
contractholder funds in the Statements of Financial Position. Detailed
information regarding the Company's variable contracts with guarantees is
outlined in Note 6.

Pursuant to the adoption of SOP 03-1 in 2004, the liability for death and
income benefit guarantees is established equal to a benefit ratio multiplied by
the cumulative contract charges earned, plus accrued interest less contract
benefit payments. The benefit ratio is calculated as the estimated present value
of all expected contract benefits divided by the present value of all expected
contract charges. The establishment of reserves for these guarantees requires
the projection of future separate account fund performance, mortality,
persistency and customer benefit utilization rates. These assumptions are
periodically reviewed and updated. For guarantees related to death benefits,
benefits represent the current guaranteed minimum death benefit payments in
excess of the current account balance. For guarantees related to income
benefits, benefits represent the present value of the minimum guaranteed
annuitization benefits in excess of the current account balance.

Projected benefits and contract charges used in determining the liability
for certain guarantees are developed using models and stochastic scenarios that
are also used in the development of estimated expected gross profits. Underlying
assumptions for the liability related to income benefits include assumed future
annuitization elections based on factors such as the extent of benefit to the
potential annuitant, eligibility conditions and the annuitant's attained age.
The liability for guarantees is re-evaluated periodically, and adjustments are
made to the liability balance through a charge or credit to contract benefits.

Guarantees related to accumulation benefits are considered to be derivative
financial instruments; therefore, the liability for accumulation benefits is
established based on its fair value.

25

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

ADOPTED ACCOUNTING STANDARDS

EMERGING ISSUES TASK FORCE ISSUE NO. 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS" ("EITF 03-1") AND FSP
EITF 03-1-1, "EFFECTIVE DATE OF PARAGRAPHS 10-20 OF EITF ISSUE NO. 03-1, THE
MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS" ("FSP EITF 03-1-1")

In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF 03-1, which was to be effective for fiscal periods beginning
after June 15, 2004. EITF 03-1 requires that when the fair value of an
investment security is less than its carrying value an impairment exists for
which a determination must be made as to whether the impairment is temporary or
other-than-temporary. In September 2004, the Financial Accounting Standards
Board ("FASB") issued, and the Company adopted, FSP EITF Issue 03-1-1, which
deferred the effective date of the impairment measurement and recognition
provisions contained in paragraphs 10-20 of EITF 03-1 until proposed FSP EITF
03-1-a is issued as final guidance (See Pending Accounting Standard). The
disclosure requirements of EITF 03-1 were previously adopted by the Company as
of December 31, 2003 for investments accounted for under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". For all
other investments within the scope of EITF 03-1, the disclosures are effective
and have been adopted by the Company as of December 31, 2004.

SOP 03-1, "ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS" ("SOP
03-1")

On January 1, 2004, the Company adopted SOP 03-1. The major provisions of
the SOP affecting the Company require:
- Establishment of reserves primarily related to death benefit and
income benefit guarantees provided under variable annuity contracts,
all of which are ceded to ALIC;
- Deferral of sales inducements that meet certain criteria, and
amortization using the same method used for deferred policy
acquisition costs ("DAC"), all of which are ceded to ALIC.
The cumulative effect of the change in accounting principle from
implementing SOP 03-1 was a loss of $26.9 million, after-tax ($41.4 million,
pre-tax) that was ceded to ALIC under the terms of the reinsurance agreements.
It was comprised of an increase in contractholder funds of $30 million, pre-tax,
and reserves for life-contingent contract benefits of $11.4 million, pre-tax.

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS ("AICPA") TECHNICAL
PRACTICE AID ("TPA") RE. SOP 03-1

In September 2004, the staff of the AICPA, aided by industry experts,
issued a set of technical questions and answers on financial accounting and
reporting issues related to SOP 03-1 that will be included in the AICPA's TPAs.
The TPA addresses a number of issues related to SOP 03-1 including when it is
necessary to establish a liability in addition to the account balance for
certain contracts such as single premium and universal life that meet the
definition of an insurance contract and have amounts assessed against the
contractholder in a manner that is expected to result in profits in earlier
years and losses in subsequent years from the insurance benefit function. The
impact of adopting the provisions of the TPA was not material to the Company's
Statements of Operations and Comprehensive Income or Financial Position.

PENDING ACCOUNTING STANDARD

FSP EITF ISSUE 03-1-a, "IMPLEMENTATION GUIDANCE FOR THE APPLICATION OF
PARAGRAPH 16 OF EITF ISSUE NO. 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS" ("FSP EITF ISSUE
03-1-a").

In September 2004, the FASB issued proposed FSP EITF 03-1-a to address the
application of paragraph 16 of EITF Issue 03-1 to debt securities that are
impaired because of increases in interest rates, and/or sector spreads.
Thereafter, in connection with its decision to defer the effective date of
paragraphs 10-20 of EITF 03-1 through the issuance of FSP EITF Issue 03-1-1, the
FASB requested from its constituents comments on the issues set forth in FSP
EITF 03-1-a and the issues that arose during the

26

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

comment letter process for FSP EITF 03-1-b, "EFFECTIVE DATE OF PARAGRAPH 16 OF
EITF ISSUE NO. 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
APPLICATION TO CERTAIN INVESTMENTS". Due to the uncertainty as to how the
outstanding issues will be resolved, the Company is unable to determine the
impact of adopting paragraphs 10-20 of EITF 03-1 until final implementation
guidance is issued. Adoption of paragraphs 10-20 of EITF 03-1 may have a
material impact on the Company's Statements of Operations and Comprehensive
Income but is not expected to have a material impact on the Company's Statements
of Financial Position as fluctuations in fair value are already recorded in
accumulated other comprehensive income.

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 its behalf. 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 $161.4 million, $112.6 million and $67.4
million in 2004, 2003 and 2002, 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 the 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 $41.7 million, $35.9 million and $33.0 million for the years ended December
31, 2004, 2003 and 2002, 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 ("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 $447 thousand and $138
thousand for the years ended December 31, 2004 and 2003, respectively that was
ceded to ALIC under the terms of the reinsurance agreements.

REINSURANCE

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

STRUCTURED SETTLEMENT OBLIGATIONS

The Company received premiums of $301 thousand, $3.2 million and
$19.1 million from AIC in 2004, 2003 and 2002, 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.

27

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

CAPITAL CONTRIBUTION

During the fourth quarter of 2004, ALIC made a cash capital contribution of
$49.7 million. This transaction was reflected in additional capital paid-in on
the Statements of Financial Position.

During the third quarter of 2003, 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, 2004.

4. INVESTMENTS

FAIR VALUES

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

28

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

SCHEDULED MATURITIES

The scheduled maturities for fixed income securities are as follows at
December 31, 2004:

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. The
commercial mortgage-backed securities are categorized by contractual maturity
because they generally are not subject to prepayment risk.

NET INVESTMENT INCOME

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

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 $5 thousand,
$289 thousand and $471 thousand and gross losses of $0 thousand, $216 thousand
and $232 thousand were realized on dispositions of fixed income securities
during 2004, 2003 and 2002, respectively.

29

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

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, 2004 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.

The following table summarizes the gross unrealized losses and fair value
of fixed income securities by the length of time that individual securities have
been in a continuous unrealized loss position as of December 31, 2004.

At December 31, 2004, the Company had unrealized losses of $1.3 million
which related to 27 holdings of fixed income securities with a fair value of
$59.0 million. All unrealized losses related to securities with

30

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

an unrealized loss position less than 20% of amortized cost, the degree of which
suggests that these securities did not pose a high risk of being other than
temporarily impaired. Unrealized losses totaling $391 thousand were in an
unrealized loss position for a period less than twelve months and $941 thousand
were in an unrealized loss position for a period of twelve months or more.
Additionally, all unrealized losses were investment grade. Investment grade is
defined as a security having a rating from the National Association of Insurance
Commissioners ("NAIC") of 1 or 2; a rating of Aaa, Aa, A or Baa from Moody's; a
rating of AAA, AA, A or BBB from Standard & Poor's ("S&P"), Fitch or Dominion;
or a comparable internal rating if an externally provided rating is not
available. Unrealized losses on investment grade securities were principally
related to changes in interest rates or changes in issuer and sector related
credit spreads since the securities were acquired.

At December 31, 2003, the Company had unrealized losses of $1.6 million
which related to 22 holdings of fixed income securities with a fair value of
$44.1 million, all of which were investment grade and which have been in an
unrealized loss position for a period less than 12 months.

As of December 31, 2004 and 2003, the Company had 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, 2004, fixed income securities and short-term investments
with a carrying value of $10.0 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

31

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

requirements. The fair value of investment contracts is based on the terms of
the underlying contracts. Fixed annuities are valued at the account balance less
surrender charges. Immediate annuities without life contingencies are valued at
the present value of future benefits at current interest rates. Market value
adjusted annuities' fair value is estimated to be the market adjusted surrender
value. Separate accounts liabilities are carried at the fair value of the
underlying assets.

EMBEDDED DERIVATIVE FINANCIAL INSTRUMENTS

The following table summarizes the notional amount, fair value and carrying
value of the Company's embedded derivative financial instruments:

The notional amounts specified in the contracts are used to calculate the
exchange of contractual payments under the agreements, and are not
representative of the potential for gain or loss on these agreements.
Fair value, which is equal to the carrying value, is based on widely
accepted pricing and valuation models, which use independent third party data as
inputs.
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates and prices. Market risk exists for all of the derivative
financial instruments that the Company currently holds, as these instruments may
become less valuable due to adverse changes in market conditions.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

There were no off-balance-sheet financial instruments at December 31, 2004
or 2003.

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

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

32

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

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:

33

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:

(1) The increase in contractholder funds due to the adoption of SOP 03-1
reflects the establishment of reserves for certain liabilities that are
primarily related to income benefit guarantees provided under variable annuity
contracts and secondary guarantees on interest-sensitive life and certain fixed
annuity contracts. These reserves were ceded to ALIC under the terms of the
reinsurance agreements.

34

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

The table below presents information regarding the Company's variable
annuity contracts with guarantees. The Company's variable annuity contracts
may offer more than one type of guarantee in each contract; therefore, the
sum of amounts listed exceeds the total account balances of variable annuity
contracts' separate accounts with guarantees.

(1) Defined as the estimated current guaranteed minimum death benefit in
excess of the current account balance at the balance sheet date.
(2) Defined as the estimated present value of the guaranteed minimum annuity
payments in excess of the current account balance.
(3) Defined as the estimated present value of the guaranteed minimum
accumulation balance in excess of the current account balance.

As of December 31, 2004, reserves for variable annuity contracts and
secondary guarantee liabilities related to death benefits, income benefits
and accumulation benefits were $19 million, $25 million and $(77) thousand,
respectively.

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 cedes a portion of the mortality risk on certain life policies with a
pool of thirteen non-affiliated reinsurers. The Company continues to have
primary liability as the direct insurer for risks reinsured.

Amounts recoverable from reinsurers are estimated based upon assumptions
consistent with those used in establishing the liabilities related to the
underlying reinsured contracts. At December 31, 2004, 95.3% of the total
reinsurance recoverables were related to ALIC and 4.7% were related to
non-affiliated reinsurers. Approximately 99% of the non-affiliated
reinsurance recoverables are due from companies rated A- or better by S&P.

35

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

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

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 $681 thousand, $879 thousand and $1.1 million in
2004, 2003 and 2002, 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, 2004 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,
2004, the amount due under the commercial paper program is $301 million and the
cash surrender value of the policies is $305

36

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

million. The repayment guarantee expires April 30, 2006. These contracts are
ceded to ALIC under the terms of its reinsurance agreements.

In the normal course of business, the Company provides standard
indemnifications to counterparties in contracts in connection with numerous
transactions, including acquisitions and divestitures. The types of
indemnifications typically provided include indemnifications for breaches of
representations and warranties, taxes and certain other liabilities, such as
third party lawsuits. The indemnification clauses are often standard contractual
terms and were entered into in the normal course of business based on an
assessment that the risk of loss would be remote. The terms of the
indemnifications vary in duration and nature. In many cases, the maximum
obligation is not explicitly stated and the contingencies triggering the
obligation to indemnify have not occurred and are not expected to occur.
Consequently, the maximum amount of the obligation under such indemnifications
is not determinable. Historically, the Company has not made any material
payments pursuant to these obligations.

The aggregate liability balance related to all guarantees, ceded to ALIC,
was not material as of December 31, 2004.

REGULATION

The Company is subject to changing social, economic and regulatory
conditions. Recent state and federal regulatory initiatives and proceedings have
included efforts to impose additional regulations regarding agent and broker
compensation and otherwise expand overall regulation of insurance products and
the insurance industry. The ultimate changes and eventual effects of these
initiatives on the Company's business, if any, are uncertain.

Regulatory bodies have contacted ALIC and some of its subsidiaries,
including the Company, and have requested information relating to variable
insurance products, including such areas as market timing and late trading
and sales practices. The Company believes that these inquiries are similar to
those made to many financial services companies as part of an industry-wide
investigation by various regulatory agencies into the practices, policies and
procedures relating to variable insurance products sales and subaccount
trading practices. ALIC and its subsidiaries, including the Company, have
responded and will continue to respond to these information requests and
investigations. The Company at the present time is not aware of any systemic
problems with respect to such matters that may have a material adverse effect
on the Company's financial position.

37

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

LEGAL PROCEEDINGS

BACKGROUND

The Company and certain of its affiliates are named as defendants in a
number of lawsuits and other legal proceedings arising out of various aspects of
its business. As background to the "Proceedings" sub-section below, please note
the following:

- These matters raise difficult and complicated factual and legal issues
and are subject to many uncertainties and complexities, including but
not limited to, the underlying facts of each matter, novel legal
issues, variations between jurisdictions in which matters are being
litigated, differences in applicable laws and judicial
interpretations, the length of time before many of these matters might
be resolved by settlement or through litigation and, in some cases,
the timing of their resolutions relative to other similar cases
brought against other companies, the fact that some of these matters
are putative class actions in which a class has not been certified and
in which the purported class may not be clearly defined, the fact that
some of these matters involve multi-state class actions in which the
applicable law(s) for the claims at issue is in dispute and therefore
unclear, and the current challenging legal environment faced by large
corporations and insurance companies.

- In these matters, plaintiffs seek a variety of remedies including
equitable relief in the form of injunctive and other remedies and
monetary relief in the form of contractual and extra-contractual
damages. In some cases, the monetary damages sought include punitive
damages or are not specified. Often more specific information beyond
the type of relief sought is not available because plaintiffs have not
requested more specific relief in their court pleadings. In our
experience, monetary demands in plaintiffs' court pleadings bear
little relation to the ultimate loss, if any, to the Company.

- For the reasons specified above, it is not possible to make meaningful
estimates of the amount or range of loss that could result from these
matters at this time. The Company reviews these matters on an on-going
basis and follows the provisions of SFAS No. 5, "Accounting for
Contingencies" when making accrual and disclosure decisions. When
assessing reasonably possible and probable outcomes, the Company bases
its decisions on its assessment of the ultimate outcome following all
appeals.

- In the opinion of the Company's management, while some of these
matters may be material to the operating results ceded to ALIC for any
particular period if an unfavorable outcome results, none will have a
material adverse effect on the financial condition of the Company.

PROCEEDINGS

Legal proceedings involving Allstate agencies and AIC may impact the
Company, even when the Company is not directly involved, because the Company
sells its products through a variety of distribution channels including Allstate
agencies. Consequently, information about the more significant of these
proceedings is provided below.

38

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

AIC is defending various lawsuits involving worker classification issues. A
putative nationwide class action filed by former employee agents 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. This matter was dismissed
with prejudice in late March 2004 by the trial court but is the subject of
further proceedings on appeal. AIC has been vigorously defending this and
various other worker classification lawsuits. The outcome of these disputes is
currently uncertain.

AIC is defending certain matters relating to its agency program
reorganization announced in 1999. These matters include a lawsuit filed in
December 2001 by the U.S. Equal Employment Opportunity Commission ("EEOC")
alleging retaliation under federal civil rights laws, a class action filed in
August 2001 by former employee agents alleging retaliation and age
discrimination under the Age Discrimination in Employment Act, breach of
contract and ERISA violations, and a lawsuit filed in October 2004 by the EEOC
alleging age discrimination with respect to a policy limiting the rehire of
agents affected by the agency program reorganization. AIC is also defending
another action, in which a class was certified in June 2004, filed by former
employee agents who terminated their employment prior to the agency program
reorganization. These plaintiffs have asserted claims under ERISA and for
constructive discharge, and are seeking the benefits provided in connection with
the reorganization. In late March 2004, in the first EEOC lawsuit and class
action lawsuit, the trial court issued a memorandum and order that, among other
things, certified classes of agents, including a mandatory class of agents who
had signed a release, for purposes of effecting the court's declaratory judgment
that the release is voidable at the option of the release signer. The court also
ordered that an agent who voids the release must return to AIC "any and all
benefits received by the [agent] in exchange for signing the release." The court
also "concluded that, on the undisputed facts of record, there is no basis for
claims of age discrimination." The EEOC and plaintiffs have asked the court to
clarify and/or reconsider its memorandum and order. The case otherwise remains
pending. A putative nationwide class action has also been filed by former
employee agents alleging various violations of ERISA. This matter was dismissed
with prejudice in late March 2004 by the trial court but is the subject of
further proceedings on appeal. In these matters, plaintiffs seek compensatory
and punitive damages, and equitable relief. AIC has been vigorously defending
these lawsuits and other matters related to its agency program reorganization.
In addition, AIC 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 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.

OTHER MATTERS

The Corporation and some of its agents and subsidiaries, including the
Company, have received interrogatories and demands to produce information from
several regulatory and enforcement authorities. These authorities are seeking
information relevant to on-going investigations into the possible violation of
antitrust or insurance laws by unnamed parties and, in particular, are seeking
information as to whether any person engaged in activities for the purpose of
price fixing, market allocation, or bid rigging. Published press reports have
indicated that numerous demands of this nature have been sent to insurance
companies as part of industry-wide investigations. The Corporation has
cooperated and intends to continue to cooperate with these and any similar
requests for information.

Various other legal and regulatory actions are currently pending that
involve the Company and specific aspects of its conduct of business. Like other
members of the insurance industry, the Company is the target of a number of
lawsuits, some of which involve claims for substantial or indeterminate amounts.
This litigation is based on a variety of issues and targets a range of the
Company's practices. The outcome of these disputes is currently unpredictable.
However, at this time, based on their present status and the existence of its
reinsurance agreements 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 expected to have a material effect on the
results of operations, liquidity or financial position of the Company.

39

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

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 costs related to
such reinsurance. Effectively, these agreements result in the Company's annual
income tax provision being computed, with adjustments, 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
results of operations of the Company.

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

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

The Company paid income taxes of $2.5 million, $4.3 million and $8.0
million in 2004, 2003 and 2002, 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. Pursuant to the American Jobs Creation Act of 2004 ("the 2004
Act"), the Company can reduce the policyholder surplus account in 2005 and 2006
without incurring any tax liability. The balance in this account at December 31,
2004 was $340 thousand, which prior to the 2004 Act would have resulted in
federal income taxes payable of $119 thousand if such amounts had been
distributed or deemed distributed from the policyholder surplus account. No
provision for taxes has ever been made for this item as the Company had no
intention of distributing such amounts. The Company expects to utilize this
provision, thereby eliminating this potential tax liability.

40

LINCOLN BENEFIT LIFE COMPANY
NOTES TO FINANCIAL STATEMENTS

10. STATUTORY FINANCIAL INFORMATION

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

Statutory accounting practices primarily differ from GAAP since they
require charging policy acquisition and certain sales inducement costs to
expense as incurred, establishing life insurance reserves based on different
actuarial assumptions, and valuing investments and establishing deferred taxes
on a different basis.

Statutory net income for 2004, 2003, and 2002 was $7.4 million, $8.4
million and $3.0 million, respectively. Statutory capital and surplus as of
December 31, 2004 and 2003 was $255.5 million and $202.1 million, respectively.

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 2005 without prior approval of the Nebraska
Department of Insurance is $25.3 million. In the twelve-month period beginning
January 1, 2004 the Company did not pay any dividends.

41

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)

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2004 and 2003, 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, 2004. Our audits also included the
financial statement schedules listed in the Index at Item 15. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, 2004 and
2003, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for certain nontraditional long-duration contracts and
separate accounts in 2004.

/s/ Deloitte & Touche LLP

Chicago, Illinois
February 24, 2005

43

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. During the fiscal
quarter ended December 31, 2004, 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.

44

PART III

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

The following fees have been, or will be, billed by Deloitte & Touche LLP
for professional services rendered to us for the fiscal year ending December 31,
2004 and 2003.

(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 SEC. These fees are ceded to ALIC under the Company's
reinsurance agreements.

(5)(i) AND (ii) 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 Lincoln Benefit. Those policies and procedures are
incorporated into this Item 14 (5) by reference to Exhibit 99(ii) - The Allstate
Corporation Policy Regarding Pre-Approval of Independent Auditors' Services. One
hundred percent of the services provided by Deloitte & Touche LLP in 2004 and
2003 were pre-approved by The Allstate Corporation Audit Committee.

45

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(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
Report of Independent Registered Public Accounting Firm

(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. The SEC file number for the exhibits incorporated by reference is
333-59765 except as otherwise noted.

46

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 10.22 to Allstate Life Insurance
Company's Form 10 filed on April 24, 2002. (SEC File No.
000-31248)

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 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.

47

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.

23 Consent of Independent Registered Public Accounting Firm

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

99(ii) The Allstate Corporation Policy Regarding Pre-Approval of
Independent Auditor's Services effective November 10, 2003

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

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

48

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 15, 2005 /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.

49

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.

50

LINCOLN BENEFIT LIFE COMPANY
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENT
IN RELATED PARTIES
DECEMBER 31, 2004

S-1

LINCOLN BENEFIT LIFE COMPANY
SCHEDULE IV--REINSURANCE

(IN THOUSANDS)

S-2