In the stylesheet bind a prefix to the namespace e.g.
Code:
<xsl:stylesheet ... xmlns:lf="http://ACORD.org/Standards/Life/2" exclude-result-prefixes="lf">
then use that prefix anywhere you qualify element names e.g.
Code:
<xsl:template match="lf:CDS/lf:Vendor">
<Vendor id="{format-number(count(preceding::lf:Vendor)+1,'v0')}">
<xsl:apply-templates select="@*|node()"/>
</Vendor>
</xsl:template>
That should show you how to change your code to work with namespaces, I would also suggest to use xsl: number to count and number the elements.