SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission file number 33-46620
FORTIS BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its
charter)
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
81-0170040
(IRS Identification No.)
500 BIELENBERG DRIVE, WOODBURY, MN 55125
(Address of principal executive offices)
(Zip code)
Registrant's telephone number, including area
code: 651-738-4000
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months ( or
for such shorter period that the registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes X No
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
June 30, December
31,
2000 1999
(unaudited)
Assets
Investments:
Fixed maturities, at fair value (amortized
Cost 2000--$2,662,313; 1999--
$2,802,697) $2,548,887 $2,706,372
Equity securities, at fair value (cost 2000-
- -$93,237; 96,530 85,021
1999--$81,554)
Mortgage loans on real estate, less
allowance for 761,221 754,514
possible losses (2000 and 1999--$11,085)
Policy loans 92,050 83,439
Short-term investments 119,202 115,527
Real estate and other investments 39,998 47,502
3,657,888 3,792,375
Cash and cash equivalents (49,986) 18,670
Receivables:
Uncollected premiums 63,783 62,938
Reinsurance recoverable on unpaid and paid 43,478 23,471
losses
Other 34,117 19,406
141,378 105,815
Accrued investment income 55,869 55,464
Deferred policy acquisition costs 435,509 430,192
Property and equipment at cost, less
accumulated 22,483 25,118
depreciation
Deferred federal income taxes 64,529 52,467
Other assets 1,697 1,582
Due from affiliates - 8,304
Assets held in separate accounts 5,465,019 5,120,152
Total assets $9,794,386 $9,610,139
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
June 30, December
31,
2000 1999
(unaudited
)
Policy reserves, liabilities and shareholders' equity
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional life insurance $1,131,194 $1,106,269
Interest sensitive and investment products 1,040,229 1,147,657
Accident and health 959,014 940,865
3,130,437 3,194,791
Unearned revenues 28,606 28,673
Other policy claims and benefits payable 245,303 265,486
Policyholder dividends payable 7,441 7,939
3,411,787 3,496,889
Accrued expense 53,560 59,409
Current income taxes payable 2,069 1,838
Other liabilities 70,259 120,110
Due to affiliates 4,870 -
Liabilities related to separate accounts 5,427,191 5,082,341
Total policy reserves and liabilities 8,969,736 8,760,587
Shareholder's equity:
Common Stock, $5 par value:
Authorized, issued and outstanding shares - 5,000 5,000
1,000,000
Additional paid-in capital 468,000 468,000
Retained earnings 418,850 427,811
Unrealized (loss) on available-for-sale
securities (net of deferred taxes 2000--
$(37,032); 1999--$31,077) (68,774) (57,715)
Unrealized (loss) gain on assets held in
separate
accounts (net of deferred taxes 2000--
$848;
1999--$3,476) 1,574 6,456
Total shareholder's equity 824,650 849,552
Total policy reserves, liabilities and $9,794,386 $9,610,139
shareholder's equity
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2000 1999
Revenues
Insurance operations:
Traditional life insurance premiums $208,162 $131,614
Interest sensitive and investment 51,912 47,447
product policy charges
Accident and health insurance premiums 476,487 502,974
736,561 682,035
Net investment income 141,250 111,389
Net realized (losses) gains on (4,789) 12,069
investments
Other income 33,273 25,449
Total revenues 906,295 830,942
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 160,446 97,296
Interest sensitive and investment 45,043 45,336
products
Accident and health claims 381,918 414,809
587,407 557,441
Policyholder dividends - 1,726
Amortization of deferred policy 31,048 18,254
acquisition costs
Insurance commissions 64,272 50,871
General and administrative expenses 162,832 165,950
Total benefits and expenses 845,559 794,242
Income before income taxes 60,736 36,700
Income tax expense (benefit)
Current 23,928 9,411
Deferred (3,517) 2,489
20,411 11,900
Net income 40,325 24,800
Other comprehensive loss:
Unrealized loss on investments (15,941) (71,083)
Comprehensive income (loss) $ $ (46,283)
24,384
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
June 30,
2000 1999
Revenues
Insurance operations:
Traditional life insurance premiums $106,447 $ 65,461
Interest sensitive and investment
product policy charges 25,635 23,576
Accident and health insurance premiums 237,197 251,812
369,279 340,849
Net investment income 69,211 55,782
Net realized gains (losses) on 6,759 (990)
investments
Other income 17,537 12,996
Total revenues 462,786 408,637
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 77,442 46,883
Interest sensitive and investment 21,724 21,381
products
Accident and health claims 194,517 201,657
293,683 269,921
Policyholder dividends (441) 699
Amortization of deferred policy 20,472 9,121
acquisition costs
Insurance commissions 33,163 23,261
General and administrative expenses 72,705 88,312
Total benefits and expenses 419,582 391,314
Income before income taxes 43,204 17,323
Income tax expense (benefit)
Current 10,408 5,736
Deferred 4,014 (618)
14,422 5,118
Net income 28,782 12,205
Other comprehensive income loss:
Unrealized loss on investments (21,420) (33,684)
Comprehensive income (loss) $ 7,362 $ (21,479)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
2000 1999
Operating activities
Net income $ 40,325 $ 24,800
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves59,135 42,489
(Decrease) increase in other policy claims
and benefits and policyholder dividends (20,748) 3,291
payable
Provision for deferred federal income taxes(3,517) 2,489
Increase in income taxes payable 231 1,611
Amortization of deferred policy acquisition31,048 18,254
costs
Policy acquisition costs deferred (36,105) (45,003)
Provision for depreciation 7,461 4,212
Amortization of investment premiums, net 29 76
Change in uncollected premiums, accrued
investment income, reinsurance
recoverable, other receivables, other (78,609) (22,079)
assets, accrued expenses, and other
liabilities
Net realized losses (gains) on investments 4,789 (12,069)
Net cash provided by operating activities 4,039 18,071
Investing activities
Purchases of fixed maturity investments (570,364) (1,023,173)
Sales or maturity of fixed maturity 695,058 1,047,529
investments
Increase in short-term investments (3,674) (6,664)
Purchases of other investments (100,138) (217,763)
Sales or maturities of other investments 84,024 175,582
Purchase of property and equipment (4,826) (340)
Net cash provided by (used in) investing 100,080 (24,829)
activities
Financing activities
Activities related to investment products:
Considerations received 120,965 131,094
Surrenders and death benefits (261,631) (193,860)
Interest credited to policyholders 17,177 20,626
Dividend (49,286) -
Net cash used in financing activities (172,775) (42,140)
Decrease in cash and cash equivalents (68,656) (48,898)
Cash and cash equivalents at beginning of 18,670 668
year
Cash and cash equivalents at end of period $ (49,986) $ (48,230)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 2000
(unaudited)
General: The accompanying unaudited financial
statements of Fortis Benefits Insurance Company contain
all adjustments necessary to present fairly the balance
sheet as of June 30, 2000 and the related statement of
income for the six months ended June 30, 2000 and 1999,
and cash flows for the six months ended June 30, 2000
and 1999.
Income tax payments for the six months ended June 30,
2000 and June 30, 1999 were $23,697,000 and $7,800,000,
respectively.
The classification of fixed maturity investments is to
be made at the time of purchase and, prospectively,
that classification is expected to be reevaluated as of
each balance sheet date. At June 30, 2000, all fixed
maturity and equity securities are classified as
available-for-sale and carried at fair value.
The amortized cost and fair values of investments
available-for sale were as follows at June 30, 2000 (in
thousands):
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gain Loss Value
Fixed Income
Securities:
Governments $ $ 1,046 $ 1,617 $
175,086 174,515
Public utilities 232,036 213 10,082 222,167
Industrial and
miscellaneous 2,067,282 3,357 101,311 1,969,328
Other 187,909 370 5,402 182,877
Total 2,662,313 4,986 118,412 2,548,887
Equity securities 93,237 7,407 4,114 96,530
$2,755,550 $12,393 $122,526 $2,645,417
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 2000
(unaudited)
The amortized cost and fair value in fixed maturities
at June 30, 2000, by contractual maturity, are shown
below (in thousands). Expected maturities will differ
from contractual maturities because borrowers may have
the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $ $
132,363 131,341
Due after one year through five years 629,032 609,800
Due after five years through ten years 787,337 754,102
Due after ten years 1,113,581 1,053,644
Total $2,662,313 $2,548,887
Proceeds from sales and maturities of investments in
fixed maturities in the six-month period ended June 30,
2000 and June 30, 1999 were $695,058,000 and
$1,047,529,000 respectively. Gross gains of $3,212,000
and $9,882,000 and gross losses of $20,542,000 and
$11,344,000 were realized on sales during the six month
period ended June 30, 2000 and 1999, respectively.
Mortgage Loans: The Company has issued commercial
mortgage loans on properties located throughout the
country. Currently, approximately 34% of outstanding
principal is concentrated in the states of New York,
California and Florida. The Company has a diversified
loan portfolio with a small average size, which greatly
reduces any loss exposure. The Company has established
a reserve for mortgage loans.
.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 2000
(unaudited)
Net Investment Income and Realized Gains (Losses) on
Investments: Major categories of net investment income
and realized gains and losses on investments for the
first six months of each year were as follows (in
thousands):
Realized
Gain(Loss) Investment Income
on Investments
2000 1999 2000 1999
Fixed maturities $ 99,296 $ 78,475 $ (17,330) $ (1,463)
Preferred stocks - 7 - 3
Common stocks 7,347 3,953 2,771 13,516
Mortgage loans on real 33,164 27,541 - -
estate
Policy loans 3,272 2,564 - -
Short-term investments 230 480 - -
Real estate and other 1,042 1,271 9,770 13
investments
144,351 114,291 $ $12,069
(4,789)
Expenses 3,101 2,902
$141,250 $111,389
Fortis Benefits Insurance Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations June 30, 2000
Compared to June 30, 1999
Revenues
The Company's major products are group disability and
dental, group medical, group life, and annuity and
individual life insurance coverages sold through a
network of independent agents and brokers. In the
fourth quarter of 1999, the Company assumed a block of
business from an affiliated company, United Family Life
Insurance Company. This assumed business is primarily
pre-need life insurance designed to pre-fund funeral
expenses and is sold as individual and group life and
annuity products. Pre-need business represents $71
million in gross premium in the first half of 2000.
For the six months ended June 30, group disability and
dental, group medical, group life, pre-need, and
annuity and individual life represented 39%, 25%, 18%,
10% and 8%, respectively of premium in 2000 and 39%,
34%, 19%, 0% and 8% respectively in 1999.
The Company continues to match investment portfolio
composition to liquidity needs and capital
requirements. Changes in interest rates during 2000 and
1999 resulted in recognition of realized gains and
losses upon sales of securities. The Company had net
capital losses from fixed income investments of
$17,330,000 for the first six months of 2000 as
compared to net capital losses of $1,463,000 for the
same period in 1999.
Benefits
The total year-to-date policyholder benefit to premium
ratio decreased to 80% in 2000 from 82% in 1999. The
group disability and dental, group medical, group life,
pre-need, and annuity and individual life benefit to
premium ratios for the six months ended June 30, were
83%, 77%, 67%, 101% and 78% respectively in 2000 and
85%, 81%, 72%, 0% and 98% respectively in 1999. Group
long term disability continues to see an increase in
claim terminations. The group medical business
experienced a lower premium to benefit ratio due to
rate increases and better management of claims. Group
life had improved mortality in 2000. The pre-need
business did not exist at the end of second quarter
1999 as it was assumed from an affiliated Company
during the last quarter of 1999. The annuity and
individual life business experienced strong market
performance in addition to lower interest crediting on
the Company's interest sensitive and investment
products.
Expenses
Commission rates have increased from the levels in
1999. This is primarily due to changes in the mix of
business by product lines as well as the change in
first year versus renewal premiums.
The Company's general and administrative expense to
premium ratio decreased to 22.0% in the second quarter
of 2000 from 24.3% in 1999. Lower general
administrative expenses relative to premium associated
with the newly assumed pre-need business is partially
responsible for the decrease. General cost monitoring
and efficiencies accounts for the remainder of the
decrease. The Company continues to monitor expenses,
striving to improve the expense to premium ratio, while
maintaining quality and timely services to
policyholders.
Market Risk and Risk Management
Interest rate risk is the Company's primary market risk
exposure. Substantial and sustained increases and
decreases in market interest rates can affect the
profitability of insurance products and market value of
investments. The yield realized on new investments
generally increases or decreases in direct relationship
with interest rate changes. The market value of the
Company's fixed maturity and mortgage loan portfolios
generally increases when interest rates decrease, and
decreases when interest rates increase.
Interest rate risk is monitored and controlled through
asset/liability management. As part of the risk
management process, different economic scenarios are
modeled, including cash flow testing required for
insurance regulatory purposes, to determine that
existing assets are adequate to meet projected
liability cash flows. A major component of the
Company's asset/liability management program is
structuring the investment portfolio with cash flow
characteristics consistent with the cash flow
characteristics of the Company's insurance liabilities.
The Company uses computer models to perform simulations
of the cash flow generated from existing insurance
policies under various interest rate scenarios.
Information from these models is used in the
determination of interest crediting strategies and
investment strategies. The asset/liability management
discipline includes strategies to minimize exposure to
loss as market interest rates change. On the basis of
these analyses, management believes there is no
material solvency risk to the Company with respect to
interest rate movements up or down of 100 basis points
from year-end levels.
Equity market risk exposure is not significant. Equity
investments in the general account are not material
enough to threaten solvency and contract owners bear
the investment risk related to the variable products.
Therefore, the risks associated with the investments
supporting the variable separate accounts are assumed
by contract owners, not by the Company. The Company
provides certain minimum death benefits that depend on
the performance of the variable separate accounts.
Currently the majority of these death benefit risks are
reinsured which then protects the Company from adverse
mortality experience and prolonged capital market
decline.
Year 2000
The Company utilizes computer systems to process
Company businesses. Fortis Inc., the Company's parent
("Fortis"), created a Year 2000 Project Office which
was dedicated to ensuring that all of the systems for
Fortis and its subsidiaries and affiliates were ready
for year 2000. The estimated total cost of the Fortis
Year 2000 Project was approximately $85 million. The
cost of the Company's portion is estimated at $28.6
million. Approximately $1.4 million was expensed by
the Company in 2000.
As of December 20, 1999, 100% of the computer system
lines of code that had been identified were renovated
and tested and were ready for year 2000. Although
there have been several minor matters, as of March 31,
2000, no significant disruptions resulting from the
century date change have been detected. The Company
will continue to monitor the status of and exposure to
any potential Year 2000 issues.
Liquidity and Capital Resources
The market value of cash, short-term investments and
publicly traded bonds and stocks is at least equal to
all policyholder reserves and liabilities. The
Company's portfolio is readily marketable and
convertible to cash to a degree sufficient to provide
for short-term needs. The Company consistently
monitors its liability durations and invests assets
accordingly. The Company has no material commitments
or off-balance sheet financing arrangements, which
would reduce sources of funds in the upcoming year.
The National Association of Insurance Commissioners has
implemented risk-based capital standards to determine
the capital requirements of a life insurance company
based upon the risks inherent in its operations. These
standards require the computation of a risk-based
capital amount which is then compared to a company's
actual total adjusted capital. Based upon current
calculations using these risk-based capital standards,
the Company's percentage of total adjusted capital is
in excess of ratios, which would require regulatory
attention.
The Company's fixed maturity investments consisted of
98% investment grade bonds as of June 30, 2000 and the
Company does not expect this percentage to change
significantly in the future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security
Holders
a. On April 28, 2000, the annual Fortis Benefits
Insurance Company Shareholder Meeting was held.
b. All 1,000,000 outstanding shares or the Company's
common stock were cast for the election of each
director (J. Kerry Clayton, (Chairman), Arie A.
Fakkert, Alan W. Feagin, Dean C. Kopperud, Michael J.
Peninger, Robert B. Pollock).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. Form 8-K report filed June 1, 2000 disclosing that
PriceWaterhouseCoopers replaced Ernst & Young as
independent auditors of the registrant effective June
1, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on it's behalf by the undersigned thereunto duly
authorized.
Fortis Benefits Insurance Company
(Registrant)
Date: August 11, 2000
/s/ Larry Cains
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its principal financial
and chief accounting officer)