SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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: 612-738-5590
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)
(Unaudited)
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost: $2,215,855 at September 30, 1997,
$2,078,438 at December 31, 1996) $ 2,282,832 $ 2,115,499
Equity securities, at fair value (cost:
$82,208 at September 30, 1997, $84,144 at
December 31, 1996) 106,050
106,290
Mortgage loans on real estate 591,231 582,869
Policy loans 66,712 60,722
Short-term investments 200,402 182,817
Real estate and other investments 61,865
29,628
$ 3,309,092 $ 3,077,825
Cash 0 20,474
Receivables:
Uncollected premium 78,292 71,386
Reinsurance recoverable on paid and unpaid losses 12,868
12,939
Due from affiliates 1,448 0
Other 16,414 9,045
109,022 93,370
Accrued investment income 44,806 39,519
Deferred policy acquisition costs 288,169 268,075
Property and equipment, at cost, less
accumulated depreciation 46,191 52,882
Deferred federal income taxes 20,132 17,008
Other assets 7,141 8,005
Assets held in separate accounts 2,949,615 2,374,718
$ 6,774,168 $ 5,951,876
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands)
(Unaudited)
September 30,
December 31,
1997 1996
(unaudited)
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Traditional life insurance $ 447,369 $
434,378
Interest sensitive and investment products 1,265,106
1,175,480
Accident and health 843,150
834,119
2,555,625 2,443,977
Unearned premiums 11,671
12,622
Other policy claims and benefits payable 214,311
191,940
Policyholder dividends payable 8,071
8,783
2,789,678 2,657,322
Debt 25,350 0
Accrued expenses 43,187
42,223
Current income taxes payable 19,231 17,424
Other liabilities 120,104
104,834
Due to Affiliates 0
4,926
Liabilities related to separate accounts 2,917,798
2,344,474
5,915,348 5,171,203
SHAREHOLDER'S EQUITY
Common stock, $5 par value, 1,000,000
shares authorized, issued and outstanding 5,000
5,000
Additional paid-in capital 468,000
468,000
Retained earnings 324,686
265,613
Unrealized gain (loss) on available-for-sale
securities, net of deferred taxes of
$29,795 at September 30, 1997 and $19,535 at
December 31, 1996 55,344 36,290
Unrealized gain on assets held in separate
accounts, net of deferred taxes of $3,007 at
September 30, 1997 and $1,454 at December 31, 1996 5,790
5,770
Total Shareholder's equity 858,820 780,673
Total policy reserves, liabilities &
Shareholder's equity $ 6,774,168 $5,951,876
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Nine months ended
September 30,
1997 1996
REVENUES
Insurance operations:
Traditional life insurance premiums $ 197,599 $
193,389
Interest sensitive and investment product
policy charges 56,750
58,398
Accident and health premiums 664,882
745,059
Total Insurance Revenue 919,231
996,846
Net investment income 169,227
151,921
Realized gains (losses) on investments 29,678
9,499
Other income 26,529
24,844
TOTAL REVENUES 1,144,665
1,183,110
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 157,152
168,167
Interest sensitive and investment products 77,004
79,392
Accident and health 518,497
603,498
752,653
851,057
Policyholder dividends 1,931
2,792
Amortization of deferred policy acquisition
costs 30,099 30,026
Insurance commissions 75,119
73,454
General and administrative expenses 193,981
183,572
TOTAL BENEFITS AND EXPENSES 1,053,783
1,140,901
INCOME BEFORE INCOME TAXES 90,882
42,209
INCOME TAX EXPENSE (BENEFITS)
Current 37,974
19,794
Deferred (6,165)
(5,021)
31,809
14,773
NET INCOME $ 59,073 $
27,436
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three months ended
September 30,
1997 1996
REVENUES
Insurance operations:
Traditional life insurance premiums $ 67,138 $
64,118
Interest sensitive and investment product
policy charges 18,919
27,227
Accident and health premiums 222,971
240,260
Total Insurance Revenue 309,028
331,605
Net investment income 57,269
51,538
Realized gains (losses) on investments 12,585
3,807
Other income 9,777
7,816
TOTAL REVENUES 388,659
394,766
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 52,985
51,734
Interest sensitive and investment products 25,068
32,085
Accident and health 170,117
193,430
248,170
277,249
Policyholder dividends (283)
904
Amortization of deferred policy acquisition
costs 10,769 9,866
Insurance commissions 24,267
22,624
General and administrative expenses 67,952
61,677
TOTAL BENEFITS AND EXPENSES 350,875
372,320
INCOME BEFORE INCOME TAXES 37,784
22,446
INCOME TAX EXPENSE (BENEFITS)
Current 13,540
12,372
Deferred ( 316)
(4,515)
13,224
7,857
NET INCOME $ 24,560 $
14,589
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine months ended
September 30,
1997 1996
OPERATING ACTIVITIES
Net income $ 59,073 $ 27,436
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase (decrease)in future policy benefit reserves
for traditional and interest sensitive products 41,325
(102,268)
Increase (decrease)in other policy claims, benefits
and policyholder dividends payable 21,659 (5,335)
Provision for deferred federal income taxes (14,937)
(5,020)
Increase (decrease) in income taxes payable 1,807
(14,977)
Amortization of policy acquisition costs 30,099 30,026
Policy acquisition costs deferred (52,527)
(49,919)
Provision for depreciation 11,473 12,341
Amortization of investment premiums, net 110 2,040
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities 14,905 (53,686)
Realized gains on investments (29,678)
(9,499)
Other (113) (6,626)
NET CASH PROVIDED BY OPERATING ACTIVITIES 83,196
(175,487)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (3,153,125) (2,063,048)
Sales or maturities of fixed maturity investments 3,023,857 2,048,551
Decrease (increase) in short-term investments 1,997,592
(724)
Purchase of other investments (2,190,370) (37,816)
Sales or maturities of other investments 153,380
41,146
Purchase of property and equipment (5,327) (7,230)
Other - (2,809)
NET CASH USED BY INVESTING ACTIVITIES (173,993) (21,930)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 159,741 157,381
Surrenders and death benefits (129,279)
(36,918)
Interest credited to policyholders 39,861 46,465
NET CASH PROVIDED BY FINANCING ACTIVITIES 70,323
166,928
DECREASE IN CASH (20,474)
(30,489)
Cash and cash equivalents at beginning of period 20,474
1
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 0 $
(30,488)
See accompanying notes.
/TABLE
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1997
(unaudited)
General: The accompanying unaudited financial statements
of Fortis Benefits Insurance Company contain all
adjustments necessary to present fairly the balance sheet
as of September 30, 1997 and the related statement of
income for the nine months ended September 30, 1997 and
1996, and cash flows for the nine months ended September
30,1997 and 1996.
Income tax payments for the nine months ended September
30,1997 and September 30, 1996 were $44,955,000 and
$34,345,382, 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 September 30, 1997, 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 September 30, 1997
(in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 150,954 $ 6,035 $ 21 $ 156,968
Public Utilities 124,401 4,306 20
128,687
Industrial and
miscellaneous 1,900,192 56,801 1,336
1,955,657
Other 40,308 1,212 0 41,520
Total 2,215,855 68,354 1,377
2,282,832
Equity Securities 82,208 26,797 2,955
106,050
$2,298,063 $ 95,151 $ 4,332
$2,388,882
The amortized cost and fair value of fixed maturities at
September 30, 1997, by contractual maturity, are shown
below (in thousands). Expected maturities will differ
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1997
(unaudited)
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 $ 34,039 $
34,248
Due after one year through
five years 826,913 841,863
Due after five years through
ten years 523,831
539,553
Due after ten years 831,072 867,168
$ 2,215,855 $ 2,282,832
Proceeds from sales and maturities of investments in
fixed maturities in the nine-month period ended September
30,1997 were $3,016,417,731, and $7,439,000 respectively.
Gross gains of $24,805,704 and gross losses of
$16,538,983 were realized on sales.
Mortgage Loans: The Company has issued commercial
mortgage loans on properties located throughout the
country. Currently, approximately 37% of outstanding
principal is concentrated in the states of Florida,
California and New York. 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
Sept.30, 1997
(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 nine months of each year were as follows (in
thousands):
Investment Realized Gain (Loss)
Income on Investments
1997 1996 1997 1996
Fixed maturities $118,995 $105,760 $ 8,267 $ (3,425)
Preferred stocks 233 173 622 257
Common stocks 6,837 4,828 20,735 9,946
Mortgage loans on
real estate 40,970 39,637 ( 8) (144)
Policy loans 3,116 2,512 0 0
Short-term investments 2,088 4,278 0 57
Real estate and other
investments 2,483 1,594 62 2,808
174,722 158,782 $ 29,678 $ 9,499
Expenses (5,495) (6,862)
$169,227 $151,920
Management's Discussion and Analysis of Financial
Condition and Results of Operations Sept. 30, 1997
Compared to Sept. 30, 1996
Revenues
Traditional life insurance premiums of Fortis Benefits
(the "Company"), principally composed of group life
coverages, increased in the first three quarters of 1997
over the same period in 1996 due to increased sales.
Interest sensitive and investment product policy charges,
which consist primarily of cost of insurance charges,
increased 23% in the first three quarters of 1997
compared to the same period in 1996. Continued sales of
interest sensitive and investment products has steadily
increased the policy base on which these charges are
assessed.
Total accident and health premiums decreased in the first
three quarters of 1997 compared to the same period in
1996 primarily due to: 1) a decision made in 1996 to
discontinue new sales of certain medical products; and,
2) sales of the remaining group medical business has
decreased 8%. The decreases above are partially offset
by a 7% increase in group disability and dental product
sales.
The Company continues to match investment portfolio
composition to liquidity needs and capital requirements.
Changes in interest rates during 1997 and 1996 resulted
in recognition of realized gains and losses.
Benefits
The Company's group life benefits which are included in
the traditional life benefits were lower in the first
three quarters of 1997 compared to the same period in
1996 as a result of improved mortality in the first three
quarters of 1997. Interest sensitive and investment
product benefits for the nine month period ended
September 30, 1997 decreased 3% from the same period in
1996. This decrease was the result of lower mortality
experience in 1997 compared to 1996.
The accident and health claims to premium ratio improved
from nine months ended September 30, 1996 to the same
period in 1997 primarily due to the improved claim
experience.
Expenses
The commission rates have increased from the levels at
September 30, 1996. This is primarily due to the change
in the mix of business by product line as well as the
change in first year versus renewal premiums. Interest
sensitive and investment products commission increased 3%
in the first nine months in 1997 compared to the same
period in 1996. The Company deferred $48.1 million of
these commissions in the first three quarters of 1997,
compared to $46.9 million in the same period in 1996. The
additional commission and deferral is the result of an
increase in sales of the company's variable life product
and variable annuity products.
The Company's expenses in the first three quarters of
1997 have increased over the same period in 1996.
Contributing to this increase are expenses associated
with enabling the application systems to be year 2000
compliant. Group dental operations are beginning managed
dental initiatives that have also contributed to the
expense increases. Expense reductions relating to the
discontinued group medical business have continued but
the expense decreases have slowed in comparison to the
premium decreases.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met
by funds provided from operations, investment income and
additional paid in capital from the Company's parent and
sole shareholder. Funds are principally used to provide
for policy benefits, operating expenses, commissions and
investment purchases. The impact of the declining
inforce medical business has been considered in
evaluating the Company's future liquidity needs. The
Company expects its operating activities and additional
paid in capital from the Company's parent to generate
sufficient funds.
The NAIC 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 risk-based
capital amount which is then compared to a company's
actual total adjusted capital. Based upon current
calculation 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 has no long or short term debt. The
Company's fixed maturity investments consisted of 96%
investment grade bonds as of September 30, 1997 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. No Forms 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements 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.
Fortis Benefits Insurance Company
(Registrant)
Date: November 13, 1997
/s/ Michael J. Peninger
Senior Vice President, Controller and Treasurer (on
behalf of the Registrant and as its principal financial
and chief accounting officer)