SECURITIES AND EX
CHANGE 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, 1998
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 per share amounts)
September 30, December 31,
1998 1997
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost 1998--$2,265,578; 1997--$2,325,589) $2,383,784 $2,415,915
Equity securities, at fair value (cost
1998--$129,946; 1997--$88,719) 128,789 109,832
Mortgage loans on real estate, less allowance
for possible losses (1998 and 1997--$11,085) 619,615 602,064
Policy loans 74,729 68,566
Short-term investments 78,831 70,537
Real estate and other investments 77,499 55,035
3,363,247 3,321,949
Cash and cash equivalents (26,411) 9,901
Receivables:
Uncollected premium 77,354 74,220
Reinsurance recoverable on paid and
unpaid losses 16,888 13,852
Due from affiliates 1,028 -
Other 15,529 19,762
110,799 107,834
Accrued investment income 45,695 47,376
Deferred policy acquisition costs 312,639 291,742
Property and equipment, at cost, less
accumulated depreciation 33,060 42,773
Deferred federal income taxes 15,595 15,037
Other assets 6,073 4,250
Assets held in separate accounts 3,200,004 2,978,622
TOTAL ASSETS $7,060,701 $6,819,484
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
September 30, December 31,
1998 1997
(unaudited)
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Life insurance $ 449,846 $ 449,017
Interest sensitive and investment products 1,243,434 1,264,227
Accident and health 835,469 792,249
2,528,749 2,505,493
Unearned premiums 11,132 10,653
Other policy claims and benefits payable 252,506 260,596
Policyholder dividends payable 8,374 8,197
2,800,761 2,784,939
Debt 45,672 26,433
Accrued expenses 50,070 49,909
Current income taxes payable 3,762 10,549
Other liabilities 84,226 113,222
Due to affiliates - 6,925Liabilities related to separate accounts
3,169,728 2,947,401
Total policy reserves and liabilities 6,154,219 5,939,378
SHAREHOLDER'S EQUITY:
Common stock, $5 par value:
Authorized, issued and outstanding shares--
1,000,000 5,000 5,000
Additional paid-in capital 468,000 468,000
Retained earnings 360,219 332,723
Unrealized gain on available-for-sale
securities (net of deferred taxes 1998--
$39,843; 1997--$38,463) 71,276 68,981
Unrealized gain on assets held in separate
accounts (net of deferred taxes 1998--$(535);
1997--$1,345 1,987 5,402
Total Shareholder's equity 906,482 880,106
Total policy reserves, liabilities &
Shareholder's equity $7,060,701 $6,819,484
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Nine months ended
September 30,
1998 1997
REVENUES
Insurance operations:
Life insurance premiums $193,002 $197,599
Interest sensitive and investment product
policy charges 63,533 56,750
Accident and health premiums 705,467 664,882
Total Insurance Revenue 962,002 919,231
Net investment income 176,177 169,227
Net realized gains on investments 46,136 29,678
Other income 33,742 26,529
TOTAL REVENUES 1,218,057 1,144,665
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 141,304 157,152
Interest sensitive and investment products 71,118 77,004
Accident and health 584,640 518,497
797,062 752,653
Policyholder dividends 2,835 1,931
Amortization of deferred policy acquisition
costs 30,883 30,099
Insurance commissions 80,040 75,119
General and administrative expenses 226,475 193,981
TOTAL BENEFITS AND EXPENSES 1,137,295 1,053,783
INCOME BEFORE INCOME TAXES 80,762 90,882
INCOME TAX EXPENSE (BENEFITS)
Current 28,325 37,974
Deferred (58) (6,165)
28,267 31,809
NET INCOME 52,495 59,073
OTHER COMPREHENSIVE LOSS:
Unrealized loss on investments (1,120) 19,073
COMPREHENSIVE INCOME $ 51,375 $ 78,146
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months ended
September 30,
1998 1997
REVENUES
Insurance operations:
Life insurance premiums $ 64,941 $67,138
Interest sensitive and investment product
policy charges 20,631 18,919
Accident and health premiums 241,434 222,971
Total Insurance Revenue 327,006 309,028
Net investment income 57,064 57,269
Net realized gains on investments 5,117 12,585
Other income 11,210 9,777
TOTAL REVENUES 400,397 388,659
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 46,278 52,985
Interest sensitive and investment products 23,236 25,068
Accident and health 200,771 170,117
270,285 248,170
Policyholder dividends 801 (283)
Amortization of deferred policy acquisition
costs 4,987 10,769
Insurance commissions 28,350 24,267
General and administrative expenses 74,170 67,952
TOTAL BENEFITS AND EXPENSES 378,593 350,875
INCOME BEFORE INCOME TAXES 21,804 37,784
INCOME TAX EXPENSE (BENEFITS)
Current 4,221 13,540
Deferred 3,393 (316)
7,614 13,224
NET INCOME 14,190 24,560
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on investments 6,984 29,328
COMPREHENSIVE INCOME $ 21,174 $ 53,888
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine months ended
September 30,
1998 1997
OPERATING ACTIVITIES
Net income $ 52,495 $ 59,073
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves 64,625 41,325
Increase (decrease)in other policy claims,
benefits and policyholder dividends payable (7,434) 21,659
Provision for deferred federal income taxes (58) (14,937)
Increase (decrease) in income taxes payable (6,787) 1,807
Amortization of policy acquisition costs 30,883 30,099
Policy acquisition costs deferred (53,706) (52,527)
Provision for depreciation 14,924 11,473
Amortization of investment premiums(discounts), net (2,757) 110
Change in uncollected premiums, accrued investment
income, reinsurance recoverable, other receivables,
other assets, debt, accrued expenses, and other
liabilities (38,816) 14,905
Realized gains on investments (46,132) (29,678)
Other - (113)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,237 83,196
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,655,160) (3,153,125)
Sales or maturities of fixed maturity investments 1,745,599 3,023,857
Decrease (increase) in short-term investments (8,295) 1,997,592
Purchase of other investments (340,244) (2,190,370)
Sales or maturities of other investments 268,056 153,380
Purchase of property and equipment (164) (5,327)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 9,792 (173,993)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 152,413 159,741
Surrenders and death benefits (243,419) (129,279)
Interest credited to policyholders 37,665 39,861
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (53,341) 70,323
INCREASE IN CASH (36,312) (20,474)
Cash and cash equivalents at beginning of period 9,901 20,474
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(26,411) $ 0
See accompanying notes.
/TABLE
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1998
(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, 1998 and the
related statement of income for the nine months ended September 30,
1998 and 1997, and cash flows for the nine months ended September
30, 1998 and 1997.
Income tax payments for the nine months ended September 30,1998 and
September 30, 1997 were $35,112,000 and $44,955,000, 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
September 1998, 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, 1998 (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 277,560 $ 15,937 $ - $ 293,497
Public Utilities 172,861 8,505 2,069 179,297
Industrial and
miscellaneous 1,735,949 96,813 3,984 1,828,778
Other 79,208 3,004 - 82,212
Total 2,265,578 124,259 6,053 2,383,784
Equity Securities 129,946 8,353 9,510 128,789
$2,395,524 $132,612 $15,563 $2,512,573
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1998
(unaudited)
The amortized cost and fair value of fixed maturities at September
30, 1998, 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 $ 127,172 $
128,115
Due after one year through
five years 834,212
859,918
Due after five years through
ten years 563,635
599,596
Due after ten years 740,559
796,155
$2,265,578
$2,383,784
Proceeds from sales and maturities of investments in fixed
maturities in the nine month period ended September 30,1998 were
$1,745,599,000, and $20,033,000 respectively. Gross gains of
$34,118,000 and $24,806,000 and gross losses of $6,438,000 and
$16,539,000 were realized on the sales during the nine month period
ended September 30, 1998 and 1997, respectively.
Mortgage Loans: The Company has issued commercial mortgage loans on
properties located throughout the country. Currently,
approximately 36% 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
September 30, 1998
(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
1998 1997
1998 1997
Fixed maturities $120,421 $118,995 $27,680 $
8,267
Preferred stocks 88 233 14
622
Common stocks 6,811 6,837 8,985
20,735
Mortgage loans on
real estate 43,143 40,187 (198)
(8)
Policy loans 3,444 3,116 -
-
Short-term investments 1,451 2,088 -
- -
Real estate and other
investments 5,680 3,265 9,655
62
181,038 174,721
$46,136 $29,678
Expenses 4,861 5,494
$176,177 $169,227
Management's Discussion and Analysis of Financial
Condition and Results of Operations September 30, 1998
Compared to September 30, 1997
Revenues
The Company's major products are group medical, group
disability and dental, group life, and annuity and
individual life insurance coverages sold through a
network of independent agents and brokers. Nine months
total group disability and dental, group medical, group
life, and annuity and individual life premiums
represented 38%, 35%, 19% and 8% respectively of total
premium in 1998 and 34%, 38%, 21% and 7% respectively in
1997. Strong group sales over the last three quarters of
1997 and first three quarters of 1998, in both the long
term disability and dental products is the primary reason
for the increase in group disability and dental premium.
Additionally, short term disability products had a larger
than usual upswing in sales during the second and third
quarter of 1998. The decrease in group medical premium
is the result of a decision in 1996 to discontinue new
sales of certain medical products coupled with higher
than normal lapses of current medical business.
The Company continues to match investment portfolio
composition to liquidity needs and capital requirements.
Changes in interest rates during 1998 and 1997 resulted
in recognition of realized gains and losses.
Benefits
The total third quarter policyholder benefit to premium
ratio remained relatively flat at 82% from 1997 to 1998.
The group disability and dental, group medical, group
life, and annuity and individual life benefit to premium
ratios for the nine months ended September 30, were 81%,
85%, 74% and 106% respectively in 1998 and 81%, 75%, 80%
and 128% respectively in 1997. The group medical business
experienced a higher premium to benefit ratio due to
higher incurred benefits than anticipated. Group life
experienced favorable year-to-date experience in 1998
compared to 1997. The annuity and individual life
business also experienced lower mortality experience in
the first three quarters of 1998 compared to the same
period in 1997, in addition to higher interest crediting
on the Company's steadily increasing policy base of
interest sensitive and investment products.
Expenses
The Company's general and administrative expense to
premium ratio has increased in the first nine months of
1998 to 24% from 21% during the same period in 1997.
Enabling the application systems to be Year 2000
compliant and increased efforts during 1997 to improve
administrative systems are the primary reasons for this
increase. The first nine months of 1997 reflect lower
general expenses compared to the balance of 1997 due to
unusually low adminstrative expenses.
Commission rates have increased from the levels in 1997.
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.
Year 2000
The Year 2000 issue is the result of computer programs
having been written using two digits rather than four to
define a year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900
rather than 2000. This could result in the failure of
major systems or miscalculations, which could have a
material impact on the operations of the Company and any
of its businesses or subsidiaries. All of the Company's
major businesses are heavily dependent upon internal
computer systems, and many have significant interaction
with systems of third parties.
A comprehensive review of the Company's computer systems
and business processes has been conducted to identify the
major systems that could be affected by the Year 2000
issue. Steps are being taken to resolve any potential
problems including modification to existing software and
the purchase of new software. These measures are
scheduled to be completed and tested on a timely basis.
The Company's goal is to complete internal remediation
and testing of each system by early 1999.
Factors that could influence the total costs to be
incurred by the Company in connection with the Year 2000
issue include the ability of the Company to successfully
identify systems containing two-digit year codes, the
nature and amount of programming required to fix the
affected programs, the related labor and consulting costs
for such remediation, and the ability of third parties
that interface with the Company to successfully address
their Year 2000 issues.
The Company is evaluating the Year 2000 readiness of
advisors and other third parties whose system failures
could have an impact on the Company's operations. The
potential materiality of any such impact is not entirely
known at this time. The Company is closely monitoring
these entities to avoid any unforseen circumstances.
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 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's fixed maturity investments consisted of 96%
investment grade bonds as of September 30, 1998 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. None
b. 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, 1998
/s/ Michael J. Peninger
Senior Vice President, Controller and Treasurer (on
behalf of the Registrant and as its principal financial
and chief accounting officer)