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 September 30, 1999
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)
September 30,
December 31,
1999 1998
(unaudited)
Assets
Investments:
Fixed maturities, at fair value (amortized $2,227,644 $2,402,343
Cost 1999--$2,286,508; 1998--
$2,315,904)
Equity securities, at fair value (cost 1999-
- -$164,064; 167,829 157,851
1998--$141,947)
Mortgage loans on real estate, less
allowance for possible losses (1999 and 628,408 610,131
1998--$11,085)
Policy loans 81,052 74,950
Short-term investments 41,775 31,868
Real estate and other investments 84,033 56,297
3,230,741 3,333,440
Cash and cash equivalents (35,774) 668
Receivables:
Uncollected premiums 69,628 61,883
Reinsurance recoverable on unpaid and paid 22,987 14,853
losses
Other 12,407 17,641
105,022 94,377
Accrued investment income 43,475 42,831
Deferred policy acquisition costs 377,739 331,938
Property and equipment at cost, less
accumulated 25,508 30,712
depreciation
Deferred federal income taxes 57,960 17,904
Other assets 6,050 3,923
Assets held in separate accounts 4,153,757 3,742,403
Total assets $7,964,478 $7,598,196
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
September 30,
December 31,
1999 1998
(unaudited
)
Policy reserves, liabilities and
shareholder's equity
Future policy benefit reserves:
Traditional life insurance $ 451,332 $ 450,776
Interest sensitive and investment products 1,157,384 1,238,125
Accident and health 916,178 861,334
2,524,894 2,550,235
Unearned revenues 24,911 13,393
Other policy claims and benefits payable 259,285 255,350
Policyholder dividends payable 8,041 8,189
2,817,131 2,827,167
Debt 44,072 20,141
Accrued expenses 56,313 57,860
Current income taxes payable 5,104 4,168
Other liabilities 86,093 86,226
Due to affiliates 7,909 9,479
Liabilities related to separate accounts 4,114,860 3,707,687
Total policy reserves and liabilities 7,131,482 6,712,728
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 388,441 344,605
Unrealized gain on available-for-sale
Securities (net of deferred taxes 1999--
$(18,013); 1998--$33,961) (33,453) 63,071
Unrealized gain on assets held in separate
Accounts (net of deferred taxes 1999--
$2,697;
1998--$2,580) 5,008 4,792
Total shareholder's equity 832,996 885,468
Total policy reserves, liabilities and $7,964,478 $7,598,196
shareholder's equity
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Nine Months
Ended
September 30,
1999 1998
Revenues
Insurance Operations:
Traditional life insurance premiums $ 197,979 $ 193,002
Interest sensitive and investment 71,306 63,533
products policy charges
Accident and health premiums 756,299 705,467
1,025,584 962,002
Net investment income 169,081 176,177
Net realized gains on investments 11,924 46,136
Other income 38,611 33,742
Total revenues 1,245,200 1,218,057
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 143,701 141,304
Interest sensitive and investment 69,081 71,118
products
Accident and health 622,439 584,640
835,221 797,062
Policyholder dividends 2,390 2,835
Acquisition of deferred policy 30,475 30,883
acquisition costs
Insurance commissions 77,906 80,040
General and administrative expenses 235,337 226,475
Total benefits and expenses 1,181,329 1,137,295
Income before income taxes 63,871 80,762
Income tax expense (benefits)
Current 8,737 28,325
Deferred 11,299 (58)
20,036 28,267
Net income 43,835 52,495
Other comprehensive loss:
Unrealized loss on investments (96,307) (1,120)
Comprehensive(loss) income $ $ 51,375
(52,472)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months
Ended
September 30,
1999 1998
Revenues
Insurance Operations:
Traditional life insurance premiums $ $ 64,941
66,365
Interest sensitive and investment 23,859 20,631
products policy charges
Accident and health premiums 253,325 241,434
343,549 327,006
Net investment income 57,692 57,064
Net realized gains on investments (145) 5,117
Other income 13,162 11,210
Total revenues 414,258 400,397
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 46,405 46,278
Interest sensitive and investment 23,745 23,236
products
Accident and health 207,630 200,771
277,780 270,285
Policyholder dividends 664 801
Acquisition of deferred policy 12,221 4,987
acquisition costs
Insurance commissions 27,035 28,350
General and administrative expenses 69,387 74,170
Total benefits and expenses 387,087 378,593
Income before income taxes 27,171 21,804
Income tax expense (benefits)
Current (674) 4,221
Deferred 8,810 3,393
8,136 7,614
Net income 19,035 14,190
Other comprehensive (loss) income:
Unrealized (loss) gain on investments (25,224) 6,984
Comprehensive (loss) income $ $
(6,189) 21,174
See accompanying notes.
Fortis Benefits Insurance Company
Statements of Cash Flows
(In thousands) Nine Months
ended
September 30,
1999 1998
Operating activities
Net income $ $
43,835 52,495
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in future policy benefit 63,995 64,625
reserves
Increase (decrease) in other policy 15,305 (7,434)
claims and benefits and policyholder
dividends payable
Provision for deferred federal income 11,299 (58)
taxes
Increase (decrease) in income taxes 936 (6,787)
payable
Amortization of deferred policy 31,352 30,883
acquisition costs
Policy acquisition costs deferred (68,446) (53,706)
Provision for depreciation 6,112 14,924
Amortization of investment premiums, (1,699) (2,757)
net
Change in uncollected premiums,
accrued investment income,
reinsurance recoverable, other
receivables, other assets, debt, 7,265 (38,816)
accrued expenses, and other
liabilities
Net realized gains on investments (11,922) (46,132)
Net cash provided by operating 98,032 7,237
activities
Investing activities
Purchases of fixed maturity (1,244,67 (1,655,16
investments 2) 0)
Sales or maturity of fixed maturity 1,270,319 1,745,599
investments
Increase in short-term investments (9,907) (8,295)
Purchases of other investments (265,668) (340,244)
Sales or maturities of other 205,698 268,056
investments
Purchase of property and equipment (908) (164)
Net cash (used in) provided by (45,138) 9,792
investing activities
Financing activities
Activities related to investment
products:
Considerations received 185,164 152,413
Surrenders and death benefits (304,791) (243,419)
Interest credited to policyholders 30,291 37,665
Net cash used in financing activities (89,336) (53,341)
Decrease in cash and cash equivalents ( 36,442) (36,312)
Cash and cash equivalents at 668 9,901
beginning of year
Cash and cash equivalents at end of $ $
period (35,774) (26,411)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1999
(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,
1999 and the related statement of income for the nine and three
months ended September 30, 1999 and 1998, and cash flows for the
nine months ended September 30, 1999 and 1998.
Income tax payments for the nine months ended September 30, 1999
and September 30, 1998 were $7,800,000 and $35,112,000,
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 30, 1999, 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, 1999 (in thousands):
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gain Loss Value
Fixed Income
Securities:
Governments $ $ 696 $ 1,383 $
99,951 99,264
Public utilities 230,226 754 10,023 220,957
Industrial and 1,790,256 11,210 53,392 1,748,074
miscellaneous
Other 166,075 406 7,132 159,349
Total 2,286,508 13,066 71,930 2,227,644
Equity securities 164,064 12,540 8,775 167,829
$2,450,572 $25,606 $80,705 $2,395,473
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1999
(unaudited)
The amortized cost and fair value in fixed maturities at
September 30, 1999, 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 $ $
82,350 82,446
Due after one year through five years 625,038 621,937
Due after five years through ten years 653,547 633,559
Due after ten years 925,573 889,702
Total $2,286,508 $2,227,644
Proceeds from sales and maturities of investments in fixed
maturities in the nine-month period ended September 30, 1999 were
$1,230,168,000, and $40,151,000 respectively. Gross gains of
$10,925,000 and $34,118,000 and gross losses of $14,986,000 and
$6,438,000 were realized on sales during the nine month period
ended September 30, 1999 and 1998, respectively.
Mortgage Loans: The Company has issued commercial mortgage loans
on properties located throughout the country. Currently,
approximately 35% 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
September 30, 1999
(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):
Realized Gain (Loss)
Investment Income
on Investments
1999 1998 1999 1998
Fixed maturities $118,381 $120,421 $ (4,061) $27,680
Preferred stocks 7 88 3 14
Common stocks 5,116 6,811 15,969 8,985
Mortgage loans on real 41,178 43,143 - (198)
estate
Policy loans 3,896 3,444 - -
Short-term investments 612 1,451 - -
Real estate and other 4,201 5,680 13 9,655
investments
173,391 181,038 $11,924 $46,136
Expenses 4,310 4,861
$169,081 $176,177
Fortis Benefits Insurance Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations September 30, 1999 Compared
to September 30, 1998
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 1998, the Company began
issuing individual long-term care products which caused a slight
shift in the product premium mix in the first nine months of
1999. Year-to-date third quarter group disability and dental,
group medical, group life, annuity and individual life, and long
term care premiums represented 39%, 33%, 19%, 8% and 1%,
respectively of premium in 1999 and 38%, 35%, 19%, 8% and 0%
respectively in 1998. The decrease in group medical premium is
the result of a decision in 1996 to discontinue new sales of
certain medical products.
The Company continues to match investment portfolio composition
to liquidity needs and capital requirements. Changes in interest
rates during 1999 and 1998 resulted in recognition of realized
gains and losses upon sales of securities.
BenefitsThe third quarter policyholder benefit to premium ratio
remained relatively flat, decreasing to 81.4% in 1999 from 83.0%
in 1998. The group disability and dental, group medical, group
life, annuity and individual life, and long term care benefit to
premium ratios for the nine months ended September 30, were 84%,
82%, 72%, 97%, and 49% respectively in 1999 and 81%, 85%, 74%,
106%, and 32% respectively in 1988. Group disability had a
higher than expected claim incidence coupled with longer than
expected claim payment periods. Group life had favorable
experience in the first nine months of 1999 compared to the same
period in 1998. The annuity and individual life business also
experienced lower mortality experience in the first three
quarters of 1999 compared to the same period in 1998, in addition
to lower interest crediting on the Company's decreasing policy
base of interest sensitive and investment products.
Expenses
The Company's general and administrative expense to premium
ratio remained relatively flat, decreasing to 23.2% in the
first nine months of 1999 from 23.8% in the same period in
1998. The Company continued to monitor expenses, striving to
improve the expense to premium ratio, while maintaining quality
and timely services to policyholders.
Commission rates have decreased from the levels in 1998. 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.
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 contractowners bear the
investment risk related to the variable products.
Therefore, the risks associated with the investments
supporting the variable separate accounts are assumed
by contractowners, 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
Introduction. The information provided in this section and in
other communications is to keep the reader informed
about Fortis, Inc. and its subsidiaries ("Fortis")
Year 2000 effort. A list of the Fortis, Inc.
subsidiaries is attached hereto as Exhibit A. This
information reflects Fortis' understanding and
expectations as of the date we provide it, but the
situation could change over time. This document is
designated as a Year 2000 Readiness Disclosure and the
information contained herein is provided in accordance
with the Year 2000 Information and Readiness Disclosure
Act (112 Stat. 2386).
Fortis relies heavily on information technology ("IT")
systems to conduct its business. These Fortis IT
systems include both internally developed and vendor-
supplied systems. Fortis also relies on the non-IT
systems including the embedded technology and facility
related systems. In addition, Fortis has business
relationships with numerous entities including but not
limited to financial institutions, financial
intermediaries, third party administrators and other
critical vendors as well as regulators and customers.
These entities are themselves reliant on their IT
systems to conduct their businesses. Therefore, there
is a supply chain of dependency among and between all
involved entities.
State of Readiness. In 1997, the Fortis parent company
organized a multi-disciplinary Year 2000 Project Team
("Team"). The Team consists of employees at each
subsidiary, audit, legal and outside consultants. The
Team and Fortis have developed and are currently
executing a comprehensive plan ("Plan") designed to
make Fortis' IT systems Year 2000 ready. The Plan
covers four stages including (i) inventory, (ii)
assessment, (iii) programming, and (iv) testing and
certification. Fortis has completed the inventory stage
for its internal hardware, software and
telecommunications systems (mainframe and client/server
applications). The assessment process is also complete
and Fortis is utilizing both internal and external
resources to reprogram or replace the systems where
necessary, and testing the applications for Year 2000
readiness. Fortis has also inventoried its various
facility locations and the systems that relate thereto
including embedded technologies. Fortis is proceeding
with actions to ensure Year 2000 readiness of those
systems. Programming, testing and certification of all
systems and applications are targeted for completion by
the end of 1999.
Fortis is also in the process of identifying third parties
with which they have a material relationship in both
sending and receiving information from those entities
with respect to current Year 2000 readiness, additional
actions which need to be taken and potential
opportunities to share specific, detailed information
and possible test results.
Costs. The cost of the Fortis Year 2000 project is estimated
at $88.2 million (pre-tax) and is being funded through
operating cash flows. Total Year 2000 project costs are
based on management's best estimates, which were
derived utilizing numerous assumptions of future
events, including the continued availability of certain
resources, third party modification plans and other
factors. Costs to upgrade and replace systems in the
normal course of business are not included in this
estimate. As of August 31, 1999, approximately $69.8
million (pre-tax) had already been expensed to Fortis.
Fortis believes that its Year 2000 project generally is
on schedule.
Risks. Fortis is attempting to limit the potential impact
of the Year 2000 by monitoring the progress of its own
Year 2000 project and those of its critical external
relationships (both I/T and non-I/T) and by developing
contingency/recovery plans. Those contingency plans
have identified the mission critical systems and
relationships and have put action plans in place to
address a Year 2000 issue. Fortis cannot guarantee that
it will be able to identify and/or resolve all of its
Year 2000 issues. Any critical unresolved Year 2000
issues at Fortis or its external relationships,
however, could have a material adverse effect on the
Fortis' results of operations, liquidity or financial
condition. If Fortis' Year 2000 issues were unresolved,
potential consequences would include, among other
possibilities, the inability to accurately and timely
process benefit claims; update customer's accounts;
process financial transactions; bill customers; assess
exposure to risks; determine liquidity requirements or
report accurate data to management, shareholders,
customers, regulators and others; as well as business
interruptions or shutdowns, financial losses, harm to
its reputation, increased scrutiny by regulators and
litigation related to Year 2000 issues. However, Fortis
is using methods recognized and adopted in the general
business community to ensure that any Year 2000 issue
will be addressed promptly and any damages will be
mitigated.
Contingency Plans. Consistent with prudent due diligence
efforts, Fortis has defined contingency plans aimed at
ensuring the continuity of critical business functions
before and after December 31, 1999, should there be an
unexpected system failure. Fortis has developed plans
that are designed to reduce the negative impact on
Fortis, and provide methods of returning to normal
operations, if failure occurs.
EXHIBIT A
FORTIS, INC. SUBSIDIARIES
First Fortis Life Insurance Company
Fortis Insurance Company
Fortis Benefits Insurance Company
American Security Insurance Company
Union Security Life Insurance Company
Standard Guaranty Insurance Company
Insureco, Inc
Fortis Advisers Inc.
Fortis Investors, Inc
United Family Life Insurance Company
Adultcare, Inc.
Dental Health Alliance, L.L.C.
Remembrance Institute, Inc.
Associated California State Insurance Agencies/Ardiel
Insurance Services, Inc
John Alden Financial Corporation
John Alden Life Insurance Company
Houston National Life Insurance Company
Pierce National Life Insurance Company
Note: Fortis, Inc. has recently acquired the American
Bankers Insurance Group (ABIG) and it's subsidiaries. To
review ABIG's Year 2000 Readiness Disclosure, please go to
www.us.fortis.com. Click on "Organization", then on
"American Bankers Insurance Group (ABIG) Year 2000 Readiness
Disclosure".
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 99%
investment grade bonds as of September 30, 1999 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. None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly
caused this report to be signed on itrs behalf by the undersigned
thereunto duly authorized.
Fortis Benefits Insurance Company
(Registrant)
Date: November 12, 1999
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its principal financial and
chief accounting officer)