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 March 31, 1996
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, except per share amounts)
March 31 December 31,
1996 1995
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost: $2,012,573 at March 31, 1996
$1,951,204 at December 31, 1995) $ 2,042,316 $ 2,075,624
Equity securities, at fair value (cost:
$77,223 at March 31, 1996, $60,935 at
December 31, 1995) 97,359 78,852
Mortgage loans on real estate 556,903 562,697
Policy loans 55,408 53,863
Short-term investments 92,906 153,499
Real estate and other investments 16,736 11,918
2,861,628 2,936,453
Cash 2,877 1
Receivables:
Uncollected premium 61,046 55,992
Reinsurance recoverable on paid and unpaid losses 11,169 11,812
Due from affiliates 148 388
Other 18,066 14,581
90,429 82,773
Accrued investment income 42,706 41,209
Deferred policy acquisition costs 244,092 237,509
Property and equipment, at cost, less
accumulated depreciation 59,815 60,031
Recoverable federal income taxes 19,127 --
Deferred federal income taxes 26,202 --
Other assets 2,773 3,551
Assets held in separate accounts 1,928,571 1,781,485
$ 5,278,220 $ 5,143,012
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
March 31, December 31,
1996 1995
(unaudited)
POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefit reserves:
Traditional life insurance $ 404,071 $ 407,706
Interest sensitive and investment products 1,117,337 1,101,931
Accident and health 820,066 832,925
2,341,474 2,342,562
Unearned premiums 11,847 13,044
Other policy claims and benefits payable 234,562 196,403
Policyholder dividends payable 8,217 7,930
2,596,100 2,559,939
Accrued expenses 46,237 68,441
Current income taxes payable -- 5,375
Deferred federal income taxes -- 9,538
Other liabilities 81,596 31,145
Liabilities related to separate accounts 1,903,941 1,757,476
4,627,874 4,431,914
SHAREHOLDER'S EQUITY
Common stock, $5 par value, 1,000,000 5,000 5,000
shares authorized, issued and outstanding 408,000 408,000
Additional paid-in capital 206,972 207,421
Retained earnings
Unrealized gain on available-for-sale
securities, net of deferred tax expense of
$15,750 at March 31, 1996 and tax benefit of
$47,455 at December 31, 1995 29,260 88,131
Unrealized gain on assets held in separate
accounts, net of deferred taxes of $605 at
March 31, 1996 and $1,371 at December 31, 1995 1,124 2,546
650,356 711,098
$ 5,278,230 $ 5,143,012
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three months ended
March 31,
1996 1995
REVENUES
Insurance operations:
Traditional life insurance premiums $ 61,744 $ 57,095
Interest sensitive and investment product
policy charges 13,575 11,205
Accident and health premiums 251,577 215,084
326,896 283,384
Net investment income 50,539 47,519
Realized gains (losses) on investments 6,866 (492)
Other income 8,444 8,320
TOTAL REVENUES 392,745 338,731
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 59,258 46,355
Interest sensitive and investment products 23,506 16,155
Accident and health 210,176 169,382
292,940 231,892
Policyholder dividends 1,134 748
Amortization of deferred policy acquisition costs 10,941 8,746
Insurance commissions 25,481 22,862
General and administrative expenses 63,122 57,815
TOTAL BENEFITS AND EXPENSES 393,618 322,063
INCOME BEFORE INCOME TAX EXPENSE (873) 16,668
INCOME TAX EXPENSE (BENEFITS)
Current 2,845 6,578
Deferred (3,269) (1,079)
(424) 5,499
NET INCOME $ (449) $ 11,169
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Three months ended
March 31,
1996 1995
OPERATING ACTIVITIES
Net income $ (449) $ 11,169
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves for
traditional and interest sensitive products (62,021) 29,206
Increase in other policy claims, benefits
and policyholder dividends payable 38,446 2,085
Decrease in deferred federal income taxes (3,269) (1,079)
Increase (decrease) in income taxes payable (24,502) (2,212)
Amortization of policy acquisition costs 10,941 8,746
Policy acquisition costs deferred (15,704) (16,715)
Provision for depreciation 4,593 3,558
Accrual of discount, net 676 (972)
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities 17,897 36,699
Realized (gains) losses on investments (6,866) 492
Other 778 293
NET CASH PROVIDED BY OPERATING ACTIVITIES (39,480) 71,270
INVESTING ACTIVITIES
Purchases of fixed maturity investments (625,023) (426,066)
Sales or maturities of fixed maturity investments 564,633 365,312
(Increase) decrease in short-term investments 60,693 (21,534)
Purchase of other investments (46,828) (102,940)
Sales or maturities of other investments 31,979 17,241
Purchase of property and equipment (4,395) (3,299)
Other 364 --
NET CASH USED BY INVESTING ACTIVITIES (18,577) (171,286)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 58,767 90,987
Surrenders and death benefits (13,369) (9,698)
Interest credited to policyholders 15,535 11,269
Dividends paid to shareholder 0 -
NET CASH PROVIDED BY FINANCING ACTIVITIES 60,933 92,558
INCREASE IN CASH 2,876 (7,458)
Cash and cash equivalents at beginning of period 1 10,888
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,877 $ 3,430
See accompanying notes.
/TABLE
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1996
(unaudited)
General: The accompanying unaudited financial
statements of Fortis Benefits Insurance Company contain
all adjustments necessary to present fairly the balance
sheet as of March 31, 1996 and the related statement of
income for the three months ended March 31, 1996, and
cash flows for the three months ended March 31, 1996
and 1995.
Acquired Business: In October, 1991 the Company
purchased certain assets and assumed certain
liabilities from the Mutual Benefit Life Insurance
Company in Rehabilitation (MBL). The seller transferred
to Fortis Benefits the assets and liabilities relating
to the group life, accident and health, disability and
dental insurance business of MBL. The acquisition was
accounted for as a purchase.
Fortis Benefits purchased this business for $318
million and issued a promissory note in the maximum
amount of $200 million. Most of the purchase price was
funded by a capital contribution of $225 million from
Fortis, Inc.
In accordance with the contractual agreement,
additional payments were paid to MBL based upon the
persistency of the long term disability portion of the
business. Under terms of this agreement, the Company
paid $6,644,000, $5,521,000 and $8,685,000 in 1994,
1993, and 1992, respectively. This additional purchase
price was accounted for as deferred policy acquisition
costs. No additional payments will be made.
Income tax payments for the three months ended March
31, 1996 and March 31, 1995 were $27,347,000 and
$8,790,000 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 March 31, 1996, 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 March 31, 1996
(in thousands):
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 517,801 $ 6,889 $ 4,431 $ 520,259
Public Utilities 67,593 3,170 632 70,131
Industrial and
miscellaneous 1,418,231 34,880 10,939 1,442,172
Other 8,948 894 88 9,754
Total 2,012,573 45,833 16,090 2,042,316
Equity Securities 77,223 21,943 1,807 97,359
$2,089,796 $ 67,776 $ 17,897 $2,139,675
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1996
(unaudited)
The amortized cost and fair value of fixed maturities
at March 31, 1996, by contractual maturity, are shown
below (in thousands). Expected maturities will differ
from contractual maturities because borrower 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 $ 41,610 $ 41,784
Due after one year through five years 551,455 557,967
Due after five years through ten years 738,868 749,600
Due after ten years 680,640 692,965
$ 2,012,573 $ 2,042,316
Proceeds from sales and maturities of investments in
fixed maturities in the three month period ended March
31, 1996 were $546,685,950, and $17,948,000
respectively. Gross gains of $13,094,428 and gross
losses of $8,949,756 were realized on sales.
Mortgage Loans: The Company has issued commercial
mortgage loans on properties located throughout the
country. Currently, approximately 27% of outstanding
principal is concentrated in the states of California,
Florida and Illinois. 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.
In 1995 the Company adopted FASB 114 and 118,
"Accounting by Creditors for Impairment of a Loan."
Statements 114 and 118 require that impaired loans are
to be valued at the present value of expected future
cash flows discounted at the loan's effective interest
rate, or, as a practical expedient, at the loan's
observable market price, or the fair market value of
the collateral if the loan is collateral dependent.
Adoption of these statements did not materially impact
the financial position or operating results of the
Company.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1996
(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 three months of each year were as follows (in
thousands):
Investment Realized Gain (Loss)
Income on Investments
1996 1995 1996 1995
Fixed maturities $ 35,421 $ 33,456 $ 1,628 $ (1,002)
Preferred stocks 51 186 250
Common stocks 620 415 2,266 264
Mortgage loans on
real estate 13,351 11,066 (144)
Policy loans 818 784
Short-term investments 2,102 2,415 57
Real estate and other
investments 239 844 2,809 246
52,602 49,166 $ 6,866 $ (492)
Expenses (2,063) (1,647)
$ 50,539 $ 47,519
Management s Discussion and Analysis of Financial
Condition and Results of Operations
March Year-to-Date 1996 Compared to March Year-to-Date
1995
Traditional life insurance premiums were $61.7 million
in the first three months of 1996 compared to $57.1
million in the same period of 1995. Revenues from
interest sensitive and investment product charges,
which consist primarily of cost of insurance charges on
these policies, increased 21.1% to $13.6 million from
first quarter 1995. Continued sales of interest
sensitive and investment products has steadily
increased the policy base on which these charges are
assessed. Accident and health premiums increased to
$251.6 million versus $215.1 for the same period in
1995. This increase was led by sales of the Company s
medical and disability products.
Total revenues were $392.7 million in the first quarter
1996 compared to $338.7 million for the same period in
1995. Included in the revenues were capital gains of
$6.9 million in 1996 versus capital losses of $.5
million in 1995.
Traditional life insurance benefits were $59.3 million
for the period ended March 31, 1996 versus $46.4
million for the same period in 1995. The high
percentage of benefits as compared to premiums is
attributable to less favorable group life mortality for
the quarter. Interest sensitive and investment product
benefits increased to $23.5 for the period ended. This
increase was the result of higher interest crediting
resulting from increased fixed account sales, and from
less favorable mortality experience. Accident and
health benefits were $210.2 million for the period
ended 1996 compared to $169.4 for the same period in
1995. Increased premium volume combined with higher
loss ratios contribute to this variance.
Commission expense in the first quarter 1996 was $25.5
million compared to $22.9 million for the same period
in 1995 this increase is consistent with increased
revenues. Amortization of deferred policy acquisition
costs were $10.9 million compared to $8.7 million for
the same period last year. The increase is due
primarily to the amortization of costs on individual
products deferred in the past years. General and
administrative expenses were $63.1 million versus $57.8
million in 1995. This increase is due primarily to the
increased volume of business.
Federal income taxes were a $.4 million benefit for the
first quarter 1996 compared to a $5.5 million expense
for the same period in 1995. The lower expense is due
to the pre-tax loss in 1996 compared to the pre-tax
income in 1995.
In summary, the Company reported a net loss of $.4
million for the period ended versus $11.1 gain in the
prior year.
Liquidity and Capital Resources
The liquidity requirements of the Company have been met
by funds provided from operations. The primary uses
of funds are to provide policy benefits and reserves,
operating expenses, commissions, and to purchase new
investments. The company expects its investment and
operating activities to generate sufficient funds for
these purposes.
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. The
computation involves applying factors to various
financial data to address four primary risks: asset
default, adverse insurance experience, interest rate
risk and external events. These standards provide for
regulatory intervention when the percentage of total
adjusted capital to authorized control level risk-based
capital is below certain levels. Based upon current
calculations of the risk-based capital standards, the
Company s percentage of total adjusted capital is well
in excess of ratios which would require regulatory
attention.
Fortis Benefits has no long or short term debt. Less
than 2% of the Company s assets consisted of non-
investment grade bonds as of March 31, 1996 and the
Company does not expect this percentage to increase
significantly in the future.
As explained in the notes to the financial statements,
the Company is classifying all fixed maturity
securities as available-for-sale and carrying them at
fair value. The unrealized gain or loss is recorded as
a component of shareholder s equity. At March 31,
1996, the Company recognized an unrealized gain, net of
taxes, of $29.3 million.
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 10, 1995
/s/ Michael J. Peninger
Senior Vice President, Controller and Treasurer (on
behalf of the Registrant and as its principal financial
and chief accounting officer)