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 June 30, 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)
June 30, December 31,
1996 1995
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost: $1,972,222 at June 30, 1996,
$1,951,204 at December 31, 1995) $ 1,978,556 $ 2,075,624
Equity securities, at fair value (cost:
$75,239 at June 30, 1996, $60,935 at
December 31, 1995) 98,936 78,852
Mortgage loans on real estate 578,672 562,697
Policy loans 56,976 53,863
Short-term investments 127,068 153,499
Real estate and other investments 20,494 11,918
2,860,702 $ 2,936,453
Cash (47,915) 1
Receivables:
Uncollected premium 64,913 55,992
Reinsurance recoverable on paid and unpaid losses 9,023 11,812
Due from affiliates 2,330 388
Other 22,551 14,581
98,817 82,773
Accrued investment income 39,776 41,209
Deferred policy acquisition costs 255,272 237,509
Property and equipment, at cost, less
accumulated depreciation 57,502 60,031
Recoverable federal income taxes 18,505 -
Deferred federal income taxes 29,593 -
Other assets 4,058 3,551
Assets held in separate accounts 2,098,912 1,781,485
$ 5,415,222 $ 5,143,012
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
June 30, December 31,
1996 1995
(unaudited)
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Traditional life insurance $ 606,243 $ 407,706
Interest sensitive and investment products 935,611 1,101,931
Accident and health 818,993 832,925
2,360,847 2,342,562
Unearned premiums 12,679 13,044
Other policy claims and benefits payable 219,542 196,403
Policyholder dividends payable 8,130 7,930
2,601,198 2,559,939
Accrued expenses 42,260 68,441
Current income taxes payable - 5,375
Deferred federal income taxes - 9,538
Other liabilities 45,059 31,145
Liabilities related to separate accounts2,073,614 1,757,476
4,762,131 4,431,914
SHAREHOLDER'S EQUITY
Common stock, $5 par value, 1,000,000
shares authorized, issued and outstanding 5,000 5,000
Additional paid-in capital 408,000 408,000
Retained earnings 220,277 207,421
Unrealized gain (loss) on available-for-sale
securities, net of deferred taxes of
$9,830 at June 30, 1996 and $47,455 at
December 31, 1995 18,256 88,131
Unrealized gain on assets held in separate
accounts, net of deferred taxes of $839 at
June 30, 1996 and $1,371 at December 31, 1995 1,558 2,546
653,091 711,098
$5,415,222 5,143,012
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Six months ended
June 30,
1996 1995
REVENUES
Insurance operations:
Traditional life insurance premiums $ 194,951$ 120,085
Interest sensitive and investment product
policy charges 31,171 22,563
Accident and health premiums 504,799 442,820
730,921 585,468
Net investment income 100,383 96,817
Realized gains (losses) on investments 5,692 23,551
Other income 17,028 17,167
TOTAL REVENUES 854,024 723,003
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 182,113 97,305
Interest sensitive and investment products 47,307 33,553
Accident and health 410,068 354,473
639,488 485,331
Policyholder dividends 1,888 1,876
Amortization of deferred policy acquisition
costs 20,160 20,992
Insurance commissions 50,830 46,092
General and administrative expenses 121,895 118,018
TOTAL BENEFITS AND EXPENSES 834,261 672,309
INCOME BEFORE INCOME TAXES 19,763 50,694
INCOME TAX EXPENSE (BENEFITS)
Current 7,422 20,346
Deferred (506) (3,019)
6,916 17,327
NET INCOME $ 12,847$ 33,367
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(unaudited)
Three months ended
June 30,
1996 1995
REVENUES
Insurance operations:
Traditional life insurance premiums $ 133,207 $62,990
Interest sensitive and investment
policy charges 17,596 11,358
Accident and health premiums 253,222 227,736
Total Insurance Revenue 404,025 302,084
Net investment income 49,844 49,298
Realized gains (losses) on investments (1,174) 24,043
Other income 8,584 8,847
TOTAL REVENUES 461,279 384,272
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 122,855 50,950
Interest sensitive and investment products 23,801 17,398
Accident and health 199,892 185,091
346,548 253,439
Policyholder dividends 754 1,128
Amortization of deferred policy acquisition
costs 9,219 12,246
Insurance commissions 25,349 23,230
General and administrative expenses 58,773 60,203
TOTAL BENEFITS AND EXPENSES 440,643 350,246
INCOME BEFORE INCOME TAX EXPENSE 20,636 34,026
INCOME TAX EXPENSE (BENEFITS)
Current 4,577 13,768
Deferred 2,763 (1,940)
7,340 11,828
NET INCOME $ 13,296 $22,198
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Six months ended
June 30,
1996 1995
OPERATING ACTIVITIES
Net income $ 12,847 $ 33,367
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves for
traditional and interest sensitive products (71,803) 44,960
Increase in other policy claims, benefits
and policyholder dividends payable (5,540) 17,132
Decrease in deferred federal income taxes 707 (3,019)
Increase (decrease) in income taxes payable (23,880) 1,124
Amortization of policy acquisition costs 4,908 20,992
Policy acquisition costs deferred (19,550) (29,839)
Provision for depreciation 8,600 7,284
Accrual of discount, net 1,134 (1,297)
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities (11,323) 2,308
Realized (gains) losses on investments (3,040) (23,551)
Other (4,978) 500
NET CASH PROVIDED BY OPERATING ACTIVITIES (111,918) 69,961
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,084,818)(1,146,459)
Sales or maturities of fixed maturity investments 1,060,351 1,093,748
Increase in short-term investments 26,115 (43,085)
Purchase of other investments (71,879) (140,596)
Sales or maturities of other investments 38,698 47,757
Purchase of property and equipment (6,072) (7,685)
Other (2,808) (15,949)
NET CASH USED BY INVESTING ACTIVITIES (40,413) (212,269)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 90,087 136,088
Surrenders and death benefits (16,493) (23,864)
Interest credited to policyholders 30,821 22,773
Dividends paid to shareholder 0 0
NET CASH PROVIDED BY FINANCING ACTIVITIES 104,415 134,997
INCREASE IN CASH (47,916) (7,311)
Cash and cash equivalents at beginning of period 1 10,888
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(47,915) $ 3,577
See accompanying notes.
/TABLE
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 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 June 30, 1996 and the related statement of income
for the six months ended June 30, 1996 and 1995, and cash
flows for the six months ended June 30, 1996 and 1995.
Income tax payments for the six months ended June 30,
1996 and June 30, 1995 were $32,194,224 and $19,221,619,
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, 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 June 30, 1996 (in
thousands):
Amortized UnrealizedUnrealizedFair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 356,603 $ 2,551$ 4,330 $ 354,824
Public Utilities 73,982 2,634 1,205 75,411
Industrial and
miscellaneous 1,532,945 25,818 19,831 1,538,932
Other 8,692 817 120 9,389
Total 1,972,222 31,820 25,486 1,978,556
Equity Securities 75,239 25,969 2,272 98,936
$2,047,461 $ 57,789$ 27,758$2,077,492
The amortized cost and fair value of fixed maturities at
June 30, 1996, by contractual maturity, are shown below
(in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1996
(unaudited)
right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $ 162,736 $ 162,902
Due after one year through
five years 556,971 562,936
Due after five years through
ten years 669,892 667,824
Due after ten years 709,671 711,963
$ 2,099,270 $ 2,105,625
Proceeds from sales and maturities of investments in
fixed maturities in the six-month period ended June 30,
1996 were $1,041,666,471 , and $18,684,818 respectively.
Gross gains of $20,278,965 and gross losses of
$17,251,418 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 Arizona,
California, 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.
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 FORTIS
BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1996
(unaudited)
statements did not materially impact the financial
position or operating results of the Company.
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):
Investment Realized Gain (Loss)
Income on Investments
1996 1995 1996 1995
Fixed maturities $ 69,489 $ 66,654 $ (2,271) $ 19,805
Preferred stocks 94 292 250 378
Common stocks 2,675 832 5,049 1,745
Mortgage loans on
real estate 26,440 23,735 (144) (17)
Policy loans 1,644 1,550
Short-term investments 3,165 5,666
Real estate and other
investments 1,435 1,345 2,808 1,640
104,942 100,074 $ 5,692 $ 23,551
Expenses (4,559) (3,257)
$100,383 $ 96,817
Management's Discussion and Analysis of Financial
Condition and Results of Operations
June Year-to-Date 1996 Compared to June Year-to-Date 1995
Traditional life insurance premiums were $195.0 million
in the first six months of 1996 compared to $120.0
million in the same period of 1995. This increase in
sales was led by the strong sales of the Company's group
life products. Interest sensitive and investment product
policy charges, which consist primarily of cost of
insurance charges, increased 38% to $31.2 million for the
first six months of 1996 compared to the same period in
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 $504.8 million versus $442.8
for the same period in 1995. This increase was led by
sales of the Company's medical and disability products.
Total revenues were $854.0 million in the second quarter
1996 year to date compared to $723.0 million for the same
period in 1995. Included in the revenues were capital
gains of $5.7 million in 1996 versus gains of $23.6
million in 1995.
Traditional life insurance benefits were $182.1 million
for the period ended June 30, 1996 versus $97.3 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 year. Interest
sensitive and investment product benefits were $47.3
million for the period ended June 30, 1996. This was an
increase of 26% from the same period in 1995. This
increase was the result of higher mortality experience in
1996 compared to 1995. Accident and health benefits were
$410.1 million for the period ended 1996 compared to
$354.5 for the same period in 1995. Increased premium
volume is the primary driver of the variance.
Commission expense for the period ended June 30, 1996 was
$50.8 million compared to $46.1 million for the same
period in 1995. Interest sensitive and investment
products commission increased 12% from the first half of
1996 compared to 1995; however, the company deferred $31
million of these commissions in the first half of 1996,
compared to $27.8 million in the first half of 1995. The
additional commission and deferral is the result of a 74%
increase in sales of the Company's variable life product,
combined with a 13% decrease in variable annuity sales.
Amortization of deferred policy acquisition costs were
$20.2 million compared to $21.0 million for the same
period last year. The decrease in the amortization of
deferred policy acquisition costs is due to lower write-
off's as expenses are amortized based on capital gains.
General and administrative expenses were $121.9 million
versus $118.0 million in 1995. This increase is due
primarily to the increased volume of business and lower
expenses on the Company's medical lines.
Federal income taxes were $6.9 million for the first six
months of 1996 compared to $17.3 million for the same
period in 1995. The lower expense is due to lower pre-
tax income including lower realized gains in 1996
compared to 1995.
In summary, the Company reported a net gain of $12.8
million for the period ended June 30, 1996 versus $33.4
million 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 June 30, 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 June 30, 1996, the Company
recognized an unrealized gain, net of taxes, of $18.3
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: August 12, 1996
/s/ Michael J. Peninger
Senior Vice President, Controller and Treasurer (on
behalf of the Registrant and as its principal financial
and chief accounting officer)