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, 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)
Sept 30, December 31,
1996 1995
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost: $1,960,373 at September 30, 1996,
$1,951,204 at December 31, 1995) $ 1,971,427 $ 2,075,624
Equity securities, at fair value (cost:
$70,711 at September 30, 1996, $60,935 at
December 31, 1995) 92,104 78,852
Mortgage loans on real estate 580,726 562,697
Policy loans 59,646 53,863
Short-term investments 153,852 153,499
Real estate and other investments 25,536 11,918
2,883,291 $ 2,936,453
Cash (30,488) 1
Receivables:
Uncollected premium 66,507 55,992
Reinsurance recoverable on paid and unpaid losses 12,168 11,812
Due from affiliates (2,182) 388
Other 48,328 14,581
124,821 82,773
Accrued investment income 41,407 41,209
Deferred policy acquisition costs 262,379 237,509
Property and equipment, at cost, less
accumulated depreciation 54,920 60,031
Recoverable federal income taxes 21,548 -
Deferred federal income taxes 20,613 -
Other assets 6,425 3,551
Assets held in separate accounts 2,236,699 1,781,485
$ 5,621,615 $ 5,143,012
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, December 31,
1996 1995
(unaudited)
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Traditional life insurance $ 604,780 $ 407,706
Interest sensitive and investment products 969,123 1,101,931
Accident and health 816,857 832,925
2,390,760 2,342,562
Unearned premiums 11,491 13,044
Other policy claims and benefits payable 221,784 196,403
Policyholder dividends payable 8,230 7,930
2,632,265 2,559,939
Accrued expenses 42,799 68,441
Current income taxes payable - 5,375
Deferred federal income taxes - 9,538
Other liabilities 63,995 31,145
Liabilities related to separate accounts 2,210,270 1,757,476
4,949,329 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 234,868 207,421
Unrealized gain (loss) on available-for-sale
securities, net of deferred taxes of
$10,656 at September 30, 1996 and $47,455 at
December 31, 1995 19,966 88,131
Unrealized gain on assets held in separate
accounts, net of deferred taxes of $1,094 at
September 30, 1996 and $1,371 at December 31, 1995 4,452 2,546
672,286 711,098
$5,621,615 5,143,012
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Nine months ended
September 30,
1996 1995
REVENUES
Insurance operations:
Traditional life insurance premiums $ 288,295 $ 184,808
Interest sensitive and investment product
policy charges 58,398 33,875
Accident and health premiums 745,059 682,547
1,091,752 901,230
Net investment income 151,921 147,311
Realized gains (losses) on investments 9,499 40,679
Other income 24,844 27,575
TOTAL REVENUES 1,278,016 1,116,795
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 263,073 152,535
Interest sensitive and investment products 79,392 53,695
Accident and health 603,498 555,816
945,963 762,046
Policyholder dividends 2,792 2,866
Amortization of deferred policy acquisition
costs 30,026 30,924
Insurance commissions 73,454 70,975
General and administrative expenses 183,572 180,612
TOTAL BENEFITS AND EXPENSES 1,235,807 1,047,723
INCOME BEFORE INCOME TAXES 42,209 69,372
INCOME TAX EXPENSE (BENEFITS)
Current 19,794 31,447
Deferred (5,021) (7,863)
14,773 23,584
NET INCOME $ 27,436 $ 45,788
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(unaudited)
Three months ended
September 30,
1996 1995
REVENUES
Insurance operations:
Traditional life insurance premiums $ 93,344 $64,723
Interest sensitive and investment
policy charges 27,227 11,312
Accident and health premiums 240,260 239,727
Total Insurance Revenue 360,831 315,762
Net investment income 51,538 50,494
Realized gains (losses) on investments 3,807 17,128
Other income 7,816 10,408
TOTAL REVENUES 423,992 393,792
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 80,960 55,230
Interest sensitive and investment products 32,085 20,142
Accident and health 193,430 201,343
306,475 276,715
Policyholder dividends 904 990
Amortization of deferred policy acquisition
costs 9,866 9,932
Insurance commissions 22,624 24,883
General and administrative expenses 61,677 62,594
TOTAL BENEFITS AND EXPENSES 401,546 375,114
INCOME BEFORE INCOME TAX EXPENSE 22,446 18,678
INCOME TAX EXPENSE (BENEFITS)
Current 12,372 11,101
Deferred (4,515) (4,844)
7,857 6,257
NET INCOME $ 14,589 $12,421
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine months ended
September 30,
1996 1995
OPERATING ACTIVITIES
Net income $ 27,436 $ 45,788
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves for
traditional and interest sensitive products (102,268) 40,160
Increase in other policy claims, benefits
and policyholder dividends payable (5,335) 33,381
Decrease in deferred federal income taxes (5,020) (7,863)
Increase (decrease) in income taxes payable (14,977) (806)
Amortization of policy acquisition costs 30,026 9,932
Policy acquisition costs deferred (49,919) (21,328)
Provision for depreciation 12,341 11,328
Accrual of discount, net 2,040 (858)
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities (53,686) 38,299
Realized (gains) losses on investments (6,972) (40,679)
Other (6,626) 419
NET CASH PROVIDED BY OPERATING ACTIVITIES (172,960) 107,773
INVESTING ACTIVITIES
Purchases of fixed maturity investments (2,063,048)(1,753,300)
Sales or maturities of fixed maturity investments 2,048,551 1,629,940
Increase in short-term investments (724) (33,703)
Purchase of other investments (37,816) (165,622)
Sales or maturities of other investments 38,619 69,523
Purchase of property and equipment (7,230) (13,672)
Other (2,809) (15,785)
NET CASH USED BY INVESTING ACTIVITIES (24,457) (282,619)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 157,381 180,185
Surrenders and death benefits (36,918) (40,354)
Interest credited to policyholders 46,465 35,784
Dividends paid to shareholder 0 0
NET CASH PROVIDED BY FINANCING ACTIVITIES 166,928 175,615
INCREASE IN CASH (30,489) 769
Cash and cash equivalents at beginning of period 1 10,888
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(30,488) $ 11,657
See accompanying notes.
/TABLE
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 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 September 30, 1996 and the related statement of
income for the nine months ended September 30, 1996 and
1995, and cash flows for the nine months ended September
30, 1996 and 1995.
Income tax payments for the nine months ended September
30,1996 and September 30, 1995 were $34,345,382 and
$32,253,506, 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, 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 September 30, 1996
(in thousands):
Amortized UnrealizedUnrealizedFair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 336,862 $ 1,434$ 2,872 $ 335,424
Public Utilities 88,589 2,744 1,054 90,279
Industrial and
miscellaneous 1,539,012 23,846 13,790 1,549,069
Other 8,952 829 117 9,663
Total 1,973,415 28,853 17,833 1,984,435
Equity Securities 70,711 23,150 1,757 92,104
$2,044,126$ 52,003$ 19,590 $2,076,539
The amortized cost and fair value of fixed maturities at
September 30, 1996, by contractual maturity, are shown
below (in thousands). Expected maturities will differ
from contractual maturities because borrowers may have
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1996
(unaudited)
the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $ 185,383 $ 185,514
Due after one year through
five years 554,995 562,567
Due after five years through
ten years 633,187 633,910
Due after ten years 740,695 743,289
$ 2,114,260 $ 2,125,280
Proceeds from sales and maturities of investments in
fixed maturities in the nine-month period ended September
30,1996 were $2,006,230,996,and $42,896,407 respectively.
Gross gains of $33,278,130 and gross losses of
$26,306,463 were realized on sales.
Mortgage Loans: The Company has issued commercial
mortgage loans on properties located throughout the
country. Currently, approximately 29% 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
September 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 nine months of each year were as follows (in
thousands):
Investment Realized Gain (Loss)
Income on Investments
1996 1995 1996 1995
Fixed maturities $105,456 $ 99,998 $ (3,232) $ 36,470
Preferred stocks 172 326 257 485
Common stocks 4,829 1,199 9,947 2,129
Mortgage loans on
real estate 39,581 36,283 (144) (242)
Policy loans 2,512 2,247 0
Short-term investments 4,383 9,289 (3)
Real estate and other
investments 1,850 2,642 2,808 1,840
158,783 151,984 $ 9,636 $ 40,679
Expenses (6,862) (4,673)
$151,921 $147,311
Management's Discussion and Analysis of Financial
Condition and Results of Operations
September Year-to-Date 1996 Compared to September Year-
to-Date 1995
Traditional life insurance premiums were $288.0 million
in the first nine months of 1996 compared to $185.0
million in the same period of 1995. This increase in
premium 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 72% to $58.4 million for
the first nine 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 $745.0 million versus $682.5
for the same period in 1995. This increase was led by
sales of the Company's medical and disability products.
Total revenues were $1,278.0 million in the third quarter
1996 year to date compared to $1,116.8 million for the
same period in 1995. Included in the revenues were
capital gains of $9.5 million in 1996 versus gains of
$40.7 million in 1995.
Traditional life insurance benefits were $263.0 million
for the period ended September 30, 1996 versus $152.5
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
$79.3 million for the period ended September 30, 1996.
This was an increase of 47% 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 $603.5 million for the period ended 1996
compared to $555.8 for the same period in 1995.
Increased premium volume is the primary driver of the
variance.
Commission expense for the period ended September 30,
1996 was $73.4 million compared to $70.9 million for the
same period in 1995. Interest sensitive and investment
products commission increased 27% from the first three
quarters of 1996 compared to 1995; however, the company
deferred $46.8 million of these commissions in the first
three quarters of 1996, compared to $39.6 million in the
first three quarters of 1995. The additional commission
and deferral is the result of a 61% increase in sales of
the Company's variable life product, combined with a 3%
increase in variable annuity sales. Amortization of
deferred policy acquisition costs were $30.0 million
compared to $30.9 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 $183.5 million versus $180.6
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 $14.7 million for the first
nine months of 1996 compared to $23.5 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 $27.4
million for the period ended September 30, 1996 versus
$45.7 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 September 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 September 30, 1996, the Company
recognized an unrealized gain, net of taxes, of $20.0
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 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)