As filed with the Securities and Exchange Commission on April 28, 1997.
Registration No. 33-63829
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
AMENDMENT NO. 4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FORTIS BENEFITS INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
Minnesota
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(State or other jurisdiction of incorporation or organization)
63
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(Primary Standard Industrial Classification Code Number)
81-0170040
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(I.R.S. Employer Identification No.)
500 Bielenberg Drive
Woodbury, Minnesota 55125
612-738-5000
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Rhonda J. Schwartz, Esquire
500 Bielenberg Drive
Woodbury, Minnesota 55125
612-738-5000
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(Name, address including zip code, and telephone number, including
area code, of agent for service)
Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:
/ X /
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CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
Title of each Proposed Proposed maximum
class of securities Amount to be maximum offering aggregate Amount of
to be registered registered price per unit offering price registration fee
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Interests under flexible * * [None registered herewith]
premium deferred
fixed annuity
contracts
- --------------------
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the proposed
maximum offering price per unit are not applicable in that these securities are
not issued in predetermined amounts or units.
FORTIS BENEFITS INSURANCE COMPANY
Cross-Reference Sheet
Pursuant to Regulation S-K
Item 501(b)
Form S-1 Item Number Prospectus Caption
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1. Forepart of the Registration Cover Page; Table of Contents;
Statement and Outside Front Distribution and Servicing
Cover Page of Prospectus
2. Inside Front and Back Other Information; Reports
Cover Pages of Prospectus
3. Summary Information, Risk Summary of Contract Features or,
Factors and Ratio of as to ratio of earnings to fixed
Earnings to Fixed Charges charges, Not Applicable
4. Use of Proceeds The Variable Account; The
Portfolios; The Fixed Account
5. Determination of Offering Not Applicable
Price
6. Dilution Not Applicable
7. Selling Security Holders None
8. Plan of Distribution Distribution and Servicing
9. Description of Securities Cover Page; The Variable Account;
to be Registered Series Fund; The Fixed Account;
Accumulation Period; Charges and
Deductions; General Provisions
10. Interests of Named Legal Matters
Experts and Counsel
11. Information with Respect Fortis Benefits/Fortis Financial
to the Registrant Group Member; Further Information
About Fortis Benefits; Financial
Statements; Distribution and
Servicing
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act
Liabilities
VALUE
ADVANTAGE
PLUS
VARIABLE
ANNUITY
Certificates Under Flexible
Premium Deferred
Combination Variable and
Fixed Annuity Contracts
[LOGO]
PROSPECTUS DATED
May 1, 1997
FORTIS-Registered Trademark-
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-827-5877
P.O. BOX 64295 500 BIELENBERG DRIVE
ST. PAUL WOODBURY
MINNESOTA 55164 MINNESOTA 55125
This Prospectus describes interests under flexible premium deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by Fortis Benefits Insurance Company ("Fortis Benefits").
Participation in a group contract will be accounted for by the issuance of a
certificate showing your interest under the group contract. Participation in an
individual contract is shown by the issuance of an individual annuity contract.
The certificate and the individual contract are hereafter both referred to as
the "Certificate". The minimum under a Certificate is generally $5,000 for the
initial and $500 for each subsequent purchase payment.
A Certificate allows you to accumulate funds on a tax-deferred basis. You may
elect a guaranteed interest accumulation option through the Fixed Account or a
variable return accumulation option through Variable Account D (the "Variable
Account") of Fortis Benefits, or a combination of these two options. Under the
variable rate accumulation option, you can choose among the following
Portfolios:
Alliance Money Market Portfolio MFS Emerging Growth Series
Alliance International Portfolio MFS High Income Series
Alliance Premier Growth Portfolio MFS World Governments Series
Federated High Income Bond Fund II Montgomery Emerging Markets Fund
Federated Utility Fund II Montgomery Growth Fund
Federated American Leaders Fund II Neuberger & Berman Limited Maturity
Federated Fund for U.S. Government Bond Portfolio
Securities II Neuberger & Berman Partners Portfolio
Fortis S&P 500 Index Series SAFECO Equity Portfolio
INVESCO Industrial Income Portfolio SAFECO Growth Portfolio
INVESCO Health Services Portfolio Strong Discovery Fund II
INVESCO Technology Portfolio Strong International Stock Fund II
Lexington Natural Resources Trust American Century VP Balanced Fund
Lexington Emerging Markets Fund American Century VP Capital
Appreciation Fund
Van Eck Worldwide Bond Fund
Van Eck Worldwide Hard Assets Fund
The accompanying Prospectus for these Portfolios describes the investment
objectives, policies and risks of each of the Portfolios. In the states where
Guarantee Periods Fixed Accounts are offered (see "FIXED ACCOUNTS"), you can
choose among 10 different guarantee periods under the guaranteed interest
accumulation option, each of which has its own interest rate. In states where
Guarantee Periods Fixed Accounts are not offered, you can choose an interest in
the General Account Fixed Account with guaranteed interest.
You have the right to examine a Certificate during a "free look" period after
you receive the Certificate and return it for a refund of the amount of the then
current Certificate Value. However, in certain states where required by state
law the refund will be in the amount of all purchase payments that have been
made, without interest or appreciation or depreciation.
The "free look" period is generally 10 days unless a longer time is specified on
the face page of your Certificate.
For Certificates requiring a refund of all purchase payments, Fortis Benefits
will allocate all Net Purchase Payments made as a part of the purchase of the
Certificate to the Alliance Money Market Portfolio until the following number of
days after Fortis Benefits mails the Certificate to you: (1) the number of days
in the "free look" period, plus (2) five days. After the expiration of such
period, the Certificate Value will be allocated to the Fixed Account and the
Portfolios as directed by you.
The Certificate provides several different types of retirement and death
benefits, including fixed and variable annuity income options. You may make
partial surrenders of the Certificate Value or may totally surrender the
Certificate for its Cash Surrender Value.
This Prospectus gives prospective investors information about the Certificates
that they should know before investing. This Prospectus must be accompanied by a
current Prospectus of the Portfolios. These Prospectuses should be read
carefully and kept for future reference.
A Statement of Additional Information, dated May 1, 1997, about certain aspects
of the Certificates has been filed with the Securities and Exchange Commission
and is available without charge, from Fortis Benefits at the address and phone
number printed above. The Table of Contents for the Statement of Additional
Information appears on page 26 of this Prospectus.
THESE POLICIES ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK,
CREDIT UNION, BROKER-DEALER OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY; AND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FORTIS-Registered Trademark- and Fortis-Registered Trademark- are registered
servicemarks of Fortis AMEV and Fortis AG.
TABLE OF CONTENTS
PAGE
PAGE
Special Terms Used in this Prospectus................................. 3
Information Concerning Fees and Charges............................... 4
Summary of Certificate Features....................................... 6
Fortis Benefits/Fortis Financial Group Member......................... 8
The Variable Account.................................................. 8
The Portfolios........................................................ 8
The Fixed Account..................................................... 9
- Guarantee Periods Fixed Account................................. 9
- Market Value Adjustment......................................... 9
- General Account Fixed Account................................... 10
- General Account Fixed Account Transfers......................... 10
- Investments by Fortis Benefits.................................. 10
Fixed Account Value................................................... 11
Accumulation Period................................................... 11
- Issuance of a Certificate and Purchase Payments................. 11
- Certificate Value............................................... 11
- Allocation of Purchase Payments and Certificate Value........... 12
- Total and Partial Surrenders.................................... 12
- Benefit Payable on Death of Annuitant or Participant............ 13
The Annuity Period.................................................... 13
- Annuity Commencement Date....................................... 13
- Commencement of Annuity Payments................................ 14
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 14
- Annuity Forms................................................... 14
- Death of Annuitant or Other Payee............................... 15
Charges and Deductions................................................ 15
- Premium Taxes................................................... 15
- Charges Against the Variable Account............................ 15
- Annual Administrative Charge.................................... 15
- Tax Charge...................................................... 15
- Miscellaneous................................................... 15
General Provisions.................................................... 16
- The Certificates................................................ 16
- Postponement of Payments........................................ 16
- Misstatement of Age or Sex and Other Errors..................... 16
- Assignment...................................................... 16
- Beneficiary..................................................... 16
- Reports......................................................... 16
Rights Reserved By Fortis Benefits.................................... 16
Distribution.......................................................... 17
Federal Tax Matters................................................... 17
Further Information about Fortis Benefits............................. 20
- General......................................................... 20
- Selected Financial Data......................................... 20
- Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 20
- Liquidity and Capital Resources................................. 22
- Competition..................................................... 22
- Regulation and Reserves......................................... 22
- Employees and Facilities........................................ 22
Directors and Executive Officers...................................... 23
- Executive Compensation.......................................... 24
- Ownership of Securities......................................... 25
Voting Privileges..................................................... 25
Legal Matters......................................................... 25
Other Information..................................................... 26
Contents of Statement of Additional Information....................... 26
Fortis Benefits Financial Statements.................................. 26
PAGE
Appendix A--Sample Market Value Adjustment Calculations............... A-1
Appendix B--Explanation of Expense Calculations....................... B-1
Appendix C--Participating Portfolios.................................. C-1
THE CERTIFICATES ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT
INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR
ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY
FORTIS BENEFITS.
SPECIAL TERMS USED IN THIS PROSPECTUS
ACCUMULATION The time period under a Certificate between the Certificate Issue Date and the Annuity
PERIOD Commencement Date.
ACCUMULATION A unit of measure used to calculate the Participants' interest in the Variable Account during
UNIT the Accumulation Period.
ANNUITANT A person during whose life annuity payments are to be made by Fortis Benefits under the
Certificate.
ANNUITY The date on which the Annuity Period commences.
COMMENCEMENT
DATE
ANNUITY PERIOD The time period following the Accumulation Period, during which annuity payments are made by
Fortis Benefits.
ANNUITY UNIT A unit of measurement used to calculate variable annuity payments.
BENEFICIARY The person entitled to receive benefits under the terms of the Certificate.
CASH SURRENDER The amount payable to the Participant on surrender of the Certificate after all applicable
VALUE adjustments and deduction of all applicable charges.
CERTIFICATE The date on which the Certificate becomes effective as shown on the Certificate Data Page.
ISSUE DATE
CERTIFICATE The sum of the Fixed Account Value and the Variable Account Value.
VALUE
FIXED ACCOUNT The Guarantee Periods Fixed Account or the General Account Fixed Account.
FIXED ACCOUNT The amount of your Certificate Value which is in the Fixed Account.
VALUE
FIXED ANNUITY An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
OPTION that you designate one or more fixed payments.
GENERAL ACCOUNT All assets of Fortis Benefits other than those in the Variable Account, and other than those
in any other legally segregated separate account established by Fortis Benefits.
GENERAL The name of the alternative under which purchase payments are allocated to Fortis Benefits
ACCOUNT FIXED General Account.
ACCOUNT
GUARANTEED The rate of interest we credit during any Guarantee Period, on an effective annual basis.
INTEREST RATE
GUARANTEE The period for which a Guaranteed Interest Rate is credited.
PERIOD
GUARANTEE The non-unitized separate account that Fortis Benefits uses to account for amounts allocated
PERIODS FIXED to Guarantee Periods.
ACCOUNT
HOME OFFICE Our office at 500 Bielenberg Drive, Woodbury, Minnesota 55125; 1-800-827-5877; Mailing
address: P.O. Box 64295, St. Paul, MN 55164.
MARKET VALUE Positive or negative adjustment in Fixed Account Value that we make if such value is paid out
ADJUSTMENT more than fifteen days before or after the end of a Guarantee Period in which it was being
held.
NET PURCHASE The gross amount of a purchase payment less any applicable premium taxes or similar
PAYMENT governmental assessments.
NON-QUALIFIED Certificates that do not qualify for the special federal income tax treatment applicable in
CERTIFICATES connection with certain retirement plans.
PARTICIPANT The person or company named in the application for a Certificate, who is entitled to exercise
all rights and privileges of ownership under the Certificate during the Accumulation Period.
PORTFOLIO Each separate investment portfolio eligible for investment by the Variable Account.
QUALIFIED Certificates that are qualified for the special federal income tax treatment applicable in
CERTIFICATES connection with certain retirement plans.
SUBACCOUNTS The several Subaccounts of the Variable Account, each of which invests its assets in a
different Portfolio.
VALUATION DATE All business days except, with respect to any Subaccount, days on which the related Portfolio
does not value its shares. Generally, the Portfolios value their shares on each day the New
York Stock Exchange is open.
VALUATION The period that starts at the close of regular trading on the New York Stock Exchange on a
PERIOD Valuation Date and ends at the close of regular trading on the exchange on the next succeeding
Valuation Date.
VARIABLE The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance
ACCOUNT Company established to receive and invest purchase payments under Certificates.
VARIABLE The amount of your Certificate Value in the Subaccounts of the Variable Account.
ACCOUNT VALUE
VARIABLE An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
ANNUITY OPTION chosen by you one or more payments which vary in amount in accordance with the net investment
experience of the Subaccounts selected by the Annuitant.
WRITTEN REQUEST A written, signed and dated request, in form and substance satisfactory to Fortis Benefits and
received at our Home Office.
3
INFORMATION CONCERNING FEES AND CHARGES
PARTICIPANT TRANSACTION CHARGES
Front-End Sales Charge Imposed on Purchases............... 0%
Maximum Surrender Charge for Sales Expenses............... 0%
Other Surrender Fees...................................... 0%
Exchange Fee.............................................. 0%
ANNUAL CERTIFICATE ADMINISTRATION CHARGE......................... $30
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge......................... .45%
Variable Account Administrative Charge.................... 0%
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Total Variable Account Annual Expenses.................. .45%
MARKET VALUE ADJUSTMENT WITH RESPECT TO GUARANTEE PERIODS FIXED ACCOUNT
Surrenders and other withdrawals from the Guarantee Periods Fixed Account more
than fifteen days from the end of a Guarantee Period are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the Fixed
Account Value. It is computed pursuant to a formula that is described in more
detail under "Market Value Adjustment."
PORTFOLIO ANNUAL EXPENSES (A) (B)
TOTAL PORTFOLIO
OPERATING
INVESTMENT EXPENSES
ADVISORY AND OTHER (*AFTER EXPENSE
MANAGEMENT FEE EXPENSES REIMBURSEMENT)
-------------- -------- -----------------
Alliance Money Market Portfolio............................. 0.50% 0.19% 0.69%
Alliance International Portfolio............................ 0.04% 0.91% 0.95%
Alliance Premier Growth Portfolio........................... 0.72% 0.23% 0.95%
Federated High Income Bond Fund II.......................... 0.01% 0.79% 0.80%
Federated Utility Fund II................................... 0.24% 0.61% 0.85%
Federated American Leaders Fund II.......................... 0.53% 0.32% 0.85%
Federated Fund for U.S. Gov't Securities Fund II............ 0.00% 0.80% 0.80%
Fortis S&P 500 Index........................................ 0.40% 0.39% 0.79%
INVESCO Health Sciences Portfolio........................... 0.60% 0.40% 1.00%
INVESCO Industrial Income Portfolio......................... 0.75% 0.20% 0.95%
INVESCO Technology Portfolio................................ 0.60% 0.40% 1.00%
Lexington Natural Resources Trust........................... 1.00% 0.42% 1.42%
Lexington Emerging Markets Fund............................. 0.85% 0.79% 1.64%
MFS Emerging Growth Series.................................. 0.75% 0.25% 1.00%
MFS High Income Series...................................... 0.75% 0.25% 1.00%
MFS World Governments Series................................ 0.75% 0.25% 1.00%
Montgomery Emerging Markets Fund............................ 0.23% 1.22% 1.45%
Montgomery Growth Fund...................................... 0.00% 0.01% 0.01%
Neuberger & Berman Partners Portfolio....................... 0.84% 0.11% 0.95%
Neuberger & Berman Maturity Bond Portfolio.................. 0.65% 0.13% 0.78%
SAFECO Growth Portfolio..................................... 0.72% 0.07% 0.79%
SAFECO Equity Portfolio..................................... 0.70% 0.02% 0.72%
Strong Discovery Fund....................................... 1.00% 0.21% 1.21%
Strong International Fund................................... 1.00% 0.90% 1.90%
American Century VP Balanced Fund........................... 1.00% 0.00% 1.00%
American Century VP Capital Appreciation Fund............... 1.00% 0.00% 1.00%
Van Eck Worldwide Bond Fund................................. 1.00% 0.08% 1.08%
Van Eck Worldwide Hard Assets Fund.......................... 1.00% 0.08% 1.08%
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(a) As a percentage of Portfolio average net assets based on historical data
for the fiscal year ended December 31, 1996 except that the expenses of the
INVESCO Health Sciences and Technology Portfolios are based upon estimates
of expenses, since these are both new as of January 1, 1997. In the absence
of expense and fee waivers or expense reimbursements by the Portfolio
investment adviser, the total expenses of the following Portfolios would
have been as hereafter indicated rather than as listed above: Alliance
International Portfolio--1.91%; Alliance Premier Growth Portfolio--1.23%;
Federated High Income Bond Fund II--1.39%; Federated Utility Fund
II--1.36%; Federated American Leaders Fund II--1.07%; Federated Fund for
U.S. Government Securities Fund II--1.81%; INVESCO Health Sciences
Portfolio--1.68%; INVESCO Industrial Income Portfolio--1.19%; INVESCO
Technology Portfolio--1.68%; Lexington Emerging Markets Fund--2.23%; MFS
Emerging Growth Series--1.16%; MFS High Income Series--1.62%; and MFS World
Governments Series--2.03%; Montgomery Emerging Markets Fund--2.47%;
Montgomery Growth Fund--6.98%. The information set forth in this table was
provided to Fortis Benefits by the Portfolio managers and Fortis Benefits
has not independently verified such information.
(b) Certain of the unaffiliated investment advisers of the Portfolios reimburse
Fortis Benefits for costs incurred in connection with administering the
Portfolios as variable funding options by payment of an amount based on
assets in the Portfolios attributable to the Certificates. These amounts
are not charged to the Portfolios or the holders of the Certificates.
4
EXAMPLES*
If you COMMENCE AN ANNUITY payment option, or whether you DO or DO NOT surrender
your Certificate, you would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
Alliance Money Market Portfolio............................. 13 39 68 149
Alliance International Portfolio............................ 15 47 81 177
Alliance Premier Growth Portfolio........................... 15 47 81 177
Federated High Income Bond Fund II.......................... 14 42 73 161
Federated Utility Fund II................................... 14 44 76 166
Federated American Leaders Fund II.......................... 14 44 76 166
Federated Fund for U.S. Gov't Securities Fund II............ 14 42 73 161
Fortis S&P 500 Index........................................ 14 42 73 160
INVESCO Health Services Portfolio........................... 16 49 84 183
INVESCO Industrial Income Portfolio......................... 15 47 81 177
INVESCO Technology Portfolio................................ 16 49 84 183
Lexington Natural Resources Trust........................... 20 61 105 228
Lexington Emerging Markets Fund............................. 22 68 116 250
MFS Emerging Growth Series.................................. 16 49 84 183
MFS High Income Series...................................... 16 49 84 183
MFS World Governments Series................................ 16 49 84 183
Montgomery Emerging Markets Fund............................ 20 62 107 231
Montgomery Growth Fund...................................... 6 18 31 70
Neuberger & Berman Partners Portfolio....................... 15 47 81 177
Neuberger & Berman Maturity Bond Portfolio.................. 13 42 72 159
SAFECO Growth Portfolio..................................... 14 42 73 160
SAFECO Equity Portfolio..................................... 13 40 69 152
Strong Discovery Fund....................................... 18 55 95 205
Strong International Fund................................... 25 76 130 276
American Century VP Balanced Fund........................... 16 49 84 183
American Century VP Capital Appreciation Fund............... 16 49 84 183
Van Eck Worldwide Bond Fund................................. 16 51 88 191
Van Eck Worldwide Hard Assets Fund.......................... 16 51 88 191
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* For purposes of these examples, the effect of the annual Certificate
administration charge has been computed based on the average total Contract
Value during the year ended December 31, 1996 and the total actual amount of
annual contract administration charges collected during the year. For the
purpose of these examples, Portfolio annual expenses are assumed to continue
at the rates set forth in the table above. Also, the examples do not include
the affect of any Market Value Adjustment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
------------------------
The foregoing tables and examples are included to assist you in understanding
the transaction and operating expenses imposed directly or indirectly under the
Certificates and the Portfolios. Amounts for state premium taxes or similar
assessments will also be deducted, where applicable.
See Appendix B for an explanation of the calculation of the amounts set forth
above.
5
SUMMARY OF CERTIFICATE FEATURES
The following summary should be read in conjunction with the detailed
information in this Prospectus. Variations from the information appearing in
this Prospectus due to requirements particular to your state are described in
supplements which are attached to this Prospectus, or in endorsements to the
Certificate as appropriate.
The Certificates are designed to provide individuals with retirement benefits
through the accumulation of Net Purchase Payments on a fixed or variable basis,
and by the application of such accumulations to provide fixed or variable
annuity payments.
"We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your"
mean a reader of this Prospectus who is contemplating making purchase payments
or taking any other action in connection with a Certificate.
PURCHASE PAYMENTS
The initial purchase payment under a Certificate must be at least $5,000 ($2,000
for a Certificate pursuant to a qualified contract). Additional purchase
payments under a Certificate must be at least $500. See "Issuance of a
Certificate and Purchase Payments."
On the Certificate Issue Date, except as hereafter explained, the initial
purchase payment is allocated, as specified by the Participant in the
Certificate application, among one or more of the Subaccounts of the Variable
Account, or to one or more of the Guarantee Periods in the Guarantee Periods
Fixed Account (or to the General Account Fixed Account if the Participant
resides in a state in which the Guaranteed Periods Fixed Account is not
offered), or to a combination thereof. As previously indicated, if the
Participant resides in a state requiring a refund of all purchase payments under
the "free look" privilege, the initial purchase payment will be allocated to the
Alliance Money Market Portfolio until the expiration of the time period
described under "Allocation of Purchase Payments and Certificate Value"
hereafter. Thereafter, it will be allocated as specified by the Participant.
Subsequent purchase payments are allocated in the same way, or pursuant to
different allocation percentages that the Participant may subsequently request
In Writing.
VARIABLE ACCOUNT INVESTMENT OPTIONS
Each of the Subaccounts of the Variable Account invests in shares of a
Portfolio. Certificate Value in each of the Subaccounts of the Variable Account
will vary to reflect the investment experience of each of the corresponding
Portfolios, as well as deductions for certain charges.
Each Portfolio has a separate and distinct investment objective. A full
description of the Portfolios and their investment objectives, policies, risks
and expenses can be found in the current Prospectus for the Portfolio, which
accompanies this Prospectus, and the Statement of Additional Information for the
Portfolio which is available upon request. (See Appendix C which contains a
summary of the investment objectives of each Portfolio.)
FIXED ACCOUNT INVESTMENT OPTIONS
Either a Guarantee Periods Fixed Account or a General Account Fixed Account is
available, depending upon your state of residence.
Any amount allocated by the Participant to the Guarantee Periods Fixed Account
earns a Guaranteed Interest Rate. The level of the Guaranteed Interest Rate
depends on the length of the Guarantee Period selected by the Participant. We
currently make available ten different Guarantee Periods, ranging from one to
ten years. If amounts are transferred, surrendered or otherwise paid out more
than fifteen days before or after the end of the applicable Guarantee Period, a
Market Value Adjustment will be applied to increase or decrease the amount that
is paid out. Accordingly, the Market Value Adjustment can result in gains or
losses to you.
Any amount allocated to the General Account Fixed Account will accrue interest
at a minimum effective annual rate plus such additional excess interest rate
which we may declare from time-to-time.
For a more complete discussion of the Fixed Accounts investment option and the
Market Value Adjustment, see "The Fixed Account."
TRANSFERS
During the Accumulation Period, you can transfer all or part of your Certificate
Value from one Subaccount to another or into the Fixed Account and, subject to
any Market Value Adjustment, from one Guarantee Period of a Guarantee Periods
Fixed Account to another or into a Subaccount. There are limitations on the
frequency and amounts of transfers from the General Account Fixed Account. There
is currently no charge for these transfers. We reserve the right to restrict the
frequency of, or otherwise condition, terminate, or impose charges upon,
transfers from a Subaccount during the Accumulation Period. During the Annuity
Period the person receiving annuity payments may make up to four transfers (but
not from a Fixed Annuity Option) during each year of the Annuity Period. For a
description of certain limitations on transfer rights, see "Allocations of
Purchase Payments and Certificate Value Transfers."
TOTAL OR PARTIAL SURRENDERS
Subject to certain conditions, all or part of the Certificate Value may be
surrendered by the Participant before the earlier of the Annuitant's death or
the Annuity Commencement Date. Amounts surrendered from the Guarantee Periods
Fixed Account may be subject to a Market Value Adjustment. See "Total and
Partial Surrenders" and "Market Value Adjustment." Particular attention should
be paid to the tax implications of any surrender, including possible penalties
for premature distributions. See "Federal Tax Matters."
CHARGES AND DEDUCTIONS
Fortis Benefits deducts daily charges at a rate of .45 % per annum of the value
of the average net assets in the Variable Account for the mortality and expense
risks it assumes. There is also an annual administrative charge each year for
Certificate administration and maintenance. This charge is $30 per year (subject
to any applicable state law limitations) and is deducted on each anniversary of
the
6
Certificate Issue Date and upon total surrender of the Certificate. Also, there
may be state premium tax charges deducted from your Certificate Value. See
"Charges and Deductions."
ANNUITY PAYMENTS
The Certificate provides several types of annuity benefits to Participants or
other persons they properly designate to receive such payments, including Fixed
and Variable Annuity Options. The Participant has considerable flexibility in
choosing the Annuity Commencement Date. However, the tax implications of an
Annuity Commencement Date must be carefully considered, including the
possibility of penalties for commencing benefits either too soon or too late.
See "Annuity Commencement Date," "Annuity Forms" and "Federal Tax Matters" in
this Prospectus and "Taxation Under Certain Retirement Plans" in the Statement
of Additional Information.
DEATH BENEFIT
In the event that the Annuitant or Participant dies prior to the Annuity
Commencement Date, a death benefit is payable to the Beneficiary. See "Benefit
Payable on Death of Annuitant or Participant."
RIGHT TO EXAMINE THE CONTRACT
A Participant may elect during a "free look" period to cancel the Certificate
and receive a refund. See the cover page of this Prospectus.
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a Certificate may be limited by
the terms of any applicable employee benefit plan. These limitations may
restrict such things as total and partial surrenders, the amount or timing of
purchase payments that may be made, when annuity payments must start and the
type of annuity options that may be selected. Accordingly, you should
familiarize yourself with these and all other aspects of any retirement plan in
connection with which a Certificate is issued.
The record owner of the group variable annuity contract pursuant to which
Certificates may be issued will be a bank trustee whose sole function is to hold
record ownership of the contract or an employer (or the employer's designee) in
connection with an employee benefit plan. In the latter cases, certain rights
that a Participant otherwise would have under a Certificate may be reserved
instead by the employer.
TAX IMPLICATIONS
The tax implications for Participants or any other persons who may receive
payments under a Certificate, and those of any related employee benefit plan can
be quite important. A brief discussion of some of these is set out under
"Federal Tax Matters" in this Prospectus and "Taxation Under Certain Retirement
Plans" in the Statement of Additional Information, but such discussion is not
comprehensive. Therefore, you should consider these matters carefully and
consult a qualified tax adviser before making purchase payments or taking any
other action in connection with a Certificate or any related employee benefit
plan. Failure to do so could result in serious adverse tax consequences which
might otherwise have been avoided.
QUESTIONS AND OTHER COMMUNICATIONS
Any question about procedures of the Certificate should be directed to your
sales representative, or Fortis Benefits' Home Office: P.O. Box 64295, St. Paul,
Minnesota, 55164: 1-800-827-5877. Purchase payments and Written Requests should
be mailed or delivered to the same Home Office address. All communications
should include the Certificate number, the Participant's name and, if different,
the Annuitant's name. The number for telephone transfers is 1-800-827-5877.
Any purchase payment or other communication, except a free-look cancellation
notice, is deemed received at Fortis Benefit's Home Office on the actual date of
receipt there in proper form unless received (1) after the close of regular
trading on The New York Stock Exchange, or (2) on a date that is not a Valuation
Date. In either of these two cases, the date of receipt will be deemed to be the
next Valuation Date.
FINANCIAL AND PERFORMANCE INFORMATION
The information presented below reflects the Accumulation Unit information for
the available Subaccounts of the Variable Account through December 31, 1996.
DECEMBER 31, 1996
------------------------------
ACCUMULATION ACCUMULATION
UNITS IN FORCE UNIT VALUE
--------------- -------------
Alliance Money Market Portfolio........... 539,196 $ 10.378
Alliance International Portfolio.......... 28,337 $ 10.517
Alliance Premier Growth Portfolio......... 19,611 $ 11.803
Federated High Income Bond Fund II........ 83,778 $ 10.978
Federated Utility Fund II................. 18,507 $ 10.748
Federated American Leaders Fund II........ 43,455 $ 11.395
Fortis S&P 500 Index Series............... 20,189 $ 9.790
Lexington Natural Resources Trust......... 64,788 $ 12.050
Lexington Emerging Markets Fund........... 6,919 $ 9.426
MFS Emerging Growth Series................ 180,147 $ 11.335
MFS High Income Series.................... 36,197 $ 10.912
MFS World Governments Series.............. 4,084 $ 10.411
Montgomery Emerging Markets Fund.......... 17,917 $ 10.632
Montgomery Growth Fund.................... 70,482 $ 12.688
SAFECO Equity Portfolio................... 20,103 $ 9.778
SAFECO Growth Portfolio................... 18,249 $ 10.398
Strong Discovery Fund II.................. 9,105 $ 10.058
Strong International Stock Fund II........ 34,083 $ 10.509
American Century V.P. Balanced Fund....... 10,307 $ 10.972
American Century V.P. Capital Appreciation
Fund..................................... 7,475 $ 9.412
Van Eck Worldwide Bond Fund............... 3,565 $ 10.293
Van Eck Worldwide Hard Assets Fund........ 47,229 $ 9.992
Audited financial statements of the available Subaccounts of the Variable
Account are included in the Statement of Additional Information.
Advertising and other sales materials may include yield and total return figures
for the Subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the Subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total return" is
the total change in value of an investment in the Subaccount over a period of
time specified in the advertisement. The rate of return shown would
7
produce that change in value over the specified period, if compounded annually.
Yield and total return figures do not reflect premium tax charges. This makes
the performance shown more favorable.
Financial information concerning Fortis Benefits is included in this Prospectus
under "Additional Information About Fortis Benefits" and "Fortis Benefits
Financial Statements."
FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER
Fortis Benefits Insurance Company, the issuer of the Certificates, was founded
in 1910. At the end of 1996, Fortis Benefits had approximately $91 billion of
total life insurance in force. Fortis Benefits is a Minnesota corporation and is
qualified to sell life insurance and annuity contracts in the District of
Columbia and in all states except New York. Fortis Benefits is an indirectly
wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by
Fortis AMEV and 50% by Fortis AG. Fortis, Inc. manages the United States
operations for these two companies.
Fortis Benefits is a member of the Fortis Financial Group, a joint effort by
Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and Time
Insurance Company, offering financial products through the management, marketing
and servicing of mutual funds, annuities and life insurance and disability
income products.
Fortis AMEV is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
AG is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis AMEV and Fortis AG
have merged their operating companies under the trade name of Fortis. The Fortis
group of companies is active in insurance, banking and financial services, and
real estate development in The Netherlands, Belgium, the United States, Western
Europe, and the Pacific Rim. The Fortis group of companies had approximately
$175 billion in assets as of year-end 1996.
All of the guarantees and commitments under the Certificates are general
obligations of Fortis Benefits, regardless of whether the Certificate Value has
been allocated to the Variable Account or to the Fixed Account. None of Fortis
Benefits' affiliated companies has any legal obligation to back Fortis Benefits'
obligations under the Certificates.
THE VARIABLE ACCOUNT
The Variable Account, which is a segregated investment account of Fortis
Benefits, was established as Variable Account D by Fortis Benefits pursuant to
the insurance laws of Minnesota as of October 14, 1987. Although the Variable
Account is an integral part of Fortis Benefits, the Variable Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Assets in the Variable Account
representing reserves and liabilities under Certificates and other variable
annuity contracts issued by Fortis Benefits will not be chargeable with
liabilities arising out of any other business of Fortis Benefits.
There are a number of Subaccounts in the Variable Account. The assets in each
Subaccount are invested exclusively in one of the Portfolios listed on page one
of this Prospectus. Income and both realized and unrealized gains or losses from
the assets of each Subaccount of the Variable Account are credited to or charged
against that Subaccount without regard to income, gains or losses from any other
Subaccount of the Variable Account or arising out of any other business we may
conduct. New Subaccounts may be added as new Portfolios are added and made
available. Correspondingly, if any Portfolios are eliminated, Subaccounts may be
eliminated from the Variable Account.
THE PORTFOLIOS
Certificate holders may choose from among a number of different Portfolios, each
of which is a mutual fund available for purchase only as a funding vehicle for
benefits under variable life insurance and variable annuities issued by Fortis
Benefits and other life insurance companies. (See Appendix C which contains a
summary of the investment objectives of each Portfolio.) Each Portfolio
corresponds to one of the Subaccounts of the Variable Account. The assets of
each Portfolio are separate from the others and each Portfolio operates as a
separate investment portfolio whose performance has no effect on the investment
performance of any other Portfolio. More detailed information for each Portfolio
offered, such as its investment policies and restrictions, charges, risks
attendant to investing in it, and other aspects of its operations, may be found
in the current prospectus for each Portfolio. Such a prospectus for the
Portfolios being considered must accompany this Prospectus and should be read in
conjunction herewith. A copy of each prospectus may be obtained without charge
from Fortis Benefits by calling 1-800-827-5877, or writing P.O. Box 64295, St.
Paul, Minnesota 55164.
Fortis Benefits purchases and redeems Portfolios' shares for the Variable
Account at their net asset value without the imposition of any sales or
redemption charges. Any dividend or capital gain distributions attributable to
Certificates are automatically reinvested in shares of the Portfolio from which
they are received at the Portfolio's net asset value on the date paid. Such
dividends and distributions will have the effect of reducing the net asset value
of each share of the corresponding Portfolio and increasing, by an equivalent
value, the number of shares outstanding of the Portfolio. However, the value of
your interest in the corresponding Subaccount will not change as a result of any
such dividends and distributions.
As indicated, Portfolios may also be available to registered separate accounts
offering variable annuity and variable life products of other participating
insurance companies, as well as to the Variable Account and other separate
accounts of Fortis Benefits. Although Fortis Benefits does not anticipate any
disadvantages to this, there is a possibility that a material conflict may arise
between the interest of the Variable Account and one or more of the other
separate accounts participating in the Portfolios. A conflict may occur due to a
change in law affecting the operations of variable life and variable annuity
separate accounts, differences in the voting instructions of the Participants
and those of other companies, or some other reason. In the event of conflict,
Fortis Benefits will take any steps necessary to protect the Participants and
variable annuity payees.
8
THE FIXED ACCOUNT
Interests in either of two different Fixed Accounts are offered by this
Prospectus, depending upon the state of residence of the Certificate applicant:
a Guarantee Periods Fixed Account or a General Account Fixed Account. Both of
these Fixed Accounts are referred to as the Fixed Account elsewhere in this
prospectus where a distinction is not relevant. A Guaranteed Periods Fixed
Account is offered to Certificate applicants in most states. However, in a
limited number of states, a General Account Fixed Account is offered in lieu of
the Guarantee Periods Fixed Account. Applicants should inquire of Fortis
Benefits or their account representative to determine which Fixed Account is
available in their state. Charges under the Certificate are the same as when the
Variable Account is being used, except that the .45% per annum charged for
mortality and expense risk and administrative expenses is not imposed on amounts
of Certificate Value in the Fixed Account.
GUARANTEE PERIODS FIXED ACCOUNT
Any amount allocated by the Participant to the Fixed Account earns a Guaranteed
Interest Rate commencing with the date of such allocation. This Guaranteed
Interest Rate continues for a number of years (not to exceed ten) selected by
the Participant. At the end of this Guarantee Period, the Participant's
Certificate Value in that Guarantee Period, including interest accrued thereon,
will be allocated to a new Guarantee Period of the same length unless Fortis
Benefits has received a Written Request from the Participant to allocate this
amount to a different Guarantee Period or periods or to one or more of the
Subaccounts. We must receive this Written Request at least three business days
prior to the end of the Guarantee Period. The first day of the new Guarantee
Period (or other reallocation) will be the day after the end of the prior
Guarantee Period. We will notify the Participant at least 45 days and not more
than 75 days prior to the end of any Guarantee Period.
We currently make available ten different Guarantee Periods, ranging from one to
ten years. Each Guarantee Period has its own Guaranteed Interest Rate, which may
differ from those for other Guarantee Periods. From time to time we will, at our
discretion, change the Guaranteed Interest Rate for future Guarantee Periods of
various lengths. These changes will not affect the Guaranteed Interest Rates
being paid on Guarantee Periods that have already commenced. Each allocation or
transfer of an amount to a Guarantee Period commences the running of a new
Guarantee Period with respect to that amount, which will earn a Guaranteed
Interest Rate that will continue unchanged until the end of that period. The
Guaranteed Interest Rate will never be less than an effective annual rate of 3%.
Fortis Benefits declares the Guaranteed Interest Rates from time to time as
market conditions dictate. Fortis Benefits advises a Participant of the
Guaranteed Interest Rate for a chosen Guarantee Period at the time a purchase
payment is received, a transfer is effectuated or a Guarantee Period is renewed.
Fortis Benefits has no specific formula for establishing the Guaranteed Interest
Rates for the Guarantee Periods. The rate may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with amounts allocated to the Guarantee Period. See
"Investments by Fortis Benefits." Fortis Benefits in determining Guaranteed
Interest Rates, may also consider, among other factors, the duration of a
Guarantee Period, regulatory and tax requirements, sales and administrative
expenses borne by Fortis Benefits, risks assumed by Fortis Benefits, Fortis
Benefits' profitability objectives, and general economic trends.
FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED
INTEREST RATES TO BE DECLARED. FORTIS BENEFITS CANNOT PREDICT OR ASSURE THE
LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL
RATE OF 3%.
Information concerning the Guaranteed Interest Rates applicable to the various
Guarantee Periods at any time may be obtained from our Home Office or from your
sales representative.
MARKET VALUE ADJUSTMENT
For Certificates with allocations to the Guarantee Periods Fixed Account, except
as described below, if any Fixed Account Value is surrendered, transferred or
otherwise paid out before the end of the Guarantee Period in which it is being
held, a Market Value Adjustment will be applied. This generally includes amounts
that are paid out as a death benefit pursuant to the Certificate, amounts
applied to an annuity option, and amounts paid as a single sum in lieu of an
annuity. However, NO Market Value Adjustment will be applied to amounts that are
paid out during the period beginning fifteen days before and ending fifteen days
after the end of a Guarantee Period in which it was being held. Additionally, no
Market Value Adjustment will be applied to amounts that are withdrawn from a
Guarantee Period and paid out to the Participant; or transferred to the Variable
Account, on an automatic periodic basis under a formal Fortis Benefits program
for the withdrawal or transfer of the earnings of the Fixed Account. (There may
be conditions and limitations imposed by Fortis Benefits associated with such a
program. See your Fortis Benefits representative for the availability of any
such program, and the conditions and limitations of such a program, in your
state.)
The Market Value Adjustment may increase or decrease the amount of Fixed Account
Value being withdrawn or transferred. The comparison of two Guaranteed Interest
Rates determines whether the Market Value Adjustment produces an increase or a
decrease. The first rate to compare is the Guaranteed Interest Rate for the
amount being transferred or withdrawn. The second rate is the Guaranteed
Interest Rate then being offered for new Guarantee Periods of the same duration
as that remaining in the Guarantee Period from which the funds are being
withdrawn or transferred. If the first rate exceeds the second by more than
1/2%, the Market Value Adjustment produces an increase. If the first rate does
not exceed the second by at least 1/2%, the Market Value Adjustment produces a
decrease. Sample calculations are shown in Appendix A.
The Market Value Adjustment will be determined by multiplying the amount being
withdrawn or transferred from the Guarantee Period (before deduction of any
applicable surrender charge) by the following factor:
( 1 + I ) n / 12
----------- - 1
( 1 + J + .005 )
9
where,
- I is the Guaranteed Interest Rate being credited to the amount being
withdrawn from the existing Guarantee Period,
- J is the Guaranteed Interest Rate then being offered for new Guarantee
Periods with durations equal to the number of years remaining in the
existing Guarantee Period (rounded up to the next higher number of years),
and
- N is the number of months remaining in the existing Guarantee Period
(rounded up to the next higher number of months).
GENERAL ACCOUNT FIXED ACCOUNT
Accounts allocated to the General Account Fixed Account are held in the General
Account of Fortis Benefits. Because of exemptive and exclusionary provisions,
interests in the General Account Fixed Account have not been registered under
the Securities Act of 1933 and the General Account Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the General Account Fixed Account nor any interests therein
are subject to the provisions of these acts and, as a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosures in the
Prospectus relating to the General Account Fixed Account. Disclosures regarding
the Fixed Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses. For Certificates with amounts
allocated to the General Account Fixed Account, this Prospectus is generally
intended to serve as a disclosure document only for the aspects of the
Certificate involving the Variable Account and contains only selected
information regarding the General Account Fixed Account. More information
regarding the General Account Fixed Account may be obtained from Fortis
Benefits' Home Office or from your sales representative.
Fortis Benefits guarantees that Certificate Value in the General Account Fixed
Account will accrue interest at an effective annual rate of at least 3%,
independent of the actual investment experience of the General Account. We may,
at our sole discretion, credit higher rates of interest, although we are not
obligated to credit interest in excess of the guaranteed rate of 3% per year.
Any interest rate in excess of 3% per year with respect to any amount in the
General Account Fixed Account pursuant to a Certificate will not be modified
more than once each calendar year. Any higher rate of interest will be quoted at
an effective annual rate. The rate of any excess interest initially or
subsequently credited to any amount can in many cases vary, depending on when
that amount was originally allocated to the General Account Fixed Account. Once
credited, such interest will be guaranteed and will become part of Certificate
Value in the General Account Fixed Account from which deductions for fees and
charges may be made.
GENERAL ACCOUNT FIXED ACCOUNT TRANSFERS
Transfers out of the General Account Fixed Account have special limitations.
Prior to the Annuity Commencement Date, Participants may transfer part or all of
the Certificate Value from the General Account Fixed Account to the Variable
Account, provided that (1) no more than one such transfer is made each
Certificate year, (2) no more than 50% of the General Account Fixed Account
Value is transferred at any time (unless the balance in the General Account
Fixed Account after the transfer would be less than $1,000, in which case up to
the entire balance may be transferred), (3) at least $1,000 is transferred at
any one time (or, if less, the entire amount in the General Account Fixed
Account), and (4) you may not make a transfer into the General Account Fixed
Account within six months after a transfer out of such account. Irrespective of
the above, we may in our discretion permit a continuing request for transfer of
lesser specified amounts automatically on a periodic basis. However, we reserve
the right to discontinue or modify any such arrangements at our discretion. No
transfers from the General Account Fixed Account may be made after the Annuity
Commencement Date.
INVESTMENTS BY FORTIS BENEFITS
Our obligations with respect to the Guarantee Periods Fixed Account and the
General Account Fixed Account are legal obligations of Fortis Benefits and are
supported by our General Account assets, which also support obligations incurred
by us under other insurance and annuity contracts. Investments purchased with
amounts allocated to both Fixed Accounts are the property of Fortis Benefits and
Participants have no legal rights in such investments. Subject to applicable
law, we have sole discretion over the investment of assets in our General
Account and in the Fixed Account.
Amounts in the Fortis Benefits' General Account and the Fixed Account will be
invested in compliance with applicable state insurance laws and regulations
concerning the nature and quality of investments for the General Account. Within
specified limits and subject to certain standards and limitations, these laws
generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments. See Fortis Benefits' Financial Statements" for
information on Fortis Benefits' investments. Investment management for amounts
in the General Account and in the Fixed Account is provided to Fortis Benefits
by Fortis Advisers, Inc.
Fortis Benefits intends to consider the return available on the instruments in
which it intends to invest amounts allocated to the Fixed Account when it
establishes Guaranteed Interest Rates. Such return is only one of many factors
considered in establishing the Guaranteed Interest Rates. See "Guarantee Periods
Fixed Account."
Fortis Benefits expects that amounts allocated to the Fixed Account generally
will be invested in debt instruments that approximately match Fortis Benefits'
liabilities with regard to the Guarantee Periods for Net Purchase Payments
allocated to Guarantee Periods Fixed Accounts and with regard to expected
holding periods for Net Purchase Payments allocated to the General Account Fixed
Account. Fortis Benefits expects that these will include primarily the following
types of debt instruments: (1) securities issued by the United States Government
or its agencies or instrumentalities, which securities may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa),
Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any
other nationally recognized rating service; (3) other debt instruments
including, but not limited to, issues of or guaranteed by banks or bank holding
companies and corporations, which obligations although not rated by Moody's or
Standard & Poor's, are deemed by Fortis Benefits
10
to have an investment quality comparable to securities which may be purchased as
stated above; and (4) other evidences of indebtedness secured by mortgages or
deeds of trust representing liens upon real estate. Notwithstanding the
foregoing, Fortis Benefits is not obligated to invest amounts allocated to the
Fixed Account according to any particular strategy, except as may be required by
applicable state insurance laws and regulations. See "Regulation and Reserves."
FIXED ACCOUNT VALUE
The Certificate's Fixed Account Value on any Valuation Date is the sum of the
Net Purchase Payments allocated to the Fixed Account, plus any transfers from
the Variable Account, plus interest credited to the Fixed Account, less any
surrender charges or annual administrative charges allocated to the Fixed
Account or transfers to the Variable Account.
ACCUMULATION PERIOD
ISSUANCE OF A CERTIFICATE AND PURCHASE PAYMENTS
Fortis Benefits reserves the right to reject any application for a Certificate
or any purchase payment for any reason. If the issuing instructions can be
accepted in the form received, the initial purchase payment will be credited
within two Valuation Dates after the later of receipt of the issuing
instructions or receipt of the initial purchase payment at Fortis Benefits' Home
Office. If the initial purchase payment cannot be credited within five Valuation
Dates after receipt because the issuing instructions are incomplete, the initial
purchase payment will be returned unless the applicant consents to our retaining
the initial purchase payment and crediting it as of the end of the Valuation
Period in which the necessary requirements are fulfilled. The initial purchase
payment must be at least $5,000 ($2,000 for a Certificate issued pursuant to a
qualified plan).
The date that the initial purchase payment is applied to the purchase of the
Certificate is also the Certificate Issue Date. The Certificate Issue Date is
the date used to determine Certificate years, regardless of when the Certificate
is delivered. The crediting of investment experience in the Variable Account, or
a fixed rate of return in the Fixed Account, begins as of the Certificate Issue
Date.
The Participant may make additional purchase payments at any time after the
Certificate Issue Date and prior to the Annuity Commencement Date, as long as
the Annuitant is living. Purchase payments (together with any required
information identifying the proper Certificates and account to be credited with
purchase payments) must be transmitted to our Home Office. Additional purchase
payments are credited to the Certificate and added to the Certificate Value as
of the end of the Valuation Period in which they are received in good order.
Each additional purchase payment under a Certificate must be at least $500. The
total of all purchase payments for all Fortis Benefits annuities having the same
owner or participant, or annuitant, may not exceed $1 million (not more than
$500,000 allocated to the Fixed Account) without Fortis Benefits' prior
approval, and we reserve the right to modify this limitation at any time.
Purchase payments in excess of the initial minimum may be made by monthly draft
against the bank account of any Participant who has completed and returned to us
a special "Thrift-O-Matic" authorization form that may be obtained from your
sales representative or from our Home Office. Arrangements can also be made for
purchase payments by wire transfer, payroll deduction, military allotment,
direct deposit and billing. Purchase payments by check should be made payable to
Fortis Benefits Insurance Company.
If the Certificate Value is less than $1,000, we may cancel the Certificate on
any Valuation Date. We will notify the Participant at least 90 days in advance
of our intention to cancel the Certificate. Such cancellation would be
considered a full surrender of the Certificate.
CERTIFICATE VALUE
Certificate Value is the total of any Variable Account Value in all the
Subaccounts of the Variable Account pursuant to the Certificate, plus any Fixed
Account Value.
There is no guaranteed minimum Variable Account Value. To the extent Certificate
Value is allocated to the Variable Account, you bear the entire investment risk.
DETERMINATION OF VARIABLE ACCOUNT VALUE. A Certificate's Variable Account Value
is based on Accumulation Unit values, which are determined on each Valuation
Date. The value of an Accumulation Unit for a Subaccount on any Valuation Date
is equal to the previous value of that Subaccount's Accumulation Unit multiplied
by that Subaccount's net investment factor (discussed directly below) for the
Valuation Period ending on that Valuation Date. At the end of any Valuation
Period, a Certificate's Variable Account Value in a Subaccount is equal to the
number of Accumulation Units in the Subaccount times the value of one
Accumulation Unit for that Subaccount.
The number of Accumulation Units in each Subaccount is equal to:
- Accumulation Units purchased at the time that any Net Purchase Payments or
transferred amounts are allocated to the Subaccount; less
- Accumulation Units redeemed to pay for the portion of any transfers from
or partial surrenders allocated to the Subaccount; less
- Accumulation Units redeemed to pay charges under the Contract.
NET INVESTMENT FACTOR. If a Subaccount's net investment factor is greater than
one, the Subaccount's Accumulation Unit value has increased. If the net
investment factor is less than one, the Subaccount's Accumulation Unit value has
decreased. The net investment factor for a Subaccount is determined by dividing
(1) the net asset value per share of the Portfolio shares held by the
Subaccount, determined at the end of the current Valuation Period, plus the per
share amount of any dividend or capital gains distribution made with respect to
the Portfolio shares held by the Subaccount during the current Valuation Period,
minus a per share charge for the increase, plus a per share credit for the
decrease, in any income taxes assessed which we determine to have resulted from
the investment operation of the subaccount or any other taxes which are
attributable to this Certificate, by (2) the net asset value per share of the
Portfolio shares held in
11
the Subaccount as determined at the end of the previous Valuation Period, and
subtracting from that result a factor representing the mortality risk, expense
risk and administrative expense charge.
DETERMINATION OF FIXED ACCOUNT VALUE. A Certificate's Fixed Account Value is
guaranteed by Fortis Benefits. Therefore, Fortis Benefits bears the investment
risk with respect to amounts allocated to the Fixed Account, except to the
extent that (a) Fortis Benefits may vary the Guaranteed Interest Rate for future
Guarantee Periods for Guarantee Periods Fixed Accounts and the current interest
for General Account Fixed Accounts (subject to the 3% effective annual minimum)
and (b) the Market Value Adjustment for Guarantee Periods Fixed Accounts imposes
investment risks on the Participant.
The Certificate's Fixed Account Value on any Valuation Date is equal to the
following amounts, in each case increased by accrued interest:
- The amount of Net Purchase Payments or transferred amounts allocated to
the Fixed Account; less
- The amount of any transfers or surrenders out of the Fixed Account.
ALLOCATION OF PURCHASE PAYMENTS AND CERTIFICATE VALUE
ALLOCATION OF PURCHASE PAYMENTS. In the application for a Certificate, the
Participant can allocate Net Purchase Payments, or portions thereof, to the
available Subaccounts of the Variable Account or to the Fixed Account (and to
Guarantee Periods within the Fixed Account for Certificates issued in states
where the Guarantee Periods Fixed Account is offered), or a combination thereof.
Percentages must be in whole numbers and the total allocation must equal 100%.
The percentage allocations for future Net Purchase Payments may be changed,
without charge, at any time by sending a Written Request to Fortis Benefits'
Home Office. Changes in the allocation of future Net Purchase Payments will be
effective on the date we receive the Participant's Written Request.
TRANSFERS. Transfers of Certificate Value from one available Subaccount to
another or into the Fixed Account, or from the Fixed Account to one of the
available Subaccounts, or in the case of a Guarantee Periods Fixed Account
transfers from one Guarantee Period to another Guarantee Period, can be made by
the Participant in Written Request to Fortis Benefits' Home Office, or by
telephone transfer as described below. There is currently no charge for any
transfer, although transfers from a Guarantee Period of a Guarantee Period Fixed
Account that are (1) more than 15 days before or after the expiration thereof,
or (2) are not a part of a formal Fortis Benefits program for the transfer of
earnings of the Fixed Account, are subject to a Market Value Adjustment. See
"Market Value Adjustment." Transfers of Certificate Value from the General
Account Fixed Account are restricted in both amount and timing. See "Fixed
Account -- General Account Fixed Account -- General Account Fixed Account
Transfers."
The minimum transfer from a Subaccount or Guarantee Period is the lesser of
$1,000 or all of the Certificate Value in the Subaccount or Fixed Account.
Irrespective of the above we may permit a continuing request for transfers of
lesser specified amounts automatically on a periodic basis. However, we reserve
the right to restrict the frequency of or otherwise condition, terminate or
impose charges (not to exceed $25 per transfer) upon transfers. We will count
all transfers between and among the Subaccounts of the Variable Account and the
Fixed Account as one transfer, if all the transfer requests are made at the same
time as part of one request. We will execute the transfers and determine all
values in connection with transfers as of the end of the Valuation Period in
which we receive the transfer request. The amount of any positive or negative
Market Value Adjustment associated with a transfer from a Guarantee Period of
the Guarantee Periods Fixed Account, respectively, will be added to or deducted
from the transferred amount.
If you complete and return the telephone transfer section of the application,
transfers may be made pursuant to telephone instructions. We will honor
telephone transfer instructions from any person who provides the correct
identifying information. Fortis Benefits will not be responsible for, and you
will bear the risk of loss from, oral instructions, including fraudulent
instructions, which are reasonably believed to be genuine. We will employ
reasonable procedures to confirm that telephone instructions are genuine, but if
such procedures are not deemed reasonable, we may be liable for any losses due
to unauthorized or fraudulent instructions. Our procedures are to verify address
and social security number, tape record the telephone call, and provide written
confirmation of the transaction. We may modify or terminate our telephone
transfer procedures at any time. The number for telephone transfers is
1-800-827-5877.
Certain restrictions on very substantial investments in any one Subaccount are
set forth under "Limitations on Allocations" in the Statement of Additional
Information.
TOTAL AND PARTIAL SURRENDERS
TOTAL SURRENDERS. The Participant may surrender all of the Cash Surrender Value
at any time during the life of the Annuitant and prior to the Annuity
Commencement Date by a Written Request sent to Fortis Benefits' Home Office. We
reserve the right to require that the Certificate be returned to us prior to
making payment, although this will not affect our determination of the amount of
the Cash Surrender Value. Cash Surrender Value is the Certificate Value at the
end of the Valuation Period during which the Written Request for the total
surrender is received by Fortis Benefits at its Home Office, plus or minus any
applicable Market Value Adjustment. See "Market Value Adjustment."
The written consent of all collateral assignees and irrevocable beneficiaries
must be obtained prior to any total surrender. Surrenders from the Variable
Account will generally be paid within seven days of the date of receipt by
Fortis Benefits' Home Office of the Written Request. Postponement of payments
may occur, however, in certain circumstances. See "Postponement of Payment."
The amount paid upon total surrender of the Cash Surrender Value (taking into
account any prior partial surrenders) may be more or less than the total Net
Purchase Payments made. After a surrender of the Cash Surrender Value or at any
time the Certificate Value is zero, all rights of the Participant, Annuitant, or
any other person will terminate.
PARTIAL SURRENDERS. At any time prior to the Annuity Commencement Date and
during the lifetime of the Annuitant, the Participant may surrender a portion of
the Fixed Account Value and/or the Variable
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Account Value by sending to Fortis Benefits' Home Office a Written Request. We
will not accept a partial surrender request unless the net proceeds payable to
you as a result of the request are at least $1,000. If the total Certificate
Value in both the Variable Account and Fixed Account would be less than $1,000
after the partial surrender, Fortis Benefits will surrender the entire Cash
Surrender Value under the Certificate.
In order for a request to be processed, the Participant must specify from which
Subaccounts of the Variable Account or Guarantee Periods of the Fixed Account,
if applicable, a partial surrender should be made.
We will surrender Accumulation Units from the Variable Account and/ or dollar
amounts from the Fixed Account so that the total amount of the partial surrender
equals the dollar amount of the partial surrender request. If the surrender is
from a Guarantee Period, the amount payable to the Participant will be reduced
by any applicable negative Market Value Adjustment, or increased by any positive
Market Value Adjustment unless the surrender is (1) within 15 days before or
after the expiration of a Guarantee Period, or (2) is a part of a formal Fortis
Benefits program for the transfer of earnings from the Fixed Account. The
partial surrender will be effective at the end of the Valuation Period in which
Fortis Benefits receives the Written Request for partial surrender at its Home
Office. Payments will generally be made within seven days of the effective date
of such request, although certain delays are permitted. See "Postponement of
Payment."
The Internal Revenue Code provides that a penalty tax will be imposed on certain
premature surrenders. For a discussion of this and other tax implications of
total and partial surrenders, including withholding requirements, see "Federal
Tax Matters." Also, under tax deferred annuity Certificates pursuant to Section
403(b) of the Internal Revenue Code, no distributions of voluntary salary
reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death, disability or hardship. (Hardship distributions will be limited
to the lesser of the amount of the hardship or the amount of salary reduction
contributions, exclusive of earnings thereon.)
BENEFIT PAYABLE ON DEATH OF ANNUITANT OR PARTICIPANT
If the Annuitant or Participant dies prior to the Annuity Commencement Date, a
death benefit will be paid to the Beneficiary. If more than one Annuitant has
been named, the death benefit payable upon the death of an Annuitant will only
be paid upon the death of the last survivor of the persons so named. The death
benefit will equal the greater of:
(1) the sum of all Net Purchase Payments made less all prior
surrenders and any applicable prior negative Market Value Adjustments (in
the case of a Certificate having a Guarantee Periods Fixed Account), or
(2) the Certificate Value adjusted by any applicable Market Value
Adjustment (in the case of a Certificate having a Guarantee Periods Fixed
Account), as of the date used for valuing the death benefit.
The value of the death benefit is determined as of the end of the Valuation
Period in which we receive, at our Home Office, proof of death and the written
request as to the manner of payment. Upon receipt of these items, the death
benefit generally will be paid within seven days. Under certain circumstances,
payment of the death benefit may be postponed. See "Postponement of Payment." If
we do not receive a Written Request for a settlement method, we will pay the
death benefit in a single sum, based on values determined at that time.
The Beneficiary may (a) receive a single sum payment, which terminates the
Certificate, or (b) select an annuity option. If the Beneficiary selects an
annuity option, he or she will have all the rights and privileges of a payee
under the Certificate. If the Beneficiary desires an Annuity option, the
election should be made within 60 days of the date the death benefit becomes
payable. Failure to make a timely election can result in unfavorable tax
consequences. For further information, see "Federal Tax Matters."
We accept any of the following as proof of death: a copy of a certified death
certificate; a copy of a certified decree of a court of competent jurisdiction
as to the finding of death; or a written statement by a medical doctor who
attended the deceased at the time of death.
If the Participant dies before the Annuitant and before the Annuity Commencement
Date with respect to a Non-Qualified Certificate certain additional requirements
are mandated by the Internal Revenue Code, which are discussed below under
"Federal Tax Matters-- Required Distributions for Non-Qualified Certificates."
It is imperative that Written Notice of the death of the Participant be promptly
transmitted to Fortis Benefits at its Home Office, so that arrangements can be
made for distribution of the entire interest in the Certificate to the
Beneficiary in a manner that satisfies the Internal Revenue Code requirements.
Failure to satisfy these requirements may result in the Certificate not being
treated as an annuity contract for federal income tax purposes, which could have
adverse tax consequences.
THE ANNUITY PERIOD
ANNUITY COMMENCEMENT DATE
The Participant may specify an Annuity Commencement Date in the application. The
Annuity Commencement Date marks the beginning of the period during which an
Annuitant or other payee designated by the Participant receives annuity payments
under the Certificate. We reserve the right to not permit an Annuity
Commencement Date which is on or after the Annuitant's 75th birthday.
Depending on the type of retirement arrangement involved, amounts that are
distributed either too soon or too late may be subject to penalty taxes under
the Internal Revenue Code. See "Federal Tax Matters." You should consider this
carefully in selecting or changing an Annuity Commencement Date.
In order to advance or defer the Annuity Commencement Date, the Participant must
submit a Written Request during the Annuitant's lifetime. The request must be
received at our Home Office at least 30 days before the then-scheduled Annuity
Commencement Date. The
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new Annuity Commencement Date must also be at least 30 days after the Written
Request is received. There is no right to make any total or partial surrender
during the Annuity Period.
COMMENCEMENT OF ANNUITY PAYMENTS
If the Certificate Value at the end of the Valuation Period which contains the
Annuity Commencement Date is less than $1,000, we may pay the entire Certificate
Value, without the imposition of any charges other than the premium tax charge,
if applicable, in a single sum payment to the Annuitant or other payee chosen by
the Participant and cancel the Certificate.
Otherwise, Fortis Benefits will apply (1) the Fixed Account Value to provide a
Fixed Annuity Option and (2) the Variable Account Value in any Subaccount to
provide a Variable Annuity Option using the same Subaccount, unless the
Participant has notified us by Written Request to apply the Fixed Account Value
and Variable Account Value in different proportions. Any such Written Request
must be received by us at our Home Office at least 30 days before the Annuity
Commencement Date.
Annuity payments under a Fixed or Variable Annuity Option will be made on a
monthly basis to the Annuitant or other properly-designated payee, unless we
agree to a different payment schedule. If more than one person is named as an
Annuitant, the Participant may elect to name one of such persons to be the sole
Annuitant as of the Annuity Commencement Date. We reserve the right to change
the frequency of any annuity payment so that each payment will be at least $50
($20 in Texas). There is no right to make any total or partial surrender during
the Annuity Period.
The amount of each annuity payment will depend on the amount of Certificate
Value applied to an annuity option, the form of annuity selected and the age of
the Annuitant. Information concerning the relationship between the Annuitant's
sex and the amount of annuity payments, including special requirements in
connection with employee benefits plans, is set forth under "Calculations of
Annuity Payments" in the Statement of Additional Information. The Statement of
Additional Information also contains detailed information about how the amount
of each annuity payment is computed.
The dollar amount of any fixed annuity payments is specified during the entire
period of annuity payments according to the provisions of the annuity form
selected. The dollar amount of variable annuity payments varies during the
annuity period based on changes in Annuity Unit Values for the Subaccounts that
you choose to use in connection with your payments.
RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE
ANNUITY PAYMENTS
If a Subaccount on which a variable annuity payment is based has an average
effective net investment return higher than 3% per annum during the period
between two such annuity payments, the Annuity Unit Value will increase, and the
second payment will be higher than the first. Conversely, if the Subaccount's
average effective net investment return over the period between the annuity
payments is less than 3% per annum, the Annuity Unit Value will decrease, and
the second payment will be lower than the first. "Net investment return," for
this purpose, refers to the Subaccount's overall investment performance, net of
the mortality and expense risk and administrative expense charges, which are
assessed at a nominal aggregate annual rate of .45%. We guarantee that the
amount of each variable annuity payment after the first payment will not be
affected by variations in our mortality experience or our expenses.
TRANSFERS. During the Annuity Period, the person receiving annuity payments may
make up to four transfers a year among Subaccounts. The current procedures for
and conditions on these transfers are the same as described above under
"Allocation of Purchase Payments and Certificate Value Transfers." Transfers
from a Fixed Annuity Option are not permitted during the Annuity Period.
ANNUITY FORMS
The Participant may select an annuity form or change a previous selection by
Written Request, which must be received by us at least 30 days before the
Annuity Commencement Date. One annuity form may be selected, although as
discussed above, payments under that form may be received on a combination fixed
and variable basis. If no annuity form selection is in effect on the Annuity
Commencement Date, in most cases we automatically apply Option B (described
below), with payments guaranteed for 10 years. If the Certificate is issued
under certain retirement plans, however, federal pension law may require that
any default payments be made pursuant to plan provisions and/or federal law. Tax
laws and regulations may impose further restrictions to assure that the primary
purpose of the plan is distribution of the accumulated funds to the employee.
The following options are available for fixed annuity payments and for variable
annuity payments.
OPTION A, LIFE ANNUITY. Payments are made as of the first Valuation Date of each
monthly period during the Annuitant's life, starting with the Annuity
Commencement Date. No payments will be made after the Annuitant dies. It is
possible for the payee to receive only one payment under this option, if the
Annuitant dies before the second payment is due.
OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20
YEARS. Payments are made as of the first Valuation Date of each monthly period
starting on the Annuity Commencement Date. Payments will continue as long as the
Annuitant lives. If the Annuitant dies before all of the guaranteed payments
have been made, we will continue installments of the guaranteed payments to the
Beneficiary.
OPTION C, JOINT AND FULL SURVIVOR ANNUITY. Payments are made as of the first
Valuation Date of each monthly period starting with the Annuity Commencement
Date. Payments will continue as long as either the Annuitant or the joint
Annuitant is alive. Payments will stop when both the Annuitant and the joint
Annuitant have died. It is possible for the payee or payees under this option to
receive only one payment, if both Annuitants die before the second payment is
due.
OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. Payments are made as
of the first Valuation Date of each monthly period starting with the Annuity
Commencement Date. Payments will continue as long as either the Annuitant or the
joint Annuitant is alive. If the Annuitant dies first, payments will continue to
the joint Annuitant at one-half the original amount. If the joint Annuitant dies
first,
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payments will continue to the Annuitant at the original full amount. Payments
will stop when both the Annuitant and the joint Annuitant have died. It is
possible for the payee or payees under this option to receive only one payment
if both Annuitants die before the second payment is due.
We also have other annuity forms available and information about them can be
obtained from your sales representative or by calling or writing to our Home
Office.
DEATH OF ANNUITANT OR OTHER PAYEE
Under most annuity forms offered by Fortis Benefits, the amounts, if any,
payable on the death of the Annuitant during the Annuity Period are the
continuation of annuity payments for any remaining guarantee period or for the
life of any joint Annuitant. In all such cases, the person entitled to receive
payments also receives any rights and privileges under the annuity form in
effect.
Additional rules applicable to such distributions under Non-Qualified
Certificates are described under "Federal Tax Matters--Required Distributions
for Non-Qualified Certificates." Though the rules there described do not apply
to Certificates issued in connection with qualified plans, similar rules apply
to the plans themselves.
CHARGES AND DEDUCTIONS
PREMIUM TAXES
The states of South Dakota and Wyoming impose a premium tax upon the receipt of
a purchase payment. In these states, and in any other state or jurisdiction
where premium taxes or similar assessments are imposed upon the receipt of
purchase payments, Fortis Benefits will pay such taxes on behalf of the
Participant and then deduct a charge for these amounts from the Certificate
Value upon the surrender, death of annuitant or Participant, or annuitization of
the Certificate. In jurisdictions where premium taxes or similar assessments are
imposed at the time annuity payments begin, Fortis Benefits will deduct a charge
for such amounts from the Certificate Value at that time. In such jurisdictions,
the charge will be deducted on a pro-rata basis from the then-current Fixed
Account Value and, by redemption of Accumulation Units, the then-current
Variable Account Value in each Subaccount. Similarly, Fortis Benefits may deduct
premium taxes from Certificate Value when no deduction was made from purchase
payments, but is subsequently determined to be due. Conversely, Fortis Benefits
will credit to the Certificate Value the amount of any deductions for premium
taxes or similar assessments that are subsequently determined not to be owed.
Applicable premium tax rates depend upon the Participant's then-current place of
residence. Applicable rates are subject to change by legislation, administrative
interpretations or judicial acts.
CHARGES AGAINST THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We will assess each Subaccount of the
Variable Account with a daily charge for mortality and expense risk at a nominal
annual rate of .45% of the average daily net assets of the Variable Account
(consisting of approximately .30% for mortality risk and approximately .15% for
expense risk). This charge is assessed during both the Accumulation Period and
the Annuity Period. We guarantee not to increase this charge for the duration of
the Certificate.
The mortality risk borne by Fortis Benefits arises from its obligation to make
annuity payments (determined in accordance with the annuity tables and other
provisions contained in the Certificate) for the full life of all Annuitants
regardless of how long all Annuitants or any individual Annuitant might live. In
addition, Fortis Benefits bears a mortality risk in that it guarantees to pay a
death benefit upon the death of an Annuitant or Participant prior to the Annuity
Commencement Date.
The expense risk assumed is that actual expenses incurred in connection with
issuing and administering the Certificate will exceed the limits on
administrative charges set in the Certificate.
If the administrative charges and the mortality and expense risk charge are
insufficient to cover the expenses and costs assumed, the loss will be borne by
the Company. Conversely, if the amount deducted proves more than sufficient, the
excess will be profit to the Company.
ANNUAL ADMINISTRATIVE CHARGE
A $30 annual administrative charge is deducted each Certificate year from the
Certificate Value on each anniversary of the Certificate Issue Date. (This
charge will be lower to the extent legally required in some states.) This charge
is to help cover administrative costs such as those incurred in issuing
Certificates, establishing and maintaining the records relating to Certificates,
making regulatory filings and furnishing confirmation notices, voting materials
and other communications, providing computer, actuarial and accounting services,
and processing Certificate transactions. We do not anticipate any profit from
this charge. This charge will initially be waived during the Annuity Period,
although Fortis Benefits reserves the right to reinstitute it at any time.
The annual administrative charge will be deducted by redemption of Accumulation
Units from each Subaccount of the Variable Account and from the Fixed Account in
the same proportion as the then-current Certificate Value is then allocated
among those alternatives pursuant to the Certificate. If the Certificate is
totally surrendered, the full annual administrative charge will be deducted at
the time of surrender.
TAX CHARGE
We currently impose no charge for taxes payable by us in connection with the
Certificate, other than for premium taxes and similar assessments when
applicable. We reserve the right to impose a charge for any other taxes that may
become payable by us in the future in connection with the Certificates or the
Separate Account.
The annual administrative charge and charges against the Variable Account
described above are for the purposes described and Fortis Benefits may receive a
profit as a result of these charges.
MISCELLANEOUS
Because the Variable Account invests in shares of the Portfolios, the net assets
of the Variable Account will reflect the investment advisory fees and certain
other expenses incurred by the Portfolios that are described in their
prospectuses.
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GENERAL PROVISIONS
THE CERTIFICATES
The Certificate, copies of any applications, amendments, riders, or endorsements
attached to the Certificate and copies of any supplemental applications,
amendments, endorsements, or revised Certificate pages which are mailed to you
are the entire Certificate. Only an officer of Fortis Benefits can agree to
change or waive any provisions of a Certificate. Any change or waiver must be in
writing and signed by an officer of Fortis Benefits. The Certificates are
non-participating and do not share in dividends or earnings of Fortis Benefits.
POSTPONEMENT OF PAYMENT
Fortis Benefits may defer for up to 15 days the payment of any amount
attributable to a purchase payment made by check to allow the check reasonable
time to clear. For a description of other circumstances in which amounts payable
out of Variable Account assets could be deferred, see "Postponement of Payments"
in the Statement of Additional Information. Fortis Benefits may also defer
payment of surrender proceeds payable out of the Fixed Account for a period of
up to 6 months.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of the Annuitant has been misstated, any amount payable will
be that which the purchase payments paid would have purchased at the correct age
and sex. If we have made any overpayments because of incorrect information about
age or sex, or any other miscalculation, Fortis Benefits will deduct the
overpayment from the next payment or payments due. We add underpayments to the
next payment. The amount of any adjustment will be credited or charged with
interest at the effective annual rate of 3% per year.
ASSIGNMENT
Rights and interests under a Qualified Certificate may be assigned only in
certain narrow circumstances referred to in the Certificate. Participants and
other payees may assign their rights and interests under Non-Qualified
Certificates, including their ownership rights.
We take no responsibility for the validity of any assignment. A change in
ownership rights must be made in writing and a copy must be sent to Fortis
Benefits' Home Office. The change will be effective on the date it was made,
although we are not bound by a change until the date we record it.
The rights under a Certificate are subject to any assignment of record at the
Home Office of Fortis Benefits. An assignment or pledge of a Certificate may
have adverse tax consequences. See below under "Federal Tax Matters."
BENEFICIARY
Before the Annuity Commencement Date and while the Annuitant is living, the
Participant may name or change a beneficiary or a contingent beneficiary by
sending a Written Request of the change to Fortis Benefits. Under certain
retirement programs, however, spousal consent may be required to name or change
a beneficiary, and the right to name a beneficiary other than the spouse may be
subject to applicable tax laws and regulations. We are not responsible for the
validity of any change. A change will take effect as of the date it is signed
but will not affect any payments we make or action we take before receiving the
Written Request. We also need the consent of any irrevocably named person before
making a requested change.
In the event of the death of a Participant or Annuitant prior to the Annuity
Commencement date the Beneficiary will be determined as follows:
- If there is any surviving Participant, the surviving Participant will be
the Beneficiary (this overrides any other beneficiary designation).
- If there is no surviving Participant, the Beneficiary will be the
beneficiary designated by the Participant.
- If there is no surviving Participant and no surviving beneficiary who has
been designated by the Participant, then the estate of the last surviving
Participant will be the Beneficiary.
REPORTS
We will mail to the Participant (or to the person receiving payments during the
annuity period), at the last known address of record, any reports and
communications required by any applicable law or regulation. You should
therefore give us prompt written notice of any address change. This will include
annual audited financial statements of the Portfolios, but not necessarily of
the Variable Account or Fortis Benefits.
RIGHTS RESERVED BY FORTIS BENEFITS
Fortis Benefits reserves the right to make certain changes if, in its judgment,
they would best serve the interests of Participants and Annuitants or would be
appropriate in carrying out the purposes of the Certificates. Any changes will
be made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, Fortis Benefits will obtain your approval of the changes
and approval from any appropriate regulatory authority. Such approval may not be
required in all cases, however. Examples of the changes Fortis Benefits may make
include:
- To operate the Variable Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any Subaccount to another Subaccount, or to one
or more separate accounts, or to the Fixed Account; or to add, combine or
remove Subaccounts in the Variable Account.
- To substitute, for the Portfolio shares held in any Subaccount, the shares
of another Portfolio or the shares of another investment company or any
other investment permitted by law.
- To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the Certificate as an
annuity.
- To change the time or time of day at which a Valuation Date is deemed to
have ended.
- To make any other necessary technical changes in the Certificate in order
to conform with any action the above provisions permit Fortis Benefits to
take, including to change the way
16
Fortis Benefits assesses charges, but without increasing as to any then
outstanding Certificate the aggregate amount of the types of charges which
Fortis Benefits has guaranteed.
DISTRIBUTION
The Certificates will be sold by individuals who, in addition to being licensed
by state insurance authorities to sell the Certificates of Fortis Benefits, are
also registered representatives of Jack White & Company, an unaffiliated
broker-dealer. The selling activities of Jack White & Company are by means of a
dealer agreement with Fortis Investors, Inc., the principal underwriter of the
Certificates. Fortis Investors and Jack White & Company are registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 as
broker-dealers and are members of the National Association of Securities
Dealers, Inc.
As compensation for distributing the Certificates, Fortis Benefits pays Jack
White & Company a fee based upon a formula which is not expected to exceed .10%
per annum of the average daily Certificate Value of the Certificates sold by it.
Fortis Benefits did not pay any amount to Fortis Investors in 1996 associated
with distribution of the Certificates. In the distribution agreement, Fortis
Benefits has agreed to indemnify Fortis Investors (and its agents, employees,
and controlling persons) for certain damages and expenses, including those
arising under federal securities laws.
See Note 13 to the Notes to Fortis Benefits' Financial Statements as to amounts
it has paid to Fortis, Inc. for various services.
Fortis Investors is an indirect subsidiary of Fortis AMEV and Fortis AG and is
therefore under common control with Fortis Benefits. Fortis Investors' principal
business address is the same as that of our Home Office. Fortis Investors is not
obligated to sell any specific amount of interests under the Certificates.
$75,000,000 of interests in the Guarantee Periods Fixed Account and an
indefinite amount of interests in the Variable Account have been registered with
the Securities and Exchange Commission.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in the opinion of Fortis Benefits are
currently in effect. These rules are based on laws, regulations and
interpretations which are subject to change at any time. This summary is not
comprehensive and is not intended as tax advice. Federal estate and gift tax
considerations, as well as state and local taxes, may also be material. You
should consult a qualified tax adviser as to the tax implications of taking any
action under a Certificate or related retirement plan.
NON-QUALIFIED CERTIFICATES
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Purchase payments made under Non-Qualified Certificates
are not excludible or deductible from the gross income of the Participant or any
other person. However, any increase in the accumulated value of a Non-Qualified
Certificate resulting from the investment performance of the Variable Account or
interest credited to the Fixed Account is generally not taxable to the
Participant or other payee until received by him or her, as surrender proceeds,
death benefit proceeds, or otherwise. The exception to this rule is that,
generally, Participants who are not natural persons are taxed annually on any
increase in the Certificate Value. However, this exception does not apply in all
cases, and you may wish to discuss this with your tax adviser.
The following discussion applies generally to Certificates owned by natural
persons.
In general, surrenders or partial withdrawals under Certificates are taxed as
ordinary income to the extent of the accumulated income or gain under the
Certificate. If a Participant assigns or pledges any part of the value of a
Certificate, the value so pledged or assigned is taxed to the Participant as
ordinary income to the same extent as a partial withdrawal.
With respect to annuity payment options, although the tax consequences may vary
depending on the option elected under the Certificate, until the investment in
the Certificate is recovered, generally only the portion of the annuity payment
that represents the amount by which the Certificate Value exceeds the
"investment in the Certificate" will be taxed. In general, a person's
"investment in the Certificate" is the aggregate amount of purchase payments
made by him or her. After an Annuitant's or other payee's "investment in the
Certificate" is recovered, the full amount of any additional annuity payments is
taxable. For variable annuity payments, in general, the taxable portion of each
annuity payment (prior to recovery of the "investment in the Certificate") is
determined by a formula which establishes the specific dollar amount of each
annuity payment that is not taxed. This dollar amount is determined by dividing
the "investment in the Certificate" by the total number of expected annuity
payments. For fixed annuity payments, in general, prior to recovery of the
"investment in the Certificate," there is no tax on the amount of each payment
which bears the same ratio to that payment as the "investment in the
Certificate" bears to the total expected value of the annuity payments for the
term of the payments. However, the remainder of each annuity payment is taxable.
The taxable portion of a distribution (in the form of an annuity or a single sum
payment) is taxed as ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all Certificates and other annuity contracts issued by us or our
affiliates to the Participant within the same calendar year will be treated as
if they were a single Certificate.
There is a 10% penalty under the Code on the taxable portion of a "premature
distribution." Generally, an amount is a "premature distribution" unless the
distribution is (1) made on or after the Participant or other payee reaches age
59 1/2, (2) made to a Beneficiary on or after death of the Participant, (3) made
upon the disability of the Participant or other payee, or (4) part of a series
of substantially equal annuity payments for the life or life expectancy of the
Participant or the Participant and Beneficiary. Premature distributions may
result, for example, from an early Annuity Commencement Date, an early
surrender, partial surrender or assignment of a Certificate or the early death
of an Annuitant who is not also the Participant or other person receiving
annuity payments under the Certificate.
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A transfer of ownership of a Certificate, or designation of an Annuitant or
other payee who is not also the Participant, may result in certain income or
gift tax consequences to the Participant that are beyond the scope of this
discussion. A Participant contemplating any transfer or assignment of a
Certificate should contact a competent tax adviser with respect to the potential
tax effects of such transaction.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CERTIFICATES
In order that a Non-Qualified Certificate be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires (a) if any
person receiving annuity payments dies on or after the Annuity Commencement Date
but prior to the time the entire interest in the Certificate has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of the
person's death; and (b) if any Participant dies prior to the Annuity
Commencement Date, the entire interest in the Certificate will be distributed
(1) within five years after the date of that person's death or (2) as annuity
payments which will begin within one year of that Participant's death and which
will be made over the life of the Participant's designated Beneficiary or over a
period not extending beyond the life expectancy of that Beneficiary. However, if
the Participant's designated Beneficiary is the surviving spouse of the
Participant, the Certificate may be continued with the surviving spouse deemed
to be the new Participant. Where the Participant or other person receiving
payments is not a natural person, the required distributions provided by Section
72(A) apply upon the death of the primary Annuitant.
No regulations interpreting the requirements of Section 72(s) have yet been
issued (although proposed regulations have been issued interpreting similar
requirements for qualified plans). Fortis Benefits intends to review and modify
the Certificate if necessary to ensure that it complies with the requirements of
Section 72(s) when clarified by regulation or otherwise.
Generally, unless the Beneficiary elects otherwise, the above requirements will
be satisfied where the death occurs prior to the Annuity Commencement Date by
paying the death benefit in a single sum, subject to proof of the Participant's
death. The Beneficiary, however, may elect by Written Request to receive an
annuity option instead of a lump sum payment. However, if the election is not
made within 60 days of the date the single sum death benefit otherwise becomes
payable, particularly where the annuitant dies and the annuitant is not the
Participant, the IRS may disregard the election for tax purposes and tax the
Beneficiary as if a single sum payment had been made.
QUALIFIED CERTIFICATES
The Certificates may be used with several types of tax-qualified plans. The tax
rules applicable to Participants, Annuitants and other payees vary according to
the type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a retirement program recognized under the Code on
behalf of an individual are excludable from the individual's gross income for
tax purposes during the Accumulation Period. The portion, if any, of any
purchase payment made by or on behalf of an individual under a Certificate that
is not excluded from the individual's gross income for tax purposes during the
Accumulation Period constitutes the individual's "investment in the
Certificate." Aggregate deferrals under all plans at the employee's option may
be subject to limitations.
When annuity payments begin, the individual will receive back his or her
"investment in the Certificate" if any, as a tax-free return of capital. The
dollar amount of annuity payments received in any year in excess of such return
is taxable as ordinary income. When payments are received as an annuity, the
tax-free return of capital is treated as if received ratably over the entire
period of the annuity until fully recovered (as described above with respect to
Non-Qualified Certificates).
The Certificates are available in connection with the following types of
retirement plans: Section 403(b) annuity plans for employees of certain
tax-exempt organizations and public educational institutions; Section 401 or
403(a) qualified pension, profit-sharing or annuity plans; individual retirement
annuities ("IRAs") under Section 408(b); simplified employee pension plans
("SEPs") under Section 408(k); SIMPLE IRA Plans under Section 408(p); Section
457 unfunded deferred compensation plans of public employers and tax-exempt
organizations' and private employer unfunded deferred compensation plans. The
tax implications of these plans are further discussed in the Statement of
Additional Information under the heading "Taxation Under Certain Retirement
Plans."
WITHHOLDING
Annuity payments and other amounts received under Certificates are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly from the qualified plan to
another qualified retirement plan. Moreover, special "backup withholding" rules
may require Fortis Benefits to disregard the recipient's election if the
recipient fails to supply Fortis Benefits with a "TIN" or taxpayer
identification number (social security number for individuals), or if the
Internal Revenue Service notifies Fortis Benefits that the TIN provided by the
recipient is incorrect.
PORTFOLIO DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which set standards of diversification for the investments
underlying the Certificates, in order for the Certificates to be treated as
annuities. Fortis Benefits believes that these diversification standards will be
satisfied. Failure to do so would result in immediate taxation to Participants
or persons receiving annuity payments of all returns credited to Certificates,
except in the case of certain Qualified Certificates. Also, current regulations
do not provide guidance as to any circumstances in which control over allocation
of values among different investment alternatives may cause Participants or
persons receiving annuity payments to be treated as the owners of Variable
Account assets for tax purposes. Fortis Benefits reserves the right to amend the
Certificates in any way necessary to avoid any such result. The Treasury
Department may establish standards in this regard through regulations or
rulings. Such standards may apply only prospectively, although retroactive
application is possible if such standards were considered not to embody a new
position.
18
CERTAIN EXCHANGES
Section 1035 of the Code provides generally that no gain or loss will be
recognized under the exchange of a life insurance or annuity contract for an
annuity contract. Thus, a properly completed exchange from one of these types of
products into a Certificate pursuant to the special annuity contract exchange
form we provide for this purpose is not generally a taxable event under the
Code, and your investment in the Certificate will be the same as your investment
in the product you exchanged out of.
Because of the complexity of these and other tax aspects in connection with an
exchange, you should consult a tax adviser before making any exchange.
TAX LAW RESTRICTIONS AFFECTING SECTION 403(B) PLANS
Section 403(b)(12) of the Internal Revenue Code restricts the distribution under
Section 403(b) annuity contracts of:
(1) elective contributions made for years beginning after December 31, 1988;
(2) earnings on those contributions; and
(3) earnings on amounts held as of December 31, 1988.
Distribution of these amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions made after
December 31, 1988 may not be distributed in the case of hardship.
19
FURTHER INFORMATION ABOUT FORTIS BENEFITS
GENERAL
Fortis Benefits is engaged in the offer and sale of insurance products,
including fixed and variable life insurance policies, fixed and variable annuity
contracts, and group life, accident and health insurance policies. The Company
markets its products to small business and individuals through a national
network of independent agents, brokers, and financial institutions.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of Fortis Benefits. This
summary has been derived in part from, and should be read in conjunction with,
the financial statements of Fortis Benefits included elsewhere in this
Prospectus.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
INCOME STATEMENT DATA
Premiums and policy fees.............. $ 1,295,878 $ 1,232,329 $ 1,022,446 $ 955,053 $ 967,111
Net investment income................. 206,023 203,537 162,514 153,657 156,431
Realized investment gains (losses).... 25,731 55,080 (28,815) 73,623 37,928
Other income.......................... 31,725 33,085 35,958 27,100 26,176
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES...................... $ 1,559,357 $ 1,524,031 $ 1,192,103 $ 1,209,433 $ 1,187,646
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total benefits and expenses........... $ 1,470,066 $ 1,442,270 $ 1,157,651 $ 1,100,199 $ 1,111,530
Income tax expense.................... 31,099 27,891 11,595 31,090 25,660
Income before cumulative effect of
accounting changes*.................. 58,192 53,870 22,857 78,144 50,456
NET INCOME.......................... 58,192 53,870 22,857 81,707 50,456
BALANCE SHEET DATA
Total assets**........................ $ 5,951,876 $ 5,143,012 $ 4,043,914 $ 3,584,139 $ 2,867,999
Total liabilities..................... 5,171,203 4,431,914 3,569,717 3,052,231 2,460,445
Total shareholder's equity**.......... 780,673 711,098 474,197 531,908 407,554
- ------------------------
* Prior-year data has not been restated for the adoption of Statements 109 and
106 in 1993 (See Note 2 of the financial statements).
** The years ended December 31, 1996, 1995, 1994 and 1993, reflect the impact of
the adoption of Statement 115 (See Note 1 of the financial statements).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1996 COMPARED TO 1995
REVENUES
Traditional life insurance premiums of Fortis Benefits (the "Company") are
principally composed of group life coverages. Total life premiums increased over
1995 due primarily to group life sales in
1996. Interest sensitive and investment product policy charges, which consist
primarily of cost of insurance charges, increased 37% from 1995 to 1996.
Continued sales of interest sensitive and investment products has steadily
increased the policy base on which these charges are assessed.
Total accident and health premiums increased in 1996 compared to 1995 due to an
increase in the group disability product sales and strong persistency. Partially
offsetting this increase was a 3% decrease in the group medical products driven
by a decision to roll the fully insured medical business into a common medical
plan and the decision to cease new sales of large group self funded medical
plans, effective January 1, 1996. Beginning April 1, 1996 and continuing into
1997, the groups will gradually be rolled to a third party administrator.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1996, 1995 and
1994 resulted in recognition of realized gains and losses.
BENEFITS
The Company's group life benefits which are included in the traditional life
benefits were higher in 1996 compared to 1995 as a result of increased
mortality. Interest sensitive and investment product benefits for the period
ended December 31, 1996 increased 23% from 1995. This increase was the result of
higher interest crediting on the Company's steadily increasing policy base in
1996 compared to 1995.
The accident and health claims to premium ratio improved from 1995 to 1996 due
primarily to the improved claim closure rates in the group disability lines.
EXPENSES
The commission rates have declined from the levels in 1995. This is primarily
due to change in the mix of business by product lines as well as the change in
the first year versus renewal premiums. Interest sensitive and investment
products commission increased from 1996 compared to 1995; however, the Company
deferred $62.4 million of
20
these commissions in 1996, compared to $52.7 million in 1995. The additional
commission and deferral is the result of an increase in sales of the company's
variable life and variable annuity products. This increase in deferred
commissions more than offset the increase in paid commissions and lowered the
net commission expense for 1996.
In 1996, the Company consolidated the fully insured group medical business
administration processing. This has resulted in expense savings as demonstrated
by the reduction in the general and administrative expenses. Also contributing
to the expense reduction was the decision to discontinue issuing large group
self funded medical business.
1995 COMPARED TO 1994
FINANCIAL CONDITION
Total assets rose to $5,143 million from $4,044 million in 1994. Half of the
increase was due to the assets held in separate accounts which grew from $1,213
million in 1994 to $1,781 million in 1995. Invested assets, excluding Separate
Accounts, increased from $2,372 million at December 31, 1994 to $2,936 million
at December 31, 1995 due to cash inflows and the appreciation of securities
available for sale. Fortis Benefits invests primarily in government and other
high-quality marketable fixed income securities with the objective of providing
reasonable returns while limiting liquidity and credit risk.
During 1995, the Company's mortgage loans on real estate increased $110 million
to $563 million. The Company has a high quality portfolio which has experienced
delinquency rates lower than the industry average. Similar to 1994, mortgage
loans represent 19% of the Company's invested assets.
Policy reserves and liabilities increased from $3,570 million at December 31,
1994 to $4,432 million at December 31, 1995. Aggregate reserves for traditional
life insurance and interest sensitive and investment products increased $222
million from $1,288 million at December 31, 1994 to $1,510 million at December
31, 1995. This increase in traditional life reserves is the result of strong
sales of the Company's group insurance and growth in the policyholder's
accumulations associated with interest sensitive products.
Policy reserves and claim liabilities for accident and health policies increased
by $35 million to nearly $833 million at December 31, 1995. This increase
reflects increased volume of business and increased liability costs for existing
disabilitants as reflected in the Company's disability reserves. Medical
reserves grew somewhat faster than premiums.
Liabilities related to separate accounts increased from $1,208 million at
December 31, 1994 to $1,757 million at December 31, 1995. This increase is
primarily the result of the increased sales of the Company's variable life and
annuity products and market appreciation during 1995.
RESULTS OF OPERATIONS
Total revenues were $1,524 million in 1995 compared to $1,192 million in 1994.
Increased premiums and policy charges in the last two years and higher-yielding
mortgage loans, offset by lower interest rates, increased the Company's net
investment income $41 million to $204 million. The favorable market conditions
generated realized gains on securities sold of $55 million in 1995 compared with
realized losses on investments of $29 million in 1994.
Traditional life premiums and policy charges increased by $52 million to $297
million in 1995. Traditional life insurance premiums increased by 21% during
1995 to $251 million. The Company has experienced strong sales of group life
products due to competitive pricing and marketing emphasis. Interest sensitive
and investment product policy charges, which consist primarily of cost of
insurance and expense charges on interest sensitive insurance policies,
increased 22% to $46 million in 1995 due to continued growth in these products.
Accident and health premiums increased $158 million in 1995 to $935 million from
$777 million in 1994 primarily as a result of increased medical and disability
sales. Disability insurance accounted for approximately one fourth of the
Company's group accident and health insurance revenues. The Company is one of
the leading writers of group disability coverages in the United States. This
market has been intensely competitive. The Company's strategy has been to
emphasize its claim management activities and refine its pricing to better
reflect the risks of various industries and occupations.
New regulations in several states have adversely affected current and future
profitability of certain medical lines. On October 24, 1995, the Company
announced that it will cease selling certain group medical products effective
January 1, 1996. The Company will continue to renew and service existing medical
business. In the long-term, the Company expects this decision to have a
favorable impact on its capital position. In the short-term, management believes
this product line change will not have a material impact on the Company's
operating results.
Total benefits to policyholders increased by $209 million in 1995 to $1,046
million. Traditional life, interest sensitive and investment products' claims
and benefits increased by $59 million to $276 million in 1995 reflecting
increased in-force group coverages and a larger in-force block of interest
sensitive and investment products.
Accident and health benefits increased to $770 million in 1995 from $620 million
in 1994. The increase is due primarily to increased disability business.
Amortization of deferred policy acquisition costs increased to $41 million in
1995 from $35 million in 1994. The increase in the amortization of interest
sensitive and investment products of $7 million to $17 million in 1995 from $10
million in 1994 is primarily due to amortization of costs related to products
sold in recent years.
Insurance commissions, net of deferrals, increased to $96 million from $86
million in 1994. These additional commissions resulted primarily from an
increase in sales of group coverages. General and administrative expenses
increased 29% to $255 million in 1995 from $197 million in 1994, approximately
in line with the increase in revenue. The increased expenses related primarily
to additional staffing and systems integration required to service the increased
amount of group insurance business written in 1995.
21
Income before federal income taxes and cumulative effect of accounting changes
totaled $82 million in 1995 compared to $34 million in 1994. Federal income
taxes were $28 million in 1995 compared to $12 million in 1994. The Company's
effective tax rate was comparable between years.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds provided from
operations, including investment income and additional paid in capital from the
Company's parent and sole shareholder. Funds are principally used to provide for
policy benefits, operating expenses, commissions and investment purchases. The
impact of the declining inforce medical business has been considered in
evaluating the Company's future liquidity needs. The Company expects its
operating activities to continue to generate sufficient funds.
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 a risk-based capital
amount which is then compared to a company's actual total adjusted capital.
Based upon current calculation the risk-based capital standards, the Company's
percentage of total adjusted capital is in excess of ratios which would require
regulatory attention.
The Company has no long or short term debt. Less than 3% of the Company's assets
consisted of non-investment grade bonds as of December 31, 1996 and the Company
does not expect this percentage to change significantly in the future.
COMPETITION
Fortis Benefits seeks to compete primarily on the basis of customer service,
product design, and, in the case of products funded through Series Fund, the
investment results achieved by Fortis Advisers, Inc. Many other insurance
companies compete with Fortis Benefits in each of its markets, including on the
basis of price. Many of these companies, which include some of the largest and
best known insurance companies, have considerably greater resources than Fortis
Benefits.
REGULATION AND RESERVES
The Company is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. Fortis Benefits'
operations and accounts are subject to periodic examination by insurance
regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of Fortis Benefits under these laws cannot be reasonably estimated.
Most of these laws do provide, however, that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include health care reform, employee benefit regulation, controls on
medicare costs and medical entitlement programs, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Pursuant to state insurance laws and regulations, Fortis Benefits is obligated
to carry on its books, as liabilities, reserves to meet its obligations under
outstanding insurance contracts. These reserves are based on assumptions about,
among other things, future claims experience and investment returns. Neither the
reserve requirements nor the other aspects of state insurance regulation provide
absolute protection to holders of insurance contracts, including the
Certificates, if Fortis Benefits were to incur claims or expenses at rates
significantly higher than expected (due, for example, to acquired immune
deficiency syndrome or other infectious diseases or catastrophes) or significant
unexpected losses on its investments.
EMPLOYEES AND FACILITIES
Fortis Benefits has approximately 2,000 employees and considers its employee
relations to be excellent; Fortis Benefits owns its Home Office building,
consisting of 295,000 square feet in Woodbury, Minnesota. It also has
administrative offices in Kansas City, Missouri. Fortis Benefits leases a
portion of that building consisting of 297,000 square feet. In addition Fortis
Benefits has several regional claims and sales offices throughout the United
States. Fortis Benefits occupies approximately 100% of its home office and 70%
of its administration building, which it expects will be adequate for its
purposes for the foreseeable future.
22
DIRECTORS AND EXECUTIVE OFFICERS
Set forth is information concerning the Company's directors and executive
officers, to the extent responsible for its variable annuity operations,
together with their business experience and principal occupations for the past
five years:
OFFICER-DIRECTORS
Dean C. Kopperud, 44 President--Fortis Financial Group; also officer of affiliated companies.
Director since 1995
Robert Brian Pollock, 42 President and Chief Executive Officer; before then Senior Vice President--Life and
Director Since 1988 Disability.
Thomas Michael Keller, 49 President--Fortis Healthcare; before then Senior Vice President of Fortis, Inc.
Director since 1990
OTHER DIRECTORS
Allen Royal Freedman, 57 Chairman and Chief Executive Officer of Fortis, Inc.
Chairman of the Board since
1995
Henry Carroll Mackin, 55 Executive Vice President of Fortis, Inc.
Director Since 1990
Arie Aristide Fakkert, 53 Assistant General Manager of Fortis International N.V.
Director Since 1987
EXECUTIVE OFFICERS
Rhonda Schwartz, 38 Senior Vice President and General Counsel--Life and Investment Products; before
then Secretary and General Counsel of Fortis, Inc.; before then Norris, McLaughlin
& Marcus--attorneys.
Michael John Peninger, 42 Senior Vice President and Chief Financial Officer
Jon H. Nicholson, 47 Vice President--Annuities.
Peggy L. Ettestad, 39 Senior Vice President--Life Operations; before that Vice President of General
Electric Company.
Fortis Benefits' officers serve at the pleasure of the board of directors, and
members of the board serve without compensation (except for expenses of
attending board meetings), until their successors are duly elected and
qualified.
Mr. Freedman is a director of Systems and Computer Technology Corporation. Mr.
Freedman is also a director of the following registered investment companies:
Fortis Equity Portfolios, Inc.; Fortis Growth Fund, Inc.; Fortis Fiduciary Fund,
Inc., Fortis Income Portfolios, Inc.; Fortis Securities, Inc.; Fortis Tax-Free
Portfolios, Inc.; Fortis Money Portfolios, Inc.; Fortis Advantage Portfolios,
Inc.; Fortis World Wide Portfolios, Inc.; Fortis Series Fund, Inc.; Special
Portfolios, Inc.
23
EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation of the
executive officers of Fortis Benefits.
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION PAYOUTS COMPENSATION (1)
- ------------------------------------------- --------- --------- --------- ----------------- ----------- ---------------
Robert B. Pollock 1996 $ 215,000 $ 69,660 $ 0 $ 0 $ 15,318
President and Chief Executive Officer 1995 215,000 84,000 0 0 14,851
1994 200,000 84,000 0 0 14,150
- -----------------------------------------------------------------------------------------------------------------------------
Jon H. Nicholson 1996 160,615 45,760 0 0 12,173
Sr. Vice President-- 1995 137,230 21,360 0 0 9,515
Custom Solutions Group 1994 120,461 33,318 0 0 9,000
- -----------------------------------------------------------------------------------------------------------------------------
Anthony J. Rotondi 1996 182,029 40,755 0 0 9,000
Sr. Vice President-- 1995 156,750 54,375 0 0 12,667
Manufacturing and Information Technology 1994 150,000 54,375 0 0 12,866
- -----------------------------------------------------------------------------------------------------------------------------
William D. Greiter 1996 178,500 48,195 0 0 12,829
Senior Vice President 1995 170,000 38,808 0 0 12,528
1994 144,000 36,750 0 0 10,834
- -----------------------------------------------------------------------------------------------------------------------------
Michael John Peninger 1996 165,000 51,975 0 0 13,018
Senior Vice President and 1995 165,000 39,150 0 0 12,249
Chief Financial Officer 1994 135,000 39,150 0 0 10,116
- ------------------------
1 This column includes contributions made by Fortis Benefits for the year for
the benefit for the named individual to a defined contribution retirement
plan.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
(LONG-TERM INCENTIVE PLAN(1) AWARDS IN LAST FISCAL YEAR)
PERFORMANCE OR
OTHER PERIOD ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF UNTIL NON-STOCK PRICE BASED PLANS
SHARES, UNITS OR MATURATION OR ----------------------------------
NAME OTHER RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM
- --------------------------------------------------- ---------------- --------------- --------- ---------- -----------
Robert B. Pollock.................................. 315 Units 3 years 0 Units 315 Units 945 Units
Jon H. Nicholson................................... 156 Units 3 years 0 Units 156 Units 468 Units
Anthony J. Rotondi................................. 199 Units 3 years 0 Units 199 Units 597 Units
William D. Greiter................................. 174 Units 3 years 0 Units 174 Units 483 Units
Michael John Peninger.............................. 161 Units 3 years 0 Units 161 Units 483 Units
- ------------------------
1 Units shown in this table represent performance units granted pursuant to an
Executive Incentive Compensation Plan in which officers and managers of
Fortis Benefits participate. Awards are made pursuant to this plan based on
the employee's position with Fortis Benefits and salary level and the extent
to which the employee and Fortis Benefits meet certain performance
objectives over 1- and 3-year periods. Employees may elect to defer awards
payable to them under this plan.
As additional compensation to its employees and executive officers, Fortis
Benefits has an Employees' Uniform Retirement Plan and an Executive Retirement
Plan which generally provide an annual annuity benefit upon retirement at age 65
(or a reduced benefit upon early retirement) equal to: .9% of the employee's
Average Annual compensation up to the employee's social security covered
compensation, plus 1.3% of compensation above the social security covered
compensation, up to $255,300, as adjusted by an index, multiplied by the
employee's years of credited services.
In addition, Fortis Benefits provides an unfunded Supplemental Executive
Retirement Plan for certain executives of Fortis Benefits. Mr. Pollock is the
only named executive currently covered by the Plan. Under the Supplemental
Executive Retirement Plan, the annual benefit is calculated by subtracting the
benefit payable under the Employees' Uniform Retirement Plan and the estimated
Social Security benefit from the "Target Benefit." The "Target Benefit" is equal
to 50% of Final Average Salary (average salary over the final 36 consecutive
months of employment) reduced for less than 20 years of service at retirement.
Upon retirement prior to age 65 and after attaining age 55
24
with 10 years of service, special early retirement rules apply. The salary used
to calculate the Final Average Salary consists of regular compensation and the
annual target incentive bonus of the participant. The estimated annual benefit
of Mr. Pollock, based on current compensation levels, under this plan is
$50,135.
The following table illustrates the COMBINED estimated life annuity benefit
payable from the Employees' Uniform Retirement Plan and Executive Retirement
Plan to employees with the specified Final Average Salary and years of service
upon retirement.
PENSION PLAN TABLE*
YEARS OF SERVICE
----------------------------------------------------------------
FINAL AVERAGE SALARY 10 15 20 25 30 35
- --------------------------- --------- --------- --------- --------- --------- ---------
$125,000................... $15,147 $ 22,720 $ 30,294 $ 37,867 $ 45,441 $ 53,014
150,000................... 18,397 27,595 36,794 45,992 55,191 64,389
175,000................... 21,647 32,470 43,294 54,117 64,941 75,764
200,000................... 24,897 37,345 49,794 62,242 74,691 87,139
225,000................... 28,147 42,220 56,294 70,367 84,441 98,514
250,000................... +30,214 45,321 60,428 75,536 90,643 105,750
275,000+.................. 30,352 45,528 60,704 75,880 91,056 106,232
- ------------------------
*The table excludes social security benefits. In general, for the purposes of
these plans, compensation includes salary and bonuses. The credited years of
service with Fortis Benefits for these individuals named in the Summary
Compensation Table above are as follows: 16, 8, 23, 12, and 11, respectively.
OWNERSHIP OF SECURITIES
All of Fortis Benefits' outstanding shares are owned by Time Insurance Company,
515 West Wells, Milwaukee, Wisc. 53201, which is itself wholly owned by Fortis,
Inc., One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is
wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB
1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan
10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis
AMEV and 50% owned, through certain subsidiaries, by Fortis AG, Boulevard Emile
Jacqmain 53, 1000 Brussels, Belgium.
VOTING PRIVILEGES
In accordance with its view of current applicable law, Fortis Benefits will vote
shares of each of the Portfolios which are attributable to a Certificate at
regular and special meetings of the shareholders of the Portfolios in proportion
to instructions received from the persons having the voting interest in the
Certificate as of the record date for the corresponding Portfolio shareholders
meeting. Participants have the voting interest during the Accumulation Period,
persons receiving annuity payments during the Annuity Period, and Beneficiaries
after the death of the Annuitant or Participant. However, if the Investment
Company Act of 1940 or any rules thereunder should be amended or if the present
interpretation thereof should change, and as a result Fortis Benefits determines
that it is permitted to vote shares of the Portfolios in its own right, it may
elect to do so.
During the Accumulation Period, the number of shares of a Portfolio attributable
to a Certificate is determined by dividing the amount of Certificate Value in
the corresponding Subaccount pursuant to the Certificate as of the record date
for the shareholders meeting by the net asset value of one Portfolio share as of
that date. During the Annuity Period, or after the death of the Annuitant or
Participant, the number of Portfolio shares deemed attributable to the
Certificate will be computed in a comparable manner, based on the liability for
future variable annuity payments allocable to that Subaccount under the
Certificate as of the record date. Such liability for future payments will be
calculated on the basis of the mortality assumptions and the assumed interest
rate used in determining the number of Annuity Units credited to the Certificate
and the applicable Annuity Unit value on the record date. During the Annuity
Period, the number of votes attributable to a Certificate will generally
decrease since funds set aside to make the annuity payments will decrease.
Fortis Benefits will vote shares for which it has received no timely
instructions, and any shares attributable to excess amounts Fortis Benefits has
accumulated in the related Subaccount, in proportion to the voting instructions
which it receives with respect to all Certificates and other variable annuity
contracts participating in a Portfolio. To the extent that Fortis Benefits or
any affiliated company holds any shares of a Portfolio, they will be voted in
the same proportion as instructions for that Portfolio that are received from
persons holding the voting interest with respect to all Fortis Benefits separate
accounts participating in that Portfolio. Shares held by separate accounts other
than the Variable Account will in general be voted in accordance with
instructions of participants in such other separate accounts. This diminishes
the relative voting influence of the Certificates.
Each person having a voting interest in a Subaccount of the Separate Account
will receive proxy material, reports and other materials relating to the
appropriate Portfolio. Pursuant to the procedures described above, these persons
may give instructions regarding the election of the Board of Directors of the
Portfolios, ratification of the selection of its independent auditors, the
approval of the investment managers of a Portfolio, changes in fundamental
investment policies of a Portfolio and all other matters that are put to a vote
by Portfolio shareholders.
LEGAL MATTERS
The legality of the Certificates described in this Prospectus has been passed
upon by David A. Peterson, Esquire, Assistant General Counsel
25
with the law department of Fortis Benefits. Messrs. Freedman, Levy, Kroll &
Simonds, Washington, D.C., have advised Fortis Benefits on certain federal
securities law matters.
OTHER INFORMATION
Registration Statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
Certificates discussed in this Prospectus. Not all of the information set forth
in the Registration Statement, amendments and exhibits thereto has been included
in this Prospectus. Statements contained in this Prospectus concerning the
content of the Certificates and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
A Statement of Additional Information is available upon request. Its contents
are as follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE
---
Fortis Benefits and the Variable Account....... 2
Calculation of Annuity Payments................ 2
Postponement of Payments....................... 3
Services....................................... 4
- Safekeeping of Variable Account Assets..... 4
- Experts.................................... 4
- Principal Underwriter...................... 4
Limitations on Allocations..................... 4
Change of Investment Adviser or Investment
Policy........................................ 4
Taxation Under Certain Retirement Plans........ 5
Withholding.................................... 9
Terms of Exemptive Relief in Connection With
Mortality and Expense Risk Charge............. 9
Variable Account Financial Statements.......... 10
APPENDIX A--Performance Information............ A-1
FORTIS BENEFITS FINANCIAL STATEMENTS
The financial statements of Fortis Benefits that are included in this Prospectus
should be considered primarily as bearing on the ability of Fortis Benefits to
meet its obligations under the Certificates. The Certificates are not entitled
to participate in earnings, dividends or surplus of Fortis Benefits.
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying balance sheets of Fortis Benefits Insurance
Company, an indirect wholly-owned subsidiary of Fortis AMEV and Fortis AG, as of
December 31, 1996 and 1995, and the related statements of income, changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, MN
February 12, 1997
27
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
--------------------
1996 1995
--------- ---------
ASSETS
Investments (NOTE 3):
Fixed maturities, at fair value (amortized cost 1996--$2,078,438;
1995--$1,951,204)................................................................... $2,115,499 $2,075,624
Equity securities, at fair value (cost 1996--$84,144; 1995--$60,935)................. 106,290 78,852
Mortgage loans on real estate, less allowance for possible losses (1996--$9,697;
1995--$8,353)....................................................................... 582,869 562,697
Policy loans......................................................................... 60,722 53,863
Short-term investments............................................................... 182,817 153,499
Real estate and other investments.................................................... 29,628 11,918
--------- ---------
3,077,825 2,936,453
Cash................................................................................... 20,474 1
Receivables:
Uncollected premiums................................................................. 71,386 55,992
Reinsurance recoverable on unpaid and paid losses.................................... 12,939 11,812
Due from affiliates.................................................................. -- 388
Other................................................................................ 9,045 14,581
--------- ---------
93,370 82,773
Accrued investment income.............................................................. 39,519 41,209
Deferred policy acquisition costs (NOTE 4)............................................. 268,075 237,509
Property and equipment at cost, less accumulated depreciation (NOTE 5)................. 52,882 60,031
Deferred federal income taxes (NOTE 7)................................................. 17,008 --
Other assets........................................................................... 8,005 3,551
Assets held in separate accounts (NOTE 8).............................................. 2,374,718 1,781,485
--------- ---------
TOTAL ASSETS........................................................................... $5,951,876 $5,143,012
--------- ---------
--------- ---------
See accompanying notes.
28
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
--------------------
1996 1995
--------- ---------
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance......................................................... $ 434,378 $ 407,706
Interest sensitive and investment products......................................... 1,175,480 1,101,931
Accident and health................................................................ 834,119 832,925
--------- ---------
2,443,977 2,342,562
Unearned revenues.................................................................... 12,622 13,044
Other policy claims and benefits payable............................................. 191,940 196,403
Policyholder dividends payable....................................................... 8,783 7,930
--------- ---------
2,657,322 2,559,939
Accrued expenses..................................................................... 42,223 68,441
Current income taxes payable......................................................... 17,424 5,375
Deferred federal income taxes (NOTE 7)............................................... -- 9,538
Other liabilities.................................................................... 104,834 31,145
Due to affiliates.................................................................... 4,926 --
Liabilities related to separate accounts (NOTE 8).................................... 2,344,474 1,757,476
--------- ---------
TOTAL POLICY RESERVES AND LIABILITIES.................................................. 5,171,203 4,431,914
SHAREHOLDER'S EQUITY (NOTES 1, 9 AND 11):
Common Stock, $5 par value:
Authorized, issued and outstanding shares--1,000,000................................. 5,000 5,000
Additional paid-in capital........................................................... 468,000 408,000
Retained earnings.................................................................... 265,613 207,421
Unrealized gains on investments, net (NOTE 3)........................................ 36,290 88,131
Unrealized gains on assets held in separate accounts, net (NOTE 3)................... 5,770 2,546
--------- ---------
TOTAL SHAREHOLDER'S EQUITY............................................................. 780,673 711,098
--------- ---------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY............................ $5,951,876 $5,143,012
--------- ---------
--------- ---------
See accompanying notes.
29
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
---------------------------------
1996 1995 1994
---------- ---------- ---------
REVENUES
Insurance operations:
Traditional life insurance premiums..................................... $ 258,496 $ 251,353 $ 207,824
Interest sensitive and investment product policy charges................ 63,336 46,076 37,823
Accident and health premiums............................................ 974,046 934,900 776,799
---------- ---------- ---------
1,295,878 1,232,329 1,022,446
Net investment income (NOTE 3)............................................ 206,023 203,537 162,514
Net realized gains (losses) on investments (NOTE 3)....................... 25,731 55,080 (28,815)
Other income.............................................................. 31,725 33,085 35,958
---------- ---------- ---------
TOTAL REVENUES........................................................ 1,559,357 1,524,031 1,192,103
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance.............................................. 220,227 202,911 162,168
Interest sensitive and investment products.............................. 90,358 73,676 55,026
Accident and health claims.............................................. 778,439 769,588 620,367
---------- ---------- ---------
1,089,024 1,046,175 837,561
Policyholder dividends.................................................... 4,169 4,305 1,986
Amortization of deferred policy acquisition costs (NOTE 4)................ 39,325 41,291 34,566
Insurance commissions..................................................... 94,723 95,559 86,111
General and administrative expenses....................................... 242,825 254,940 197,427
---------- ---------- ---------
TOTAL BENEFITS AND EXPENSES........................................... 1,470,066 1,442,270 1,157,651
---------- ---------- ---------
Income before federal income taxes and cumulative effect of accounting
changes.................................................................. 89,291 81,761 34,452
Federal income taxes (NOTE 7)............................................. 31,099 27,891 11,595
---------- ---------- ---------
NET INCOME................................................................ $ 58,192 $ 53,870 $ 22,857
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes.
30
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
UNREALIZED UNREALIZED
GAINS GAINS ON ASSETS
ADDITIONAL (LOSSES) ON HELD IN
COMMON PAID-IN RETAINED INVESTMENTS, SEPARATE
STOCK CAPITAL EARNINGS NET ACCOUNTS, NET TOTAL
----------- ----------- ----------- --------------- --------------- ---------
Balance, January 1, 1994 $ 5,000 $ 345,000 $ 130,694 $ 50,144 $ 1,070 $ 531,908
Net income............................... -- -- 22,857 -- -- 22,857
Additional paid-in capital............... -- 13,000 -- -- -- 13,000
Change in unrealized losses on
investments, net........................ -- -- -- (93,052) -- (93,052)
Change in unrealized gain on assets held
in separate account, net................ -- -- -- -- (516) (516)
----------- ----------- ----------- ------- ------ ---------
Balance, December 31, 1994............... 5,000 358,000 153,551 (42,908) 554 474,197
Net income............................... -- -- 53,870 -- -- 53,870
Additional paid-in capital............... -- 50,000 -- -- -- 50,000
Change in unrealized gains on
investments, net........................ -- -- -- 131,039 -- 131,039
Change in unrealized gain on assets held
in separate account, net................ -- -- -- -- 1,992 1,992
----------- ----------- ----------- ------- ------ ---------
Balance, December 31, 1995............... 5,000 408,000 207,421 88,131 2,546 711,098
Net income............................... -- -- 58,192 -- -- 58,192
Additional paid-in capital............... -- 60,000 -- -- -- 60,000
Change in unrealized gains on
investments, net........................ -- -- -- (51,841) -- (51,841)
Change in unrealized gain on assets held
in separate account, net................ -- -- -- -- 3,224 3,224
----------- ----------- ----------- ------- ------ ---------
Balance, December 31, 1996............... $ 5,000 $ 468,000 $ 265,613 $ 36,290 $ 5,770 $ 780,673
----------- ----------- ----------- ------- ------ ---------
----------- ----------- ----------- ------- ------ ---------
See accompanying notes.
31
STATEMENTS OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ---------- -----------
OPERATING ACTIVITIES
Net income............................................................. $ 58,192 $ 53,870 $ 22,857
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in future policy benefit reserves for traditional, interest
sensitive and accident and health policies.......................... 26,193 80,478 79,014
Increase in other policy claims and benefits and policyholder
dividends payable................................................... 18,638 27,676 10,075
Provision for deferred federal income taxes.......................... (1,094) (13,584) (2,356)
Increase in income taxes payable..................................... 12,049 1,023 3,283
Amortization of deferred policy acquisition costs.................... 39,325 41,291 34,566
Policy acquisition costs deferred.................................... (66,515) (56,391) (54,349)
Provision for mortgage loan losses................................... 1,344 924 1,105
Provision for depreciation........................................... 17,312 15,654 12,267
Amortization of investment premiums (discount) net................... 1,821 (239) (914)
Change in receivables, accrued investment income, unearned premiums,
accrued expenses and other liabilities.............................. 38,614 3,427 (36,650)
Net realized (gains) losses on investments........................... (25,731) (55,080) 28,815
Other................................................................ (261) (2,431) (135)
------------ ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 119,887 96,618 97,578
INVESTING ACTIVITIES
Purchases of fixed maturity investments................................ (2,778,352) (2,151,133) (1,943,697)
Sales or maturities of fixed maturity investments...................... 2,652,887 2,000,068 1,798,184
Increase in short-term investments..................................... (29,318) (35,908) (44,266)
Purchases of other investments......................................... (210,182) (240,264) (211,836)
Sales of other investments............................................. 163,569 112,598 104,399
Purchases of property and equipment.................................... (10,992) (19,975) (16,164)
Purchase of group insurance business................................... -- -- (6,644)
Other.................................................................. -- 1,229 500
------------ ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................ (212,388) (333,385) (319,524)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received.............................................. 128,446 187,484 200,499
Surrenders and death benefits........................................ (125,274) (60,522) (19,207)
Interest credited to policyholders................................... 49,802 48,918 31,867
Additional paid-in capital from shareholder............................ 60,000 50,000 13,000
------------ ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 112,974 225,880 226,159
------------ ---------- -----------
Increase (decrease) in cash............................................ 20,473 (10,887) 4,213
CASH AT BEGINNING OF YEAR........................................ 1 10,888 6,675
------------ ---------- -----------
CASH AT END OF YEAR.............................................. $ 20,474 $ 1 $ 10,888
------------ ---------- -----------
------------ ---------- -----------
See accompanying notes.
32
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
DECEMBER 31, 1996
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Fortis Benefits Insurance Company (the Company) is an indirect wholly-owned
subsidiary of Fortis AMEV and Fortis AG. The Company is incorporated in
Minnesota and distributes its products in all states except New York. To date,
the majority of the Company's revenues have been derived from group employee
benefits products and the remainder from individual life and annuity products.
RECOGNITION OF REVENUES AND POLICY RESERVES AND LIABILITIES
The Company follows generally accepted accounting principles which differ in
certain respects from statutory accounting practices prescribed or permitted by
regulatory authorities. The more significant of these principles are:
Premiums for traditional life insurance are recognized as revenues when due
over the premium-paying period. Reserves for future policy benefits are
computed using the net level method and include investment yield, mortality,
withdrawal, and other assumptions based on the Company's experience,
modified as necessary to reflect anticipated trends and to include
provisions for possible unfavorable deviations.
Revenues for interest sensitive and investment products consist of charges
assessed against policy account balances during the period for the cost of
insurance, policy administration, and surrender charges. Future policy
benefit reserves are computed under the retrospective deposit method and
consist of policy account balances before applicable surrender charges.
Policy benefits charged to expense during the period include amounts paid in
excess of policy account balances and interest credited to policy account
balances. Interest credit rates for universal life and investment products
ranged from 6.2% to 7% and 4% to 7.8% in 1996 and 1995, respectively.
Premiums for accident and health insurance products, including medical, long
and short-term disability and dental insurance products are recognized as
revenues ratably over the contract period in proportion to the risk insured.
Reserves for future disability benefits are based on the 1964 Commissioners
Disability Table at 6% interest. Calculated reserves are modified based on
the Company's actual experience. Other policy claims and benefits payable
for reported and incurred but not reported claims and related claims
adjustment expenses are determined using case-basis estimates and past
experience. The methods of making such estimates and establishing the
related liabilities are continually reviewed and updated. Any adjustments
resulting therefrom are reflected in income currently.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are directly related to
the production of new business are deferred to the extent recoverable and
amortized. For traditional life insurance products, such costs are amortized
over the premium paying period. For interest sensitive and investment products,
such costs are amortized in relation to expected future gross profits. For
accident and health and group life insurance products, these costs represent the
present value at the acquisition of these lines in the October 1, 1991 purchase
(see Note 2) of future profits which are amortized against the expected premium
revenues of the lines acquired. These amortization periods require significant
management judgment and are reviewed continually. As excess amounts of deferred
costs over future premiums or gross profits are identified, such excess amounts
are expensed.
INVESTMENTS
The Company's investment strategy is developed based on many factors including
insurance liability matching, rate of return, maturity, credit risk, tax
considerations and regulatory requirements.
All fixed maturity investments are classified as available-for-sale and carried
at fair value. That determination is made at the time of each purchase and,
prospectively, is reevaluated as of each balance sheet date.
Changes in fair values of available-for-sale securities, after related deferred
income taxes and after adjustment for the changes in pattern of amortization of
deferred policy acquisition costs and participating policyholder dividends, are
reported directly in shareholder's equity as unrealized gains (losses) on
investments and, accordingly, have no effect on net income. The offsets to the
unrealized appreciation or depreciation represent adjustments of deferred policy
acquisition cost amortization and policyholder dividends payable that would have
been required as a charge or credit to income had such unrealized amounts been
realized.
Mortgage loans constitute first liens on commercial real estate and other income
producing properties. The insurance statutes in Minnesota generally require that
the initial principal loaned not exceed 80% of the appraised value of the
property securing the loan. The Company's policy fully complies with this
statute. Mortgage loans on real estate are reported at unpaid balance, adjusted
for amortization of premium or discount, less allowance for possible losses. The
change in the allowance for possible losses is recorded with realized gains and
losses on investments. Policy loans are reported at unpaid balance.
Realized gains and losses on sales of investments, and declines in value judged
to be other-than-temporary, are recognized on the specific identification basis.
Investment income is recorded as earned.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation. The
Company provides for depreciation principally on the straight-line method over
the estimated useful lives of the related property.
33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board ("FASB") Statement 109, ACCOUNTING FOR
INCOME TAXES. Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and the tax bases and are measured
using the enacted tax rates.
SEPARATE ACCOUNTS
Assets and liabilities associated with separate accounts relate to premium and
annuity considerations for variable life and annuity products for which the
contract holder, rather than the Company, bears the investment risk. Separate
account assets are reported at fair value.
GUARANTY FUND ASSESSMENTS
The economy and other factors have caused an increase in the number of insurance
companies that are under regulatory supervision. This circumstance may result in
an increase in assessments by state guaranty funds, or voluntary payments by
solvent insurance companies, to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments can be partially recovered
through a reduction in future premium taxes in some states. The Company is not
able to reasonably estimate the impact of future assessments on its financial
position but does not believe that the impact will be material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform to the 1996 presentation.
2. ACQUIRED BUSINESS
In 1991, the company purchased certain assets and assumed certain
liabilities from The Mutual Benefit Life Insurance Company in Rehabilitation
(MBL). The seller transferred to the Company, 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. The original
purchase price of the acquisition was $318,000,000. Subsequent additional
payments of $20,850,000 were made ending in 1994. These additional payments, as
well as $126,515,000 of the original purchase price represent the present value
of future profits on the lines of business acquired at the date of acquisition
and have been accounted for as deferred policy acquisition costs (see Note 4).
3. INVESTMENTS
AVAILABLE FOR SALE SECURITIES
The following is a summary of the available for sale securities (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ----------- ----------- ---------
December 31, 1996:
Fixed income securities:
Governments.................................. $ 321,574 $ 3,418 $ 1,323 $ 323,669
Public utilities............................. 92,116 2,758 403 94,471
Industrial and miscellaneous................. 1,656,420 38,413 6,527 1,688,306
Other........................................ 8,328 750 25 9,053
--------- ----------- ----------- ---------
Total fixed income securities................ 2,078,438 45,339 8,278 2,115,499
Equity securities............................ 84,144 23,340 1,194 106,290
--------- ----------- ----------- ---------
Total...................................... $2,162,582 $ 68,679 $ 9,472 $2,221,789
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
December 31, 1995:
Fixed income securities:
Governments.................................. $ 453,406 $ 36,938 $ 142 $ 490,202
Public utilities............................. 55,793 4,617 -- 60,410
Industrial and miscellaneous................. 1,420,374 82,705 1,282 1,501,797
Other........................................ 21,631 1,586 2 23,215
--------- ----------- ----------- ---------
Total fixed income securities................ 1,951,204 125,846 1,426 2,075,624
Equity securities............................ 60,935 20,321 2,404 78,852
--------- ----------- ----------- ---------
Total...................................... $2,012,139 $ 146,167 $ 3,830 $2,154,476
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
34
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS (CONTINUED)
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 1996, 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............................................... $ 57,745 $ 57,849
Due after one year through five years................................. 576,951 588,257
Due after five years through ten years................................ 666,892 675,262
Due after ten years................................................... 776,850 794,131
--------- ---------
Total................................................................. $2,078,438 $2,115,499
--------- ---------
--------- ---------
MORTGAGE LOANS
The Company has issued commercial mortgage loans on properties located
throughout the United States. Approximately 36% of outstanding principal is
concentrated in the states of California, Texas and New York at December 31,
1996 as compared to concentrated interests in California, Florida and New York
of 35% at December 31, 1995. Loan commitments outstanding totaled $6,141,000 at
December 31, 1996.
In May 1993, FASB issued Statement 114, ACCOUNTING FOR CREDITORS FOR IMPAIRMENT
OF A LOAN, which became effective for fiscal years beginning after December 15,
1994, and which the Company adopted in 1995. Statement 114 requires 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. The impact of adoption was
not material to the Company's financial position or operating results.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $2,537,000 and $2,385,000 at
December 31, 1996 and 1995, respectively, on deposit with various governmental
authorities as required by law.
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) recorded in shareholder's equity for
the year ended December 31 were as follows (in thousands):
1996 1995 1994
--------- --------- ---------
Change in unrealized gains before adjustments...................... $ (83,065) $ 214,452 $(155,923)
Adjustments:
Decrease (increase) in amortization of deferred policy acquisition
costs............................................................. 3,376 (9,789) 9,288
Participating policyholders' share of earnings..................... -- -- 2,684
Deferred income taxes.............................................. 31,072 (71,632) 50,383
--------- --------- ---------
Change in net unrealized gains (losses)............................ (48,617) 133,031 (93,568)
Net unrealized gains (losses), beginning of year................... 90,677 (42,354) 51,214
--------- --------- ---------
Net unrealized gains (losses), end of year......................... $ 42,060 $ 90,677 $ (42,354)
--------- --------- ---------
--------- --------- ---------
35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS (CONTINUED)
NET INVESTMENT INCOME AND NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Major categories of net investment income and realized gains (losses) on
investments for each year were as follows (in thousands):
1996 1995 1994
--------- --------- ---------
NET INVESTMENT INCOME
Fixed maturities................................................... $ 141,973 $ 139,062 $ 119,668
Equity securities.................................................. 6,682 2,026 1,937
Mortgage loans on real estate...................................... 52,949 49,227 36,816
Policy loans....................................................... 3,195 2,797 2,731
Short-term investments............................................. 5,175 11,863 4,671
Real estate and other investments.................................. 5,358 4,750 2,138
--------- --------- ---------
215,332 209,725 167,961
Expenses........................................................... (9,309) (6,188) (5,447)
--------- --------- ---------
$ 206,023 $ 203,537 $ 162,514
--------- --------- ---------
--------- --------- ---------
NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Fixed maturities................................................... $ 3,334 $ 50,393 $ (27,854)
Equity securities.................................................. 18,281 2,830 1,352
Mortgage loans on real estate...................................... (144) (242) (2,992)
Policy loans....................................................... -- -- --
Short-term investments............................................. 57 (3) (60)
Real estate and other investments.................................. 4,203 2,102 739
--------- --------- ---------
$ 25,731 $ 55,080 $ (28,815)
--------- --------- ---------
--------- --------- ---------
Proceeds from sales of investments in fixed maturities were $2,652,887,000,
$2,000,068,000 and $1,798,185,000 in 1996, 1995 and 1994, respectively. Gross
gains of $28,606,000, $61,070,000 and $16,618,000 and gross losses of
$25,272,000, $10,677,000 and $44,472,000 were realized on the sales in 1996,
1995 and 1994, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows
(in thousands):
INTEREST
SENSITIVE AND
TRADITIONAL INVESTMENT ACCIDENT
LIFE PRODUCTS AND HEALTH TOTAL
----------- --------------- ----------- ---------
Balance January 1, 1995........................ $ 49,910 $ 141,309 $ 40,979 $ 232,198
Acquisition costs deferred..................... -- 56,391 -- 56,391
Acquisition costs amortized.................... (11,378) (17,071) (12,842) (41,291)
Additional amortization of deferred acquisition
costs from unrealized gains on
available-for-sale securities -- (9,789) -- (9,789)
----------- --------------- ----------- ---------
Balance December 31, 1995...................... 38,532 170,840 28,137 237,509
Acquisition costs deferred..................... -- 66,515 -- 66,515
Acquisition costs amortized.................... (5,375) (19,695) (14,255) (39,325)
Reduced amortization of deferred acquisition
costs from unrealized gains on
available-for-sale securities................. -- 3,376 -- 3,376
----------- --------------- ----------- ---------
Balance December 31, 1996...................... $ 33,157 $ 221,036 $ 13,882 $ 268,075
----------- --------------- ----------- ---------
----------- --------------- ----------- ---------
Included within total deferred policy acquisition costs at December 31, 1996 is
$27,914,000 of present value of future profits (PVP) resulting from acquisitions
accounted for as a purchase. The estimated amount of PVP to be amortized during
each of the next two years is as follows: 1997-- $17,478,000; and
1998--$10,436,000.
During 1996, 1995 and 1994, the Company sold portions of its investment
portfolio and in accordance with FASB Statement 97, the recognition of the
realized capital (losses) gains resulted in (reduced) additional amortization of
acquisition costs deferred of $1,894,000, $4,825,000 and $(935,000),
respectively. In addition, the Company recorded (reduced) policyholder dividends
payable of $1,095,000 in 1995 and $(761,000) in 1994.
36
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
5. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year follows (in
thousands):
1996 1995
--------- ---------
Land........................................................................ $ 1,900 $ 1,900
Building and improvements................................................... 25,133 23,319
Furniture and equipment..................................................... 95,370 85,592
--------- ---------
122,403 110,811
Less accumulated depreciation............................................... (69,521) (50,780)
Net property and equipment.................................................. $ 52,882 $ 60,031
--------- ---------
--------- ---------
6. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims and claims
adjustment expenses is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
Balance as of January 1, net of reinsurance recoverables........... $ 928,832 $ 838,810 $ 806,538
Add: Incurred losses related to:
Current year..................................................... 865,907 827,261 656,052
Prior years...................................................... (64,094) (28,520) (58,218)
--------- --------- ---------
Total incurred losses.......................................... 801,813 798,741 597,834
Deduct: Paid losses related to:
Current year..................................................... 549,144 492,460 377,595
Prior years...................................................... 233,790 216,259 187,967
--------- --------- ---------
Total paid losses.............................................. 782,934 708,719 565,562
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables......... $ 947,711 $ 928,832 $ 838,810
--------- --------- ---------
--------- --------- ---------
The table above compares to the amounts reported on the balance sheet in the
following respects: (1) the table above is presented net of ceded reinsurance
and the accident and health reserves reported on the balance sheet are gross of
ceded reinsurance; (2) the table above includes claims adjustment expense
liabilities that are included in accrued expenses on the balance sheet; and (3)
the table above includes accident and health benefits payable which are included
with other policy claims and benefits payable reported on the balance sheet.
In each of the years presented above, the accident and health insurance line of
business experienced overall favorable development on claims reserves
established as of the previous year end. The favorable development was a result
of lower medical costs due to less uncertainty in the health business, a
reduction of loss reserves which considered historically high inflation in
medical costs and, in 1994, a refinement in the claims reserve estimates.
7. FEDERAL INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of Fortis, Inc. Income tax
expense or credits are allocated among the affiliated subsidiaries by applying
corporate income tax rates to taxable income or loss determined on a separate
return basis according to a Tax Allocation Agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial statement purposes and
for income tax purposes.
37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
7. FEDERAL INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
--------- ---------
Deferred tax assets:
Reserves.................................................................. $ 51,271 $ 54,346
Separate account assets/liabilities....................................... 40,989 34,386
Unrealized losses......................................................... 2,648 --
Accrued liabilities....................................................... 8,439 13,781
Claims and benefits payable............................................... 7,764 2,626
Other..................................................................... 1,549 123
--------- ---------
Total deferred tax assets............................................... 112,660 105,262
Deferred tax liabilities:
Other..................................................................... 2,348 --
Unrealized gains.......................................................... 20,402 48,826
Deferred policy acquisition costs......................................... 67,850 60,930
Investments............................................................... 1,942 --
Fixed assets.............................................................. 3,110 5,044
--------- ---------
Total deferred tax liabilities.......................................... 95,652 114,800
--------- ---------
Net deferred tax asset (liability)...................................... $ 17,008 $ (9,538)
--------- ---------
--------- ---------
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets, and, therefore, no such valuation
allowance has been established.
The Company's tax expense (credit) for the year ended December 31 is shown as
follows (in thousands):
1996 1995 1994
--------- --------- ---------
Current.............................................................. $ 32,193 $ 39,660 $ 15,046
Deferred............................................................. (1,094) (11,769) (3,451)
--------- --------- ---------
$ 31,099 $ 27,891 $ 11,595
--------- --------- ---------
--------- --------- ---------
Federal Income tax payments and refunds resulted in net payments of $16,434,000,
$40,453,000 and $10,351,000 in 1996, 1995 and 1994, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
1996 1995 1994
--------- --------- ---------
Statutory income tax rate............................................ 35.0% 35.0% 35.0%
Tax audit provision.................................................. -- -- 0.8
Other, net........................................................... (.2) (0.9) (2.1)
--------- --------- ---------
34.8% 34.1% 33.7%
--------- --------- ---------
--------- --------- ---------
8. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets at December 31 were as follows (in thousands):
1996 1995
--------- ---------
Premium and annuity considerations for the variable annuity products and
variable universal life product for which the contract holder, rather
than the Company, bears the investment risk.............................. $2,344,474 $1,757,476
Assets of the separate accounts owned by the Company, at fair value....... 30,244 24,009
--------- ---------
$2,374,718 $1,781,485
--------- ---------
--------- ---------
38
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
9. STATUTORY ACCOUNTING PRACTICES
Reconciliations of net income and shareholder's equity on the basis of
statutory accounting to the related amounts presented in the accompanying
statements were as follows (in thousands):
NET INCOME SHAREHOLDER'S EQUITY
------------------------------- --------------------
1996 1995 1994 1996 1995
--------- --------- --------- --------- ---------
Based on statutory accounting practices......... $ 55,046 $ 30,576 $ 49,759 $ 482,507 $ 377,040
Deferred policy acquisition costs............... 27,190 15,100 19,783 268,075 237,509
Investment valuation differences................ (1,600) 330 370 31,326 114,413
Policy reserves................................. (19,505) (29,238) (25,213) (131,159) (114,259)
Current income taxes payable.................... (1,292) (1,294) -- (7,895) (7,895)
Deferred income taxes........................... 1,094 11,769 2,356 17,008 (9,538)
Realized gains (losses) on investments.......... 264 1,938 (1,052) -- --
Realized gains (losses) transferred to the
Interest Maintenance Reserve (IMR), net of
tax............................................ 2,335 31,711 (18,456) -- --
Amortization of IMR, net of tax................. (6,130) (5,261) (5,479) -- --
Property and equipment.......................... -- -- -- 20,481 27,172
Interest maintenance reserve.................... -- -- -- 50,019 53,814
Asset valuation reserve......................... -- -- -- 62,961 48,507
Other, net...................................... 790 (1,761) 789 (12,650) (15,665)
--------- --------- --------- --------- ---------
As reported herein.............................. $ 58,192 $ 53,870 $ 22,857 $ 780,673 $ 711,098
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
10. REINSURANCE
The maximum amount that the Company retains on any one life is $500,000 of
life insurance including accidental death. Amounts in excess of $500,000 are
reinsured with other life insurance companies on a yearly renewable term basis.
Ceded reinsurance premiums for the year ended December 31 were as follows (in
thousands):
1996 1995 1994
--------- --------- ---------
Life insurance......................................................... $ 8,680 $ 4,661 $ 5,571
Accident and health insurance.......................................... 6,793 3,410 36,782
--------- --------- ---------
$ 15,473 $ 8,071 $ 42,353
--------- --------- ---------
--------- --------- ---------
Recoveries under reinsurance contracts for the year ended December 31 were as
follows (in thousands):
1996 1995 1994
--------- --------- ---------
Life insurance........................................................ $ 7,225 $ 2,489 $ 1,650
Accident and health insurance......................................... 5,993 8,807 19,913
--------- --------- ---------
$ 13,218 $ 11,296 $ 21,563
--------- --------- ---------
--------- --------- ---------
Reinsurance ceded would become a liability of the Company in the event the
reinsurers are unable to meet the obligations assumed under the reinsurance
agreements. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers.
11. STATUTORY INFORMATION
Dividend distributions to parent are restricted as to amount by state
regulatory requirements. The Company had $47,728,000 free from such restrictions
at December 31, 1996. Distributions in excess of this amount would require
regulatory approval.
Statutory-basis financial statements are prepared in accordance with accounting
practices prescribed or permitted by Minnesota Insurance regulatory authorities.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners ("NAIC"), as well as state
laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed; such
practices may differ form state to state, may differ from company to company
within a state, and may change in the future. The NAIC is currently in the
process of codifying statutory accounting practices. This project, which is not
expected to be completed before 1998, may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory-basis
financial statements.
Insurance enterprises are required by State Insurance Departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. All of
the Company's insurance subsidiaries exceed minimum RBC requirements.
39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis, Inc. These services
include assistance in benefit plan administration, corporate insurance,
accounting, tax, auditing, investment and other administrative functions. The
fees paid to Fortis, Inc. for these services for the years ended December 31,
1996, 1995 and 1994, were $13,319,000, $10,074,000 and $8,944,000, respectively.
In conjunction with the marketing of its variable annuity products, the Company
paid $68,616,000, $59,308,000 and $57,307,000, in commissions to its affiliate,
Fortis Investors, Inc. for the years ended December 31, 1996, 1995 and 1994,
respectively.
13. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
Investments are reported in the accompanying balance sheets on the following
basis:
The fair values for fixed maturity securities and equity securities are
based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair values are estimated using values
obtained from independent pricing services or, in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity of
the investments.
Mortgage loans are reported at unpaid principal balance less allowances for
possible losses. The fair values of mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered
for similar loans to borrowers with similar credit ratings. Loans with
similar characteristics are aggregated for purposes of the calculations. The
fair values for the Company's policy reserves under the investment products
are determined using cash surrender value.
The fair values under all insurance contracts are taken into consideration
in the Company's overall management of interest rate risk, such that the
Company's exposure to changing interest rates is minimized through the
matching of investment maturities with amounts due under insurance
contracts.
DECEMBER 31
------------------------------------------
1996 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
Assets:
Investments:
Securities available-for-sale:
Fixed maturities...................................... $2,115,499 $2,115,499 $2,075,624 $2,075,624
Equity securities..................................... 106,290 106,290 78,852 78,852
Mortgage loans on real estate......................... 582,869 614,555 562,697 605,501
Policy loans.............................................. 60,722 60,722 53,863 53,863
Short-term investments.................................... 182,817 182,817 153,499 153,499
Cash...................................................... 20,474 20,474 1 1
Assets held in separate accounts.......................... 2,371,601 2,371,601 1,781,485 1,781,485
Liabilities:
Individual and group annuities (subject to discretionary
withdrawal).............................................. $ 916,754 $ 886,110 $ 865,623 $ 834,621
14. COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. These actions have been
considered in establishing policy benefit and loss reserves. Management and its
legal counsel are of the opinion that the settlement of these actions will not
have a material adverse effect on the Company's financial position or results of
operations.
15. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company participates in the Fortis, Inc. noncontributory defined benefit
pension plan covering substantially all of its employees. Benefits are based on
years of service and the employee's compensation during such years of service.
Fortis, Inc. is not able to segregate Company specific benefit obligations or
plan assets. On an aggregate basis, the fair value of plan assets exceeded the
accumulated benefit obligations as of December 31, 1996.
The Company has a profit sharing plan covering substantially all employees which
provides benefits payable to participants on retirement or disability and to
beneficiaries of participants in event of the participant's death. Amounts
contributed to the plan and expensed by the Company were $3,913,000, $3,765,000
and $3,536,000 in 1996, 1995 and 1994, respectively.
40
APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is:
( 1 + I ) n/12
---------- - 1
( 1 + J + .005 )
Sample Calculation 1: Positive Adjustment
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 7%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment
1 + .08 60/12
$10,000 x ------------- - 1] = $234.73
[( 1 + .07 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,234.73
Sample Calculation 2: Negative Adjustment
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 9%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 x ------------- - 1] = - $666.42
[( 1 + .09 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,333.58
Sample Calculation 3: Negative Adjustment
Amount withdrawn or transferred $10,000
Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 7.75%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 x --------------- - 1] = - $114.94
[( 1 + .0775 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,885.06
- ------------------------
*Assumed for illustrative purposes only.
A-1
APPENDIX B--EXPLANATION OF EXPENSE CALCULATIONS
The expense for a given year is calculated by multiplying the projected
beginning of the year policy value by the total expense rate. The total expense
rate is the sum of the variable account expense rate plus the total Portfolio
expense rate plus the annual administrative charge rate.
The policy values are projected by assuming a single payment of $1,000 grows at
an annual rate equal to 5% reduced by the total expense rate described above.
For example, the 3 year expense for the Alliance Money Market Portfolio is
calculated as follows:
Total Variable Account Annual Expenses 0.45%
+ Total Portfolio Operating Expenses 0.69%
+ Annual Administrative Charges (see below) 0.11%
= Total Expense Rate 1.25%
The Annual Administrative Charge rate is calculated by dividing the total Annual
Contract Charges we collected in 1995 on similar contracts by the average policy
value in force in 1995 on such contracts.
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = $1000.00 x 0.0125 = $12.53
Year 2 Beginning Policy Value = $1037.47
Year 2 Expense = $1037.47 x 0.0125 = $13.00
Year 3 Beginning Policy Value = $1076.34
Year 3 Expense = $1076.34 x 0.0125 = $13.49
So the cumulative expenses for years 1-3 for the Alliance Money Market Portfolio
are equal to:
$12.53 + $13.00 + $13.49 = $39.02
B-1
APPENDIX C--PARTICIPATING PORTFOLIOS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
The Alliance Variable Products Series Fund, Inc. is an open-ended series
investment company. It was incorporated under Maryland law on November 17, 1987.
Alliance Capital Management L.P. serves as the Fund's manager.
ALLIANCE MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE: Seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
ALLIANCE INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
ALLIANCE PREMIER GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth.
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company. It was
established as a Massachusetts business trust under a Declaration of Trust dated
September 15, 1993. Federated Advisers is the investment adviser.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
INVESTMENT OBJECTIVE: Seeks to provide current income. Under normal
circumstances, the portfolio pursues its investment objective by investing at
least 65% of the value of its total assets in securities issued or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities.
AMERICAN LEADERS FUND II
INVESTMENT OBJECTIVE: To achieve long-term growth of capital and to provide
income.
UTILITY FUND II
INVESTMENT OBJECTIVE: To achieve high current income and moderate capital
appreciation.
HIGH INCOME BOND FUND II
INVESTMENT OBJECTIVE: To seek high current income.
FORTIS SERIES FUND, INC.
The Fortis Series Fund, Inc. is an open-end series investment fund. It was
incorporated under Minnesota law in 1986. Fortis Advisers, Inc. serves as the
fund's manager.
FORTIS S&P 500 INDEX SERIES
INVESTMENT OBJECTIVE: Seeks to replicate the total return of the Standard &
Poor's 500 Composite Stock Price Index primarily through investment in equity
securities.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The INVESCO Variable Investment Funds, Inc. is an open-end series management
investment company. It was incorporated under Maryland law on August 19, 1993.
INVESCO Funds Group, Inc. serves as the Fund's manager.
C-1
INVESCO INDUSTRIAL INCOME PORTFOLIO
INVESTMENT OBJECTIVE: Seeks the best possible current income while following
sound investment practices. Capital growth potential is an additional
consideration in the selection of the portfolio securities. The portfolio
normally invests at least 65% of its total assets in dividend-paying common
stocks.
INVESCO HEALTH SERVICES PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies that develop,
produce, or distribute products or services related to health care.
INVESCO TECHNOLOGY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies in
technology-related industries such as computers, communications, video,
electronics, oceanography, office and factory automation, and robotics.
LEXINGTON NATURAL RESOURCES TRUST
The Lexington Natural Resources Trust is an open-end management investment
company. It was organized as a Massachusetts business trust on October 7, 1988.
Lexington Management Corporation is the Investment Adviser of the fund.
INVESTMENT OBJECTIVE: To seek long-term growth of capital through investment
primarily in common stocks of companies that own or develop natural resources
and other basic commodities, or supply goods and services to such companies.
LEXINGTON EMERGING MARKETS FUND, INC.
The Lexington Emerging Markets Fund, Inc. is an open-end management investment
company. It was organized as a corporation under Maryland law on December 27,
1993. Lexington Management Corporation is the fund's investment adviser.
INVESTMENT OBJECTIVE: To seek long-term growth of capital primarily through
investment in equity securities of companies domiciled in, or doing business in,
emerging countries and emerging markets.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust is an open-end management investment company. It
was organized as a business trust under the laws of the Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994. Massachusetts
Financial Services Company manages each series.
MFS EMERGING GROWTH SERIES
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital. The series'
policy is to invest primarily in common stocks of small and medium-sized
companies that are early in their life cycle but which have the potential to
become major enterprises.
MFS HIGH INCOME SERIES
INVESTMENT OBJECTIVE: Seeks high current income by investing primarily in a
professionally managed portfolio of fixed income securities, some of which may
involve equity features.
MFS WORLD GOVERNMENTS SERIES
INVESTMENT OBJECTIVE: Seeks preservation and growth of capital, together with
moderate current income. The series attempts to provide investors with an
opportunity to enhance the value and increase the protection of their investment
against inflation and otherwise by taking advantage of investment opportunities
in the U.S. as well as in other countries where opportunities may be more
rewarding.
THE MONTGOMERY FUNDS III
The Montgomery Funds III is an open-end investment company. This Delaware
business trust was organized on August 24, 1994. The trust is managed by
Montgomery Asset Management, L.P.
C-2
MONTGOMERY VARIABLE SERIES: GROWTH FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities, usually common stock, of domestic companies of all sizes.
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies in countries having economies and markets
generally considered by the World Bank or the United Nations to be emerging or
developing.
NEUBERGER & BERMAN ADVISERS MANAGERS TRUST
Neuberger & Berman Advisers Managers Trust is an open-end diversified series
management investment company. It was established as a Delaware business trust
on May 23, 1994. Neuberger & Berman Management Incorporated serves as manager of
the Fund.
NEUBERGER & BERMAN LIMITED MATURITY BOND PORTFOLIO
INVESTMENT OBJECTIVE: Seeks highest current income consistent with low risk to
principal and liquidity; and secondarily, total return. Principal investments
are short-to-intermediate term debt securities, primarily investment grade.
NEUBERGER & BERMAN PARTNERS PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital growth. Principal investments are common
stocks and other equity securities of established companies.
SAFECO RESOURCE SERIES TRUST
The SAFECO Resource Series Trust is an open-end series management investment
company. It is a Delaware business trust established by a trust instrument dated
May 13, 1993. SAFECO Asset Management Company is the fund's manager.
SAFECO EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital and reasonable current
income. The Equity Portfolio ordinarily invests principally in common stocks or
securities convertible into common stocks.
SAFECO GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital and the increased income that
ordinarily follows from such growth. The Growth Portfolio ordinarily invests in
a preponderance of its assets in common stock selected for potential
appreciation.
STRONG VARIABLE INSURANCE FUNDS, INC.
The Strong Variable Insurance Funds, Inc. is an open-end management investment
company. It was incorporated in Wisconsin. Strong Capital Management, Inc. is
the investment adviser.
THE STRONG DISCOVERY FUND II
INVESTMENT OBJECTIVE: Seeks to identify emerging investment trends and
attractive growth opportunities.
THE STRONG INTERNATIONAL STOCK FUND II
INVESTMENT OBJECTIVE: Seeks capital growth. The fund invests primarily in the
equity securities of issuers located outside of the United States.
TCI PORTFOLIOS, INC.
TCI Portfolios, Inc. is a open-end management investment company. It was
organized as a Maryland corporation on June 4, 1987. TCI Portfolios, Investors
Research Corporation serves as the investment manager of TCI Portfolios.
TCI BALANCED FUND
INVESTMENT OBJECTIVE: Capital growth and current income. Seeks to achieve its
investment objective by maintaining approximately 60% of the assets in common
stocks that are considered to have better-then-average prospects for
appreciation and the remaining assets in bonds and other fixed income
securities.
C-3
TCI GROWTH FUND
INVESTMENT OBJECTIVE: Capital Growth. Seeks to achieve its investment objective
by investing primarily in common stocks that are considered to have
better-than-average prospects for appreciation.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company.
It was organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the two funds listed below.
WORLDWIDE HARD ASSETS FUND
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investing
globally, primarily in (i) precious metals, (ii) ferrous and non-ferrous metals,
(iii) oil and gas, (iv) forest products, (v) real estate, and (vi) other basic
non-agricultural commodities.
WORLDWIDE BOND FUND
INVESTMENT OBJECTIVE: Seeks high total return through a flexible policy of
investing globally, primarily in debt securities.
C-4
CERTIFICATES UNDER
FLEXIBLE PREMIUM DEFERRED
COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
VALUE ADVANTAGE PLUS VARIABLE ANNUITY
Issued by
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
This Statement of Additional Information is not a Prospectus. It is intended
that this Statement of Additional Information be read in conjunction with the
Prospectus for certificates under flexible premium deferred combination variable
and fixed annuity contracts ("Certificates"), dated May 1, 1997. A copy of the
Prospectus may be obtained without charge from Fortis Investors, Inc.
1-800-827-5877, mailing address: P.O. Box 64272, St. Paul, MN 55164. You have
the option of receiving benefits under a Contract through Fortis Benefits'
Variable Account D or through Fortis Benefits' Guarantee Periods Fixed Account
or its General Account Fixed Account.
TABLE OF CONTENTS
Fortis Benefits and the Variable Account.......................................1
Calculation of Annuity Payments................................................2
Postponement of Payments.......................................................3
Services.......................................................................3
- Safekeeping of Variable Account Assets......................................3
- Experts.....................................................................4
- Principal Underwriter.......................................................4
Taxation Under Certain Retirement Plans........................................4
Withholding....................................................................8
Variable Account Financial Statements..........................................9
Appendix A -- Performance Information........................................A-1
In order to supplement the description in the Prospectus, the following provides
additional information about the Certificates and other matters which may be of
interest to you. Terms used in this Statement of Additional Information have
the same meanings as are defined in the Prospectus under the heading "Special
Terms Used in This Prospectus."
FORTIS BENEFITS AND THE VARIABLE ACCOUNT
Fortis Benefits Life Insurance Company, the issuer of the Certificates, is a
Minnesota corporation qualified to sell life insurance and annuity contracts in
the District of Columbia and in all states except New York. Fortis Benefits is
a wholly-owned subsidiary of Time Insurance Company, a stock company organized
under the laws of Wisconsin, which itself is a wholly-owned subsidiary of
Fortis, Inc. Fortis, Inc. is a corporation based in New York, which manages the
United States operations of Fortis AMEV and Fortis AG.
1
Fortis AMEV has been in business since 1847 and is a publicly-traded,
multi-national insurance, real estate, and financial services group
headquartered in The Netherlands. It is one of the largest holding companies in
Europe, with subsidiary companies in twelve countries on four continents.
Fortis AMEV is the third largest insurance company in the Netherlands.
Fortis AG is a multi-national insurance, real estate and financial services firm
that has been in business since 1824. It has subsidiary companies in eight
countries. Fortis AG is one of the largest life insurance companies in Belgium.
Fortis AMEV and Fortis AG have combined assets of approximately $175 billion.
The assets allocated to the Variable Account are the exclusive property of
Fortis Benefits. Registration of the Variable Account under the Investment
Company Act of 1940 does not involve supervision of the management or investment
practices or policies of the Variable Account or of Fortis Benefits by the
Securities and Exchange Commission. Fortis Benefits may accumulate in the
Variable Account proceeds from charges under the Certificates and other amounts
in excess of the Variable Account assets representing reserves and liabilities
under Certificates and other variable annuity contracts issued by Fortis
Benefits. Fortis Benefits may from time to time transfer to it's General
Account any of such excess amounts. Under certain remote circumstances the
assets of one Subaccount may not be insulated from liability associated with
another Subaccount.
Best's Insurance Reports has assigned Fortis Benefits a rating of A (Excellent)
for financial position and operating performance. Fortis Benefits has a rating
of AA from Standard & Poor's. As defined by Standard & Poor's, insurers rated
AA offer "excellent financial security." These ratings represent such rating
agencies' independent opinion of Fortis Benefits' financial strength and ability
to meet policy holder obligations, but have no relevance to the performance and
quality of the assets in Subaccounts of the Variable Account.
CALCULATION OF ANNUITY PAYMENTS
FIXED ANNUITY OPTION
The amount of each annuity payment under a Fixed Annuity Option is fixed and
guaranteed by Fortis Benefits. Monthly fixed annuity payments will start as of
the end of the Valuation Period that contains the Annuity Commencement Date. At
that time, the Contract Value, after any Market Value Adjustment, is computed
and that portion of the Contract Value which will be applied to the Fixed
Annuity Option selected is determined. The amount of the first monthly payment
under the Fixed Annuity Option selected will be at least as large as would
result from using the annuity tables contained in the Contract to apply such
amount of Contract Value to the annuity form selected. The dollar amounts of
any fixed annuity payments after the first are specified during the entire
period of annuity payments according to the provisions of the annuity form
selected.
VARIABLE ANNUITY OPTION
ANNUITY UNITS. To the extent a Variable Annuity Option has been selected, we
convert the Accumulation Units for each Subaccount of the Variable Account into
Annuity Units for each Subaccount at their values determined as of the end of
the Valuation Period which contains the Annuity Commencement Date. As of such
time, any Fixed Account Value to be applied to a Variable Annuity Option is also
converted, after any Market Value Adjustment, to Annuity Units in the
Subaccounts selected based on the then-current Annuity Unit value. The initial
number of Annuity Units in each Subaccount is determined by dividing the amount
of the initial monthly variable annuity payment (see "Variable Annuity Option --
Variable Annuity Payments," below) allocable to that Subaccount by the value of
one Annuity Unit in that Subaccount as of the time of the conversion. The
number of Annuity Units for each Subaccount will remain constant, as long as an
annuity remains in force and the allocation among the Subaccounts has not
changed.
The value of each Subaccount's Annuity Units will vary to reflect the investment
experience of the Subaccount as well as charges deducted from the Subaccount.
The value of each Subaccount's Annuity Units is equal to the prior value of the
Subaccount's Annuity Units multiplied by the net investment factor for that
Subaccount (discussed in the Prospectus under "Contract Value") for the
Valuation Period ending on that Valuation Date, with an offset for the 4%
assumed interest rate used in the annuity tables of the Contract.
2
VARIABLE ANNUITY PAYMENTS. Variable annuity payments start at the end of the
Valuation Period that contains the Annuity Commencement Date, and will vary in
amount as the related Annuity Unit values vary. The amount of the first monthly
payment is shown on the annuity tables contained in the Contract for each $1,000
of Contract Value applied to the Variable Annuity Option selected as of the end
of such Valuation Period. The first variable annuity payment is, in effect,
allocated among the Subaccounts in the same proportion as the Contract Value is
allocated among the Subaccounts upon Commencement of annuity payments.
Payments after the first will vary in amount and are determined on the first
Valuation Date of each subsequent monthly period. If the monthly payment under
the annuity form selected is based on the value of Annuity Units of a single
Subaccount, the monthly payment is found by multiplying the number of the
Contract's Annuity Units for the Subaccount by the Annuity Unit value of such
Subaccount as of the first Valuation Date in each monthly period following the
Annuity Commencement Date. If the monthly payment under the Variable Annuity
Option selected is based upon the value of Annuity Units in more than one
Subaccount, this is repeated for each applicable Subaccount. The sum of these
payments is the variable annuity payment.
GENDER OF ANNUITANT
The amount of each annuity payment ordinarily will be higher for a male
Annuitant than for a female Annuitant with an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males. However, there will be no differences between male and female
Annuitants' in any jurisdiction, including Montana, where such differences are
not permitted. We will also make available Certificates with no such
differences in connection with certain employer-sponsored benefit plans.
Employers should be aware that, under most such plans, Certificates that make
distinctions based on gender are prohibited by law.
POSTPONEMENT OF PAYMENTS
With respect to amounts in the Subaccounts of the Variable Account, payment of
any amount due upon a total or partial surrender, death or under an annuity
option will ordinarily be made within seven days after all documents required
for such payment are received by Fortis Benefits at its Home Office. However,
Fortis Benefits may defer the determination, application or payment of any death
benefit, transfer, partial or total surrender or annuity payment, to the extent
dependent on Accumulation or Annuity Unit Values, for any period during which
the New York Stock Exchange is closed (other than customary weekend and holiday
closings) or trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission, for any period during which any
emergency exists as a result of which it is not reasonably practicable for
Fortis Benefits to determine the investment experience for the Contract, or for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of investors.
SERVICES
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
Title to the assets of the Variable Account is held by Fortis Benefits. The
assets of the Variable Account are kept segregated and held separate and apart
from Fortis Benefits' other assets. Fort's Advisers, Inc., an affiliate of
Fortis Benefits, maintains records of all purchases and redemptions of shares of
the Portfolios held by each of the Subaccounts of the Variable Account.
EXPERTS
The financial statements of Fortis Benefits Insurance Company appearing in the
Prospectus and those of Separate Account D offering in this Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon also
appearing in the Prospectus or this Statement of Additional Information,
respectively, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
3
PRINCIPAL UNDERWRITER
Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the
Certificates, is a Minnesota corporation and a member of the Securities
Investors Protection Corporation. The offering of the Certificates is
continuous, and Fortis Investors does not anticipate discontinuing the offering
of the Certificates, although it reserves the right to do so. Certificates
generally will be issued for Annuitants from ages zero to ninety in all states.
TAXATION UNDER CERTAIN RETIREMENT PLANS
Federal income tax information concerning the purchase of Certificates for
specific types of retirement plans is set forth below. You should also refer to
"Federal Tax Matters" in the Prospectus. The tax information provided is not
comprehensive, and you should consult a qualified tax adviser before taking any
action in connection with a retirement plan.
SECTION 403(b) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS OR
PUBLIC EDUCATIONAL INSTITUTIONS
PURCHASE PAYMENTS. Under Section 403(b) of the Internal Revenue Code ("Code"),
payments made by certain employers (i.e., tax-exempt organizations meeting the
requirements of Section 501(c)(3) of the Code, or public educational
institutions) to purchase Certificates for their employees are excludible from
the gross income of employees to the extent that such aggregate purchase
payments do not exceed certain limitations prescribed by the Code. This is the
case whether the purchase payments are a result of voluntary salary reduction
amounts or employer contributions. Salary reduction payments are, however,
subject to FICA (social security) taxes.
TAXATION OF DISTRIBUTIONS. Distributions from a Section 403(b) tax-deferred
annuity are taxed as ordinary income to the recipient as described under
"Federal Tax Matters" in the Prospectus. Taxable distributions received before
the employee attains age 59 1/2 generally are subject to a 10% penalty tax in
addition to regular income tax. Certain distributions are excepted from this
penalty tax, including distributions following the employee's death, disability,
separation from service after age 55, separation from service at any age if the
distribution is in the form of an annuity for the life (or life expectancy) of
the employee (or the employee and Beneficiary) and distributions not in excess
of deductible medical expenses. In addition, no distributions of voluntary
salary reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death , disability or hardship. (Hardship distributions will be limited
to the lesser of the amount of the hardship or the amount of salary reduction
contributions, exclusive of earnings thereon.)
REQUIRED DISTRIBUTIONS. Generally, distributions from Section 403 (b) annuities
must commence not later than April 1 of the calendar year following the calendar
year in which the employee attains age 70 1/2, and such distributions must be
made over a period that does not exceed the life expectancy of the employee (or
the employee and Beneficiary). A penalty tax of 50% would be imposed on any
amount by which the minimum required distribution in any year exceeded the
amount actually distributed in that year. In addition, in the event that the
employee dies before his or her entire interest in the Contract has been
distributed, the employee's entire interest must be distributed in accordance
with rules similar to those applicable upon the death of the Participant or
Payee in the case of a Non-Qualified Contract, as described in the Prospectus.
Certain of these and other provisions are incorporated in a special endorsement
attached to Certificates that are intended to qualify under Section 403(b), and
reference should be made to that endorsement for its complete terms.
TAX-FREE EXCHANGES AND ROLLOVERS. The Code provides for the tax-free transfer
of one Section 403(b) annuity for another Section 403(b) annuity, and the IRS
has ruled (Revenue Ruling 90-24) that amounts transferred may qualify as
tax-free transfers under certain circumstances. In addition, Section 403(b)(8)
of the code permits tax-free rollovers from Section 403(b) programs to
individual retirement annuities or other Section 403(b) programs under certain
circumstances.
4
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
PURCHASE PAYMENTS. Subject to certain limitations prescribed by the Code,
purchase payments made by an employer (or a self-employed individual) under a
pension, profit-sharing or annuity plan qualified under Section 401 or Section
403(a) of the Code are generally deductible by the employer and excluded from
the taxable income of the employee for federal income tax purposes, whether
made under a salary reduction agreement or directly by employer contributions.
Salary reduction payments are, however, subject to FICA (social security) taxes.
Purchase payments made directly by an employee generally are made on an
after-tax basis.
TAXATION OF DISTRIBUTIONS. Distributions from Certificates purchased under
these qualified plans are taxable as ordinary income, except to the extent
allocable to an employee's after-tax contributions, as described under "Federal
Tax Matters -- Qualified Plans," in the Prospectus. However, if an employee or
other payee receives a "lump sum" distribution, as defined in the Code, from an
exempt employees' trust, the taxable portion of the distribution may be subject
to special tax treatment. For most individuals receiving lump sum
distributions after attaining age 59 1/2, the rate of tax may be determined
under a special 5-year income averaging provision. Those who attained age 50 by
January 1, 1986 may instead elect to use a 10-year income averaging provision
based on the income tax rates in effect for 1986. Taxable distributions
received prior to attainment of age 59 1/2 under a Contract purchased under a
qualified plan are subject to the same 1O% penalty tax (and the same exceptions)
as described above with respect to Section 403(b) annuities.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these
qualified plans are generally the same as described above with respect to
Section 403(b) annuities.
TAX-FREE ROLLOVERS. If, within 60 days of receipt, an employee who receives a
single sum distribution transfers all of the taxable amount received to another
plan qualified under Section 401 or 403(a), or to an individual retirement
account or annuity as provided for under the Code, the transferred amount will
not be taxed in the year of distribution. Certain "partial" distributions may
also qualify for tax-free rollover treatment, but only if transferred to an
individual retirement account or annuity. However, income tax may be withheld
from the distribution unless the distribution is transferred directly from the
qualified plan to the individual retirement account or individual retirement
annuity.
INDIVIDUAL RETIREMENT ANNUITIES
PURCHASE PAYMENTS. Individuals may make contributions for individual
retirement annuity ("IRA") Contracts. Deductible contributions for any year may
be made up to the lesser of $2,000 or 100% of compensation for individuals who
(1) are not (and whose spouses are not) active participants in another
retirement plan, (2) are unmarried and have adjusted gross income of $25,000 or
less, or (3) are married and have adjusted gross income of $40,000 or less. An
individual may also establish an IRA for his or her spouse if they file a joint
return for the taxable year and his or her spouse earns less than the individual
does for that year. The annual purchase payments for both spouses' Contracts
cannot exceed the lesser of $4,000 or 100% of the couple's combined earned
income, and no more than $2,000 may be contributed to either spouse's IRA for
any year. Individuals who are active participants in other retirement plans and
whose adjusted gross income (with certain special adjustment) exceed the cut-off
point ($25,000 for unmarried, $40,000 for married persons filing jointly, and $0
for married persons filing a separate return) by less than $10,000 are
entitled to make deductible IRA contributions in proportionately reduced
amounts. For example, a married individual who is an active participant in
another retirement plan and files a separate tax return is entitled to a partial
IRA deduction if the individual's adjusted gross income is less than $10,000 and
no IRA deduction if his or her adjusted gross income is equal to or greater than
$10,000.
An individual may make non-deductible IRA contributions to the extent of (1) the
lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of compensation
over (2) the IRA deductible contribution made with respect to the individual.
An individual may not make any contributions to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter. Contributions to
a spouse's IRA may not be made for any year in which that spouse reaches age
70 1/2 or for any year thereafter.
TAXATION OF DISTRIBUTIONS. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA
5
Contract prior to age 59 1/2 are subject to a 10% penalty tax in addition to
regular income tax. Certain distributions are exempted from this penalty tax
including distributions following the owner's death or disability or
distribution in the form of an annuity for the life of (or life expectancy) of
the owner (or the owner and beneficiary), or distributions not in excess of
deductible medical expenses or certain distributions to pay health insurance
premiums after an extended period of unemployment.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for IRAs are
generally the same as described above with respect to Section 403(b) annuities.
Certain of these and other provisions are incorporated in a special endorsement
attached to IRA Certificates, and reference should be made to that endorsement
for its complete terms.
TAX-FREE ROLLOVERS. The Code permits funds to be transferred in a tax-free
rollover from a qualified employer pension, profit-sharing, annuity, bond
purchase or tax-deferred annuity plan to an IRA Contract if certain conditions
are met, and if the rollover of assets is completed within 60 days after the
distribution from the qualified plan is received. In addition, not more
frequently than once every twelve months, amounts may be rolled over tax-free
from one IRA to another, subject to the 60-day limitation and other
requirements. The once-per-year limitation on rollovers does not apply to
direct transfers of funds between IRA custodians or trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS
PURCHASE PAYMENTS. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% of
the employee's earned income. Employees of certain small employers may have
contributions made to a special kind of SEP (SARSEP) on their behalf on a salary
reduction basis if the SARSEP plan was in effect on December 31, 1996. These
salary reduction contributions may not exceed $9,500 in 1997, which is indexed
for inflation. Employees of tax-exempt organizations and state or local
government agencies have never been eligible for the salary reduction type of
SEP.
TAXATION OF DISTRIBUTIONS. Generally, distribution payments from SEPs are
subject to the same distribution rules described above for IRAs.
REQUIRED DISTRIBUTIONS. SEP distributions are subject to the same minimum
required distribution rules described above for IRAs.
TAX-FREE ROLLOVERS. Generally, rollovers and direct transfers may be made to
and from SEPs in the same manner as described above for IRAs, subject to the
same conditions and limitations. Rollovers to other IRAs, excluding SIMPLE IRAs
are also possible. Special rules apply if the rollover is from a SARSEP IRA.
SECTION 408(p) SIMPLE IRA PLANS
PURCHASE PAYMENTS: Under Section 408(p) of the Code, small employers may
establish a type of IRA plan referred to as a Savings Incentive Match Plan for
Employees (SIMPLE Plan). An employee may contribute annually through his or her
employer a pre-tax salary reduction contribution not to exceed the lesser of
$6,000 or 100% of compensation. The employer must annually either (1) match the
employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay
contribution for each eligible employee regardless of whether the employee makes
any salary reduction contribution. In two out of every five years, the employer
has the option to reduce the matching contribution as low as 1% of pay but
advance notice must be provided to employees.
TAXATION OF DISTRIBUTIONS: Generally, distributions from SIMPLE IRA Plans are
subject to the same distribution rules described above for IRAs. However, if an
individual withdraws any amount from his SIMPLE IRA Plan within the first two
years of his or her commencement of participation in the employer's SIMPLE IRA
Plan, the 10% penalty tax for premature distribution, if such tax applies, will
be increased to 25%.
REQUIRED DISTRIBUTIONS: SIMPLE distributions are subject to the same minimum
distribution rules described above for IRAs.
6
TAX-FREE ROLLOVERS: Generally, rollovers and direct transfers may be made to
and from SIMPLE IRAs in the same manner as described above for IRAs, subject to
the same conditions and limitations. Rollovers or transfers to other IRAs,
other than SIMPLE IRAs, are also possible but only after the second anniversary
of commencement of participation in the employer's SIMPLE IRA Plan.
SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS AND
TAX-EXEMPT ORGANIZATIONS
PURCHASE PAYMENTS. Under Section 457 of the Code, all individuals who perform
services for a state of local government or governmental agency may participate
in a deferred compensation program. Other tax-exempt employers may establish
unfunded deferred compensation plans under Section 457 for employees and/or
independent contractors.
Though not actually a qualified plan as that term is normally used, this type of
program allows individuals to defer the receipt of compensation that otherwise
would be currently payable and therefore to defer the payment of federal income
taxes on such amounts. Assuming that the program meets the requirements to be
considered an eligible deferred compensation plan (an "EDCP"), an individual may
contribute (and thereby defer from current income tax purposes) the lesser of
$7,500 or 33-1/3% of the individual's includible compensation. (Includible
compensation means compensation from the employer which would be currently
includible in gross income for federal tax purposes.) In addition, during the
last three years before an individual attains normal retirement age, additional
"catch-up" deferrals are permitted.
The amounts which are deferred may be used by the employer to purchase the
Certificates offered by this Prospectus. The Contract is owned by the employer
and is subject to the claims of the employer's creditors. The employee has no
rights or interest in the Contract and is entitled only to payment in accordance
with the EDCP provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from an EDCP are
includible in gross income for the taxable year in which such amounts are paid
or otherwise made available.
DISTRIBUTIONS BEFORE SEPARATION FROM SERVICE. Distributions generally are not
permitted under an EDCP prior to separation from service or reaching age 70 1/2,
except in cases of severe financial hardship. Hardship distributions are
includible in the gross income of the individual in the year in which paid.
REQUIRED DISTRIBUTIONS. The distribution requirements for these qualified plans
are generally the same as described above with respect to Section 403(b)
annuities. However, if distributions do not commence before the employee's
death, the entire interest of the Contract must be distributed within 15 years
if the beneficiary is not the employee's surviving spouse.
TAX-FREE TRANSFERS. The Code permits the tax-free direct transfer of EDCP
amounts to another EDCP, subject to certain conditions. Any transfers must be
with employer consent.
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
PURCHASE PAYMENTS. Private taxable employers may establish unfunded,
non-qualified deferred compensation plans for a select group of management or
highly compensated employees and/or for independent contractors. Certain
arrangements of tax-exempt employers entered into prior August 16, 1986, and not
subsequently modified, are also subject to the rules for private taxable
employer deferred compensation plans discussed below. (Unfunded deferred
compensation plans of other tax-exempt employers are generally subject to the
requirements of Section 457.)
These types of programs allow individuals to defer receipt of up to 100% of
compensation which would otherwise be includible in income and therefore to
defer the payment of federal income taxes on such amounts. Purchase payments
made by the employer, however are not immediately deductible by the employer,
and the employer is currently taxed on any increase in Contract Value.
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Contract is owned
by the employer and is subject to the claims of the employer's creditors. The
7
individual has no right or interest in the Contract and is entitled only to
payment from the employer's general assets in accordance with plan provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
EXCESS DISTRIBUTIONS--15% TAX.
Certain persons, particularly those who participate in more than one
tax-qualified retirement plan, may be subject to an additional tax of 15% on
certain excess aggregate distributions from those plans. In general, excess
distributions are taxable distributions for all tax qualified plans in excess of
a specified annual limit for payments made in the form of an annuity (currently
$160,000) or five times the annual limit for lump sum distributions.
WITHHOLDING
Annuity payments and other amounts received under Certificates are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and, with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly to another qualified
retirement plan. Moreover, special "backup withholding" rules may require
Fortis Benefits to disregard the recipient's election if the recipient fails to
supply Fortis Benefits with a "TIN" or taxpayer identification number (social
security number for individuals), or if the Internal Revenue Service notifies
Fortis Benefits that the TIN provided by the recipient is incorrect.
VARIABLE ACCOUNT FINANCIAL STATEMENTS
8
Report of Independent Auditors
Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying statement of net assets of Fortis Benefits
Insurance Company Variable Account D (comprising, respectively, the Fortis
Series Fund, Inc.'s Growth Stock, U.S. Government Securities, Money Market,
Asset Allocation, Diversified Income, Global Growth, Aggressive Growth,
Growth & Income, High Yield, Global Asset Allocation, Global Bond,
International Stock, Value, S & P 500 and Blue Chip Stock Subaccounts, the
Norwest Select Fund's ValuGrowth, Intermediate Bond, Small Company Stock and
Income Equity Subaccounts, the Scudder Variable Life Investment Fund's
International Subaccount, the Alliance Variable Product Series Fund's Money
Market, International and Premier Growth Subaccounts, the SAFECO Resource
Series Fund's Growth and Equity Subaccounts, the Federated Insurance Series
Fund's High Income, Utility and American Leaders Subaccounts, the Lexington
Funds, Inc.'s Natural Resources Trust and Emerging Markets Subaccounts, the
MFS Variable Insurance Trust Fund's MFS Emerging Growth, MFS High Income and
MFS World Government Subaccounts, the Montgomery Variable Series Fund's
Emerging Markets and Growth Subaccounts, the Strong Variable Insurance Funds'
Discovery, Government Securities, Advantage and International Subaccounts,
the TCI Portfolios, Inc. Fund's TCI Balanced and TCI Growth Subaccounts and
Van Eck Worldwide Ins. Trust Fund's Worldwide Bond and Gold & Natural
Resources Subaccounts) as of December 31, 1996, and the related statements of
changes in net assets for each of the three years then ended, except for the
Fortis Series Fund, Inc.'s Global Asset Allocation, Global Bond, and
International Stock Subaccounts and the Norwest Select Fund's Small Company
Stock Subaccount which are for the years ended December 31, 1996 and 1995;
the Fortis Series Fund, Inc.'s Value, S & P 500 and Blue Chip Stock
Subaccounts and the Norwest Select Fund's Income Equity Subaccount which are
for the period from May 1, 1996 to December 31, 1996; The SAFECO Resource
Series Fund's Growth and Equity Subaccounts which are for the period from
December 1, 1996 to December 31, 1996; and the Alliance Variable Product
Series Fund's Money Market, International and Premier Growth Subaccounts, the
Federated Insurance Series Fund's High Income, Utility and American Leaders
Subaccounts, the Lexington Funds, Inc.'s Natural Resources Trust and Emerging
Markets Subaccounts, the MFS Variable Insurance Trust Fund's MFS Emerging
Growth, MFS High Income and MFS World Government Subaccounts, the Montgomery
Variable Series Fund's Emerging Markets and Growth Subaccounts, the Strong
Variable Insurance Funds' Discovery, Government Securities, Advantage and
International Subaccounts, the TCI Portfolios, Inc. Fund's
1
TCI Balanced and TCI Growth Subaccounts and Van Eck Worldwide Ins. Trust
Fund's Worldwide Bond and Gold & Natural Resources Subaccounts which are for
the period from February 1, 1996 to December 31, 1996. These financial
statements are the responsibility of the management of Fortis Benefits
Insurance Company. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1996 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company Variable Account D at December 31, 1996, and the changes in the net
assets for the periods described in the first paragraph, in conformity with
generally accepted accounting principles.
/s/
Ernst & Young LLP
Minneapolis, MN
April 18, 1997
2
Fortis Benefits Insurance Company
Variable Account D
Statement of Net Assets
December 31, 1996
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS INSURANCE
SHARES COST AT MARKET VALUE COMPANY
---------------------------------------------------------------------------
Investments in Fortis Series Fund, Inc.,
(NOTE 3):
Growth Stock Series 15,583,268 $ 341,611,800 $ 507,916,391 $ -
U.S. Government Securities Series 14,526,572 156,757,189 153,538,606 -
Money Market Series 5,029,790 54,521,952 55,044,510 -
Asset Allocation Series 21,539,395 304,056,275 366,021,085 -
Diversified Income Series 8,572,475 100,804,245 100,281,675 -
Global Growth Series 13,583,403 187,528,373 258,026,237 -
Aggressive Growth Series 5,544,810 70,132,053 75,519,214 -
Growth & Income Series 8,051,806 100,203,874 122,087,921 -
High Yield Series 4,051,930 40,889,644 39,813,044 -
Global Asset Allocation Series 2,728,172 31,152,329 33,676,273 3,634,755
Global Bond Series 1,679,027 18,243,166 18,623,272 5,608,266
International Stock Series 3,493,832 39,573,523 43,469,557 3,652,514
Value Series 1,111,402 11,764,918 12,648,523 808,092
S & P 500 Series 1,616,568 17,115,725 18,536,048 4,070,786
Blue Chip Stock Series 1,258,592 13,357,117 14,688,036 4,143,071
Investments in Norwest Select Fund,
(NOTE 3)
ValuGrowth Fund 730,869 8,675,998 10,495,280 -
Intermediate Bond Fund 547,127 6,007,333 5,865,200 -
Small Company Stock Fund 451,480 5,384,371 6,094,981 1,524,340
Income Equity Fund 866,818 9,055,905 9,675,189 -
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE LIFE
VARIABLE LIFE UNITS INSURANCE POLICIES
INSURANCE POLICIES OUTSTANDING PER ACCUMULATION
UNIT
-------------------------------------------------------------------
Investments in Fortis Series Fund, Inc.,
(NOTE 3):
Growth Stock Series $ 507,916,391 169,472,646 $ 3.00
U.S. Government Securities Series 153,538,606 9,635,092 15.94
Money Market Series 55,044,510 36,552,266 1.51
Asset Allocation Series 366,021,085 154,525,474 2.37
Diversified Income Series 100,281,675 55,653,680 1.80
Global Growth Series 258,026,237 13,993,552 18.44
Aggressive Growth Series 75,519,214 5,706,895 13.23
Growth & Income Series 122,087,921 7,892,683 15.47
High Yield Series 39,813,044 3,337,604 11.93
Global Asset Allocation Series 30,041,518 2,330,884 12.89
Global Bond Series 13,015,006 1,088,043 11.96
International Stock Series 39,817,043 3,137,348 12.69
Value Series 11,840,431 1,071,648 11.05
S & P 500 Series 14,465,262 1,279,947 11.30
Blue Chip Stock Series 10,544,965 915,358 11.52
Investments in Norwest Select Fund,
(NOTE 3)
ValuGrowth Fund 10,495,280 744,037 14.11
Intermediate Bond Fund 5,865,200 519,750 11.28
Small Company Stock Fund 4,570,641 306,790 14.90
Income Equity Fund 9,675,189 877,957 11.02
3
Fortis Benefits Insurance Company
Variable Account D
Statement of Net Assets (continued)
December 31, 1996
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS INSURANCE
SHARES COST AT MARKET VALUE COMPANY
---------------------------------------------------------------------------
Investments in Scudder Variable Life Investment,
(NOTE 3):
International Portfolio 258,508 $ 2,962,830 $ 3,425,231 $ -
Investments in Alliance Variable Product Series,
(NOTE 3):
Money Market Portfolio 5,593,809 5,593,809 5,593,809 -
International Portfolio 20,015 292,978 298,024 -
Premier Growth Portfolio 14,757 225,188 231,690 -
Investments in SAFECO Resource Series,
(NOTE 3):
Growth Portfolio 9,852 200,319 189,755 -
Equity Portfolio 9,038 216,232 196,581 -
Investments in Federated Insurance Series,
(NOTE 3):
High Income Fund 89,298 895,837 914,407 -
Utility Fund 16,766 194,954 198,012 -
American Leaders Fund 32,437 482,939 494,990 -
Investments in Lexington Funds, Inc.,
(NOTE 3):
Natural Resources Trust 54,496 771,851 778,755 -
Emerging Markets Fund 6,520 64,919 65,720 -
Investments in MFS Variable Insurance Trust,
(NOTE 3):
MFS Emerging Growth Series 153,869 2,066,856 2,037,226 -
MFS High Income Series 36,337 394,868 394,984 -
MFS World Government Series 4,019 42,240 42,523 -
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE LIFE
VARIABLE LIFE UNITS INSURANCE POLICIES
INSURANCE POLICIES OUTSTANDING PER ACCUMULATION
UNIT
-------------------------------------------------------------------
Investments in Scudder Variable Life Investment,
(NOTE 3):
International Portfolio $ 3,425,231 260,708 $13.14
Investments in Alliance Variable Product Series,
(NOTE 3):
Money Market Portfolio 5,593,809 539,196 10.37
International Portfolio 298,024 28,337 10.52
Premier Growth Portfolio 231,690 19,611 11.81
Investments in SAFECO Resource Series,
(NOTE 3):
Growth Portfolio 189,755 18,249 10.40
Equity Portfolio 196,581 20,103 9.78
Investments in Federated Insurance Series,
(NOTE 3):
High Income Fund 914,407 83,778 10.91
Utility Fund 198,012 18,507 10.70
American Leaders Fund 494,990 43,455 11.39
Investments in Lexington Funds, Inc.,
(NOTE 3):
Natural Resources Trust 778,755 64,788 12.02
Emerging Markets Fund 65,720 6,919 9.50
Investments in MFS Variable Insurance Trust,
(NOTE 3):
MFS Emerging Growth Series 2,037,226 180,147 11.31
MFS High Income Series 394,984 36,197 10.91
MFS World Government Series 42,523 4,084 10.41
4
Fortis Benefits Insurance Company
Variable Account D
Statement of Net Assets (continued)
December 31, 1996
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS INSURANCE
SHARES COST AT MARKET VALUE COMPANY
---------------------------------------------------------------------------
Investments in Montgomery Variable Series,
(NOTE 3):
Emerging Markets Fund 17,894 $ 189,135 $ 190,569 $ -
Growth Fund 72,534 913,392 894,347 -
Investments in Strong Variable Insurance Funds,
(NOTE 3):
Discovery Fund II 8,480 89,400 91,586 -
Government Securities Fund II 7,211 69,577 69,301 -
Advantage Fund II 30,027 302,525 301,173 -
International Fund II 31,910 355,770 358,346 -
Investments in TCI Portfolios, Inc.,
(NOTE 3):
TCI Balanced Fund 14,998 112,124 113,083 -
TCI Growth Fund 6,828 70,806 69,920 -
Investments in Van Eck Worldwide Insurance Trust,
(NOTE 3):
Worldwide Bond Fund 3,306 36,302 36,700 -
Gold & Natural Resources Fund 28,206 453,574 471,605 -
---------------------------------------------------------
Total $1,533,834,215 $1,869,479,379 $23,441,824
---------------------------------------------------------
---------------------------------------------------------
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE LIFE
VARIABLE LIFE UNITS INSURANCE POLICIES
INSURANCE POLICIES OUTSTANDING PER ACCUMULATION
UNIT
-------------------------------------------------------------------
Investments in Montgomery Variable Series,
(NOTE 3):
Emerging Markets Fund $ 190,569 17,917 $10.64
Growth Fund 894,347 70,482 12.69
Investments in Strong Variable Insurance Funds,
(NOTE 3):
Discovery Fund II 91,586 9,105 10.06
Government Securities Fund II 69,301 6,998 9.90
Advantage Fund II 301,173 29,586 10.18
International Fund II 358,346 34,083 10.51
Investments in TCI Portfolios, Inc.,
(NOTE 3):
TCI Balanced Fund 113,083 10,307 10.97
TCI Growth Fund 69,920 7,475 9.35
Investments in Van Eck Worldwide Insurance Trust,
(NOTE 3):
Worldwide Bond Fund 36,700 3,565 10.29
Gold & Natural Resources Fund 471,605 47,229 9.99
------------------------------------
Total $1,846,037,555 470,602,480
------------------------------------
------------------------------------
SEE ACCOMPANYING NOTES.
5
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets
Year ended December 31, 1996
FORTIS U.S.
FORTIS GOVERNMENT FORTIS FORTIS
GROWTH STOCK SECURITIES MONEY MARKET ASSET ALLOCATION
SERIES SERIES SERIES SERIES
---------------------------------------------------------------
OPERATIONS
Dividend income $ 1,755,003 $ 11,268,567 $ 1,961,696 $ 18,389,804
Mortality and expense and policy advance charges
(NOTE 4) (6,383,239) (2,182,582) (304,880) (4,666,220)
Net realized gain (loss) on investments 6,173,815 (229,036) 875,419 4,730,794
Net unrealized appreciation (depreciation) of
investments during the period 62,258,164 (8,049,967) (396,193) 17,669,052
---------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 63,803,743 806,982 2,136,042 36,123,430
CAPITAL TRANSACTIONS
Purchase of Variable Account units 40,354,935 9,792,095 53,529,569 35,139,069
Redemption of Variable Account units (19,671,112) (32,995,603) (38,173,512) (27,343,627)
Mortality and expense charge redeemed 6,383,239 2,182,582 304,880 4,666,220
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
---------------------------------------------------------------
Increase (decrease) from capital transactions 27,067,062 (21,020,926) 15,660,937 12,461,662
Net assets at beginning of period 417,045,586 173,752,550 37,247,531 317,435,993
---------------------------------------------------------------
Net assets at end of period $507,916,391 $153,538,606 $55,044,510 $366,021,085
---------------------------------------------------------------
---------------------------------------------------------------
FORTIS FORTIS FORTIS FORTIS
DIVERSIFIED GLOBAL GROWTH AGGRESSIVE GROWTH &
INCOME SERIES SERIES GROWTH SERIES INCOME SERIES
---------------------------------------------------------------
OPERATIONS
Dividend income $ 7,814,749 $ 349,640 $ 130,127 $ 3,357,159
Mortality and expense and policy advance charges
(NOTE 4) (1,375,570) (2,982,707) (818,660) (1,187,861)
Net realized gain (loss) on investments 94,162 1,304,350 1,462,499 214,625
Net unrealized appreciation (depreciation) of
investments during the period (3,883,159) 34,010,868 311,941 14,270,467
---------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 2,650,182 32,682,151 1,085,907 16,654,390
CAPITAL TRANSACTIONS
Purchase of Variable Account units 4,487,798 56,339,715 45,154,232 51,705,892
Redemption of Variable Account units (12,133,337) (4,633,717) (9,407,569) (1,795,563)
Mortality and expense charge redeemed 1,375,570 2,982,707 818,660 1,187,861
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
---------------------------------------------------------------
Increase (decrease) from capital transactions (6,269,969) 54,688,705 36,565,323 51,098,190
Net assets at beginning of period 103,901,462 170,655,381 37,867,984 54,335,341
---------------------------------------------------------------
Net assets at end of period $100,281,675 $258,026,237 $75,519,214 $122,087,921
---------------------------------------------------------------
---------------------------------------------------------------
6
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
FORTIS
FORTIS GLOBAL ASSET FORTIS FORTIS
HIGH YIELD ALLOCATION GLOBAL BOND INTERNATIONAL
SERIES SERIES SERIES STOCK SERIES
----------------------------------------------------------
OPERATIONS
Dividend income $ 3,381,726 $ 1,354,041 $ 900,099 $ 1,318,016
Mortality and expense and policy advance charges
(NOTE 4) (431,670) (300,249) (142,264) (377,251)
Net realized gain (loss) on investments 60,612 62,447 11,779 153,762
Net unrealized appreciation (depreciation) of
investments during the period (261,534) 2,171,960 394,408 3,249,452
----------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 2,749,134 3,288,199 1,164,022 4,343,979
CAPITAL TRANSACTIONS
Purchase of Variable Account units 14,950,454 15,032,759 8,709,675 24,843,475
Redemption of Variable Account units (3,738,286) (743,168) (2,924,096) (2,013,891)
Mortality and expense charge redeemed 431,670 300,249 142,264 377,251
Funding of subaccount by Fortis Benefits Insurance
Company - 2,944,303 5,030,752 2,926,075
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - (142,728) (218,365) (101,798)
----------------------------------------------------------
Increase (decrease) from capital transactions 11,643,838 17,391,415 10,740,230 26,031,112
Net assets at beginning of period 25,420,072 12,996,659 6,719,020 13,094,466
----------------------------------------------------------
Net assets at end of period $39,813,044 $33,676,273 $18,623,272 $43,469,557
----------------------------------------------------------
----------------------------------------------------------
FORTIS FORTIS NORWEST SELECT
FORTIS S & P 500 BLUE CHIP VALUGROWTH
VALUE SERIES* SERIES* STOCK SERIES* FUND
----------------------------------------------------------
OPERATIONS
Dividend income $ 67,900 $ 102,931 $ 50,146 $ 82,203
Mortality and expense and policy advance charges
(NOTE 4) (50,034) (58,475) (42,346) (106,853)
Net realized gain (loss) on investments 4,138 79,382 101,880 55,679
Net unrealized appreciation (depreciation) of
investments during the period 883,605 1,420,323 1,330,919 1,308,423
----------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 905,609 1,544,161 1,440,599 1,339,452
CAPITAL TRANSACTIONS
Purchase of Variable Account units 11,049,449 14,397,817 12,543,584 4,632,105
Redemption of Variable Account units (62,025) (990,762) (2,873,938) (340,655)
Mortality and expense charge redeemed 50,034 58,475 42,346 106,853
Funding of subaccount by Fortis Benefits Insurance
Company 710,000 3,550,000 3,550,000 -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company (4,544) (23,643) (14,555) -
----------------------------------------------------------
Increase (decrease) from capital transactions 11,742,914 16,991,887 13,247,437 4,398,303
Net assets at beginning of period - - - 4,757,525
----------------------------------------------------------
Net assets at end of period $12,648,523 $18,536,048 $14,688,036 $10,495,280
----------------------------------------------------------
----------------------------------------------------------
7
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
NORWEST SELECT NORWEST SELECT NORWEST SELECT SCUDDER
INTERMEDIATE SMALL COMPANY INCOME EQUITY INTERNATIONAL
BOND FUND STOCK FUND FUND* PORTFOLIO
-----------------------------------------------------------------------
OPERATIONS
Dividend income $ 266,665 $ 512,352 $ 73,375 $ 47,233
Mortality and expense and policy advance charges
(NOTE 4) (59,335) (36,673) (42,286) (37,291)
Net realized gain (loss) on investments 2,306 8,076 3,546 7,053
Net unrealized appreciation (depreciation) of
investments during the period (240,519) 722,953 619,284 312,160
-----------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (30,883) 1,206,708 653,919 329,155
CAPITAL TRANSACTIONS
Purchase of Variable Account units 3,468,748 3,069,610 9,076,709 1,328,103
Redemption of Variable Account units (700,061) (128,442) (97,725) (80,771)
Mortality and expense charge redeemed 59,335 36,673 42,286 37,291
Funding of subaccount by Fortis Benefits Insurance
Company - 1,038,350 - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------------------
Increase (decrease) from capital transactions 2,828,022 4,016,191 9,021,270 1,284,623
Net assets at beginning of period 3,068,061 872,082 - 1,811,453
-----------------------------------------------------------------------
Net assets at end of period $5,865,200 $6,094,981 $9,675,189 $3,425,231
-----------------------------------------------------------------------
-----------------------------------------------------------------------
ALLIANCE ALLIANCE ALLIANCE
MONEY MARKET INTERNATIONAL PREMIER GROWTH
PORTFOLIO** PORTFOLIO** PORTFOLIO**
--------------------------------------------------
OPERATIONS
Dividend income $ 102,380 $ 1,304 $ 24,242
Mortality and expense and policy advance charges
(NOTE 4) (10,300) (544) (671)
Net realized gain (loss) on investments - 1,004 28,494
Net unrealized appreciation (depreciation) of
investments during the period - 5,046 6,502
--------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 92,080 6,810 58,567
CAPITAL TRANSACTIONS
Purchase of Variable Account units 29,009,905 3,914,735 1,256,492
Redemption of Variable Account units (23,518,476) (3,624,065) (1,084,040)
Mortality and expense charge redeemed 10,300 544 671
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
--------------------------------------------------
Increase (decrease) from capital transactions 5,501,729 291,214 173,123
Net assets at beginning of period - - -
Net assets at end of period $ 5,593,809 $ 298,024 $ 231,690
--------------------------------------------------
--------------------------------------------------
8
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
SAFECO SAFECO FEDERATED FEDERATED
GROWTH EQUITY HIGH INCOME UTILITY
PORTFOLIO*** PORTFOLIO*** FUND** FUND**
-----------------------------------------------------------
OPERATIONS
Dividend income $ 14,945 $ 17,950 $ 20,894 $ 2,018
Mortality and expense and policy advance charges
(NOTE 4) (48) (26) (1,205) (203)
Net realized gain (loss) on investments (6,108) - 6,428 11,122
Net unrealized appreciation (depreciation) of
investments during the period (10,564) (19,651) 18,570 3,058
-----------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (1,775) (1,727) 44,687 15,995
CAPITAL TRANSACTIONS
Purchase of Variable Account units 441,504 198,282 1,538,226 1,026,928
Redemption of Variable Account units (250,022) - (669,711) (845,114)
Mortality and expense charge redeemed 48 26 1,205 203
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------
Increase (decrease) from capital transactions 191,530 198,308 869,720 182,017
Net assets at beginning of period - - - -
-----------------------------------------------------------
Net assets at end of period $189,755 $196,581 $ 914,407 $ 198,012
-----------------------------------------------------------
-----------------------------------------------------------
LEXINGTON LEXINGTON
FEDERATED NATURAL EMERGING
AMERICAN RESOURCES MARKETS
LEADERS FUND** TRUST FUND** FUND**
----------------------------------------------
OPERATIONS
Dividend income $ 3,741 $ 1,130 $ -
Mortality and expense and policy advance charges
(NOTE 4) (869) (909) (253)
Net realized gain (loss) on investments 22,746 33,868 (583)
Net unrealized appreciation (depreciation) of
investments during the period 12,051 6,904 801
----------------------------------------------
Net increase (decrease) in net assets resulting from
operations 37,669 40,993 (35)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,372,344 2,056,140 1,131,006
Redemption of Variable Account units (915,892) (1,319,287) (1,065,504)
Mortality and expense charge redeemed 869 909 253
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
----------------------------------------------
Increase (decrease) from capital transactions 457,321 737,762 65,755
Net assets at beginning of period - - -
----------------------------------------------
Net assets at end of period $ 494,990 $ 778,755 $ 65,720
----------------------------------------------
----------------------------------------------
9
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
MONTGOMERY
MFS EMERGING MFS HIGH MFS WORLD EMERGING
GROWTH INCOME GOVERNMENT MARKETS
SERIES** SERIES** SERIES** FUND**
-----------------------------------------------------------
OPERATIONS
Dividend income $ 8,097 $ 21,440 $ - $ 391
Mortality and expense and policy advance charges
(NOTE 4) (3,876) (1,019) (116) (375)
Net realized gain (loss) on investments 148,625 12,701 2,897 (499)
Net unrealized appreciation (depreciation) of
investments during the period (29,630) 116 283 1,434
-----------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 123,216 33,238 3,064 951
CAPITAL TRANSACTIONS
Purchase of Variable Account units 21,176,704 672,340 262,500 801,303
Redemption of Variable Account units (19,266,570) (311,613) (223,157) (612,060)
Mortality and expense charge redeemed 3,876 1,019 116 375
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------
Increase (decrease) from capital transactions 1,914,010 361,746 39,459 189,618
Net assets at beginning of period - - - -
-----------------------------------------------------------
Net assets at end of period $2,037,226 $394,984 $ 42,523 $190,569
-----------------------------------------------------------
-----------------------------------------------------------
STRONG
MONTGOMERY STRONG GOVERNMENT
GROWTH DISCOVERY SECURITIES
FUND** FUND II** FUND II**
--------------------------------------------
OPERATIONS
Dividend income $ 41,303 $ 6,715 $ 1,630
Mortality and expense and policy advance charges
(NOTE 4) (1,779) (544) (671)
Net realized gain (loss) on investments 42,751 (5,280) 2,051
Net unrealized appreciation (depreciation) of
investments during the period (19,045) 2,186 (276)
--------------------------------------------
Net increase (decrease) in net assets resulting from
operations 63,230 3,077 2,734
CAPITAL TRANSACTIONS
Purchase of Variable Account units 2,961,408 321,349 743,861
Redemption of Variable Account units (2,132,070) (233,384) (677,965)
Mortality and expense charge redeemed 1,779 544 671
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
--------------------------------------------
Increase (decrease) from capital transactions 831,117 88,509 66,567
Net assets at beginning of period - - -
--------------------------------------------
Net assets at end of period $ 894,347 $ 91,586 $ 69,301
--------------------------------------------
--------------------------------------------
10
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
STRONG STRONG TCI TCI
ADVANTAGE INTERNATIONAL BALANCED GROWTH
FUND II** FUND II** FUND** FUND**
-----------------------------------------------------------------
OPERATIONS
Dividend income $ 5,379 $ 1,058 $ 140 $ 113
Mortality and expense and policy advance charges
(NOTE 4) (48) (26) (1,205) (203)
Net realized gain (loss) on investments 1,416 15,704 2,990 (5,589)
Net unrealized appreciation (depreciation) of
investments during the period (1,352) 2,576 959 (886)
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 5,395 19,312 2,884 (6,565)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,277,539 4,776,591 651,649 1,563,734
Redemption of Variable Account units (981,809) (4,437,583) (542,655) (1,487,452)
Mortality and expense charge redeemed 48 26 1,205 203
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------------
Increase (decrease) from capital transactions 295,778 339,034 110,199 76,485
Net assets at beginning of period - - - -
-----------------------------------------------------------------
Net assets at end of period $ 301,173 $ 358,346 $113,083 $ 69,920
-----------------------------------------------------------------
-----------------------------------------------------------------
VAN ECK VAN ECK COMBINED
WORLDWIDE GOLD & NATURAL VARIABLE
BOND FUND** RESOURCES FUND** ACCOUNT
-------------------------------------------------
OPERATIONS
Dividend income $ 468 $ 3,629 $ 53,462,399
Mortality and expense and policy advance charges
(NOTE 4) (869) (1,505) (21,613,710)
Net realized gain (loss) on investments (109) (3,564) 15,488,353
Net unrealized appreciation (depreciation) of
investments during the period 398 18,031 128,100,118
-------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (112) 16,591 175,437,160
CAPITAL TRANSACTIONS
Purchase of Variable Account units 63,735 2,385,593 499,209,661
Redemption of Variable Account units (27,792) (1,932,084) (227,006,165)
Mortality and expense charge redeemed 869 1,505 21,613,710
Funding of subaccount by Fortis Benefits Insurance
Company - - 19,749,480
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - (505,633)
-------------------------------------------------
Increase (decrease) from capital transactions 36,812 455,014 313,061,053
Net assets at beginning of period - - 1,380,981,166
-------------------------------------------------
Net assets at end of period $36,700 $ 471,605 $1,869,479,379
-------------------------------------------------
-------------------------------------------------
* For the period from May 1, 1996 to December 31, 1996.
** For the period from February 1, 1996 to December 31, 1996.
*** For the period from December 1, 1996 to December 31, 1996.
SEE ACCOMPANYING NOTES.
11
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets
Year ended December 31, 1995
FORTIS U.S. FORTIS
FORTIS GOVERNMENT FORTIS ASSET
GROWTH STOCK SECURITIES MONEY MARKET ALLOCATION
SERIES SERIES SERIES SERIES
-----------------------------------------------------------
OPERATIONS
Dividend income $ 1,840,330 $ 8,296 $ 1,390,716 $ 12,053,233
Mortality and expense and policy advance charges
(NOTE 4) (4,926,616) (2,226,178) (485,370) (3,776,116)
Net realized gain (loss) on investments 2,244,343 (2,199,244) 624,600 657,519
Net unrealized appreciation (depreciation) of
investments during the period 81,868,441 30,648,947 29,966 41,467,924
-----------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 81,026,498 26,231,821 1,559,912 50,402,560
CAPITAL TRANSACTIONS
Purchase of Variable Account units 38,293,107 8,352,984 32,372,114 26,712,802
Redemption of Variable Account units (13,094,690) (28,554,947) (37,771,314) (7,551,884)
Mortality and expense charge redeemed 4,926,616 2,226,178 485,370 3,776,116
Funding of subaccount by Fortis Benefits
Insurance Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------
Increase (decrease) from capital transactions 30,125,033 (17,975,785) (4,913,830) 22,937,034
Net assets at beginning of period 305,894,055 165,496,514 40,601,449 244,096,399
-----------------------------------------------------------
Net assets at end of period $417,045,586 $173,752,550 $37,247,531 $317,435,993
-----------------------------------------------------------
-----------------------------------------------------------
FORTIS FORTIS FORTIS FORTIS
DIVERSIFIED GLOBAL GROWTH AGGRESSIVE GROWTH &
INCOME SERIES SERIES GROWTH SERIES INCOME SERIES
-------------------------------------------------------------
OPERATIONS
Dividend income $ 4,826 $ 889,918 $ 131,332 $ 909,272
Mortality and expense and policy advance charges
(NOTE 4) (1,319,921) (1,926,551) (304,716) (437,914)
Net realized gain (loss) on investments (722,251) 489,178 534,513 35,576
Net unrealized appreciation (depreciation) of
investments during the period 16,334,785 35,553,129 4,721,034 7,722,201
-------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 14,297,439 35,005,674 5,082,163 8,229,135
CAPITAL TRANSACTIONS
Purchase of Variable Account units 5,015,452 18,528,694 24,973,529 31,466,100
Redemption of Variable Account units (11,835,588) (8,118,814) (3,729,001) (816,805)
Mortality and expense charge redeemed 1,319,921 1,926,551 304,716 437,914
Funding of subaccount by Fortis Benefits
Insurance Company - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-------------------------------------------------------------
Increase (decrease) from capital transactions (5,500,215) 12,336,431 21,549,244 31,087,209
Net assets at beginning of period 95,104,238 123,313,276 11,236,577 15,018,997
-------------------------------------------------------------
Net assets at end of period $103,901,462 $170,655,381 $37,867,984 $54,335,341
-------------------------------------------------------------
-------------------------------------------------------------
12
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1995
FORTIS NORWEST
FORTIS GLOBAL ASSET FORTIS FORTIS SELECT
HIGH YIELD ALLOCATION GLOBAL BOND INTERNATIONAL VALUGROWTH
SERIES SERIES SERIES STOCK SERIES FUND
--------------------------------------------------------------------------
OPERATIONS
Dividend income $ 2,182,916 $ 345,923 $ 336,887 $ 180,007 $ 50,547
Mortality and expense and policy advance charges
(NOTE 4) (251,064) (77,959) (49,301) (74,571) (39,979)
Net realized gain (loss) on investments 47,908 (27,354) 52,221 1,557 12,413
Net unrealized appreciation (depreciation) of
investments during the period (221,078) 351,983 (14,301) 646,603 510,859
--------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,758,682 592,593 325,506 753,596 533,840
CAPITAL TRANSACTIONS
Purchase of Variable Account units 14,183,765 12,556,722 8,567,265 12,412,684 3,059,819
Redemption of Variable Account units (2,740,528) (230,615) (2,223,052) (146,385) (225,312)
Mortality and expense charge redeemed 251,064 77,959 49,301 74,571 39,979
Funding of subaccount by Fortis Benefits
Insurance Company - - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - - -
--------------------------------------------------------------------------
Increase (decrease) from capital transactions 11,694,301 12,404,066 6,393,514 12,340,870 2,874,486
Net assets at beginning of period 11,967,089 - - - 1,349,199
--------------------------------------------------------------------------
Net assets at end of period $25,420,072 $12,996,659 $6,719,020 $13,094,466 $4,757,525
--------------------------------------------------------------------------
--------------------------------------------------------------------------
NORWEST NORWEST
SELECT SELECT SMALL SCUDDER COMBINED
INTERMEDIATE COMPANY INTERNATIONAL VARIABLE
BOND FUND STOCK FUND PORTFOLIO ACCOUNT
-----------------------------------------------------------
OPERATIONS
Dividend income $ 172,247 $ 28,697 $ 5,274 $ 20,530,421
Mortality and expense and policy advance charges
(NOTE 4) (27,041) (2,828) (19,707) (15,945,832)
Net realized gain (loss) on investments 24,440 (329) (4,479) 1,770,611
Net unrealized appreciation (depreciation) of
investments during the period 98,386 (12,343) 150,241 219,856,777
-----------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 268,032 13,197 131,329 226,211,977
CAPITAL TRANSACTIONS
Purchase of Variable Account units 2,608,516 859,696 1,113,419 241,076,668
Redemption of Variable Account units (521,303) (3,639) (431,126) (117,995,003)
Mortality and expense charge redeemed 27,041 2,828 19,707 15,945,832
Funding of subaccount by Fortis Benefits
Insurance Company - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------
Increase (decrease) from capital transactions 2,114,254 858,885 702,000 139,027,497
Net assets at beginning of period 685,775 - 978,124 1,015,741,692
-----------------------------------------------------------
Net assets at end of period $3,068,061 $872,082 $1,811,453 $1,380,981,166
-----------------------------------------------------------
-----------------------------------------------------------
SEE ACCOMPANYING NOTES.
13
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets
Year ended December 31, 1994
FORTIS U.S.
FORTIS GOVERNMENT FORTIS FORTIS ASSET
GROWTH STOCK SECURITIES MONEY MARKET ALLOCATION
SERIES SERIES SERIES SERIES
--------------------------------------------------------------------
OPERATIONS
Dividend income $ 2,224,886 $ 13,644,959 $ - $ 9,186,739
Mortality and expense and policy advance charges
(NOTE 4) (3,753,659) (2,648,040) (491,242) (3,050,115)
Net realized gain (loss) on investments 1,017,245 (3,898,323) 194,135 283,379
Net unrealized appreciation (depreciation) of
investments during the period (10,439,005) (24,335,220) 1,255,055 (9,690,299)
--------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (10,950,533) (17,236,624) 957,948 (3,270,296)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 72,313,277 12,541,099 52,469,852 58,509,925
Redemption of Variable Account units (13,597,387) (60,391,902) (40,583,910) (6,821,686)
Mortality and expense charge redeemed 3,753,659 2,648,040 491,242 3,050,115
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
--------------------------------------------------------------------
Increase (decrease) from capital transactions 62,469,549 (45,202,763) 12,377,184 54,738,354
Net assets at beginning of period 254,375,039 227,935,901 27,266,317 192,628,341
--------------------------------------------------------------------
Net assets at end of period $305,894,055 $165,496,514 $40,601,449 $244,096,399
--------------------------------------------------------------------
--------------------------------------------------------------------
FORTIS FORTIS FORTIS
DIVERSIFIED GLOBAL GROWTH AGGRESSIVE
INCOME SERIES SERIES GROWTH SERIES
---------------------------------------------------
OPERATIONS
Dividend income $ 7,607,329 $ 829,695 $ 45,402
Mortality and expense and policy advance charges
(NOTE 4) (1,344,477) (1,383,450) (48,160)
Net realized gain (loss) on investments (767,738) 37,068 (14,814)
Net unrealized appreciation (depreciation) of
investments during the year (12,476,808) (3,836,491) 354,186
---------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (6,981,694) (4,353,178) 336,614
CAPITAL TRANSACTIONS
Purchase of Variable Account units 24,210,219 63,570,141 11,827,795
Redemption of Variable Account units (14,240,935) (2,600,492) (975,992)
Mortality and expense charge redeemed 1,344,477 1,383,450 48,160
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
---------------------------------------------------
Increase (decrease) from capital transaction 11,313,761 62,353,099 10,899,963
Net assets at beginning of period 90,772,171 65,313,355 -
---------------------------------------------------
Net assets at end of period $95,104,238 $123,313,276 $11,236,577
---------------------------------------------------
---------------------------------------------------
14
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1994
FORTIS FORTIS NORWEST SELECT
GROWTH & INCOME HIGH YIELD VALUGROWTH
SERIES SERIES FUND
-----------------------------------------------------
OPERATIONS
Dividend income $ 154,775 $ 546,340 $ -
Mortality and expense and policy advance charges
(NOTE 4) (66,282) (67,340) (4,796)
Net realized gain (loss) on investments (5,003) (2,813) 499
Net change in unrealized appreciation (depreciation)
of investments during the period (139,658) (596,104) (24,752)
-----------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (56,168) (119,917) (29,049)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 15,221,338 13,770,714 1,395,749
Redemption of Variable Account units (212,455) (1,751,048) (22,297)
Mortality and expense charge redeemed 66,282 67,340 4,796
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-----------------------------------------------------
Increase (decrease) from capital transactions 15,075,165 12,087,006 1,378,248
Net assets at beginning of period - - -
-----------------------------------------------------
Net assets at end of period $15,018,997 $11,967,089 $1,349,199
-----------------------------------------------------
-----------------------------------------------------
NORWEST SELECT SCUDDER COMBINED
INTERMEDIATE INTERNATIONAL VARIABLE
BOND FUND PORTFOLIO ACCOUNT
----------------------------------------------------
OPERATIONS
Dividend income $ - $ - $ 34,240,125
Mortality and expense and policy advance charges
(NOTE 4) (2,966) (3,751) (12,864,278)
Net realized gain (loss) on investments (113) (2,393) (3,158,871)
Net change in unrealized appreciation (depreciation)
of investments during the period 51 (36,913) (59,965,958)
----------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (3,028) (43,057) (41,748,982)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 698,986 1,033,608 327,562,703
Redemption of Variable Account units (13,149) (16,178) (141,227,431)
Mortality and expense charge redeemed 2,966 3,751 12,864,278
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
----------------------------------------------------
Increase (decrease) from capital transactions 688,803 1,021,181 199,199,550
Net assets at beginning of period - - 858,291,124
----------------------------------------------------
Net assets at end of period $685,775 $ 978,124 $1,015,741,692
----------------------------------------------------
----------------------------------------------------
SEE ACCOMPANYING NOTES.
15
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements
December 31, 1996
1. GENERAL
FORTIS BENEFITS INSURANCE COMPANY
Variable Account D (the Account) was established as a segregated asset account
of Fortis Benefits Insurance Company (Fortis Benefits) on October 14, 1987 under
Minnesota law. The Account is registered under the Investment Company Act of
1940 as a unit investment trust.
Fortis Benefits was founded in 1910. At December 31, 1996, Fortis Benefits had
approximately $91 billion of total life insurance in force. Fortis Benefits is a
Minnesota corporation and is qualified to sell life insurance and annuity
contracts in the District of Columbia and in all states except New York. Fortis
Benefits is an indirectly wholly-owned subsidiary of Fortis, Inc., which is
itself indirectly owned 50% by N.V. AMEV and 50% by Compagnie Financiere et de
Reassurance du Group AG ("Group AG"). Fortis, Inc. manages the United States
operations for these two companies.
N.V. AMEV is a diversified financial services company headquartered in Utrecht,
The Netherlands, where its insurance operations began in 1847. Group AG is a
diversified financial services company headquartered in Brussels, Belgium, where
its insurance operations began in 1824. N.V. AMEV and Group AG have merged their
operating companies under the trade name of Fortis. The Fortis group of
companies is active in insurance, banking, and financial services, and real
estate development in the Netherlands, Belgium, The United States, Western
Europe, and the Pacific Rim. The Fortis group of companies had over $175 billion
in assets at the end of 1996.
Fortis Advisers, Inc. (a wholly-owned subsidiary of Fortis, Inc.) provides
investment management services to the Fortis Series Fund, Inc. portfolios in
exchange for investment advisory and management fees. Investment advisory and
management fees are based on each portfolio's daily net assets and decrease in
reduced percentages as average daily net assets increase. The fees represent an
investment expense to Fortis Series Fund, Inc. which reduces the portfolios'
net assets. The fees charged by Fortis Advisers, Inc. are not available on an
individual variable account basis. Fees for all Fortis Series Fund, Inc.
portfolios to which Fortis Advisers, Inc. provided investment management
services amounted to $11,076,174, $7,819,224, and $5,839,044 in 1996, 1995 and
1994 respectively.
16
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
There are forty three subaccounts within the Account. The investment objectives
and policies of each of the Account's subaccounts are as follows.
FORTIS SERIES FUNDS, INC.
- - GROWTH STOCK PORTFOLIO SUBACCOUNT--seeks growth of capital through short-
term and long-term appreciation.
- - U.S. GOVERNMENT SECURITIES PORTFOLIO SUBACCOUNT--seeks to earn a high level
of current income consistent with prudent investment risk.
- - MONEY MARKET PORTFOLIO SUBACCOUNT--seeks high level of capital stability
and liquidity and, to the extent consistent with these objectives, a high
level of current income.
- - ASSET ALLOCATION PORTFOLIO SUBACCOUNT--seeks favorable overall rates of
return on capital, primarily through increased ownership of equity
securities during periods when stock market conditions appear favorable,
and short-term and long-term debt instruments during periods when stock
market conditions are less favorable.
- - DIVERSIFIED INCOME PORTFOLIO SUBACCOUNT--seeks high level of current income
by investing primarily in a diversified portfolio of government securities
and investment grade corporate bonds.
- - GLOBAL GROWTH PORTFOLIO SUBACCOUNT--seeks growth of capital through long-
term capital appreciation, through ownership of equity securities,
allocated among diverse international markets.
- - AGGRESSIVE GROWTH PORTFOLIO SUBACCOUNT--seeks long-term capital
appreciation in equity securities.
- - GROWTH AND INCOME PORTFOLIO SUBACCOUNT--seeks growth of capital and current
income, through ownership of equity securities that provide an income
component and the potential for growth.
17
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
- - HIGH YIELD PORTFOLIO SUBACCOUNT--seeks maximum total return through current
income and capital appreciation, through ownership of a diversified
portfolio of high-yielding fixed-income securities.
- - GLOBAL ASSET ALLOCATION SUBACCOUNT-- seeks favorable overall rates of
return on capital, primarily through increased ownership of foreign &
domestic equity securities during periods when stock market conditions
appear favorable, and short-term and long-term foreign & domestic debt
instruments during periods when stock market conditions are less favorable.
- - GLOBAL BOND SUBACCOUNT--seeks total return from current income and capital
appreciation, by investing in a global portfolio of high quality fixed
income securities.
- - INTERNATIONAL STOCK SUBACCOUNT--seeks capital appreciation by investing
primarily in equity securities of non-United States companies.
- - VALUE SUBACCOUNT--seeks growth of capital through short and long-term
capital appreciation. Investing in equity securities based on the "Value"
philosophy.
- - S & P 500 INDEX SUBACCOUNT--seeks growth of capital by replicating the
total return of the Standard & Poor's 500 Composite Stock Price Index.
- - BLUE CHIP STOCK SUBACCOUNT--seeks capital appreciation by investing
primarily in large and medium-sized blue chip companies.
NORWEST SELECT FUNDS
- - VALUGROWTH STOCK FUND--seeks growth of capital by investing principally in
medium and large capitalization companies that possess above-average growth
characteristics and attractive valuations.
- - INTERMEDIATE BOND FUND--seeks income through investing primarily in a
diversified portfolio of government and corporate bonds in an evenly
balanced maturity structure.
18
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
- - SMALL COMPANY STOCK FUND--seeks growth of capital by investing primarily in
the common stock of small and medium size domestic companies, in the early
stage of development or may produce goods and services which have a
favorable prospect for growth.
- - INCOME EQUITY FUND--seeks income by investing primarily in the common stock
of large domestic companies that are perceived to have above-average return
potential based on current market valuations.
SCUDDER VARIABLE LIFE INVESTMENT
- - INTERNATIONAL PORTFOLIO--seeks long-term growth of capital primarily
through diversified holdings of marketable foreign securities.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
- - MONEY MARKET PORTFOLIO--seeks income by investing in money market
securities, with less than one year until maturity, and meets the objective
of safety of principal, excellent liquidity and maximum current income to
the extent consistent with the first two objectives.
- - INTERNATIONAL PORTFOLIO--seeks to obtain a total return on its assets from
long-term growth of capital principally through a broad portfolio of
marketable securities of established foreign companies.
- - PREMIER GROWTH PORTFOLIO--seeks growth of capital by pursuing aggressive
investment policies. Investments will be based upon their potential for
capital appreciation.
19
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
SAFECO RESOURCE SERIES TRUST
- - EQUITY PORTFOLIO--seeks long-term growth of capital and reasonable income
by investing principally in common stocks.
- - GROWTH PORTFOLIO--seeks growth of capital and the increased income that
ordinarily follows from such growth.
FEDERATED INSURANCE SERIES
- - HIGH INCOME FUND II--seek high current income, by investing primarily in a
professionally managed, diversified portfolio of fixed income securities.
- - UTILITY FUND II--seeks high current income and moderate capital
appreciation, by investing primarily in a professionally managed
diversified portfolio of equity and debt securities of utility companies.
- - AMERICAN LEADERS FUND II--seeks long-term capital growth, by investing the
majority of its assets in common stock of "blue chip" companies.
LEXINGTON FUNDS DISTRIBUTOR, INC.
- - NATURAL RESOURCES TRUST--seek long-term growth of capital through
investments primarily in common stocks of companies that own or develop
natural resources and other basic commodities, or supply goods and services
to such companies.
- - EMERGING MARKETS FUND--seeks long-term growth of capital primarily through
investment in equity securities and equivalents of companies domiciled in,
or doing business in, emerging countries and emerging markets.
20
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
MFS VARIABLE INSURANCE TRUST
- - MFS EMERGING GROWTH SERIES--seeks long-term growth of capital through
investment in common stock of companies that are early in their life cycle,
with potential to become major enterprises.
- - MFS HIGH INCOME SERIES--seeks high current income through investing,
primarily in a professionally managed diversified portfolio of fixed income
securities, some of which may involve equity features.
- - MFS WORLD GOVERNMENTS SERIES--seeks growth of capital, with moderate
current income through investment in a internationally diversified
portfolio consisting primarily of debt securities and lesser extent equity
securities
MONTGOMERY VARIABLE SERIES
- - EMERGING MARKETS FUND--seeks long-term growth of capital primarily through
investment in equity securities and equivalents of companies domiciled in,
or doing business in, emerging countries and emerging markets.
- - GROWTH FUND--seeks capital appreciation by investing at least 65% of its
assets in the equity securities of domestic companies.
STRONG VARIABLE INSURANCE FUNDS, INC.
- - DISCOVERY FUND II--Seeks capital growth by investing in securities that are
believed to represent growth opportunities.
- - GOVERNMENT SECURITIES FUND II--seeks total return by investing for a high
level of current income with a moderate degree of share-price fluctuation.
- - ADVANTAGE FUND II--seeks current income with a very low degree of share-
price fluctuation, by investing primarily in ultra short-term
investment-grade debt obligations.
21
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
- - INTERNATIONAL FUND II--seeks capital growth by investing primarily in
equity securities of issuers located outside of the United States.
TCI PORTFOLIOS, INC.
- - TCI BALANCED--seeks capital growth and current income by investing in a
combination of common stocks (and other equity equivalents) and fixed
income securities.
- - TCI GROWTH--seeks capital growth by investing in common stocks that have a
better than average potential for appreciation.
VAN ECK WORLDWIDE INSURANCE TRUST
- - WORLDWIDE BOND FUND--seeks high return through a flexible policy of
investing globally, primarily in debt securities.
- - GOLD AND NATURAL RESOURCES FUND--seeks long-term capital appreciation by
investing in equity and debt securities of companies engaged in the
exploration, development, production and distribution of gold and other
natural resources, such as strategic and other metals, minerals, forest
products, oil, natural gas and coal.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The assets of the Account are segregated from Fortis Benefits Insurance
Company's other assets. The operations of the Account are part of Fortis
Benefits Insurance Company. The following is a summary of significant
accounting policies consistently followed by the Account in the preparation
of its financial statements.
INVESTMENT VALUATION
Investments in mutual funds (the "Funds") are valued at the net asset
(market) value per share at the close of business on December 31, 1996 as
reported by the Fund.
22
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENT TRANSACTIONS
Investment Transactions are accounted for on the trade date. Realized gains and
losses on investments are determined in the basis of identified cost. Capital
gain distributions from mutual funds are recorded on the ex-dividend date and
reinvested upon receipt.
INVESTMENT INCOME
Dividend income from mutual funds is recorded on the ex-dividend date and
reinvested upon receipt.
3. INVESTMENTS
Investment in shares of the Fortis Series Funds Inc., Norwest Select Fund,
Scudder Variable Life Investment Fund, Alliance Variable Products Series Fund,
Inc., SAFECO Resource Series Trust, Federated Insurance Series, Lexington Funds
Distributor, Inc., MFS Variable Insurance Trust, Montgomery Variable Series,
Strong Variable Insurance Funds, Inc., TCI Portfolios, Inc., and Van Eck
Worldwide Insurance Trust (the Funds) are stated at market value, which is based
on the percentage owned by the Account of the net asset value of the respective
portfolios of the Funds. The Funds' net asset value is based on market
quotations of the securities held in the portfolio. The cost of investments sold
and redeemed is determined on the average cost method. Unrealized appreciation
or depreciation of investments represents the Account's share of the mutual
fund's undistributed net investment income, undistributed realized gains or
losses and unrealized appreciation or depreciation in the Funds' investments.
23
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Purchases and sales of shares of the Fund are recorded on the trade date. The
number of shares and aggregate cost of purchases and proceeds from sales of
shares were as follows:
SHARES
-------------------------- COST OF PROCEEDS
PURCHASED SOLD PURCHASES FROM SALES
--------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Fortis Series Fund, Inc.,
Growth Stock Series 1,316,877 636,480 $40,354,935 $13,497,297
U.S. Government Securities Series 911,132 3,066,517 9,792,095 33,224,639
Money Market Series 4,890,211 3,484,284 53,529,569 37,298,093
Asset Allocation Series 2,119,407 1,656,181 35,139,069 22,612,833
Diversified Income Series 357,973 1,005,530 4,487,798 12,039,175
Global Growth Series 3,180,571 254,987 56,339,715 3,329,367
Aggressive Growth Series 3,202,119 654,509 45,154,232 7,945,070
Growth & Income Series 3,719,238 123,779 51,705,892 1,580,938
High Yield Series 1,460,586 365,643 14,950,454 3,677,674
Global Asset Allocation Series 1,548,139 73,695 17,977,062 823,449
Global Bond Series 1,282,696 280,803 13,740,427 3,130,682
International Stock Series 2,397,683 175,126 27,769,550 1,961,927
Value Series 1,110,964 3,953 11,759,449 62,431
S & P 500 Series 1,695,947 90,342 17,947,817 935,023
Blue Chip Series 1,524,910 271,863 16,093,584 2,786,613
Norwest Select Fund,
ValuGrowth Fund 348,043 25,400 4,632,105 284,976
Intermediate Bond Fund 323,851 64,140 3,468,748 697,755
Small Company Stock Fund 345,221 9,976 4,107,960 120,366
Income Equity Fund 855,795 9,655 9,076,709 94,179
Scudder Variable Life Investment,
International Portfolio 98,552 6,404 1,328,103 73,718
Alliance Variable Product Series,
Money Market Portfolio 29,009,905 23,518,475 29,009,905 23,518,476
International Portfolio 267,012 245,510 3,914,735 3,623,061
Premier Growth Portfolio 83,324 69,550 1,256,492 1,055,546
24
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
SHARES
-------------------------- COST OF PROCEEDS
PURCHASED SOLD PURCHASES FROM SALES
--------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
(CONTINUED)
SAFECO Resource Series,
Growth Portfolio 21,412 12,345 $ 441,504 $ 256,130
Equity Portfolio 9,038 - 198,282 -
Federated Insurance Series:
High Income Fund 155,252 67,532 1,538,226 663,283
Utility Fund 90,748 74,159 1,026,928 833,792
American Leaders Fund 95,282 62,716 1,372,344 893,146
Lexington Funds, Inc.:
Natural Resources Trust 152,771 98,312 2,056,140 1,285,419
Emerging Markets Fund 113,436 106,965 1,131,006 1,066,087
MFS Variable Insurance Trust:
MFS Emerging Growth Series 1,578,159 1,407,439 21,176,704 19,117,745
MFS High Income Series 61,750 27,858 672,340 298,912
MFS World Government Series 25,429 21,388 262,500 220,260
Montgomery Variable Series:
Emerging Markets Fund 76,452 58,302 801,303 612,559
Growth Fund 244,447 176,044 2,961,408 2,089,319
Strong Variable Insurance Funds:
Discovery Fund II 29,429 21,579 321,349 238,664
Government Securities Fund II 77,682 70,643 743,861 675,914
Advantage Fund II 126,607 97,506 1,277,539 980,393
International Fund II 426,271 397,453 4,776,591 4,457,879
TCI Portfolios, Inc.:
TCI Balanced Fund 81,790 72,450 651,649 539,665
TCI Growth Fund 151,030 144,527 1,563,734 1,481,863
Van Eck Worldwide Ins. Trust:
Worldwide Bond Fund 6,334 2,578 63,735 27,683
Gold & Natural Resources Fund 146,230 118,292 2,385,593 1,928,520
25
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
SHARES
-------------------------- COST OF PROCEEDS
PURCHASED SOLD PURCHASES FROM SALES
--------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
Fortis Series Fund, Inc.:
Growth Stock Series 1,474,490 534,461 $38,219,083 $13,219,252
U.S. Government Securities Series 774,095 2,822,335 8,256,814 28,588,389
Money Market Series: 3,006,701 3,520,068 32,427,432 37,776,714
Asset Allocation Series 1,708,881 515,324 26,748,824 7,609,627
Diversified Income Series 436,611 1,063,223 5,016,172 11,853,689
Global Growth Series 1,232,021 624,923 18,345,602 8,164,182
Aggressive Growth Series 2,130,122 300,532 24,945,836 3,730,794
Growth & Income Series 2,741,398 71,626 31,425,809 818,308
High Yield Series 1,387,101 266,413 14,170,291 2,741,248
Global Asset Allocation Series 1,130,399 23,288 12,516,549 230,769
Global Bond Series 759,105 193,919 8,564,998 2,223,226
International Stock Series 1,159,824 14,425 12,411,656 146,602
Norwest Select Fund:
ValuGrowth Fund 273,933 20,542 3,057,527 225,370
Intermediate Bond Fund 242,873 48,103 2,608,128 521,311
Adjustable U.S. Government Reserve
Fund 75,540 314 859,233 3,639
Small Company Stock Fund 38,761 94,688 392,834 968,236
Scudder Variable Life Investment:
International Portfolio 101,034 39,728 1,113,265 431,133
YEAR ENDED DECEMBER 31, 1994
Fortis Series Fund, Inc.,
Growth Stock Series 3,266,440 631,035 72,583,504 13,830,835
U.S. Government Securities Series 1,186,119 5,847,237 12,608,370 60,458,766
Money Market Series 5,458,066 3,903,494 52,479,135 40,593,794
Asset Allocation Series 4,191,226 496,813 58,622,192 6,924,469
Diversified Income Series 2,065,335 1,262,643 24,259,910 14,270,172
Global Growth Series 5,023,325 214,984 63,626,783 2,654,200
Aggressive Growth Series 1,246,139 103,726 11,828,451 976,762
Growth & Income Series 1,497,281 21,061 15,217,894 213,057
High Yield Series 1,381,673 175,340 13,771,173 1,751,362
Norwest Select Fund:
ValuGrowth Stock Fund 139,803 2,270 1,396,722 22,296
Intermediate Bond Fund 70,247 1,326 698,920 13,149
Adjustable U.S. Government Reserve Fund 78,556 22,627 798,991 231,685
Scudder Variable Life Investment Fund:
International Portfolio 93,016 1,517 1,031,994 16,179
26
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
The number of shares and cost of shares issued from reinvestment of dividends
with the Funds were as follows:
COST OF
SHARES SHARES
-----------------------------
YEAR ENDED DECEMBER 31, 1996
Fortis Series Fund, Inc.:
Growth Stock Series 53,172 $ 1,755,003
U.S. Government Securities Series 1,115,661 11,268,567
Money Market Series 183,457 1,961,696
Asset Allocation Series 1,078,332 18,389,804
Diversified Income Series 701,215 7,814,749
Global Growth Series 18,721 349,640
Aggressive Growth Series 9,589 130,127
Growth & Income Series 222,479 3,357,159
High Yield Series 346,560 3,381,726
Global Asset Allocation Series 11,755 1,354,041
Global Bond Series 81,830 900,099
International Stock Series 109,584 1,318,016
Value Series 5,990 67,900
S & P 500 Series 8,915 102,931
Blue Chip Stock Series 4,298 50,146
Norwest Select Fund:
ValuGrowth Fund 5,666 82,203
Intermediate Bond Fund 24,747 266,665
Small Company Stock Fund 38,370 512,352
Income Equity Fund 6,608 73,375
Scudder Variable Life Investment:
International Portfolio 3,949 47,233
Alliance Capital Management:
Money Market Series 102,380 102,380
International Series 88 1,304
Premier Growth Series 1,734 24,242
27
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
COST OF
SHARES SHARES
--------------------------
YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
SAFECO Resource Series:
Growth Series 785 $ 14,945
Equity Series 810 17,950
Federated Insurance Series:
High Income Series 2,069 20,894
Utility Series 174 2,018
American Leaders Series 244 3,741
Lexington Funds, Inc.:
Natural Resources Trust Fund 82 1,130
Emerging Markets Fund - -
Massachusetts Financial Service Group:
Emerging Growth Series 610 8,097
High Income Series 1,972 21,440
World Government Series - -
Montgomery Variable Funds:
Emerging Markets Fund 38 391
Growth Fund 3,413 41,303
Strong Variable Annuity Funds:
Discovery II Fund 678 6,715
Government Securities II Fund 163 1,630
Advantage II Fund 535 5,379
International II Fund 96 1,058
American Century Investments:
TCI Balanced Fund 20 140
TCI Growth Fund 10 113
Van Eck World Wide Insurance Trust:
Worldwide Bond Fund 44 468
Gold & Natural Resources Fund 215 3,629
28
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
COST OF
SHARES SHARES
----------------------------
YEAR ENDED DECEMBER 31, 1995
Fortis Series Fund, Inc.:
Growth Stock Series 67,820 $ 1,840,330
U.S. Government Securities Series 834 8,296
Money Market Series 134,020 1,390,716
Asset Allocation Series 771,842 12,053,233
Diversified Income Series 439 4,826
Global Growth Series 57,730 889,918
Aggressive Growth Series 10,929 131,332
Growth & Income Series 75,502 909,272
High Yield Series 225,440 2,182,916
Global Asset Allocation Series 30,572 345,923
Global Bond Series 30,119 336,887
International Stock Series 16,292 180,007
Norwest Select Fund:
ValuGrowth Stock Fund 4,219 50,547
Intermediate Bond Fund 15,730 172,247
Small Company Stock Fund 2,569 28,697
Scudder Variable Life Investment Fund:
International Portfolio 448 5,274
YEAR ENDED DECEMBER 31, 1994
Fortis Series Fund, Inc.:
Growth Stock Series 101,668 $ 2,224,886
U.S. Government Securities Series 1,448,879 13,644,959
Money Market Series - -
Asset Allocation Series 679,533 9,186,739
Diversified Income Series 731,228 7,607,329
Global Growth Series 68,077 829,695
Aggressive Growth Series 4,680 45,402
Growth & Income Series 15,373 154,775
High Yield Series 57,965 546,340
29
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
COST OF
SHARES SHARES
-----------------------------
YEAR ENDED DECEMBER 31, 1994 (CONTINUED)
Norwest Select Fund:
ValuGrowth Stock Fund - $ -
Intermediate Bond Fund - -
Adjustable U.S. Government Reserve Fund - -
Scudder Variable Life Investment Fund:
International Portfolio - -
Fortis Benefits' investment in the subaccounts represented the following number
of shares of the Funds held and aggregate cost of amounts invested at December
31, 1996:
COST OF
SHARES SHARES
----------------------------
Fortis Series Fund, Inc.:
Global Asset Allocation Series 294,457 $ 2,980,543
Global Bond Series 505,627 5,110,208
International Stock Series 293,568 2,958,854
Value Series 71,006 710,588
S & P 500 Series 355,022 3,553,364
Blue Chip Stock Series 355,013 3,552,202
Norwest Select Fund:
ValuGrowth Fund 112,914 1,166,340
30
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES
ORGANIZATION EXPENSES
Fortis Benefits assumed all organizational expenses of the Account.
PREMIUM TAXES
Where premium taxes or similar assessments are imposed by states or other
jurisdiction upon receipt of purchase payments, Fortis Benefits pays such taxes
on behalf of the Contract Owner and then will deduct a charge for these amounts
from the Contract Value upon surrender, death of the Annuitant or Contract
Owner, or Annuitization of the Contract. In jurisdiction where premium taxes or
similar assessments are imposed at the time annuity payments begin, Fortis
Benefits will deduct a charge on a pro rata basis from the Contract Value at
that time.
POLICY ADMINISTRATION CHARGE
A $35 annual policy administrative charge is deducted each contract year from
value of each Opportunity Variable and Masters Variable Annuity Contract or $30
for each Norwest Passage Variable and Value Advantage Plus Variable Annuity
contract on each anniversary of the contract date and upon total surrender of
the contract. This charge will be waived during the Accumulation Period if the
Contract Value at the end of the Contract Year (or upon total surrender) is
$25,000 or more, for the Opportunity Variable, Masters Variable and Norwest
Passage Variable Annuity Contracts.
MORTALITY AND EXPENSE RISK CHARGE
Fortis Benefits assesses each subaccount of the Opportunity Variable, Masters
Variable and Norwest Passage Variable Annuity a daily charge for mortality and
expense risk at an annual rate of 1.25% of the net assets representing equity of
contract owners held in each subaccount. For the Value Advantage Plus Variable
Annuity the mortality and expense risk charge is assessed at an annual rate of
.45%.
31
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES (CONTINUED)
ADMINISTRATIVE CHARGE
Fortis Benefits assesses each subaccount of the Opportunity Variable and Masters
Variable Annuity a daily charge for administrative expense at annual rate of
.10% of the net assets representing equity of contract owners held in each
subaccount. For the Norwest Passage Variable Annuity the mortality and expense
risk charge is assessed at an annual rate of .15%.
SURRENDER CHARGE
FREE SURRENDERS--The following amounts can be withdrawn from the Contract
without a surrender charge:
- Any purchase payments received by us more than five years prior to the
surrender date for Opportunity Variable Annuity and Norwest Passage
Variable Annuity and seven years for Masters Variable Annuity and have
not been previously surrendered.
- In any Contract year, up to 10% of the purchase payments received by
us less than five years prior to the surrender date for Opportunity
Variable Annuity and Norwest Passage Variable Annuity and seven years
prior to the surrender date for Masters Variable Annuity.
- For Norwest Passage Variable Annuity and Masters Variable Annuity any
earnings that have not been previously surrendered.
- For Value Advantage Plus Variable Annuity there is no Surrender
charge.
AMOUNT OF SURRENDER CHARGE--Surrender charges apply only if the amount being
withdrawn exceeds the sum of the amounts listed above under Free Surrenders.
The surrender charge is based on a percentage of the amount of purchase
payments surrendered and is set at 5% during each of the first five years of the
Opportunity Variable Annuity and Norwest Passage Variable Annuity contracts,
after which no surrender charge applies, and is set at 7% during the first
seven years of the Masters Variable Annuity contracts, with a sliding scale
down to zero by the end of the seventh year. Surrender charges collected by
Fortis Benefits were $2,727,170, $2,205,945 and $1,988,863 in 1996, 1995 and
1994, respectively.
32
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES
The operations of the Account form a part of, and are taxed with, the operations
of Fortis Benefits, which is taxed as a life insurance company under the
Internal Revenue Code. As a result, the net asset values of the subaccounts are
not affected by federal income taxes on income distributions received by the
subaccounts.
33
APPENDIX A
PERFORMANCE INFORMATION
In advertising and other sales material for the Certificates, yield and total
return information for the Subaccounts of the Variable Account may be included.
The information below provides investment results for the indicated Subaccounts
of the Variable Account. The results shown in this section are not an estimate
or guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Participant.
YIELD CALCULATIONS
Yield information for the Alliance Money Market Subaccount will be based on the
seven days ended on a specified date. It will be computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical pre-
existing account (after the deduction of all asset based charges) having a
balance of one Accumulation Unit at the beginning of the period and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and multiplying the base period return by
(365/7), with the resulting yield figure carried to the nearest hundredth of one
percent. The seven day yield for the Alliance Money Market Subaccount as of
December 31, 1996 was 4.36%.
An effective yield may also be quoted for the Alliance Money Market Subaccount.
Effective yield is calculated by compounding the current yield as follows:
365/7
Effective Yield = [(Base Period Return + 1) ] -1
The seven day effective yield for the Alliance Money Market Subaccount as of
December 31, 1996 was 4.45%.
Yield information for the other Subaccounts will be based on the thirty days
ended on a specified date and carried to the nearest hundredth of a percent,
according to the following formula:
6
A-B
2[(----- + 1) - 1]
CD
Where:
A = net investment income earned during the period by the Portfolio whose shares
are owned by the Subaccount,
B = expenses accrued for the period,
C = the average daily number of Accumulation Units outstanding during the
period, and
D = the offering price per Accumulation Unit at the end of the last day of the
period.
The following table sets figures for the thirty days ended December 31, 1996.
Subaccount Yield
---------- -----
Federated High Yield Bond ................................. 8.40%
MFS High Income ........................................... 5.99%
MFS World Governments ..................................... 8.32%
Van Eck Worldwide Bond .................................... 1.42%
A-1
APPENDIX A
Fortis Benefits may advertise its relative performance as compiled by outside
organizations. Following is a list of ratings services which may be referred to
in advertisements, along with the category in which the applicable Subaccount is
included:
Rating Service Category
-------------- --------
Alliance Money Market Subaccount
Morningstar Publications, Inc.
Lipper Analytical Services, Inc.
Alliance International Subaccount
Morningstar Publications, Inc. International
Lipper Analytical Services, Inc. International
Alliance Premier Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Federated High Yield Bond Subaccount
Morningstar Publications, Inc. High Yield Bond
Lipper Analytical Services, Inc.
Federated Utility Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
Federated American Leaders Subaccount
Morningstar Publications, Inc. Growth & Income
Lipper Analytical Services, Inc.
Lexington Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
Lexington Emerging Markets Subaccount
Morningstar Publications, Inc. International Stock
Lipper Analytical Services, Inc.
A-1
MFS Emerging Growth Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Mid Cap Funds
MFS High Income Subaccount
Morningstar Publications, Inc. High Yield Bonds
Lipper Analytical Services, Inc. Mid Cap Funds
MFS World Governments Subaccount
Morningstar Publications, Inc. International Bonds
Lipper Analytical Services, Inc.
Montgomery Emerging Markets Subaccount
Morningstar Publications, Inc. Diversified Emerging Markets
Lipper Analytical Services, Inc. Emerging Markets Funds
Montgomery Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Strong Discovery Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Capital Appreciation Fund
Strong Government Securities Subaccount
Morningstar Publications, Inc. Government Bond - General
Lipper Analytical Services, Inc.
Strong Advantage Subaccount
Morningstar Publications, Inc. Corporate Bond - General
Lipper Analytical Services, Inc.
Strong International Stock Subaccount
Morningstar Publications, Inc. Foreign Stock
Lipper Analytical Services, Inc. International Fund
TCI Balanced Subaccount
Morningstar Publications, Inc. Balanced
Lipper Analytical Services, Inc.
A-2
TCI Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc.
Van Eck Worldwide Bond Subaccount
Morningstar Publications, Inc. International Bond
Lipper Analytical Services, Inc.
Van Eck Gold and Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc. Gold Oriented Fund
A-3
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses of the issuance and distribution of the Contracts,
other than commissions on sales of the Contracts are as follows:
Amount
------
Securities and Exchange Commission
registration fee $ 0
Printing and engraving $ 3,000.00
Accounting fees and expenses $ 1,500.00
Legal fees and expenses $ 3,000.00
Item 14. Indemnification of Directors and Officers
Section 300.083 of Minnesota Law General Provision provides in part that a
corporation organized under such law shall have power to indemnify anyone made,
or threatened to be made, a party to a threatened, pending or completed
proceeding, whether civil or criminal, administrative or investigative, because
he is or was a director or officer of the corporation, or served as a director
or officer of another corporation at the request of the corporation.
Indemnification in such a proceeding may extend to judgments, penalties, fines
and amounts paid in settlement, as well as to reasonable expenses, including
attorneys' fees and disbursements. In a civil proceeding, there can be no
indemnification under the statute, unless it appears that the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and its
shareholders and unless such person has received no improper personal benefit;
in a criminal proceeding, the person seeking indemnification must also have no
reasonable cause to believe his conduct was unlawful.
Article VI Section 5 of the By-laws of the Fortis Benefits Insurance
Company provides as follows:
Section 5. The Company shall indemnify (including therein the prepayment
of expenses) any person who is or was a director, officer or employee, or
who is or was serving at the request of the Company as a director, officer
or employee of another corporation, partnership, joint venture, trust or
other enterprise for expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him with
respect to any threatened, pending or completed action, suit or proceedings
against him by reason of the fact that he is or was such a director,
officer or employee to the extent and in the manner permitted by law.
Section 12 of the Principal Underwriter agreement incorporated as exhibit 1
to this registration statement (which is incorporated herein by this reference)
provides that Fortis Investors, Inc. and Fortis Benefits will indemnify each
other, and each other's officers, directors and controlling persons, with
respect to certain types of misstatements or omissions in connection with the
offer and sale of the Certificates.
Certain officers, directors or controlling persons of Fortis Investors, Inc. are
also officers, directors and controlling persons of Fortis Benefits.
Pursuant to the Principal Underwriter and Servicing Agreement, Fortis
Investors has agreed to indemnify Variable Account D, Fortis Benefits, and each
of its officers, directors and controlling persons for damages and expenses (1)
arising out of certain material misstatements and omissions in connection with
the offer and sale of the Contracts, if the misstatement or omission was based
on information furnished by Fortis Investors or (2) otherwise arising out of
Fortis Investors' negligence, bad faith, willful misfeasance or reckless
disregard of its responsibilities. Pursuant to its Dealer Sales Agreements, a
form of which is filed as Exhibit 3(b) to this registration statement and is
incorporated herein by this reference, firms that sell the contracts agree to
indemnify Fortis Benefits, Fortis Investors, the Separate Account, and their
officers, directors, employees, agents, and controlling persons from liabilities
and expenses arising out of the wrongful conduct or omissions of said selling
firm or its officers, directors, employees, controlling persons or agents.
Item 15. Recent Sales of Unregistered Securities (3 years)
The Registrant discovered that its registration of the dollar amounts of
sales in the non-unitized interest in the fixed account of a similar previously
registered product had inadvertently been exceeded, resulting in unregistered
sales of $61,164,136 between February 27, 1995 and October 25, 1995. The
Registrant claims no exemption for such excess and has provided a Notice of
Rescission rights to those individuals who purchased unregistered securities.
The principal underwriter of such securities was Fortis Investors, Inc., an
affiliated broker/dealer.
Item 16. Exhibits and Financial Statement Schedule
a. Exhibits
1. (a) Form of Principal Underwriter and Servicing Agreement
(incorporated by reference from Form N-4 Registration Statement of
Fortis Benefits and its Variable Account D filed on January 11, 1994,
File No. 33-73986);
(b) Form of Amendment to Principal Underwriting (incorporated by
reference from Form N-4 Registration Statement of Fortis Benefits and
its Variable Account D filed on January 11, 1994, File No. 33-73986).
2. Form of Asset Transfer and Acquisition Agreement dated August 28, 1991
and supplement thereto dated October 1, 1991 (incorporated by
reference from Form 8-K filed on October 16, 1991 [as amended by Form
8 filed on October 21, 1991], File No. 33-37576).
3. (a) Articles of Incorporation of Fortis Benefits Insurance Company
(incorporated by reference from Form S-6 Registration Statement of
Fortis Benefits and its Variable Account C filed on March 17, 1986,
File No. 33-03919);
(b) By-laws of Fortis Benefits Insurance Company (incorporated by
reference from Form S-6 Registration Statement of Fortis Benefits and
its Variable Account C filed on March 17, 1986, File No. 33-03919);
(c) Amendment to Articles of Incorporation and By-laws dated November
21, 1991 (incorporated by reference from Post-Effective Amendment No.
1 to the Form N-4 Registration Statement of Fortis Benefits and its
Variable Account D filed on March 2, 1992, File No. 33-37577).
4. (a) Form of Combination Fixed and Variable Group Annuity Contract
(incorporated by reference from Form N-4 Registration Statement of
Fortis Benefits filed on November 2, 1995, File No. 33-63935);
(b) Form of Certificate to be used in connection with Contract filed
as Exhibit 4 (a) (incorporated by reference from Form N-4 Registration
Statement of Fortis Benefits filed on November 2, 1995, File No.
33-63935);
(c) Form of Combination Fixed and Variable Individual Annuity Contract
(General Account Fixed Account) (incorporated by reference from Form
N-4 Registration Statement of Fortis Benefits filed on November 2,
1995, File No. 33-63935);
(d) Form of IRA Endorsement (incorporated by reference from
Pre-Effective Amendment No. 1 to the From N-4 Registration Statement
of Fortis Benefits and its Variable Account D filed on March 28, 1991,
File No. 33-37577);
(e) Form of Section 403(b) Annuity Endorsement (incorporated by
reference from Pre-Effective Amendment No. 1 to Form N-4 Registration
Statement of Western Life and its Variable Account D filed on March
28, 1991).
5. Opinion and consent of David A. Peterson, Esq., Assistant General
Counsel of Fortis Benefits Insurance Company, as to the legality of
the securities being registered (included as part of the original
filing of this Form S-1 Registration Statement filed on October 31,
1995).
10. Fortis, Inc. Executive Incentive Compensation Plan (incorporated by
reference from Amendment No. 1 to Form S-1 Registration Statement of
Fortis Benefits filed on March 28, 1991, File No. 33-37576).
23. Consent of Ernst & Young LLP.
24. Power of Attorney for Messrs. Freedman, Mackin, Mahoney, Clancy,
Meler, Keller, Gaddy, Pollock, Clayton and Greiter (incorporated by
reference from Form S-6 Registration Statement of Fortis Benefits and
its Variable Account C filed on December 17, 1993, File No. 33-73138).
b. Not applicable.
Item 17. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement::
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement, including (but not limited to) any addition or deletion of
a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the indemnification provision described in response to
Item 14, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will governed by the final adjudication of such issue.
EXHIBIT INDEX
Item
Number Description
- ------ -----------
23 Consent of Accountants
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this amended Registration Statement to be signed
on its behalf in the City of St. Paul, State of Minnesota on this 23rd day of
April, 1997.
FORTIS BENEFITS INSURANCE COMPANY
(Registrant)
By: /s/
------------------------------------------
Robert Brian Pollock, President
As required by the Securities Act of 1933 and the Investment Company Act of
1940, this Registration Statement has been signed by the following persons, in
the capacities indicated, on April 23, 1997.
Signature Title With Fortis Benefits
- --------- --------------------------
* Chairman of the Board
- ---------------------------------
Allen Royal Freedman
* Director
- ---------------------------------
Henry Carrol Mackin
* Director
- ---------------------------------
Thomas Michael Keller
Director
- ---------------------------------
Arie Aristide Fakkert
/s/ Director
- ---------------------------------
Dean C. Kopperud
/s/ President and Director
- --------------------------------- (Chief Executive Officer)
Robert Brian Pollock
/s/ Senior Vice President, Controller
- --------------------------------- and Treasurer (Principal
Michael John Peninger Accounting Officer and
Principal Financial Officer)
*By: /s/
-----------------------------
Robert Brian Pollock
Attorney-in-Fact