EXHIBIT 99
FORTIS BENEFITS
INSURANCE COMPANY
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001
AND 2000
FORTIS BENEFITS INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<Table>
<Caption>
PAGE(s)
Report of Independent Accountants 1
Financial Statements:
Balance Sheets 2-3
Statements of Income 4
Statements of Changes in Shareholder's Equity 5
Statements of Cash Flows 6-7
Notes to Financial Statements 8-26
</Table>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Fortis Benefits Insurance Company
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in shareholder's equity and of cash flows present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company (the Company), an indirect, wholly owned subsidiary of Fortis (SA/NV)
and Fortis N.V. at December 31, 2002 and 2001, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002, then ended in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Minneapolis, Minnesota
February 13, 2003
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
<Table>
<Caption>
DECEMBER 31
ASSETS 2002 2001
Investments:
Fixed maturities, at fair value (amortized cost 2002 - $2,884,670;
2001 - $2,744,158) $ 3,044,689 $ 2,785,442
Equity securities, at fair value (cost 2002 - $108,002;
2001 - $114,049) 102,214 115,348
Mortgage loans on real estate, less allowance for probable losses
(2002 - $13,228; 2001 - $13,118) 578,517 655,211
Policy loans 10,301 9,935
Short-term investments 282,383 258,790
Real estate and other investments 62,248 64,424
------------ ------------
4,080,352 3,889,150
Cash and cash equivalents 9,660 11,704
Receivables:
Uncollected premiums 62,480 63,080
Reinsurance recoverable on unpaid and paid losses 1,151,186 1,104,617
Other 16,183 34,027
------------ ------------
1,229,849 1,201,724
Accrued investment income 45,584 50,999
Deferred policy acquisition costs 123,813 108,406
Property and equipment at cost, less accumulated depreciation 3,796 4,972
Federal income tax recoverable 8,258 --
Deferred federal income taxes 125,317 193,022
Other assets 7,746 12,780
Identifiable intangible assets, less accumulated amortization
(2002 - $1,400) 27,400 --
Due from affiliates -- 12,044
Goodwill, less accumulated amortization (2002 and 2001 - $5,720) 156,006 167,992
Assets held in separate accounts 3,126,978 4,372,559
------------ ------------
Total assets $ 8,944,759 $ 10,025,352
============ ============
</Table>
The accompanying notes are an integral part of the financial statements.
2
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
<Table>
<Caption>
DECEMBER 31
POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY 2002 2001
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional and pre-need life insurance $ 1,881,137 $ 1,796,952
Interest sensitive and investment products 1,020,724 1,052,932
Accident and health 1,264,565 1,110,436
------------ ------------
4,166,426 3,960,320
Unearned revenues 50,145 54,811
Other policy claims and benefits payable 257,880 265,702
Policyholder dividends payable 1,876 2,023
------------ ------------
4,476,327 4,282,856
Accrued expenses 96,099 92,783
Current income taxes payable -- 80,306
Other liabilities 99,120 106,220
Due to Affiliates 3,842 --
Deferred gain on reinsurance ceded 308,167 369,833
Liabilities related to separate accounts 3,126,978 4,372,559
------------ ------------
Total policy reserves and liabilities 8,110,533 9,304,557
------------ ------------
Commitments and contingencies (Note 14) -- --
Shareholder's equity:
Common stock, $5 par value: authorized, issued and outstanding
shares - 1,000,000 5,000 5,000
Additional paid-in capital 516,570 516,570
Retained earnings 211,459 170,811
Accumulated other comprehensive income 101,197 28,414
------------ ------------
Total shareholder's equity 834,226 720,795
------------ ------------
Total policy reserves and liabilities and shareholder's equity $ 8,944,759 $ 10,025,352
============ ============
</Table>
The accompanying notes are an integral part of the financial statements.
3
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
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<Table>
<Caption>
YEARS ENDED DECEMBER 31
2002 2001 2000
Revenues:
Insurance operations:
Traditional and pre-need life insurance premiums $ 504,230 $ 497,053 $ 492,288
Interest sensitive and investment product
policy charges 2,481 49,690 159,728
Accident and health insurance premiums 1,179,653 1,000,935 952,228
------------ ------------ ------------
1,686,364 1,547,678 1,604,244
Net investment income 258,590 306,377 331,380
Net realized losses on investments (45,801) (34,437) (21,629)
Amortization of gain on reinsured business 61,666 52,179 5,000
Other income 11,619 13,161 9,607
------------ ------------ ------------
Total revenues 1,972,438 1,884,958 1,928,602
Benefits and expenses:
Benefits to policyholders:
Traditional and pre-need life insurance 437,249 422,478 413,326
Interest sensitive investment products 3,955 39,701 89,062
Accident and health claims 863,561 773,926 750,048
------------ ------------ ------------
1,304,765 1,236,105 1,252,436
Policyholder dividends 22 966 2,685
Amortization of deferred policy acquisition costs 47,793 55,936 55,311
Insurance commissions 166,393 141,623 131,772
General and administrative expenses 308,592 287,495 348,968
------------ ------------ ------------
Total benefits and expenses 1,827,565 1,722,125 1,791,172
------------ ------------ ------------
Income before federal income taxes 144,873 162,833 137,430
Federal income taxes 44,225 55,474 44,820
------------ ------------ ------------
Net income $ 100,648 $ 107,359 $ 92,610
============ ============ ============
</Table>
The accompanying notes are an integral part of the financial statements.
4
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(In thousands)
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME
Balance, December 31, 1999 $ 1,000,291 $ 5,000 $ 645,757 $ 427,328 $ (77,794)
Comprehensive income :
Net income 92,610 -- -- 92,610 --
Change in unrealized gain
on investments, net 55,941 -- -- -- 55,941
Change in unrealized loss
due to foreign currency exchange (1,310) (1,310)
------------
Total comprehensive income 148,551
Dividend (156,486) -- -- (156,486) --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 991,046 5,000 645,757 363,452 (23,163)
Comprehensive income :
Net income 107,359 -- -- 107,359 --
Change in unrealized gain
on investments, net 53,062 -- -- -- 53,062
Change in unrealized loss
due to foreign currency exchange (1,485) (1,485)
------------
Total comprehensive income 160,421
Net deemed dividend to parent (129,187) -- (129,187) -- --
Dividend (300,000) -- -- (300,000) --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 720,795 5,000 516,570 170,811 28,414
Comprehensive income :
Net income 100,648 -- -- 100,648 --
Change in unrealized gain
on investments, net 74,696 -- -- -- 74,696
Change in unrealized loss
due to foreign currency exchange (1,913) (1,913)
------------
Total comprehensive income 175,344 -- -- -- --
Dividend (60,000) -- -- (60,000) --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 $ 834,226 $ 5,000 $ 516,570 $ 211,459 $ 101,197
============ ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of the financial statements.
5
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
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<Table>
<Caption>
YEARS ENDED DECEMBER 31
2002 2001 2000
Cash flows from operating activities:
Net income $ 100,648 $ 107,359 $ 92,610
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation and amortization of intangibles 2,654 2,769 6,628
Amortization of gain on reinsured business (61,666) (52,179) (5,000)
Amortization of investment (discounts) premiums, net 343 (8,065) 4,190
Net realized losses on investments 45,801 34,436 21,629
Policy acquisition costs deferred (63,200) (74,993) (118,867)
Amortization of deferred policy acquisition costs 47,793 55,936 55,311
Provision for deferred federal income taxes 23,897 (147,243) (8,093)
(Increase) decrease in income taxes recoverable (86,520) 163,445 (13,963)
Change in receivables, accrued investment income, unearned
revenue, accrued expenses, other assets, due to and
from affiliates and other liabilities (14,175) 37,210 (51,691)
Increase in future policy benefit reserves for
traditional, interest sensitive and accident and health
policies 206,106 121,712 165,148
(Decrease) increase in other policy claims and benefits and
policyholder dividends payable (7,761) 13,360 (25,303)
Other (3,979) (1,947) 215
------------ ------------ ------------
Net cash provided by operating activities 189,941 251,800 122,814
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed maturity investments (1,997,147) (1,400,355) (1,757,391)
Sales and repayments of fixed maturity investments 1,806,737 1,729,692 1,992,838
Purchase of short-term investments (1,042,551) (1,378,825) (565,146)
Sales and repayments of short-term investments 1,018,878 1,291,366 518,870
Purchases of other investments (80,010) (222,285) (363,978)
Sales of other investments 169,310 294,350 298,927
Purchases of property and equipment (78) (131) (635)
Sales and repayments of property and equipment 1 17,321 32
Cash (paid) received pursuant to reinsurance agreement -- (27,176) 17,591
Cash paid pursuant to reinsurance agreement (6,697) (162,003) --
------------ ------------ ------------
Net cash (used in) provided by investing activities (131,557) 141,954 141,109
------------ ------------ ------------
Cash flows from financing activities:
Activities related to investment products:
Considerations received -- 43,713 226,139
Surrenders and death benefits -- (79,329) (448,349)
Interest credited to policyholders -- 7,174 32,886
Dividend (60,000) (375,000) (81,486)
Change in foreign exchange rate (428) 4,308 1,337
------------ ------------ ------------
Net cash used in financing activities (60,428) (399,134) (269,473)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (2,044) (5,380) (5,550)
Cash and cash equivalents at beginning of year 11,704 17,084 22,634
------------ ------------ ------------
Cash and cash equivalents at end of year $ 9,660 $ 11,704 $ 17,084
============ ============ ============
</Table>
The accompanying notes are an integral part of the financial statements.
6
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
<Table>
<Caption>
YEARS ENDED DECEMBER 31
2002 2001 2000
Supplemental schedule of non-cash investing activities:
Assets and liabilities transferred in reinsurance
transactions (Note 9):
Cessations of FFG in 2001 and LTC in 2000:
Non-cash assets (ceded) received:
Compensation for ceded liabilities $ -- $ (500,000) $ --
Fixed maturities -- (161,579) --
Other investments -- (196,987) --
Capital gains on assets transferred -- 582 --
Other assets -- (20,367) (157)
Deferred acquisition costs -- (441,555) (20,829)
------------ ------------ ------------
Total value of assets (ceded) received $ -- $ (1,319,906) $ (20,986)
============ ============ ============
Non-cash liabilities ceded (assumed):
Ceding commission $ -- $ 500,000 $ --
Future policy benefit reserves -- 1,049,137 15,086
Claim liabilities and dividends payable -- 14,928 7
Unearned premium reserves -- 241 7,641
Separate accounts seed money liability -- (21,387) --
Other liabilities -- 1,515 (320)
Proceeds reallocation -- 198,750 --
------------ ------------ ------------
Total liabilities ceded (assumed) $ -- $ 1,743,184 $ 22,414
============ ============ ============
Deemed dividend to parent $ -- $ (198,750) $ --
Deferred tax asset -- 69,563 --
------------ ------------ ------------
Net deemed dividend to parent $ -- $ (129,187) $ --
============ ============ ============
Assumptions of Protective DBD in 2002 and 2001:
Non-cash assets assumed:
Goodwill and intangibles (3,796) 143,204 --
Other assets 1,435 20,890 --
Federal income tax recoverable (2,044) 77,110 --
------------ ------------ ------------
Total assets assumed $ (4,405) $ 241,204 $ --
============ ============ ============
Non-cash liabilities assumed
Future policy benefit reserves $ -- $ (21,913) $ --
Unearned premium reserves -- (13,975) --
Claim liabilities and dividends payable 208 (15,068) --
Accrued expenses and other liabilities (2,500) (28,245) --
------------ ------------ ------------
Total liabilities assumed $ (2,292) $ (79,201) $ --
============ ============ ============
</Table>
The accompanying notes are an integral part of the financial statements.
7
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Fortis Benefits Insurance Company (the Company) is an indirect wholly
owned subsidiary of Fortis, Inc. (Fortis), which itself is an indirect,
wholly owned subsidiary of Fortis (SA/NV) and Fortis N.V. The Company
is incorporated in Minnesota and distributes its products in all states
except New York. The Company's revenues are derived principally from
group employee benefits products and from individual pre-need products.
Effective March 1, 2000, the Company sold through cessation long-term
care insurance business to John Hancock Life Insurance Company on a
100% co-insurance basis. (See Note 9 "Reinsurance" for more information
on this reinsurance transaction.)
Effective April 1, 2001, the Company sold through cessation certain
individual life insurance policies and annuity contracts to Hartford
Life Insurance and Annuity Company on a 100% co-insurance basis and
it's Separate Accounts business on a 100% modified co-insurance basis.
(See Note 9 "Reinsurance" for more information on this reinsurance
transaction.)
Effective July 1, 2001, the Company completed a statutory merger in
which Pierce National Life Insurance Company (PNL), a California
insurance company, merged with and into the Company (the Merger).
Immediately prior to the Merger, both the Company and PNL were indirect
wholly owned subsidiaries of Fortis, Inc., a Nevada corporation and a
holding company for certain insurance companies in the United States.
The Merger was completed as part of an internal reorganization being
effected by Fortis, Inc. with respect to certain of its life and health
insurance companies. Prior period financial statements have been
restated to reflect the merger.
On December 31, 2001, the Company purchased the Dental Benefits
Division of Protective Life Corporation. The Purchase includes group
dental, group life and group disability insurance products. The Company
reinsured these insurance products on a 100% co-insurance basis and
performs administration of such insurance products. (See Note 9
"Reinsurance" for more information on this reinsurance transaction.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146 (SFAS 146), Accounting for
Costs Associated with or Disposal Activities, which is effective for
exit or disposal activities that are initiated after December 31, 2002.
The Company currently is not engaging in any exit or disposal
activities and does not believe the impact of this new pronouncement
will be material.
8
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board issued statement
of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 addresses
financial accounting and reporting for business combinations and
requires that all business combinations initiated after June 30, 2001
be accounted for using the purchase method. See Note 3 "Identifiable
Intangibles".
SFAS 142 eliminates the amortization of goodwill and certain intangible
assets that are deemed to have indefinite lives and requires such
assets to be tested for impairment and to be written down to fair
value, if necessary. In accordance with SFAS 142, the Company no longer
amortizes goodwill but rather tests this intangible for impairment at
least on an annual basis. Upon adoption of this standard in 2002, the
Company reviewed its goodwill and determined that no impairment was
necessary. The Company's goodwill arises predominately from the
purchase of the Dental Benefits Division of Protective Life
Corporation, see Note 9 "Reinsurance".
Derivatives Implementation Group (DIG) Issue B36, Bifurcation of
Embedded Credit Derivatives, will require companies to review their
modified coinsurance agreements for embedded credit derivatives. The
Company is reviewing this issue at the current time and does not
believe it to have a material effect on its financial statements going
forward.
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 and all marketable equity securities are
classified as available-for-sale and carried at fair value.
Changes in fair values of available for sale securities, after related
deferred income taxes and after adjustment for the changes in the
pattern of amortization of deferred policy acquisition costs and
participating policyholder dividends, are reported directly in
shareholder's equity as accumulated other comprehensive income and,
accordingly, have no effect on net income. The unrealized appreciation
or depreciation is net of deferred policy acquisition cost amortization
and taxes 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. Mortgage loans
on real estate are reported at amortized cost, less allowance for
losses. The change in the allowance for losses is recorded with
realized gains and losses on investments.
Policy loans are reported at their unpaid balance. Short-term
investments are carried at cost, which approximates fair value.
Real estate and other investments consist principally of limited
partnerships and are accounted for using the equity method of
accounting.
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.
9
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
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 and pre-need life insurance
and long-term care products (included as accident and health 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. Estimation of future gross profits
requires significant management judgment and is reviewed periodically.
As excess amounts of deferred costs over future premiums or gross
profits are identified, such excess amounts are expensed.
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. Depreciation expense was $1,253, $1,243 and $4,831 for the
years ended December 31, 2002, 2001 and 2000, respectively.
INCOME TAXES
The Company reports its taxable income in a consolidated federal income
tax return along with other affiliated subsidiaries of Fortis, Inc.
(Fortis). 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.
GUARANTY FUND ASSESSMENTS
There are a number of insurance companies that are currently under
regulatory supervision. This may result in future assessments to the
Company by state guaranty fund associations to cover losses to
policyholders of insolvent or rehabilitated companies. These
assessments can be partially recovered through a reduction in future
premium taxes in some states. The Company believes it has adequately
provided for the impact of future assessments relating to current
insolvencies.
SEPARATE ACCOUNTS
Effective April 1, 2001, the Company sold through cessation its
separate accounts business to Hartford Life Insurance and Annuity
Company on a 100% modified co-insurance basis. Reinsurance ceded would
become a liability of the Company in the event the reinsurers are
unable to meet the obligations assumed under the reinsurance agreement.
(See Note 9 "Reinsurance" for more information on this reinsurance
transaction.)
Revenues and expenses related to the separate account assets and
liabilities are excluded from the amounts reported in the accompanying
statements of income.
Assets and liabilities associated with the separate accounts relate to
deposits and annuity considerations for variable life and variable
annuity products for which the contract owner, rather than the Company,
bears the investment risk. Separate account assets are reported at fair
value and represent funds held for the exclusive benefit of the
variable annuity and variable life insurance contract owners.
10
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
The Company received mortality and expense risk fees from the separate
accounts, deducted monthly cost of insurance charges, and received
minimum death benefit guarantee fees along with issue and
administrative fees from the variable life insurance separate accounts
prior to the sale.
The Company made contractual mortality assurances to the variable
annuity contract owners that the net assets of the separate accounts
will not be affected by future variations in the actual life expectancy
experience of the annuitants and beneficiaries from the mortality
assumptions implicit in the annuity contracts. The Company made
periodic fund transfers to, or withdrawals from, the separate account
assets for such actuarial adjustments for variable annuities in the
benefit payment period. The Company also guarantees that the rates at
which administrative fees are deducted from contract funds will not
exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at
which insurance charges and administrative fees are deducted from
contract funds will not exceed contractual maximums. The Company also
guarantees that the death benefit will continue to be payable at the
initial level regardless of investment performance so long as minimum
premium payments are made.
REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance and pre-need life products 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 crediting rates for
universal life and investment products ranged from 3% to 10% in 2002,
3% to 14% in 2001 and 4% to 15% in 2000.
A portion of the Company's pre-need life products provide an increasing
future benefit tied typically to the U.S. Consumer Price Index or a
targeted growth rate established at management's discretion. All
pre-need life products that have death benefit increases made at
management's discretion are accounted for as interest-sensitive life
products.
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 1987 Commissioners Group Disability Table. The valuation
interest rate is the Single Premium Immediate Annuity valuation rate
less 100 basis points. Claims in the first five years 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 there from
are reflected in income currently.
11
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income which includes unrealized gains and losses adjusted for the
impact of gains and losses realized during the current year on
securities classified as available-for-sale, net of the effect on
deferred policy acquisition costs, unrealized gains and losses on
foreign currency exchange, and taxes.
CASH AND CASH EQUIVALENTS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These
securities are carried principally at amortized cost which approximates
fair value.
RECLASSIFICATIONS
Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
INSURANCE RELATED ASSESSMENTS
The Company has received notification of the insolvency of various life
and health insurance companies. It is expected that these insolvencies
will result in guaranty fund assessments against the Company based on
premiums already written. As a result, the Company has accrued guaranty
fund liabilities of $5,200 and $3,900 at December 31, 2002 and December
31, 2001 respectively. These liabilities are generally paid within one
to two years after a company has been declared insolvent.
The Company is also required to be a member of various state health
insurance pools. It is expected that it will receive assessments from
these pools based on premiums already written. As a result, the Company
has accrued health insurance pool liabilities of $900 and $650 at
December 31, 2002 and December 31, 2001 respectively. These liabilities
are generally paid within one to two years after the premiums are
written.
3. IDENTIFIABLE INTANGIBLES
The Company applied the provisions of SFAS 141 for the purchase of the
Dental Benefits Division of Protective Life Corporation on December 31,
2001. The Company completed the final allocation of the purchase price
and recorded $28,800 of other identifiable intangible assets as
follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31
2002 2001
Other $ 2,000 $ --
Current Groups in Force:
Present Value of Customer Contracts
and Relationships 26,800 --
------------ ------------
Total 28,800 --
Less Accumulated Amortization 1,400 --
------------ ------------
Net Intangibles $ 27,400 --
============ ============
</Table>
12
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
Identifiable intangibles are amortized over 20 years using a straight
line method. During 2002, $1,400 of amortization expense was
recognized. Approximately, $1,400 of intangible assets amortization
expense will be recognized each year over the next 19 years.
4. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the available-for-sale securities:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
AT DECEMBER 31, 2002:
Fixed maturities:
Governments $ 188,467 $ 11,486 $ 13 $ 199,940
Public utilities 213,793 15,253 2,430 226,616
Industrial and miscellaneous 1,954,189 133,903 20,544 2,067,549
Other 528,221 22,365 2 550,584
------------ ------------ ------------ ------------
Total fixed maturities 2,884,670 183,007 22,989 3,044,689
Equity securities 108,002 2,617 8,405 102,214
------------ ------------ ------------ ------------
Total $ 2,992,672 $ 185,624 $ 31,394 $ 3,146,903
============ ============ ============ ============
</Table>
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
AT DECEMBER 31, 2001:
Fixed maturities:
Governments $ 216,644 $ 3,554 $ 3,583 $ 216,615
Public utilities 191,860 4,777 4,834 191,803
Industrial and miscellaneous 2,048,100 69,239 34,104 2,083,235
Other 287,554 6,701 466 293,789
------------ ------------ ------------ ------------
Total fixed maturities 2,744,158 84,271 42,987 2,785,442
Equity securities 114,049 6,012 4,713 115,348
------------ ------------ ------------ ------------
Total $ 2,858,207 $ 90,283 $ 47,700 $ 2,900,790
============ ============ ============ ============
</Table>
The amortized cost and fair value of available-for-sale investments in
fixed maturities at December 31, 2002, by contractual maturity, are
shown below.
13
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
<Table>
<Caption>
AMORTIZED FAIR
COST VALUE
Due in one year or less $ 47,087 $ 47,185
Due after one year through five years 381,407 402,914
Due after five years through ten years 858,016 906,034
Due after ten years 1,598,160 1,688,556
------------ ------------
Total $ 2,884,670 $ 3,044,689
============ ============
</Table>
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.
MORTGAGE LOANS
The Company has issued commercial mortgage loans on properties located
throughout the United States. Approximately 37% and 36% of outstanding
principal is concentrated in the states of New York, California and
Florida, at December 31, 2002 and 2001, respectively. Loan commitments
outstanding totaled $10,200 and $0 at December 31, 2002 and 2001,
respectively.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $47,125 and $64,176 at
December 31, 2002 and 2001, respectively, on deposit with various
governmental authorities as required by law.
14
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) on investments recorded in
accumulated other comprehensive income for the year ended December 31,
are set forth below:
<Table>
<Caption>
BEFORE- TAX
TAX BENEFIT NET-OF-TAX
AMOUNT (EXPENSE) AMOUNT
December 31, 2002:
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments $ 160,604 $ (55,542) $ 105,062
Reclassification for gains (losses)
realized in net income (46,717) 16,351 (30,366)
Unrealized loss due to foreign currency exchange (1,913) (1,913)
------------ ------------ ------------
Other comprehensive gain $ 111,974 $ (39,191) $ 72,783
============ ============ ============
December 31, 2001:
(Restated) Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments $ 125,473 $ (43,904) $ 81,569
Increase in amortization of deferred policy
acquisition costs (1,752) 612 (1,140)
Reclassification for gains (losses)
realized in net income (42,061) 14,694 (27,367)
Unrealized loss due to foreign currency exchange (1,485) (1,485)
------------ ------------ ------------
Other comprehensive gain $ 80,175 $ (28,598) $ 51,577
============ ============ ============
December 31, 2000:
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments $ 118,869 $ (41,145) $ 77,724
Increase in amortization of deferred policy
acquisition costs (2,314) 810 (1,504)
Reclassification for gains (losses)
realized in net income (31,198) 10,919 (20,279)
Unrealized loss due to foreign currency exchange (1,310) (1,310)
------------ ------------ ------------
Other comprehensive gain $ 84,047 $ (29,416) $ 54,631
============ ============ ============
</Table>
15
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME AND NET REALIZED (LOSSES) GAINS ON INVESTMENTS
Major categories of net investment income and realized (losses) gains
on investments for each year were as follows:
<Table>
<Caption>
2002 2001 2000
NET INVESTMENT INCOME:
Fixed maturities $ 200,458 $ 217,535 $ 240,163
Equity securities 10,364 16,967 15,842
Mortgage loans on real estate 52,392 65,524 72,278
Policy loans 575 2,156 7,114
Short-term investments 787 939 600
Real estate and other investments 1,894 9,428 2,877
------------ ------------ ------------
266,470 312,549 338,874
Expenses (7,880) (6,172) (7,494)
------------ ------------ ------------
$ 258,590 $ 306,377 $ 331,380
============ ============ ============
NET REALIZED (LOSSES) GAINS ON INVESTMENTS:
Fixed maturities $ (50,698) $ (35,594) $ (35,889)
Equity securities 3,981 (6,467) 4,691
Mortgage loans on real estate 917 7,810 --
Short-term investments -- (129) 120
Real estate and other investments (1) (57) 9,449
------------ ------------ ------------
$ (45,801) $ (34,437) $ (21,629)
============ ============ ============
</Table>
Other than temporary impairments (OTTI) are included in realized gains
and losses and consist of $39,249, $5,907 and $3,129 for fixed
maturities and $6,560, $28,529 and $18,500 for equity equities in 2002,
2001 and 2000 respectively. OTTI write-downs are recorded at the end of
each quarter based on the fair value of the security as of the
reporting date.
Proceeds from sales of investments in fixed maturities were $1,772,351,
$1,729,692 and $1,992,838 in 2002, 2001 and 2000, respectively. In
fixed maturities there were gross gains of $58,295, $47,473 and $16,692
and gross losses of $108,993, $83,067 and $52,581 of which were
realized on the sales in 2002, 2001 and 2000, respectively.
16
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
5. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as
follows:
<Table>
<Caption>
INTEREST
TRADITIONAL SENSITIVE AND
AND PRE-NEED INVESTMENT ACCIDENT
LIFE PRODUCTS AND HEALTH TOTAL
U
Balance, December 31, 1999 $ 107,679 $ 366,724 $ 18,498 $ 492,901
Acquisition costs deferred 20,866 95,284 2,983 119,133
Acquisition costs amortized (21,806) (32,854) (21,481) (76,141)
Foreign currency conversion (262) (4) -- (266)
Increased amortization of deferred
acquisition costs from unrealized gains
on available-for-sale securities -- (2,314) -- (2,314)
------------ ------------ ------------ ------------
Balance, December 31, 2000 $ 106,477 $ 426,836 $ -- $ 533,313
Acquisition costs deferred 52,413 22,580 -- 74,993
Acquisition costs amortized (51,811) (445,681) -- (497,492)
Foreign currency conversion (615) (41) -- (656)
Increased amortization of deferred
acquisition costs from unrealized gains
on available-for-sale securities -- (1,752) -- (1,752)
------------ ------------ ------------ ------------
Balance, December 31, 2001 106,464 1,942 -- 108,406
Acquisition costs deferred 53,474 9,260 381 63,115
Acquisition costs amortized (45,870) (1,923) -- (47,793)
Foreign currency conversion 61 24 -- 85
------------ ------------ ------------ ------------
Balance, December 31, 2002 $ 114,129 $ 9,303 $ 381 $ 123,813
============ ============ ============ ============
</Table>
Included in total policy acquisition costs amortized in 2001 are
$441,555 of acquisition costs and $8,013 of present value of future
profits resulting from the reinsurance cession agreement on certain
individual life insurance policies and annuity contracts with Hartford
Life Insurance Company, which became effective April 1, 2001. See Note
9 "Reinsurance" for more information on the reinsurance transaction.
17
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year
follows:
<Table>
<Caption>
2002 2001
Leasehold improvements $ 2,106 $ 2,106
Furniture and equipment 38,670 49,878
------------ ------------
40,776 51,984
Less accumulated depreciation (36,980) (47,012)
------------ ------------
Net property and equipment $ 3,796 $ 4,972
============ ============
</Table>
During 2001, land, building and furniture and equipment with book
values of $1,900, $15,307, and $1,605, respectively, were sold to
Hartford Life and Annuity Insurance Company for $20,791.
7. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims is
summarized as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31
2002 2001 2000
Balance as of January 1, net of reinsurance
recoverables $ 1,247,580 $ 1,154,773 $ 1,140,084
Add: Incurred losses related to:
Current year 873,404 822,695 753,173
Prior years (9,843) (36,591) (25,859)
------------ ------------ ------------
Total incurred losses 863,561 786,104 727,314
Deduct: Paid losses related to:
Current year 508,427 434,095 428,725
Prior years 302,984 259,202 283,900
------------ ------------ ------------
Total paid losses 811,411 693,297 712,625
------------ ------------ ------------
Balance as of December 31, net of
reinsurance recoverables $ 1,299,730 $ 1,247,580 $ 1,154,773
============ ============ ============
</Table>
18
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
The table above differs from 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; and (2) the table above
includes accident and health benefits payable which are included with
other policy claims and benefits payable reported on the balance sheet.
Included in incurred losses presented above related to 2001 is $12,178
of reserves assumed resulting from the Dental Benefits Division of
Protective Life Corporation reinsurance agreement which became
effective December 31, 2001. See Note 9 "Reinsurance" for more
information on this reinsurance transaction.
Excluded from incurred losses presented above related to 2000 is
$22,734 of reserves ceded resulting from the long-term care reinsurance
agreement with John Hancock Life Insurance Company, which became
effective March 1, 2000. See Note 9 "Reinsurance" for more information
on this reinsurance transaction.
In 2002, 2001 and 2000 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 a reduction of loss reserves due to ongoing
analysis of recent loss development trends.
The liability for unpaid accident and health claims includes
$1,250,267, $1,109,112 and $1,042,180 of total disability income
reserves as of December 31, 2002, 2001 and 2000 respectively, which
were discounted for anticipated interest earnings using a rate which
varies by incurral year.
19
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
8. FEDERAL INCOME TAXES
The significant components of the Company's deferred tax liabilities
and assets as of December 31, 2002 and 2001 are as follows:
<Table>
<Caption>
2002 2001
Deferred tax assets:
Deferred gain on reinsurance $ 107,859 $ 129,427
Separate account assets/liabilities -- 8,418
Reserves 25,892 24,356
Deferred policy acquisition costs 20,327 23,427
Claims and benefits payable 7,936 7,706
Accrued liabilities 10,870 8,229
Capital loss Carryforward 12,011 --
Unrealized losses 3,686 --
Investments 3,560 4,515
Other 4,799 6,508
------------ ------------
Total deferred tax assets 196,940 212,586
Deferred tax liabilities:
Unrealized gains 56,384 16,523
Fixed assets 1,258 1,075
Investments 2,571 1,966
Intangible Assets 11,410 --
------------ ------------
Total deferred tax liabilities 71,623 19,564
------------ ------------
Net deferred tax asset $ 125,317 $ 193,022
============ ============
</Table>
As of December 31, 2002, the Company had a balance of $12,145 in its
Policyholder Surplus Account under the provisions of the Internal
Revenue Code. This amount could become taxable to the extent that
certain future events occur.
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.
20
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
The Company's tax expense (benefit) for the year ended December 31 is
shown as follows:
<Table>
<Caption>
2002 2001 2000
Current $ 20,805 $ 84,696 $ 52,981
Deferred 23,420 (29,222) (8,161)
------------ ------------ ------------
$ 44,225 $ 55,474 $ 44,820
============ ============ ============
</Table>
Federal income tax payments and refunds resulted in net payments of
$112,164, $8,684 and $67,384 in 2002, 2001 and 2000, respectively.
The Company's effective income tax rate varied from the statutory
federal income tax rate as follows:
<Table>
<Caption>
2002 2001 2000
Statutory income tax rate 35.0% 35.0% 35.0%
Other (4.5) (0.9) (2.1)
------------ ------------ ------------
30.5% 34.1% 32.9%
============ ============ ============
</Table>
In 2002, the Company's effective tax rate varied from the statutory
federal income tax rate primarily due to an IRS audit settlement
adjustment.
At December 31, 2002, the Company has a capital loss carryforward of
$33,485. All net operating loss and alternative minimum tax credit
carryforwards have been fully utilized.
9. REINSURANCE
In the 1996, First Fortis Life Insurance Company (First Fortis), an
affiliate, received approval from the New York State Insurance
Department for a reinsurance agreement with the Company. The agreement,
which became effective as of January 1, 1996, decreased First Fortis'
long-term disability reinsurance retention from a $10 net monthly
benefit to a $2 net monthly benefit for claims incurred on and after
January 1, 1996. The Company has assumed $6,705, $6,622 and $6,884 of
premium from First Fortis in 2002, 2001 and 2000, respectively. The
Company has assumed $21,905 and $17,480 of reserves in 2002 and 2001,
respectively, from First Fortis.
In the 1999, United Family Life Insurance Company (UFL), an affiliate,
received approval from the state of Georgia for a reinsurance agreement
with the Company. The agreement, which became effective October 1,
1999, provided for the cession of substantially all of UFL's pre-need
life insurance business on a 100% co-insurance basis. The Company
assumed approximately $690,806 of reserves and received approximately
$654,924 of cash, investments (primarily fixed maturities and
mortgages) and other assets as of October 1, 1999. The $35,882 ceding
commission was capitalized as an acquisition cost. The Company has
assumed premium from UFL of $25,048 in 2002 and $35,919 in 2001 and
$63,069 in 2000. The Company has assumed $665,081 and $696,961 of
reserves in 2002 and 2001, respectively, from UFL.
In 2000, the Company entered into a reinsurance agreement with John
Hancock Life Insurance Company (John Hancock) for the sale of the
Long-Term Care (LTC) line of business. The sale of
21
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
the LTC line of business was effective March 1, 2000. The Company
recorded a gain on this transaction of $19,019. The gain has been
deferred and is being amortized as the level of direct inforce LTC
policies decreases over future years, not to exceed 30 years. The
amount of gain amortized was $1,959, $2,581 and $3,100 in 2002, 2001
and 2000, respectively. The Company ceded $81,712, $69,719 and $32,222
of premiums in 2002, 2001 and 2000, respectively. The Company ceded
$133,173 and $62,637 of reserves to John Hancock in 2002 and 2001,
respectively.
In 2001, the Company entered into a reinsurance agreement with Hartford
Life Insurance and Annuity Company (Hartford) for the sale (Sale) of
its Fortis Financial Group division (the Division). The Division
includes, among other blocks of business, certain individual life
insurance policies and annuity contracts (collectively, the Insurance
Contracts) written by the Company. Certain of the Insurance Contracts
permit investment in, among other investment options, various series of
the Fortis Series Fund.
To effect the Sale as it relates to the Company, The Hartford reinsured
the Insurance Contracts on a 100% coinsurance basis (or 100% modified
coinsurance basis for the Separate Accounts block) and agreed to
administer the Insurance Contracts going forward. The Company received
in connection with the Sale aggregate cash consideration of
approximately $500 million from The Hartford. The reinsurance
transaction resulted in a gain of $396,102 which was deferred and is
being amortized into income at the rate that earnings from the business
sold would have expected to emerge. The amount of gain amortized in
2002 and 2001 was $58,227 and $47,928 respectively.
In 2001, the Company entered into a reinsurance agreement with
Protective Life Corporation (Protective). The agreement, which became
effective December 31, 2001, provided for the assumption of
Protective's Dental Benefits Division on a 100% co-insurance basis. The
Company assumed approximately $75,000 of reserves, $244,000 of assets
including $147,000 of goodwill and intangibles, and paid cash of
approximately $169,000. During 2002, the Company finalized its
purchase price allocation and allocated $28,800 to intangible assets
(see Note 3), net of deferred income taxes of $10,060.
The maximum amount that the Company retains on any one life is $800 of
life insurance including accidental death. Amounts in excess of $800
are reinsured with other life insurance companies on a yearly renewable
term basis.
<Table>
<Caption>
2002 2001 2000
Life insurance $ 307,360 $ 435,917 $ 17,048
Accident and health insurance 101,426 76,132 48,427
------------ ------------ ------------
$ 408,786 $ 512,049 $ 65,475
============ ============ ============
</Table>
Ceded reinsurance premiums for the year ended December 31 were as
follows:
<Table>
<Caption>
2002 2001 2000
Life insurance $ 56,229 $ 52,548 $ 6,686
Accident and health insurance 11,701 7,420 8,535
------------ ------------ ------------
$ 67,930 $ 59,968 $ 15,221
============ ============ ============
</Table>
Recoveries under reinsurance contracts for the year ended December 31
were as follows:
22
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
Reinsurance ceded would become a liability of the Company in the event
the reinsurers are unable to meet the obligations assumed under the
reinsurance agreement. 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.
10. DIVIDEND RESTRICTIONS
Dividend distributions to the parent are restricted as to the amount by
state regulatory requirements. A dividend is extraordinary when
combined with all other dividends and distributions made with in the
preceding 12 months exceeds the greater of 10% of the insurers surplus
as regards to policy holders on December 31 of the next preceding year,
or the net gain from operations. In 2002 the Company declared dividends
of $60,000, all of which were ordinary. In 2001, the Company declared
dividends of $300,000, all of which was extraordinary. Approval was
sought and received from the Minnesota Department of Commerce for the
distribution of the extraordinary dividends in 2001. The Company paid
$375,000 during 2001, $75,000 of which was declared in 2000. The
Company paid $60,000 during 2002.
11. REGULATORY ACCOUNTING REQUIREMENTS
Statutory-basis financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Minnesota
Department of Commerce. 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 from state to state, may differ from company to company
within a state, and may change in the future. The Company does not
employ any significant permitted practices.
In 1998, the NAIC adopted codified statutory accounting practices
(Codification) effective January 1, 2001. Codification changed, to some
extent, prescribed statutory accounting practices and resulted in
changes to the accounting practices that the Company uses to prepare
its statutory-basis financial statements. Codification required
adoption by the various states before it became the prescribed
statutory basis of accounting for insurance companies domesticated
within those states. Minnesota adopted Codification effective January
1, 2001. The cumulative effect of all changes resulting from the
Codification guidance was recorded as a direct adjustment to statutory
surplus on January 1, 2001. The effect of the adoption was an increase
to statutory surplus of $33,501 due primarily to deferred taxes.
Insurance enterprises are required by State Insurance Departments to
adhere to minimum risk-based capital (RBC) requirements developed by
the NAIC. The Company exceeds the minimum RBC requirements.
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:
23
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
<Table>
<Caption>
NET INCOME SHAREHOLDER'S EQUITY
--------------------------------------------- -----------------------------
2002 2001 2000 2002 2001
Based on statutory accounting
practices $ 111,378 $ (48,149) $ 99,806 $ 503,324 $ 485,031
Deferred policy acquisition costs 15,321 19,057 63,821 123,814 108,406
Investment valuation differences (4,058) (3,892) (3,456) 150,916 49,062
Deferred and uncollected premiums (846) 2,684 449 (13,078) (12,934)
Policy reserves (4,628) (2,744) (13,383) 45,922 52,593
Commissions 1,755 6,722 (45,485) -- 5
Current income taxes payable (2,044) (60,568) 2,616 1,384 1,384
Deferred income taxes (23,420) 29,221 8,162 87,841 162,081
Realized gains on investments (1,794) 3,444 (4,958) -- --
Realized gains (losses) transferred
to the Interest Maintenance
Reserve (IMR), net of tax (8,201) 6,011 (17,376) -- --
Amortization of IMR, net of tax 2,260 672 (5,352) -- --
Write-off of investment (6,507) (5,907) (3,129) -- --
Pension expense 5,447 3,745 (2,145) (810) (6,256)
Goodwill and intangibles (1,400) (1,535) (1,551) 188,605 174,492
Property and equipment -- (1,255) -- 2,062 2,532
Interest maintenance reserve -- -- -- 8,682 14,621
Asset valuation reserve -- -- -- 35,464 55,616
Ceded reinsurance agreement 9,503 8,998 -- (308,167) (361,513)
Assumed reinsurance agreement 6,697 147,429 -- -- --
Other, net 1,185 3,426 14,591 8,267 (4,325)
------------ ------------ ------------ ------------ ------------
Based on generally accepted
accounting principles $ 100,648 $ 107,359 $ 92,610 $ 834,226 $ 720,795
============ ============ ============ ============ ============
</Table>
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis and its affiliates.
These services include assistance in benefit plan administration,
corporate insurance, accounting, tax, auditing, investment, information
technology and other administrative functions. The fees paid to Fortis,
Inc. for these services for years ended December 31, 2002, 2001 and
2000, were $15,406, $9,332 and $11,174, respectively. Information
technology expenses were $8,711, $10,436 and $47,123 for years ended
December 31, 2002, 2001 and 2000, respectively.
In conjunction with the marketing of its fixed and variable annuity and
variable life products, the Company paid $0, $19,313 and $93,107 in
commissions to its affiliate, Fortis Investors, Inc., for the years
ended December 31, 2002, 2001 and 2000, respectively.
Administrative expenses allocated for the Company may be greater or
less than the expenses that would be incurred if the Company were
operating on a separate company basis.
24
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
13. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
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. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations. The carrying amount of policy loans
reported in the balance sheet approximates fair value. For short-term
investments, the carrying amount is a reasonable estimate of fair
value. The fair values for the Company's policy reserves under the
investment products are determined using cash surrender value. Separate
account assets and liabilities are reported at their estimated fair
values in the balance sheet.
The fair value of group annuities is primarily based upon termination
value, which is calculated by applying contractual market value
adjustments to the account balances. For those contracts not subject to
market value adjustments at termination, book value represents fair
value. For fair value of individual annuities is based primarily on
surrender values. For those individual annuities that are not
surrenderable, discounted future cash flows are used for calculating
fair value.
Separate account assets and liabilities are reported at their estimated
fair value in the balance sheet.
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.
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Assets:
Investments:
Securities available-for-sale:
Fixed maturities $ 3,044,689 $ 3,044,689 $ 2,785,442 $ 2,791,350
Equity securities 102,214 102,214 115,348 115,348
Mortgage loans on real estate 578,517 656,268 655,211 690,026
Policy loans 10,301 10,301 9,935 9,935
Short-term investments 282,383 282,383 258,790 258,790
Assets held in separate accounts 3,126,978 3,126,978 4,372,559 4,372,559
Liabilities:
Individual and group annuities
(subject to discretionary
withdrawal) 436,123 430,199 286,367 276,900
Liabilities related to separate
accounts 3,126,978 3,126,978 4,372,559 4,372,559
</Table>
25
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
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 is an indirect wholly-owned subsidiary of Fortis, which
sponsors a defined benefit pension plan covering employees and certain
agents who meet eligibility requirements as to age and length of
service. The benefits are based on years of service and career
compensation. Fortis Inc.'s funding policy is to contribute annually
the maximum amount that can be deducted for federal income tax
purposes, and to charge each subsidiary an allocable amount based on
its employee census. Pension cost allocated to the Company amounted to
approximately $3,640, $4,114 and $2,097 for 2002, 2001 and 2000,
respectively.
The Company participates in a contributory profit sharing plan,
sponsored by Fortis, covering employees and certain agents who meet
eligibility requirements as to age and length of service. Benefits are
payable to participants on retirement or disability and to the
beneficiaries of participants in the event of death. For employees
hired on or before December 31, 2000, the first 3% of an employee's
contribution is matched 200% by the Company. The second 2% is matched
50% by the Company. For employees hired after December 31, 2000, the
first 3% of an employee's contribution is matched 100% by the Company.
The second 2% is matched 50% by the Company. The amount expensed was
approximately $5,344, $5,216 and $4,573 for 2002, 2001 and 2000,
respectively.
In addition to retirement benefits, the Company participates in other
health care and life insurance benefit plans (postretirement benefits)
for retired employees, sponsored by Fortis. Health care benefits,
either through a Fortis sponsored retiree plan for retirees under age
65 or through a cost offset for individually purchased Medigap policies
for retirees over age 65, are available to employees who retire on or
after January 1, 1993, at age 55 or older, with 10 years or more
service. Life insurance, on a retiree pay all basis, is available to
those who retire on or after January 1, 1993.
There were no net postretirement benefit costs allocated to the Company
for the years ended December 31, 2002, 2001 and 2000. The Company made
contributions to the postretirement benefit plans of approximately
$2,275, $1,049 and $0 in 2002, 2001 and 2000, respectively, as claims
were incurred. During 2002, 2001 and 2000 the Company incurred expenses
related to retirement benefits of $1,223, $1,369 and $48, respectively.
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