SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-46620
FORTIS BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
81-0170040
(IRS Identification No.)
576 BIELENBERG DRIVE, WOODBURY, MN 55125
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 651-361-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ASSETS JUNE 30, DECEMBER 31,
2003 2002
-------------------------
(UNAUDITED)
Investments:
Fixed maturities, at fair value (amortized cost 2003 - $3,112,054;
2002 - $2,884,670 $3,428,194 $3,044,689
Equity securities, at fair value (cost 2003 - $192,902;
2002 - $108,002) 203,190 102,214
Mortgage loans on real estate, less allowance for possible losses
(2003-- $13,275, 2002--$13,228) 592,780 578,517
Policy loans 10,466 10,301
Short-term investments 138,731 282,383
Real estate and other investments 63,793 62,248
---------- ----------
4,437,154 4,080,352
Cash and cash equivalents 14,086 9,660
Receivables:
Uncollected premiums 61,088 62,480
Reinsurance recoverable on unpaid and paid losses 1,166,191 1,151,186
Other 23,944 16,183
---------- ----------
1,251,223 1,229,849
Accrued investment income 48,656 45,584
Deferred policy acquisition costs 134,092 123,813
Property and equipment at cost, less accumulated depreciation 3,191 3,796
Federal income tax recoverable - 8,258
Deferred federal income taxes 47,342 125,317
Other assets 6,135 7,746
Identifiable intangible assets, less accumulated amortization (2003 - $2,102; 26,698 27,400
2002 - $1,400)
Goodwill 158,145 156,006
Assets held in separate accounts 3,256,988 3,126,978
---------- ----------
Total assets $9,383,710 $8,944,759
========== ==========
The accompanying notes are an integral part of the financial statements.
2
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
POLICY RESERVES AND LIABILITIES AND SHAREHOLDER'S EQUITY 2003 2002
--------------------------
(UNAUDITED)
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional and pre-need life insurance $1,938,999 $1,881,137
Interest sensitive and investment products 1,045,266 1,020,724
Accident and health 1,309,485 1,264,565
---------- ----------
4,293,750 4,166,426
Unearned revenues 48,097 50,145
Other policy claims and benefits payable 257,834 257,880
Policyholder dividends payable 1,875 1,876
---------- ----------
4,601,556 4,476,327
Accrued expenses 85,836 96,099
Other liabilities 141,967 99,120
Deferred gain on reinsurance ceded 281,558 308,167
Due to affiliates 4,006 3,842
Current income tax payable 5,383 -
Liabilities related to separate accounts 3,256,988 3,126,978
---------- ----------
Total policy reserves and liabilities 8,377,294 8,110,533
---------- ----------
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 267,842 211,459
Accumulated other comprehensive income 217,004 101,197
---------- ----------
Total shareholder's equity 1,006,416 834,226
---------- ----------
Total policy reserves and liabilities and shareholder's equity $9,383,710 $8,944,759
========== ==========
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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SIX MONTHS ENDED JUNE 30,
2003 2002
-------------------------
Revenues: (UNAUDITED) (UNAUDITED)
Insurance operations:
Traditional and pre-need life insurance premiums $ 246,423 $ 257,818
Interest sensitive and investment product
policy charges 1,324 1,412
Accident and health insurance premiums 597,201 587,321
---------- ----------
844,948 846,551
Net investment income 127,518 129,582
Net realized gains (losses) on investments 2,045 (22,310)
Amortization of gain on reinsured business 26,609 30,880
Other income 5,890 5,383
---------- ----------
Total revenues 1,007,010 990,086
Benefits and expenses:
Benefits to policyholders:
Traditional and pre-need life insurance 227,375 223,811
Interest sensitive investment products 909 3,311
Accident and health claims 427,371 437,091
---------- ----------
655,655 664,213
Policyholder dividends - (405)
Amortization of deferred policy acquisition costs 23,276 21,825
Insurance commissions 84,011 85,720
General and administrative expenses 157,475 157,453
---------- ----------
Total benefits and expenses 920,417 928,806
---------- ----------
Income before income taxes 86,593 61,280
Federal income taxes 30,210 19,423
---------- ----------
Net income $ 56,383 $ 41,857
========== ==========
Other comprehensive income (loss):
Unrealized gain (loss) on investments 115,807 (22,416)
---------- ----------
Comprehensive income $ 172,190 $ 19,441
========== ==========
The accompanying notes are an integral part of the financial statements.
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FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
2003 2002
---------------------------
Revenues: (UNAUDITED) (UNAUDITED)
Insurance operations:
Traditional and pre-need life insurance premiums $ 123,647 $ 129,359
Interest sensitive and investment product
policy charges 883 764
Accident and health insurance premiums 289,371 297,595
--------- ---------
413,901 427,718
Net investment income 65,419 63,564
Net realized gains (losses) on investments 6,602 (22,764)
Amortization of gain on reinsured business 11,306 15,402
Other income 3,003 2,433
--------- ---------
Total revenues 500,231 486,353
Benefits and expenses:
Benefits to policyholders:
Traditional and pre-need life insurance 110,657 106,752
Interest sensitive investment products 522 1,419
Accident and health claims 201,061 215,398
--------- ---------
312,240 323,569
Policyholder dividends - (474)
Amortization of deferred policy acquisition costs 10,351 11,615
Insurance commissions 44,210 50,887
General and administrative expenses 74,899 76,528
--------- ---------
Total benefits and expenses 441,700 462,125
--------- ---------
Income before income taxes 58,531 24,228
Federal income taxes 20,448 7,555
--------- ---------
Net income $ 38,083 $ 16,673
========= =========
Other comprehensive income:
Unrealized gain on investments 83,136 20,775
--------- ---------
Comprehensive income $ 121,219 $ 37,448
========= =========
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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SIX MONTHS ENDED JUNE 30,
2003 2002
----------------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 56,383 $ 41,857
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation 605 668
Amortization of gain on reinsured business (26,609) (30,880)
Amortization of investment premiums, net (735) 489
Net realized (gains) losses on sold investments (2,045) 22,310
Policy acquisition costs deferred (28,908) (28,948)
Amortization of deferred policy acquisition costs 23,276 21,825
Provision for deferred federal income taxes 18,567 20,224
Decrease (increase) in income taxes recoverable 13,897 (79,592)
Change in receivables, accrued investment income, unearned
premiums, accrued expenses, other assets, due to and
from affiliates and other liabilities 6,453 (109,120)
Increase in future policy benefit reserves for traditional,
interest sensitive and accident and health policies 102,259 111,306
Decrease in other policy claims and benefits and
policyholder dividends payable (106) (15,727)
----------- -----------
Net cash provided by (used in) operating activities 163,037 (45,588)
----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity investments (725,257) (1,176,087)
Sales and repayments of fixed maturity investments 517,591 994,302
Purchases of short-term investments (1,159,211) -
Sales and repayments of short-term investments 1,302,881 256,281
Purchases of other investments (150,211) (136,942)
Sales of other investments 55,147 96,849
Purchases of property and equipment - (33)
----------- -----------
Net cash (used in) provided by investing activities (159,060) 34,370
----------- -----------
Cash flows from financing activities:
Change in foreign exchange rate 449 664
----------- -----------
Net cash (used in) provided by financing activities 449 664
----------- -----------
Increase (decrease) in cash and cash equivalents 4,426 (10,554)
----------- -----------
Cash and cash equivalents at beginning of year 9,660 11,704
----------- -----------
Cash and cash equivalents at end of year $ 14,086 $ 1,150
=========== ===========
The accompanying notes are an integral part of the financial statements.
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FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2003 (In thousands)
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1. GENERAL
The accompanying unaudited financial statements of Fortis Benefits
Insurance Company contain all adjustments necessary to present fairly
the balance sheet as of June 30, 2003 and the related statement of
income for the six months ended June 30, 2003 and 2002, and cash flows
for the six months ended June 30, 2003 and 2002.
Income tax receipts (payments) were $2,375 and $(78,658) for the six
months ended June 30, 2003 and 2002, respectively.
2. FIXED MATURITY AND EQUITY INVESTMENTS
At June 30, 2003, all fixed maturity and equity securities are
classified as available-for-sale and carried at fair value.
The amortized cost and fair values of investments available-for sale
were as follows at June 30, 2003:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Fixed maturities:
Governments $ 164,986 $ 14,007 $ 2 $ 178,991
Public utilities 217,136 26,865 195 243,806
Industrial and miscellaneous 2,162,205 252,508 3,160 2,411,553
Other 567,727 26,356 239 593,844
---------- ---------- ---------- ----------
Total fixed maturities 3,112,054 319,736 3,596 3,428,194
Equity securities 192,902 10,392 104 203,190
---------- ---------- ---------- ----------
Total $3,304,956 $ 330,128 $ 3,700 $3,631,384
========== ========== ========== ==========
The amortized cost and fair value in fixed maturities at June 30, 2003,
by contractual maturity, are shown below. 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.
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FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
June 30, 2003 (In thousands)
- --------------------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
Due in one year or less $ 32,806 $ 35,430
Due after one year through five years 399,006 433,971
Due after five years through ten years 1,085,467 1,185,892
Due after ten years 1,594,775 1,772,901
---------- ----------
Total $3,112,054 $3,428,194
========== ==========
Proceeds from sales of investments in fixed maturities in the six-month
period ended June 30, 2003 and June 30, 2002 were $517,591 and $994,302
respectively. Gross gains of $13,341 and $19,813 and gross losses of
$11,017 and $45,328 were realized on sales during the six month periods
ended June 30, 2003 and 2002, respectively.
Mortgage Loans The Company has issued commercial mortgage loans on
properties located throughout the United States. Approximately 36.4% of
outstanding principal is concentrated in the states of New York,
California and Florida, at June 30, 2003. The Company has a diversified
loan portfolio with a small average size, which greatly reduces any
loss exposure. The Company has established a reserve for mortgage
loans.
Net Investment Income and Net Realized Gains (Losses) on Investments:
Major categories of net investment income and realized gains (losses)
on investments for the first six months of each year were as follows:
REALIZED GAIN (LOSS)
INVESTMENT INCOME ON INVESTMENTS
2003 2002 2003 2002
Fixed maturities $ 97,003 $ 101,978 $ 2,324 $ (25,515)
Preferred stocks 5,168 2,997 (87) (47)
Common stocks 42 2,301 (210) 2,401
Mortgage loans on real estate 24,418 26,421 - 918
Policy loans 273 276 - -
Short-term investments 1,088 107 18 (67)
Real estate and other investments 3,612 (564) - -
--------- --------- --------- ---------
131,604 133,516 $ 2,045 $ (22,310)
========= =========
Expenses (4,086) (3,934)
--------- ---------
$ 127,518 $ 129,582
========= =========
Other than temporary impairments (OTTI) are included in realized gain
and losses and consist of $7,876 and $0 for fixed maturities in 2003
and 2002, 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.
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FORTIS BENEFITS INSURANCE COMPANY
JUNE 30, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
JUNE 30, 2003 COMPARED TO JUNE 30, 2002
REVENUES
Fortis Benefits Insurance Company (the "Company") distributes its products
through a network of independent agents, brokers and financial institutions. The
Company's major products offered are group dental, group disability, group life,
group medical, pre-need annuity and life and accidental death coverages. The
Company's accident and health insurance business consists of group dental, group
disability, group medical and accidental death products.
The Company's increase in accident and health premium is due to a combination of
product line increases and decreases. The Company's disability premium increased
at six months ended June 30, 2003 over six months ended June 30, 2002 due to
additional reinsurance contracts assumed by the company. This disability premium
increase was offset slightly by lower disability sales production as a result of
stricter pricing discipline. Accidental death premium in the accident and health
line increased as a result of increases in new business sales. Group medical
premiums decreased due to higher lapse rates. Dental premiums decreased due to
lower sales production and persistency.
The group life products experienced lower sales and lower persistency during the
first half of 2003, reflecting lower life premium levels when compared to the
first half of 2002.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Net investment income decreased from $130
million during the six months ended June 30, 2002 to $128 million during the six
months ended June 30, 2003 due to lower yielding investment markets. Changes in
interest rates during the first half of 2002 and 2003 resulted in recognition of
realized gains and losses upon sales of securities. The Company had less capital
losses from fixed maturity investments in 2003 as compared to 2002.
BENEFITS
The total year-to-date policyholder benefit to premium ratio decreased from
78.5% to 77.6% for the six months ended June 30, 2002 to June 30, 2003,
respectively. The group dental, group disability, group life, group medical,
pre-need and accidental death benefit to premium ratios for the six months ended
June 30, were 71%, 82%, 79%, 67%, 106% and 33% respectively in 2003 and 73%,
87%, 76%, 66%, 101% and 50% respectively in 2002. The decrease in the dental
loss ratio was due to favorable claim experience. The decrease in the disability
loss ratio is attributable to lower incidence rates and favorable development on
existing claims. The increase in the pre-need loss ratio is due to a shift from
limited pay to single pay policies, resulting in higher first year reserves.
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FORTIS BENEFITS INSURANCE COMPANY
JUNE 30, 2003
EXPENSES
Commission rates have decreased from levels in 2002. This is primarily due to
changes in the mix of business by product lines as well as the change in first
year versus renewal premiums.
The Company's general and administrative expense to premium ratio remained flat
at 19% at the end of the first half of 2003 and 2002. The Company continues to
monitor expenses, striving to improve the expense to premium ratio, while
maintaining quality and timely services to policyholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
MARKET RISK AND RISK MANAGEMENT
Interest rate risk is the Company's primary market risk exposure. Substantial
and sustained increases and decreases in market interest rates can affect the
profitability of insurance products and market value of investments. The yield
realized on new investments generally increases or decreases in direct
relationship with interest rate changes. The market value of the Company's fixed
maturity and mortgage loan portfolios generally increases when interest rates
decrease and decreases when interest rates increase.
Interest rate risk is monitored and controlled through asset/liability
management. As part of the risk management process, different economic scenarios
are modeled, including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet projected
liability cash flows. A major component of the Company's asset/liability
management program is structuring the investment portfolio with cash flow
characteristics consistent with the cash flow characteristics of the Company's
insurance liabilities. The Company uses computer models to perform simulations
of the cash flow generated from existing insurance policies under various
interest rate scenarios. Information from these models is used in the
determination of interest crediting strategies and investment strategies. The
asset/liability management discipline includes strategies to minimize exposure
to loss as market interest rates change. On the basis of these analyses,
management believes there is no material solvency risk to the Company with
respect to interest rate movements up or down of 100 basis points from year-end
levels.
Equity market risk exposure is not significant. Equity investments in the
general account are not material enough to threaten solvency and contract owners
bear the investment risk related to the variable products. Therefore, the risks
associated with the investments supporting the variable separate accounts are
assumed by contract owners, not by the Company. The Company provides certain
minimum death benefits that depend on the performance of the variable separate
accounts. Currently the majority of these death benefit risks are reinsured
which then protects the Company from adverse mortality experience and prolonged
capital market decline.
Subsequent to June 2003, the Company purchased a derivative investment. The
investment is not material, and as such, will have no adverse impact on
financial position.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds provided from
operations, including investment income. Funds are principally used to provide
for policy benefits, operating
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FORTIS BENEFITS INSURANCE COMPANY
JUNE 30, 2003
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 National Association of Insurance Commissioners 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 calculations using
these risk-based capital standards, the Company's percentage of total adjusted
capital is in excess of ratios, which would require regulatory attention.
The Company's fixed maturity investments consisted of 93% investment grade bonds
as of June 30, 2003 and the Company does not expect this percentage to change
significantly in the future.
REGULATION
The Company is subject to the laws and regulations established by the Minnesota
State Insurance Department governing insurance business conducted in Minnesota
State. Periodic audits are conducted by the Minnesota Insurance Department
related to the Company's compliance with these laws and regulations. To date,
there have been no adverse findings regarding the Company's operations.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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FORTIS BENEFITS INSURANCE COMPANY
JUNE 30, 2003
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. 302 Certification of Chief Executive Officer (Exhibit 31.1)
302 Certification of Chief Executive Officer (Exhibit 31.2)
906 Certification of Chief Executive Officer (Exhibit 32.1)
906 Certification of Chief Executive Officer (Exhibit 32.2)
b. None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.
Fortis Benefits Insurance Company
(Registrant)
/s/ Larry Cains
- -----------------------------
Larry Cains
Controller and Treasurer
Date: August 12, 2003
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