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 September 30, 2001
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
----- -----
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------------------
(UNAUDITED) (restated)
ASSETS
Investments:
Fixed maturities, at fair value
(amortized Cost 2001--$2,861,119; 2000--$3,258,446) $ 2,913,606 $ 3,236,446
Equity securities, at fair value
(cost 2001--$149,163 2000--$91,164) 140,555 88,014
Mortgage loans on real estate, less allowance for
possible losses (2001 and 2000--$11,085) 668,815 856,213
Policy loans 9,898 111,594
Short-term investments 534,255 171,351
Real estate and other investments 37,783 41,712
--------------------------
4,304,912 4,505,330
Cash and cash equivalents 92,270 17,084
Receivables:
Uncollected premiums 63,757 68,182
Reinsurance recoverable on unpaid and paid losses 1,123,855 105,097
Other 13,281 53,096
--------------------------
1,200,893 226,375
Accrued investment income 55,843 63,330
Deferred policy acquisition costs 106,752 533,313
Property and equipment at cost, less accumulated
depreciation 1,809 20,893
Federal income tax recoverable -- 6,029
Deferred federal income taxes 201,282 45,779
Other assets 3,074 3,543
Due from affiliates 24,313 --
Goodwill, less accumulated amortization
(2001--$5,348; 2000--$4,195) 25,211 26,690
Assets held in separate accounts 3,989,024 5,184,083
--------------------------
Total assets $10,005,383 $10,632,449
==========================
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share amounts)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-----------------------------
(UNAUDITED) (restated)
POLICY RESERVES, LIABILITIES AND SHAREHOLDERS' EQUITY
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional life insurance $ 1,761,361 $ 1,854,095
Interest sensitive and investment products 1,080,982 1,027,079
Accident and health 1,083,976 1,007,789
-----------------------------
3,926,319 3,888,963
Unearned revenues 35,733 35,132
Other policy claims and benefits payable 236,473 244,755
Policyholder dividends payable 2,027 9,470
-----------------------------
4,200,552 4,178,320
Accrued expense 76,224 76,041
Current income taxes payable 160,906 --
Dividends declared and payable 300,000 75,000
Other liabilities 189,002 128,965
Deferred gain on LTC sale 13,922 15,919
Deferred gain on FFG sale 363,400 --
Due to affiliates -- 7,883
Liabilities related to separate accounts 3,989,024 5,159,275
-----------------------------
Total policy reserves and liabilities 9,293,030 9,641,403
Shareholder's equity:
Common stock, $5 par value:
Authorized, issued and outstanding shares - 1,000,000 5,000 5,000
Additional paid-in capital 516,640 645,757
Retained earnings 165,512 364,783
Unrealized gain (loss) on available-for-sale
Securities (net of deferred taxes 2001--
$14,996; 2000--$(12,596)) 27,850 (23,394)
Unrealized gain on assets held in separate
Accounts (net of deferred taxes 2000--$113) -- 210
Unrealized loss due to foreign currency exchange (2,649) (1,310)
-----------------------------
Total shareholder's equity 712,353 991,046
-----------------------------
Total policy reserves, liabilities and shareholder's equity $ 10,005,383 $ 10,632,449
=============================
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
---------------------------
(restated)
REVENUES
Insurance operations:
Traditional life insurance premiums $ 376,069 $ 369,734
Interest sensitive and investment product
policy charges 46,371 120,613
Accident and health insurance premiums 750,082 712,977
---------------------------
1,172,522 1,203,324
Net investment income 228,140 247,951
Net realized gains (losses) on investments 8,483 (22,093)
Amortization of gains on reinsurance transactions 33,883 2,207
Other income 12,492 8,632
---------------------------
Total revenues 1,455,520 1,440,021
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 317,292 302,776
Interest sensitive and investment products 35,385 70,418
Accident and health claims 574,773 560,176
---------------------------
927,450 933,370
Policyholder dividends 875 2,081
Amortization of deferred policy acquisition costs 44,096 44,046
Insurance commissions 109,180 101,332
General and administrative expenses 220,711 256,027
---------------------------
Total benefits and expenses 1,302,312 1,336,955
---------------------------
Income before income taxes 153,208 103,066
Income tax expense (benefit)
Current 168,215 36,889
Deferred (115,736) (3,928)
---------------------------
52,479 32,961
---------------------------
Net income 100,729 70,105
===========================
Other comprehensive income:
Unrealized gains on investments 49,695 15,928
---------------------------
Comprehensive income $ 150,424 $ 86,033
===========================
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
-----------------------
(restated)
REVENUES
Insurance operations:
Traditional life insurance premiums $ 121,758 $ 127,468
Interest sensitive and investment product
policy charges 3,290 41,611
Accident and health insurance premiums 255,065 236,378
-----------------------
380,113 405,457
Net investment income 73,500 81,194
Net realized gains (losses) on investments 10,132 (15,276)
Amortization of gains on reinsurance transactions 16,362 951
Other income 3,934 2,748
-----------------------
Total revenues 484,041 475,074
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 100,581 105,017
Interest sensitive and investment products 4,451 23,605
Accident and health claims 191,279 178,214
-----------------------
296,311 306,836
Policyholder dividends 116 165
Amortization of deferred policy acquisition costs 11,872 8,745
Insurance commissions 40,047 34,359
General and administrative expenses 70,152 86,944
-----------------------
Total benefits and expenses 418,498 437,049
-----------------------
Income before income taxes 65,543 38,025
Income tax expense (benefit)
Current 18,034 11,183
Deferred 4,112 (411)
-----------------------
22,146 10,772
-----------------------
Net income 43,397 27,253
=======================
Other comprehensive income:
Unrealized gains on investments 33,456 35,036
-----------------------
Comprehensive income $ 76,853 $ 62,289
=======================
See accompanying notes
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
----------------------------
(restated)
OPERATING ACTIVITIES
Net income $ 100,729 $ 70,106
Adjustments to reconcile net income to net cash used in operations:
Increase in future policy benefit reserves 65,798 114,669
Decrease in other policy claims and benefits and policyholder
dividends payable (797) (21,746)
Provision for deferred federal income taxes (115,736) (3,928)
Increase in income taxes payable 166,935 2,584
Amortization of deferred policy acquisition costs 44,096 44,046
Policy acquisition costs deferred (61,395) (88,738)
Provision for depreciation, amortization of goodwill 2,349 9,917
Amortization of investment premiums, net (534) 3,818
Amortization of gain on reinsurance transactions (33,883) (2,207)
Change in uncollected premiums, accrued investment income,
reinsurance recoverable, other receivables, other assets, unearned
revenues, accrued expenses, and other liabilities 66,199 (102,458)
Net realized (gains) losses on investments (8,483) 22,093
Gain on sale of property and equipment (2,782) --
----------------------------
Net cash provided in operating activities 222,496 48,156
----------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,120,226) (1,301,698)
Sales or maturity of fixed maturity investments 1,363,064 1,441,188
(Increase) decrease in short-term investments (362,904) 47,554
Purchases of other investments (280,301) (184,287)
Sales or maturities of other investments 333,399 98,597
Sales (purchases) of property and equipment 20,670 (5,010)
Cash (disbursed) received pursuant to reinsurance agreement (1,605) 17,591
----------------------------
Net cash (used) provided by investing activities (47,903) 113,935
----------------------------
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 43,713 178,889
Surrenders and death benefits (79,329) (378,797)
Interest credited to policyholders 7,174 25,253
Dividend (75,000) (56,486)
Change in foreign exchange rate 4,035 3,093
----------------------------
Net cash used in financing activities (99,407) (228,048)
----------------------------
Increase (decrease) in cash and cash equivalents 75,186 (65,957)
Cash and cash equivalents at beginning of year 17,084 22,682
----------------------------
Cash and cash equivalents at end of period $ 92,270 $ (43,275)
============================
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF CASH FLOWS (continued)
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
----------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Assets and liabilities transferred in reinsurance transactions:
Non-cash Assets ceded:
Fixed maturities $ (161,579) --
Other investments (196,987) --
Capital gains on assets transferred 585 --
Other assets (20,245) (157)
Deferred acquisition costs (441,555) (20,829)
----------------------------
Total value of assets ceded $ (819,781) $ (20,986)
============================
Non-cash liabilities ceded:
Future policy benefit reserves $ 1,049,136 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 (24,996) (320)
Proceeds reallocation 198,750
----------------------------
Total liabilities ceded $ 1,216,672 $ 22,414
============================
Deemed dividend to parent $ (198,750) $ --
Deferred tax asset 69,633
----------------------------
Net deemed dividend to parent $ (129,117) $ --
============================
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements (in thousands)
September 30, 2001
(unaudited)
General: The accompanying unaudited financial statements of Fortis Benefits
Insurance Company (the "Company") contain all adjustments necessary to present
fairly the balance sheet as of September 30, 2001 and the related statement of
income for the nine months ended September 30, 2001 and 2000, and cash flows for
the nine months ended September 30, 2001 and 2000.
Income tax payments for the nine months ended September 30, 2001 and September
30, 2000 were $1,323 and $32,997, respectively.
The classification of fixed maturity investments is to be made at the time of
purchase and, prospectively, that classification is expected to be reevaluated
as of each balance sheet date. At September 30, 2001, all fixed maturity and
equity securities are classified as available-for-sale and carried at fair
value.
The amortized cost and fair values of investments available-for sale were as
follows at September 30, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
-------------------------------------------------------
Fixed Income Securities:
Governments $ 270,602 $ 10,357 $ 372 $ 280,587
Public utilities 214,276 8,788 3,488 219,576
Industrial and miscellaneous 2,093,705 81,181 54,437 2,120,449
Other 282,536 10,763 305 292,994
-------------------------------------------------------
Total 2,861,119 111,089 58,602 2,913,606
Equity securities 149,163 6,564 15,172 140,555
-------------------------------------------------------
$3,010,282 $ 117,653 $ 73,774 $3,054,161
=======================================================
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements (in thousands)
September 30, 2001
(unaudited)
The amortized cost and fair value in fixed maturities at September 30, 2001, 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.
Amortized Fair
Cost Value
-------------------------
Due in one year or less $ 119,722 $ 122,039
Due after one year through five years 532,474 553,289
Due after five years through ten years 1,034,540 1,042,480
Due after ten years 1,174,383 1,195,798
-------------------------
Total $2,861,119 $2,913,606
=========================
Proceeds from sales of investments in fixed maturities in the nine-month period
ended September 30, 2001 and September 30, 2000 were $1,363,064 and $1,441,188
respectively. Gross gains of $33,882 and $8,615 and gross losses of $37,092 and
$43,967 were realized on sales during the nine month periods ended September 30,
2001 and 2000, respectively.
Mortgage Loans: The Company has issued commercial mortgage loans on properties
located throughout the country. Currently, approximately 36% of outstanding
principal are concentrated in the states of New York, California and Florida.
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.
Effective as of July 1, 2001, Fortis Benefits Insurance Company, a Minnesota
insurance company ("FBIC"), completed a merger in which Pierce National Life
Insurance Company, a California insurance company ("PNL"), merged with and into
FBIC (the "Merger"). Immediately prior to the Merger, both FBIC 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. The PNL
business is primarily pre-need life insurance designed to pre-fund funeral
expenses and is sold as individual life and annuity products. The transaction
will be accounted for as a statutory merger. Prior periods amounts have been
restated to reflect the merger.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements (in thousands)
September 30, 2001
(unaudited)
Disposal of Fortis Financial Group (the "Division"): On April 1, 2001, Fortis,
Inc. completed the sale (the "Sale") of its Division to The Hartford Financial
Services Group ("Hartford") for $1.12 billion. The Division includes, among
other blocks of business, certain individual life insurance policies (including
variable universal life insurance policies) and all annuity contracts
(collectively, the "Insurance Contracts") written by the Company and some of its
affiliates.
To effect the Sale as it relates to the Company, Hartford reinsured the
Insurance Contracts on a 100% coinsurance basis, with the variable products on a
modified coinsurance basis, and agreed to administer the Insurance Contracts
prospectively. The Company received $500 million as part of the reinsurance
agreement. The Sale also included Hartford's purchase of certain real and
personal property owned by the Company and used in connection with the
Division's business for which the Company received $21 million.
The $1.12 billion purchase price was reallocated amongst the Company and other
affiliates involved in the sale. The Sale resulted in a pre-tax deferred gain of
approximately $395 million for the Company. The deferred gain will be amortized
at the rate that earnings from the business sold would have been expected to
emerge. Amortization of approximately $32 million has been included in income as
of September 30, 2001. The Company ceded $315,969 of premiums and $988,364 of
reserves to Hartford as of September 30, 2001.
Net Investment Income and Realized Gains (Losses) on Investments: Major
categories of net investment income and realized gains and losses on investments
for the first nine months of each year were as follows:
REALIZED GAIN(LOSS)
INVESTMENT INCOME ON INVESTMENTS
2001 2000 2001 2000
----------------------------------------------------
Fixed maturities $ 166,833 $ 180,957 $ (3,210) $ (35,352)
Preferred stocks 1,784 -- 61 --
Common stocks 9,658 12,134 815 3,369
Mortgage loans on real estate 50,595 53,543 7,810 --
Policy loans 2,010 5,113 -- --
Short-term investments 846 502 (110) 120
Real estate and other investments 1,219 1,325 3,117 9,770
----------------------------------------------------
232,945 253,574 $ 8,483 $ (22,093)
------------------------
Expenses 4,805 5,623
-----------------------
$ 228,140 $ 247,951
=======================
FORTIS BENEFITS INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER 30, 2000
REVENUES
On April 1, 2001, the Company entered into a coinsurance agreement with Hartford
Financial Services Group whereby the Company ceded the Investment Product block
of business to the Hartford. This reinsurance agreement resulted in a 66%
decrease in the revenues derived from these Investment Products for nine months
ended September 30, 2001 compared to nine months ended September 30, 2000.
Fortis Benefits Insurance Company (the "Company") distributes its products
through a network of independent agents and brokers. The major products offered
are group disability, group dental, group medical, group life, and pre-need
annuity and life coverages. Strong sales in the group dental, pre-need, group
disability and group life lines resulted in an increase of premium from nine
months ended September 30, 2000 to 2001 respectively of 12%, 7%, 4% and 2%. Rate
increases in the group medical line resulted in a 5% premium decrease due to
non-renewal of existing business and lower new sales.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 2001 and 2000
resulted in recognition of realized gains and losses upon sales of securities.
The Company had net capital losses from fixed income investments of $3.2 million
for the first nine months of 2001 as compared to net capital losses of $35.3
million for the same period in 2000.
BENEFITS
The total year-to-date policyholder benefit to premium ratio increased from
77.5% to 79.1% from September 30, 2000 to September 30, 2001. The group
disability, group dental, group medical, group life, pre-need, and Investment
Product benefit to premium ratios for the nine months ended September 30, were
87%, 75%, 75%, 73%, 100% and 58% respectively in 2001 and 87%, 75%, 74%, 69%,
102% and 53% respectively in 2000. Both group life experienced unusually high
mortality during the first nine months of 2001.
EXPENSES
Commission rates have increased from the levels in 2000. 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 decreased to
19% in the third quarter of 2001 from 21% in 2000. Third quarter expenses
relative to premium have decreased due to a shift in pre-need new business sales
to a product requiring higher
deferrable expenses. Offsetting these deferrable expenses are relatively flat
costs associated with the group medical line where premiums have decreased
slightly. These group medical expenses have not decreased relative to premium
due to fixed costs remaining flat and an increase in compensation expenses
offsetting decreases in other variable costs. The Company continues to monitor
expenses, striving to improve the expense to premium ratio, while maintaining
quality and timely services to policyholders.
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.
LIQUIDITY AND CAPITAL RESOURCES
The market value of cash, short-term investments and publicly traded bonds and
stocks is at least equal to all policyholder reserves and liabilities, net of
reinsurance recoverable. The Company's portfolio is readily marketable and
convertible to cash to a degree
sufficient to provide for short-term needs. The Company consistently monitors
its liability durations and invests assets accordingly. The Company has no
material commitments or off-balance sheet financing arrangements, which would
reduce sources of funds in the upcoming year.
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 97% investment grade bonds
as of September 30, 2001 and the Company does not expect this percentage to
change significantly in the future.
PURCHASE OF PROTECTIVE LIFE DENTAL BENEFITS DIVISION
On July 10, 2001, Fortis, Inc. agreed to purchase (the "Purchase") the Dental
Benefits Division of Protective Life Corporation ("Protective"). The Purchase
includes group dental, group life and group disability insurance products
("Insurance Products") as well as prepaid dental subsidiaries. The Company will
reinsure these Insurance Products on a 100% coinsurance basis and perform
administration of such Insurance Products. The Company anticipates that the
transaction can be completed in the fourth quarter of 2001, subject to customary
closing conditions.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. A Form 8-K was filed on July 13, 2001 reporting that the Company
completed a merger with Pierce National Life Insurance Company on
July 1, 2001.
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)
Date: November 13, 2001
/s/ Larry Cains
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its
principal financial and chief accounting officer)