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 March 31, 2002
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)
- --------------------------------------------------------------------------------
ASSETS MARCH 31, DECEMBER 31,
2002 2001
-------------------------------------
(UNAUDITED)
Investments:
Fixed maturities, at fair value (amortized cost 2002 - $2,966,677;
2001 - $2,744,158 $ 2,942,305 $ 2,785,442
Equity securities, at fair value (cost 2002 - $171,356;
2001 - $114,049) 171,986 115,348
Mortgage loans on real estate, less allowance for possible losses
(2002--$13,118, 2001--$13,118) 616,649 655,211
Policy loans 10,021 9,935
Short-term investments 5,930 258,790
Real estate and other investments 64,865 64,424
----------------- ------------------
3,811,756 3,889,150
Cash and cash equivalents 3,504 11,704
Receivables:
Uncollected premiums 73,808 63,080
Reinsurance recoverable on unpaid and paid losses 1,150,474 1,104,617
Other 33,034 34,027
----------------- ------------------
1,257,316 1,201,724
Accrued investment income 54,306 50,999
Deferred policy acquisition costs 111,401 108,406
Property and equipment at cost, less accumulated depreciation 4,873 4,972
Federal income tax recoverable 12,425 -
Deferred federal income taxes 199,766 193,022
Other assets 7,686 12,780
Due from affiliates 5,664 12,044
Goodwill, less accumulated amortization (2002 - $5,720
2001 - $5720) 167,977 167,992
Assets held in separate accounts 4,277,773 4,372,559
----------------- ------------------
Total assets $ 9,914,447 $ 10,025,352
================ =================
The accompanying notes are an integral part of the financial statements.
2
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
MARCH 31, 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 $ 1,820,132 $ 1,796,952
Interest sensitive and investment products 1,055,537 1,052,932
Accident and health 1,169,299 1,110,436
----------------- ------------------
4,044,968 3,960,320
Unearned revenues 49,721 54,811
Other policy claims and benefits payable 264,533 265,702
Policyholder dividends payable 1,999 2,023
----------------- ------------------
4,361,221 4,282,856
Accrued expenses 84,212 92,783
Current income taxes payable - 80,306
Other liabilities 134,098 106,220
Deferred gain on reinsurance ceded 354,355 369,833
Due to affiliates - -
Liabilities related to separate accounts 4,277,773 4,372,559
----------------- ------------------
Total policy reserves and liabilities 9,211,659 9,304,557
----------------- ------------------
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 126,432 170,811
Unrealized gain on available-for-sale securities (net
of deferred taxes 2002 - $28,664; 2001 - $16,099) 53,233 29,899
Unrealized gain (loss) due to foreign currency exchange 1,553 (1,485)
----------------- ------------------
Total shareholder's equity 702,788 720,795
----------------- ------------------
Total policy reserves and liabilities and shareholder's equity $ 9,914,447 $ 10,025,352
================= ==================
The accompanying notes are an integral part of the financial statements.
3
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2002 2001
------------------------------
(UNAUDITED) (restated)
Revenues:
Insurance operations:
Traditional and pre-need life insurance premiums $ 128,459 $ 130,956
Interest sensitive and investment product
policy charges 648 27,442
Accident and health insurance premiums 289,726 242,911
---------- ------------
418,833 401,309
Net investment income 66,018 81,052
Net realized gains (losses) on investments 454 (1,401)
Amortization of gain on reinsured business 15,478 818
Other income 2,950 15,708
---------- ------------
Total revenues 503,733 497,486
Benefits and expenses:
Benefits to policyholders:
Traditional and pre-need life insurance 117,059 117,701
Interest sensitive investment products 1,892 25,378
Accident and health claims 221,693 191,647
---------- ------------
340,644 334,726
Policyholder dividends 69 663
Amortization of deferred policy acquisition costs 10,210 21,085
Insurance commissions 34,833 30,980
General and administrative expenses 80,925 84,526
---------- ------------
Total benefits and expenses 466,681 471,980
---------- ------------
Income before income taxes 37,052 25,506
Income tax expense
Current (4,605) 2,502
Deferred 16,473 5,895
---------- ------------
11,868 8,397
---------- ------------
Net income $ 25,184 $ 17,109
========== ============
Other comprehensive loss:
Unrealized (loss) gain on investments (43,191) 19,242
---------- ------------
Comprehensive (loss) income $ (18,007) $ 36,351
========== ============
The accompanying notes are an integral part of the financial statements.
4
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2002 2001
-----------------------------
(UNAUDITED) (RESTATED)
Cash flows from operating activities:
Net income $ 25,184 $ 17,109
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation and amortization of goodwill 132 1,508
Amortization of gain on reinsured business (15,478) (818)
Amortization of investment (discounts) premiums, net (1,168) (782)
Net realized (gains) losses on sold investments (454) 1,401
Policy acquisition costs deferred (13,238) (33,267)
Amortization of deferred policy acquisition costs 10,210 21,085
Provision for deferred federal income taxes 16,473 5,895
(Increase) decrease in income taxes recoverable (92,731) 15,902
Change in receivables, accrued investment income, unearned
premiums, accrued expenses, other assets, due to and
from affiliates and other liabilities (33,208) (70,127)
Increase in future policy benefit reserves for traditional,
interest sensitive and accident and health policies 84,648 40,884
Decrease in other policy claims and benefits and
policyholder dividends payable (1,193) (4,290)
----------- -----------
Net cash used by operating activities (20,823) (5,500)
----------- -----------
Cash flows from investing activities:
Purchases of fixed maturity investments (706,820) (492,751)
Sales and repayments of fixed maturity investments 482,302 508,747
Decrease in short-term investments 252,860 19,368
Purchases of other investments (84,596) (33,632)
Sales of other investments 68,654 20,125
Purchases of property and equipment (33) (127)
----------- -----------
Net cash provided by investing activities 12,367 21,730
----------- -----------
Cash flows from financing activities:
Activities related to investment products:
Considerations received -- 43,713
Surrenders and death benefits -- (79,329)
Interest credited to policyholders -- 7,174
Dividend -- (75,000)
Change in foreign exchange rate 256 4,066
----------- -----------
Net cash provided by (used in) financing activities 256 (99,376)
----------- -----------
Decrease in cash and cash equivalents (8,200) (83,146)
Cash and cash equivalents at beginning of year 11,704 17,082
----------- -----------
Cash and cash equivalents at end of year $ 3,504 $ (66,064)
=========== ===========
The accompanying notes are an integral part of the financial statements.
5
FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
General: The accompanying unaudited financial statements of Fortis
Benefits Insurance Company contain all adjustments necessary to present
fairly the balance sheet as of March 31, 2002 and the related statement
of income for the three months ended March 31, 2002 and 2001, and cash
flows for the three months ended March 31, 2002 and 2001.
Income tax (payments) receipts were $ (88,134) and $ 13,367 for the three
months ended March 31, 2002 and March 2001, 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 March 31, 2002, 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 March 31, 2002:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
Fixed maturities:
Governments $ 156,392 $ 3,031 $ 4,115 $ 155,308
Public utilities 211,452 3,262 8,828 205,886
Industrial and miscellaneous 2,172,971 38,669 57,308 2,154,332
Other 425,862 3,791 2,874 426,779
---------------- ------------- --------------- ----------------
Total fixed maturities 2,966,677 48,753 73,125 2,942,305
Equity securities 171,356 5,648 5,018 171,986
---------------- ------------- --------------- ----------------
Total $ 3,138,033 $ 54,401 $ 78,143 $ 3,114,291
================ ============= =============== ================
The amortized cost and fair value in fixed maturities at March 31, 2002,
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
(In thousands)
- --------------------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
Due in one year or less $ 126,595 $ 128,669
Due after one year through five years 391,678 396,118
Due after five years through ten years 941,221 935,039
Due after ten years 1,507,183 1,482,479
---------------- ----------------
Total $ 2,966,677 $ 2,942,305
================ ================
Proceeds from sales of investments in fixed maturities in the three-month
period ended March 31, 2002 and March 31, 2001 were $482,302 and $401,194
respectively. Gross gains of $9,484 and $13,650 and gross losses of
$11,606 and $12,180 were realized on sales during the three month periods
ended March 31, 2002 and 2001, 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 March 31, 2002. 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 period
amounts for the 2001 schedules have been restated to reflect the merger.
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.
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FORTIS BENEFITS INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(In thousands)
- --------------------------------------------------------------------------------
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 $14,557 has been
included in income during the three months ended March 31, 2002. The
Company ceded $89,265 of premiums and $958,130 of reserves to Hartford
through March 31, 2002.
In the fourth quarter of 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 $79,000 of reserves, $241,000 of assets
including $143,000 of goodwill, and paid net cash of approximately
$162,000 as of December 31, 2001.
Net Investment Income and Net Realized (Losses) Gains on Investments:
Major categories of net investment income and realized (losses) gains on
investments for the first three months of each year were as follows:
REALIZED GAIN (LOSS)
INVESTMENT INCOME ON INVESTMENTS
2002 2001 2002 2001
(restated) (restated)
Fixed maturities $ 50,117 $ 58,309 $ (2,122) $ (1,291)
Preferred stocks 1,451 22 32 --
Common stocks 1,543 3,463 1,593 --
Mortgage loans on real estate 13,494 18,319 1,029 --
Policy loans 129 1,733 -- --
Short-term investments 65 134 (78) (110)
Real estate and other investments 1,188 963 -- --
--------- -------- -------- --------
67,987 82,943 454 (1,401)
-------- --------
Expenses (1,969) (1,891)
--------- --------
$ 66,018 $ 81,052
========= ========
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FORTIS BENEFITS INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS MARCH 31, 2002 COMPARED TO MARCH 31, 2001
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 disability, group dental, group
medical, group life, pre-need annuity and life and accidental death coverages.
Strong sales in the pre-need annuity and life line resulted in an increase of
premium from three months ended March 31, 2001 to 2002 of 4%. Rate increases in
the group medical line resulted in a 15% premium decrease due to non-renewal of
existing business and lower new sales. Slower sales and decreases in persistency
in both the group life and group disability lines in the beginning of 2002 are
the overall factors resulting in decreased revenue from three months ended March
31, 2001 to the same period in 2002.
On December 31, 2001, the Company purchased (the "Purchase") the Dental Benefits
Division of Protective Life Corporation ("Protective"). The Purchase includes
primarily group dental products. The Company reinsured this business on a 100%
coinsurance basis and will perform all administration activities. The Company
assumed approximately $79 million of reserves, $241 million of assets including
$143 million of goodwill, and paid net cash of approximately $162 million as of
December 31, 2001.
During 2001, the Company began offering a new accidental death product through
financial institutions. This business represents 3% and 0.6% of total premium as
of March 31, 2002 and 2001 respectively. On April 1, 2001, the Company entered
into a coinsurance agreement with Hartford Financial Services Group ("Hartford")
whereby the Company ceded the Investment Product block of business to the
Hartford. Revenue on this business represented 0% and 8% of total Company first
quarter revenue in 2002 and 2001, respectively.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 2002 and 2001
resulted in recognition of realized gains and losses upon sales of securities.
The Company had net capital losses from fixed maturity investments of $2.1
million and $1.3 million for the first three months of 2002 and 2001,
respectively.
BENEFITS
The total year-to-date policyholder benefit to premium ratio decreased from
83.4% to 81.3% from March 31, 2001 to March 31, 2002. The group disability,
group dental, group medical, group life and pre-need benefit to premium ratios
for the three months ended March 31, were 89%, 72%, 69%, 83% and 102%
respectively in 2002 and 86%, 73%, 77%, 80% and 106% respectively in 2001. Group
disability claim incidence is higher and terminations lower during the three
months ended March 31, 2002 as compared to the same period ended March 31, 2001.
9
Group life experienced unusually high mortality during the first three months of
2002. The 8% decrease in the group medical benefit to premium ratio during the
first quarter of 2002 compared to the same period in 2001 is a result of pricing
increases and improved administration on this business.
EXPENSES
Commission rates have increased from levels in 2001. 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 first quarter of 2002 from 21% during the same period in 2001. First
quarter 2001 expenses associated with the business reinsured by the Hartford had
proportionally higher expenses on premium revenue than the remaining business'
expense to premium levels. Offsetting this 2001 to 2002 decrease in expense to
premium ratio are expense increases related to systems project 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
10
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. 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 97.5% investment grade
bonds as of March 31, 2002 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.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. On January 14, 2002, a form 8-K report was filed regarding the
acquisition of Protective Life Corporation's Dental Benefits Division
by Fortis, Inc. and certain of it's affiliates including the
Registrant.
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: May 15, 2002
/s/ Larry Cains
________________________
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its principal financial and chief accounting
officer)
12