1
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, 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.)
2323 GRAND BOULEVARD KANSAS CITY, MO 64108-2670
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (816) 474-2345
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 [ ]
2
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
2001 2000
----------------------------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities, at fair value (amortized
cost 2001 -- $2,544,868; 2000 -- $2,543,040) $ 2,581,843 $ 2,530,480
Equity securities, at fair value (cost 2001--$107,078
2000--$91,164) 103,889 87,912
Mortgage loans on real estate, less allowance for
possible losses (2001 and 2000 -- $11,085) 811,722 810,616
Policy loans 104,012 102,308
Short-term investments 114,109 152,736
Real estate and other investments 36,204 41,712
----------------------------------
3,751,779 3,725,764
Cash and cash equivalents (65,131) 13,209
Receivables:
Uncollected premiums 68,223 66,505
Reinsurance recoverable on unpaid and paid losses 73,602 64,182
Other 23,095 48,083
----------------------------------
164,920 178,770
Accrued investment income 52,950 52,556
Deferred policy acquisition costs 485,448 473,761
Property and equipment at cost, less accumulated
depreciation 20,206 20,891
Federal income tax recoverable -- 7,248
Deferred federal income taxes 10,726 33,825
Other assets 1,802 1,677
Due from affiliates 4,176 --
Assets held in separate accounts 4,475,197 5,184,083
----------------------------------
Total assets $ 8,902,073 $ 9,691,784
==================================
3
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands)
MARCH 31, 2001 DECEMBER 31,
2000
----------------------------------
(UNAUDITED)
POLICY RESERVES, LIABILITIES AND SHAREHOLDERS' EQUITY
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional life insurance $ 1,190,056 $ 1,170,612
Interest sensitive and investment products 946,319 970,591
Accident and health 1,034,099 1,007,328
----------------------------------
3,170,474 3,148,531
Unearned revenues 34,756 33,614
Other policy claims and benefits payable 236,710 240,677
Policyholder dividends payable 7,115 7,438
----------------------------------
3,449,055 3,430,260
Accrued expense 64,585 69,476
Current income taxes payable 5,533 --
Other liabilities 39,510 181,633
Deferred gain on LTC sale 15,101 15,919
Due to affiliates -- 4,497
Liabilities related to separate accounts 4,453,810 5,159,275
----------------------------------
Total policy reserves and liabilities 8,027,594 8,861,060
Shareholder's equity:
Common Stock, $5 par value:
Authorized, issued and outstanding shares - 1,000,000 5,000 5,000
Additional paid-in capital 468,000 468,000
Retained earnings 381,495 366,643
Unrealized gain (loss) on available-for-sale
securities (net of deferred taxes 2001 --
$11,838; 2000 -- $(4,921)) 21,998 (9,129)
Unrealized (loss) gain on assets held in separate
accounts (net of deferred taxes 2001 -- $(1,085);
2000 -- $113) (2,014) 210
----------------------------------
Total shareholder's equity 874,479 830,724
----------------------------------
Total policy reserves, liabilities and shareholder's equity $ 8,902,073 $ 9,691,784
==================================
See accompanying notes.
4
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS ENDED
MARCH 31,
2001 2000
------------------------------
(Unaudited)
REVENUES
Insurance operations:
Traditional life insurance premiums $ 116,753 $ 101,715
Interest sensitive and investment product policy charges
40,240 39,948
Accident and health insurance premiums 242,838 239,290
------------------------------
399,831 380,953
Net investment income 67,738 72,039
Net realized gains (losses) on investments 1,470 (11,548)
Other income 3,309 2,065
------------------------------
Total revenues 472,348 443,509
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 100,734 83,004
Interest sensitive and investment products 26,150 23,319
Accident and health claims 191,612 187,401
------------------------------
318,496 293,724
Policyholder dividends 543 441
Amortization of deferred policy acquisition costs 18,884 10,576
Insurance commissions 30,800 31,109
General and administrative expenses 81,800 90,127
------------------------------
Total benefits and expenses 450,523 425,977
------------------------------
Income before income taxes 21,825 17,532
Income tax expense (benefit)
Current (564) 13,520
Deferred 7,537 (7,531)
------------------------------
6,973 5,989
------------------------------
Net income 14,852 11,543
==============================
Other comprehensive income:
Unrealized gain on investments 28,903 5,479
------------------------------
Comprehensive income $ 43,755 $ 17,022
==============================
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2001 2000
-------------------------------
OPERATING ACTIVITIES
Net income $ 14,852 $ 11,543
Adjustments to reconcile net income to net cash used in operating
activities:
Increase in future policy benefit reserves 50,385 25,850
Decrease in other policy claims and benefits and policyholder
dividends payable (4,290) (7,910)
Provision for deferred federal income taxes 7,537 (7,531)
Increase in income taxes payable 12,781 7,466
Amortization of deferred policy acquisition costs 18,884 10,576
Policy acquisition costs deferred (32,283) (8,447)
Provision for depreciation 812 1,273
Amortization of investment premiums, net (1,179) (594)
Amortization of gain on reinsurance transaction (818) (5)
Change in uncollected premiums, accrued investment income,
reinsurance recoverable, other receivables, other assets,
accrued expenses, and other liabilities (141,215) (75,773)
Net realized (gains) losses on investments (1,470) 11,548
-------------------------------
Net cash used in operating activities (76,004) (32,004)
-------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (400,213) (422,661)
Sales or maturity of fixed maturity investments 401,326 447,363
Decrease in short-term investments 38,627 15,527
Purchases of other investments (33,632) (28,796)
Sales or maturities of other investments 20,125 17,577
(Purchase) or sale of property and equipment (127) 76
-------------------------------
Net cash provided by investing activities 26,106 29,086
-------------------------------
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 43,713 53,876
Surrenders and death benefits (79,329) (131,880)
Interest credited to policyholders 7,174 8,765
-------------------------------
Net cash used in financing activities (28,442) (69,239)
-------------------------------
Decrease in cash and cash equivalents (78,340) (72,157)
Cash and cash equivalents at beginning of year 13,209 18,670
-------------------------------
Cash and cash equivalents at end of period $ (65,131) $ (53,487)
===============================
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements (in thousands)
March 31, 2001
(unaudited)
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, 2001 and the related statement of income for the
three months ended March 31, 2001 and 2000, and cash flows for the three months
ended March 31, 2001 and 2000.
Income tax receipts were $13,346 and payments were $7,098 for the three months
ended March 31, 2001 and March 31, 2000, 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, 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 March 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
-------------------------------------------------------------------
Fixed Income Securities:
Governments $ 197,498 $ 5,581 $ 303 $ 202,776
Public utilities 201,680 5,607 2,922 204,365
Industrial and miscellaneous
1,933,839 55,299 30,788 1,958,350
Other 211,851 5,018 517 216,352
-------------------------------------------------------------------
Total 2,544,868 71,505 34,530 2,581,843
Equity securities 107,078 7,450 10,639 103,889
-------------------------------------------------------------------
$2,651,946 $78,955 $ 45,169 $2,685,732
===================================================================
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FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements (in thousands)
March 31, 2001
(unaudited)
The amortized cost and fair value in fixed maturities at March 31, 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 $ 87,885 $ 88,368
Due after one year through five years 567,926 582,206
Due after five years through ten years 836,104 850,804
Due after ten years 1,052,953 1,060,465
------------------------------
Total $2,544,868 $2,581,843
==============================
Proceeds from sales of investments in fixed maturities in the three-month period
ended March 31, 2001 and March 31, 2000 were $401,194 and $447,061 respectively.
Gross gains of $13,650 and $1,696 and gross losses of $12,180 and $14,412 were
realized on sales during the three month periods ended March 31, 2001 and 2000,
respectively.
Mortgage Loans: The Company has issued commercial mortgage loans on properties
located throughout the country. Currently, approximately 37% of outstanding
principal is 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.
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FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements (in thousands)
March 31, 2001
(unaudited)
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 three months of each year were as follows:
REALIZED GAIN (LOSS)
INVESTMENT INCOME ON INVESTMENTS
2001 2000 2001 2000
-------- -------- -------- --------
Fixed maturities $ 46,105 $ 50,297 $ 1,470 $(12,716)
Preferred stocks 22 -- -- --
Common stocks 3,145 2,575 -- 1,246
Mortgage loans on real estate 17,455 16,109 -- 66
Policy loans 1,606 1,570 -- --
Short-term investments 74 115 -- --
Real estate and other investments 947 2,923 -- (144)
-------- -------- -------- --------
69,354 73,589 $ 1,470 $(11,548)
======== ========
Expenses 1,616 1,550
-------- --------
$ 67,738 $ 72,039
======== ========
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FORTIS BENEFITS INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS MARCH 31, 2001 COMPARED TO MARCH 31, 2000
REVENUES
Major products for Fortis Benefits Insurance Company (the "Company") are group
disability and dental, group medical, group life, and annuity and individual
life insurance coverages sold through a network of independent agents and
brokers. For the three months ended March 31, group disability and dental, group
medical, group life, pre-need, and annuity and individual life represented 40%,
23%, 18%, 11% and 8%, respectively of premium in 2001 and 38%, 26%, 18%, 10% and
8% respectively in 2000.
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 gains from fixed income investments of $1.5 million
for the first three months of 2001 as compared to net capital losses of $12.7
million for the same period in 2000.
BENEFITS
The total year-to-date policyholder benefit to premium ratio remained flat at
80% for the first quarter 2001 and 2000. The group disability and dental, group
medical, group life, pre-need, and annuity and individual life benefit to
premium ratios for the three months ended March 31, were 81%, 77%, 80%, 102% and
81% respectively in 2001 and 82%, 77%, 72%, 105% and 82% respectively in 2000.
Both group life and pre-need experienced unusually high mortality during the
first quarter of 2001.
EXPENSES
Commission rates have decreased 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
20.4% in the first quarter of 2001 from 24.5% in 2000. First quarter 2000
expenses included administrative system conversions and development and costs
associated with increased sales activity. 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.
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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. 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 96% investment grade bonds
as of March 31, 2001 and the Company does not expect this percentage to change
significantly in the future.
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EVENTS SUBSEQUENT
On April 1, 2001, Fortis, Inc. completed the sale (the "Sale") of its Fortis
Financial Group division (the "Division") to The Hartford Financial Services
Group ("The Hartford"). 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. Certain of the Insurance Contracts permit
investment in, among other investment options, various series of the Fortis
Series Fund (the "Fund").
To effect the Sale as it relates to the Company, Hartford Life and Annuity
Insurance Company ("Hartford Annuity"), an indirect wholly owned subsidiary of
The Hartford, reinsured the Insurance Contracts on a 100% coinsurance basis and
agreed to administer the Insurance Contracts going forward. The Sale also
included Hartford Annuity's purchase of certain real and personal property owned
by the Company and used in connection with the Division's business. Also as part
of the Sale, Hartford Life and Accident Insurance Company purchased 100% of the
outstanding stock of Fortis Advisers, Inc. ("Fortis Advisers"), which is the
investment adviser for the Fund. The Sale also included 100% of the outstanding
stock of Fortis Investors, Inc., which is a wholly owned subsidiary of Fortis
Advisers and acts as principal distributor for the Fund. Fortis and the Company
received in connection with the Sale aggregate cash consideration of
approximately $1.15 billion from The Hartford and its affiliates.
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
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(B) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K on
February 8, 2001 to announce the agreement by Fortis, Inc. to sell the Fortis
Financial Group to The Hartford as discussed above in "Events Subsequent."
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 M. Cains
- ---------------------------------
Larry M. Cains
Controller and Treasurer
Date: May 14, 2001