<Page>
As filed with the Securities and Exchange Commission on April 5, 2004.
File No. 333-20345
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 8 TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST FORTIS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
13-2699219
(I.R.S. Employer Identification Number)
308 MALTBIE STREET, SUITE 200
SYRACUSE, NEW YORK 13204
315-451-0066
(Address, including zip code, and telephone number, including area code of
registrant's principal executive office)
MARIANNE O'DOHERTY
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 2999
HARTFORD, CONNECTICUT 06104-2999
(860) 843-6733
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11 (a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<Page>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<Page>
PART I
<Page>
<Table>
TD WATERHOUSE VARIABLE ANNUITY
SEPARATE ACCOUNT A
ISSUED BY:
FIRST FORTIS LIFE INSURANCE COMPANY
P.O. BOX 64272
ST. PAUL, MINNESOTA 55164
ADMINISTERED BY:
HARTFORD LIFE INSURANCE COMPANY
P.O. BOX 5085
HARTFORD, CONNECTICUT 06102-5085
TELEPHONE: 1-800-862-6668 (CONTRACT OWNERS)
1-800-862-7155 (REGISTERED REPRESENTATIVES)
</Table>
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- --------------------------------------------------------------------------------
This prospectus describes information you should know before you purchase the TD
Waterhouse Variable Annuity. Please read it carefully.
TD Waterhouse Variable Annuity is a contract between you and First Fortis Life
Insurance Company where you agree to make at least one Premium Payment and
Fortis agrees to make a series of Annuity Payouts at a later date. This Contract
is a flexible premium, tax-deferred, variable annuity offered to both
individuals and groups. It is:
x Flexible, because you may add Premium Payments at any time.
x Tax-deferred, which means you don't pay taxes until you take money out or
until we start to make Annuity Payouts.
x Variable, because the value of your Contract will fluctuate with the
performance of the underlying Funds.
At the time you purchase your Contract, you allocate your Premium Payment to
"Sub-Accounts." These are subdivisions of our Separate Account, an account that
keeps your Contract assets separate from our company assets. The Sub-Accounts
then purchase shares of mutual funds set up exclusively for variable annuity or
variable life insurance products. These are not the same mutual funds that you
buy through your stockbroker or through a retail mutual fund. They may have
similar investment strategies and the same portfolio managers as retail mutual
funds. This Contract offers you Funds with investment strategies ranging from
conservative to aggressive and you may pick those Funds that meet your
investment goals and risk tolerance. The Sub-Accounts and the Funds are listed
below:
- - ALLIANCEBERNSTEIN MONEY MARKET PORTFOLIO SUB-ACCOUNT which purchases Class A
shares of Alliance Money Market Portfolio of AllianceBernstein Variable
Products Series Fund, Inc.
- - ALLIANCEBERNSTEIN INTERNATIONAL PORTFOLIO SUB-ACCOUNT which purchases Class A
shares of Alliance International Portfolio of AllianceBernstein Variable
Products Series Fund, Inc.
- - ALLIANCEBERNSTEIN PREMIER GROWTH PORTFOLIO SUB-ACCOUNT which purchases
Class A shares of Alliance Premier Growth Portfolio of AllianceBernstein
Variable Products Series Fund, Inc.
- - AMERICAN CENTURY VP BALANCED FUND SUB-ACCOUNT which purchases shares of
American Century VP Balanced Fund of American Century Variable Portfolios,
Inc.
- - AMERICAN CENTURY VP CAPITAL APPRECIATION FUND SUB-ACCOUNT which purchases
shares of American Century VP Capital Appreciation Fund of American Century
Variable Portfolios, Inc.
- - FEDERATED AMERICAN LEADERS FUND II SUB-ACCOUNT WHICH purchases Primary shares
of Federated American Leaders Fund II of Federated Insurance Series
- - FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES FUND II SUB-ACCOUNT which
purchases shares of Federated Fund for U.S. Government Securities Fund II of
Federated Insurance Series
- - FEDERATED HIGH INCOME BOND FUND II SUB-ACCOUNT which purchases Primary shares
of Federated High Income Bond Fund II of Federated Insurance Series
- - FEDERATED CAPITAL INCOME FUND II SUB-ACCOUNT which purchases shares of
Federated Capital Income Fund II of Federated Insurance Series
- - HARTFORD INDEX HLS FUND SUB-ACCOUNT which purchases Class IA shares of
Hartford Index Fund, Inc.
- - INVESCO CORE EQUITY FUND SUB-ACCOUNT which purchases Series I shares of
INVESCO VIF-Core Equity Fund of the AIM Variable Insurance Funds.
- - INVESCO HEALTH SCIENCE FUND SUB-ACCOUNT which purchases Series I shares of
INVESCO VIF-Health Science Fund of the AIM Variable Insurance Funds.
<Page>
- - INVESCO TECHNOLOGY FUND SUB-ACCOUNT which purchases Series I shares of INVESCO
VIF-Technology Fund of the AIM Variable Insurance Funds.
- - MFS EMERGING GROWTH SERIES SUB-ACCOUNT which purchases Initial Class shares of
MFS Emerging Growth Series of MFS Variable Insurance Trust
- - MFS HIGH INCOME SERIES SUB-ACCOUNT which purchases Initial Class shares of MFS
High Income Series of MFS Variable Insurance Trust
- - MFS STRATEGIC INCOME SERIES SUB-ACCOUNT which purchases Initial Class shares
of MFS Strategic Income Series of MFS Variable Insurance Trust
- - GARTMORE GVIT DEVELOPING MARKETS FUND SUB-ACCOUNT (formerly Montgomery
Variable Series: Emerging Markets Fund Sub-Account) which purchases Class II
shares of the Gartmore GVIT Developing Markets Fund of the Gartmore Variable
Insurance Trust
- - NEUBERGER BERMAN AMT LIMITED MATURITY BOND PORTFOLIO SUB-ACCOUNT which
purchases shares of Neuberger Berman AMT Limited Maturity Bond Portfolio of
Neuberger Berman Advisers Management Trust
- - NEUBERGER BERMAN AMT PARTNERS PORTFOLIO SUB-ACCOUNT which purchases shares of
Neuberger Berman AMT Partners Portfolio of Neuberger Berman Advisers
Management Trust
- - ING VP NATURAL RESOURCES TRUST SUB-ACCOUNT which purchases shares of ING VP
Natural Resources Trust
- - ING VP EMERGING MARKETS FUND SUB-ACCOUNT which purchases shares of ING VP
Emerging Markets Fund
- - SAFECO CORE EQUITY PORTFOLIO SUB-ACCOUNT (formerly Safeco Equity Portfolio
Sub-Account) which purchases shares of Safeco Core Equity Portfolio of Safeco
Resource Series Trust
- - SAFECO GROWTH OPPORTUNITIES PORTFOLIO SUB-ACCOUNT which purchases shares of
Safeco Growth Opportunities Portfolio of Safeco Resource Series Trust
- - THE STRONG MID CAP GROWTH FUND II SUB-ACCOUNT which purchases shares of The
Strong Mid Cap Growth Fund II which is a series fund of Strong Variable
Insurance Funds, Inc.
- - VAN ECK WORLDWIDE BOND FUND SUB-ACCOUNT which purchases shares of Van Eck
Worldwide Bond Fund of Van Eck Worldwide Insurance Trust
- - VAN ECK WORLDWIDE HARD ASSETS FUND SUB-ACCOUNT which purchases shares of Van
Eck Worldwide Hard Assets Fund of Van Eck Worldwide Insurance Trust
You may also allocate some or all of your Premium Payment to either the Fixed
Accumulation Feature or a Guarantee Period. The Fixed Accumulation Feature pays
an interest rate guaranteed for a certain time period from the time the Premium
Payment is made. A Guarantee Period guarantees a rate of interest until a
specified maturity date and may be subject to a Market Value Adjustment. Premium
Payments allocated to the Fixed Accumulation Feature or a Guarantee Period are
not segregated from our company assets like the assets of the Separate Account.
If you decide to buy this Contract, you should keep this prospectus for your
records. You can also call us at 1-800-862-6668 to get a Statement of Additional
Information, free of charge. The Statement of Additional Information contains
more information about this Contract, and, like this prospectus, the Statement
of Additional Information is filed with the Securities and Exchange Commission
("SEC").
Although we file the prospectus and the Statement of Additional Information with
the SEC, the SEC doesn't approve or disapprove these securities or determine if
the information in this prospectus is truthful or complete. Anyone who
represents that the SEC does these things may be guilty of a criminal offense.
This prospectus and the Statement of Additional Information can also be obtained
from the SEC's website (http://www.sec.gov).
This Contract IS NOT:
- A bank deposit or obligation
- Federally insured
- Endorsed by any bank or governmental agency
This Contract may not be available for sale in all states.
- --------------------------------------------------------------------------------
PROSPECTUS DATED: MAY 3, 2004
STATEMENT OF ADDITIONAL INFORMATION DATED: MAY 3, 2004
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
- ----------------------------------------------------------------------
DEFINITIONS 4
- ----------------------------------------------------------------------
FEE TABLE 6
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HIGHLIGHTS 10
- ----------------------------------------------------------------------
GENERAL CONTRACT INFORMATION 11
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First Fortis Life Insurance Company 11
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The Separate Account 11
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The Funds 11
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PERFORMANCE RELATED INFORMATION 14
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Guarantee Periods 14
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THE CONTRACT 16
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Purchases and Contract Value 16
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Charges and Fees 18
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Death Benefit 19
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Surrenders 20
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ANNUITY PAYOUTS 21
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OTHER PROGRAMS AVAILABLE 22
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OTHER INFORMATION 23
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Legal Matters 24
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More Information 24
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FEDERAL TAX CONSIDERATIONS 24
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INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS 28
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ACCUMULATION UNIT VALUES 32
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FURTHER INFORMATION ABOUT FIRST FORTIS LIFE INSURANCE
COMPANY 36
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TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION 39
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APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS 40
- ----------------------------------------------------------------------
APPENDIX II -- INVESTMENTS BY FORTIS 42
- ----------------------------------------------------------------------
FINANCIAL STATEMENTS F-1
- ----------------------------------------------------------------------
</Table>
<Page>
4 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
DEFINITIONS
These terms are capitalized when used throughout this prospectus. Please refer
to these defined terms if you have any questions as you read your prospectus.
ACCOUNT: Any of the Sub-Accounts or Guarantee Period accounts.
ACCUMULATION PERIOD: The time after you purchase the Contract until we begin to
make Annuity Payouts.
ACCUMULATION UNITS: If you allocate your Premium Payment to any of the
Sub-Accounts, we will convert those payments into Accumulation Units in the
selected Sub-Accounts. Accumulation Units are valued at the end of each
Valuation Day and are used to calculate the value of your Contract prior to
Annuitization.
ACCUMULATION UNIT VALUE: The daily price of Accumulation Units on any Valuation
Day.
ADMINISTRATIVE OFFICE: Hartford Life Insurance Company administers these
Contracts. Our location and overnight mailing address is: 200 Hopmeadow Street,
Simsbury, Connecticut 06089. Our standard mailing address is: Investment Product
Services, P.O. Box 5085, Hartford, Connecticut 06102-5085.
ANNIVERSARY VALUE: The value equal to the Contract Value as of a Contract
Anniversary, increased by the dollar amount of any Premium Payments made since
that anniversary and reduced by the dollar amount of any partial Surrenders
since that anniversary.
ANNUITANT: The person on whose life the Contract is based. The Annuitant may not
be changed after your Contract is issued.
ANNUITY CALCULATION DATE: The date we calculate the first Annuity Payout.
ANNUITY PAYOUT: The money we pay out after the Annuity Commencement Date for the
duration and frequency you select.
ANNUITY PAYOUT OPTION: Any of the options available for payout after the Annuity
Commencement Date or death of the Contract Owner or Annuitant.
ANNUITY PERIOD: The time during which we make Annuity Payouts.
ANNUITY UNIT: The unit of measure we use to calculate the value of your Annuity
Payouts under a variable dollar amount Annuity Payout Option.
ANNUITY UNIT VALUE: The daily price of Annuity Units on any Valuation Day.
BENEFICIARY: The person entitled to receive a Death Benefit upon the death of
the Contract Owner.
CHARITABLE REMAINDER TRUST: An irrevocable trust, where an individual donor
makes a gift to the trust, and in return receives an income tax deduction. In
addition, the individual donor has the right to receive a percentage of the
trust earnings for a specified period of time.
CODE: The Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT: The person you may designate to become the Annuitant if
the original Annuitant dies before the Annuity Commencement Date. You must name
a Contingent Annuitant before the original Annuitant's death. This is only
available if you own a Non-Qualified Contract.
CONTRACT: The individual Annuity Contract and any endorsements or riders. Group
participants and some individuals may receive a certificate rather than a
Contract.
CONTRACT ANNIVERSARY: The anniversary of the date we issued your Contract. If
the Contract Anniversary falls on a Non-Valuation Day, then the Contract
Anniversary will be the next Valuation Day.
CONTRACT OWNER OR YOU: The owner or holder of the Contract described in this
prospectus. We do not capitalize "you" in the prospectus.
CONTRACT VALUE: The total value of the Accounts on any Valuation Day.
CONTRACT YEAR: Any 12 month period between Contract Anniversaries, beginning
with the date the Contract was issued.
DEATH BENEFIT: The amount payable after the Contract Owner or the Annuitant
dies.
DOLLAR COST AVERAGING: A program that allows you to systematically make
transfers between Accounts available in your Contract.
FORTIS: First Fortis Life Insurance Company, the company that issued this
Contract.
GENERAL ACCOUNT: This account holds our company assets and any assets not
allocated to a Separate Account. The assets in this account are available to the
creditors of Fortis and/or Hartford.
JOINT ANNUITANT: The person on whose life Annuity Payouts are based if the
Annuitant dies after Annuitization. You may name a Joint Annuitant only if your
Annuity Payout Option provides for a survivor. The Joint Annuitant may not be
changed.
MARKET VALUE ADJUSTMENT: An adjustment that either increases or decreases the
amount we pay you under certain circumstances.
NET INVESTMENT FACTOR: This is used to measure the investment performance of a
Sub-Account from one Valuation Day to the next, and is also used to calculate
your Annuity Payout amount.
NON-VALUATION DAY: Any day the New York Stock Exchange is not open for trading.
PAYEE: The person or party you designate to receive Annuity Payouts.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 5
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PREMIUM PAYMENT: Money sent to us to be invested in your Contract.
PREMIUM TAX: A tax charged by a state or municipality on Premium Payments.
QUALIFIED CONTRACT: A Contract that is defined as a tax-qualified retirement
plan in the Code.
REQUIRED MINIMUM DISTRIBUTION: A federal requirement that individuals age 70 1/2
and older must take a distribution from their tax-qualified retirement account
by December 31, each year. For employer sponsored Qualified Contracts, the
individual must begin taking distributions at the age of 70 1/2 or upon
retirement, whichever comes later.
SUB-ACCOUNT VALUE: The value on or before the Annuity Calculation Date, which is
determined on any day by multiplying the number of Accumulation Units by the
Accumulation Unit Value for that Sub-Account.
SURRENDER: A complete or partial withdrawal from your Contract.
SURRENDER VALUE: The amount we pay you if you terminate your Contract before the
Annuity Commencement Date. The Surrender Value is equal to the Contract Value
minus any applicable Market Value Adjustment.
VALUATION DAY: Every day the New York Stock Exchange is open for trading. Values
of the Separate Account are determined as of the close of the New York Stock
Exchange, generally 4:00 p.m. Eastern Time.
VALUATION PERIOD: The time span between the close of trading on the New York
Stock Exchange from one Valuation Day to the next.
<Page>
6 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
FEE TABLE
The following tables describe the fees and expenses that you will pay when
buying, owning, and surrendering the Contract.
This table describes the fees and expenses that you will pay at the time that
you purchase the Contract or Surrender the Contract. Charges for state premium
taxes may also be deducted when you purchase the Contract, upon Surrender or
when we start to make Annuity Payouts.
<Table>
CONTRACT OWNER TRANSACTION EXPENSES
SALES CHARGE IMPOSED ON PURCHASES (as a percentage of
Premium Payments) None
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MAXIMUM CONTINGENT DEFERRED SALES CHARGE (as a percentage of
Premium Payments) None
- ---------------------------------------------------------------------
</Table>
This table describes the fees and expenses that you will pay periodically and on
a daily basis during the time that you own the Contract, not including fees and
expenses of the underlying Funds.
<Table>
ANNUAL MAINTENANCE FEE (1) $30
- ---------------------------------------------------------------------
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average
daily Sub-Account value)
Mortality and Expense Risk Charge 0.45%
- ---------------------------------------------------------------------
Total Separate Account Annual Expenses 0.45%
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</Table>
(1) An annual $30 charge deducted on a Contract Anniversary or upon Surrender if
the Contract Value at either of those times is less than $50,000. It is
deducted proportionately from the Accounts in which you are invested at the
time of the charge.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 7
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THIS TABLE SHOWS THE MINIMUM AND MAXIMUM TOTAL FUND OPERATING EXPENSES CHARGED
BY THE UNDERLYING FUNDS THAT YOU MAY PAY ON A DAILY BASIS DURING THE TIME THAT
YOU OWN THE CONTRACT. MORE DETAIL CONCERNING EACH FUND'S FEES AND EXPENSES IS
CONTAINED IN THE PROSPECTUS FOR EACH FUND.
<Table>
<Caption>
Minimum Maximum
- -------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.44% 2.58%
(these are expenses that are deducted from Fund
assets, including management fees, Rule 12b-1
distribution and/or service fees, and other expenses)
- -------------------------------------------------------------------------
</Table>
Annual Fund Operating Expenses
As of the Fund's Year End
(As a percentage of net assets)
<Table>
<Caption>
TOTAL ANNUAL
FUND OPERATING
EXPENSES (BEFORE TOTAL
12B-1 CONTRACTUAL FEE CONTRACTUAL FEE ANNUAL
AND/OR WAIVERS OR WAIVERS OR FUND
MANAGEMENT SERVICING OTHER EXPENSE EXPENSE OPERATING
FEES FEES EXPENSES REIMBURSEMENTS) REIMBURSEMENTS EXPENSES
- ---------------------------------------------------------------------------------------------------------------------------------
AllianceBernstein Money Market Portfolio --
Class A 0.50% N/A 0.18% 0.68% NA 0.68%
- ---------------------------------------------------------------------------------------------------------------------------------
AllianceBernstein International Portfolio --
Class A 1.00% N/A 0.66% 1.66% N/A 1.66%
- ---------------------------------------------------------------------------------------------------------------------------------
AllianceBernstein Premier Growth
Portfolio -- Class A 1.00% N/A 0.05% 1.05% N/A 1.05%
- ---------------------------------------------------------------------------------------------------------------------------------
American Century VP Balanced Fund 0.90% N/A 0.00% 0.90% N/A 0.90%
- ---------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation
Fund (1) 1.00% N/A 0.00% 1.00% N/A 1.00%
- ---------------------------------------------------------------------------------------------------------------------------------
Federated American Leaders Fund II -- Primary
shares 0.75% N/A 0.38% 1.13% 0.25% 0.88%
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Fund for U.S. Government Securities
Fund II 0.60% N/A 0.37% 0.97% 0.25% 0.72%
- ---------------------------------------------------------------------------------------------------------------------------------
Federated High Income Bond Fund II -- Primary
shares 0.60% N/A 0.42% 1.02% 0.25% 0.77%
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Capital Income Fund II 0.75% N/A 0.52% 1.27% 0.25% 1.02%
- ---------------------------------------------------------------------------------------------------------------------------------
Hartford Index HLS Fund -- Class IA 0.40% N/A 0.04% 0.44% N/A 0.44%
- ---------------------------------------------------------------------------------------------------------------------------------
INVESCO VIF-Core Equity Fund --
Series I (2)(3) 0.75% N/A 0.38% 1.13% N/A 1.13%
- ---------------------------------------------------------------------------------------------------------------------------------
INVESCO VIF-Health Science Fund --
Series I (2)(3) 0.75% N/A 0.33% 1.08% N/A 1.08%
- ---------------------------------------------------------------------------------------------------------------------------------
INVESCO VIF-Technology Fund
--Series I (2)(3)(4) 0.75% N/A 0.41% 1.16% N/A 1.16%
- ---------------------------------------------------------------------------------------------------------------------------------
MFS-Registered Trademark- Emerging Growth
Series -- Initial Class (6) 0.75% N/A 0.12% 0.87% N/A 0.87%
- ---------------------------------------------------------------------------------------------------------------------------------
MFS-Registered Trademark- High Income
Series -- Initial Class (6)(7)(8) 0.75% N/A 0.15% 0.90% 0.00% 0.90%
- ---------------------------------------------------------------------------------------------------------------------------------
MFS-Registered Trademark- Strategic Income
Series -- Initial Class (6)(7)(8) 0.75% N/A 0.36% 1.11% 0.21% 0.90%
- ---------------------------------------------------------------------------------------------------------------------------------
Gartmore GVIT Developing Markets Fund --
Class II 1.15% 0.25% 0.32% 1.72% N/A 1.72%
- ---------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Limited Maturity Bond
Portfolio 0.65% N/A 0.09% 0.74% N/A 0.74%
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Neuberger Berman AMT Partners Portfolio 0.83% N/A 0.07% 0.90% N/A 0.90%
- ---------------------------------------------------------------------------------------------------------------------------------
ING VP Natural Resources Trust 1.00% N/A 0.61% 1.61% N/A 1.61%
- ---------------------------------------------------------------------------------------------------------------------------------
ING VP Emerging Markets Fund 0.85% N/A 1.73% 2.58% 0.08% 2.50%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Page>
8 FIRST FORTIS LIFE INSURANCE COMPANY
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<Table>
<Caption>
TOTAL ANNUAL
FUND OPERATING
EXPENSES (BEFORE TOTAL
12B-1 CONTRACTUAL FEE CONTRACTUAL FEE ANNUAL
AND/OR WAIVERS OR WAIVERS OR FUND
MANAGEMENT SERVICING OTHER EXPENSE EXPENSE OPERATING
FEES FEES EXPENSES REIMBURSEMENTS) REIMBURSEMENTS EXPENSES
- ---------------------------------------------------------------------------------------------------------------------------------
Safeco Core Equity Portfolio 0.74% N/A 0.06% 0.80% N/A 0.80%
- ---------------------------------------------------------------------------------------------------------------------------------
Safeco Growth Opportunities Portfolio 0.74% N/A 0.06% 0.80% N/A 0.80%
- ---------------------------------------------------------------------------------------------------------------------------------
The Strong Mid Cap Growth Fund II (9) 0.75% N/A 0.71% 1.46% N/A 1.46%
- ---------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond Fund 1.00% N/A 0.21% 1.21% N/A 1.21%
- ---------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Hard Assets Fund 1.00% N/A 0.23% 1.23% N/A 1.23%
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) The Fund has a stepped fee schedule. As a result, the Fund's management fee
generally decreases as Fund assets increase.
(2) The fund has adopted a new form of administrative services and transfer
agency agreements which will be effective May 1, 2004. As a result, Other
Expenses have been restated to reflect the changes in fees under the new
agreements.
(3) The fund's advisor is entitled to receive reimbursement from the fund for
fees and expenses paid for by the fund's advisor pursuant to expense
limitation commitments between the fund's advisor and the fund if such
reimbursement does not cause the fund to exceed its then-current expense
limitations and the reimbursement is made within three years after the
fund's advisor incurred the expense.
(4) As a result of a reorganization of another fund into INVESCO Technology
Fund, which occured on April 30, 2004, the fund's Total Annual Operating
Expenses have been restated to reflect current expenses.
(5) The Fund's actual "Other Expenses" and "Total Fund Operating Expenses" were
lower than the figures shown because the custodian fees were reduced under
expense offset arrangements.
(6) Each series of the MFS Variable Insurance Trust has an offset arrangement
that reduces the series' custodian fee based upon the amount of cash
maintained by the series with its custodian and dividend dispursing agent.
Each series may enter into other such arrangements and directed brokerage
arrangements, which would also have the effect of reducing the series'
expenses. "Other Expenses" do not take into account these fee reductions,
and are therefore higher than the actual expenses of the series. Had these
fee reductions been taken into account, the net "Total Annual Fund Operating
Expenses" would be lower for certain series and would equal: 0.86% for MFS
Emerging Growth Series.
(7) MFS has contractually agreed, subject to reimbursement, to bear the series
expenses such that "Other Expenses" do not exceed 0.15% annual for each
series. (Note that the High Income Series' "Other Expenses" are currently
0.15% and the series is reimbursing MFS). This agreement will continue until
at least December 31, 2004.
(8) The reimbursement agreement will terminate on the earlier of December 31,
2004 or such date as all expenses previously borne by MFS under agreement
have been paid by the series.
(9) The Adviser for this Fund voluntarily agreed to waive and/or reimburse
certain Fund expenses. The Fund Adviser may cease this waiver and/or
reimbursement at any time. With such waiver and/or reimbursement Total Fund
Operating Expenses would have been:
<Table>
<Caption>
TOTAL
ANNUAL
FUND
OTHER OPERATING
MANAGEMENT FEES EXPENSES EXPENSES
- -------------------------------------------------------------------------------------------------------
The Strong Mid Cap Growth Fund II 0.75% 0.43% 1.18%
- -------------------------------------------------------------------------------------------------------
</Table>
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 9
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EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN THE
CONTRACT WITH THE COST OF INVESTING IN OTHER VARIABLE ANNUITY CONTRACTS. THESE
COSTS INCLUDE CONTRACT OWNER TRANSACTION EXPENSES, SEPARATE ACCOUNT ANNUAL
EXPENSES, AND TOTAL ANNUAL FUND OPERATING EXPENSES.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN THE CONTRACT FOR THE TIME PERIODS
INDICATED. THE EXAMPLE ALSO ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH
YEAR AND ASSUMES THE MAXIMUM FEES AND EXPENSES OF ANY OF THE FUNDS. ALTHOUGH
YOUR ACTUAL COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS, YOUR COSTS
WOULD BE:
(1) If you Surrender your Contract at the end of the applicable time period:
<Table>
1 year $ 318
- --------------------------------------------------------------------
3 years $ 972
- --------------------------------------------------------------------
5 years $1,650
- --------------------------------------------------------------------
10 years $3,456
- --------------------------------------------------------------------
</Table>
(2) If you annuitize at the end of the applicable time period:
<Table>
1 year $ 311
- --------------------------------------------------------------------
3 years $ 964
- --------------------------------------------------------------------
5 years $1,642
- --------------------------------------------------------------------
10 years $3,447
- --------------------------------------------------------------------
</Table>
(3) If you do not Surrender your Contract:
<Table>
1 year $ 318
- --------------------------------------------------------------------
3 years $ 972
- --------------------------------------------------------------------
5 years $1,650
- --------------------------------------------------------------------
10 years $3,456
- --------------------------------------------------------------------
</Table>
<Page>
10 FIRST FORTIS LIFE INSURANCE COMPANY
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HIGHLIGHTS
HOW DO I PURCHASE THIS CONTRACT?
You must complete our application or order request and submit it to us for
approval with your first Premium Payment. Your first Premium Payment must be at
least $5,000 and subsequent Premium Payments must be at least $50, unless you
take advantage of our InvestEase-Registered Trademark- Program or are part of
certain retirement plans.
- For a limited time, usually within ten days after you receive your Contract,
you may cancel your Contract. You may bear the investment risk for your
Premium Payment prior to our receipt of your request for cancellation.
WHAT TYPE OF SALES CHARGE WILL I PAY?
You don't pay a sales charge when you purchase your Contract.
IS THERE AN ANNUAL MAINTENANCE FEE?
We deduct a $30.00 fee each year on your Contract Anniversary or when you fully
Surrender your Contract, if, on either of those dates, the value of your
Contract is less than $50,000.
WHAT CHARGES WILL I PAY ON AN ANNUAL BASIS?
In addition to the Annual Maintenance Fee, you pay the following charges each
year:
- - MORTALITY AND EXPENSE RISK CHARGE -- This charge is for insurance. It is
subtracted daily and is equal to an annual charge of 0.45% of your Contract
Value invested in the Funds.
- - ANNUAL FUND OPERATING EXPENSES -- These are charges for the Funds. See the
Annual Fund Operating Expenses table for more complete information and the
Funds' prospectuses accompanying this prospectus.
CAN I TAKE OUT ANY OF MY MONEY?
You may Surrender all or part of the amounts you have invested at any time
before we start making Annuity Payouts. You may have to pay income tax on the
money you take out and, if you Surrender before you are age 59 1/2, you may have
to pay an income tax penalty. Surrenders may be subject to a Market Value
Adjustment.
IS THERE A MARKET VALUE ADJUSTMENT?
Surrenders and other withdrawals from a Guarantee Period in our General Account
may be subject to a Market Value Adjustment. The Market Value Adjustment may
increase or reduce the General Account value of your Contract. The Market Value
Adjustment is computed using a formula that is described in this prospectus
under "Market Value Adjustment".
WHAT INVESTMENT CHOICES ARE AVAILABLE?
You may allocate your Premium Payment or Contract Values among the following
investment choices:
- - The variable Sub-Accounts that invest in underlying Funds; and/or
- - One or more Guarantee Periods, which may be subject to a Market Value
Adjustment.
WILL FORTIS PAY A DEATH BENEFIT?
There is a Death Benefit if the Contract Owner dies before we begin to make
Annuity Payouts. The Death Benefit amount will remain invested in the
Sub-Accounts according to your last instructions and will fluctuate with the
performance of the underlying Funds until we receive proof of death and complete
instructions from the Beneficiary.
If death occurs before the Annuity Commencement Date, the Death Benefit is the
greater of:
- - The total Premium Payments you have made to us minus any partial Surrenders
and any applicable negative Market Value Adjustment; or
- - The Contract Value of your Contract.
WHAT ANNUITY PAYOUT OPTIONS ARE AVAILABLE?
When it comes time for us to make payouts, you may choose one of the following
Annuity Payout Options: Life Annuity, Life Annuity with Payments for 10 or 20
years, Joint and 1/2 Contingent Survivor Annuity, and Joint and Full Survivor
Annuity. We may make other Annuity Payout Options available at any time.
You must begin to take payouts by the Annuitant's 110th birthday unless you
elect a later date to begin receiving payments subject to the laws and
regulations then in effect and our approval. The date you select may have tax
consequences, so please check with a qualified tax advisor. If you do not tell
us what Annuity Payout Option you want before that time, we will make Automatic
Annuity Payouts under the Life Annuity with Payments Guaranteed for 10 Years.
Depending on the investment allocation of your Contract in effect on the Annuity
Commencement Date, we will make Automatic Annuity Payouts that are:
- - fixed dollar amount Automatic Annuity Payouts,
- - variable dollar amount Automatic Annuity Payouts, or
- - a combination of fixed dollar amount and variable dollar amount Automatic
Annuity Payouts.
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FIRST FORTIS LIFE INSURANCE COMPANY 11
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GENERAL CONTRACT INFORMATION
FIRST FORTIS LIFE INSURANCE COMPANY
First Fortis Life Insurance Company ("Fortis") is the issuer of the contracts.
Fortis is a New York corporation founded in 1971. It is qualified to sell life
insurance and annuity contracts in New York.
Fortis is a wholly owned subsidiary of Assurant, Inc., which recently merged
with Fortis, Inc. As a result of the merger, Assurant, Inc. is the successor to
the business operations, assets and obligations of Fortis, Inc. Fortis, Inc. is
the ultimate parent of Fortis Benefits Insurance Company. Assurant, Inc.
recently concluded an initial public offering of its common stock.
All of the guarantees and commitments under the contracts are general
obligations of Fortis. None of Fortis' affiliated companies has any legal
obligation to back Fortis' obligations under the contracts.
On April 1, 2001, the parent company of Fortis entered into an agreement with
Hartford Life and Annuity Insurance Company ("Hartford") to co-insure the
obligations of Fortis under the variable annuity Contracts and to provide
administration for the Contracts. Hartford was originally incorporated under the
laws of Wisconsin on January 9, 1956, and subsequently redomiciled to
Connecticut. Hartford's offices are located in Simsbury, Connecticut; however,
its mailing address is P.O. Box 2999, Hartford, CT 06104-2999. Hartford is
ultimately controlled by The Hartford Financial Services Group, Inc., one of the
largest financial service providers in the United States.
THE SEPARATE ACCOUNT
The Separate Account is where we set aside and invest the assets of some of our
annuity contracts, including this Contract. The Separate Account was established
on October 1, 1993 as "Separate Account A" and is registered as a unit
investment trust under the Investment Company Act of 1940. This registration
does not involve supervision by the SEC of the management or the investment
practices of the Separate Account, Fortis or Hartford. The Separate Account
meets the definition of "Separate Account" under federal securities law. This
Separate Account holds only assets for variable annuity contracts. The Separate
Account:
- - Holds assets for your benefit and the benefit of other Contract Owners, and
the persons entitled to the payouts described in the Contract.
- - Is not subject to the liabilities arising out of any other business Fortis or
Hartford may conduct.
- - Is not affected by the rate of return of Fortis' General Account or Hartford's
General Account or by the investment performance of any of Fortis' or
Hartford's other Separate Accounts.
- - May be subject to liabilities from a Sub-Account of the Separate Account that
holds assets of other variable annuity contracts offered by the Separate
Account, which are not described in this prospectus.
- - Is credited with income and gains, and takes losses, whether or not realized,
from the assets it holds.
We do not guarantee the investment results of the Separate Account. There is no
assurance that the value of your Contract will equal the total of the payments
you make to us.
THE FUNDS
The AllianceBernstein Variable Products Series Funds, Inc. is an open-ended
series investment Company. It was incorporated under Maryland law on November
17, 1987. Alliance Capital Management L.P. serves as the Fund's Manager for
AllianceBernstein Money Market Portfolio, AllianceBernstein International
Portfolio and AllianceBernstein Premier Growth Portfolio.
The shares of each AllianceBernstein Variable Products Series Fund have been
divided into Class A and Class B. Only Class A shares are available in this
Contract.
American Century Variable Portfolios, Inc. is an open-end management investment
company. It was organized as a Maryland corporation on June 4, 1987. American
Century Investment Management, Inc., serves as the investment manager for
American Century VP Balanced Fund and American Century VP Capital Appreciation
Fund.
Federated Insurance Series is an open-end management investment company. It was
established as a Massachusetts business trust under a Declaration of Trust dated
September 15, 1993. Federated Investment Management Company is the investment
adviser to Federated High Income Bond Fund II, Federated Capital Income Fund II,
Federated American Leaders Fund II and Federated Fund for U.S. Government
Securities II.
Hartford Index HLS Fund is sponsored and administered by Hartford or its
affiliates. HL Investment Advisers, LLC located at 200 Hopmeadow Street,
Simsbury, Connecticut, serves as the investment manager to the Fund. Hartford
Investment Management Company serves as sub-investment adviser and provides day
to day investment services. The Fund is a separate Maryland corporation
registered with the Securities and Exchange Commission as an open-end management
investment company. Shares of the Fund have been divided into Class IA and
Class IB. Only Class IA shares are available in this Contract.
The INVESCO VIF-Core Equity Fund, INVESCO VIF-Health Science Fund and INVESCO
VIF-Technology Fund are investment portfolios of AIM Variable Insurance Funds,
which is a registered open-ended, series, management investment company. A I M
Advisors, Inc. serves as the investment adviser to these Funds. INVESCO
Institutional (N.A.), Inc. serves as the sub-adviser to these funds.
MFS Variable Insurance Trust is an open-end management investment company. It
was organized as a business trust under the laws of the Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994. Massachusetts
Financial Services Company manages MFS-Registered Trademark- Emerging Growth
Series, MFS-Registered Trademark- High Income Series and MFS-Registered
Trademark- Strategic Income Series.
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12 FIRST FORTIS LIFE INSURANCE COMPANY
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The Gartmore Variable Insurance Trust is an open-end investment company. This
Massachusetts business trust was organized on June 30, 1981. Gartmore Global
Asset Management Trust manages the Gartmore GVIT Developing Markets Fund and
Gartmore Global Partners serves as sub-adviser.
Neuberger Berman Advisers Management Trust is an open-end diversified series
management investment company. It was established as a Delaware business trust
on May 23, 1994. Neuberger Berman Management Inc. serves as manager of Neuberger
Berman AMT Limited Maturity Bond Portfolio and Neuberger Berman AMT Partners
Portfolio.
ING VP Emerging Markets Fund, Inc. is a diversified, open-end management
investment company organized on December 27, 1993, as a corporation under the
laws of the State of Maryland. ING VP Natural Resources Trust is a
non-diversified, open-end management investment company organized on November
15, 1988 as a business trust under the laws of the Commonwealth of
Massachusetts. ING Investments, LLC is the Investment Advisor to both the Fund
and the Trust. ING Investment Management Advisers, B.V. is the Sub-Advisor to
ING VP Emerging Markets Fund and Aeltus Investment Management, Inc. is the
Sub-Advisor to ING VP Natural Resources Trust.
The Safeco Resources Series Trust is an open-end series management investment
company. It is a Delaware business trust established by a trust instrument dated
May 13, 1993. Safeco Asset Management Company is the Fund manager for Safeco
Core Equity Portfolio and Safeco Growth Opportunities Portfolio.
The Strong Variable Insurance Funds, Inc. is an open-end management investment
company. It was incorporated in Wisconsin. Strong Capital Management, Inc. is
the investment adviser to The Strong Mid Cap Growth Fund II.
Van Eck Worldwide Insurance Trust is an open-end management investment company.
It was organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to Van Eck Worldwide Bond Fund and Van Eck
Worldwide Hard Assets Fund.
We do not guarantee the investment results of any of the underlying Funds. Since
each underlying Fund has different investment objectives, each is subject to
different risks. These risks and the Funds' expenses are more fully described in
the accompanying Funds' prospectus, and the Funds' Statement of Additional
Information which may be ordered from us. The Funds' prospectus should be read
in conjunction with this Prospectus before investing.
The Funds may not be available in all states.
The investment goals of each of the Funds are as follows:
ALLIANCEBERNSTEIN MONEY MARKET PORTFOLIO -- Seeks safety of principal,
maintenance of liquidity and maximum current income by investing in a broadly
diversified portfolio of money market securities.
ALLIANCEBERNSTEIN INTERNATIONAL PORTFOLIO -- Seeks to obtain a total return on
its assets from long-term growth of capital and from income principally through
a broad portfolio of marketable securities of established non-United States
companies (or United States companies having their principal activities and
interests outside the United States), companies participating in foreign
economies with prospects for growth, and foreign government securities.
ALLIANCEBERNSTEIN PREMIER GROWTH PORTFOLIO -- Seeks growth of capital, rather
than current income, by pursuing aggressive investment policies.
AMERICAN CENTURY VP BALANCED FUND -- Seeks capital and current income by
maintaining approximately 60% of the assets in common stocks that are considered
to have better-than-average prospects for appreciation and the remaining assets
in bonds and other fixed income securities.
AMERICAN CENTURY VP CAPITAL APPRECIATION FUND -- Seeks capital growth by
investing primarily in common stocks that are considered to have
better-than-average prospects for appreciation.
FEDERATED AMERICAN LEADERS FUND II -- Seeks to achieve long-term growth of
capital with a secondary objective to provide income. It invests, primarily, in
common stock of "blue-chip" companies.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES FUND II -- Seeks to provide
current income. Under normal circumstances, it invests, primarily in securities
issued or guaranteed as to payment of principal and interest by the U.S.
Government, its agencies or instrumentalists.
FEDERATED HIGH INCOME BOND FUND II -- Seeks high current income. It invests
primarily in a professionally managed, diversified portfolio of fixed income
securities. The fixed income securities in which it invests are lower-rated
corporate debt obligations, which are commonly referred to as "junk bonds."
FEDERATED CAPITAL INCOME FUND II -- Seeks to achieve high current income and
moderate capital appreciation. It invests primarily in a professionally managed,
diversified portfolio of equity and fixed income securities that have high
relative income potential.
HARTFORD INDEX HLS FUND -- Seeks to provide investment results which approximate
the price and yield performance of publicly traded common stocks in the
aggregate. Sub-advised by Hartford Investment Management Company.
INVESCO VIF-CORE EQUITY FUND -- Seeks the best possible current income while
following sound investment practices. Capital growth potential is an additional
consideration in the selection of the portfolio securities.
INVESCO VIF-HEALTH SCIENCE FUND -- Seeks capital appreciation.
INVESCO VIF-TECHNOLOGY FUND -- Seeks capital appreciation.
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES -- Seeks to provide long-term
growth of capital.
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FIRST FORTIS LIFE INSURANCE COMPANY 13
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MFS-REGISTERED TRADEMARK- HIGH INCOME SERIES -- Seeks high current income.
MFS-REGISTERED TRADEMARK- STRATEGIC INCOME SERIES -- Seeks to provide high
current income by investing in fixed income securities and secondarily to
provide significant capital appreciation.
GARTMORE GVIT DEVELOPING MARKETS FUND (formerly Montgomery Variable Series:
Emerging Markets Fund) -- Seeks long-term capital appreciation.
NEUBERGER BERMAN AMT LIMITED MATURITY BOND PORTFOLIO -- Seeks high current
income consistent with low risk to principal and liquidity; and secondarily,
total return.
NEUBERGER BERMAN AMT PARTNERS PORTFOLIO -- Seeks capital growth.
ING VP NATURAL RESOURCES TRUST -- Seeks long-term growth of capital.
ING VP EMERGING MARKETS FUND -- Seeks long-term growth of capital.
SAFECO CORE EQUITY PORTFOLIO (formerly Safeco Equity Portfolio) -- Seeks
long-term growth of capital and reasonable current income.
SAFECO GROWTH OPPORTUNITIES PORTFOLIO -- Seeks growth of capital.
THE STRONG MID CAP GROWTH FUND II -- Seeks capital growth.
VAN ECK WORLDWIDE BOND FUND -- Seeks high total return-income plus capital
appreciation by investing globally, primarily in a variety of debt securities.
VAN ECK WORLDWIDE HARD ASSETS FUND -- Seeks long-term capital appreciation by
investing primarily in "hard asset" securities.
MIXED AND SHARED FUNDING -- Shares of the Funds may be sold to our other
separate accounts and our insurance company affiliates or other unaffiliated
insurance companies to serve as the underlying investment for both variable
annuity contracts and variable life insurance policies, a practice known as
"mixed and shared funding." As a result, there is a possibility that a material
conflict may arise between the interests of Contract Owners, and of owners of
other contracts whose contract values are allocated to one or more of these
other separate accounts investing in any one of the Funds. In the event of any
such material conflicts, we will consider what action may be appropriate,
including removing the Fund from the Separate Account or replacing the Fund with
another underlying fund. There are certain risks associated with mixed and
shared funding, as disclosed in the Funds' prospectus.
VOTING RIGHTS -- We are the legal owners of all Fund shares held in the Separate
Account and we have the right to vote at the Fund's shareholder meetings. To the
extent required by federal securities laws or regulations, we will:
- - Notify you of any Fund shareholders' meeting if the shares held for your
Contract may be voted.
- - Send proxy materials and a form of instructions that you can use to tell us
how to vote the Fund shares held for your Contract.
- - Arrange for the handling and tallying of proxies received from Contract
Owners.
- - Vote all Fund shares attributable to your Contract according to instructions
received from you, and
- - Vote all Fund shares for which no voting instructions are received in the same
proportion as shares for which instructions have been received.
If any federal securities laws or regulations, or their present interpretation,
change to permit us to vote Fund shares on our own, we may decide to do so. You
may attend any Shareholder Meeting at which shares held for your Contract may be
voted. After we begin to make Annuity Payouts to you, the number of votes you
have will decrease.
SUBSTITUTIONS, ADDITIONS, OR DELETIONS OF FUNDS -- We reserve the right, subject
to any applicable law, to make certain changes to the Funds offered under your
Contract. We may, in our sole discretion, establish new Funds. New Funds will be
made available to existing Contract Owners as we determine appropriate. We may
also close one or more Funds to additional Premium Payments or transfers from
existing Sub-Accounts.
We may eliminate the shares of any of the Funds from the Contract for any reason
and we may substitute shares of another registered investment company for the
shares of any Fund already purchased or to be purchased in the future by the
Separate Account. To the extent required by the Investment Company Act of 1940
(the "1940 Act"), substitutions of shares attributable to your interest in a
Fund will not be made until we have the approval of the Commission and we have
notified you of the change.
In the event of any substitution or change, we may, by appropriate endorsement,
make any changes in the Contract necessary or appropriate to reflect the
substitution or change. If we decide that it is in the best interest of Contract
Owners, the Separate Account may be operated as a management company under the
1940 Act or any other form permitted by law, may be deregistered under the 1940
Act in the event such registration is no longer required, or may be combined
with one or more other Separate Accounts.
ADMINISTRATIVE AND DISTRIBUTION SERVICES -- Fortis has entered into agreements
with the investment advisers or distributors of many of the Funds. Under the
terms of these agreements, Fortis, or its agents, provide administrative and
distribution related services and the Funds pay fees that are usually based on
an annual percentage of the average daily net assets of the Funds. These
agreements may be different for each Fund or each Fund family and may include
fees under a distribution and/or servicing plan adopted by a Fund pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
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14 FIRST FORTIS LIFE INSURANCE COMPANY
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PERFORMANCE RELATED INFORMATION
The Separate Account may advertise certain performance-related information
concerning the Sub-Accounts. Performance information about a Sub-Account is
based on the Sub-Account's past performance only and is no indication of future
performance.
When a Sub-Account advertises its standardized total return, it will usually be
calculated since the inception of the Separate Account for one year, five years,
and ten years or some other relevant periods if the Sub-Account has not been in
existence for at least ten years. Total return is measured by comparing the
value of an investment in the Sub-Account at the beginning of the relevant
period to the value of the investment at the end of the period. Total return
calculations reflect a deduction for Total Annual Fund Operating Expenses, any
Contingent Deferred Sales Charge, Separate Account Annual Expenses without any
optional charge deductions, and the Annual Maintenance Fee.
The Separate Account may also advertise non-standardized total returns that
pre-date the inception of the Separate Account. These non-standardized total
returns are calculated by assuming that the Sub-Accounts have been in existence
for the same periods as the underlying Funds and by taking deductions for
charges equal to those currently assessed against the Sub-Accounts.
Non-standardized total return calculations reflect a deduction for Total Annual
Fund Operating Expenses and Separate Account Annual Expenses without any
optional charge deductions, and do not include deduction for Contingent Deferred
Sales Charge or the Annual Maintenance Fee. This means the non-standardized
total return for a Sub-Account is higher than the standardized total return for
a Sub-Account. These non-standardized returns must be accompanied by
standardized returns.
If applicable, the Sub-Accounts may advertise yield in addition to total return.
The yield will be computed in the following manner: The net investment income
per unit earned during a recent one month period is divided by the unit value on
the last day of the period. This figure includes the recurring charges at the
Separate Account level.
A money market Sub-Account may advertise yield and effective yield. The yield of
a Sub-Account over a seven-day period and then annualized, i.e. the income
earned in the period is assumed to be earned every seven days over a 52-week
period and stated as a percentage of the investment. Effective yield is
calculated similarly but when annualized, the income earned by the investment is
assumed to be reinvested in Sub-Account units and thus compounded in the course
of a 52-week period. Yield and effective yield include the recurring charges at
the Separate Account level.
We may provide information on various topics to Contract Owners and prospective
Contract Owners in advertising, sales literature or other materials. These
topics may include the relationship between sectors of the economy and the
economy as a whole and its effect on various securities markets, investment
strategies and techniques (such as systematic investing, Dollar Cost Averaging
and asset allocation), the advantages and disadvantages of investing in
tax-deferred and taxable instruments, customer profiles and hypothetical
purchase scenarios, financial management and tax and retirement planning, and
other investment alternatives, including comparisons between the Contract and
the characteristics of and market for such alternatives.
GUARANTEE PERIODS
Any amount you allocate to our General Account under this Contract earns a
guaranteed interest rate beginning on the date you make the allocation. The
guaranteed interest rate continues for the number of years you select, up to a
maximum of ten years. We call this a Guarantee Period. At the end of your
Guarantee Period, your Contract Value, including accrued interest, will be
allocated to a new Guarantee Period that is the same length as your original
Guaranteed Period. However, you may reallocate your Contract Value to different
Guarantee Periods or to the Sub-Accounts. If you decide to reallocate your
Contract Value, you must do so by sending us a written request. We must receive
your written request at least three business days before the end of your
Guarantee Period. The first day of your new Guarantee Period or other
reallocation will be the day after the end of your previous Guarantee Period. We
will notify you at least 45 days and not more than 75 days before the end of
your Guarantee Period.
We currently offer ten different Guarantee Periods. These Guarantee Periods
range in length from one to ten years. Each Guarantee Period has its own
guaranteed interest rate, which may differ from other Guarantee Periods. We may,
at our discretion, change the guaranteed interest rate for future Guarantee
Periods. These changes will not affect the guaranteed interest rates we are
paying on current Guarantee Periods. The guaranteed interest rate will never be
less than an effective annual rate of 3%. Fortis' Management makes the final
determination on the guaranteed interest rates to be declared. We cannot predict
or assure the level of any future guaranteed interest rates in excess of an
effective annual rate of 3%.
We declare the guaranteed interest rates from time to time as market conditions
dictate. We advise you of the guaranteed interest rate for a Guarantee Period at
the time we receive a Premium Payment from you, or at the time we execute a
transfer you have requested, or at the time a Guarantee Period is renewed. You
may obtain information concerning the guaranteed interest rates that apply to
the various Guarantee Periods. You may obtain this information from our home
office or from your sales representative at any time.
We do not have a specific formula for establishing the guaranteed interest rates
for the Guarantee Periods. Guaranteed interest rates may be influenced by the
available interest rates on the investments we acquire with the amounts you
allocate for a
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FIRST FORTIS LIFE INSURANCE COMPANY 15
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particular Guarantee Period. Guaranteed interest rates do not necessarily
correspond to the available interest rates on the investments we acquire with
the amounts you allocate for a particular Guarantee Period. In addition, when we
determine guaranteed interest rates, we may consider:
- - the duration of a Guarantee Period;
- - regulatory and tax requirements;
- - sales and administrative expenses we bear;
- - risks we assume;
- - our profitability objectives; and
- - general economic trends.
MARKET VALUE ADJUSTMENT
Except as described below, we will apply a Market Value Adjustment to any
General Account value that is:
- - surrendered,
- - transferred, or
- - otherwise paid out
before the end of its Guarantee Period.
For example, we will apply a Market Value Adjustment to General Account value
that we pay:
- - as an amount applied to an Annuity Payout option, or
- - as an amount paid as a single sum in lieu of an Annuity Payout.
The Market Value Adjustment reflects both the amount of time left in your
Guarantee Period and the difference between the rate of interest credited to
your current Guarantee Period and the rate of interest we are crediting to a new
Guarantee period with a duration equal to the amount to time left in your
Guarantee Period. If your Guarantee Period's rate of interest is lower than the
rate of interest we are currently crediting the new Guarantee Period, then the
application of the Market Value Adjustment will reduce the amount you receive or
transfer. Conversely, if your Guarantee period's rate of interest is higher than
the rate of interest we are crediting for the new Guarantee Period, then the
application of the Market Value Adjustment will increase the amount you receive
or transfer.
You will find sample Market Value Adjustment calculations in Appendix I.
We do not apply a Market Value Adjustment to withdrawals and transfers of
General Account value under two exceptions.
We will not apply a Market Value Adjustment to General Account value that we pay
out during a 30 day period that:
- - begins 15 days before the end date of the Guarantee Period in which the
general account value was being held, and that:
- - ends 15 days after the end date of the Guarantee Period in which the general
account value was being held.
In addition, we will not apply a Market Value Adjustment to General Account
value that is withdrawn or transferred from a Guarantee Period on a periodic,
automatic basis. This exception only applies to such withdrawals or transfers
under a formal Fortis program for the withdrawal or transfer of General Account
value.
We may impose conditions and limitations on any formal Fortis program for the
withdrawal or transfer of general account value. Ask your Fortis representative
about the availability of such a program in your state. In addition, if such a
program is available in your state, your Fortis representative can inform you
about the conditions and limitations that may apply to that program.
DOLLAR COST AVERAGING PLUS ("DCA PLUS") PROGRAMS -- You may enroll in one or
more special pre-authorized transfer programs known as our DCA Plus Programs
(the "Programs"). Under these Programs, Contract Owners who enroll may allocate
a minimum of $5,000 of their Premium Payment into a Program (we may allow a
lower minimum Premium Payment for qualified plan transfers or rollovers,
including IRAs) and pre-authorize transfers to any of the Sub-Accounts under
either a 6-Month Transfer Program or 12-Month Transfer Program subject to
Program rules. The 6-Month Transfer Program and the 12-Month Transfer Program
will generally have different credited interest rates. Under the 6-Month
Transfer Program, the interest rate can accrue up to 6 months and all Premium
Payments and accrued interest must be transferred from the Program to the
selected Sub-Accounts in 3 to 6 months. Under the 12-Month Transfer Program, the
interest rate can accrue up to 12 months and all Premium Payments and accrued
interest must be transferred to the selected Sub-Accounts in 7 to 12 months.
This will be accomplished by monthly transfers for the period selected and with
the final transfer of the entire amount remaining in the Program.
The pre-authorized transfers will begin within 15 days of receipt of the Program
payment provided we receive complete enrollment instructions. If we do not
receive complete Program enrollment instructions within 15 days of receipt of
the initial Program payment, the Program will be voided and the entire balance
in the Program will be transferred to the Accounts designated by you. If you do
not designate an Account, we will return your Program payment to you for further
instruction. If your Program payment is less than the required minimum amount,
we will apply it to your Contract as a subsequent Premium Payment.
Under the DCA Plus Programs, the credited interest rate is not earned on the
full amount of your Premium Payment for the entire length of the Program. This
is because Program transfers to the Sub-Accounts decrease the amount of your
Premium Payment remaining in the Program.
Any subsequent Program payments we receive during an active Program transfer
period which are received during the same interest rate effective period will be
credited to the current Program. Any subsequent Program payments we receive
during an active Program transfer period which are received during a
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16 FIRST FORTIS LIFE INSURANCE COMPANY
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different interest rate effective period will be used to start a new Program.
That Program will be credited with the interest rate in effect on the date we
start the new Program. Unless you send us different instructions, the new
Program will be the same length of time as your current Program and will
allocate the subsequent Program payments to the same Sub-Accounts.
Hartford may limit the total number of DCA Programs and DCA Plus Programs to 5
Programs open at any one time.
We determine, in our sole discretion, the interest rates credited to the
Program. These interest rates may vary depending on the Contract you purchased.
Please consult your Registered Representative to determine the interest rate for
your Program.
You may elect to terminate the transfers by calling or writing us of your intent
to cancel enrollment in the Program. Upon cancellation, all the amounts
remaining in the Program will be immediately transferred to the Sub-Accounts you
selected for the Program.
We may discontinue, modify or amend the Programs or any other interest rate
program we establish. Any change to a Program will not affect Contract Owners
currently enrolled in the Program.
If you make systematic transfers from the Fixed Accumulation Feature under a
Dollar Cost Averaging Program or DCA Plus Program, you must wait 6 months after
your last systematic transfer before moving Sub-Account Values back to the Fixed
Accumulation Feature.
THE CONTRACT
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PURCHASES AND CONTRACT VALUE
WHAT TYPES OF CONTRACTS ARE AVAILABLE?
The Contract is an individual or group tax-deferred variable annuity contract.
It is designed for retirement planning purposes and may be purchased by any
individual, group or trust, including:
- - Any trustee or custodian for a retirement plan qualified under Sections 401(a)
or 403(a) of the Code;
- - Annuity purchase plans adopted by public school systems and certain tax-exempt
organizations according to Section 403(b) of the Code;
- - Individual Retirement Annuities adopted according to Section 408 of the Code;
- - Employee pension plans established for employees by a state, a political
subdivision of a state, or an agency of either a state or a political
subdivision of a state, and
- - Certain eligible deferred compensation plans as defined in Section 457 of the
Code.
The examples above represent Qualified Contracts, as defined by the Code. In
addition, individuals and trusts can also purchase Contracts that are not part
of a tax qualified retirement plan. These are known as Non-Qualified Contracts.
If you are purchasing the Contract for use in an IRA or other qualified
retirement plan, you should consider other features of the Contract besides tax
deferral, since any investment vehicle used within an IRA or other qualified
plan receives tax-deferred treatment under the Code.
HOW DO I PURCHASE A CONTRACT?
You may purchase a Contract by completing and submitting an application or an
order request along with an initial Premium Payment. For most Contracts, the
minimum Premium Payment is $5,000. For additional Premium Payments, the minimum
Premium Payment is $50. Under certain situations, we may allow smaller Premium
Payments, for example, if you are part of our InvestEase-Registered Trademark-
Program or certain tax qualified retirement plans. Prior approval is required
for Premium Payments of $1,000,000 or more.
You and your Annuitant must not be older than age 90 on the date that your
Contract is issued. You must be of legal age in the state where the Contract is
being purchased or a guardian must act on your behalf.
HOW ARE PREMIUM PAYMENTS APPLIED TO MY CONTRACT?
Your initial Premium Payment will be invested within two Valuation Days of our
receipt of a properly completed application or an order request and the Premium
Payment. If we receive your subsequent Premium Payment before the close of the
New York Stock Exchange, it will be priced on the same Valuation Day. If we
receive your Premium Payment after the close of the New York Stock Exchange, it
will be invested on the next Valuation Day. If we receive your subsequent
Premium Payment on a Non-Valuation Day, the amount will be invested on the next
Valuation Day. Unless we receive new instructions, we will invest the Premium
Payment based on your last allocation instructions. We will send you a
confirmation when we invest your Premium Payment.
If the request or other information accompanying the initial Premium Payment is
incomplete when received, we will hold the money in a non-interest bearing
account for up to five Valuation Days while we try to obtain complete
information. If we cannot obtain the information within five Valuation Days, we
will either return the Premium Payment and explain why the Premium Payment could
not be processed or keep the Premium Payment if you authorize us to keep it
until you provide the necessary information.
CAN I CANCEL MY CONTRACT AFTER I PURCHASE IT?
We want you to be satisfied with the Contract you have purchased. We urge you to
closely examine its provisions. If for any reason you are not satisfied with
your Contract, simply return it within ten days after you receive it with a
written request for cancellation that indicates your tax-withholding
instructions. In
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FIRST FORTIS LIFE INSURANCE COMPANY 17
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some states, you may be allowed more time to cancel your Contract. We may
require additional information, including a signature guarantee, before we can
cancel your Contract.
You bear the investment risk from the time the Contract is issued until we
receive your complete cancellation request.
The amount we pay you upon cancellation depends on the requirements of the state
where you purchased your Contract.
HOW IS THE VALUE OF MY CONTRACT CALCULATED BEFORE THE ANNUITY COMMENCEMENT DATE?
The Contract Value is the sum of all Accounts. There are two things that affect
your Sub-Account value: (1) the number of Accumulation Units and (2) the
Accumulation Unit Value. The Sub-Account value is determined by multiplying the
number of Accumulation Units by the Accumulation Unit Value. Therefore, on any
Valuation Day your Contract Value reflects the investment performance of the
Sub-Accounts and will fluctuate with the performance of the underlying Funds.
When Premium Payments are credited to your Sub-Accounts, they are converted into
Accumulation Units by dividing the amount of your Premium Payments, minus any
Premium Taxes, by the Accumulation Unit Value for that day. The more Premium
Payments you put into your Contract, the more Accumulation Units you will own.
You decrease the number of Accumulation Units you have by requesting Surrenders,
transferring money out of an Account, settling a Death Benefit claim or by
annuitizing your Contract.
To determine the current Accumulation Unit Value, we take the prior Valuation
Day's Accumulation Unit Value and multiply it by the Net Investment Factor for
the current Valuation Day.
The Net Investment Factor is used to measure the investment performance of a
Sub-Account from one Valuation Day to the next. The Net Investment Factor for
each Sub-Account equals:
- - The net asset value per share plus applicable distributions per share of each
Fund held in the Sub-Account at the end of the current Valuation Day divided
by
- - The net asset value per share of each Fund held in the Sub-Account at the end
of the prior Valuation Day; multiplied by
- - The daily expense factor for the mortality and expense risk charge adjusted
for the number of days in the period, and any other applicable charges.
We will send you a statement at least annually, which tells you how many
Accumulation Units you have, their value and your total Contract Value.
A Contract's Guarantee Period value is guaranteed by Fortis. We bear the
investment risk with respect to amounts allocated to a Guarantee Period, except
to the extent that (1) we may vary the guaranteed interest rate for future
Guarantee Periods (subject to the 3% effective annual minimum) and (2) the
Market Value Adjustment imposes investment risks on you. The Contract's
Guarantee Period value on any Valuation Date is the sum of its general account
values in each Guarantee Period on that date. The general account value in a
Guarantee Period is equal to the following amounts, in each case increased by
accrued interest at the applicable guaranteed interest rate:
- - The amount of Premium Payments or transferred amounts allocated to the
Guarantee Period; less
- - The amount of any transfers or Surrenders out of the Guarantee Period.
CAN I TRANSFER FROM ONE INVESTMENT CHOICE TO ANOTHER?
Subject to the restrictions below, you may transfer Contract Value among the
Sub-Accounts and the Guarantee Periods. Transfers from a Guarantee Period may be
subject to a Market Value Adjustment.
TRANSFERS BETWEEN SUB-ACCOUNTS -- You may transfer from one Sub-Account to
another before and after the Annuity Commencement Date at no extra charge. Your
transfer request will be processed on the day that it is received as long as it
is received on a Valuation Day before the close of the New York Stock Exchange.
Otherwise, your request will be processed on the following Valuation Day. We
will send you a confirmation when we process your transfer. You are responsible
for verifying transfer confirmations and promptly advising us of any errors
within 30 days of receiving the confirmation. After the Annuity Commencement
Date, the Payee may make four Sub-Account Transfers.
SUB-ACCOUNT TRANSFER RESTRICTIONS -- This Contract is not designed to serve as a
vehicle for frequent trading in response to short-term fluctuations in the stock
market. Any individual or legal entity that intends to engage in international
arbitrage, utilize market timing practices or make frequent transfers to take
advantage of inefficiencies in Fund pricing should not purchase this Contract.
These abusive or disruptive transfers can have an adverse impact on management
of a Fund, increase Fund expenses and affect Fund performance.
- - You may submit 20 Sub-Account transfers each Contract Year for each Contract
by U.S. Mail, Voice Response Unit, Internet, or telephone.
- - Once these 20 Sub-Account transfers have been executed, you may submit any
additional Sub-Account transfers only in writing by U.S. Mail or overnight
delivery service. Transfer requests sent by same day mail or courier service
will not be accepted. If you want to cancel a written Sub-Account transfer,
you must also cancel it in writing by U.S. Mail or overnight delivery service.
We will process the cancellation request as of the day we receive it.
In addition, if your initial Premium Payment is $1 million or more, or if you
are acting on behalf of multiple Contract Owners with aggregate Contract Values
of $2 million or more, you may be required to sign a separate agreement with
Hartford which includes additional restrictions before you may submit any Sub-
Account transfers.
The underlying Funds are available for use with many different variable life
insurance policies, variable annuity products and
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funding agreements, and they are offered directly to certain qualified
retirement plans. Some of these products and plans may have different transfer
restrictions or no transfer restrictions at all. In addition, as a result of
settlement of litigation against Hartford, with respect to certain owners of
older Contracts, we currently only have the ability to restrict transfers into
certain Funds and to limit the total Contract Value invested in any one Fund.
The effect on you may include higher transaction costs or lower performance.
ABUSIVE TRANSFERS -- Regardless of the number of transfers you have made, we
will monitor Sub-Account transfers and we may terminate your transfer privileges
until your next Contract Anniversary if we determine that you are engaging in a
pattern of transfers that is disadvantageous or potentially harmful to other
Contract Owners. We will consider the following factors:
- - the dollar amount of the transfer;
- - the total assets of the Funds involved in the transfer;
- - the number of transfers completed in the current calendar quarter; or
- - whether the transfer is part of a pattern of transfers designed to take
advantage of short term market fluctuations or market inefficiencies.
We will send you a letter after your 10th Sub-Account transfer to remind you of
our Sub-Account transfer policy. After your 20th transfer, or after any time we
determine that you are engaging in a pattern of abusive transfers, we will send
you a letter to notify you that your transfer privileges have been restricted or
terminated under our policy until your next Contract Anniversary.
None of these restrictions are applicable to Sub-Account transfers made under a
Dollar Cost Averaging Program or other systematic transfer program.
We will continue to monitor transfer activity and Fortis or Hartford may modify
these restrictions at any time.
POWER OF ATTORNEY -- You may authorize another person to make transfers on your
behalf by submitting a completed power of attorney form. Once we have the
completed form on file, we will accept transfer instructions from your
designated third party, subject to any transfer restrictions in place, until we
receive new instructions in writing from you. You will not be able to make
transfers or other changes to your Contract if you have authorized someone else
to act under a power of attorney.
CHARGES AND FEES
The following charges and fees are associated with the Contract:
MORTALITY AND EXPENSE RISK CHARGE
For assuming mortality and expense risks under the Contract, we deduct a daily
charge at an annual rate of 0.45% of Sub-Account Value. The mortality and
expense risk charge is broken into charges for mortality risks and for an
expense risk:
- - MORTALITY RISK -- There are two types of mortality risks that we assume, those
made while your Premium Payments are accumulating and those made once Annuity
Payouts have begun.
During the period your Premium Payments are accumulating, we are required to
cover any difference between the Death Benefit paid and the Surrender Value.
These differences may occur during periods of declining value or in periods
where the Contingent Deferred Sales Charges would have been applicable. The risk
that we bear during this period is that actual mortality rates, in aggregate,
may exceed expected mortality rates.
Once Annuity Payouts have begun, we may be required to make Annuity Payouts as
long as the Annuitant is living, regardless of how long the Annuitant lives. The
risk that we bear during this period is that the actual mortality rates, in
aggregate, may be lower than the expected mortality rates.
- - EXPENSE RISK -- We also bear an expense risk that the Contingent Deferred
Sales Charges and the Annual Maintenance Fee collected before the Annuity
Commencement Date may not be enough to cover the actual cost of selling,
distributing and administering the Contract.
Although variable Annuity Payouts will fluctuate with the performance of the
underlying Fund selected, your Annuity Payouts will not be affected by (a) the
actual mortality experience of our Annuitants, or (b) our actual expenses if
they are greater than the deductions stated in the Contract. Because we cannot
be certain how long our Annuitants will live, we charge this percentage fee
based on the mortality tables currently in use. The mortality and expense risk
charge enables us to keep our commitments and to pay you as planned.
ANNUAL MAINTENANCE FEE
The Annual Maintenance Fee is a flat fee that is deducted from your Contract
Value to reimburse us for expenses relating to the administrative maintenance of
the Contract and the Accounts. The annual $30 charge is deducted on a Contract
Anniversary or when the Contract is fully Surrendered if the Contract Value at
either of those times is less than $50,000. The charge is deducted
proportionately from each Account in which you are invested.
WHEN IS THE ANNUAL MAINTENANCE FEE WAIVED?
We will waive the Annual Maintenance Fee if your Contract Value is $50,000 or
more on your Contract Anniversary or when you fully Surrender your Contract. We
reserve the right to waive the Annual Maintenance Fee under certain other
conditions.
PREMIUM TAXES
We deduct Premium Taxes, if required, by a state or other government agency.
Some states collect the taxes when Premium Payments are made; others collect at
Annuitization. Since we pay Premium Taxes when they are required by applicable
law, we may deduct them from your Contract when we pay the taxes, upon
Surrender, or on the Annuity Commencement Date. The Premium Tax rate varies by
state or municipality. Currently, the maximum rate charged by any state is 3.5%
and 1% in Puerto Rico.
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FIRST FORTIS LIFE INSURANCE COMPANY 19
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CHARGES AGAINST THE FUNDS
The Separate Account purchases shares of the Funds at net asset value. The net
asset value of the Fund shares reflects investment advisory fees and
administrative expenses already deducted from the assets of the Funds. These
charges are described in the Fund prospectuses accompanying this prospectus.
DEATH BENEFIT
WHAT IS THE DEATH BENEFIT AND HOW IS IT CALCULATED?
The Death Benefit is the amount we will pay if the Contract Owner dies before we
begin to make Annuity Payouts. The Death Benefit is calculated when we receive a
certified death certificate or other legal document acceptable to us along with
complete instructions from all beneficiaries on how to pay the death benefit.
Until we receive proof of death and the completed instructions from the
Beneficiary, the Death Benefit will remain invested in the same Accounts,
according to the Contract Owner's last instructions. Therefore, the Death
Benefit amount will fluctuate with the performance of the underlying Funds. When
there is more than one Beneficiary, we will calculate the Accumulation Units for
each Sub-Account for each Beneficiary's portion of the proceeds.
If death occurs before the Annuity Commencement Date, the Death Benefit is the
greater of:
- - The total Premium Payments you have made to us minus any partial Surrenders
and any applicable negative Market Value Adjustment; or
- - The Contract Value of your Contract.
HOW IS THE DEATH BENEFIT PAID?
The Death Benefit may be taken in one lump sum or under any of the Annuity
Payout Options then being offered by us. On the date we receive proof of death
and complete instructions from the Beneficiary, we will compute the Death
Benefit to be paid out or applied to a selected Annuity Payout Option. When
there is more than one Beneficiary, we will calculate the Death Benefit amount
for each Beneficiary's portion of the proceeds and then pay it out or apply it
to a selected Annuity Payout Option according to each Beneficiary's
instructions. If we receive the complete instructions on a Non-Valuation Day,
computations will take place on the next Valuation Day.
If your Beneficiary elects to receive the Death Benefit amount as a lump sum
payment, we may transfer that amount to our General Account and issue the
Beneficiary a draftbook. The Beneficiary can write one draft for the total
payment of the Death Benefit, or keep the money in the General Account and write
drafts as needed. We will credit interest at a rate determined periodically in
our sole discretion. For Federal income tax purposes, the Beneficiary will be
deemed to have received the lump sum payment on transfer of the Death Benefit
amount to the General Account. The interest will be taxable in the tax year that
it is credited. If the Beneficiary resides or the Contract was purchased in a
state that imposes restrictions on this method of lump sum payment, we may issue
a check to the Beneficiary.
The Beneficiary may elect, under the Annuity Proceeds Settlement Option, "Death
Benefit Remaining with the Company", to leave proceeds from the Death Benefit
with us for up to five years from the date of death if the death occurred before
the Annuity Commencement Date. Once we receive a certified death certificate or
other legal document acceptable to us, the Beneficiary can: (a) make Sub-Account
transfers and (b) take Surrenders.
The Beneficiary of a non-qualified Contract or IRA may also elect the Single
Life Expectancy Only option. This option allows the Beneficiary to take the
Death Benefit in a series of payments spread over a period equal to the
Beneficiary's remaining life expectancy. Distributions are calculated based on
IRS life expectancy tables. This option is subject to different limitations and
conditions depending on whether the Contract is non-qualified or an IRA.
REQUIRED DISTRIBUTIONS -- If the Contract Owner dies before the Annuity
Commencement Date, the Death Benefit must be distributed within five years after
death, or be distributed under a distribution option or Annuity Payout Option
that satisfies the Alternatives to the Required Distributions described below.
If the Contract Owner dies on or after the Annuity Commencement Date under an
Annuity Payout Option that permits the Beneficiary to elect to continue Annuity
Payouts or receive the Commuted Value, any remaining value must be distributed
at least as rapidly as under the payment method being used as of the Contract
Owner's death.
If the Contract Owner is not an individual (e.g. a trust), then the original
Annuitant will be treated as the Contract Owner in the situations described
above and any change in the original Annuitant will be treated as the death of
the Contract Owner.
WHAT SHOULD THE BENEFICIARY CONSIDER?
ALTERNATIVES TO THE REQUIRED DISTRIBUTIONS -- The selection of an Annuity Payout
Option and the timing of the selection will have an impact on the tax treatment
of the Death Benefit. To receive favorable tax treatment, the Annuity Payout
Option selected: (a) cannot extend beyond the Beneficiary's life or life
expectancy, and (b) must begin within one year of the date of death.
If these conditions are not met, the Death Benefit will be treated as a lump sum
payment for tax purposes. This sum will be taxable in the year in which it is
considered received.
SPOUSAL CONTRACT CONTINUATION -- If the Contract Owner dies and the Beneficiary
is the Contract Owner's spouse, the Beneficiary may elect to continue the
Contract as the Contract Owner, receive the death benefit in one lump sum
payment or elect an Annuity Payout Option. If the Contract continues with the
spouse as Contract Owner, we will adjust the Contract Value to the amount that
we would have paid as the Death Benefit payment, had the spouse elected to
receive the Death Benefit as
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20 FIRST FORTIS LIFE INSURANCE COMPANY
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a lump sum payment. Spousal Contract Continuation will only apply one time for
each Contract.
SURRENDERS
WHAT KINDS OF SURRENDERS ARE AVAILABLE?
FULL SURRENDERS BEFORE THE ANNUITY COMMENCEMENT DATE -- When you Surrender your
Contract before the Annuity Commencement Date and while the Annuitant is living,
the Surrender Value of the Contract will be made in a lump sum payment. The
Surrender Value is the Contract Value minus any applicable Market Value
Adjustment and Premium Taxes. The Surrender Value may be more or less than the
amount of the Premium Payments made to a Contract.
PARTIAL SURRENDERS BEFORE THE ANNUITY COMMENCEMENT DATE -- You may request a
partial Surrender of Contract Values at any time before the Annuity Commencement
Date and while the Annuitant is living. There are two restrictions:
- - The partial Surrender amount must be at least equal to $1,000, our current
minimum for partial Surrenders, and
- - The Contract must have a minimum Contract Value of $1,000 after the Surrender.
We reserve the right to close your Contract and pay the full Surrender Value
if the Contract Value is under the minimum after the Surrender. The minimum
Contract Value in Texas must be $1,000 after the Surrender with no Premium
Payments made during the prior two Contract Years.
HOW DO I REQUEST A SURRENDER?
Requests for full Surrenders must be in writing. Requests for partial Surrenders
can be made in writing or by telephone. We will send your money within seven
days of receiving complete instructions. However, we may postpone payment of
Surrenders whenever: (a) the New York Stock Exchange is closed, (b) trading on
the New York Stock Exchange is restricted by the SEC, (c) the SEC permits and
orders postponement, or (d) the SEC determines that an emergency exists to
restrict valuation.
WRITTEN REQUESTS -- To request a full or partial Surrender, complete a Surrender
Form or send us a letter, signed by you, stating:
- - the dollar amount that you want to receive, either before or after we withhold
taxes and deduct for any applicable charges,
- - your tax withholding amount or percentage, if any, and
- - your mailing address.
If there are joint Contract Owners, both must authorize all Surrenders. For a
partial Surrender, specify the Accounts that you want your Surrender to come
from, otherwise, the Surrender will be taken in proportion to the value in each
Account.
TELEPHONE REQUESTS -- To request a partial Surrender by telephone, we must have
received your completed Telephone Redemption Program Enrollment Form. If there
are joint Contract Owners, both must sign this form. By signing the form, you
authorize us to accept telephone instructions for partial Surrenders from either
Contract Owner. Telephone authorization will remain in effect until we receive a
written cancellation notice from you or your joint Contract Owner, we
discontinue the program; or you are no longer the owner of the Contract. There
are some restrictions on telephone surrenders, please call us with any
questions.
We may record telephone calls and use other procedures to verify information and
confirm that instructions are genuine. We will not be liable for losses or
expenses arising from telephone instructions reasonably believed to be genuine.
WE MAY MODIFY THE REQUIREMENTS FOR TELEPHONE REDEMPTIONS AT ANY TIME.
Telephone Surrender instructions received before the close of the New York Stock
Exchange will be processed on that Valuation Day. Otherwise, your request will
be processed on the next Valuation Day.
COMPLETING A POWER OF ATTORNEY FORM FOR ANOTHER PERSON TO ACT ON YOUR BEHALF MAY
PREVENT YOU FROM MAKING SURRENDERS VIA TELEPHONE.
WHAT SHOULD BE CONSIDERED ABOUT TAXES?
There are certain tax consequences associated with Surrenders:
PRIOR TO AGE 59 1/2 -- If you make a Surrender prior to age 59 1/2, there may be
adverse tax consequences including a 10% federal income tax penalty on the
taxable portion of the Surrender payment. Surrendering before age 59 1/2 may
also affect the continuing tax-qualified status of some Contracts.
WE DO NOT MONITOR SURRENDER REQUESTS. TO DETERMINE WHETHER A SURRENDER IS
PERMISSIBLE, WITH OR WITHOUT FEDERAL INCOME TAX PENALTY, PLEASE CONSULT YOUR
PERSONAL TAX ADVISER.
MORE THAN ONE CONTRACT ISSUED IN THE SAME CALENDAR YEAR -- If you own more than
one contract issued by us or our affiliates in the same calendar year, then
these contracts may be treated as one contract for the purpose of determining
the taxation of distributions prior to the Annuity Commencement Date. Please
consult your tax adviser for additional information.
INTERNAL REVENUE CODE SECTION 403(b) ANNUITIES -- As of December 31, 1988, all
section 403(b) annuities have limits on full and partial Surrenders.
Contributions to your Contract made after December 31, 1988 and any increases in
cash value after December 31, 1988 may not be distributed unless you are:
(a) age 59 1/2, (b) no longer employed, (c) deceased, (d) disabled, or
(e) experiencing a financial hardship (cash value increases may not be
distributed for hardships prior to age 59 1/2). Distributions prior to age
59 1/2 due to financial hardship; unemployment or retirement may still be
subject to a penalty tax of 10%.
WE ENCOURAGE YOU TO CONSULT WITH YOUR QUALIFIED TAX ADVISER BEFORE MAKING ANY
SURRENDERS. PLEASE SEE THE "FEDERAL TAX CONSIDERATIONS" SECTION FOR MORE
INFORMATION.
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ANNUITY PAYOUTS
THIS SECTION DESCRIBES WHAT HAPPENS WHEN WE BEGIN TO MAKE REGULAR ANNUITY
PAYOUTS FROM YOUR CONTRACT. YOU, AS THE CONTRACT OWNER, SHOULD ANSWER FIVE
QUESTIONS:
- - When do you want Annuity Payouts to begin?
- - Which Annuity Payout Option do you want to use?
- - How often do you want to receive Annuity Payouts?
- - What level of Assumed Investment Return should you choose?
- - Do you want Annuity Payouts to be fixed or variable or a combination?
Please check with your financial adviser to select the Annuity Payout Option
that best meets your income needs.
1. WHEN DO YOU WANT ANNUITY PAYOUTS TO BEGIN?
You select an Annuity Commencement Date when you purchase your Contract or at
any time before you begin receiving Annuity Payouts. You may change the Annuity
Commencement Date by notifying us within thirty days prior to the date. The
Annuity Commencement Date cannot be deferred beyond the Annuitant's 91st
birthday. The date you select may have tax consequences, so please check with a
qualified tax advisor. If this Contract is issued to the trustee of a Charitable
Remainder Trust, the Annuity Commencement Date may be deferred to the
Annuitant's 100th birthday.
The Annuity Calculation Date is when the amount of your Annuity Payout is
determined. This occurs within five Valuation Days before your selected Annuity
Commencement Date.
All Annuity Payouts, regardless of frequency, will occur on the same day of the
month as the Annuity Commencement Date. After the initial payout, if an Annuity
Payout date falls on a Non-Valuation Day, the Annuity Payout is computed on the
prior Valuation Day. If the Annuity Payout date does not occur in a given month
due to a leap year or months with only 28 days (i.e. the 31st), the Annuity
Payout will be computed on the last Valuation Day of the month.
2. WHICH ANNUITY PAYOUT OPTION DO YOU WANT TO USE?
Your Contract contains the Annuity Payout Options described below. The Annuity
Proceeds Settlement Option is an option that can be elected by the Beneficiary
and is described in the "Death Benefit" section. We may at times offer other
Annuity Payout Options. Once we begin to make Annuity Payouts, the Annuity
Payout Option cannot be changed.
LIFE ANNUITY
We make Annuity Payouts as long as the Annuitant is living. When the Annuitant
dies, we stop making Annuity Payouts. A Payee would receive only one Annuity
Payout if the Annuitant dies after the first payout, two Annuity Payouts if the
Annuitant dies after the second payout, and so forth.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS
We will make Annuity Payouts as long as the Annuitant is living, but we at least
guarantee to make Annuity Payouts for a time period you select either 10 or 20
years. If the Annuitant dies before the guaranteed number of years have passed,
then the Beneficiary may elect to continue Annuity Payouts for the remainder of
the guaranteed number of years.
JOINT AND FULL SURVIVOR ANNUITY
We will make Annuity Payouts as long as the Annuitant and Joint Annuitant are
living. When one Annuitant dies, we continue to make Annuity Payouts to the
Contract Owner until that second Annuitant dies.
JOINT AND 1/2 CONTINGENT SURVIVOR ANNUITY
We make Payouts as long as both the Annuitant and Joint Annuitant are alive. If
the Annuitant dies first, we will make Payouts equal to 1/2 the original payout.
If the Joint Annuitant dies first, we will continue to make Payouts at the full
amount.
We may offer other Annuity Payout Options available.
IMPORTANT INFORMATION:
- - YOU CANNOT SURRENDER YOUR CONTRACT ONCE ANNUITY PAYOUTS BEGIN.
- - For Qualified Contracts, if you elect an Annuity Payout Option with a Period
Certain, the guaranteed number of years must be less than the life expectancy
of the Annuitant at the time the Annuity Payouts begin. We compute life
expectancy using the IRS mortality tables.
- - AUTOMATIC ANNUITY PAYOUTS -- If you do not elect an Annuity Payout Option,
Annuity Payouts will automatically begin on the Annuity Commencement Date
under the Life Annuity with Payments for a Period Certain Annuity Payout
Option with a ten-year period certain. Automatic Annuity Payouts will be fixed
dollar amount Annuity Payouts, variable dollar amount Annuity Payouts, or a
combination of fixed or variable dollar amount Annuity Payouts, depending on
the investment allocation of your Account in effect on the Annuity
Commencement Date.
3. HOW OFTEN DO YOU WANT THE PAYEE TO RECEIVE ANNUITY PAYOUTS?
In addition to selecting an Annuity Commencement Date and an Annuity Payout
Option, you must also decide how often you want the Payee to receive Annuity
Payouts. You may choose to receive Annuity Payouts:
- - monthly,
- - quarterly,
- - semiannually, or
- - annually.
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Once you select a frequency, it cannot be changed. If you do not make a
selection, the Payee will receive monthly Annuity Payouts. You must select a
frequency that results in an Annuity Payout of at least $50. If the amount falls
below $50, we have the right to change the frequency to bring the Annuity Payout
up to at least $50.
WHAT IS THE ASSUMED INVESTMENT RETURN?
The Assumed Investment Return ("AIR") is the investment return before we start
to make Annuity Payouts. It is a critical assumption for calculating variable
dollar amount Annuity Payouts. The first Annuity Payout will be based upon the
AIR. The remaining Annuity Payouts will fluctuate based on the performance of
the underlying Funds. The AIR for this Contract is 3%.
For example, if the Sub-Accounts earned exactly the same as the AIR, then the
second monthly Annuity Payout Option is the same as the first. If the
Sub-Accounts earned more than the AIR, then the second monthly Annuity Payout
Option is higher than the first. If the Sub-Accounts earned less than the AIR,
then the second monthly Annuity Payout Option is lower than the first.
Level variable dollar Annuity Payouts would be produced if the investment
returns remained constant and equal to the AIR. In fact, Annuity Payouts will
vary up or down as the investment rate varies up or down from the AIR.
DO YOU WANT FIXED DOLLAR AMOUNT OR VARIABLE DOLLAR AMOUNT ANNUITY PAYOUTS OR A
COMBINATION OF BOTH?
You may choose an Annuity Payout Option with fixed dollar amounts, variable
dollar amounts or a combination depending on your income needs.
FIXED DOLLAR AMOUNT ANNUITY PAYOUTS -- Once a fixed dollar amount Annuity Payout
begins, you cannot change your selection to receive variable dollar amount
Annuity Payout. You will receive equal fixed dollar amount Annuity Payouts
throughout the Annuity Payout period. Fixed dollar amount Annuity Payout amounts
are determined by multiplying the Contract Value, minus any applicable Premium
Taxes, by an annuity rate. The annuity rate is set by us and is not less than
the rate specified in the fixed dollar amount Annuity Payout Option tables in
your Contract.
VARIABLE DOLLAR AMOUNT ANNUITY PAYOUTS -- A variable dollar amount Annuity
Payout is based on the investment performance of the Sub-Accounts. The variable
dollar amount Annuity Payouts may fluctuate with the performance of the
underlying Funds. To begin making variable dollar amount Annuity Payouts, we
convert the first Annuity Payout amount to a set number of Annuity Units and
then price those units to determine the Annuity Payout amount. The number of
Annuity Units that determines the Annuity Payout amount remains fixed unless you
transfer units between Sub-Accounts.
The dollar amount of the first variable Annuity Payout depends on:
- - the Annuity Payout Option chosen,
- - the Annuitant's attained age and gender (if applicable), and,
- - the applicable annuity purchase rates based on the 1983a Individual Annuity
Mortality table
- - the Assumed Investment Return
The total amount of the first variable dollar amount Annuity Payout is
determined by dividing the Contract Value minus any applicable Premium Taxes, by
$1,000 and multiplying the result by the payment factor defined in the Contract
for the selected Annuity Payout Option.
The dollar amount of each subsequent variable dollar amount Annuity Payout is
equal to the total of:
Annuity Units for each Sub-Account multiplied by Annuity Unit Value for each
Sub-Account.
The Annuity Unit Value of each Sub-Account for any Valuation Period is equal to
the Accumulation Unit Value Net Investment Factor for the current Valuation
Period multiplied by the Annuity Unit factor, multiplied by the Annuity Unit
Value for the preceding Valuation Period.
COMBINATION ANNUITY PAYOUTS -- You may choose to receive a combination of fixed
dollar amount and variable dollar amount annuity payouts as long as they total
100% of your Annuity Payout. For example, you may choose to receive 40% fixed
dollar amount and 60% variable dollar amount to meet your income needs.
TRANSFER OF ANNUITY UNITS -- After the Annuity Calculation Date, you may
transfer dollar amounts of Annuity Units from one Sub-Account to another four
times per year. On the day you make a transfer, the dollar amounts are equal for
both Sub-Accounts and the number of Annuity Units will be different. We will
transfer the dollar amount of your Annuity Units the day we receive your written
request if received before the close of the New York Stock Exchange. Otherwise,
the transfer will be made on the next Valuation Day.
OTHER PROGRAMS AVAILABLE
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We may discontinue, modify or amend any of these Programs or any other programs
we establish. Any changes to a Program will not affect Contract Owners currently
enrolled in the Program.
INVESTEASE-REGISTERED TRADEMARK- -- InvestEase, which was formerly called "PAC,"
is an electronic transfer program that allows you to have money automatically
transferred from your checking or savings account, and invested in your
Contract. It is available for Premium Payments made after your initial Premium
Payment. The minimum amount for each transfer is $50. You can elect to have
transfers occur either monthly or quarterly, and they can be made into any
Account available in your Contract.
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FIRST FORTIS LIFE INSURANCE COMPANY 23
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AUTOMATIC INCOME PROGRAM -- The Automatic Income Program allows you to Surrender
a percentage of your total Premium Payments each Contract Year. You can
Surrender from the Accounts you select systematically on a monthly, quarterly,
semiannual, or annual basis.
ASSET ALLOCATION PROGRAM -- Asset Allocation is a program that allows you to
choose an allocation for your Sub-Accounts to help you reach your investment
goals. The Contract offers model allocations with pre-selected Sub-Accounts and
percentages that have been established for each type of investor ranging from
conservative to aggressive. Over time, Sub-Account performance may cause your
Contract's allocation percentages to change, but under the Asset Allocation
Program, your Sub-Account allocations are rebalanced to the percentages in the
current model you have chosen. You can transfer freely between allocation models
up to twelve times per year. You can also allocate a portion of your investment
to Sub-Accounts that may not be part of the model. You can only participate in
one asset allocation model at a time.
ASSET REBALANCING -- Asset Rebalancing is another type of asset allocation
program in which you customize your Sub-Accounts to meet your investment needs.
You select the Sub-Accounts and the percentages you want allocated to each Sub-
Account. Based on the frequency you select, your model will automatically
rebalance to the original percentages chosen. You can transfer freely between
models up to twelve times per year. You can also allocate a portion of your
investment to Sub-Accounts that are not part of the model. You can only
participate in one asset rebalancing model at a time.
DOLLAR COST AVERAGING PROGRAMS -- We currently offer two different types of
Dollar Cost Averaging Programs in addition to the DCA Plus Program. If you
enroll, you may select either the Fixed Amount DCA Program or the
Earnings/Interest DCA Program. The Fixed Amount DCA Program allows you to
regularly transfer an amount you select from the Fixed Accumulation Feature or
any Fund into a different Fund. The Earnings/Interest DCA Program allows you to
regularly transfer the interest from the Fixed Accumulation Feature or the
earnings from one Fund into a different Fund. For either Program, you may select
transfers on a monthly or quarterly basis, but you must at least make three
transfers during the Program. The Fixed Amount DCA Program begins at the end of
the length of the transfer period you selected plus two business days. That
means if you select a monthly transfer, your Earnings/Interest DCA Program will
begin one month plus two business days after your enrollment.
OTHER INFORMATION
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ASSIGNMENT -- A Non-Qualified Contract may be assigned. We must be properly
notified in writing of an assignment. Any Annuity Payouts or Surrenders
requested or scheduled before we record an assignment will be made according to
the instructions we have on record. We are not responsible for determining the
validity of an assignment. Assigning a Non-Qualified Contract may require the
payment of income taxes and certain penalty taxes. Please consult a qualified
tax adviser before assigning your Contract.
A Qualified Contract may not be transferred or otherwise assigned, unless
allowed by applicable law.
CONTRACT MODIFICATION -- The Annuitant may not be changed. However, if the
Annuitant is still living, the Contingent Annuitant may be changed at any time
prior to the Annuity Commencement Date by sending us written notice.
We may modify the Contract, but no modification will affect the amount or term
of any Contract unless a modification is required to conform the Contract to
applicable federal or state law. No modification will effect the method by which
Contract Values are determined.
HOW CONTRACTS ARE SOLD -- Woodbury Financial Services ("WFS") serves as
Principal Underwriter for the securities issued with respect to the Separate
Account. WFS is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. It is an affiliate of ours. WFS
is ultimately controlled by The Hartford. The principal business address of WFS
is 500 Bielenberg Drive, Woodbury, MN 55125. The securities will be sold by
individuals who represent us as insurance agents and who are registered
representatives of broker-dealers that have entered into distribution agreements
with WFS.
Commissions will be paid by Fortis and will not be more than 7% of Premium
Payments. From time to time, Fortis may pay or permit other promotional
incentives, in cash or credit or other compensation.
Broker-dealers or financial institutions are compensated according to a schedule
set forth by WFS and any applicable rules or regulations for variable insurance
compensation. Compensation is generally based on Premium Payments made by
policyholders or Contract Owners. This compensation is usually paid from the
sales charges described in this prospectus.
In addition, a broker-dealer or financial institution may also receive
additional compensation for, among other things, training, marketing or other
services provided. WFS, its affiliates or Fortis may also make compensation
arrangements with certain broker-dealers or financial institutions based on
total sales by the broker-dealer or financial institution of insurance products.
These payments, which may be different for different broker-dealers or financial
institutions, will be made by WFS, its affiliates or Fortis out of their own
assets and will not affect the amounts paid by the policyholders or Contract
Owners to purchase, hold or Surrender variable insurance products.
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24 FIRST FORTIS LIFE INSURANCE COMPANY
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INDEPENDENT ACCOUNTANTS
The financial statements of First Fortis Life Insurance Company as of
December 31, 2003 and 2002 and for each of the three years in the period ended
December 31, 2003 included in this Registration Statement have been audited by
PricewaterhouseCoopers LLP and are included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. The principal business address
of PricewaterhouseCoopers LLP is 650 Third Avenue South, Suite 1300,
Minneapolis, MN 55402.
LEGAL MATTERS
There are no material legal proceedings pending to which the Separate Account is
a party.
Counsel with respect to federal laws and regulations applicable to the issue and
sale of the Contracts and with respect to New York law is Douglas R. Lowe,
corporate counsel, First Fortis Life Insurance Company, 500 Bielenberg Drive,
Woodbury, MN 55125.
MORE INFORMATION
You may call your Registered Representative if you have any questions or write
or call us at the address below:
Hartford Life Insurance Company
Attn: Investment Product Services
P.O. Box 5085
Hartford, Connecticut 06102-5085
Telephone: 1-800-862-6668 (Contract Owners)
1-800-862-7155 (Registered Representatives)
FINANCIAL STATEMENTS
You can find financial statements of the Separate Account and Fortis in the
Statement of Additional Information. To receive a copy of the Statement of
Additional Information free of charge, call your representative or complete the
form at the end of this prospectus and mail the form to us at the address
indicated on the form.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
What are some of the federal tax consequences which affect these Contracts?
A. GENERAL
Since federal tax law is complex, the tax consequences of purchasing this
contract will vary depending on your situation. You may need tax or legal advice
to help you determine whether purchasing this contract is right for you.
Our general discussion of the tax treatment of this contract is based on our
understanding of federal income tax laws as they are currently interpreted. A
detailed description of all federal income tax consequences regarding the
purchase of this contract cannot be made in the prospectus. We also do not
discuss state, municipal or other tax laws that may apply to this contract. For
detailed information, you should consult with a qualified tax adviser familiar
with your situation.
B. TAXATION OF FORTIS AND THE SEPARATE ACCOUNT
The Separate Account is taxed as part of Fortis which is taxed as a life
insurance company under Subchapter L of Chapter 1 of the Internal Revenue Code
of 1986, as amended (the "Code"). Accordingly, the Separate Account will not be
taxed as a "regulated investment company" under Subchapter M of Chapter 1 of the
Code. Investment income and any realized capital gains on the assets of the
Separate Account are reinvested and are taken into account in determining the
value of the Accumulation and Annuity Units. As a result, such investment income
and realized capital gains are automatically applied to increase reserves under
the Contract.
No taxes are due on interest, dividends and short-term or long-term capital
gains earned by the Separate Account with respect to qualified or non-qualified
Contracts.
C. TAXATION OF ANNUITIES -- GENERAL PROVISIONS AFFECTING PURCHASERS OTHER THAN
QUALIFIED RETIREMENT PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS, CORPORATIONS, ETC.
Code Section 72 contains provisions for contract owners which are not natural
persons. Non-natural persons include corporations, trusts, limited liability
companies, partnerships and other types of legal entities. The tax rules for
contracts owned by non-natural persons are different from the rules for
contracts owned by individuals. For example, the annual net increase in the
value of the contract is currently includable in the gross income of a
non-natural person, unless the non-natural person holds the contract as an agent
for a natural person. There are additional exceptions from current inclusion
for:
- - certain annuities held by structured settlement companies,
- - certain annuities held by an employer with respect to a terminated qualified
retirement plan and
- - certain immediate annuities.
A non-natural person which is a tax-exempt entity for federal tax purposes will
not be subject to income tax as a result of this provision.
If the contract owner is a non-natural person, the primary annuitant is treated
as the contract owner in applying mandatory distribution rules. These rules
require that certain distributions be made upon the death of the contract owner.
A change in the primary annuitant is also treated as the death of the contract
owner.
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FIRST FORTIS LIFE INSURANCE COMPANY 25
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2. OTHER CONTRACT OWNERS (NATURAL PERSONS).
A Contract Owner is not taxed on increases in the value of the Contract until an
amount is received or deemed received, e.g., in the form of a lump sum payment
(full or partial value of a Contract) or as Annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are summarized
briefly below. Also summarized are special rules affecting distributions from
Contracts obtained in a tax-free exchange for other annuity contracts or life
insurance contracts which were purchased prior to August 14, 1982.
a. DISTRIBUTIONS PRIOR TO THE ANNUITY COMMENCEMENT DATE.
i. Total premium payments less amounts received which were not includable in
gross income equal the "investment in the contract" under Section 72 of the
Code.
ii. To the extent that the value of the Contract (ignoring any surrender
charges except on a full surrender) exceeds the "investment in the
contract," such excess constitutes the "income on the contract." It is
unclear what value should be used in determining the "income on the
contract." We believe that the current Contract value (determined without
regard to surrender charges) is an appropriate measure. However, the IRS
could take the position that the value should be the current Contract value
(determined without regard to surrender charges) increased by some measure
of the value of certain future benefits.
iii. Any amount received or deemed received prior to the Annuity Commencement
Date (e.g., upon a partial surrender) is deemed to come first from any
such "income on the contract" and then from "investment in the contract,"
and for these purposes such "income on the contract" shall be computed by
reference to any aggregation rule in subparagraph 2.c. below. As a result,
any such amount received or deemed received (1) shall be includable in
gross income to the extent that such amount does not exceed any such
"income on the contract," and (2) shall not be includable in gross income
to the extent that such amount does exceed any such "income on the
contract." If at the time that any amount is received or deemed received
there is no "income on the contract" (e.g., because the gross value of the
Contract does not exceed the "investment in the contract" and no
aggregation rule applies), then such amount received or deemed received
will not be includable in gross income, and will simply reduce the
"investment in the contract."
iv. The receipt of any amount as a loan under the Contract or the assignment or
pledge of any portion of the value of the Contract shall be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b.
v. In general, the transfer of the Contract, without full and adequate
consideration, will be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b. This transfer rule does not
apply, however, to certain transfers of property between spouses or incident
to divorce.
vi. In general, any amount actually received under the Contract as a Death
Benefit, including any optional Death Benefits, will be treated as an
amount received for purposes of this subparagraph a. and the next
subparagraph b. As a result, we believe that for federal tax purposes any
optional Death Benefits should be treated as an integral part of the
Contract's benefits (i.e., as an investment protection benefit) and that
any charges under the Contract for any optional Death Benefits should not
be treated as an amount received by the Contract Owner for purposes of this
subparagraph a. However, it is possible that the IRS could take a contrary
position that some or all of these charges for any optional Death Benefits
should be treated for federal tax purposes as an amount received under the
Contract (e.g., as an amount distributed from the Contract to pay for an
additional benefit that should be treated as a benefit that is being
provided by a separate contract for tax purposes, i.e., by a separate
contract that is not part of the annuity Contract for tax purposes).
b. DISTRIBUTIONS AFTER ANNUITY COMMENCEMENT DATE.
Annuity payments made periodically after the Annuity Commencement Date are
includable in gross income to the extent the payments exceed the amount
determined by the application of the ratio of the "investment in the contract"
to the total amount of the payments to be made after the Annuity Commencement
Date (the "exclusion ratio").
i. When the total of amounts excluded from income by application of the
exclusion ratio is equal to the investment in the contract as of the
Annuity Commencement Date, any additional payments (including surrenders)
will be entirely includable in gross income.
ii. If the annuity payments cease by reason of the death of the Annuitant and,
as of the date of death, the amount of annuity payments excluded from gross
income by the exclusion ratio does not exceed the investment in the
contract as of the Annuity Commencement Date, then the remaining portion of
unrecovered investment shall be allowed as a deduction for the last taxable
year of the Annuitant.
iii. Generally, nonperiodic amounts received or deemed received after the
Annuity Commencement Date are not entitled to any exclusion ratio and
shall be fully includable in gross income. However, upon a full surrender
after such date, only the excess of the amount received (after any
surrender charge) over the remaining "investment in the contract" shall be
includable in gross income (except to the extent that the aggregation rule
referred to in the next subparagraph c. may apply).
c. AGGREGATION OF TWO OR MORE ANNUITY CONTRACTS.
Contracts issued after October 21, 1988 by the same insurer (or affiliated
insurer) to the same Contract Owner within the same
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26 FIRST FORTIS LIFE INSURANCE COMPANY
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calendar year (other than certain contracts held in connection with a
tax-qualified retirement arrangement) will be treated as one annuity Contract
for the purpose of determining the taxation of distributions prior to the
Annuity Commencement Date. An annuity contract received in a tax-free exchange
for another annuity contract or life insurance contract may be treated as a new
Contract for this purpose. We believe that for any annuity subject to such
aggregation, the values under the Contracts and the investment in the contracts
will be added together to determine the taxation under subparagraph 2.a., above,
of amounts received or deemed received prior to the Annuity Commencement Date.
Withdrawals will first be treated as withdrawals of income until all of the
income from all such Contracts is withdrawn. As of the date of this prospectus,
there are no regulations interpreting this provision.
d. 10% PENALTY TAX -- APPLICABLE TO CERTAIN WITHDRAWALS AND ANNUITY
PAYMENTS.
i. If any amount is received or deemed received on the Contract (before or
after the Annuity Commencement Date), the Code applies a penalty tax equal
to ten percent of the portion of the amount includable in gross income,
unless an exception applies.
ii. The 10% penalty tax will not apply to the following distributions:
1. Distributions made on or after the date the recipient has attained the
age of 59 1/2.
2. Distributions made on or after the death of the holder or where the
holder is not an individual, the death of the primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of substantially equal
periodic payments (not less frequently than annually) for the life (or
life expectancy) of the recipient (or the joint lives or life
expectancies of the recipient and the recipient's designated
Beneficiary). In determining whether a payment stream designed to
satisfy this exception qualifies, it is possible that the IRS could take
the position that the entire interest in the Contract should include not
only the current Contract value, but also some measure of the value of
certain future benefits.
5. Distributions made under certain annuities issued in connection with
structured settlement agreements.
6. Distributions of amounts which are allocable to the "investment in the
contract" prior to August 14, 1982 (see next subparagraph e.).
e. SPECIAL PROVISIONS AFFECTING CONTRACTS OBTAINED THROUGH A TAX-FREE
EXCHANGE OF OTHER ANNUITY OR LIFE INSURANCE CONTRACTS PURCHASED PRIOR TO
AUGUST 14, 1982.
If the Contract was obtained by a tax-free exchange of a life insurance or
annuity Contract purchased prior to August 14, 1982, then any amount received or
deemed received prior to the Annuity Commencement Date shall be deemed to come
(1) first from the amount of the "investment in the contract" prior to
August 14, 1982 ("pre-8/14/82 investment") carried over from the prior Contract,
(2) then from the portion of the "income on the contract" (carried over to, as
well as accumulating in, the successor Contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the contract" and
(4) last from the remaining "investment in the contract." As a result, to the
extent that such amount received or deemed received does not exceed such
pre-8/14/82 investment, such amount is not includable in gross income. In
addition, to the extent that such amount received or deemed received does not
exceed the sum of (a) such pre-8/14/82 investment and (b) the "income on the
contract" attributable thereto, such amount is not subject to the 10% penalty
tax. In all other respects, amounts received or deemed received from such post-
exchange Contracts are generally subject to the rules described in this
subparagraph e.
f. REQUIRED DISTRIBUTIONS.
i. Death of Contract Owner or Primary Annuitant
Subject to the alternative election or spouse beneficiary provisions in ii
or iii below:
1. If any Contract Owner dies on or after the Annuity Commencement Date and
before the entire interest in the Contract has been distributed, the
remaining portion of such interest shall be distributed at least as
rapidly as under the method of distribution being used as of the date of
such death;
2. If any Contract Owner dies before the Annuity Commencement Date, the
entire interest in the Contract will be distributed within 5 years after
such death; and
3. If the Contract Owner is not an individual, then for purposes of 1. or
2. above, the primary annuitant under the Contract shall be treated as
the Contract Owner, and any change in the primary annuitant shall be
treated as the death of the Contract Owner. The primary annuitant is the
individual, the events in the life of whom are of primary importance in
affecting the timing or amount of the payout under the Contract.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a Contract Owner described in i. above is
payable to or for the benefit of a designated beneficiary, such beneficiary
may elect to have the portion distributed over a period that does not extend
beyond the life or life expectancy of the beneficiary. Distributions must
begin within a year of the Contract Owner's death.
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FIRST FORTIS LIFE INSURANCE COMPANY 27
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iii. Spouse Beneficiary
If any portion of the interest of a Contract Owner is payable to or for the
benefit of his or her spouse, and the Annuitant or Contingent Annuitant is
living, such spouse shall be treated as the Contract Owner of such portion
for purposes of section i. above. This spousal contract continuation shall
apply only once for this contract.
g. ADDITION OF RIDERS.
The addition of a rider to the Contract could cause it to be considered newly
issued or entered into, for tax purposes, and thus could result in the loss of
certain grandfathering with respect to the Contract. Please contact your tax
adviser for more information.
3. DIVERSIFICATION REQUIREMENTS.
The Code requires that investments supporting your contract be adequately
diversified. Code Section 817 provides that a variable annuity contract will not
be treated as an annuity contract for any period during which the investments
made by the separate account or underlying fund are not adequately diversified.
If a contract is not treated as an annuity contract, the contract owner will be
subject to income tax on annual increases in cash value.
The Treasury Department's diversification regulations require, among other
things, that:
- - no more than 55% of the value of the total assets of the segregated asset
account underlying a variable contract is represented by any one investment,
- - no more than 70% is represented by any two investments,
- - no more than 80% is represented by any three investments and
- - no more than 90% is represented by any four investments.
In determining whether the diversification standards are met, all securities of
the same issuer, all interests in the same real property project, and all
interests in the same commodity are each treated as a single investment. In the
case of government securities, each government agency or instrumentality is
treated as a separate issuer.
A separate account must be in compliance with the diversification standards on
the last day of each calendar quarter or within 30 days after the quarter ends.
If an insurance company inadvertently fails to meet the diversification
requirements, the company may still comply within a reasonable period and avoid
the taxation of contract income on an ongoing basis. However, either the company
or the contract owner must agree to pay the tax due for the period during which
the diversification requirements were not met.
We monitor the diversification of investments in the separate accounts and test
for diversification as required by the Code. We intend to administer all
contracts subject to the diversification requirements in a manner that will
maintain adequate diversification.
4. OWNERSHIP OF THE ASSETS IN THE SEPARATE ACCOUNT.
In order for a variable annuity contract to qualify for tax deferral, assets in
the separate accounts supporting the contract must be considered to be owned by
the insurance company and not by the contract owner. It is unclear under what
circumstances an investor is considered to have enough control over the assets
in the separate account to be considered the owner of the assets for tax
purposes. If the contract owner is considered to be the owner of the assets for
tax purposes, the contract owner will be subject to income tax on annual
increases in cash value.
The IRS has issued several rulings discussing investor control. These rulings
say that certain incidents of ownership by the contract owner, such as the
ability to select and control investments in a separate account, will cause the
contract owner to be treated as the owner of the assets for tax purposes.
In its explanation of the diversification regulations, the Treasury Department
recognized that the temporary regulations "do not provide guidance concerning
the circumstances in which investor control of the investments of a segregated
asset account may cause the investor, rather than the insurance company, to be
treated as the owner of the assets in the account." The explanation further
indicates that "the temporary regulations provide that in appropriate cases a
segregated asset account may include multiple sub-accounts, but do not specify
the extent to which policyholders may direct their investments to particular
sub-accounts without being treated as the owners of the underlying assets.
Guidance on this and other issues will be provided in regulations or revenue
rulings under Section 817(d), relating to the definition of variable contract."
The final regulations issued under Section 817 did not provide guidance
regarding investor control. However, in July 2003, the Internal Revenue Service
issued two revenue rulings addressed to investor control. Revenue
Ruling 2003-91 generally follows earlier rulings that say that the contract
owner should not have the ability to select and control investments. Revenue
Ruling 2003-92 concerns specific separate account investment that could cause
the contract owner to be treated as the owner of these investments.
Despite the release of these rulings, there continues to be some uncertainty
about when a contract owner is considered the owner of the assets for tax
purposes. We reserve the right to modify the contract, as necessary, to prevent
you from being considered the owner of assets in the separate account.
D. FEDERAL INCOME TAX WITHHOLDING
Any portion of a distribution that is current taxable income to the Contract
Owner will generally be subject to federal income tax withholding and reporting
under the Code. Generally, however, a Contract Owner may elect not to have
income taxes withheld or to have income taxes withheld at a different rate by
filing a completed election form with us. Election forms will be provided at the
time distributions are requested.
E. GENERAL PROVISIONS AFFECTING QUALIFIED RETIREMENT PLANS
The Contract may be used for a number of qualified retirement plans. If the
Contract is being purchased with respect to some form of qualified retirement
plan, please refer to Appendix I for information relative to the types of plans
for which it may be used and the general explanation of the tax features of such
plans.
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28 FIRST FORTIS LIFE INSURANCE COMPANY
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F. ANNUITY PURCHASES BY NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
The discussion above provides general information regarding U.S. federal income
tax consequences to annuity purchasers that are U.S. citizens or residents.
Purchasers that are not U.S. citizens or residents will generally be subject to
U.S. federal income tax and withholding on taxable annuity distributions at a
30% rate, unless a lower treaty rate applies and any required tax forms are
submitted to us. In addition, purchasers may be subject to state premium tax,
other state and/or municipal taxes, and taxes that may be imposed by the
purchaser's country of citizenship or residence. Prospective purchasers are
advised to consult with a qualified tax adviser regarding U.S., state, and
foreign taxation with respect to an annuity purchase.
G. GENERATION SKIPPING TRANSFER TAX
Under certain circumstances, the Code may impose a "generation skipping transfer
tax" when all or part of an annuity contract is transferred to, or a death
benefit is paid to, an individual two or more generations younger than the
owner. Regulations issued under the Code may require us to deduct the tax from
your Contract, or from any applicable payment, and pay it directly to the IRS.
H. ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA")
repealed the Federal estate tax and replaced it with a carryover basis income
tax regime effective for estates of decedents dying after December 31, 2009.
EGTRRA also repealed the generation skipping transfer tax, but not the gift tax,
for transfers made after December 31, 2009. EGTRRA contains a sunset provision,
which essentially returns the Federal estate, gift and generation skipping
transfer taxes to their pre-EGTRRA form, beginning in 2011. Congress may or may
not enact permanent repeal between now and then.
During the period prior to 2010, EGTRRA provides for periodic decreases in the
maximum estate tax rate coupled with periodic increases in the unified credit
exemption amount. For 2004, the maximum estate tax rate is 48% and the unified
credit exemption amount is $1,500,000.
The complexity of the new tax law, along with uncertainty as to how it might be
modified in coming years, underscores the importance of seeking guidance from a
qualified advisor to help ensure that your estate plan adequately addresses your
needs and that of your beneficiaries under all possible scenarios.
INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS
- --------------------------------------------------------------------------------
This summary does not attempt to provide more than general information about the
federal income tax rules associated with use of a Contract by a tax-qualified
retirement plan. State income tax rules applicable to tax-qualified retirement
plans often differ from federal income tax rules, and this summary does not
describe any of these differences. Because of the complexity of the tax rules,
owners, participants and beneficiaries are encouraged to consult their own tax
advisors as to specific tax consequences.
The Contracts may offer death benefits that may exceed the greater of the
amounts paid for the Contract or the Contract's cash value. Owners who intend to
use the Contract in connection with tax-qualified retirement plans should
consider the income tax effects that such a death benefit may have on the plan.
The federal tax rules applicable to owners of Contracts under tax-qualified
retirement plans vary according to the type of plan as well as the terms and
conditions of the plan itself. Contract owners, plan participants and
beneficiaries are cautioned that the rights and benefits of any person may be
controlled by the terms and conditions of the tax-qualified retirement plan
itself, regardless of the terms and conditions of a Contract. We are not bound
by the terms and conditions of such plans to the extent such terms conflict with
a Contract, unless we specifically consent to be bound.
Some tax-qualified retirement plans are subject to distribution and other
requirements that are not incorporated into our administrative procedures.
Contract owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions comply with applicable
law. Tax penalties may apply to transactions with respect to tax-qualified
retirement plans if applicable federal income tax rules and restrictions are not
carefully observed.
We do not currently offer the Contracts in connection with all of the types of
tax-qualified retirement plans discussed below and may not offer the Contracts
for all types of tax-qualified retirement plans in the future.
1. TAX-QUALIFIED PENSION OR PROFIT-SHARING PLANS -- Eligible employers can
establish certain tax-qualified pension and profit-sharing plans under section
401 of the Code. Rules under section 401(k) of the Code govern certain "cash or
deferred arrangements" under such plans. Rules under section 408(k) govern
"simplified employee pensions". Tax-qualified pension and profit-sharing plans
are subject to limitations on the amount that may be contributed, the persons
who may be eligible to participate, the time when distributions must commence,
and the form in which distributions must be paid. Employers intending to use the
Contracts in connection with tax-qualified pension or profit-sharing plans
should seek competent tax and other legal advice. If the death benefit under the
Contract can exceed the greater of the amount paid for the Contract and the
Contract's cash value, it is possible that the IRS would characterize such death
benefit as an "incidental death benefit." There are limitations on the amount of
incidental benefits that may be provided under pension and profit sharing plans.
In addition, the provision of such benefits may result in currently taxable
income to the participants.
2. TAX SHELTERED ANNUITIES UNDER SECTION 403(b) -- Public schools and certain
types of charitable, educational and scientific organizations, as specified in
section 501(c)(3) of the Code,
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 29
- --------------------------------------------------------------------------------
can purchase tax-sheltered annuity contracts for their employees. Tax-deferred
contributions can be made to tax-sheltered annuity contracts under section
403(b) of the Code, subject to certain limitations. In general, total
contributions may not exceed the lesser of (1) 100% of the participant's
compensation, and (2) $41,000 (adjusted for increases in cost-of-living). The
maximum elective deferral amount is equal to $13,000 for 2004, $14,000 for 2005,
and $15,000 for 2006 and thereafter, indexed. The limitation on elective
deferrals may be increased to allow certain "catch-up" contributions for
individuals who have attained age 50.
Tax-sheltered annuity programs under section 403(b) are subject to a PROHIBITION
AGAINST DISTRIBUTIONS FROM THE CONTRACT ATTRIBUTABLE TO CONTRIBUTIONS MADE
PURSUANT TO A SALARY REDUCTION AGREEMENT, unless such distribution is made:
- - after the participating employee attains age 59 1/2;
- - upon severance from employment;
- - upon death or disability; or
- - in the case of hardship (and in the case of hardship, any income attributable
to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions attributable to
cash values or other amounts held under a section 403(b) contract as of
December 31, 1988.
If the death benefit under the Contract can exceed the greater of the amount
paid for the Contract and the Contract's cash value, it is possible that the IRS
would characterize such death benefit as an "incidental death benefit." If the
death benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a section 403(b)
arrangement.
3. DEFERRED COMPENSATION PLANS UNDER SECTION 457 -- Certain governmental
employers or tax-exempt employers other than a governmental unit can establish a
Deferred Compensation Plan under section 457 of the Code. For these purposes, a
"governmental employer" is a State, a political subdivision of a State, or an
agency or an instrumentality of a State or political subdivision of a State.
Employees and independent contractors performing services for a governmental or
tax-exempt employer can elect to have contributions made to a Deferred
Compensation Plan of their employer in accordance with the employer's plan and
section 457 of the Code.
Deferred Compensation Plans that meet the requirements of section 457(b) of the
Code are called "eligible" Deferred Compensation Plans. Section 457(b) limits
the amount of contributions that can be made to an eligible Deferred
Compensation Plan on behalf of a participant. Generally, the limitation on
contributions is the lesser of (1) 100% of a participant's includible
compensation or (2) the applicable dollar amount, equal to $13,000 for 2004,
$14,000 for 2005, and $15,000 for 2006 and thereafter, indexed. The plan may
provide for additional "catch-up" contributions during the three taxable years
ending before the year in which the participant attains normal retirement age.
In addition, the contribution limitation may be increased to allow certain
"catch-up" contributions for individuals who have attained age 50.
All of the assets and income of an eligible Deferred Compensation Plan for a
governmental employer must be held in trust for the exclusive benefit of
participants and their beneficiaries. For this purpose, certain custodial
accounts and annuity contracts are treated as trusts. The requirement of a trust
does not apply to amounts under an eligible Deferred Compensation Plan of a
tax-exempt (non-governmental) employer. In addition, the requirement of a trust
does not apply to amounts under a Deferred Compensation Plan of a governmental
employer if the Deferred Compensation Plan is not an eligible plan within the
meaning of section 457(b) of the Code. In the absence of such a trust, amounts
under the plan will be subject to the claims of the employer's general
creditors.
In general, distributions from an eligible Deferred Compensation Plan to a
participant or beneficiary are prohibited under section 457 of the Code unless
made after the participating employee:
- - attains age 70 1/2,
- - has a severance from employment as defined in the Code (including death of the
participating employee), or
- - suffers an unforeseeable financial emergency as defined in the Code.
4. INDIVIDUAL RETIREMENT ANNUITIES ("IRAS") UNDER SECTION 408
TRADITIONAL IRAS -- Eligible individuals can establish individual retirement
programs under section 408 of the Code through the purchase of an IRA. Section
408 imposes limits with respect to IRAs, including limits on the amount that may
be contributed to an IRA, the amount of such contributions that may be deducted
from taxable income, the persons who may be eligible to contribute to an IRA,
and the time when distributions commence from an IRA. See Section 6 below for a
discussion of rollovers involving IRAs.
SIMPLE IRAS -- Eligible employees may establish SIMPLE IRAs in connection with a
SIMPLE IRA plan of an employer under section 408(p) of the Code. Special
rollover rules apply to SIMPLE IRAs. Amounts can be rolled over from one SIMPLE
IRA to another SIMPLE IRA. However, amounts can be rolled over from a SIMPLE IRA
to a Traditional IRA only after two years have expired since the employee first
commenced participation in the employer's SIMPLE IRA plan. Amounts cannot be
rolled over to a SIMPLE IRA from a qualified plan or a Traditional IRA. Fortis
is a non-designated financial institution for purposes of the SIMPLE IRA rules.
ROTH IRAS -- Eligible individuals may establish Roth IRAs under section 408A of
the Code. Contributions to a Roth IRA are not deductible. Subject to special
limitations, a Traditional IRA,
<Page>
30 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
SIMPLE IRA or Simplified Employee Pension under Section 408(k) of the Code may
be converted into a Roth IRA or a distribution from such an arrangement may be
rolled over to a Roth IRA. However, a conversion or a rollover to a Roth IRA is
not excludable from gross income. If certain conditions are met, qualified
distributions from a Roth IRA are tax-free.
5. FEDERAL TAX PENALTIES AND WITHHOLDING -- Distributions from tax-qualified
retirement plans are generally taxed as ordinary income under section 72 of the
Code. Under these rules, a portion of each distribution may be excludable from
income. The excludable amount is the portion of the distribution that bears the
same ratio as the after-tax contributions, if any, bear to the expected return.
(a) PENALTY TAX ON EARLY DISTRIBUTIONS Section 72(t) of the Code imposes an
additional penalty tax equal to 10% of the taxable portion of a distribution
from certain tax-qualified retirement plans. However, the 10% penalty tax
does not apply to a distribution that is:
- - Made on or after the date on which the employee reaches age 59 1/2;
- - Made to a beneficiary (or to the estate of the employee) on or after the death
of the employee;
- - Attributable to the employee's becoming disabled (as defined in the Code);
- - Part of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the employee or the
joint lives (or joint life expectancies) of the employee and his or her
designated beneficiary;
- - Except in the case of an IRA, made to an employee after separation from
service after reaching age 55; or
- - Not greater than the amount allowable as a deduction to the employee for
eligible medical expenses during the taxable year.
In addition, the 10% penalty tax does not apply to a distribution from an IRA
that is:
- - Made after separation from employment to an unemployed IRA owner for health
insurance premiums, if certain conditions are met;
- - Not in excess of the amount of certain qualifying higher education expenses,
as defined by section 72(t)(7) of the Code; or
- - A qualified first-time homebuyer distribution meeting the requirements
specified at section 72(t)(8) of the Code.
Certain other exceptions also are available.
If you are a participant in a SIMPLE IRA plan, you should be aware that the 10%
penalty tax is increased to 25% with respect to non-exempt early distributions
made from your SIMPLE IRA during the first two years following the date you
first commenced participation in any SIMPLE IRA plan of your employer.
(b) MINIMUM DISTRIBUTION PENALTY TAX If the amount distributed is less than the
minimum required distribution for the year, the Participant is subject to a
50% penalty tax on the amount that was not properly distributed.
An individual's interest in a tax-qualified retirement plan generally must be
distributed, or begin to be distributed, not later than the Required Beginning
Date. Generally, the Required Beginning Date is April 1 of the calendar year
following the later of:
- - the calendar year in which the individual attains age 70 1/2; or
- - the calendar year in which the individual retires from service with the
employer sponsoring the plan.
The Required Beginning Date for an individual who is a five (5) percent owner
(as defined in the Code), or who is the owner of an IRA, is April 1 of the
calendar year following the calendar year in which the individual attains age
70 1/2.
The entire interest of the Participant must be distributed beginning no later
than the Required Beginning Date over:
- - the life of the Participant or the lives of the Participant and the
Participant's designated beneficiary (as defined in the Code), or
- - over a period not extending beyond the life expectancy of the Participant or
the joint life expectancy of the Participant and the Participant's designated
beneficiary.
Each annual distribution must equal or exceed a "minimum distribution amount"
which is determined generally by dividing the account balance by the applicable
life expectancy. This account balance is generally based upon the account value
as of the close of business on the last day of the previous calendar year. In
addition, minimum distribution incidental benefit rules may require a larger
annual distribution. Required minimum distributions also can be made in the form
of annuity payments. The death benefit under the contract may affect the amount
of the minimum required distribution that must be taken.
If an individual dies before reaching his or her Required Beginning Date, the
individual's entire interest must generally be distributed within five years of
the individual's death. However, this rule will be deemed satisfied, if
distributions begin before the close of the calendar year following the
individual's death to a designated beneficiary and distribution is over the life
of such designated beneficiary (or over a period not extending beyond the life
expectancy of the beneficiary). If the beneficiary is the individual's surviving
spouse, distributions may be delayed until the individual would have attained
age 70 1/2.
If an individual dies after reaching his or her Required Beginning Date or after
distributions have commenced, the individual's interest must generally be
distributed at least as rapidly as under the method of distribution in effect at
the time of the individual's death.
The minimum distribution requirements apply to Roth IRAs after the Contract
owner dies, but not while the Contract owner is alive. In addition, if the owner
of a Traditional or Roth IRA dies
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 31
- --------------------------------------------------------------------------------
and the Contract owner's spouse is the sole designated beneficiary, the
surviving spouse may elect to treat the Traditional or Roth IRA as his or her
own.
In 2002, the Internal Revenue Service issued final and temporary regulations in
the Federal Register relating to minimum required distributions. The death
benefit under your Contract may affect the amount of the required distribution
that must be taken from your Contract. Please consult with your tax or legal
adviser with any questions regarding these new regulations.
(c) WITHHOLDING We are generally required to withhold federal income tax from
the taxable portion of each distribution made under a Contract. The federal
income tax withholding requirements, including the rate at which withholding
applies, depend on whether a distribution is or is not an eligible rollover
distribution.
Federal income tax withholding from the taxable portion of distributions that
are not eligible rollover distributions is required unless the payee is eligible
to, and does in fact, elect not to have income tax withheld by filing an
election with us. Where the payee does not elect out of withholding, the rate of
income tax to be withheld depends on whether the distribution is nonperiodic or
periodic. Regardless of whether an election is made not to have federal income
taxes withheld, the recipient is still liable for payment of federal income tax
on the taxable portion of the distribution.
For periodic payments, federal income tax will be withheld from the taxable
portion of the distribution by treating the payment as wages under IRS wage
withholding tables, using the marital status and number of withholding
allowances elected by the payee on an IRS Form W-4P, or acceptable substitute,
filed with us. Where the payee has not filed a Form W-4P, or acceptable
substitute, with us, the payee will be treated as married claiming three
withholding allowances. Special rules apply where the payee has not provided us
with a proper taxpayer identification number or where the payments are sent
outside the United States or U.S. possessions.
For nonperiodic distributions, where a payee has not elected out of withholding,
income tax will be withheld at a rate of 10 percent from the taxable portion of
the distribution.
Federal income tax withholding is required at a rate of 20 percent from the
taxable portion of any distribution that is an eligible rollover distribution to
the extent it is not directly rolled over to an eligible retirement plan. Payees
cannot elect out of income tax withholding with respect to such distributions.
Also, special withholding rules apply with respect to distributions from
non-governmental section 457(b) plans, and to distributions made to individuals
who are neither citizens or resident aliens of the United States.
6. ROLLOVER DISTRIBUTIONS -- Under present federal tax law, "eligible rollover
distributions" from qualified retirement plans under section 401(a) of the Code,
qualified annuities under section 403(a) of the Code, section 403(b)
arrangements, and governmental 457(b) plans generally can be rolled over
tax-free within 60 days to any of such plans or arrangements that accept such
rollovers. Similarly, distributions from an IRA generally are permitted to be
rolled over tax-free within 60 days to a qualified plan, qualified annuity,
section 403(b) arrangement, or governmental 457(b) plan. After-tax contributions
may be rolled over from a qualified plan, qualified annuity or governmental 457
plan into another qualified plan or an IRA. In the case of such a rollover of
after-tax contributions, the rollover is permitted to be accomplished only
through a direct rollover. In addition, a qualified plan is not permitted to
accept rollovers of after-tax contributions unless the plan provides separate
accounting for such contributions (and earnings thereon). Similar rules apply
for purposes of rolling over after-tax contributions from a section 403(b)
arrangement. After-tax contributions (including nondeductible contributions to
an IRA) are not permitted to be rolled over from an IRA into a qualified plan,
qualified annuity, section 403(b) arrangement, or governmental 457(b) plan.
For this purpose, an eligible rollover distribution is generally a distribution
to an employee of all or any portion of the balance to the credit of the
employee in a qualified trust under section 401(a) of the Code, qualified
annuity under section 403(a) of the Code, a 403(b) arrangement or a governmental
457(b) plan. However, an eligible rollover distribution does not include: any
distribution which is one of a series of substantially equal periodic payments
(not less frequently than annually) made (1) for the life (or life expectancy)
of the employee or the joint lives (or joint life expectancies) of the employee
and the employee's designated beneficiary, or (2) for a specified period of 10
years or more; any distribution to the extent it is a required minimum
distribution amount (discussed above); or any distribution which is made upon
hardship of the employee.
Separate accounting is required on amounts rolled from plans described under
Code sections 401, 403(b) or 408(IRA), when those amounts are rolled into plans
described under section 457(b) sponsored by governmental employers. These
amounts, when distributed from the governmental 457(b) plan, will be subject to
the 10% early withdrawal tax applicable to distributions from plans described
under sections 401, 403(b) or 408(IRA), respectively.
<Page>
32 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
The following information should be read in conjunction with the financial
statements for the Separate Account included in the Statement of Additional
Information, which is incorporated by reference in this prospectus.
<Table>
AS OF DECEMBER 31,
-----------------------------------------------------------
SUB-ACCOUNT 2003 2002 2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
ALLIANCEBERNSTEIN INTERNATIONAL PORTFOLIO
Accumulation Unit Value at beginning of period $ 8.819 $10.456 $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.553 $ 8.819 $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 14 18 -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
ALLIANCEBERNSTEIN MONEY MARKET PORFOLIO
Accumulation Unit Value at beginning of period $12.954 $12.945 $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.964 $12.954 $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 80 154 -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
ALLIANCEBERNSTEIN PREMIER GROWTH PORTFOLIO
Accumulation Unit Value at beginning of period $14.421 $20.887 $25.357 $30.515 $23.171 $15.729 $11.803
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $17.754 $14.421 $20.887 $25.357 $30.515 $23.171 $15.729
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 15 32 39 39 33 33 18
-------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VP BALANCED FUND
Accumulation Unit Value at beginning of period $13.343 $14.819 $15.456 $15.952 $14.567 $12.639 $10.972
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.868 $13.343 $14.819 $15.456 $15.952 $14.567 $12.639
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 5 5 5 8 5 2 1
-------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VP CAPITAL APPRECIATION FUND
Accumulation Unit Value at beginning of period $ 8.764 $11.172 $15.691 $14.453 $ 8.825 $ 9.061 $ 9.412
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $10.511 $ 8.764 $11.172 $15.691 $14.453 $ 8.825 $ 9.061
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 4 5 6 10 3 1 --
-------------------------------------------------------------------------------------------------------------------------
FEDERATED AMERICAN LEADERS FUND II
Accumulation Unit Value at beginning of period $14.420 $18.155 $19.046 $18.671 $17.577 $15.012 $11.395
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $18.331 $14.420 $18.155 $19.046 $18.671 $17.577 $15.012
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 9 9 9 8 1 4 --
-------------------------------------------------------------------------------------------------------------------------
FEDERATED CAPITAL INCOME FUND II
Accumulation Unit Value at beginning of period $ 9.178 $12.116 $14.115 $15.561 $15.375 $13.550 $10.748
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.026 $ 9.178 $12.116 $14.115 $15.561 $15.375 $13.550
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 3 3 3 7 4 3 --
-------------------------------------------------------------------------------------------------------------------------
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES FUND II
Accumulation Unit Value at beginning of period $14.508 $13.364 $12.542 $11.352 $11.473 $10.705 $10.000
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.785 $14.508 $13.364 $12.542 $11.352 $11.473 $10.705
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 14 25 35 21 8 4 2
-------------------------------------------------------------------------------------------------------------------------
FEDERATED HIGH INCOME BOND FUND II
Accumulation Unit Value at beginning of period $11.946 $11.834 $11.733 $12.956 $12.720 $12.441 $10.978
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.534 $11.946 $11.834 $11.733 $12.956 $12.720 $12.441
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 5 8 7 11 9 32 30
-------------------------------------------------------------------------------------------------------------------------
GARTMORE GVIT DEVELOPING MARKETS FUND
Accumulation Unit Value at beginning of period $ 7.285 $ -- $ -- $ -- $ -- $ -- $ --(a)
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $10.115 $ -- $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 8 -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 33
- --------------------------------------------------------------------------------
<Table>
AS OF DECEMBER 31,
-----------------------------------------------------------
SUB-ACCOUNT 2003 2002 2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
HARTFORD INDEX HLS FUND
Accumulation Unit Value at beginning of period $11.961 $15.493 $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.257 $11.961 $ -- $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 24 22 -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
ING VP EMERGING MARKETS FUND
Accumulation Unit Value at beginning of period $ 6.418 $ 7.111 $ 7.993 $13.480 $ 5.940 $ 8.300 $ 9.426
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $ 9.406 $ 6.418 $ 7.111 $ 7.993 $13.480 $ 5.940 $ 8.300
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 1 1 4 2 1 -- --
-------------------------------------------------------------------------------------------------------------------------
ING VP NATURAL RESOURCES TRUST
Accumulation Unit Value at beginning of period $11.230 $11.522 $13.768 $11.684 $10.288 $12.853 $12.050
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.593 $11.230 $11.522 $13.768 $11.684 $10.288 $12.853
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 2 2 9 1 1 -- --
-------------------------------------------------------------------------------------------------------------------------
INVESCO CORE EQUITY FUND
Accumulation Unit Value at beginning of period $12.117 $15.047 $16.592 $15.922 $13.928 $12.137 $10.000
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.788 $12.117 $15.047 $16.592 $15.922 $13.928 $12.137
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 9 -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
INVESCO HEALTH SCIENCE FUND
Accumulation Unit Value at beginning of period $13.899 $18.480 $21.236 $16.342 $15.654 $11.007 $10.000
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $17.680 $13.899 $18.480 $21.236 $16.342 $15.654 $11.007
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 11 12 13 23 6 8 --
-------------------------------------------------------------------------------------------------------------------------
INVESCO TECHNOLOGY FUND
Accumulation Unit Value at beginning of period $ 8.032 $15.178 $28.144 $36.917 $14.322 $11.446 $10.000
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.617 $ 8.032 $15.178 $28.144 $36.917 $14.322 $11.446
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 31 31 46 45 31 2 --
-------------------------------------------------------------------------------------------------------------------------
MFS EMERGING GROWTH SERIES
Accumulation Unit Value at beginning of period $11.314 $17.158 $25.912 $32.324 $18.374 $13.756 $11.335
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.668 $11.314 $17.158 $25.912 $32.324 $18.374 $13.756
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 1 6 12 14 13 7 11
-------------------------------------------------------------------------------------------------------------------------
MFS HIGH INCOME SERIES
Accumulation Unit Value at beginning of period $12.531 $12.272 $12.077 $12.998 $12.266 $12.342 $10.912
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.715 $12.531 $12.272 $12.077 $12.998 $12.266 $12.342
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 5 12 11 15 14 43 39
-------------------------------------------------------------------------------------------------------------------------
MFS STRATEGIC INCOME SERIES
Accumulation Unit Value at beginning of period $12.553 $11.633 $11.154 $10.685 $11.008 $10.249 $10.411
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.794 $12.553 $11.633 $11.154 $10.685 $11.008 $10.249
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 2 2 4 6 2 -- --
-------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN AMT LIMITED MATURITY BOND PORTFOLIO
Accumulation Unit Value at beginning of period $13.309 $12.691 $11.718 $11.023 $10.911 $10.498 $ 9.879
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.570 $13.309 $12.691 $11.718 $11.023 $10.911 $10.498
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 10 13 8 4 3 5 --
-------------------------------------------------------------------------------------------------------------------------
NEUBERGER BERMAN AMT PARTNERS PORTFOLIO
Accumulation Unit Value at beginning of period $10.135 $13.422 $13.880 $13.835 $12.946 $12.478 $ 9.593
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.630 $10.135 $13.422 $13.880 $13.835 $12.946 $12.478
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 5 4 6 8 3 4 1
-------------------------------------------------------------------------------------------------------------------------
SAFECO CORE EQUITY PORTFOLIO
Accumulation Unit Value at beginning of period $ 9.711 $13.166 $14.596 $16.436 $15.105 $12.152 $ 9.778
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.063 $ 9.711 $13.166 $14.596 $16.436 $15.105 $12.152
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 10 21 26 33 25 25 19
-------------------------------------------------------------------------------------------------------------------------
</Table>
<Page>
34 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
<Table>
AS OF DECEMBER 31,
-----------------------------------------------------------
SUB-ACCOUNT 2003 2002 2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
SAFECO GROWTH OPPORTUNITIES PORTFOLIO
Accumulation Unit Value at beginning of period $11.019 $17.757 $14.973 $16.023 $15.237 $14.993 $10.398
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.679 $11.019 $17.757 $14.973 $16.023 $15.237 $14.993
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 10 14 28 13 8 14 1
-------------------------------------------------------------------------------------------------------------------------
THE STRONG MID CAP GROWTH FUND II
Accumulation Unit Value at beginning of period $ 6.762 $10.876 $10.000 $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $ 9.034 $ 6.762 $10.876 $ -- $ -- $ -- $ --
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 10 7 -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE BOND FUND
Accumulation Unit Value at beginning of period $12.540 $10.354 $10.954 $10.807 $11.778 $10.493 $10.293
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.751 $12.540 $10.354 $10.954 $10.807 $11.778 $10.493
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 1 2 1 2 2 1 4
-------------------------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE HARD ASSETS FUND
Accumulation Unit Value at beginning of period $ 7.754 $ 8.016 $ 8.992 $ 8.108 $ 6.731 $ 9.775 $ 9.992
-------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.199 $ 7.754 $ 8.016 $ 8.992 $ 8.108 $ 6.731 $ 9.775
-------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 1 -- 3 3 1 -- --
-------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Inception date June 20, 2003.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
FURTHER INFORMATION ABOUT FIRST FORTIS
LIFE INSURANCE COMPANY
BUSINESS
First Fortis is a stock life insurance company formed in 1971 and organized
under the laws of the State of New York. It is a direct wholly owned subsidiary
of Assurant, Inc. (Assurant), which owns and operates a number of companies that
provide insurance products and related services in North America and selected
other markets. Assurant, a Delaware corporation, completed an initial public
offering of its common stock in February 2004, and its common stock now trades
on The New York Stock Exchange. Prior to the initial public offering,
Fortis, Inc., a Nevada corporation, had formed Assurant and merged into it on
February 4, 2004. The merger was done in order to redomesticate Fortis, Inc.
from Nevada to Delaware and to change its name. As a result of the merger,
Assurant is the successor to the business operations and obligations of
Fortis, Inc. First Fortis has been a wholly owned subsidiary of Fortis, Inc.
since 1989.
References to the "Company," "First Fortis," "we," "us" or "our" refer to First
Fortis Life Insurance Company. Also, in this report, references to "Assurant"
refer to Fortis, Inc. and its subsidiaries prior to the merger described above,
and Assurant, Inc. and its subsidiaries after the consummation of the merger
described above.
As an indirect wholly owned subsidiary of Assurant, First Fortis does not have
any publicly issued equity or debt securities. We are, however, subject to
certain filing requirements of the Securities Exchange Act of 1934, as amended,
because we have issued certain variable and market value adjusted insurance
contracts, which are required to be registered with the SEC as securities.
Effective April 1, 2001, Assurant exited this line of business and sold the
business segment, then referred to as Fortis Financial Group, to The Hartford
Financial Services Group, Inc. and certain of its subsidiaries (The Hartford).
This sale was accomplished by means of reinsurance and modified coinsurance. As
a result, The Hartford is contractually responsible for servicing the insurance
contracts, including the payment of benefits, oversight of investment
management, overall contract administration and funding of reserves. If The
Hartford fails to fulfill its obligations, however, we will be obligated to
perform the services and make the required payments and funding.
In addition, effective March 1, 2000, Assurant sold all of its long term care
insurance operations to John Hancock Life Insurance Company (John Hancock). In
connection with that sale, we reinsured our existing block of long-term care
insurance policies to John Hancock on a coinsurance basis. Under the coinsurance
agreement, we transferred 100% of the policy reserves and related assets on this
block of business to John Hancock, and John Hancock agreed to be responsible for
100% of the policy benefits. The assets backing the liabilities on this business
are held in a trust and John Hancock is obligated to fund the trust if the value
of the assets is deemed insufficient to fund the liabilities. If John Hancock
fails to fulfill these obligations, we will be obligated to make these payments.
In 2001, another indirect wholly owned subsidiary of Assurant, Bankers American
Life Assurance Company (BALAC), merged into First Fortis. Pursuant to that
merger, First Fortis acquired all assets and liabilities of BALAC, which had
been licensed to write insurance business only in the State of New York.
On June 2, 2003, Assurant terminated the Voting Trust Agreement, dated June 1,
1999, pursuant to which Assurant's voting rights with respect to our stock had
been placed in a trust. The trust was established after a stockholder in
Belgium, Societe Generale de Belgique S.A. (SGB), and its parent company, Suez
Lyonnaise des Eaux (Suez), acquired more than 20% of the stock of Fortis SA/NV,
one of the indirect stockholders of Assurant. This caused Suez and SGB to hold
indirectly more than 10% of our stock. However, as of April 24, 2003, Suez and
SGB reduced their stock holdings to only 1.5% of Fortis SA/NV which, at that
time, represented only 0.75% of our stock. Because the ownership percentage of
Suez and SGB was substantially below the 10% threshold set forth in
Section 1501(a)(2) of the New York Insurance Law, the trust was terminated
pursuant to Section 11(a) of the Voting Trust Agreement, and all voting rights
of our stock are now held directly by Assurant.
Assurant currently has four decentralized operating business segments including
the following:
- - Assurant Employee Benefits, which provides employer- and employee-paid group
dental insurance, as well as group disability insurance and group life
insurance. In its core benefits business, Assurant Employee Benefits focuses
on employer-sponsored programs for employers with typically between 20 and
1,000 employees and, at December 31, 2003, substantially all of Assurant
Employee Benefits' coverages in force were for employers with less than 1,000
employees. This business segment has a particularly strong emphasis on
employers with under 250 employees. The average in force case size at Assurant
Employee Benefits was 56 enrolled employees as of December 31, 2003.
- - Assurant Solutions, which provides specialty property solutions and consumer
protection solutions. Specialty property solutions primarily include
creditor-placed homeowners insurance (including tracking services) and
manufactured housing homeowners insurance. Consumer protection solutions
primarily include debt protection administration, credit insurance and
warranties and extended service contracts. Assurant Solutions develops,
underwrites and markets specialty insurance products and services through
collaborative relationships with its clients (financial institutions,
retailers, manufactured housing and automobile dealers, utilities and other
entities) to their customers. In its consumer protection solutions division,
Assurant Solutions intends to continue to focus on being a low-cost provider
of debt protection administration services, to leverage its administrative
infrastructure with its large customer base clients and to manage the switch
from credit
<Page>
36 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
insurance programs to debt protection programs in the United States.
- - Assurant Health, which provides individual health insurance, including
short-term and student medical insurance, and small employer group insurance.
- - Assurant PreNeed, which provides pre-funded funeral insurance. This insurance
provides whole life insurance death benefits or annuity benefits used to fund
costs incurred in connection with pre-arranged funerals.
First Fortis, which is licensed to sell life, health and annuity insurance only
in New York, writes certain of the insurance products that are marketed in New
York by the Assurant Employee Benefits and Assurant Solutions business segments.
Within the Assurant Employee Benefits segment, we write group life, group
dental, group long-term disability and group short-term disability insurance
products, and we provide sales, marketing, underwriting, claims and other
administrative services for those products. Within the Assurant Solutions
segment, we market, sell and issue credit life and health insurance products,
but the administration of those products is handled by other entities within
that segment. Of our total gross revenues generated during 2003, approximately
76% were from the Assurant Employee Benefits segment and approximately 18% from
the Assurant Solutions segment. It is possible that our sales of the credit life
and health insurance products for the Assurant Solutions segment will decline,
as almost all of the largest credit card issuing institutions in the United
States have switched from offering credit insurance to their credit card
customers to offering their own banking-approved debt protection programs.
Assurant Solutions earns fee income from performing debt protection
administration services for such institutions, but we are not involved in
providing those services and do not receive that fee income.
RISK FACTORS
First Fortis is subject to risks associated with our business. These risks
include, among others:
- - Reliance on Relationships with Significant Clients, Distributors and Other
Parties. If our significant clients, distributors and other parties with which
we do business decline to renew or seek to terminate our relationships or
contractual arrangements, our results of operations and financial condition
could be materially adversely affected. We are also subject to the risk that
these parties may face financial difficulties, reputational issues or problems
with respect to their own products and services, which may lead to decreased
sales of products and services.
- - Failure to Attract and Retain Sales Representatives or Develop and Maintain
Distribution Sources. Our sales representatives interface with clients and
third party distributors. Our inability to attract and retain our sales
representatives or an interruption in, or changes to, our relationships with
various third-party distributors could impair our ability to compete and
market our insurance products and services and materially adversely affect our
results of operations and financial condition. In addition, our ability to
market our products and services depends on our ability to tailor our channels
of distribution to comply with changes in the regulatory environment.
- - Effect of General Economic, Financial Market and Political Conditions. Our
results of operations and financial condition may be materially adversely
affected by general economic, financial market and political conditions,
including:
- insurance industry cycles;
- levels of employment;
- levels of inflation and movements of the financial markets;
- fluctuations in interest rates;
- monetary policy;
- demographics; and
- legislative and competitive factors.
- - Failure to Predict Accurately Benefits and Other Costs and Claims. We may be
unable to predict accurately benefits, claims and other costs or to manage
such costs through our loss limitation methods, which could have a material
adverse effect on our results of operations and financial condition if claims
substantially exceed our expectations.
- - Changes in Regulation. Legislation or other regulatory reform that increases
the regulatory requirements imposed on us or that changes the way we are able
to do business may significantly harm our business or results of operations in
the future.
As of December 31, 2003, we had approximately 25 employees in our sales offices
in New York City and Rochester, New York. In addition, approximately 33 Assurant
employees, subject to a lease arrangement, spend at least a portion of their
time working for us at our headquarters in Syracuse, New York.
PROPERTIES
We lease a 15,684 square foot office building in Syracuse, New York that serves
as our headquarters. We also lease 9,471 square feet of space in New York City
and 2,539 square feet of space in Rochester, New York that serve as sales
offices. We believe that our leased properties are adequate for our current
business operations.
LEGAL PROCEEDINGS
We are regularly involved in litigation in the ordinary course of business, both
as a defendant and as a plaintiff. We may from time to time be subject to a
variety of legal and regulatory actions relating to our current and past
business operations. While we cannot predict the outcome of any pending or
future litigation, examination or investigation and although no assurances can
be given, we do not believe that any pending matter will have a material adverse
effect on our financial condition or results of operations.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 37
- --------------------------------------------------------------------------------
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
There is no public trading market for our common stock. As of March 1, 2004, we
had 100,000 shares of common stock outstanding, all of which are owned directly
by Assurant. We did not pay any dividends to our stockholder in 2002 or 2003. As
part of the regulatory approval process for the 2001 merger of BALAC into First
Fortis, we agreed not to pay any ordinary dividends to Assurant until fiscal
year 2004.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of First Fortis. This
summary has been derived in part from the financial statements of First Fortis
included elsewhere in this prospectus. You should read the following along with
these financial statements.
<Table>
<Caption>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
(IN MILLIONS) 2003 2002
- ------------------------------------------------------------------------
REVENUES:
Net earned premiums and other considerations $69 $74
Net investment income 10 11
Net realized gains (losses) on investments 1 (3)
Fees and other income 2 3
--- ---
Total revenues 82 85
--- ---
BENEFITS, LOSSES AND EXPENSES:
Policyholder benefits 45 47
Selling, underwriting and general expenses 24 26
--- ---
Total benefits, losses and expenses 69 73
--- ---
INCOME BEFORE INCOME TAXES: 13 12
Income taxes 4 4
--- ---
NET INCOME $ 9 $ 8
- ------------------------------------------------------------------------
</Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO DECEMBER 31, 2002
TOTAL REVENUES
Total revenues decreased by $3 million, or 3.5%, from $85 million for the year
ended December 31, 2002, to $82 million for the year ended December 31, 2003.
This decrease was primarily due to a decline in net earned premiums, resulting
from a decline in the rate of renewals for both the group life and the credit
life and health business. The decline in renewals for the group life business
resulted primarily from our continued pricing discipline. The decline in
renewals for the credit life and health business resulted primarily from an
adverse regulatory climate that has affected this line of business generally. In
2003, our total net earned premiums were derived 83% from the group life, group
dental and group disability business, and 17% from the credit life and health
business. In 2002, the group life, group dental and group disability business
accounted for 77% of our premiums, and the credit life and health business
accounted for 23% of our premiums.
Net investment income decreased slightly from $11 million in 2002 to $10 million
in 2003 due to lower yielding investment markets. Changes in interest rates
during 2003 and 2002 resulted in recognition of realized gains and losses on
sales of securities. The Company realized gains of $1 million and losses of $3
million in 2003 and 2002, respectively. We continue to match investment
portfolio composition to liquidity needs and capital requirements.
POLICYHOLDER BENEFITS
Policyholder benefits decreased by $2 million, or 4.3%, from $47 million for the
year ended December 31, 2002, to $45 million for the year ended December 31,
2003. The decrease was driven by favorable development in disability claims and
lower claims volume due to the reduction in group life net earned premiums. In
addition, during the third quarter of 2003, we completed reserve studies for the
group life, group dental and group disability products, which concluded that, in
the aggregate, these reserves were redundant. Adjustments were made to reserves
to reflect current mortality and morbidity experience. In addition, the reserve
discount rate on all claims was changed to reflect the continuing low interest
rate environment. The net impact of these adjustments was a reduction in
reserves of approximately $0.2 million.
The total policyholder benefit to premium ratio increased from 64% in 2002 to
65% in 2003. Although the group dental, group disability and group life loss
ratios were all impacted by the reserve adjustment described above, our overall
increase is due primarily to the credit life and health business. In that line
of business, the policyholder benefit to premium ratio increased
<Page>
38 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
from 39% in 2002 to 60% in 2003, driven by two primary factors. First, we have
ceased writing any new single premium life insurance business and the existing
policies are in run-off. These policies have an average 36 month term and, in
run-off, the net earned premiums decrease more quickly than benefits because of
premium cancellations. Second, we are no longer marketing mortgage life
insurance, which had a low loss ratio.
EXPENSES
Commensurate with the decline in net earned premiums from 2002 to 2003, general
and administrative expenses fell from $26 million in 2002 to $24 million in
2003. Our general and administrative expense to premium ratio stayed flat at 22%
from 2002 to 2003.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a provider of insurance products, effective risk management is fundamental to
our ability to protect both our customers' and our stockholder's interests. We
are exposed to potential loss from various market risks, in particular interest
rate risk and credit risk, as well as inflation risk.
Interest rate risk is the possibility the fair value of liabilities will change
more or less than the market value of investments in response to changes in
interest rates, including changes in the slope or shape of the yield curve and
changes in spreads due to credit risks and other factors.
Credit risk is the possibility that counterparties may not be able to meet
payment obligations when they become due. We assume counterparty credit risk in
many forms. A counterparty is any person or entity from which cash or other
forms of consideration are expected to extinguish a liability or obligation to
us. Primarily, our credit risk exposure is concentrated in our fixed income
investment portfolio and, to a lesser extent, in our reinsurance recoverables.
INTEREST RATE RISK
Interest rate risk arises as we invest substantial funds in interest-sensitive
fixed income assets, such as fixed maturity investments, mortgage-backed and
asset-backed securities and commercial mortgage loans. There are two forms of
interest rate risk--price risk and reinvestment risk. Price risk occurs when
fluctuations in interest rates have a direct impact on the market valuation of
these investments. As interest rates rise, the market value of these investments
falls, and conversely, as interest rates fall, the market value of these
investments rises. Reinvestment risk occurs when fluctuations in interest rates
have a direct impact on expected cash flows from mortgage-backed and
asset-backed securities. As interest rates fall, an increase in prepayments on
these assets results in earlier than expected receipt of cash flows forcing us
to reinvest the proceeds in an unfavorable lower interest rate environment, and
conversely as interest rates rise, a decrease in prepayments on these assets
results in later than expected receipt of cash flows forcing us to forgo
reinvesting in a favorable higher interest rate environment. As of December 31,
2003, we held $168 million of fixed maturity securities at fair market value and
$4 million of commercial mortgages at amortized cost for a combined total of 90%
of total invested assets. As of December 31, 2002, we held $176 million of fixed
maturity securities at fair market value and no commercial mortgages for a
combined total of 96% of total invested assets.
We expect to manage interest rate risk by selecting investments with
characteristics such as duration, yield, currency and liquidity tailored to the
anticipated cash outflow characteristics of our insurance and reinsurance
liabilities.
Our group long-term disability reserves are also sensitive to interest rates.
Group long-term disability reserves are discounted to the valuation date at the
valuation interest rate. The valuation interest rate is determined by taking
into consideration actual and expected earned rates on our asset portfolio, with
adjustments for investment expenses and provisions for adverse deviation.
The interest rate sensitivity of our fixed maturity security assets is assessed
using hypothetical test scenarios that assume several positive and negative
parallel shifts of the underlying yield curves. The individual securities are
repriced under each scenario using a valuation model. For investments such as
mortgage-backed and asset-backed securities, a prepayment model was used in
conjunction with a valuation model. Our actual experience may differ from the
results noted below particularly due to assumptions utilized or if events occur
that were not included in the methodology.
CREDIT RISK
We have exposure to credit risk primarily as a holder of fixed income securities
and by entering into reinsurance cessions.
Our risk management strategy and investment policy is to invest in debt
instruments of high credit quality issuers and to limit the amount of credit
exposure with respect to any one issuer. We attempt to limit our credit exposure
by imposing fixed maturity portfolio limits on individual issuers based upon
credit quality. Currently our portfolio limits are 1.5% for issuers rated AA-
and above, 1% for issuers rated A- to A+, 0.75% for issuers rated BBB- to BBB+
and 0.38% for issuers rated BB- to BB+. These portfolio limits are further
reduced for certain issuers with whom we have credit exposure on reinsurance
agreements. We use the lower of Moody's or Standard & Poor's ratings to
determine an issuer's rating.
We are also exposed to the credit risk of our reinsurers. When we reinsure, we
are still liable to our insureds regardless of whether we get reimbursed by our
reinsurer. As part of our overall risk and capacity management strategy, we
purchase reinsurance for certain risks that we underwrite.
For at least 50% of our $100 million of reinsurance recoverables at
December 31, 2003, we are protected from the credit risk by using some type of
risk mitigation mechanism such as a trust, letter of credit or by withholding
the assets in a modified coinsurance or co-funds-withheld arrangement. For
recoverables that are not protected by these mechanisms, we are dependent solely
on the credit of the reinsurer. Occasionally, the credit worthiness of the
reinsurer becomes questionable. Reinsurance may not be available or adequate to
protect us against losses, and we are subject to the credit risk of reinsurers.
We believe that a majority of our reinsurers are rated "A-" or better by A.M.
Best.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION
<Table>
<Caption>
- ----------------------------------------------------------------------
GENERAL INFORMATION
- ----------------------------------------------------------------------
Safekeeping of Assets
- ----------------------------------------------------------------------
Independent Accountants
- ----------------------------------------------------------------------
Non-Participating
- ----------------------------------------------------------------------
Misstatement of Age or Sex
- ----------------------------------------------------------------------
Principal Underwriter
- ----------------------------------------------------------------------
PERFORMANCE RELATED INFORMATION
- ----------------------------------------------------------------------
Total Return for all Sub-Accounts
- ----------------------------------------------------------------------
Yield for Sub-Accounts
- ----------------------------------------------------------------------
Money Market Sub-Accounts
- ----------------------------------------------------------------------
Additional Materials
- ----------------------------------------------------------------------
Performance Comparisons
- ----------------------------------------------------------------------
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
</Table>
<Page>
40 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
We will determine the Market Value Adjustment by multiplying the General Account
value that is withdrawn or transferred from the existing Guarantee Period (after
deduction of any applicable surrender charge) by the following factor:
[(1 + I)/(1 + J + .0025)] TO THE POWER OF n/12 - 1
where,
- - I is the guaranteed interest rate we credit to the general account value that
is withdrawn or transferred from the existing Guarantee Period.
- - J is the guaranteed interest rate we are then offering for new Guarantee
Periods with durations equal to the number of years remaining in the existing
Guarantee Period (rounded up to the next higher number of years).
- - N is the number of months remaining in the existing Guarantee Period (rounded
up to the next higher number of months).
However, if we stop offering a guaranteed interest rate for a Guarantee Period,
we determine I and J with a different method. In these cases, we determine I and
J by using the "bond equivalent yield" on applicable U.S. Treasury Bills or U.S.
Treasury Notes. We determine this yield on either the 1st or the 15th of the
applicable month. Therefore, if we stop offering a guaranteed interest rate for
a Guarantee Period, I and J will be as follows:
- - I is the bond equivalent yield that was available on applicable U.S. Treasury
Bills or U.S. Treasury Notes at the beginning of the existing Guarantee
Period. The applicable U.S. Treasury Bills or U.S. Treasury Notes will be
those that have maturities equal in length to that of the existing Guarantee
Period.
- - J is the bond equivalent yield on applicable U.S. Treasury Bills or U.S.
Treasury Notes that is available at the time we calculate the Market Value
Adjustment. The applicable U.S. Treasury Bills or U.S. Treasury Notes will be
those that have maturities equal in length to the length of time remaining in
the existing Guarantee Period.
SAMPLE CALCULATION 1: POSITIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 Years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 7%*
Remaining Guarantee Period (N) 60 months
</Table>
<Table>
Market Value Adjustment: = $10,000 X [[(1 + .08)/(1 + .07 + .0025)] TO THE
POWER OF 60/12 - 1]
= $354.57
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$10,354.57
SAMPLE CALCULATION 2: NEGATIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 Years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 9%*
Remaining Guarantee Period (N) 60 months
</Table>
<Table>
Market Value Adjustment: = $10,000 X [[(1 + .08)/(1 + .09 + .0025)] TO THE
POWER OF 60/12 - 1]
= -$559.14
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment):
$9,440.86
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 41
- --------------------------------------------------------------------------------
SAMPLE CALCULATION 3: NEGATIVE ADJUSTMENT
<Table>
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 Years
Time of withdrawal or transfer Beginning of 3rd year of Existing Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for new 5-year guarantee (J) 7.75%*
Remaining Guarantee Period (N) 60 months
</Table>
<Table>
Market Value Adjustment: = $10,000 X [[(1 + .08)/(1 + .0775 + .0025)] TO THE
POWER OF 60/12 - 1]
= 0
</Table>
Amount transferred or withdrawn (adjusted for Market Value Adjustment): $10,000
* Assumed for illustrative purposes only.
<Page>
42 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
APPENDIX II -- INVESTMENTS BY FORTIS
Fortis' legal obligations with respect to the Guarantee Periods are supported by
our general account assets. These general account assets also support our
obligations under other insurance and annuity contracts. Investments purchased
with amounts allocated to the Guarantee Periods are the property of Fortis, and
you have no legal rights in such investments. Subject to applicable law, we have
sole discretion over the investment of assets in our general account. Neither
our general account nor the Guarantee Periods are subject to registration under
the Investment Company Act of 1940.
We will invest amounts in our general account in compliance with applicable
state insurance laws and regulations concerning the nature and quality of
investments for the general account. Within specified limits and subject to
certain standards and limitations, these laws generally permit investment in:
- - federal, state and municipal obligations,
- - preferred and common stocks,
- - corporate bonds,
- - real estate mortgages and mortgage backed securities,
- - real estate, and
- - certain other investments, including various derivative investments.
See the Financial Statements for information on our investments.
When we establish guaranteed interest rates, we will consider the available
return on the instruments in which we invest amounts allocated to the general
account. However, this return is only one of many factors we consider when we
establish the guaranteed interest rates. See "Guarantee Periods".
Generally, we expect to invest amounts allocated to the Guarantee Periods in
debt instruments. We expect that these debt instruments will approximately match
our liabilities with regard to the Guarantee Periods. We also expect that these
debt instruments will primarily include:
(1) securities issued by the United States Government or its agencies or
instrumentalities. These securities may or may not be guaranteed by the
United States Government;
(2) debt securities that, at the time of purchase, have an investment grade
within the four highest grades assigned by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Corporation ("Standard & Poor's"), or any
other nationally recognized rating service. Moody's four highest grades are:
Aaa, Aa, A, and Baa. Standard & Poor's four highest grades are: AAA, AA, A,
and BBB;
(3) other debt instruments including, but not limited to, issues of, or
guaranteed by, banks or bank holding companies and corporations. Although
not rated by Moody's or Standard & Poor's, we deem these obligations to have
an investment quality comparable to securities that may be purchased as
stated above;
(4) other evidences of indebtedness secured by mortgages or deeds of trust
representing liens upon real estate.
Except as required by applicable state insurance laws and regulations, we are
not obligated to invest amounts allocated to the general account according to
any particular strategy.
The Contracts are reinsured by Hartford Life Insurance Company. As part of this
reinsurance arrangement, the assets supporting the General Account under the
Contracts are held by Fortis; however, these assets are managed by Hartford
Investment Management Company ("HIMCO"), an affiliate of Hartford Life and
Annuity Insurance Company. HIMCO generally invests those assets as described
above for the Contract General Account related investments of Fortis.
<Page>
To obtain a Statement of Additional Information, please complete the form below
and mail to:
First Fortis Life Insurance Company
Attn: Investment Product Services
P.O. Box 5085
Hartford, Connecticut 06102-5085
Please send a Statement of Additional Information for First Fortis Masters
variable annuity to me at the following address:
- ----------------------------------------------------
Name
- ------------------------------------------------------------------
Address
- ------------------------------------------------------------------
City/State Zip Code
<Page>
REPORT OF INDEPENDENT AUDITORS
---------------------------------------
To the Board of Directors and Stockholder of
First Fortis Life Insurance Company:
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholder's equity and cash flows present fairly, in
all material respects, the financial position of First Fortis Life Insurance
Company (the Company), an indirect, wholly owned subsidiary of Fortis (SA/NV)
and Fortis N.V., at December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 20, 2004
F-1
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
YEARS ENDED DECEMBER 31, 2003 AND 2002
<Table>
<Caption>
DECEMBER 31,
---------------------
2003 2002
---------------------
(in thousands except
share data)
ASSETS
Investments:
Fixed maturities available for sale, at fair
value (amortized cost -- $157,032 in 2003 and
$166,221 in 2002) $167,712 $175,616
Equity securities available for sale, at fair
value (cost -- $9,574 in 2003 and $3,054 in
2002) 9,784 3,100
Commercial mortgage loans on real estate, at
amortized cost 3,800 --
Policy loans, at amortized cost 37 24
Short-term investments, at amortized cost 8,091 3,394
Other investments 275 348
---------------------
TOTAL INVESTMENTS 189,699 182,482
---------------------
Cash and cash equivalents 1,060 2,030
Premiums and accounts receivable 2,777 2,793
Reinsurance recoverables 100,451 110,128
Due from affiliates -- 1,511
Accrued investment income 2,185 2,333
Deferred acquisition costs 942 1,570
Deferred income taxes, net 3,040 4,170
Goodwill 2,038 1,971
Other assets 82 108
Assets held in separate accounts 39,678 43,430
---------------------
TOTAL ASSETS $341,952 $352,526
---------------------
LIABILITIES
Future policy benefits and expenses $ 24,143 $ 14,991
Unearned premiums 35,798 55,578
Claims and benefits payable 137,233 140,142
Commissions payable 3,811 3,848
Reinsurance balances payable 1,935 2,807
Funds held under reinsurance 94 261
Deferred gain on disposal of businesses 8,067 9,963
Due to affiliates 2,407 --
Accounts payable and other liabilities 6,264 7,955
Income tax payable 1,771 2,478
Liabilities related to separate accounts 39,678 43,430
---------------------
TOTAL LIABILITIES 261,201 281,453
---------------------
STOCKHOLDER'S EQUITY
Common stock, $20 par value: authorized, issued
and outstanding shares -- 100,000 2,000 2,000
Additional paid-in capital 43,006 43,006
Retained earnings 28,663 20,139
Accumulated other comprehensive income 7,082 5,928
Total stockholder's equity 80,751 71,073
---------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $341,952 $352,526
---------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-2
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2003 2002 2001
---------------------------
(in thousands)
REVENUES
Net earned premiums and other considerations $69,206 $74,215 $62,059
Net investment income 10,315 11,171 10,006
Net realized gain (loss) on investments 646 (2,599) (1,722)
Amortization of deferred gain on disposal of
businesses 1,896 2,242 1,984
Fees and other income 306 368 938
---------------------------
TOTAL REVENUES 82,369 85,397 73,265
---------------------------
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 45,114 47,151 42,469
Amortization of deferred acquisition costs 774 2,319 534
Underwriting, general and administrative
expenses 23,237 23,638 18,197
---------------------------
TOTAL BENEFITS, LOSSES AND EXPENSES 69,125 73,108 61,200
Income before income taxes 13,244 12,289 12,065
Income taxes 4,507 4,197 4,241
---------------------------
NET INCOME $ 8,737 $ 8,092 $ 7,824
---------------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-3
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
--------------------------------------------------------
(in thousands)
BALANCE, JANUARY 1, 2001 $2,000 $37,440 $ 4,223 $ (285) $43,378
BALAC equity as of 11/30/01 -- 5,566 -- -- 5,566
Comprehensive income:
Net income -- -- 7,824 -- 7,824
Net change in unrealized gains on securities -- -- -- 2,532 2,532
-------
Total comprehensive income 10,356
--------------------------------------------------------
BALANCE, DECEMBER 31, 2001 2,000 43,006 12,047 2,247 59,300
--------------------------------------------------------
Comprehensive income:
Net income -- -- 8,092 -- 8,092
Net change in unrealized gains on securities -- -- -- 3,681 3,681
-------
Total comprehensive income 11,773
--------------------------------------------------------
BALANCE, DECEMBER 31, 2002 2,000 43,006 20,139 5,928 71,073
--------------------------------------------------------
Comprehensive income:
Net income -- -- 8,737 -- 8,737
Net change in unrealized gains on securities -- -- -- 941 941
Other -- -- (213) 213 --
-------
Total comprehensive income 9,678
--------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $2,000 $43,006 $28,663 $7,082 $80,751
--------------------------------------------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-4
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2003 2002 2001
-------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 8,737 $ 8,092 7,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in reinsurance recoverable 9,677 (2,075) (15,412)
Change in premiums and accounts receivables 1,527 3,995 (338)
Change in deferred acquisition costs 628 2,190 344
Change in accrued investment income 148 155 378
Change in insurance policy reserves and
liabilities (13,537) 47 2,382
Change in accounts payable and other liabilities 716 (3,897) (327)
Change in commissions payable (37) 107 1,023
Change in reinsurance payable (872) (76) (215)
Change in funds held under reinsurance (167) 68 2
Amortization of deferred gain on disposal of
businesses (1,896) (2,243) (1,984)
Change in income taxes (83) (4,241) (462)
Net realized (gains) losses on investments (646) 2,599 1,722
Other 18 (207) 821
-------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 4,213 4,514 (4,242)
-------------------------------
INVESTING ACTIVITIES
Sales of:
Fixed maturities available for sale 30,892 86,092 60,078
Equity securities available for sale 2,486 1,640 435
Other invested assets 73 126 (1,015)
Maturities, prepayments and scheduled redemption
of:
Fixed maturities available for sale 22,221 14,276 13,529
Purchase of:
Fixed maturities available for sale (43,359) (111,100) (50,312)
Equity securities available for sale (8,986) (2,096) (498)
(Increase) in commercial mortgage loans on real
estate (3,800) -- --
(Increase) decrease in short term investments (4,697) 3,207 4,026
(Increase) in policy loans (13) (18) (2)
Net cash received related to acquisition/sale of
business via reinsurance -- -- 6,766
Cash used for BALAC -- -- (32,875)
-------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES (5,183) (7,873) 132
-------------------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-5
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
DECEMBER 31, 2003, 2002 AND 2001
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2003 2002 2001
--------------------------
(in thousands)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received -- -- 1,864
Surrenders and death benefits -- -- (317)
Interest credited to policyholders -- -- 84
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES -- -- 1,631
--------------------------
Change in cash and cash equivalents (970) (3,359) (2,479)
Cash and cash equivalents at beginning of period 2,030 5,389 7,868
--------------------------
Cash and cash equivalents at end of period $1,060 $ 2,030 $ 5,389
--------------------------
Supplemental schedule of non-cash investing
activities:
Assets and liabilities transferred in
reinsurance transactions (Note 9):
Non-cash assets (ceded) received:
Other assets $ -- $ (63) $ (182)
Deferred acquisition costs -- -- (3,957)
Separate accounts -- -- 143
--------------------------
TOTAL VALUE OF ASSETS (CEDED) RECEIVED $ -- $ (63) $(3,996)
--------------------------
Non-cash liabilities ceded (assumed):
Future policy benefit reserves $ -- $ -- $ 6,957
Other liabilities -- (32) 25
--------------------------
TOTAL LIABILITIES CEDED (ASSUMED) $ -- $ (32) $ 6,982
--------------------------
Supplemental information:
Income taxes paid $4,544 $ 8,455 $ 4,703
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-6
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS
First Fortis Life Insurance Company (the "Company") is a provider of life and
health insurance products. At December 31, 2003, the Company was a wholly owned
subsidiary of Fortis, Inc. ("Fortis"), which itself was an indirect, wholly
owned subsidiary of Fortis (SA/NV) of Belgium and Fortis N.V of the Netherlands
(collectively, the "Parent").
On February 5, 2004, the Parent sold approximately 65% of its ownership interest
in Fortis via an Initial Public Offering ("IPO"). In connection with the IPO,
Fortis was merged into Assurant, Inc., a Delaware corporation, which was formed
solely for the purpose of the redomestication of Fortis. After the merger,
Assurant, Inc. became the successor to the business, operations and obligations
of Fortis. Assurant, Inc is traded on the New York Stock Exchange under the
symbol AIZ.
The Company is incorporated in New York and is qualified to sell life, health
and annuity insurance in the state of New York. The Company's revenues are
derived primarily from group employee benefits and credit products and health.
The Company offers insurance products, including life insurance policies,
annuity contracts, and group life, accident and health insurance policies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The preparation of financial statements in conformity with GAAP
requires management to make estimates when recording transactions resulting from
business operations based on information currently available. The most
significant items on the Company's balance sheet that involve accounting
estimates and actuarial determinations are goodwill, reinsurance recoverables,
valuation of investments, deferred acquisition costs ("DAC"), liabilities for
future policy benefits and expenses, and claims and benefits payable. The
accounting estimates and actuarial determinations are sensitive to market
conditions, investment yields, mortality, morbidity, commissions and other
acquisition expenses, and terminations by policyholders. As additional
information becomes available or actual amounts are determinable, the recorded
estimates will be revised and reflected in operating results. Although some
variability is inherent in these estimates, the Company believes the amounts
provided are reasonable.
COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive income,
which includes unrealized gains and losses on securities classified as available
for sale, less deferred income taxes.
RECLASSIFICATIONS
Certain amounts in the 2002 and 2001 financial statements have been reclassified
to conform to the 2003 presentation.
CASH AND CASH EQUIVALENTS
The Company considers cash on hand, all operating cash and working capital cash
to be cash equivalents. These amounts are carried principally at cost, which
approximates fair value. Cash balances are reviewed at the end of each reporting
period to determine if negative cash balances exist. If negative cash balances
do exist, the cash accounts are netted with other positive cash accounts of the
same bank provided the right of offset exists between the accounts. If the right
of offset does not exist, the negative cash balances are reclassified to
accounts payable.
INVESTMENTS
The Company's investment strategy is developed based on many factors including
insurance asset and liability management, rate of return, maturity, credit risk,
tax considerations and regulatory requirements.
Fixed maturities and equity securities are classified as available-for-sale and
reported at fair value. Changes in fair values of available for sale securities,
after related deferred income taxes and after adjustment for the changes in the
pattern of amortization of deferred policy acquisition costs and participating
policyholder dividends, are reported as accumulated other comprehensive income
and, accordingly, have no effect on net income. The unrealized appreciation or
depreciation in the fair value of available for sale securities is reported net
of taxes that would have been required as a charge or credit to income had such
unrealized amounts been realized.
Commercial mortgage loans on real estate are reported at unpaid balances,
adjusted for amortization of premium or discount, less allowance for losses.
Allowances, if necessary, are established for mortgage loans based on the
difference between the unpaid loan balance and the estimated fair value of the
underlying real estate when such loans are determined to be in default as to
scheduled payments. The change in the allowance for losses is recorded as
realized gains and losses on investments. Such allowances are based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or at the loan's observable market price, or the fair
F-7
<Page>
market value of the collateral if the loan is collateral dependent.
Policy loans are reported at unpaid principal balances, which do not exceed the
cash surrender value of the underlying policies.
Short-term investments include all investment cash and highly liquid
investments. These amounts are carried principally at cost, which approximates
fair value.
The Company regularly monitors its investment portfolio to ensure that
investments that may be other than temporarily impaired are identified in a
timely fashion and properly valued, and that any impairments are charged against
earnings in the proper period. The Company's methodology to identify potential
impairments requires professional judgment. Changes in individual security
values are monitored on a semi-monthly basis in order to identify potential
problem credits. In addition, securities whose market price is equal to 85% or
less of their original purchase price are added to the impairment watchlist,
which is discussed at monthly meetings attended by members of the Company's
investment, accounting and finance departments. Any security whose price
decrease is deemed other-than-temporary is written down to its then current
market level. Inherently, there are risks and uncertainties involved in making
these judgments. Changes in circumstances and critical assumptions such as a
continued weak economy, a more pronounced economic downturn or unforeseen events
which affect one or more companies, industry sectors or countries could result
in additional write downs in future periods for impairments that are deemed to
be other-than-temporary.
Realized gains and losses on sales of investments and declines in value judged
to be other-than-temporary are recognized on the specific identification basis.
Investment income is recorded as earned net of investment expenses.
The Company anticipates prepayments of principal in the calculation of the
effective yield for mortgage-backed securities and structured securities. The
majority of the Company's mortgage-backed securities and structured securities
are of high credit quality. Therefore, the retrospective method is used to
adjust the effective yield.
REINSURANCE
Reinsurance recoverables include amounts related to paid benefits and estimated
amounts related to unpaid policy and contract claims, future policyholder
benefits and policyholder contract deposits. The cost of reinsurance is
accounted for over the terms of the underlying reinsured policies using
assumptions consistent with those used to account for the policies. Amounts
recoverable from reinsurers are estimated in a manner consistent with claim and
claim adjustment expense reserves or future policy benefits reserves and are
reported in the consolidated balance sheets. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies. The ceding of insurance does not discharge the Company's
primary liability to insureds. An estimated allowance for doubtful accounts is
recorded on the basis of periodic evaluations of balances due from reinsurers,
reinsurer solvency, management's experience, and current economic conditions.
DEFERRED ACQUISITION COSTS (DAC)
The costs of acquiring new business, which vary with and are directly related to
the production of new business, are deferred to the extent recoverable and
amortized. For credit life, disability, accident and health insurance products,
such costs are amortized over the premium paying period. For interest sensitive
and investment products, such costs are amortized in relation to expected future
gross profits.
A premium deficiency is recognized by a charge to the statement of operations as
a reduction of DAC to the extent that future policy premiums, including
anticipation of interest income, are not adequate to recover all DAC and related
claims, benefits and expenses. If the premium deficiency is greater than
unamortized DAC, a liability will be accrued for the excess deficiency.
GOODWILL
Goodwill represents the excess of acquisition costs over the net fair values of
identifiable assets acquired and liabilities assumed in a business combination.
The Company adopted Statement of Financial Accounting Standards No. 142 ("FAS
142"), Goodwill and Other Intangible Assets, as of January 1, 2002. Pursuant to
FAS 142, goodwill is deemed to have an indefinite life and should not be
amortized, but rather tested at least annually for impairment. The goodwill
impairment test has two steps. The first identifies potential impairments by
comparing the fair value of a reporting unit with its book value, including
goodwill. If the fair value of the reporting unit exceeds the carrying amount,
goodwill is not impaired and the second step is not required. If the carrying
value exceeds the fair value, the second step calculates the possible impairment
loss by comparing the implied fair value of goodwill with the carrying amount.
If the implied goodwill is less than the carrying amount, a write down is
recorded. Prior to the adoption of FAS 142, goodwill was amortized over 20
years. Upon the adoption of FAS 142, the Company ceased amortizing goodwill. The
measurement of fair value was determined based on a valuation report prepared by
an independent valuation firm. The valuation was based on an evaluation of
ranges of future discounted earnings, public company trading multiples and
acquisitions of similar companies. Certain key assumptions considered include
forecasted trends in revenues, operating expenses and effective tax rates.
On December 31, 2001, the Company entered into an agreement with Protective Life
Corporation which provided for the assumption of its Dental Benefits Division.
The blocks of business purchased included group dental, group life and group
disability insurance products. At that time, the Company recorded $1,625 of
goodwill on this transaction. In 2002, the Company completed its final
F-8
<Page>
allocation of purchase price and recorded $22 in additional goodwill. As of
December 31, 2003 and 2002, the Company has $1,714 and 1,647, respectively, of
goodwill for this business.
SEPARATE ACCOUNTS
Assets and liabilities associated with separate accounts relate to premium and
annuity considerations for variable life and annuity products for which the
contract-holder, rather than the Company, bears the investment risk. Separate
account assets are reported at fair value. Revenues and expenses related to the
separate account assets and liabilities, to the extent of benefits paid or
provided to the separate account policyholders, are excluded from the amounts
reported in the accompanying consolidated statements of operations. Through
April 1, 2001, the Company received administrative fees for managing the funds
and other fees for assuming mortality and certain expense risks. Such fees were
included in net earned premiums and other considerations in the statements of
operations. Since April 1, 2001, all fees have been ceded to the Hartford Life
Insurance and Annuity Company (the "Hartford") (see note 4).
The Company received mortality and expense risk fees from the separate accounts,
deducted monthly cost of insurance charges, and received minimum death benefit
guarantee fees along with issue and administrative fees from the variable life
insurance separate accounts prior to the sale.
The Company made contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company made periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities in the benefit payment period. The Company also guarantees that the
rates at which administrative fees are deducted from contract funds will not
exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue to be payable at the initial level regardless of
investment performance so long as minimum premium payments are made. The risk
associated with minimum business guarantees has been ceded to the Hartford as
noted above.
INCOME TAXES
Beginning January 1, 2003, the Company files consolidated federal income tax
return with its parent, Fortis, Inc.
From January 1, 2001 through December 31, 2002, the Company reported its taxable
income in a separately filed federal income tax return.
From May 1, 1997 through December 31, 2000, the Company reported its taxable
income in a consolidated federal income tax return along with other affiliated
subsidiaries of Fortis. Income tax expense or credits were allocated among the
affiliated subsidiaries by applying corporate income tax rates to taxable income
or loss determined on a separate return basis according to a Tax Allocation
Agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial statement purposes and
for income tax purposes.
OTHER ASSETS
Other assets include prepaid items and intangible assets. Identifiable
intangible assets with finite lives are amortized on a straight-line basis over
their estimated useful lives. The Company tests the intangible assets for
impairment whenever circumstances warrant, but at least annually. If impairment
exists, then excess of the unamortized balance over the fair value of the
intangible assets will be charged to income at that time.
REVENUES AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance products are recognized as revenues when
due over the premium-paying period. Reserves for future policy benefits are
computed using the net level method and include investment yield, mortality,
withdrawal, and other assumptions based on the Company's experience, modified as
necessary to reflect anticipated trends and to include provisions for possible
unfavorable deviations.
Revenues for investment products consist of charges assessed against policy
account balances during the period for the cost of insurance, policy
administration, and surrender charges. Future policy benefit reserves are
computed under the retrospective deposit method and consist of policy account
balances before applicable surrender charges. Policy benefits charged to expense
during the period include amounts paid in excess of policy account balances and
interest credited to policy account balances. Interest crediting rates for
investment products ranged from 3% to 7% in 2003, 3% to 10% in 2002 and 3% to
10.8% in 2001.
Premiums for accident and health insurance products, including medical,
long-term and short-term disability and dental insurance products, are
recognized as revenues ratably over the contract period in proportion to the
risk insured. Reserves for future disability benefits are based on the 1987
Commissioners Group Disability Table. The valuation interest rate is the Single
Premium Immediate Annuity valuation rate less 100 basis points. Claims in the
first five years are modified based on the Company's actual experience.
CLAIMS AND BENEFITS PAYABLE
Other policy claims and benefits payable for reported and incurred but not
reported claims and related claims adjustment expenses are determined using
case-basis
F-9
<Page>
estimates and past experience. The methods of making such estimates and
establishing the related liabilities are continually reviewed and updated. Any
adjustments resulting there from are reflected in income currently.
GUARANTY FUND ASSESSMENTS
There are a number of insurance companies that are currently under regulatory
supervision. This may result in future assessments to the Company by state
guaranty fund associations to cover losses to policyholders of insolvent or
rehabilitated companies. These assessments can be partially recovered through a
reduction in future premium taxes in some states. The Company believes it has
adequately provided for the impact of future assessments relating to current
insolvencies.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued FAS 146,
Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146").
This statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
("EITF") Issue 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit on Activity (Including Certain Costs Incurred
in Restructuring ("EITF 94-3")). EITF 94-3 required accrual of liabilities
related to exit and disposal activities at a plan (commitment) date. FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company adopted this Statement on January 1, 2003. The
adoption of this standard did not have a material impact on the Company's
financial position or the results of operations.
In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees ("FIN 45"). FIN 45 requires that a
liability be recognized at the inception of certain guarantees for the fair
value of the obligation, including the ongoing obligation to stand ready to
perform over the term of the guarantee. Guarantees, as defined in FIN 45,
include contracts that contingently require the Company to make payments to a
guaranteed party based on changes in an underlying obligation that is related to
an asset, liability or equity security of the guaranteed party, performance
guarantees, indemnification agreements and indirect guarantees of indebtedness
of others. This new accounting standard is effective for certain guarantees
issued or modified after December 31, 2002. In addition, FIN 45 requires certain
additional disclosures. The Company adopted this standard on January 1, 2003,
and the adoption did not have a material impact on the Company's financial
position or the results of operations.
In April 2003, the FASB's Derivative Implementation Group ("DIG") released FAS
133 Implementation Issue B36, Embedded Derivatives: Modified Coinsurance
Arrangement and Debt Instrument that Incorporates Credit Risk Exposures that are
Unrelated or Only Partially Related to the Creditworthiness of the obligor under
those Instruments ("DIG B36"). DIG B36 addresses whether FAS 133 requires
bifurcation of a debt instrument into a debt host contract and an embedded
derivative if the debt instrument incorporates both interest rate risk and
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the issuer of that instrument. Under DIG B36, modified
coinsurance and coinsurance with funds withheld reinsurance agreements as well
as other types of receivables and payables where interest is determined by
reference to a pool of fixed maturity assets or a total return debt index are
examples of arrangements containing embedded derivatives requiring bifurcation.
The effective date of the implementation guidance is October 1, 2003. The
adoption of this standard did not have a material impact on the Company's
financial position or the results of operations.
In April 2003, the FASB issued FAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("FAS 149"). This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FAS
133, Accounting for Derivative Instruments and Hedging Activities. This
Statement is effective prospectively for contracts entered into or modified
after June 30, 2003 and prospectively for hedging relationships designated after
June 30, 2003. The adoption of this standard did not have a material impact on
the Company's financial position or the results of operations.
On July 7, 2003, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long Duration Contracts and for Separate Accounts ("SOP 03-1").
SOP 03-1 provides guidance on a number of topics unique to insurance
enterprises, including separate account presentation, interest in separate
accounts, gains and losses on the transfer of assets from the general account to
a separate account, liability valuation, returns based on a contractually
referenced pool of assets or index, accounting for contracts that contain death
or other insurance benefit features, accounting for reinsurance and other
similar contracts, accounting for annuitization benefits and sales inducements
to contract holders. SOP 03-1 will be effective for the Company's financial
statements on January 1, 2004. The Company assessed this statement and
determined that the adoption of this statement will not have a material impact
on the Company's financial position or the results of operations.
In January 2003, the FASB issued Interpretation 46 ("FIN 46"), Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("ARB 51"), which clarifies the consolidation accounting guidance in ARB
51, Consolidated Financial Statements, as it applies to certain entities in
which equity investors who
F-10
<Page>
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entities to finance their activities
without additional subordinated financial support from other parties. Such
entities are known as variable interest entities ("VIEs"). FIN 46 requires that
the primary beneficiary of a VIE consolidate the VIE. FIN 46 also requires new
disclosures for significant relationships with VIEs, whether or not
consolidation accounting is either used or anticipated. The consolidation
requirements of FIN 46 apply immediately to VIEs created after January 31, 2003,
and to VIEs in which an enterprise holds a variable interest that was acquired
after February 1, 2003. On October 8, 2003, the FASB deferred the adoption of
FIN 46 until reporting periods ending after December 15, 2003. The adoption of
this statement did not have a material impact on the Company's financial
position or the results of operations.
3. MERGERS AND ACQUISITIONS
BANKERS AMERICA LIFE ASSURANCE COMPANY ("BALAC")
On November 30, 2001, the Company completed a statutory merger in which Bankers
American Life Assurance Company ("BALAC"), a New York insurance company, merged
into the Company (the "Merger"). The Merger was completed as part of an internal
reorganization being effected by Fortis with respect to certain of its life and
health insurance companies. This transaction was accounted for at historical
cost, similar to pooling of interests. The results of operations for BALAC have
been included as of January 1, 2001.
DENTAL BENEFITS DIVISION ("DBD") OF PROTECTIVE LIFE CORPORATION ("PROTECTIVE")
The following transaction was accounted for under the purchase method.
Consequently, the purchase price was allocated to assets acquired and
liabilities assumed based on the relative fair values. On December 31, 2001, the
Company purchased the Dental Benefits Division of Protective Life Corporation
("Protective"). The purchase included group dental, group life and group
disability insurance products ("Insurance Products"). The Company entered into a
reinsurance agreement with Protective for these insurance products on a 100%
co-insurance basis and performs administration services for such insurance
products. The Company assumed approximately $239 of reserves, paid cash of
approximately $2,350 and recorded $1,647 of goodwill at December 31, 2001. The
result of operation of the business acquired has been included in the financial
statements since the date of acquisition.
4. DISPOSITIONS
FORTIS FINANCIAL GROUP ("FFG")
On April 2, 2001, the Company entered into a reinsurance agreement with the
Hartford Life Insurance and Annuity Company (the "Hartford") for the sale of its
Fortis Financial Group ("FFG") division. FFG includes annuity contracts
(collectively, the "Insurance Contracts") written by the Company. Certain of the
Insurance Contracts permit investment in, among other investment options,
various series of the Fortis Series Fund.
To execute the sale as it relates to the Company, the Hartford reinsured the
Insurance Contracts on a 100% coinsurance basis (or 100% modified coinsurance
basis for the Separate Accounts block) and agreed to administer the Insurance
Contracts going forward. The Company received in connection with the sale an
aggregate consideration of approximately $15,000 from the Hartford. The
reinsurance contracts did not legally replace the Company as the insurer to
policyholders or extinguish the Company's liabilities to its policyholders. The
reserves for this block of business are included in the Company's reserves, see
Note 9. The deferred gain is being amortized over the remaining estimated life
of the underlying business. The amortization of the deferred gain is more rapid
in the first few years after sale and will be slower as the liabilities in the
reinsured block decrease. During 2003, 2002 and 2001, the Company recognized
pre-tax income of approximately $1,694, $1,985, and $1,646, respectively,
reflecting the amortization of a portion of the deferred gain in the results of
operations.
F-11
<Page>
5. INVESTMENTS
The amortized cost and fair value of fixed maturities and equity securities were
as follows:
<Table>
<Caption>
At December 31, 2003
---------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------------
FIXED MATURITIES
BONDS:
United States Government and government agencies and
authorities $ 27,211 $ 861 $ (18) $ 28,054
States, municipalities and political subdivisions 2,775 246 -- 3,021
Foreign governments 5,349 396 (23) 5,722
Public utilities 20,239 2,047 -- 22,286
All other corporate bonds 101,458 7,226 (55) 108,629
---------------------------------------------------------
TOTAL FIXED MATURITIES $157,032 $10,776 $ (96) $167,712
---------------------------------------------------------
EQUITY SECURITIES
NON-REDEEMABLE PREFERRED STOCKS:
Non-sinking fund preferred stocks $ 9,574 $ 256 $ (46) $ 9,784
---------------------------------------------------------
TOTAL EQUITY SECURITIES $ 9,574 $ 256 $ (46) $ 9,784
---------------------------------------------------------
</Table>
<Table>
<Caption>
At December 31, 2002
---------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------------
FIXED MATURITIES
BONDS:
United States Government and government agencies and
authorities $ 36,949 $ 1,787 $ -- $ 38,736
States, municipalities and political subdivisions 2,778 217 -- 2,995
Foreign governments 4,173 406 -- 4,579
Public utilities 23,869 1,473 (450) 24,892
All other corporate bonds 98,452 6,267 (305) 104,414
---------------------------------------------------------
TOTAL FIXED MATURITIES $166,221 $10,150 $(755) $175,616
---------------------------------------------------------
EQUITY SECURITIES
NON-REDEEMABLE PREFERRED STOCKS:
Non-sinking fund preferred stocks $ 3,054 $ 64 $ (18) $ 3,100
---------------------------------------------------------
TOTAL EQUITY SECURITIES $ 3,054 $ 64 $ (18) $ 3,100
---------------------------------------------------------
</Table>
The amortized cost and fair value of fixed maturities at December 31, 2003 by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because issuers of the securities may have the right to
call or prepay obligations with or without call or prepayment penalties.
<Table>
<Caption>
Amortized
Cost Fair Value
--------------------------
Due in one year or less $ 1,691 $ 1,740
Due after one year through five years 29,185 31,466
Due after five years through ten years 48,939 52,377
Due after ten years 37,140 41,061
TOTAL 116,955 126,644
Mortgage and asset backed securities 40,077 41,068
--------------------------
TOTAL $157,032 $167,712
--------------------------
</Table>
Gross gains of $1,247, $2,887 and $2,054 and gross losses of $560, $4,331, and
$2,981 were realized on these sales in 2003, 2002 and 2001, respectively.
F-12
<Page>
Major categories of net investment income were as follows:
<Table>
<Caption>
Years ended December 31,
---------------------------
2003 2002 2001
---------------------------
Fixed maturities $ 9,869 $11,104 $ 8,908
Equity securities 528 280 846
Policy loans 3 2 --
Short-term investments 61 112 23
Other investments (7) (46) 401
Investment expenses (139) (281) (172)
---------------------------
NET INVESTMENT INCOME $10,315 $11,171 $10,006
---------------------------
</Table>
The net realized gains (losses) recorded in income for 2003, 2002 and 2001 are
summarized as follows:
<Table>
<Caption>
Years ended December 31,
------------------------
2003 2002 2001
------------------------
Fixed maturities $628 $(2,489) $(1,633)
Equity securities 21 (32) (89)
------------------------
Total marketable securities 649 (2,521) (1,722)
Other (3) (78) --
------------------------
TOTAL $646 $(2,599) $(1,722)
------------------------
</Table>
The Company recorded $38, $1,077, and $795 of pre-tax realized losses in 2003,
2002 and 2001, respectively, associated with other-than-temporary declines in
value of available for sale securities.
The Company has made commercial mortgage loans, collateralized by the underlying
real estate, on properties located in the State of New York.
The Company had fixed maturities carried at $993 and $979 at December 31, 2003
and 2002, respectively, on deposit with various governmental authorities as
required by law.
6. INCOME TAXES
The Company is subject to U.S. taxes. Starting in 2003, it is part of the U.S.
consolidated federal income tax return with its parent, Fortis, Inc. For 2002
and 2001, it filed a separate U.S. federal tax return. Information about current
and deferred tax expense follows:
<Table>
<Caption>
Years Ended December 31,
-------------------------------
2003 2002 2001
-------------------------------
Current expense:
Federal $3,837 $4,548 $ 8,917
Foreign -- -- --
-------------------------------
TOTAL CURRENT EXPENSE 3,837 4,548 8,917
Deferred expense (benefit)
Federal 670 (351) (4,676)
Foreign -- -- --
-------------------------------
TOTAL DEFERRED EXPENSE (BENEFIT) 670 (351) (4,676)
-------------------------------
TOTAL INCOME TAX EXPENSE $4,507 $4,197 $ 4,241
-------------------------------
</Table>
A reconciliation of the federal income tax rate to the Company's effective
income tax rate follows:
<Table>
<Caption>
December 31,
-------------------------------
2003 2002 2001
-------------------------------
Federal income tax rate: 35.0% 35.0% 35.0%
Reconciling items:
Tax exempt interest (0.2) (0.3) 0.0
Dividends received deduction (0.7) 0.0 0.0
Permanent nondeductible expenses 0.2 0.1 0.2
Other (0.3) (0.6) 0.0
-------------------------------
EFFECTIVE INCOME TAX RATE: 34.0% 34.2% 35.2%
-------------------------------
</Table>
F-13
<Page>
The tax effects of temporary differences that result in significant deferred tax
assets and deferred tax liabilities are as follows:
<Table>
<Caption>
December 31,
------------------
2003 2002
------------------
Deferred tax assets:
Policyholder and separate account reserves $ 271 $ 89
Accrued liabilities 865 466
Deferred acquisition costs 1,442 1,238
Other assets 3,469 4,417
Investment adjustments 805 1,151
------------------
GROSS DEFERRED TAX ASSETS 6,852 7,361
------------------
Deferred tax liabilities:
Unrealized gains on fixed maturities and equities 3,812 3,191
------------------
GROSS DEFERRED TAX LIABILITIES 3,812 3,191
------------------
Net deferred income tax asset $3,040 $4,170
------------------
</Table>
At December 31, 2003, the Company and its subsidiaries had capital loss
carryforwards for U.S. federal income tax purposes. Capital loss carryforwards
total $2,299 and will all expire in 2007 if unused.
7. STOCKHOLDER'S EQUITY
The Board of Directors of the Company has authorized 100,000 shares of common
stock with a stated value of $20 per share. All the shares are issued and
outstanding as of December 31, 2003 and 2002. All the outstanding shares at
December 31, 2003 are owned by Fortis (see Note 1).
The Company did not pay any dividends as of December 31, 2003, 2002, and 2001.
The maximum amount of dividends which can be paid by the State of New York
insurance companies to shareholders without prior approval of the Insurance
Commissioner is subject to restrictions relating to statutory surplus (see
Note 8).
8. STATUTORY INFORMATION
The Company prepares its statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York. Prescribed statutory accounting practices (SAP) includes
the Accounting Practices and Procedures Manual of the National Association of
Insurance Commissioners ("NAIC") as well as state laws, regulations and
administrative rules.
The principal differences between SAP and GAAP are: 1) policy acquisition costs
are expensed as incurred under SAP, but are deferred and amortized under GAAP;
2) amounts collected from holders of universal life-type and annuity products
are recognized as premiums when collected under SAP, but are initially recorded
as contract deposits under GAAP, with cost of insurance recognized as revenue
when assessed and other contract charges recognized over the periods for which
services are provided; 3) the classification and carrying amounts of investments
in certain securities are different under SAP than under GAAP; 4) the criteria
for providing asset valuation allowances, and the methodologies used to
determine the amounts thereof, are different under SAP than under GAAP; 5) the
timing of establishing certain reserves, and the methodologies used to determine
the amounts thereof, are different under SAP than under GAAP; and 6) certain
assets are not admitted for purposes of determining surplus under SAP.
F-14
<Page>
Reconciliations of net income and stockholder's equity on the basis of statutory
accounting to the related amounts presented in the accompanying statements were
as follows:
<Table>
<Caption>
Net Income Stockholder's Equity
----------------------------------------------------
2003 2002 2001 2003 2002
----------------------------------------------------
Based on statutory accounting practices $10,190 $ 8,770 $ 12,478 $73,599 $64,032
Deferred policy acquisition costs (628) (2,190) (344) 942 1,570
Deferred and uncollected premiums (932) 156 (14,724) 33 11
Policy reserves (798) 361 4,360 398 3,906
Investment valuation difference -- -- -- 10,726 9,163
Commissions 426 (1,848) 308 (233) (33)
Deferred taxes -- -- -- (1,424) (1,735)
Deferred gain on disposal of business 1,896 2,242 1,984 (8,067) (9,963)
Unearned ceding fee -- -- -- (1,439) (2,427)
Amounts payable reinsurance ceded -- -- -- 454 726
Funds held under reinsurance treaty unauthorized
reinsurer -- -- -- -- (155)
Realized gains (losses) on investments 547 (443) (2,963) -- --
Amortization of goodwill -- -- (46) 2,038 1,971
Income taxes (339) 351 5,606 3,040 3,838
Pension (61) 153 249 (106) (85)
Amortization of IMR (5) (45) (142) -- --
Reinsurance in unauthorized companies -- -- -- 42 56
Interest maintenance reserve -- -- -- -- (511)
Asset valuation reserve -- -- -- 908 583
Agents balances -- -- -- 23 93
Other (1,559) 585 1,058 (183) 33
----------------------------------------------------
BASED ON GENERALLY ACCEPTED ACCOUNTING PRINCIPLES $ 8,737 $ 8,092 $ 7,824 $80,751 $71,073
----------------------------------------------------
</Table>
Insurance enterprises are required by state insurance departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. The
Company exceeds minimum RBC requirements.
Per Section 4207 of New York Insurance Laws, dividends may be paid by domestic
stock life insurance companies upon receiving approval from the Superintendent
of Insurance 30 days prior to declaration. The payment of dividends in excess of
a certain amount (i.e., extraordinary dividends) must be approved by the
Department of Insurance, in the state of New York. Ordinary dividends are
limited to the lesser of (i) 10% of the statutory surplus as of the end of the
prior year or (ii) 100% of adjusted net investment income of the same period. If
insurance regulators determine that payment of an ordinary dividend or any other
payments by the Company's insurance subsidiaries to the Company (such as
payments under a tax sharing agreement or payments for employee or other
services) would be adverse to policyholders or creditors, the regulators may
block such payments that would otherwise be permitted without prior approval.
The Company entered into an agreement with the New York Insurance Department in
connection with the merger of BALAC in 2001, pursuant to which the Company
agreed not to pay any dividends until fiscal year 2004. No assurance can be
given that there will not be further regulatory actions restricting the ability
of the Company's insurance subsidiaries to pay dividends.
Effective January 1, 2001, the NAIC revised the Accounting Practices and
Procedures Manual in a process referred to as Codification. The Company has
adopted the provisions of the revised manual with certain exceptions.
Codification has changed, to some extent, prescribed SAP and resulted in changes
to the accounting practices that used to prepare the statutory basis financial
statements. As a result, the Company reported a change of accounting principle
as an adjustment that increased statutory surplus by $640.
9. REINSURANCE
In the ordinary course of business, the Company is involved in both the
assumption and cession of reinsurance with non-affiliated companies. The
following table provides details of the reinsurance recoverables balance for the
years ended December 31:
<Table>
<Caption>
2003 2002
-----------------------
Ceded future policy
holder benefits and
expense $ 24,051 $ 14,891
Ceded unearned premium 30,120 46,987
Ceded claims and
benefits payable 44,621 46,315
Ceded paid losses 1,659 1,935
-----------------------
TOTAL $100,451 $110,128
-----------------------
</Table>
F-15
<Page>
The effect of reinsurance on premiums earned and benefits incurred was as
follows:
<Table>
<Caption>
Years Ended December 31,
------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------ ------------------------------ ------------------------------
Long Short Long Short Long Short
Duration Duration Total Duration Duration Total Duration Duration Total
------------------------------------------------------------------------------------------------
GROSS EARNED
PREMIUMS AND OTHER
CONSIDERATION $ 11,442 $ 97,379 $108,821 $ 10,618 $119,369 $129,987 $ 10,659 $ 83,768 $ 94,427
premiums assumed -- 6,513 6,513 -- 2,100 2,100 -- -- --
premiums ceded (11,442) (34,686) (46,128) (10,618) (47,254) (57,872) (10,489) (21,879) (32,368)
------------------------------------------------------------------------------------------------
Net earned premiums and
other considerations $ -- $ 69,206 $ 69,206 $ -- $ 74,215 $ 74,215 $ 170 $ 61,889 $ 62,059
------------------------------------------------------------------------------------------------
GROSS POLICYHOLDER
BENEFITS $ 22,637 $ 61,514 $ 84,151 $ 18,217 $ 81,827 $100,044 $ 11,321 $ 61,275 $ 72,596
benefits assumed -- 6,785 6,785 -- 1,323 1,323 -- (113) (113)
benefits ceded (22,628) (23,194) (45,822) (18,209) (36,007) (54,216) (10,814) (19,200) (30,014)
------------------------------------------------------------------------------------------------
Net policyholder benefits $ 9 $ 45,105 $ 45,114 $ 8 $ 47,143 $ 47,151 $ 507 $ 41,962 $ 42,469
------------------------------------------------------------------------------------------------
</Table>
The Company utilizes ceded reinsurance for loss protection and capital
management and business divestitures.
LOSS PROTECTION AND CAPITAL MANAGEMENT
As part of the Company's overall risk and capacity management strategy, the
Company purchases reinsurance for certain risks underwritten by the Company,
including significant individual or catastrophic claims, and to free up capital
to enable the Company to write additional business.
Under indemnity reinsurance transactions in which the Company is the ceding
insurer, the Company remains liable for policy claims if the assuming company
fails to meet its obligations. To limit this risk, the Company has control
procedures in place to evaluate the financial condition of reinsurers and to
monitor the concentration of credit risk to minimize this exposure. The
selection of reinsurance companies is based on criteria related to solvency and
reliability and, to a lesser degree, diversification as well as on developing
strong relationships with the Company's reinsurers for the sharing of risks.
BUSINESS DIVESTITURES
The Company has used reinsurance to exit certain businesses, such as the
disposals of FFG (see Note 4). Assets backing ceded liabilities related to this
business are held in trust for the benefit of the Company and are reflected in
the Company's balance sheet.
The reinsurance recoverable from the Hartford was $6,870 and $6,699 as of
December 31, 2003 and 2002, respectively. The Company would be responsible to
administer this business in the event of a default by reinsurers. In addition,
under the reinsurance agreement, the Hartford is obligated to contribute funds
to increase the value of the separate accounts relating to the business sold if
such value declines. If the Hartford fails to fulfill these obligations, the
Company will be obligated to make these payments.
In 2000, the Company divested its long term care insurance operations to John
Hancock Life Insurance Company (John Hancock). Reinsurance recoverable from John
Hancock was $21,046 and $11,295 as of December 31, 2003 and 2002, respectively.
F-16
<Page>
10. RESERVES
The following table provides reserve information by major lines of business as
of:
<Table>
<Caption>
December 31, 2003 December 31, 2002
------------------------------------- -------------------------------------
Future Policy Claims and Future Policy Claims and
Benefits and Unearned Benefits Benefits and Unearned Benefits
Expenses Premiums Payable Expenses Premiums Payable
-----------------------------------------------------------------------------
LONG DURATION CONTRACTS:
FFG and other disposed businesses $24,143 $ 2,694 $ 1,171 $14,991 $ 2,646 $ 457
SHORT DURATION CONTRACTS:
Group term life -- 125 20,936 -- 126 25,021
Group disability -- 110 85,956 -- 105 81,917
Medical -- 8 1,884 -- 9 779
Dental -- 111 1,858 -- 108 1,923
Credit Life and Disability -- 30,628 24,608 -- 52,584 28,061
Other -- 2,122 820 -- 1,984
-----------------------------------------------------------------------------
TOTAL $24,143 $35,798 $137,233 $14,991 $55,578 $140,142
-----------------------------------------------------------------------------
</Table>
LONG DURATION CONTRACTS
The Company's long duration contracts are comprised of FFG and other disposed
businesses. A description of the disposal of FFG can be found in the
dispositions footnote (see note 4). The reserves for these blocks of business
are included in the Company's reserves in accordance with FAS 113, Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The
Company maintains an offsetting reinsurance recoverable related to these
reserves (see note 9).
SHORT DURATION CONTRACTS
The Company's short duration contracts are comprised of group term life, group
disability, medical and dental, credit and all other. The disability category
includes short and long term disability products. Claims and benefits payable
for long-term disability have been discounted at 5.25%. The December 31, 2003
and 2002 liabilities include $85,491 and $81,275, respectively of such reserves.
The amount of discounts deducted from outstanding reserves as of December 31,
2003 and 2002 are $20,477 and $22,184 respectively.
11. FAIR VALUE DISCLOSURES
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments ("FAS 107") requires disclosure of fair value
information about financial instruments, as defined therein, for which it is
practicable to estimate such fair value. These financial instruments may or may
not be recognized in the balance sheets. In the measurement of the fair value of
certain financial instruments, if quoted market prices were not available other
valuation techniques were utilized. These derived fair value estimates are
significantly affected by the assumptions used. Additionally, FAS 107 excludes
certain financial instruments including those related to insurance contracts.
In estimating the fair value of the financial instruments presented, the Company
used the following methods and assumptions:
Cash, cash equivalents and short-term investments: the carrying amount reported
approximates fair value because of the short maturity of the instruments.
Fixed maturity securities: the fair value for fixed maturity securities is based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
Equity securities: fair value of equity securities and non-sinking fund
preferred stocks is based upon quoted market prices.
Commercial mortgage loans and policy loans: the fair values of mortgage loans
are estimated using discounted cash flow analyses, based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Mortgage loans with similar characteristics are aggregated for purposes
of the calculations. The carrying amounts of policy loans are reported in the
balance sheets at amortized cost, which approximates fair value.
Other investments: the fair values of joint ventures are calculated based on
fair market value appraisals. The carrying amounts of the remaining other
investments approximate fair value.
Policy reserves under investment products: the fair values for the Company's
policy reserves under the investment products are determined using cash
surrender value.
Separate account assets and liabilities: separate account assets and liabilities
are reported at their estimated fair values in the balance sheet.
F-17
<Page>
<Table>
<Caption>
December 31, 2003 December 31, 2002
--------------------------- ---------------------------
Carrying Value Fair Value Carrying Value Fair Value
---------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 1,060 $ 1,060 $ 2,030 $ 2,030
Fixed maturities 167,712 167,712 175,616 175,616
Equity securities 9,784 9,784 3,100 3,100
Commercial mortgage loans on real estate 3,800 3,800 -- --
Policy loans 37 37 24 24
Short-term investments 8,091 8,091 3,394 3,394
Other investments 275 275 348 348
Assets held in separate accounts 39,678 39,678 43,430 43,430
FINANCIAL LIABILITIES
Policy reserves under investment products (Individual
and group annuities, subject to discretionary
withdrawal) $ 6,527 $ 6,346 $ 6,662 $ 6,440
Liabilities related to separate accounts 39,678 39,678 43,430 43,430
</Table>
The fair value of the Company's liabilities for insurance contracts other than
investment-type contracts are not required to be disclosed. However, the fair
values of liabilities under all insurance contracts are taken into consideration
in the Company's overall management of interest rate risk, such that the
Company's exposure to changing interest rates is minimized through the matching
of investment maturities with amounts due under insurance contracts.
12. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company is a wholly-owned subsidiary of Fortis, which sponsors a defined
benefit pension plan and certain other post retirement benefits covering
employees and certain agents who meet eligibility requirements as to age and
length of service. Plan assets of the defined benefit plans are not specifically
identified by each participating subsidiary. Therefore, a breakdown of plan
assets is not reflected in these financial statements. The Company has no legal
obligation for benefits under these plans. The benefits are based on years of
service and career compensation. Fortis's pension plan funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes, and to charge each subsidiary an allocable amount based on its
employee census. Pension cost allocated to the Company amounted to $61, $153 and
$249 for 2003, 2002 and 2001, respectively.
The Company has a contributory profit sharing plan, sponsored by Fortis,
covering employees and certain agents who meet eligibility requirements as to
age and length of service. Benefits are payable to participants on retirement or
disability and to the beneficiaries of participants in the event of death. For
employees hired on or before December 31, 2000, the first 3% of an employee's
contribution is matched 200% by the Company. The second 2% is matched 50% by the
Company. For employees hired after December 31, 2000, the first 3% of an
employee's contribution is matched 100% by the Company. The second 2% is matched
50% by the Company. The amount expensed was approximately $44, $70 and $107 for
2003, 2002 and 2001, respectively.
With respect to retirement benefits, the Company participates in other health
care and life insurance benefit plans (postretirement benefits) for retired
employees, sponsored by Fortis. Health care benefits, either through a Fortis
sponsored retiree plan for retirees under age 65 or through a cost offset for
individually purchased Medigap policies for retirees over age 65, are available
to employees who retire on or after January 1, 1993, at age 55 or older, with 10
years or more service. Life insurance, on a retiree pay all basis, is available
to those who retire on or after January 1, 1993. During 2003, 2002, and 2001 the
Company incurred no expenses related to retirement benefits.
13. DEFERRED POLICY ACQUISITION COSTS
Information about deferred policy acquisition costs follows:
<Table>
<Caption>
December 31,
--------------------------
2003 2002 2001
--------------------------
Beginning Balance $1,570 $ 3,760 $ 4,127
Costs deferred 146 129 190
Amortization (774) (2,319) (534)
Recovery of acquisition
costs on FFG reinsurance -- -- (3,956)
BALAC merger -- -- 3,933
--------------------------
ENDING BALANCE $ 942 $ 1,570 $ 3,760
--------------------------
</Table>
14. GOODWILL
Information about goodwill follows:
<Table>
<Caption>
Goodwill for the Year Ended
December 31,
---------------------------
2003 2002 2001
---------------------------
Beginning Balance $1,971 $1,949 $ 370
Amounts acquired 67 22 1,625
Amortization, net of
interest accrued -- -- (46)
---------------------------
ENDING BALANCE $2,038 $1,971 $1,949
---------------------------
</Table>
F-18
<Page>
15. RELATED PARTY TRANSACTIONS
The Company received various services from Fortis. These services include
assistance in benefit plan administration, corporate insurance, accounting, tax,
auditing, investment, information systems, actuarial and other administrative
functions. The fees paid for these services for years ended December 31, 2003,
2002 and 2001 were $4,236, $3,474 and $1,761, respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating as a separate
company.
The Company cedes group liability business to its affiliate, Fortis Benefits
Insurance Company (Fortis Benefits). The Company has ceded $5,847, $6,705 and
$6,622 of premium to Fortis Benefits in 2003, 2002 and 2001, respectively. The
Company has ceded $22,096 and $21,905 of reserves in 2003 and 2002,
respectively, to Fortis Benefits.
16. SUBSEQUENT EVENTS
In connection with the IPO (see Note 1) the board of directors of Assurant, Inc.
approved certain employee benefit programs. The Company's intercompany
allocations will be impacted by the following changes:
2004 LONG-TERM INCENTIVE PLAN
The 2004 Long-Term Incentive Plan was effective on February 5, 2003. The 2004
Long-Term Incentive Plan authorizes the granting of awards to employees,
officers, and directors in the following forms: (1) options to purchase shares
of Assurant's common stock, which may be non-statutory stock options or
incentive stock options under the U.S. tax code; (2) stock appreciation rights,
which give the holder the right to receive the difference between the fair
market value per share on the date of exercise over the grant price;
(3) performance awards, which are payable in cash or stock upon the attainment
of specified performance goals; (4) restricted stock, which is subject to
restrictions on transferability and subject to forfeiture on terms set by the
Compensation Committee; (5) dividend equivalents, which entitle the participant
to payments equal to any dividends paid on the shares of stock underlying an
award; and (6) other stock-based awards in the discretion of the Compensation
Committee, including unrestricted stock grants.
There are 10,000,000 shares reserved and available for issuance under the plan.
Under the plan, 68,976 shares of common stock of Assurant, Inc. were granted to
certain officers of Assurant, Inc. on February 5, 2004. Any awards will be made
at the discretion of the Compensation Committee. Therefore, it is not presently
possible to determine the benefits or amounts that will be received by any
individuals or groups pursuant to the 2004 Long-Term Incentive Plan in the
future.
2004 EMPLOYEE STOCK PURCHASE PLAN
The 2004 Employee Stock Purchase Plan will go into effect on or about July 1,
2004. The purpose of the stock purchase plan is to enhance the proprietary
interest among the employees of Assurant, Inc. The stock purchase plan is
designed to allow eligible employees to purchase discounted shares of the
Assurant's common stock, at defined intervals, with their accumulated payroll
deductions.
Employees are eligible to participate if they are designated by the Compensation
Committee and if they are customarily employed for at least 20 hours per week
and five months per calendar year, and provided they have served as an employee
for at least six months. A total of 5,000,000 shares of Assurant's common stock
have been reserved for issuance under the stock purchase plan.
EXECUTIVE MANAGEMENT INCENTIVE PLAN
The Executive Management Incentive Plan went into effect January 1, 2004.
Participation in the Executive Management Incentive Plan is limited to senior
officers of Assurant, Inc. and its subsidiaries who are selected to participate
in the plan for a given year by the Compensation Committee. The plan provides
for the payment of annual monetary awards to each participant equal to a
percentage of such participant's base salary based upon the achievement of
certain designated performance goals.
The amount of awards under the plan will be determined at the discretion of the
Compensation Committee. Therefore, it is not presently possible to determine the
benefits or amounts that will be received by any individuals or groups pursuant
to this plan.
AMENDMENT TO ASSURANT APPRECIATION INCENTIVE RIGHTS PLAN ("AAIR PLAN")
The AAIR Plan was amended to provide for the cash-out and replacement of
Assurant, Inc. incentive rights with stock appreciation rights on the
Assurant, Inc. common stock. The business segment rights outstanding under the
plan were not changed or effected. The conversion of outstanding Assurant, Inc.
incentive rights occurred as described in this paragraph. The Assurant, Inc.
incentive rights were valued as of December 31, 2003 using a special valuation
method, as follows. The measurement value of each Assurant, Inc. incentive right
as of December 31, 2002, was adjusted to reflect dividends paid by
Assurant, Inc., consistent with past practices; such adjusted value was then
multiplied by the arithmetic average of the change during calendar year 2003 in
the Dow Jones Life Insurance Index, the Dow Jones Property Casualty Index, and
the Dow Jones Healthcare Providers Index; and the result became the measurement
value of a Assurant, Inc. incentive rights as of December 31, 2003.
On January 18, 2004, each Assurant, Inc. incentive right then outstanding under
the plan was cashed out for a cash payment equal to the difference, if any,
between the measurement value of the Assurant, Inc. incentive rights as of
December 31st immediately preceeding the date of
F-19
<Page>
grant, and the measurement value of that right determined as of December 31,
2003, pursuant to the special valuation. Each outstanding Assurant, Inc.
incentive right, whether or not vested, was cancelled effective as of the date
it was cashed out. Following the cash-out and cancellation of Assurant, Inc.
incentive rights, Assurant, Inc. granted to each participant whose rights were
cashed out a number of stock appreciation rights on Assurant's common stock
(referred to as "replacement rights"). The number of replacement rights granted
to a participant was equal (1) the measurement value of the participant's
cashed-out Assurant, Inc. incentive rights, divided by (2) the IPO price of $22
a share. Each replacement right that replaces a vested cashed-out right was
vested immediately, and each replacement right that replaces a non-vested
cashed-out right will become vested on the vesting date for the corresponding
cashed-out right, but no replacement right, whether or not vested, may be
exercised sooner than one year from the closing date of the IPO. After that
waiting period, each replacement right will be exercisable for the remaining
term of the corresponding cancelled right.
At December 31, 2003, the Company was an indirectly owned subsidiary of
Fortis, Inc. Fortis N.V. and Fortis SA/NV (collectively the "Parent"), through
their affiliates, including their wholly owned subsidiary, Fortis Insurance
N.V., owned 100% of Fortis, Inc.
17. COMMITMENTS AND CONTINGENCIES
The Company lease office space and equipment under operating lease arrangements.
Certain facility leases contain escalation clauses based on increases in the
lessors' operating expenses. At December 31, 2003, the aggregate future minimum
lease payment under operating lease agreements that have initial or
non-cancelable terms in excess of one year are:
<Table>
2004 252
2005 256
2006 173
--------
TOTAL MINIMUM FUTURE LEASE PAYMENT $ 681
--------
</Table>
Rent expense was $492, $652 and $698 for 2003, 2002 and 2001 respectively.
The Company is regularly involved in litigation in the ordinary course of
business, both as a defendant and as a plaintiff. The Company may from time to
time be subject to a variety of legal and regulatory actions relating to the
Company's current and past business operations. While the Company cannot predict
the outcome of any pending or future litigation, examination or investigation,
the Company does not believe that any pending matter will have a material
adverse effect on the Company's business, financial condition or results of
operations.
F-20
<Page>
PART II
<Page>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
First Fortis' By-Laws provide for indemnity and payment of expenses of
First Fortis' officers and directors in connection with certain legal
proceedings, judgments, and settlements arising by reason of their
service as such, all to the extent and in the manner permitted by law.
Applicable New York law generally permits payment of such
indemnification and expenses if the person seeking indemnification has
acted in good faith and for a purpose that he reasonably believed to
be in, or not opposed to, the best interests of the Company, and, in a
criminal proceeding, if the person seeking indemnification also has no
reasonable cause to believe his conduct was unlawful. No
indemnification is further permitted to an individual if there has
been an adjudication, and a judgement rendered adverse to the
individual seeking indemnification, finding that the acts were
committed in bad faith, as the result of active and deliberate
dishonesty, or that there was personal gain, financial profit, or
other advantage which he or she was not otherwise legally entitled.
There are agreements in place under which the underwriter and
affiliated persons of the Registrant may be indemnified against
liabilities arising out of acts or omissions in connection with the
offer of the Contracts; provided however, that so such indemnity will
be made to the underwriter or affiliated persons of the Registrant for
liabilities to which they would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<Page>
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
------- ----------- ----------------
1 Underwriting Agreement Incorporated by reference to
Post-Effective Amendment No. 8 to the
Registration Statement File No.
33-14761 filed with the Commission on
April 4, 2002.
3(a) Articles of Incorporation Incorporated by reference to
Post-Effective Amendment No. 8 to the
Registration Statement File No.
33-14761 filed with the Commission on
April 4, 2002.
3(b) By-laws Incorporated by reference to
Post-Effective Amendment No. 8 to the
Registration Statement File No.
33-14761 filed with the Commission on
April 4, 2002.
4 Variable Annuity Contract Incorporated by reference to
Pre-Effective Amendment No. 1 to the
Registration Statement File No.
333-20343 filed with the Commission on
May 9, 1997.
5 Opinion re legality Filed herewith.
23(a) Legal Consent Filed herewith as Exhibit 5.
23(b) Consent of PricewaterhouseCoopers LLP, Filed herewith.
Independent Accountants
24 Copy of Power of Attorney Filed herewith.
</Table>
<Page>
Item 18. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
i. To include any Prospectus required by section 10(a)(3)
of the Securities Act of 1933;
ii. To reflect in the Prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933,
each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
reasonable grounds to believe that it meets all the requirements for filing this
Post-Effective Amendment on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Simsbury, State of Connecticut on this 5th day of
April, 2004.
FIRST FORTIS LIFE INSURANCE COMPANY
By: Robert B. Pollock *By: /s/ Marianne O'Doherty
----------------------------------- ---------------------------
Robert B. Pollock, President* Marianne O'Doherty
Attorney-In-Fact
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons, in the
capacities and on the date indicated.
Robert B. Pollock
President, Chief Executive Officer
and Chairman of the Board*
Terry J. Kryshak
Sr. Vice President, Chief
Administrative Officer and Director*
Larry M. Cains
Treasurer and Director*
and Principal Financial Officer *By: /s/ Marianne O'Doherty
Allen R. Freedman ---------------------------
Director* Marianne O'Doherty
Dale E. Gardner Attorney-in-Fact
Director*
Kenneth W. Nelson Date: April 5, 2004
Director*
Esther L. Nelson, Director*
Clarence E. Galston, Director*
333-20345
<Page>
EXHIBIT INDEX
5 Opinion and Consent of Douglas R. Lowe, Esq., corporate counsel of
First Fortis Life Insurance Company.
23(a) Legal Consent filed as part of Exhibit 5.
23(b) Consent of PricewaterhouseCoopers LLP, Independent Accountants.
24 Copy of Power of Attorney.