<Page>
As filed with the Securities and Exchange Commission on April 15, 2005.
File No. 333-20345
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 10 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. [ ]
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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
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<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 before you purchase your
variable annuity.
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:
- - AIM V.I. CORE STOCK FUND SUB-ACCOUNT (formerly INVESCO VIF Core Equity Fund
Sub-Account) which purchases Series I shares of AIM V.I. Core Stock Fund of
the AIM Variable Insurance Funds
- - AIM V.I. HEALTH SCIENCE FUND SUB-ACCOUNT (formerly INVESCO VIF Health Science
Fund Sub-Account) which purchases Series I shares of AIM V.I. Health Science
Fund of the AIM Variable Insurance Funds (Effective July 1, 2005, AIM V.I.
Health Science Fund will be renamed AIM V.I. Global Health Core Fund)
- - AIM V.I. TECHNOLOGY FUND SUB-ACCOUNT (formerly INVESCO VIF Technology Fund
Sub-Account) which purchases Series I shares of AIM V.I. Technology Fund of
the AIM Variable Insurance Funds
- - 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 LARGE CAP GROWTH PORTFOLIO SUB-ACCOUNT (formerly
AllianceBernstein Premier Growth Portfolio Sub-Account) which purchases Class
A shares of Alliance Large Cap Growth Portfolio of AllianceBernstein Variable
Products Series Fund, Inc.
- - AMERICAN CENTURY INVESTMENTS VP BALANCED FUND SUB-ACCOUNT which purchases
shares of American Century Investments VP Balanced Fund of American Century
Investments Variable Portfolios, Inc.
- - AMERICAN CENTURY INVESTMENTS VP CAPITAL APPRECIATION FUND SUB-ACCOUNT which
purchases shares of American Century Investments VP Capital Appreciation Fund
of American Century Investments 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
<Page>
- - 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 HLS Fund of Hartford Series Fund, Inc.
- - MFS EMERGING GROWTH SERIES SUB-ACCOUNT which purchases Initial Class shares of
MFS-Registered Trademark- Emerging Growth Series of MFS-Registered Trademark-
Variable Insurance Trust(SM)
- - MFS HIGH INCOME SERIES SUB-ACCOUNT which purchases Initial Class shares of
MFS-Registered Trademark- High Income Series of MFS-Registered Trademark-
Variable Insurance Trust(SM)
- - MFS STRATEGIC INCOME SERIES SUB-ACCOUNT which purchases Initial Class shares
of MFS-Registered Trademark- Strategic Income Series of MFS-Registered
Trademark- Variable Insurance Trust(SM)
- - GARTMORE GVIT DEVELOPING MARKETS FUND SUB-ACCOUNT which purchases Class II
shares of 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
- - PIONEER FUND VCT PORTFOLIO (formerly Safeco Core Equity Portfolio Sub-Account)
which purchases shares of Pioneer Fund VCT Portfolio (formerly Safeco Core
Equity Portfolio) of Pioneer Variable Contracts Trust (formerly Safeco
Resource Series Trust)
- - PIONEER GROWTH OPPORTUNITIES VCT PORTFOLIO SUB-ACCOUNT (formerly Safeco Growth
Opportunities Portfolio Sub-Account) which purchases shares of Pioneer Growth
Opportunities VCT Portfolio (Safeco Growth Opportunities Portfolio) of Pioneer
Variable Contracts Trust (formerly Safeco Resource Series Trust)
- - 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
- - WELLS FARGO ADVANTAGE DISCOVERY FUND which purchases shares of the Wells Fargo
Advantage Discovery Fund, which is a series fund of Wells Fargo Variable 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 and its features may not be available for sale in all states.
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PROSPECTUS DATED: MAY 2, 2005
STATEMENT OF ADDITIONAL INFORMATION DATED: MAY 2, 2005
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FIRST FORTIS LIFE INSURANCE COMPANY 3
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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DEFINITIONS 4
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FEE TABLE 6
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HIGHLIGHTS 8
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GENERAL CONTRACT INFORMATION 9
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First Fortis Life Insurance Company 9
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The Separate Account 9
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The Funds 9
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PERFORMANCE RELATED INFORMATION 12
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Guarantee Periods 12
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THE CONTRACT 14
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Purchases and Contract Value 14
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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 23
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OTHER INFORMATION 24
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Legal Matters 25
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More Information 25
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FEDERAL TAX CONSIDERATIONS 25
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INFORMATION REGARDING TAX-QUALIFIED RETIREMENT PLANS 31
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ACCUMULATION UNIT VALUES 35
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FURTHER INFORMATION ABOUT FIRST FORTIS LIFE INSURANCE
COMPANY 38
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TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION 43
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APPENDIX I -- SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS 44
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APPENDIX II -- INVESTMENTS BY FORTIS 46
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FINANCIAL STATEMENTS F-1
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</Table>
<Page>
4 FIRST FORTIS LIFE INSURANCE COMPANY
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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.
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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
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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
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</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
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SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average
daily Sub-Account value)
Mortality and Expense Risk Charge 0.45%
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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.
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
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Total Annual Fund Operating Expenses
(these are expenses that are deducted from Fund
assets, including management fees, Rule 12b-1
distribution and/or service fees, and other expenses) 0.43% 2.75%
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</Table>
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FIRST FORTIS LIFE INSURANCE COMPANY 7
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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, MAXIMUM 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 $ 336
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3 years $1,024
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5 years $1,735
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10 years $3,616
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</Table>
(2) If you annuitize at the end of the applicable time period:
<Table>
1 year $ 328
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3 years $1,016
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5 years $1,726
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10 years $3,607
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</Table>
(3) If you do not Surrender your Contract:
<Table>
1 year $ 336
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3 years $1,024
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5 years $1,735
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10 years $3,616
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</Table>
CONDENSED FINANCIAL INFORMATION
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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. For more information
on how Accumulation Unit Values are calculated see "How is the value of my
Contract calculated before the Annuity Commencement Date?". Please refer to the
"Accumulation Unit Values" Section of this Prospectus for information regarding
Accumulation Unit Values.
<Page>
8 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 deducted daily and is
equal to an annual charge of 0.45% of your Contract Value invested in the
Sub-Accounts.
- - ANNUAL FUND OPERATING EXPENSES -- These are charges for the Funds. See the
Funds' prospectuses accompanying this prospectus for more complete
information.
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.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 9
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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. Assurant, Inc. is the
ultimate parent of First Fortis Insurance Company. Assurant, Inc. is a premier
provider of specialized insurance products and related services in North America
and selected other international markets. Its stock is traded on the New York
Stock Exchange under the symbol AIZ.
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, 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 Large-Cap 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 AIM V.I. Core Stock Fund, AIM V.I. Health Science Fund and AIM V.I.
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 the AIM V.I. Core Stock
Fund.
MFS-Registered Trademark- Variable Insurance Trust(SM) 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.
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
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10 FIRST FORTIS LIFE INSURANCE COMPANY
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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.
Pioneer Investment Management, Inc. ("Pioneer") serves as the investment adviser
for the Pioneer Fund VCT Portfolio and Pioneer Growth Opportunities VCT
Portfolio. Pioneer is an indirect, wholly-owned subsidiary of UniCredito
Italiano S.p.A., an Italian Bank. Pioneer's main office is located at 60 State
Street, Boston, Massachusetts 02109.
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.
Wells Fargo Variable Trust is an open-end management investment company. It was
established as a Delaware statutory trust. Wells Fargo Funds Management, LLC is
the investment adviser to the Wells Fargo Advantage Discovery 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:
AIM V.I. CORE STOCK FUND (formerly 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.
AIM V.I. HEALTH SCIENCE FUND (formerly INVESCO VIF Health Science Fund) -- Seeks
capital appreciation.
AIM V.I. TECHNOLOGY FUND (formerly INVESCO VIF Technology Fund) -- Seeks capital
appreciation.
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 LARGE CAP 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.
MFS-REGISTERED TRADEMARK- EMERGING GROWTH SERIES -- Seeks to provide long-term
growth of capital.
MFS-REGISTERED TRADEMARK- HIGH INCOME SERIES -- Seeks high current income.
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FIRST FORTIS LIFE INSURANCE COMPANY 11
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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.
PIONEER FUND VCT (formerly Safeco Core Equity Portfolio) -- Seeks long-term
growth of capital and reasonable current income.
PIONEER GROWTH OPPORTUNITIES VCT PORTFOLIO (formerly Safeco Growth Opportunities
Portfolio) -- Seeks reasonable income and 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.
WELLS FARGO ADVANTAGE DISCOVERY FUND -- Seeks long-term capital appreciation.
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. This risks are 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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12 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 13
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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 from our Fixed Accumulation Feature
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 according to your instructions on record for 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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14 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 initial 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 15
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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. 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 make to 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 at the end of the current Valuation Day divided by
- - The net asset value per share of each Fund 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 SUB-ACCOUNT TO ANOTHER?
You may make transfers between the Sub-Accounts offered in this Contract
according to our policies and procedures.
WHAT IS A SUB-ACCOUNT TRANSFER?
A Sub-Account transfer is a transaction requested by you that involves
reallocating part or all of your Contract Value among the underlying Funds
available in your Contract.
You may transfer from one Sub-Account to another before and after the Annuity
Commencement Date. Your transfer request will be processed on the day that it is
received as long as it is received in good order 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.
WHAT HAPPENS WHEN I REQUEST A SUB-ACCOUNT TRANSFER?
When you request a Sub-Account transfer, Hartford sells shares of the underlying
Fund that makes up the Sub-Account you are transferring from and buys shares of
the underlying Fund that makes up the Sub-Account you want to transfer into.
Each day, many Contract Owners request Sub-Account transfers. Some request
transfers into a particular Sub-Account, and others request transfers out of a
particular Sub-Account. In addition, each day some Contract Owners allocate new
Premium Payments to Sub-Accounts, and others request Surrenders. Hartford
combines all the requests to transfer out of a Sub-Account along with all
Surrenders from that Sub-Account and determines how many shares of that
Sub-Account's underlying Fund Hartford would need to sell to satisfy all
Contract Owners' "transfer-out" requests. At the same time, Hartford also
combines all the requests to transfer into a particular Sub-Account or new
Premium Payments allocated to that Sub-Account and determines how many shares of
that Sub-Account's underlying Fund Hartford would need to buy to satisfy all
Contract Owners' "transfer-in" requests.
In addition, many of the underlying Funds that are available as investment
options in Hartford's variable annuity products are also available as investment
options in variable life insurance policies, retirement plans, group funding
agreements and other products offered by Hartford. Each day, investors and
participants in these other products engage in transactions similar to
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the Sub-Account transfers described for variable annuity Contract Owners.
Hartford takes advantage of its size and available technology to combine the
sales of a particular underlying Fund for all the variable annuities, variable
life insurance policies, retirement plans, group funding agreements or other
products offered by Hartford. We also combine all the purchases of that
particular underlying Fund for all the products we offer. We then "net" those
trades. This means that we sometimes reallocate shares of an underlying Fund
within the accounts at Hartford rather than buy new shares or sell shares of the
underlying Fund.
For example, if we combine all transfer-out requests and Surrenders of the
Hartford Stock HLS Fund Sub-Account with all other sales of that underlying Fund
from all the other products available at Hartford, we may have to sell $1
million dollars of that Fund on any particular day. However, if other Contract
Owners and the owners of other products offered by Hartford, want to purchase or
transfer-in an amount equal to $300,000 of that Fund, then Hartford would send a
sell order to the underlying Fund for $700,000, which is a $1 million sell order
minus the purchase order of $300,000.
WHAT RESTRICTIONS ARE THERE ON MY ABILITY TO MAKE A SUB-ACCOUNT TRANSFER?
You should be aware that there are several important restrictions on your
ability to make a Sub-Account transfer.
FIRST, YOU MAY MAKE ONLY ONE SUB-ACCOUNT TRANSFER EACH DAY. Hartford limits each
Contract Owner to one Sub-Account Transfer each day. Hartford counts all
Sub-Account transfer activity that occurs on any one day as one Sub-Account
transfer, except you cannot transfer the same Contract Value more than once a
day.
For example, if the only transfer you make on a day is a transfer of $10,000
from the Hartford Money Market HLS Fund Sub-Account into another Sub-Account, it
would count as one Sub-Account transfer. If, however, on a single day you
transfer $10,000 out of the Hartford Money Market HLS Fund Sub-Account into five
other Sub-Accounts (dividing the $10,000 among the five other Sub-Accounts
however you chose), that day's transfer activity would count as one Sub-Account
transfer. Likewise, if on a single day you transferred $10,000 out of the
Hartford Money Market HLS Fund Sub-Account into ten other Sub-Accounts (dividing
the $10,000 among the ten other Sub-Accounts however you chose), that day's
transfer activity would count as one Sub-Account transfer. Conversely, if you
have $10,000 in Contract Value distributed among 10 different Sub-Accounts and
you request to transfer the Contract Value in all those Sub-Accounts into one
Sub-Account that would also count as one Sub-Account transfer.
However, you cannot transfer the same Contract Value more than once in one day.
That means if you have $10,000 in the Hartford Money Market HLS Fund Sub-Account
and you transfer all $10,000 into the Hartford Stock HLS Fund Sub-Account, on
that same day you could not then transfer the $10,000 out of the Hartford Stock
HLS Fund Sub-Account into another Sub-Account.
Second, HARTFORD, AS THE ADMINISTRATOR FOR THE CONTRACTS ON BEHALF OF FORTIS,
HAS IMPLEMENTED POLICIES DESIGNED TO RESTRICT EXCESSIVE SUB-ACCOUNT TRANSFERS.
You should not purchase this Contract if you want to make frequent Sub-Account
transfers for any reason. In particular, Hartford does not want you to purchase
this Contract if you plan to engage in "market timing," which includes frequent
transfer activity into and out of the same underlying Fund, or engaging in
frequent Sub-Account transfers in order to exploit inefficiencies in the pricing
of the underlying Fund.
Hartford attempts to curb frequent transfers in the following ways:
x 20 Transfer Rule;
x Abusive Trading Policy; and
x Third Party Transfer Service Agreements.
THE 20 TRANSFER RULE -- Hartford employs the "20 Transfer Rule" to help curb
frequent Sub-Account transfers. Under this policy, you are allowed to submit a
total of 20 Sub-Account transfer requests each Contract Year for each Contract
by any of the following methods: U.S. Mail, Voice Response Unit, Internet or
telephone. Once these 20 Sub-Account transfers have been requested, you may
submit any additional Sub-Account transfer requests only in writing by U.S. Mail
or overnight delivery service. Transfer requests by telephone, voice recording
unit, via the internet or 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 good order.
We actively monitor Contract Owner's compliance with this policy. Our computer
system will automatically send you a letter after your 10th Sub-Account transfer
to remind you of our Sub-Account transfer policy. After your 20th transfer
request, the computer system will not allow you to do another Sub-Account
transfer by telephone, voice recording unit or via the internet. You will be
instructed to send your Sub-Account transfer request by U.S. Mail or overnight
delivery service.
Each Contract Anniversary, we reset your transfers to allow 20 new Sub-Account
transfers by any means.
We may make changes to this policy at any time.
ABUSIVE TRANSFER POLICY -- Regardless of the number of Sub-Account transfers you
have done under the 20 Transfer Rule, you still may have your Sub-Account
transfer privileges restricted if you violate the Abusive Transfer Policy, which
is designed to respond to market timing activity observed by the underlying
Funds.
Under the Abusive Transfer Policy, we rely on the underlying Funds to identify a
pattern or frequency of Sub-Account transfers that the underlying Fund wants us
to investigate. Most often, the
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underlying Fund will identify a particular day where it experienced a higher
percentage of shares bought followed closely by a day where it experienced the
almost identical percentage of shares sold. Once an underlying Fund contacts us,
we run a report that identifies all Contract Owners who transferred in or out of
that underlying Fund's Sub-Account on the day or days identified by the
underlying Fund. We then review the Contracts on that list to determine whether
transfer activity of each identified Contract violates our written Abusive
Transfer Policy. We don't reveal the precise details of this policy to make it
more difficult for abusive traders to adjust their behavior to escape detection
under this procedure. We can tell you that we consider some or all of the
following factors in our review:
- - 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.
If you meet the criteria established in our Abusive Transfer Policy, we will
terminate your Sub-Account transfer privileges until your next Contract
Anniversary, at which point your transfer privileges will be reinstated.
Since we combine all the purchases of a particular underlying Fund for all the
products through net trades, the underlying Fund is unable to identify transfers
of any specific Contract owner. As a result, there is the risk that the
underlying Fund may not be able to identify abusive transfers.
THIRD PARTY TRANSFER SERVICE AGREEMENTS -- 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 that includes additional restrictions on your
ability to request Sub-Account transfers. We do not currently require Contract
Owners or others to sign these agreements. However, if we believe that these
agreements may help curb frequent transfers, or for any other reason, we may,
without notice, begin requiring these agreements again.
In the event such agreements are required, the terms and conditions of these
agreements may vary from one agreement to the next but all of these agreements,
without exception, would be more restrictive than our regular policies that
restrict excessive Sub-Account transfers.
ARE THERE ANY EXCEPTIONS TO THESE POLICIES?
INDIVIDUAL EXCEPTIONS. Except for the exceptions listed below, Hartford does not
make any exceptions to its policies restricting frequent trading. This means
that if you request to be excused from any of the policies and to be permitted
to engage in a Sub-Account transfer that would violate any of these policies,
Hartford will refuse your request.
SOME ESTABLISHED EXCEPTIONS. You should be aware, however, that the 20 Transfer
Rule and the Abusive Trading Policy do not apply to all Contract Owners and do
not apply in all circumstances, which we describe here:
- - The 20 Transfer Rule and the Abusive Trading Policy do not apply to certain
Contracts serviced by Windsor Securities, Inc., a registered broker-dealer
firm, that sued Hartford in the 1990's for a variety of issues, including
Hartford's attempt to limit its Contract Owners' Sub-Account transfers. As a
result of the settlement of this litigation, these Contract Owners have
different Sub-Account transfer restrictions. With respect to these Contract
Owners, we currently only have the ability to restrict transfers into certain
underlying Funds and to limit the total Contract Value invested in any one
underlying Fund. As of December 31, 2004, the total Contract Value for this
group of Contracts was approximately $115 million.
- - The 20 Transfer Rule does not apply to Sub-Account transfers that occur
automatically as part of an established asset allocation program or asset
rebalancing program that rebalances a Contract Owner's holdings on a periodic,
pre-established basis according to the prior written instructions of the
Contract Owner or as part of a DCA program, including the DCA Plus program.
That means that transfers that occur under these programs are not counted
toward the 20 transfers allowed under the 20 Transfer Rule. We don't apply the
20 Transfer Rule to programs, like asset rebalancing, asset allocation and DCA
programs, that allow Sub-Account transfers on a regularly scheduled basis
because the underlying Funds expect these transfers and they usually do not
represent the type of Sub-Account transfers that the underlying Funds find
problematic.
Other than these exceptions, the only other exceptions to the 20 Transfer Rule
impose more restrictive limitations than the 20 Transfer Rule. For example, in
Oregon, we have the contractual right to limit Sub-Account transfers to only one
Sub-Account transfer every 30 days and to require that the transfer request be
sent in writing. We currently do not enforce this right, but should we choose to
do so, it would be an exception to the 20 Transfer Rule. There are also some
Third Party Transfer Service Agreements that are customized for certain brokers
that contain transfer limitations that are also more restrictive than the 20
Transfer Rule.
POSSIBILITY OF UNDETECTED FREQUENT TRADING IN THE UNDERLYING FUNDS. In addition
to the exceptions we have just described, you should also be aware that there
may be frequent trading in the underlying Funds that Hartford is not able to
detect and prevent, which we describe here:
- - There is a variable annuity that we offer that has no Contingent Deferred
Sales Charge. We are aware that frequent traders have used this annuity in the
past to engage in frequent Sub-Account transfers that does not violate the
precise terms of the 20 Transfer Rule. We believe that we have addressed this
practice by closing all the international and global funds
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18 FIRST FORTIS LIFE INSURANCE COMPANY
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available in the annuity. However, we cannot always tell if there is frequent
trading in this product.
- - These policies apply only to individuals and entities that own this Contract
and any subsequent or more recent versions of this Contract. However, the
underlying Funds that make up the Sub-Accounts of this Contract are available
for use with many different variable life insurance policies, variable annuity
products and funding agreements, and they are offered directly to certain
qualified retirement plans. Some of these products and plans may have less
restrictive transfer rules or no transfer restrictions at all. Many of the
group variable annuities or group funding agreements are offered to retirement
plans, and plan sponsors administer their plan according to Plan documents. If
these retirement plan documents have no restrictions on Sub-Account transfers,
then Hartford cannot apply the 20 Transfer Rule and may not be able to apply
any other restriction on transfers. Hartford has been working with plan
sponsors and plan administrators to ensure that any frequent transfer activity
is identified and deterred. Hartford has had only limited success in this
area. Frequent transfers by individuals or entities that occur in other
investment or retirement products provided by Hartford could have the same
abusive affect as frequent Sub-Account transfers done by Contract Owners of
this Contract.
HOW AM I AFFECTED BY FREQUENT SUB-ACCOUNT TRANSFERS?
Frequent Sub-Account transfers often result in frequent purchases and
redemptions of shares of the underlying Fund. Frequent purchases and redemptions
of the shares of the underlying Funds may increase your costs under this
Contract and may also lower your Contract's overall performance. Your costs may
increase because the underlying Fund will pass on any increase in fees related
to the frequent purchase and redemption of the underlying Fund's stocks. There
would also be administrative costs associated with these transactions.
Frequent transfers may also cause an underlying Fund to hold more cash than the
underlying Fund would like to hold. A large cash position means that the
underlying Fund will not be fully invested and may miss a rise in value of the
securities that the Fund would have purchased. If the underlying Fund chooses
not to hold a larger cash position, then it may have to sell securities that it
would have otherwise like to have kept, in order to meet its redemption
obligations. Both of these measures could result in lower performance of the
underlying Fund, which in turn would result in lower overall performance of your
Contract.
Because frequent transfers may raise the costs associated with this Contract and
lower performance, the effect may be a lower Death Benefit paid to your
Beneficiary or lower annuity payouts for your Payee.
WHAT IF A PROSPECTUS FOR THE UNDERLYING FUNDS HAS DIFFERENT POLICIES AND
PROCEDURES REGARDING FREQUENT TRADING?
We print the prospectus for the variable annuity together with the prospectuses
for the underlying Funds. While the prospectuses for the underlying Funds may
describe policies and procedures regarding frequent trading that may be
different from those described in the variable annuity prospectus, the policies
and procedures described in the variable annuity prospectus control how we
administer Sub-Account transfers.
We will continue to monitor transfer activity and 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
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FIRST FORTIS LIFE INSURANCE COMPANY 19
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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.
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 invested 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.
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20 FIRST FORTIS LIFE INSURANCE COMPANY
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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 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.
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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.
ANNUITY PAYOUTS
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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
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22 FIRST FORTIS LIFE INSURANCE COMPANY
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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.
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
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FIRST FORTIS LIFE INSURANCE COMPANY 23
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Unit Factor, multiplied by the Annuity Unit Value for the preceding Valuation
Period. The Annuity Unit Factor for a 3% AIR is 0.999919%.
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. All Sub-Account transfers
must comply with our Sub-Account transfer restriction policies. For more
information on Sub-Account restrictions, please see the sub-section entitled
"Can I transfer from one Sub-Account to another?" under the section entitled
"The Contract."
OTHER PROGRAMS AVAILABLE
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
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
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24 FIRST FORTIS LIFE INSURANCE COMPANY
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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. WFS 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. Fortis also pays a trail
commission which will never exceed 100 bps.
ADDITIONAL COMPENSATION TO BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHER
PERSONS ("FINANCIAL INTERMEDIARIES") -- In addition to the commissions (which
may be paid or reallowed to Financial Intermediaries from an applicable sales
charge and/or advanced to Financial Intermediaries) the distributor or its
affiliates pay, out of their own assets, significant additional compensation
("Additional Payments") to Financial Intermediaries (who may or may not be
affiliates of the distributor) in connection with the sale and distribution of
the variable annuity contracts ("Contracts") based on a number of factors. This
additional compensation is not paid directly by you.
With the exception of certain compensation arrangements discussed herein, and
"Negotiated Additional Amounts" defined below, these Additional Payments, which
are generally based on average net assets (or on aged assets i.e., assets held
over one year) and on sales of the Contracts attributable to a particular
Financial Intermediary, may, but are normally not expected to, exceed, in the
aggregate 0.1% of the average net assets of the Contracts attributable to a
particular Financial Intermediary. A listing of Financial Intermediaries to whom
the distributor makes such Additional Payments is provided below. Separate
Additional Payments may also be made in connection with the sale and
distribution of the Contracts in such forms as, among others, "due diligence"
payments and "marketing support" fees ("Negotiated Additional Amounts"), as
discussed in greater detail below. With the exception of certain Negotiated
Additional Amounts specifically discussed herein, payments of Negotiated
Additional Amounts did not exceed $65,000 per Financial Intermediary for the
calendar year ended December 31, 2004. These Additional Payments and Negotiated
Additional Amounts may, in some cases, act as a financial incentive for a
Financial Intermediary to recommend the purchase of one Contract over another
Contract. Please consult your Financial Intermediary for more information.
DISTRIBUTION ARRANGEMENTS -- Contracts issued by Fortis are continuously offered
and sold by selected broker-dealers who have selling agreements with Woodbury
Financial Services, Inc. ("WFS"). Except as discussed below, WFS, an affiliate
of Hartford Life Insurance Company and Hartford Life and Annuity Insurance
Company (collectively, including WFS, referred to as "Hartford Life") bears all
the expenses of providing services pursuant to Contracts including the payment
of the expenses relating to the distribution of prospectuses for sales purposes
as well as any advertising or sales literature.
In addition to the commissions described herein, Hartford Life and its
affiliates pay, out of their own assets, Additional Payments to Financial
Intermediaries in connection with the sale and distribution of the Contracts.
Certain Additional Payments are generally based on average net assets (or on
aged assets) of the Contracts attributable to a particular Financial
Intermediary, on sales of the Contracts attributable to a particular Financial
Intermediary, and/or on reimbursement of related sales expenses. Such Additional
Payments are generally made for the placement of the Contracts on a Financial
Intermediary's list of annuity products available for purchase by its customers.
Separate Additional Payments may take the form of, among others: (1) "due
diligence" payments for a Financial Intermediary's examination of the annuity
products and payments for providing training and information relating to the
annuity product and (2) "marketing support" fees for providing assistance in
promoting the sale of the annuity product (Negotiated Additional Amounts).
Subject to NASD regulations, Hartford Life and its affiliates may contribute
Negotiated Additional Amounts to various non-cash and cash incentive
arrangements to promote the sale of the Contracts, as well as sponsor various
annuity product educational programs, sales contests and/or promotions in which
Financial Intermediaries that participate may receive prizes such as travel
awards, merchandise and cash and/or investment research pertaining to particular
securities and other financial instruments or to the securities and financial
markets generally, educational information and related support materials and
hardware and/or software. Hartford Life and its affiliates may also pay for the
travel expenses, meals, lodging and entertainment of Financial Intermediaries
and their salespersons and guests in connection with education, sales and
promotional programs, subject to applicable NASD regulations. These programs,
which may be different for different Financial Intermediaries, will not change
the price an investor will pay for the Contracts or the amount that a registered
representative will receive from such sale. These Additional Payments and
Negotiated Additional Amounts may, in some cases, act as a financial incentive
for a Financial Intermediary to recommend the purchase of one annuity product
over another annuity product. Please consult your Financial Intermediary for
more information.
As of December 31, 2004 Hartford Life and its affiliates have entered into
arrangements to make Additional Payments that are generally based on average net
assets (or on aged assets) attributable to a particular Financial Intermediary,
on sales of the Contracts attributable to a particular Financial Intermediary,
and/or
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FIRST FORTIS LIFE INSURANCE COMPANY 25
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on reimbursement of related sales expenses to Advantage Capital Corporation, FSC
Securities Corporation, Royal Alliance Associates, Sentra Securities
Corporation, Spelman & Company, and SunAmerica Securities (collectively, the
"AIG Advisors Group") and WFS. Hartford Life and its affiliates may enter into
arrangements with other Financial Intermediaries to make such Additional
Payments. Separate Additional Payments in the form of Negotiated Additional
Amounts may also be made to the above-listed Financial Intermediaries and to
other Financial Intermediaries.
The Additional Payments to Financial Intermediaries in connection with the sale
and distribution of the Contracts are negotiated based on a range of qualitative
factors, including, but not limited to, access and opportunity to provide
product education and training, assistance with the development and
implementation of joint marketing and business plans, reputation in the
industry, ability to attract and retain assets, target markets, customer
relationships and quality of service. No one factor is determinative of the type
or amount of Additional Payments to be provided and factors are weighed in the
assessment of such determination.
For the fiscal year ended December 31, 2004, Hartford Life or its affiliates
paid approximately $100,000 in total Additional Payments, including Negotiated
Additional Amounts to Financial Intermediaries.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of First Fortis Life Insurance Company as of
December 31, 2004 and 2003 and for each of the three years in the period ended
December 31, 2004 included in this Registration Statement have been audited by
PricewaterhouseCoopers LLP and are included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
given on the authority of said firm as experts in auditing and accounting. The
principal business address of PricewaterhouseCoopers LLP is 225 South Sixth
Street, Suite 1400, 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, 576 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
- --------------------------------------------------------------------------------
A. INTRODUCTION
The following summary of tax rules does not provide or constitute any tax
advice. It provides only a general discussion of certain of the expected federal
income tax consequences with respect to amounts contributed to, invested in or
received from a Contract, based on our understanding of the existing provisions
of the Code, Treasury Regulations thereunder, and public interpretations thereof
by the IRS (e.g., Revenue Rulings, Revenue Procedures or Notices) or by
published court decisions. This summary discusses only certain federal income
tax consequences to United States Persons, and does not discuss state, local or
foreign tax consequences. The term United States Persons means citizens or
residents of the United States, domestic corporations, domestic partnerships,
trust or estates that are subject to United States federal income tax,
regardless of the source of their income.
This summary has been prepared by us after consultation with tax counsel, but no
opinion of tax counsel has been obtained. We do not make any guarantee or
representation regarding any tax status (e.g., federal, state, local or foreign)
of any Contract or any transaction involving a Contract. In addition, there is
always a possibility that the tax treatment of an annuity contract could change
by legislation or other means (such as regulations, rulings or judicial
decisions). Moreover, it is always possible that any such change in tax
treatment could be made retroactive (that is, made effective prior to the date
of the change). Accordingly, you should consult a qualified tax adviser for
complete information and advice before purchasing a Contract.
In addition, this discussion does not address many of the tax consequences if
you use the Contract in various arrangements, including Charitable Remainder
Trusts, tax-qualified retirement arrangements, deferred compensation plans,
split-dollar insurance arrangements, or other employee benefit arrangements. The
tax consequences of any such arrangement may vary depending on the particular
facts and circumstances of each individual arrangement and whether the
arrangement satisfies certain tax qualification or classification requirements.
In addition, the tax rules affecting such an arrangement may have changed
recently, e.g., by legislation or regulations that affect compensatory or
employee benefit arrangements. Therefore, if you are contemplating the use of a
Contract in any arrangement the value of which to you depends in part on its tax
consequences, you
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26 FIRST FORTIS LIFE INSURANCE COMPANY
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should consult a qualified tax adviser regarding the tax treatment of the
proposed arrangement and of any Contract used in it.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. SPECIAL
TAX RULES MAY APPLY WITH RESPECT TO CERTAIN SITUATIONS THAT ARE NOT DISCUSSED
HEREIN. EACH POTENTIAL PURCHASER OF A CONTRACT IS ADVISED TO CONSULT WITH A
QUALIFIED TAX ADVISER AS TO THE CONSEQUENCES OF ANY AMOUNTS INVESTED IN A
CONTRACT UNDER APPLICABLE FEDERAL, STATE, LOCAL OR FOREIGN TAX LAW.
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 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 the Contracts.
C. TAXATION OF ANNUITIES -- GENERAL PROVISIONS AFFECTING CONTRACTS NOT HELD IN
TAX-QUALIFIED PLANS
Section 72 of the Code governs the taxation of annuities in general.
1. NON-NATURAL PERSONS AS OWNERS
Pursuant to Code Section 72(u), an annuity contract held by a taxpayer other
than a natural person generally is not treated as an annuity contract under the
Code. Instead, such a non-natural Contract Owner generally could be required to
include in gross income currently for each taxable year the excess of (a) the
sum of the Contract Value as of the close of the taxable year and all previous
distributions under the Contract over (b) the sum of net premiums paid for the
taxable year and any prior taxable year and the amount includable in gross
income for any prior taxable year with respect to the Contract under
Section 72(u). However, Section 72(u) does not apply to:
- - A contract the nominal owner of which is a non-natural person but the
beneficial owner of which is a natural person (e.g., where the non-natural
owner holds the contract as an agent for the natural person),
- - A contract acquired by the estate of a decedent by reason of such decedent's
death,
- - Certain contracts acquired with respect to tax-qualified retirement
arrangements,
- - Certain contracts held in structured settlement arrangements that may qualify
under Code Section 130, or
- - A single premium immediate annuity contract under Code Section 72(u)(4), which
provides for substantially equal periodic payments and an annuity starting
date that is no later than 1 year from the date of the contract's purchase.
A non-natural Contract Owner that is a tax-exempt entity for federal tax
purposes (e.g., a tax-qualified retirement trust or a Charitable Remainder
Trust) generally would not be subject to federal income tax as a result of such
current gross income under Code Section 72(u). However, such a tax-exempt
entity, or any annuity contract that it holds, may need to satisfy certain tax
requirements in order to maintain its qualification for such favorable tax
treatment. See, e.g., IRS Tech. Adv. Memo. 9825001 for certain Charitable
Remainder Trusts.
Pursuant to Code Section 72(s), if the Contract Owner is a non-natural person,
the primary annuitant is treated as the "owner" in applying the required
distribution rules described below. These rules require that certain
distributions be made upon the death of an "owner." In addition, for a
non-natural owner, a change in the primary annuitant is treated as the death of
the "owner." However, the provisions of Code Section 72(s) do not apply to
certain contracts held in tax-qualified retirement arrangements or structured
settlement arrangements.
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
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FIRST FORTIS LIFE INSURANCE COMPANY 27
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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 owner within the same calendar year (other than certain
contracts held in connection with tax-qualified retirement arrangements) will be
aggregated and 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 Contracts 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 be
treated first as withdrawals of income until all of the income from all such
Contracts is withdrawn. In addition, the Treasury Department has specific
authority under the aggregation rules in Code Section 72(e)(11) to issue
regulations to prevent the avoidance of the income-out-first rules for
non-periodic distributions through the serial purchase of annuity contracts or
otherwise. As of the date of this prospectus, there are no regulations
interpreting these aggregation provisions.
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.
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28 FIRST FORTIS LIFE INSURANCE COMPANY
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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.).
If the taxpayer avoids this 10% penalty tax by qualifying for the substantially
equal periodic payments exception and later such series of payments is modified
(other than by death or disability), the 10% penalty tax will be applied
retroactively to all the prior periodic payments (i.e., penalty tax plus
interest thereon), unless such modification is made after both (a) the taxpayer
has reached age 59 1/2 and (b) 5 years have elapsed since the first of these
periodic payments.
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 shallbe 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. Such distributions
must begin within a year of the Contract Owner's death.
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 RIDER OR MATERIAL CHANGE.
The addition of a rider to the Contract, or a material change in the Contract's
provisions, could cause it to be considered newly issued or entered into, for
tax purposes, and thus could cause the Contract to lose certain grandfathered
tax status. Please contact your tax adviser for more information.
h. PARTIAL EXCHANGES.
The IRS in Rev. Rul. 2003-76 has confirmed that the owner of an annuity contract
can direct its insurer to transfer a portion of the contract's cash value
directly to another annuity contract (issued by the same insurer or by a
different insurer), and such a direct transfer can qualify for tax-free exchange
treatment under Code Section 1035 (a "partial exchange"). However, Rev. Rul.
2003-76 also refers to caveats and additional guidance in the companion Notice
2003-51, which discusses cases in which a partial exchange is followed by a
surrender, withdrawal or other distribution from either the old contract or the
new contract. Notice 2003-51 specifically indicates that the IRS is considering
(1) under what circumstances it should treat a partial exchange followed by such
a distribution within 24 months as presumptively for "tax avoidance" purposes
(e.g., to avoid the income-out-first rules on amounts received under Code
Section 72) and (2) what circumstances it should treat as rebutting such a
presumption (e.g., death, disability, reaching age 59 1/2, divorce or loss of
employment). Accordingly, we advise you to consult with a qualified tax
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FIRST FORTIS LIFE INSURANCE COMPANY 29
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adviser as to potential tax consequences before attempting any partial exchange.
3. DIVERSIFICATION REQUIREMENTS.
The Code requires that investments supporting your Contract be adequately
diversified. Code Section 817(h) 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 under Code Section 817(h)
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 insurer
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. TAX OWNERSHIP OF THE ASSETS IN THE SEPARATE ACCOUNT.
In order for a variable annuity contract to qualify for tax income deferral,
assets in the separate account supporting the contract must be considered to be
owned by the insurance company, and not by the contract owner, for tax purposes.
The IRS has stated in published rulings that a variable contract owner will be
considered the "owner" of separate account assets for income tax purposes if the
contract owner possesses sufficient incidents of ownership in those assets, such
as the ability to exercise investment control over the assets. In circumstances
where the variable contract owner is treated as the "tax owner" of certain
separate account assets, income and gain from such assets would be includable in
the variable contract owner's gross income. The Treasury Department indicated in
1986 that, in regulations or revenue rulings under Code Section 817(d) (relating
to the definition of a variable contract), it would provide guidance on the
extent to which contract owners may direct their investments to particular
subaccounts without being treated as tax owners of the underlying shares.
Although no such regulations have been issued to date, the IRS has issued a
number of rulings that indicate that this issue remains subject to a facts and
circumstances test for both variable annuity and life insurance contracts.
For instance, the IRS in Rev. Rul. 2003-92 reiterated its position in prior
rulings that, where shares in a fund offered in an insurer's separate account
are not available exclusively through the purchase of a variable insurance
contract (e.g., where such shares can be purchased directly by the general
public or others without going through such a variable contract), such "public
availability" means that such shares should be treated as owned directly by the
contract owner (and not by the insurer) for tax purposes, as if such contract
owner had chosen instead to purchase such shares directly (without going through
the variable contract). More specifically, Rev. Rul. 2003-92 extended this
"public availability" doctrine to interests in a non-registered limited
partnership that are not publicly traded but are available directly to qualified
buyers through private placements (as well as through variable contracts),
holding that such limited partnership interests should be treated as owned
directly by a variable contract owner (and not by the insurer). By contrast,
where such limited partnership interests are available exclusively through the
purchase of a variable insurance contract, Rev. Rul. 2003-92 held that such
investment assets should be treated as owned by the insurer (and not by the
contract owner). None of the shares or other interests in the fund choices
offered in our Separate Account for your Contract are available for purchase
except through an insurer's variable contracts.
The IRS in Rev. Rul. 2003-91 also indicated that an insurer could provide as
many as 20 fund choices for its variable contract owners (each with a general
investment strategy, e.g., a small company stock fund or a special industry
fund) under certain circumstances, without causing such a contract owner to be
treated as the tax owner of any of the underlying fund assets. As a result, we
believe that any owner of a Contract also should receive the same favorable tax
treatment. However, there is necessarily some uncertainty here as long as the
IRS continues to use a facts and circumstances test for investor control and
other tax ownership issues. Therefore, we reserve the right to modify the
Contract as necessary to prevent you from being treated as the tax owner of any
underlying assets.
D. FEDERAL INCOME TAX WITHHOLDING
The portion of an amount received under a Contract that is taxable gross income
to the recipient is also subject to federal income tax withholding, pursuant to
Code Section 3405, which requires the following:
1. Non-Periodic Distributions. The portion of a non-periodic distribution that
is includable in gross income is subject to federal income tax withholding
unless the recipient elects not to have such tax withheld ("election out").
We will
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provide such an "election out" form at the time such a distribution is
requested. If the necessary "election out" forms are not submitted to us in
a timely manner, we are required to withhold 10 percent of the includable
amount of distribution.
2. Periodic Distributions (payable over a period greater than one year). The
portion of a periodic distribution that is includable in gross income is
subject to federal income tax withholding as if the recipient were married
claiming 3 exemptions, unless the recipient elects otherwise. A recipient
may elect out of such withholding, or elect to have income tax withheld at a
different rate, by providing a completed election form. We will provide such
an election form at the time such a distribution is requested.
Regardless of any "election out" (or any amount of tax actually withheld) on an
amount received from a Contract, the recipient is generally liable for any
failure to pay the full amount of tax due on the includable portion of such
amount received. You also may be required to pay penalties under the estimated
income tax rules, if your withholding and estimated tax payments are
insufficient to satisfy your total tax liability.
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.
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.
G. ESTATE, GIFT AND GENERATION-SKIPPING TAX AND RELATED TAX CONSIDERATIONS
Any amount payable upon a Contract Owner's death, whether before or after the
Annuity Commencement Date, is generally includable in the Contract Owner's
estate for federal estate tax purposes. Similarly, prior to the Contract Owner's
death, the payment of any amount from the Contract, or the transfer of any
interest in the Contract, to a beneficiary or other person for less than
adequate consideration may have federal gift tax consequences. In addition, any
transfer to, or designation of, a non-spouse beneficiary who either is
(1) 37 1/2 or more years younger than a Contract Owner or (2) a grandchild (or
more remote further descendent) of a Contract Owner may have federal
generation-skipping-transfer ("GST") tax consequences under Code Section 2601.
Regulations under Code Section 2662 may require us to deduct any such GST tax
from your Contract, or from any applicable payment, and pay it directly to the
IRS. However, any federal estate, gift or GST tax payment with respect to a
Contract could produce an offsetting income tax deduction for a beneficiary or
transferee under Code Section 691(c) (partially offsetting such federal estate
or GST tax) or a basis increase for a beneficiary or transferee under Code
Section 691(c) or Section 1015(d). In addition, as indicated above in
"Distributions Prior to the Annuity Commencement Date," the transfer of a
Contract for less than adequate consideration during the Contract Owner's
lifetime generally is treated as producing an amount received by such Contract
Owner that is subject to both income tax and the 10% penalty tax. To the extent
that such an amount deemed received causes an amount to be includable currently
in such Contract Owner's gross income, this same income amount could produce a
corresponding increase in such Contract Owner's tax basis for such Contract that
is carried over to the transferee's tax basis for such Contract under Code
Section 72(e)(4)(C)(iii) and Section 1015.
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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, 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) $40,000 (adjusted for increases in
cost-of-living). The maximum elective deferral amount is equal to $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.
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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 $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. Hartford
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, 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 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. 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;
- - 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;
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FIRST FORTIS LIFE INSURANCE COMPANY 33
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- - 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.
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 entire value
of all benefits provided under a Contract as of the close of business on the
last day of the previous calendar year. The death benefit and any optional
benefits purchased under the Contract may affect the amount of the minimum
required distribution that must be taken. 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 if the
payment structure satisfies certain rules set forth in Income Tax Regulations.
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 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 and in 2004, the Internal Revenue Service issued final and temporary
regulations in the Federal Register relating to minimum required distributions.
Please consult with your tax or legal adviser with any questions regarding the
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 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
<Page>
34 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
an eligible recipient 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>
FIRST FORTIS LIFE INSURANCE COMPANY 35
- --------------------------------------------------------------------------------
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 2004 2003 2002 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
AIM V.I. CORE STOCK FUND
Accumulation Unit Value at beginning of period $14.788 $12.117 $15.047 $16.592 $15.922 $13.928 $12.137 $10.000
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.346 $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) 4 9 -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
AIM V.I. HEALTH SCIENCE FUND
Accumulation Unit Value at beginning of period $17.680 $13.899 $18.480 $21.236 $16.342 $15.654 $11.007 $10.000
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $18.933 $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) 10 11 12 13 23 6 8 --
---------------------------------------------------------------------------------------------------------------------------------
AIM V.I. TECHNOLOGY FUND
Accumulation Unit Value at beginning of period $11.617 $ 8.032 $15.178 $28.144 $36.917 $14.322 $11.446 $10.000
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.101 $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) 25 31 31 46 45 31 2 --
---------------------------------------------------------------------------------------------------------------------------------
ALLIANCEBERNSTEIN MONEY MARKET PORFOLIO
Accumulation Unit Value at beginning of period $12.964 $12.954 $12.945 -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.997 $12.964 $12.954 -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 31 80 154 -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
ALLIANCEBERNSTEIN INTERNATIONAL PORTFOLIO
Accumulation Unit Value at beginning of period $11.553 $ 8.819 $10.456 $13.544 $16.990 $12.175 $10.818 $10.517
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.528 $11.553 $ 8.819 $10.456 $13.544 $16.990 $12.175 $10.818
---------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 10 14 18 18 21 5 6 4
---------------------------------------------------------------------------------------------------------------------------------
ALLIANCEBERNSTEIN PREMIER GROWTH PORTFOLIO
Accumulation Unit Value at beginning of period $17.754 $14.421 $20.887 $25.357 $30.515 $23.171 $15.729 $11.803
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $19.198 $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) 10 15 32 39 39 33 33 18
---------------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VP BALANCED FUND
Accumulation Unit Value at beginning of period $15.868 $13.343 $14.819 $15.456 $15.952 $14.567 $12.639 $10.972
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $17.341 $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) 12 5 5 5 8 5 2 1
---------------------------------------------------------------------------------------------------------------------------------
AMERICAN CENTURY VP CAPITAL APPRECIATION FUND
Accumulation Unit Value at beginning of period $10.511 $ 8.764 $11.172 $15.691 $14.453 $ 8.825 $ 9.061 $ 9.412
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.257 $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 4 5 6 10 3 1 --
---------------------------------------------------------------------------------------------------------------------------------
FEDERATED AMERICAN LEADERS FUND II
Accumulation Unit Value at beginning of period $18.331 $14.420 $18.155 $19.046 $18.671 $17.577 $15.012 $11.395
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $20.033 $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) 10 9 9 9 8 1 4 --
---------------------------------------------------------------------------------------------------------------------------------
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES FUND II
Accumulation Unit Value at beginning of period $14.785 $14.508 $13.364 $12.542 $11.352 $11.473 $10.705 $10.000
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.250 $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 14 25 35 21 8 4 2
---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Page>
36 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
<Table>
AS OF DECEMBER 31,
-------------------------------------------------------------------
SUB-ACCOUNT 2004 2003 2002 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
FEDERATED HIGH INCOME BOND FUND II
Accumulation Unit Value at beginning of period $14.534 $11.946 $11.834 $11.733 $12.956 $12.720 $12.441 $10.978
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.982 $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) 3 5 8 7 11 9 32 30
---------------------------------------------------------------------------------------------------------------------------------
FEDERATED CAPITAL INCOME FUND II
Accumulation Unit Value at beginning of period $11.026 $ 9.178 $12.116 $14.115 $15.561 $15.375 $13.550 $10.748
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.074 $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 3 7 4 3 --
---------------------------------------------------------------------------------------------------------------------------------
HARTFORD INDEX HLS FUND
Accumulation Unit Value at beginning of period $15.257 $11.961 $15.493 $17.748 $19.700 $16.424 $12.883 $ 9.759
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $16.767 $15.257 $11.961 $15.493 $17.748 $19.700 $16.424 $12.883
---------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 20 24 22 42 28 43 2 --
---------------------------------------------------------------------------------------------------------------------------------
MFS EMERGING GROWTH SERIES
Accumulation Unit Value at beginning of period $14.668 $11.314 $17.158 $25.912 $32.324 $18.374 $13.756 $11.335
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $16.495 $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 $14.715 $12.531 $12.272 $12.077 $12.998 $12.266 $12.342 $10.912
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $15.989 $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) 2 5 12 11 15 14 43 39
---------------------------------------------------------------------------------------------------------------------------------
MFS STRATEGIC INCOME SERIES
Accumulation Unit Value at beginning of period $13.794 $12.553 $11.633 $11.154 $10.685 $11.008 $10.249 $10.411
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $14.793 $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 2 4 6 2 -- --
---------------------------------------------------------------------------------------------------------------------------------
GARTMORE GVIT DEVELOPING MARKETS FUND
Accumulation Unit Value at beginning of period $10.115 $ 7.285 -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $12.063 $10.115 -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 10 8 -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN AMT LIMITED MATURITY BOND PORTFOLIO
Accumulation Unit Value at beginning of period $13.570 $13.309 $12.691 $11.718 $11.023 $10.911 $10.498 $ 9.879
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.614 $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) 4 10 13 8 4 3 5 --
---------------------------------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN AMT PARTNERS PORTFOLIO
Accumulation Unit Value at beginning of period $13.630 $10.135 $13.422 $13.880 $13.835 $12.946 $12.478 $ 9.593
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $16.144 $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) 2 5 4 6 8 3 4 1
---------------------------------------------------------------------------------------------------------------------------------
ING VP NATURAL RESOURCES TRUST
Accumulation Unit Value at beginning of period $14.593 $11.230 $11.522 $13.768 $11.684 $10.288 $12.853 $12.050
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $16.367 $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) 4 2 2 9 1 1 -- --
---------------------------------------------------------------------------------------------------------------------------------
ING VP EMERGING MARKETS FUND
Accumulation Unit Value at beginning of period $ 9.406 $ 6.418 $ 7.111 $ 7.993 $13.480 $ 5.940 $ 8.300 $ 9.426
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $11.396 $ 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) 2 1 1 4 2 1 -- --
---------------------------------------------------------------------------------------------------------------------------------
PIONEER FUND VCT PORTFOLIO
Accumulation Unit Value at beginning of period $10.063 -- -- -- -- -- -- --(a)
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $10.285 -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 8 -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 37
- --------------------------------------------------------------------------------
<Table>
AS OF DECEMBER 31,
-------------------------------------------------------------------
SUB-ACCOUNT 2004 2003 2002 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------------------------
PIONEER GROWTH OPPORTUNITIES VCT PORTFOLIO
Accumulation Unit Value at beginning of period $15.679 $11.019 $17.757 $14.973 $16.023 $15.237 $14.993 $10.398
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $19.094 $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) 11 10 14 28 13 8 14 1
---------------------------------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE BOND FUND
Accumulation Unit Value at beginning of period $14.751 $12.540 $10.354 $10.954 $10.807 $11.778 $10.493 $10.293
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $16.029 $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) 3 1 2 1 2 2 1 4
---------------------------------------------------------------------------------------------------------------------------------
VAN ECK WORLDWIDE HARD ASSETS FUND
Accumulation Unit Value at beginning of period $11.199 $ 7.754 $ 8.016 $ 8.992 $ 8.108 $ 6.731 $ 9.775 $ 9.992
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $13.823 $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) 5 1 -- 3 3 1 -- --
---------------------------------------------------------------------------------------------------------------------------------
WELLS FARGO ADVANTAGE DISCOVERY FUND
Accumulation Unit Value at beginning of period $ 9.034 $ 6.762 $10.876 $10.000 -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit Value at end of period $10.717 $ 9.034 $ 6.762 $10.876 -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
Number of Accumulation Units outstanding at end of period
(in thousands) 5 10 7 -- -- -- -- --
---------------------------------------------------------------------------------------------------------------------------------
</Table>
(a) Inception date December 10, 2004.
<Page>
38 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
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.
Assurant currently has four decentralized operating business segments including
the following:
<Table>
<Caption>
OPERATING BUSINESS SEGMENT PRINCIPAL PRODUCTS & SERVICES PRINCIPAL DISTRIBUTION CHANNELS
- ------------------------------------------------------------------------------------------------------------
ASSURANT SOLUTIONS
- ------------------------------------------------------------------------------------------------------------
SPECIALTY PROPERTY - Creditor-placed homeowners insurance - Mortgage lenders and services
(including tracking services)
- ------------------------------------------------------------------------------------------------------------
- Manufactured housing homeowners - Manufactured housing lenders, dealers
insurance and vertically integrated builders
- ------------------------------------------------------------------------------------------------------------
CONSUMER PROTECTION - Debt protection administration - Financial institutions (including
credit card issuers) and retailers
- ------------------------------------------------------------------------------------------------------------
- Credit insurance
- ------------------------------------------------------------------------------------------------------------
- Warranties and extended service - Consumer electronics and appliance
contracts retailers
- ------------------------------------------------------------------------------------------------------------
- Vehicle dealerships
- ------------------------------------------------------------------------------------------------------------
-- Appliances
-- Automobiles and recreational
vehicles
-- Consumer electronics
-- Wireless devices
- ------------------------------------------------------------------------------------------------------------
ASSURANT HEALTH
- ------------------------------------------------------------------------------------------------------------
INDIVIDUAL HEALTH - Preferred Provider Organizations - Independent agents
(PPO)
- ------------------------------------------------------------------------------------------------------------
- Short-term medical insurance - National accounts
- ------------------------------------------------------------------------------------------------------------
- Student medical insurance - Internet
- ------------------------------------------------------------------------------------------------------------
SMALL EMPLOYER GROUP - PPO - Independent agents
HEALTH
- ------------------------------------------------------------------------------------------------------------
ASSURANT EMPLOYEE BENEFITS - Group dental insurance - Employee benefit advisors
-- Employer-paid
-- Employee-paid
- ------------------------------------------------------------------------------------------------------------
- Group disability insurance - Brokers
- ------------------------------------------------------------------------------------------------------------
- DRMS (1)
- ------------------------------------------------------------------------------------------------------------
- Group term life insurance
- ------------------------------------------------------------------------------------------------------------
ASSURANT PRENEED - Pre-funded funeral insurance - Service Corporation International
(SCI)
- ------------------------------------------------------------------------------------------------------------
- Independent funeral homes
- ------------------------------------------------------------------------------------------------------------
</Table>
(1) DRMS refers to Disability Reinsurance Management Services, Inc., one of our
wholly owned subsidiaries that provides a turnkey facility to other insurers
to write principally group disability insurance.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 39
- --------------------------------------------------------------------------------
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.
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, 2004, we had approximately 9 employees in our sales offices
in New York, New York. In addition, approximately 23 Assurant employees, subject
to a lease arrangement,
<Page>
40 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
spent at least a portion of their time working for us at our headquarters in
Syracuse, New York.
In 2004, we initiated the consolidation of the Syracuse, New York customer
relations support functions to our Kansas City, Missouri and Birmingham, Alabama
offices. As a result, approximately 20 positions will be eliminated in the
Syracuse, New York office during 2004 and 2005.
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
that serves as sales office. 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.
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, 2005, we
had 100,000 shares of common stock outstanding, all of which are owned directly
by Assurant. We paid $40 million, zero and zero in dividends to our stockholder
in 2004, 2003 and 2002, respectively. 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) 2004 2003
- ------------------------------------------------------------------------
REVENUES:
Net earned premiums and other considerations $ 65 $69
Net investment income 9 10
Net realized gains (losses) on investments .8 .7
Fees and other income 1.9 2.1
---- ---
Total revenues 78 82
---- ---
BENEFITS, LOSSES AND EXPENSES:
Policyholder benefits 42 45
Selling, underwriting and general expenses (1) 19 24
---- ---
Total benefits, losses and expenses 61 69
---- ---
INCOME BEFORE INCOME TAXES: 17 13
Income taxes 4 4
---- ---
NET INCOME $ 12 $ 9
- ------------------------------------------------------------------------
</Table>
(1) Includes amortization of DAC and VOBA and underwriting, general and
administrative expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31, 2003
TOTAL REVENUES
Total Revenues decreased by $4,339, or 5%, from $82,369 for the year ended
December 31, 2003, to $78,030 for the year ended December 31, 2004.
Net earned premiums and other considerations decreased $3,613, or 5%, from
$69,206 for the year ended December 31, 2003, to $65,593 for the year ended
December 31, 2004. The decrease was primarily due to decreases of $3,981, $3,446
and $1,585 in our credit life, group life and group dental businesses,
respectively, offset by an increase of $5,413 in our group disability business.
The decrease in our credit life business is primarily due to an adverse
regulatory climate. The decrease in our group life business was primarily due to
the non-renewal of certain unprofitable business in 2003. The decrease in our
group dental business was primarily due to maintaining pricing discipline in an
increasingly competitive market, which has resulted in lower sales and renewals.
The increase in group disability business was
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 41
- --------------------------------------------------------------------------------
primarily driven by business written through alternate distribution sources. In
2004, our total net earned premiums were derived 87% from the group life, group
dental and group disability business, and 13% from the credit life business. In
2003, our total net earned premiums were derived 82% from the group life, group
dental and group disability business, and 18% from the credit life business.
Net investment income decrease by $577, or 6% from $10,315 for the year ended
December 31, 2003, to $9,738 for the year ended December 31, 2004. The decline
is attributable to a decrease in invested assets.
Net realized gains on investments increased $173, or 27%, from $646 for the year
ended December 31, 2003, to $819 for the year ended December 31, 2004. Net
realized gains on investments are comprised on both other-than-temporary
impairments and realized gains/(losses) on the sales of securities. For the
years ended December 31, 2003 and 2004, we had other-than-temporary impairments
on fixed maturity and equity securities of $38 and zero, respectively.
Amortization of deferred gain on disposal of business decreased by $321, or 17%,
from $1,896 for the year ended December 31, 2003, to $1,575 for the year ended
December 31, 2004. The decrease is consistent with the anticipated run-off of
the businesses ceded to The Hartford in 2001 and John Hancock in 2000.
Fees and other income decreased by $1, or less than 1%, from $306 for the year
ended December 31, 2003, to $305 for the year ended December 31, 2004. The
decrease is driven by lower administrative services only sales.
TOTAL BENEFITS, LOSSES AND EXPENSES
Total benefits, losses and expenses decrease by $7,704, or 11%, from $69,125 for
the year ended December 31, 2003, to $61,421 for the year ended December 31,
2004.
Policyholder benefits decreased by $2,382, or 5%, from $45,114 for the year
ended December 31, 2003, to $42,732 for the year ended December 31, 2004. The
decrease was primarily due to decreases of $1,432, $985 and $1,217 in our credit
life, group life and group dental businesses, offset by an increase of $2,075 in
our group disability business. The decrease in our credit life business is
primarily due to less new business as a result of the adverse regulatory
climate. The decrease in group life and dental benefits is predominantly
attributable to favorable mortality experience in group life and improved
experience in group dental. The increase in group disability is primarily due to
growth in business written through alternate distribution sources, as well as
unfavorable experience on a large case.
Selling, underwriting and general expenses decreased $5,322, or 22%, from
$24,011 for the year ended December 31, 2003, to $18,689 for the year ended
December 31, 2004. The decrease was primarily due to a decrease of $3,659 in our
credit life business and a net decrease of $1,406 in our group disability, group
life and group dental business. The decrease in our credit life business is due
to less new business as a result of the adverse regulatory climate. The decrease
in our group disability, group life and group dental business was driven by
focused expense management in 2004.
NET INCOME
Net income increase $3,240, or 37%, from $8,737 for the year ended December 31,
2003, to $11,977 for the year ended December 31, 2004.
Income taxes increased $125, or 3%, from $4,507 for the year ended December 31,
2003, to $4,632 for the year ended December 31, 2004. The increase is primarily
due to an increase in pre-tax income. In additional, during the fourth quarter
of 2004, an analysis of the federal tax liability resulted in a $1,000 reduction
of our tax liability.
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,
<Page>
42 FIRST FORTIS LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
2004, we held $128,766 of fixed maturity securities at fair market value and
$9,125 of commercial mortgages at amortized cost for a combined total of 91% of
total invested assets. As of December 31, 2003, we held $167,712 of fixed
maturity securities at fair market value and $3,800 of commercial mortgages for
a combined total of 90% 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 $94 million of reinsurance recoverables at December 31,
2004, 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.
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY 43
- --------------------------------------------------------------------------------
TABLE OF CONTENTS TO STATEMENT OF ADDITIONAL INFORMATION
<Table>
<Caption>
- ----------------------------------------------------------------------
GENERAL INFORMATION
- ----------------------------------------------------------------------
Safekeeping of Assets
- ----------------------------------------------------------------------
Independent Registered Public Accounting Firm
- ----------------------------------------------------------------------
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>
44 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 45
- --------------------------------------------------------------------------------
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>
46 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 REGISTERED PUBLIC ACCOUNTING FIRM
------------------------------------------------------------------------
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), a direct wholly owned subsidiary of Assurant, Inc. at
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004 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
standards of the Public Company Accounting Oversight Board (United States),
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
March 31, 2005
Minneapolis, Minnesota
F-1
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
AT DECEMBER 31, 2004 AND 2003
<Table>
<Caption>
DECEMBER 31,
-----------------------
2004 2003
-----------------------
(in thousands except
share data)
ASSETS
Investments:
Fixed maturities available for sale, at fair value
(amortized cost -- $119,840 in 2004 and $157,032 in 2003) $128,766 $167,712
Equity securities available for sale, at fair value
(cost -- $8,514 in 2004 and $9,574 in 2003) 8,571 9,784
Commercial mortgage loans on real estate at amortized cost 9,125 3,800
Policy loans 80 37
Short-term investments 4,575 8,091
Other investments -- 275
-----------------------
TOTAL INVESTMENTS 151,117 189,699
-----------------------
Cash and cash equivalents 5,360 1,060
Premiums and accounts receivable, net 4,858 2,777
Income tax receivable 1,250 --
Reinsurance recoverables 93,607 100,451
Due from affiliates 582 --
Accrued investment income 1,701 2,185
Deferred acquisition costs 1,123 942
Deferred income taxes, net 1,481 3,040
Goodwill 2,038 2,038
Other assets 95 82
Assets held in separate accounts 32,446 39,678
-----------------------
TOTAL ASSETS $295,658 $341,952
-----------------------
LIABILITIES
Future policy benefits and expenses $ 29,168 $ 24,143
Unearned premiums 20,902 35,798
Claims and benefits payable 139,270 137,233
Commissions payable 5,001 3,811
Reinsurance balances payable 2,509 1,935
Funds held under reinsurance 89 94
Deferred gain on disposal of businesses 6,492 8,067
Due to affiliates -- 2,407
Accounts payable and other liabilities 8,292 6,264
Tax payable -- 1,771
Liabilities related to separate accounts 32,446 39,678
-----------------------
TOTAL LIABILITIES 244,169 261,201
-----------------------
STOCKHOLDER'S EQUITY
Common stock, par value $20 per share, 100,000 shares
authorized, issued, and outstanding 2,000 2,000
Additional paid-in capital 43,006 43,006
Retained earnings 644 28,663
Accumulated other comprehensive income 5,839 7,082
Total stockholder's equity 51,489 80,751
-----------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $295,658 $341,952
-----------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-2
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------
2004 2003 2002
-----------------------------------
(in thousands)
REVENUES
Net earned premiums and other considerations $65,593 $69,206 $74,215
Net investment income 9,738 10,315 11,171
Net realized gain (loss) on investments 819 646 (2,599)
Amortization of deferred gain on disposal of businesses 1,575 1,896 2,242
Fees and other income 305 306 368
-----------------------------------
TOTAL REVENUES 78,030 82,369 85,397
-----------------------------------
BENEFITS, LOSSES AND EXPENSES
Policyholder benefits 42,732 45,114 47,151
Amortization of deferred acquisition costs 247 774 2,319
Underwriting, general and administrative expenses 18,442 23,237 23,638
-----------------------------------
TOTAL BENEFITS, LOSSES AND EXPENSES 61,421 69,125 73,108
Income before income taxes 16,609 13,244 12,289
Income taxes 4,632 4,507 4,197
-----------------------------------
NET INCOME $11,977 $ 8,737 $ 8,092
-----------------------------------
</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, 2004, 2003 AND 2002
<Table>
<Caption>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
---------------------------------------------------------
(in thousands)
BALANCE, JANUARY 1, 2002 $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
---------------------------------------------------------
Dividends on common stock -- -- (40,000) -- (40,000)
Comprehensive income:
Net income -- -- 11,977 -- 11,977
Net change in unrealized gains on securities -- -- -- (1,239) (1,239)
Other -- -- 4 (4) --
--------
Total comprehensive income 10,738
---------------------------------------------------------
BALANCE, DECEMBER 31, 2004 $2,000 $43,006 $ 644 $ 5,839 $ 51,489
---------------------------------------------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-4
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
---------------------------------
(in thousands)
OPERATING ACTIVITIES
Net income $ 11,977 $ 8,737 $ 8,092
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in reinsurance recoverable 6,844 9,677 (2,075)
Change in premiums and accounts receivables (2,663) 1,527 3,995
Change in deferred acquisition costs (181) 628 2,190
Change in accrued investment income 484 148 155
Change in insurance policy reserves and expenses (7,834) (13,537) 47
Change in accounts payable and other liabilities (379) 716 (3,897)
Change in commissions payable 1,190 (37) 107
Change in reinsurance balances payable 574 (872) (76)
Change in funds held under reinsurance (5) (167) 68
Amortization of deferred gain on disposal of businesses (1,575) (1,896) (2,243)
Change in income taxes (794) (83) (4,241)
Net realized (gains)/losses on investments (819) (646) 2,599
Other (166) 18 (207)
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,653 4,213 4,514
---------------------------------
INVESTING ACTIVITIES
Sales of:
Fixed maturities available for sale 57,159 30,892 86,092
Equity securities available for sale 4,376 2,486 1,640
Other invested assets 275 73 126
Maturities, prepayments, and scheduled redemption of:
Fixed maturities available for sale 11,214 22,221 14,276
Purchase of:
Fixed maturities available for sale (30,195) (43,359) (111,100)
Equity securities available for sale (3,330) (8,986) (2,096)
Change in commercial mortgage loans on real estate (5,325) (3,800) --
Change in short term investments 3,516 (4,697) 3,207
Change in policy loans (43) (13) (18)
---------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES $ 37,647 $ (5,183) $ (7,873)
---------------------------------
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-5
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
------------------------------------
(in thousands)
FINANCING ACTIVITIES
Dividends paid $(40,000) $ -- $ --
------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (40,000) -- --
------------------------------------
Change in cash and cash equivalents 4,300 (970) (3,359)
Cash and cash equivalents at beginning of period 1,060 2,030 5,389
------------------------------------
Cash and cash equivalents at end of period $ 5,360 $1,060 $ 2,030
------------------------------------
Supplemental schedule of non-cash investing activities:
Assets and liabilities transferred in reinsurance
transaction (Note 8):
Non-cash assets ceded:
Other assets $ -- $ -- $ (63)
------------------------------------
TOTAL VALUE OF ASSETS CEDED $ -- $ -- $ (63)
------------------------------------
Other liabilities $ -- $ -- $ (32)
------------------------------------
TOTAL LIABILITIES ASSUMED $ -- $ -- $ (32)
------------------------------------
Supplemental information:
Income taxes paid $ 5,428 $4,544 $ 8,455
</Table>
SEE THE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS
F-6
<Page>
FIRST FORTIS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS EXCEPT SHARE DATA)
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS
First Fortis Life Insurance Company (the "Company") is a provider of life and
health insurance products. At January 1, 2004, the Company was a wholly owned
subsidiary of Fortis, Inc., which itself was an indirect, wholly owned
subsidiary of Fortis N.V. of the Netherlands and Fortis SA/NV of Belgium
(collectively, the "Fortis") through their affiliates, including their wholly
owned subsidiary, Fortis Insurance N.V.
On February 5, 2004, Fortis sold approximately 65% of its ownership interest in
Assurant, Inc. via an initial public offering (the "IPO") and retained
approximately 35% of its ownership (50,199,130 shares). In connection with the
IPO, Fortis, Inc. was merged into Assurant, Inc., a Delaware corporation, which
was formed solely for the purpose of the redomestication of Fortis, Inc. After
the merger, Assurant, Inc. became the successor to the business, operations and
obligations of Fortis, Inc. Assurant, Inc. is traded on the New York Stock
Exchange under the symbol AIZ.
On January 21, 2005, Fortis owned approximately 36% (50,199,130 shares) of the
Assurant, Inc. based on the number of shares outstanding that day and sold
27,200,000 of those shares in a secondary offering to the public. Assurant, Inc.
did not receive any of the proceeds from the sale of shares of common stock by
Fortis. Fortis received all net proceeds from the sale. Fortis concurrently sold
exchangeable bonds, due January 26, 2008, that are mandatorily exchangeable for
their remaining 22,999,130 shares of Assurant, Inc. Fortis may elect, prior to
the maturity date of the bonds, a cash settlement alternative and pay the
bondholders an amount of cash equal to the applicable market value of
Assurant, Inc.'s common stock. The exchangeable bonds and the shares of the
Assurant, Inc.'s common stock into which they are exchangeable have not been and
will not be registered under the Securities Act of 1933 and may not be offered
or sold in the United States absent registration or an applicable exemption from
registration requirements.
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 principally from group employee benefits and credit products. 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, claims and benefits payable and taxes. 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 and adequate.
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 prior period amounts have been reclassified to conform to the 2004
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 providing 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
appropriate insurance asset and liability management, rate of return, maturity,
credit risk, tax considerations and regulatory requirements.
F-7
<Page>
Fixed maturities and equity securities are classified as available-for-sale and
reported at fair value. If the fair value is higher than the amortized cost for
debt securities or the purchase cost for equity securities, the excess is an
unrealized gain; and if lower than cost, the difference is an unrealized loss.
The net unrealized gains and losses, less deferred income taxes are reported as
included in accumulated other comprehensive income and, accordingly, have no
effect on net income.
Commercial mortgage loans on real estate are reported at unpaid balances,
adjusted for amortization of premium or discount, less allowance for losses. The
change in the allowance for losses is recorded as realized gains and losses on
investments.
Policy loans are reported at unpaid principal balances, which do not exceed the
cash surrender value of the underlying policies.
Other investments consist of investments in joint ventures and partnerships. The
joint ventures and partnerships are valued according to the equity method of
accounting. Any changes in the fair value are recorded as net realized gains and
losses in the statement of operations.
Short-term investments include all investment cash and short maturity
investments. These amounts are carried principally at cost, which approximates
fair value.
The Company regularly monitors its investment portfolio to determine 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 regular basis in order
to identify potential credit problems. In addition, securities whose market
price is equal to 85% or less of their original purchase price are added to the
impairment watch list, 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 with the amount of the writedown reflected as a
realized loss in the Statement of Operations for that period. Assessment factors
include, but are not limited to, the financial condition and rating of the
issuer, any collateral held and the length of time the market value of the
security has been below cost.
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 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 that vary with and are primarily related to
the production of new business are deferred to the extent that such costs are
deemed recoverable from future premiums or gross profits. Acquisition costs
primarily consist of commissions, policy issuance expenses, premium taxes and
certain direct marketing expenses.
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.
SHORT DURATION CONTRACTS
Acquisition costs relating to single premium credit insurance contracts are
amortized over the term of the contracts in relation to premiums earned.
Acquisition costs relating to monthly pay credit insurance business consist
mainly of direct marketing costs and are deferred and amortized over the
estimated average terms of the underlying contracts.
Acquisition costs relating to group term life, group disability and group dental
consist primarily of new
F-8
<Page>
business underwriting, field sales support, commissions to agents and brokers,
and compensation to sales representatives. These acquisition costs are front-end
loaded; thus they are deferred and amortized over the estimated terms of the
underlying contracts.
LONG DURATION CONTRACTS
Acquisition costs on the Fortis Financial Group ("FFG") and Long-Term Care
("LTC") disposed businesses were written off when the businesses were sold.
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. The Company performs a goodwill impairment test annually
and has not recognized an impairment charge since adoption. The Company
performed a January 1, 2005 impairment test during the three months ended
March 31, 2005 and concluded that goodwill was not further impaired.
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.
Prior to April 2, 2001, FFG had issued variable insurance products registered as
securities under the Securities Act of 1933. These products featured fixed
premiums, a minimum death benefit, and policyholder returns linked to an
underlying portfolio of securities. The variable insurance products issued by
FFG have been 100% reinsured with The Hartford Financial Services Group Inc.
("The Hartford"). The balance of reserve ceded for the variable insurance
products issued by FFG was $5,559 and $6,870 as of December 31, 2004 and 2003,
respectively.
INCOME TAXES
From January 1, 2002 through December 31, 2002, the Company reported its taxable
income in a separately filed federal income tax return.
Beginning January 1, 2003, the Company reports its taxable income in a
consolidated federal income tax return along with other affiliated subsidiaries
of Assurant, Inc. Income tax expense or credits are 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.
Current federal income taxes are charged to operations based upon amounts
estimated to be payable or recoverable as a result of taxable operations for the
current year. Deferred income taxes are recognized for temporary differences
between the financial reporting basis and income tax basis of assets and
liabilities, based on enacted tax laws and statutory tax rates applicable to the
periods in which we expect the temporary differences to reverse. The Company is
required to establish a valuation allowance for any portion of the deferred tax
assets that management believes will not be realized. In the opinion of
management, it is more likely than not that the Company will realize the benefit
of the deferred tax assets and, therefore, no such valuation allowance has been
established.
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 earnings at that time.
PREMIUMS
SHORT DURATION CONTRACTS
The Company's short duration contracts are those on which the Company recognizes
revenue on a pro-rata basis over the contract term. The Company's short duration
contracts primarily include group term life, group disability, medical and
dental, credit life and disability.
LONG DURATION CONTRACTS
Premiums for LTC insurance and traditional life insurance contracts within FFG
are recognized as revenue when due from the policyholder. For universal life
insurance and investment-type annuity contracts within FFG, revenues consist of
charges assessed against policy balances. For the
F-9
<Page>
FFG and LTC businesses previously sold, all revenue is ceded to Hartford Life
and Annuity Insurance Company ("the Hartford") and John Hancock Life Insurance
Company ("John Hancock"), respectively.
REINSURANCE ASSUMED
Reinsurance premiums assumed are calculated based upon payments received from
ceding companies together with accrual estimates, which are based on both
payments received and in force policy information received from ceding
companies. Any subsequent differences arising on such estimates are recorded in
the period in which they are determined.
FEE INCOME
The Company primarily derives income from fees received from providing
administrative services. Fee income is earned when services are performed.
RESERVES
Reserves are established according to GAAP, using generally accepted actuarial
methods and are based on a number of factors. These factors include experience
derived from historical claim payments and actuarial assumptions to arrive at
loss development factors. Such assumptions and other factors include trends, the
incidence of incurred claims, the extent to which all claims have been reported,
and internal claims processing charges. The process used in computing reserves
cannot be exact, particularly for liability coverages, since actual claim costs
are dependent upon such complex factors as inflation, changes in doctrines of
legal liabilities and damage awards. The methods of making such estimates and
establishing the related liabilities are periodically reviewed and updated.
SHORT DURATION CONTRACTS
For short duration contracts, claims and benefits payable reserves are recorded
when insured events occur. The liability is based on the expected ultimate cost
of settling the claims. The claims and benefits payable reserves include
(1) case basis reserves for known but unpaid claims as of the balance sheet
date; (2) incurred but not reported ("IBNR") reserves for claims where the
insured event has occurred but has not been reported to the Company as of the
balance sheet date; and (3) loss adjustment expense reserves for the expected
handling costs of settling the claims.
For group disability, the case reserves and the IBNR are calculated based on
historical experience and on assumptions relating to claim severity, frequency,
and other factors. These assumptions are modified as necessary to reflect
anticipated trends, with any adjustment being reflected in current operations.
We establish reserves for disability policies in an amount equal to the net
present value of the expected claims future payments. Group long-term disability
and group term life waiver of premium 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. Group long-term disability and group term life reserve adequacy
studies are performed annually, and morbidity and mortality assumptions are
adjusted where appropriate.
Unearned premium reserves are maintained for the portion of the premiums on
short duration contracts that is related to the unexpired period of the policy.
LONG DURATION CONTRACTS
Future policy benefits and expense reserves on LTC and the traditional life
insurance contracts within FFG are recorded at the present value of future
benefits to be paid to policyholders and related expenses less the present value
of the future net premiums. These amounts are estimated and include assumptions
as to the expected investment yield, inflation, mortality, morbidity and
withdrawal rates as well as other assumptions that are based on the Company's
experience. These assumptions reflect anticipated trends and include provisions
for possible unfavorable deviations.
Future policy benefits and expense reserves for investment-type annuity
contracts in FFG consist of policy account balances before applicable surrender
charges and certain deferred policy initiation fees that are being recognized in
income over the terms of the policies. Policy benefits charged to expense during
the period include amounts paid in excess of policy account balances and
interest credited to policy account balances.
Changes in the estimated liabilities are charged or credited to operations as
the estimates are revised.
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 New York. The Company believes it has
adequately provided for the impact of future assessments relating to current
insolvencies.
RECENT ACCOUNTING PRONOUNCEMENTS
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
F-10
<Page>
on the Company's financial position or 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 was effective for the Company's financial
statements on January 1, 2004. The adoption of this statement did not have a
material impact on the Company's financial position or the results of
operations.
In December 2003, the FASB issued FAS 132 (Revised 2003), Employers' Disclosure
about Pensions and Other Postretirement Benefits ("FAS 132" -- Revised 2003).
This statement revises employers' disclosure about pension plans and other
postretirement benefit plans. This statement does not change the measurement or
recognition of those plans required by FAS No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlement and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. This
statement retains the disclosure requirements contained in FAS 132, Employers'
Disclosure about Pensions and Other Postretirement Benefits, which it replaces.
It requires additional disclosure to that found in FAS 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans and was effective
for fiscal year ending after December 15, 2003. The Company's Parent fully
adopted this statement.
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 03-1, The Meaning of Other Than Temporary Impairment and Its
Application to Certain Investments ("EITF 03-1"). EITF 03-1 provides guidance on
the disclosure requirements for other than temporary impairments of debt and
marketable equity investments that are accounted for under Financial Accounting
Standard 115 ("FAS 115"). EITF 03-1 also provides guidance for evaluating
whether an investment is other than temporarily impaired. The adoption of
EITF 03-1 required the Company to include certain quantitative and qualitative
disclosures for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under FAS 115 that are impaired at the
balance sheet date but for which an other than temporary impairment has not been
recognized. The disclosures were effective for financial statements for fiscal
years ending after December 15, 2003. The Company adopted the disclosure
requirements of EITF 03-1 at December 31, 2003. The guidance for evaluating
whether an investment is other than temporarily impaired is effective for
reporting periods beginning after June 15, 2004; however, the Financial
Accounting Standards Board ("FASB") has issued two new proposed Staff Positions.
EITF 03-1a, which would defer the June 15, 2004 effective date of the
requirement to record impairment losses caused by the effect of increases in
interest rates or sector spreads on debt securities subject to paragraph 16 of
EITF 03-1 until further guidance is provided and EITF 03-1b, which would exclude
minor impairments from the requirement. Both Staff Positions are still in the
comment period phase. The Company is continuing to evaluate the impact of
adoption of this issue given the fact that portions of the issue are still in
the comment period. The Company currently follows the guidance on other than
temporary impairments provided by Staff Accounting Bulletin ("SAB") 59,
Accounting for Noncurrent Marketable Equity Securities.
In May 2004, the FASB issued FASB Staff Position ("FSP") FAS 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("FAS 106-2"), which provides guidance
on accounting for the effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act"). The Act introduces (1) a prescription
drug benefit under Medicare and (2) a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least "actuarially
equivalent" to Medicare Part D. The FASB concluded that the subsidy should be
treated as an actuarial gain pursuant to FAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. FAS 106-2 is effective for the
first interim period or annual period beginning after June 15, 2004. Since the
effects of the Act were not considered a significant event, the effects of the
Act were incorporated in the next measurement of plan assets and obligations,
December 31, 2004. The Company believes that it will be entitled to the subsidy.
Therefore, the Company adopted FAS 106-2 as of December 31, 2004. The adoption
of FAS 106-2 did not have a material effect on either the Company's accumulated
postretirement benefit obligation or its financial position or results of
operations.
F-11
<Page>
3. INVESTMENTS
The amortized cost and fair value of fixed maturities and equity securities as
of December 31, 2004 were as follows:
<Table>
<Caption>
---------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------------
FIXED MATURITIES
BONDS:
United States Government and government agencies and
authorities $ 21,001 $ 698 $(22) 21,677
States, municipalities and political subdivisions 2,777 276 -- 3,053
Foreign governments 2,842 209 (5) 3,046
Public utilities 16,376 1,670 (1) 18,045
All other corporate bonds 76,844 6,172 (71) 82,945
---------------------------------------------------------
TOTAL FIXED MATURITIES $119,840 $9,025 $(99) $128,766
---------------------------------------------------------
EQUITY SECURITIES
NON-REDEEMABLE PREFERRED STOCKS:
Non-sinking fund preferred stocks 8,514 142 (85) 8,571
---------------------------------------------------------
TOTAL EQUITY SECURITIES $ 8,514 $ 142 $(85) $ 8,571
---------------------------------------------------------
</Table>
The amortized cost and fair value of fixed maturities as of December 31, 2003
were as follows:
<Table>
<Caption>
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>
The amortized cost and fair value of fixed maturities at December 31, 2004 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 $ 9,053 $ 9,197
Due after one year through five years 16,834 18,182
Due after five years through ten years 29,523 31,769
Due after ten years 36,100 40,884
TOTAL 91,510 100,032
Mortgage and asset backed securities 28,330 28,734
--------------------------
TOTAL $119,840 $128,766
--------------------------
</Table>
Gross gains of $1,474, $1,247 and $2,887 and gross losses of $427, $560 and
$4,331 were realized on sales of fixed maturities and equity securities in 2004,
2003 and 2002, respectively.
F-12
<Page>
Major categories of net investment income were as follows:
<Table>
<Caption>
Years Ended December 31,
--------------------------
2004 2003 2002
--------------------------
Fixed maturities $8,697 $ 9,869 $11,104
Equity securities 719 528 280
Commercial mortgage loans on real estate 337 -- --
Policy loans 4 3 2
Short-term investments 98 61 112
Other investments 5 (7) (46)
Investment expenses (122) (139) (281)
--------------------------
NET INVESTMENT INCOME $9,738 $10,315 $11,171
--------------------------
</Table>
The net realized gains (losses) recorded in income for 2004, 2003 and 2002 are
summarized as follows:
<Table>
<Caption>
Years Ended December 31,
--------------------------
2004 2003 2002
--------------------------
Fixed maturities $1,060 $628 $(2,489)
Equity securities (13) 21 (32)
--------------------------
Total marketable securities 1,047 649 (2,521)
Other (228) (3) (78)
--------------------------
TOTAL $ 819 $646 $(2,599)
--------------------------
</Table>
The Company recorded $0, $38 and $1,077 of pre-tax realized losses in 2004, 2003
and 2002, respectively, associated with other-than-temporary declines in value
of available for sale securities.
The investment category and duration of the Company's gross unrealized losses on
fixed maturities and equity securities at December 31, 2004 were as follows:
<Table>
<Caption>
Less than 12 months 12 Months or More Total
----------------------- ----------------------- -----------------------
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
---------------------------------------------------------------------------
FIXED MATURITIES
BONDS:
United States Government and government
agencies and authorities $ 4,985 $(22) $ -- $ -- $ 4,985 $(22)
States, municipalities and political
subdivisions -- -- -- -- -- --
Foreign governments 533 (5) -- -- 533 (5)
Public utilities 66 (1) -- -- 66 (1)
All other corporate bonds 6,199 (45) 637 (26) 6,836 (71)
---------------------------------------------------------------------------
TOTAL FIXED MATURITIES $11,783 $(73) $637 $(26) $12,420 $(99)
---------------------------------------------------------------------------
EQUITY SECURITIES
COMMON STOCKS:
Public utilities $ -- $ -- $ -- $ -- $ -- $ --
Banks, trusts and insurance companies -- -- -- -- -- --
Industrial, miscellaneous and all other -- -- -- -- -- --
NON-REDEEMABLE PREFERRED STOCKS:
Non-sinking fund preferred stocks 2,514 (54) 297 (31) 2,811 (85)
---------------------------------------------------------------------------
TOTAL EQUITY SECURITIES $ 2,514 $(54) $297 $(31) $ 2,811 $(85)
---------------------------------------------------------------------------
</Table>
The total unrealized loss represents less than 2% of the aggregate fair value of
the related securities. Approximately 86% of these securities in an unrealized
loss position have been in a continuous loss position for less than twelve
months. The total unrealized losses on securities that were in a continuous
unrealized loss position for longer than six months but less than 12 months were
approximately $15, with no security with a book value greater than $1,000 having
a market value below 99% of book value.
As part of the Company's ongoing monitor ing process, the Company regularly
reviews its investment portfolio to ensure that investments that may be other
than temporarily impaired are identified on a timely basis and that any
impairment is charged against earnings in the proper
F-13
<Page>
period. The Company has reviewed these securities and concluded that there were
no additional other than temporary impairments as of December 31, 2004. Due to
issuers' continued satisfaction of the securities' obligations in accordance
with their contractual terms and their continued expectations to do so, as well
as the Company's evaluation of the fundamentals of the issuers' financial
condition, the Company believes that the securities in an unrealized loss status
are not impaired and intends to hold them until recovery.
The Company has made commercial mortage loans, collaterized by the underlying
real estate, on properties located in the State of New York, Minnesota, and
Pennsylvania. A potential loss reserve based on historical data adjusted for
current expectations is maintained and is typically between 1.25% and 2.25% of
commercial mortgage loans on real estate. As of December 31, 2004, the reserve
was approximately 2.0% of the unpaid principal of our commercial mortgage loans,
or $200.
The Company had fixed maturities carried at $959 and $993 at December 31, 2004
and 2003, respectively, on deposit with various governmental authorities as
required by law.
4. 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, Assurant, Inc. For 2002,
it filed a separate U.S. federal tax return. Information about current and
deferred tax expense follows:
<Table>
<Caption>
Years Ended December 31,
---------------------------
2004 2003 2002
---------------------------
Current expense:
Federal $2,406 $3,837 $4,548
Foreign -- -- --
---------------------------
TOTAL CURRENT EXPENSE 2,406 3,837 4,548
Deferred expense (benefit)
Federal 2,226 670 (351)
Foreign -- -- --
---------------------------
TOTAL DEFERRED EXPENSE (BENEFIT) 2,226 670 (351)
---------------------------
TOTAL INCOME TAX EXPENSE $4,632 $4,507 $4,197
---------------------------
</Table>
A reconciliation of the federal income tax rate to the Company's effective
income tax rate follows:
<Table>
<Caption>
December 31,
------------------------------
2004 2003 2002
------------------------------
Federal income tax rate: 35.0% 35.0% 35.0%
Reconciling items:
Tax exempt interest (0.3) (0.2) (0.3)
Dividends received deduction (0.4) (0.7) --
Permanent nondeductible expenses -- 0.2 0.1
Change in reserve for prior year taxes (6.0) -- --
Other (0.4) (0.3) (0.6)
------------------------------
EFFECTIVE INCOME TAX RATE: 27.9% 34.0% 34.2%
------------------------------
</Table>
F-14
<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,
------------------
2004 2003
------------------
Deferred tax assets:
Policyholder and separate account reserves $ 390 $ 271
Accrued liabilities 111 865
Deferred acquisition costs 1,300 1,442
Deferred gains on reinsurance 2,272 2,857
Other assets 570 1,417
------------------
GROSS DEFERRED TAX ASSETS 4,643 6,852
------------------
Deferred tax liabilities:
Investment adjustment 18 --
Unrealized gains on fixed maturities and equities 3,144 3,812
------------------
GROSS DEFERRED TAX LIABILITIES 3,162 3,812
------------------
Net deferred income tax asset $1,481 $3,040
------------------
</Table>
5. 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, 2004 and 2003. All the outstanding shares at
December 31, 2004 are owned by Assurant, Inc. (see Note 1). The Company paid
dividends of $40,000, $0, and $0 at December 31, 2004, 2003 and 2002,
respectively.
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
6).
6. 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-15
<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
---------------------------------------------------
2004 2003 2002 2004 2003
---------------------------------------------------
Based on statutory accounting practices $11,088 $10,190 $ 8,770 $43,039 $73,599
Deferred policy acquisition costs 181 (628) (2,190) 1,123 942
Deferred and uncollected premiums 1,006 (932) 156 104 33
Policy reserves 591 (798) 361 2,002 398
Investment valuation difference -- -- -- 8,636 10,726
Commissions 99 426 (1,848) (134) (233)
Deferred taxes -- -- -- (1,305) (1,424)
Deferred gain on disposal of business 320 1,896 2,242 (6,492) (8,067)
Unearned ceding fee 612 -- -- (827) (1,439)
Amounts payable reinsurance ceded -- -- -- 25 454
Funds held under reinsurance treaty unauthorized
reinsurer -- -- -- --
Realized gains (losses) on investments 497 547 (443) -- --
Amortization of goodwill -- -- -- 2,038 2,038
Income taxes (2,226) (339) 351 1,481 3,040
Pension (154) (61) 153 (300) (106)
Amortization of IMR (37) (5) (45) -- --
Reinsurance in unauthorized companies -- -- -- 48 42
Interest maintenance reserve -- -- -- 569 --
Asset valuation reserve -- -- -- 1,182 908
Agents balances -- -- -- 54 23
Other -- (1,559) 585 246 (183)
---------------------------------------------------
BASED ON GENERALLY ACCEPTED ACCOUNTING PRINCIPLES $11,977 $ 8,737 $ 8,092 $51,489 $80,751
---------------------------------------------------
</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 upon approval of the New York
Department of Insurance. 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.
7. 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>
2004 2003
----------------------
Ceded future policy
holder benefits and
expense $29,085 $ 24,051
Ceded unearned premium 18,139 30,120
Ceded claims and benefits
payable 44,291 44,621
Ceded paid losses 2,092 1,659
----------------------
TOTAL $93,607 $100,451
----------------------
</Table>
F-16
<Page>
The changes in direct premiums and premiums ceded were as follows:
<Table>
<Caption>
Years Ended December 31,
------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
Long Short Long Short Long Short
Duration Duration Total Duration Duration Total Duration Duration Total
------------------------------------------------------------------------------------------------
GROSS EARNED
PREMIUMS AND OTHER
CONSIDERATIONS $ 10,930 $ 79,285 $ 90,215 $ 11,442 $ 97,379 $108,821 $ 10,618 $119,369 $129,987
Premiums assumed -- 13,174 13,174 -- 6,513 6,513 -- 2,100 2,100
Premiums ceded (10,930) (26,866) (37,796) (11,442) (34,686) (46,128) (10,618) (47,254) (57,872)
------------------------------------------------------------------------------------------------
Net earned premiums
and other
considerations $ -- $ 65,593 $ 65,593 $ -- $ 69,206 $ 69,206 $ -- $ 74,215 $ 74,215
------------------------------------------------------------------------------------------------
GROSS POLICYHOLDER
BENEFITS $ 19,628 $ 46,939 $ 66,567 $ 22,637 $ 61,514 $ 84,151 $ 18,217 $ 81,827 $100,044
Benefits assumed -- 15,304 15,304 -- 6,785 6,785 -- 1,323 1,323
Benefits ceded (19,619) (19,520) (39,139) (22,628) (23,194) (45,822) (18,209) (36,007) (54,216)
------------------------------------------------------------------------------------------------
Net policyholder
Benefits $ 9 $ 42,723 $ 42,732 $ 9 $ 45,105 $ 45,114 $ 8 $ 47,143 $ 47,151
------------------------------------------------------------------------------------------------
</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. 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.
In 2001, the Company entered into a reinsurance agreement with the Hartford for
the sale of its FFG division. The reinsurance recoverable from the Hartford was
$5,559 and $6,870 as of December 31, 2004 and 2003, 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 account
assets relating to modified guaranteed annuity business sold if such value
declines below the value of the associated liabilities. If the Hartford fails to
fulfill these obligations, the Company will be obligated to make these payments.
In 2000, the Company divested its LTC operations to John Hancock. Reinsurance
recoverable from John Hancock was $28,862 and $21,046 as of December 31, 2004
and 2003, respectively.
F-17
<Page>
8. RESERVES
The following table provides reserve information by major lines of business as
of:
<Table>
<Caption>
December 31, 2004 December 31, 2003
------------------------------------- -------------------------------------
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 $29,168 $ 2,648 $ 2,689 $24,143 $ 2,694 $ 1,171
SHORT DURATION CONTRACTS:
Group term life -- 103 20,045 -- 125 20,936
Group disability -- 129 92,641 -- 110 85,956
Medical -- 6 2,144 -- 8 1,884
Dental -- 95 1,939 -- 111 1,858
Credit Life and Disability -- 17,921 19,389 -- 30,628 24,608
Other -- -- 423 -- 2,122 820
-----------------------------------------------------------------------------
TOTAL $29,168 $20,902 $139,270 $24,143 $35,798 $137,233
-----------------------------------------------------------------------------
</Table>
The Company's short duration contract group 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, 2004 and 2003
liabilities include $92,254 and $85,491, respectively of such reserves. The
amount of discounts deducted from outstanding reserves as of December 31, 2004
and 2003 are $20,747 and $20,477 respectively.
9. FAIR VALUE DISCLOSURES
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financia l 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-18
<Page>
<Table>
<Caption>
December 31, 2004 December 31, 2003
--------------------------- ---------------------------
Carrying Value Fair Value Carrying Value Fair Value
---------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 5,360 $ 5,360 $ 1,060 $ 1,060
Fixed maturities 128,766 128,766 167,712 167,712
Equity securities 8,571 8,571 9,784 9,784
Commercial mortgage loans on real estate 9,125 9,627 3,800 3,800
Policy loans 80 80 37 37
Short-term investments 4,575 4,575 8,091 8,091
Other investments -- -- 275 275
Assets held in separate accounts 32,446 32,446 39,678 39,678
FINANCIAL LIABILITIES
Policy reserves under investment products (Individual
and group annuities, subject to discretionary
withdrawal) $ 5,286 $ 5,177 $ 6,527 $ 6,346
Liabilities related to separate accounts 32,446 32,446 39,678 39,678
</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.
10. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company is a wholly-owned subsidiary of Assurant, Inc., 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. Assurant'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 $108, $61 and
$153 for 2004, 2003 and 2002, respectively.
The Company has a contributory profit sharing plan, sponsored by Assurant,
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 $34, $44 and $70 for
2004, 2003 and 2002, 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 Assurant. Health care benefits, either through an
Assurant sponsored retiree pla n 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
2004, 2003, and 2002 the Company incurred expenses related to retirement
benefits of $37, $0 and $0, respectively.
11. DEFERRED POLICY ACQUISITION COSTS
Information regarding deferred policy acquisition costs follows:
<Table>
<Caption>
December 31,
-------------------------
2004 2003 2002
-------------------------
Beginning Balance $ 942 $1,570 $ 3,760
Costs deferred 428 146 129
Amortization (247) (774) (2,319)
-------------------------
ENDING BALANCE $1,123 $ 942 $ 1,570
-------------------------
</Table>
12. GOODWILL
Information regarding goodwill follows:
<Table>
<Caption>
Goodwill for the Year Ended
December 31,
---------------------------
2004 2003 2002
---------------------------
Beginning Balance $2,038 $1,971 $1,949
Acquistions -- 67 22
---------------------------
ENDING BALANCE $2,038 $2,038 $1,971
---------------------------
</Table>
13. RELATED PARTY TRANSACTIONS
The Company received various services from Assurant. 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
F-19
<Page>
for years ended December 31, 2004, 2003 and 2002 were $4,192, $4,236 and $3,474,
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 $6,526, $5,847 and
$6,705 of premium to Fortis Benefits in 2004, 2003 and 2002, respectively. The
Company has ceded $23,533 and $22,096 of reserves in 2004 and 2003,
respectively, to Fortis Benefits.
14. 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, 2004, the aggregate future minimum
lease payment under operating lease agreements that have initial or
non-cancelable terms in excess of one year are:
<Table>
2005 604
2006 521
2007 348
2008 348
2009 and thereafter --
--------
TOTAL MINIMUM FUTURE LEASE PAYMENTS $ 1,821
--------
</Table>
Rent expense was $418, $492 and $652 for 2004, 2003 and 2002 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.
15. SUBSEQUENT EVENTS
On March 14, 2005 the Company was notified by the Insurance Department of the
State of New York that the Company is entitled to an estimated refund of
approximately $2,788 as a result of our participation in a Specified Medical
Condition Pool under regulations mandating community rated medical coverage for
high-risk individuals. It is anticipated that the disbursement will be made by
July 30, 2005. The Company has not recorded any amounts in the financials
statements as a result of this anticipated disbursement.
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 15, 2005.
3(a) Articles of Incorporation Incorporated by reference to
Post-Effective Amendment No. 12 to the
Registration Statement File No.
33-79701 filed with the Commission on
April 15, 2005.
3(b) By-laws Incorporated by reference to
Post-Effective Amendment No. 12 to the
Registration Statement File No.
33-79701 filed with the Commission on
April 15, 2005.
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 Registered Public
Accounting Firm
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 15th day of
April, 2005.
FIRST FORTIS LIFE INSURANCE COMPANY
By: Lance R. Wilson *By: /s/ Marianne O'Doherty
----------------------------------- ---------------------------
Lance R. Wilson, Marianne O'Doherty
President and Chief Attorney-In-Fact
Executive Officer
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.
Lance R. Wilson
President, Chief Executive Officer,
Chairman of the Board and Director*
Terry J. Kryshak
Sr. Vice President and Director*
Ranell M. Jacobson
Treasurer, Director
and Principal Financial Officer* *By: /s/ Marianne O'Doherty
Barbara R. Hege ---------------------------
Assistant Treasurer, Director* Marianne O'Doherty
Leslie G. Silvester, Director*
Allen R. Freedman
Director*
Dale E. Gardner Date: April 15, 2005
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 Registered Public
Accounting Firm.
24 Copy of Power of Attorney.