As filed with the Securities and Exchange Commission on April 28, 1999.
Registration No. 33-63829
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-2
AMENDMENT NO. 6
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FORTIS BENEFITS INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
Minnesota
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(State or other jurisdiction of incorporation or organization)
63
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(Primary Standard Industrial Classification Code Number)
81-0170040
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(I.R.S. Employer Identification No.)
500 Bielenberg Drive
Woodbury, Minnesota 55125
651-738-5000
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Rhonda J. Schwartz, Esquire
500 Bielenberg Drive
Woodbury, Minnesota 55125
651-738-5000
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(Name, address including zip code, and telephone number, including
area code, of agent for service)
Approximate Date of Commencement of Proposed Sale to 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/
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CALCULATION OF REGISTRATION FEE
------------------------------------------------------------------------
Title of each Proposed Proposed maximum
class of securities Amount to be maximum offering aggregate Amount of
to be registered registered price per unit offering price registration fee
- ---------------------------------------------------------------------------------------------------------
Interests under flexible * * [None registered herewith]
premium deferred
fixed annuity
contracts
- ------------------
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the proposed
maximum offering price per unit are not applicable in that these securities are
not issued in predetermined amounts or units.
FORTIS BENEFITS INSURANCE COMPANY
Cross-Reference Sheet
Pursuant to Regulation S-K
Item 501(b)
Form S-1 Item Number Prospectus Caption
- -------------------- ------------------
1. Forepart of the Registration Cover Page; Table of Contents;
Statement and Outside Front Distribution and Servicing
Cover Page of Prospectus
2. Inside Front and Back Other Information; Reports
Cover Pages of Prospectus
3. Summary Information, Risk Summary of Contract Features or,
Factors and Ratio of as to ratio of earnings to fixed
Earnings to Fixed Charges charges, Not Applicable
4. Use of Proceeds The Variable Account; The
Portfolios; The Fixed Account
5. Determination of Offering Not Applicable
Price
6. Dilution Not Applicable
7. Selling Security Holders None
8. Plan of Distribution Distribution and Servicing
9. Description of Securities Cover Page; The Variable Account;
to be Registered Series Fund; The Fixed Account;
Accumulation Period; Charges and
Deductions; General Provisions
10. Interests of Named Legal Matters
Experts and Counsel
11. Information with Respect Fortis Benefits/Fortis Financial
to the Registrant Group Member; Further Information
About Fortis Benefits; Financial
Statements; Distribution and
Servicing
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act
Liabilities
PART II
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-827-5877
P.O. BOX 64295 500 BIELENBERG DRIVE
ST. PAUL WOODBURY
MINNESOTA 55164 MINNESOTA 55125
PROSPECTUS DATED MAY 1, 1999
This prospectus describes interests under flexible premium deferred combination
variable and fixed annuity contracts issued by Fortis Benefits Insurance Company
("Fortis Benefits").
These contracts allow you to accumulate funds on a tax-deferred basis. You may
elect a guaranteed interest accumulation option through a fixed account or a
variable return accumulation option through a variable account or a combination
of these two options. Under the variable return accumulation option, you can
choose among the following investment portfolios:
Alliance Money Market Portfolio MFS Emerging Growth Series
Alliance International Portfolio MFS High Income Series
Alliance Premier Growth Portfolio MFS Global Governments Series
American Century VP Balanced Fund Montgomery Emerging Markets Fund
American Century VP Capital Appreciation Fund Montgomery Growth Fund
Federated High Income Bond Fund II Neuberger & Berman Limited Maturity
Federated Utility Fund II Bond Portfolio
Federated American Leaders Fund II Neuberger & Berman Partners Portfolio
Federated Fund for U.S. Government Securities II SAFECO Equity Portfolio
Fortis S&P 500 Index Series SAFECO Growth Portfolio
INVESCO Equity Income Fund Strong Discovery Fund II
INVESCO Health Sciences Fund Strong International Stock Fund II
INVESCO Technology Fund Van Eck Worldwide Bond Fund
Lexington Natural Resources Trust Van Eck Worldwide Hard Assets Fund
The accompanying prospectus for these investment portfolios describes the
investment objectives, policies and risks of each of the portfolios. You can
choose among different guarantee periods under the guaranteed interest
accumulation option, each of which has its own current interest rate which is
guaranteed for the entire guarantee period. In states where Guarantee Periods
Fixed Accounts are not offered, you can choose an interest in a fixed account
which has a minimum interest rate guarantee and a higher current rate which can
be changed from time to time.
This prospectus gives you information about the contracts you should know before
investing. This prospectus must be accompanied by a current prospectus of the
available investment portfolios. These prospectuses should be read carefully and
kept for future reference.
A Statement of Additional Information, dated January 1, 1999, about certain
aspects of the contracts has been filed with the Securities and Exchange
Commission and is available without charge from Fortis Benefits at the address
and phone number printed above. The Table of Contents for the Statement of
Additional Information appears on page 21 of this prospectus.
THESE CONTRACTS ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK,
CREDIT UNION, BROKER-DEALER OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY. THEY INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
Special Terms Used in this Prospectus................................. 2
Information Concerning Fees and Charges............................... 3
Summary of Contract Features.......................................... 5
Fortis Benefits/Fortis Financial Group Member......................... 7
The Variable Account.................................................. 8
The Portfolios........................................................ 8
The Fixed Account..................................................... 8
- Guarantee Periods Fixed Account................................. 8
- Market Value Adjustment......................................... 9
- General Account Fixed Account................................... 10
- General Account Fixed Account Transfers......................... 10
- Investments by Fortis Benefits.................................. 10
Accumulation Period................................................... 11
- Issuance of a Contract and Purchase Payments.................... 11
- Contract Value.................................................. 11
- Allocation of Purchase Payments and Contract Value.............. 12
- Total and Partial Surrenders.................................... 12
- Telephone Transactions.......................................... 13
- Benefit Payable on Death of Contract Owner or Annuitant......... 13
The Annuity Period.................................................... 14
- Annuity Commencement Date....................................... 14
- Commencement of Annuity Payments................................ 14
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 14
- Annuity Options................................................. 15
- Death of Annuitant or Other Payee............................... 15
Charges and Deductions................................................ 15
- Premium Taxes................................................... 15
- Charges Against the Variable Account............................ 15
- Annual Administrative Charge.................................... 15
- Tax Charge...................................................... 16
- Miscellaneous................................................... 16
General Provisions.................................................... 16
- The Contracts................................................... 16
- Postponement of Payments........................................ 16
- Misstatement of Age or Sex and Other Errors..................... 16
- Assignment...................................................... 16
- Beneficiary..................................................... 16
- Reports......................................................... 17
Rights Reserved by Fortis Benefits.................................... 17
Distribution.......................................................... 17
Federal Tax Matters................................................... 17
Further Information about Fortis Benefits............................. 20
- General......................................................... 20
- Ownership of Securities......................................... 20
- Selected Financial Data......................................... 20
- Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 20
Voting Privileges..................................................... 22
Legal Matters......................................................... 23
Other Information..................................................... 23
Contents of Statement of Additional Information....................... 23
Fortis Benefits Financial Statements.................................. 23
Appendix A--Sample Market Value Adjustment Calculations............... A-1
Appendix B--Explanation Of Expense Calculations....................... B-1
Appendix C--Participating Portfolios.................................. C-1
THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT
INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR
ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY
FORTIS BENEFITS.
SPECIAL TERMS USED IN THIS PROSPECTUS
Accumulation The time period under a contract between the contract issue date and the annuity commencement
Period date.
Accumulation A unit of measure used to calculate the contract owners' interest in the Variable Account
Unit during the Accumulation Period.
Annuitant A person during whose life annuity payments are to be made by Fortis Benefits under the
contract.
Annuity Period The time period following the Accumulation Period, during which annuity payments are made by
Fortis Benefits.
Annuity Unit A unit of measurement used to calculate variable annuity payments.
Fixed Annuity An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
Option that you designate one or more fixed payments.
General Account The name of the alternative under which purchase payments are allocated to Fortis Benefits
Fixed Account general account.
Guarantee The non-unitized separate account that Fortis Benefits uses to account for amounts allocated
Periods Fixed to guarantee periods.
Account
Market Value Positive or negative adjustment in fixed account value that we make if such value is paid out
Adjustment more than fifteen days before or after the end of a guarantee period in which it was being
held.
Non-Qualified Contracts that do not qualify for the special federal income tax treatment applicable in
Contracts connection with certain retirement plans.
Qualified Contracts that are qualified for the special federal income tax treatment applicable in
Contracts connection with certain retirement plans.
Valuation Date All business days except, with respect to any subaccount, days on which the related portfolio
does not value its shares. Generally, the portfolios value their shares on each day the New
York Stock Exchange is open.
Valuation The period that starts at the close of regular trading on the New York Stock Exchange on a
Period Valuation Date and ends at the close of regular trading on the exchange on the next succeeding
Valuation Date.
Variable The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance
Account Company established to receive and invest purchase payments under contracts.
Variable An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
Annuity Option chosen by you one or more payments which vary in amount in accordance with the net investment
experience of the subaccounts selected by the Annuitant.
2
INFORMATION CONCERNING FEES AND CHARGES
CONTRACT OWNER TRANSACTION CHARGES
Front-End Sales Charge Imposed on
Purchases................................... 0%
Maximum Surrender Charge for Sales
Expenses.................................... 0%
Other Surrender Fees....................... 0%
Exchange Fee............................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE............. $ 30
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge............... .45%
Variable Account Administrative Charge.......... 0%
---
Total Variable Account Annual Expenses........ .45%
MARKET VALUE ADJUSTMENT WITH RESPECT TO GUARANTEE PERIODS FIXED ACCOUNT
Surrenders and other withdrawals from the Guarantee Periods Fixed Account more
than fifteen days from the end of a guarantee period are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the fixed
account value. It is computed pursuant to a formula that is described in more
detail under "Market Value Adjustment."
PORTFOLIO ANNUAL EXPENSES (A) (B)
INVESTMENT
ADVISORY AND OTHER
MANAGEMENT FEE EXPENSES
--------------- -----------
Alliance Money Market Portfolio........................................................ 0.50% 0.18%
Alliance International Portfolio....................................................... 0.67% 0.28%
Alliance Premier Growth Portfolio...................................................... 0.97% 0.09%
American Century VP Balanced Fund...................................................... 1.00% 0.00%
American Century VP Capital Appreciation Fund.......................................... 1.00% 0.00%
Federated High Income Bond Fund II..................................................... 0.60% 0.18%
Federated Utility Fund II.............................................................. 0.68% 0.25%
Federated American Leaders Fund II..................................................... 0.74% 0.14%
Federated Fund for U.S. Gov't Securities Fund II....................................... 0.52% 0.33%
Fortis S&P 500 Index................................................................... 0.40% 0.06%
INVESCO Equity Income Fund............................................................. 0.75% 0.18%
INVESCO Health Sciences Fund........................................................... 0.75% 0.52%
INVESCO Technology Fund................................................................ 0.75% 0.65%
Lexington Natural Resources Trust...................................................... 1.00% 0.29%
MFS Emerging Growth Series............................................................. 0.75% 0.10%
MFS High Income Series................................................................. 0.75% 0.28%
MFS Global Governments Series.......................................................... 0.65% 0.36%
Montgomery Emerging Markets Fund....................................................... 1.25% 0.50%
Montgomery Growth Fund................................................................. 1.00% 0.25%
Neuberger & Berman Limited Maturity Bond Portfolio..................................... 0.65% 0.11%
Neuberger & Berman Partners Portfolio.................................................. 0.78% 0.06%
SAFECO Equity Portfolio................................................................ 0.75% 0.03%
SAFECO Growth Portfolio................................................................ 0.75% 0.05%
Strong Discovery Fund.................................................................. 1.00% 0.19%
Strong International Fund.............................................................. 1.00% 0.62%
Van Eck Worldwide Bond Fund............................................................ 1.00% 0.15%
Van Eck Worldwide Hard Assets Fund..................................................... 1.00% 0.16%
TOTAL PORTFOLIO
OPERATING
EXPENSES (*AFTER
EXPENSE
REIMBURSEMENT)
-----------------------
Alliance Money Market Portfolio........................................................ 0.68%
Alliance International Portfolio....................................................... 0.95%
Alliance Premier Growth Portfolio...................................................... 1.06%
American Century VP Balanced Fund...................................................... 1.00%
American Century VP Capital Appreciation Fund.......................................... 1.00%
Federated High Income Bond Fund II..................................................... 0.78%
Federated Utility Fund II.............................................................. 0.93%
Federated American Leaders Fund II..................................................... 0.88%
Federated Fund for U.S. Gov't Securities Fund II....................................... 0.85%
Fortis S&P 500 Index................................................................... 0.46%
INVESCO Equity Income Fund............................................................. 0.93%
INVESCO Health Sciences Fund........................................................... 1.27%
INVESCO Technology Fund................................................................ 1.40%
Lexington Natural Resources Trust...................................................... 1.29%
MFS Emerging Growth Series............................................................. 0.85%
MFS High Income Series................................................................. 1.03%
MFS Global Governments Series.......................................................... 1.01%
Montgomery Emerging Markets Fund....................................................... 1.75%
Montgomery Growth Fund................................................................. 1.25%
Neuberger & Berman Limited Maturity Bond Portfolio..................................... 0.76%
Neuberger & Berman Partners Portfolio.................................................. 0.84%
SAFECO Equity Portfolio................................................................ 0.78%
SAFECO Growth Portfolio................................................................ 0.80%
Strong Discovery Fund.................................................................. 1.19%
Strong International Fund.............................................................. 1.62%
Van Eck Worldwide Bond Fund............................................................ 1.15%
Van Eck Worldwide Hard Assets Fund..................................................... 1.16%
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(a) As a percentage of portfolio average net assets based on historical data for
the fiscal year ended December 31, 1998. In the absence of expense and fee
waivers or expense reimbursements by the portfolio investment adviser, the
total expenses of the following portfolios would have been as hereafter
indicated rather than as listed above: Alliance International
portfolio--1.37%; Alliance Premier Growth Portfolio--1.09%; Federated
Utility Fund II--1.00%; Federated American Leaders Fund II--0.89%; Federated
Fund for U.S. Government Securities Fund II--0.93%; INVESCO Equity Income
Portfolio--1.17%; INVESCO Health Sciences Portfolio--4.37%; INVESCO
Technology Portfolio--6.60%; and MFS Global Governments Series--1.11%;
Montgomery Growth Fund--1.40%; Van Eck Worldwide Hard Assets Fund--1.20%.
The information set forth in this table was provided to Fortis Benefits by
the portfolio managers and Fortis Benefits has not independently verified
such information.
(b) Certain of the unaffiliated investment advisers of the portfolios reimburse
Fortis Benefits for costs incurred in connection with administering the
portfolios as variable funding options by payment of an amount based on
assets in the portfolios attributable to the contracts. These amounts are
not charged to the portfolios or the holders of the contracts.
3
EXAMPLES*
If you COMMENCE AN ANNUITY payment option, or whether you DO or DO NOT surrender
your contract, you would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
Alliance Money Market Portfolio............................. 12 37 64 142
Alliance International Portfolio............................ 15 45 78 172
Alliance Premier Growth Portfolio........................... 16 49 84 184
American Century VP Balanced Fund........................... 15 47 61 177
American Century VP Capital Appreciation Fund............... 15 47 81 177
Federated High Income Bond Fund II.......................... 13 40 69 153
Federated Utility Fund II................................... 14 45 77 169
Federated American Leaders Fund II.......................... 14 43 75 164
Federated Fund for U.S. Gov't Securities Fund II............ 14 42 73 161
Fortis S&P 500 Index........................................ 10 30 53 117
INVESCO Health Sciences Portfolio........................... 18 55 95 206
INVESCO Equity Income Portfolio............................. 14 45 77 169
INVESCO Technology Portfolio................................ 19 59 102 220
Lexington Natural Resources Trust........................... 18 56 96 208
MFS Emerging Growth Series.................................. 14 42 73 161
MFS High Income Series...................................... 15 48 83 180
MFS Global Governments Series............................... 15 47 81 178
Montgomery Emerging Markets Fund............................ 23 70 119 256
Montgomery Growth Fund...................................... 18 55 94 204
Neuberger & Berman Partners Portfolio....................... 14 42 73 159
Neuberger & Berman Limited Maturity Bond Portfolio.......... 13 40 68 151
SAFECO Growth Portfolio..................................... 13 41 71 155
SAFECO Equity Portfolio..................................... 13 40 69 153
Strong Discovery Fund....................................... 17 53 91 198
Strong International Fund................................... 21 66 113 243
Van Eck Worldwide Bond Fund................................. 17 51 89 193
Van Eck Worldwide Hard Assets Fund.......................... 17 52 89 194
- ------------------------
* For purposes of these examples, the effect of the annual contract
administration charge has been computed based on the average total contract
value during the year ended December 31, 1998 and the total actual amount of
annual contract administration charges collected during the year. For the
purpose of these examples, portfolio annual expenses are assumed to continue
at the rates set forth in the table above. Also, the examples do not include
the affect of any Market Value Adjustment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
------------------------
The foregoing tables and examples are included to assist you in understanding
the transaction and operating expenses imposed directly or indirectly under the
contracts and the portfolios. Amounts for state premium taxes or similar
assessments will also be deducted, where applicable.
See Appendix B for an explanation of the calculation of the amounts set forth
above.
4
SUMMARY OF CONTRACT FEATURES
The following summary should be read in conjunction with the detailed
information in this prospectus. Variations from the information appearing in
this prospectus due to requirements particular to your state are described in
supplements which are attached to this prospectus, or in endorsements to the
contract as appropriate.
The contracts are designed to provide individuals with retirement benefits
through the accumulation of purchase payments on a fixed or variable basis, and
by the application of such accumulations to provide fixed or variable annuity
payments.
"We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your"
mean a reader of this prospectus who is contemplating making purchase payments
or taking any other action in connection with a contract.
Depending on the state that you live in, the contract that is issued to you may
be as a part of a group contract or as an individual contract. Participation in
a group contract will be evidenced by the issuance of a certificate showing your
interest under the group contract. In other states, an individual contract will
be issued to you. Both the certificate and the contract are referred to as a
"contract" in this prospectus.
FREE LOOK
You have the right to examine a contract during a "free look" period after you
receive the contract and return it for a refund of the amount of the then
current contract value. However, in certain states where required by state law
the refund will be in the amount of all purchase payments that have been made,
without interest or appreciation or depreciation. The "free look" period is
generally 10 days unless a longer time is specified on the face page of your
contract.
PURCHASE PAYMENTS
The initial purchase payment under a contract must be at least $5,000 ($2,000
for a contract which is part of a qualified plan). Additional purchase payments
under a contract must be at least $50. See "Issuance of a Contract and Purchase
Payments."
ALLOCATION OF PURCHASE PAYMENTS
On the date that the contract is issued, except as hereafter explained, the
initial purchase payment is allocated, as specified by the you in the contract
application, among one or more of the portfolios, or to one or more of the
guarantee periods in the Guarantee Periods Fixed Account (or to the General
Account Fixed Account if you reside in a state in which the Guarantee Periods
Fixed Account is not offered), or to a combination thereof. As previously
indicated, if the contract owner resides in a state requiring a refund of all
purchase payments under the "free look" privilege, the initial purchase payment
will be allocated to the Alliance Money Market Portfolio until the following
number of days after we mail the contract to you: (1) the number of days in the
"free look" period, plus (2) five days. After the expiration of the period, the
contract value will be allocated to the fixed account and the portfolios as
directed by you. Subsequent purchase payments are allocated in the same way, or
pursuant to different allocation percentages that the you may subsequently
request in writing.
VARIABLE ACCOUNT INVESTMENT OPTIONS
Each of the subaccounts of the Variable Account invests in shares of a
portfolio. Contract value in each of the subaccounts of the Variable Account
will vary to reflect the investment experience of each of the corresponding
portfolios, as well as deductions for certain charges.
Each portfolio has a separate and distinct investment objective. A full
description of the portfolios and their investment objectives, policies, risks
and expenses can be found in the current prospectus for the portfolio, which
accompanies this prospectus, and the Statement of Additional Information for the
portfolio which is available upon request. (See Appendix C which contains a
summary of the investment objectives of each portfolio.)
FIXED ACCOUNT INVESTMENT OPTIONS
Either a Guarantee Periods Fixed Account or a General Account Fixed Account is
available, depending upon your state of residence.
Any amount allocated by the contract owner to the Guarantee Periods Fixed
Account earns a guaranteed interest rate. The level of the guaranteed interest
rate depends on the length of the guarantee period selected by the contract
owner. We currently make available ten different guarantee periods, ranging from
one to ten years. If amounts are transferred, surrendered or otherwise paid out
more than fifteen days before or after the end of the applicable guarantee
period, a Market Value Adjustment will be applied to increase or decrease the
amount that is paid out. Accordingly, the Market Value Adjustment can result in
gains or losses to you.
Any amount allocated to the General Account Fixed Account will accrue interest
at a minimum effective annual rate plus such additional excess interest rate
which we may declare from time-to-time.
For a more complete discussion of the fixed accounts investment option and the
Market Value Adjustment, see "The Fixed Account."
TRANSFERS
During the Accumulation Period, you can transfer all or part of your contract
value from one subaccount to another or into the fixed account and, subject to
any Market Value Adjustment, from one guarantee period of a Guarantee Periods
Fixed Account to another or into a subaccount. There are limitations on the
frequency and amounts of transfers from the General Account Fixed Account. There
is currently no charge for these transfers. We reserve the right to restrict the
frequency of, or otherwise condition, terminate, or impose charges upon,
transfers from a subaccount during the Accumulation Period. During the Annuity
Period the person receiving annuity payments may make up to four transfers (but
not from a Fixed Annuity Option) during each year of the Annuity Period. For a
description of certain limitations on transfer rights, see "Allocations of
Purchase Payments and Contract Value Transfers."
TOTAL OR PARTIAL SURRENDERS
Subject to certain conditions, all or part of the contract value may be
surrendered by you before the earlier of: (1) the Annuitant's death or (2) the
annuity commencement date. Amounts surrendered from the
5
Guarantee Periods Fixed Account may be subject to a Market Value Adjustment. See
"Total and Partial Surrenders" and "Market Value Adjustment." Particular
attention should be paid to the tax implications of any surrender, including
possible penalties for premature distributions. See "Federal Tax Matters."
CHARGES AND DEDUCTIONS
We deduct daily charges at a rate of .45 % per annum of the value of the average
net assets in the Variable Account for the mortality and expense risks we
assume. There is also an annual administrative charge each year for contract
administration and maintenance. This charge is $30 per year (subject to any
applicable state law limitations) and is deducted on each anniversary of the
contract issue date and upon total surrender of the contract. Also, there may be
state premium tax charges deducted from your contract value. See "Charges and
Deductions."
ANNUITY PAYMENTS
The contract provides several types of annuity benefits to you or other persons
you properly designate to receive such payments, including Fixed and Variable
Annuity Options. The contract owner has considerable flexibility in choosing the
annuity commencement date. However, the tax implications of an annuity
commencement date must be carefully considered, including the possibility of
penalties for commencing benefits either too soon or too late. See "Annuity
Commencement Date," "Annuity Options" and "Federal Tax Matters" in this
prospectus and "Taxation Under Certain Retirement Plans" in the Statement of
Additional Information.
DEATH BENEFIT
In the event that the Annuitant or contract owner dies prior to the annuity
commencement date, a death benefit is payable to the beneficiary. See "Benefit
Payable on Death of Contract Owner (or Annuitant)."
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a contract may be limited by the
terms of any applicable employee benefit plan. These limitations may restrict
such things as total and partial surrenders, the amount or timing of purchase
payments that may be made, when annuity payments must start and the type of
annuity options that may be selected. Accordingly, you should familiarize
yourself with these and all other aspects of any retirement plan in connection
with which a contract is issued.
The record owner of the group variable annuity contract pursuant to which group
certificates may be issued will be a bank trustee whose sole function is to hold
record ownership of the contract or an employer (or the employer's designee) in
connection with an employee benefit plan. In the latter cases, certain rights
that a contract owner otherwise would have under a contract may be reserved
instead by the employer.
TAX IMPLICATIONS
The tax implications for you or any other persons who may receive payments under
a contract, and those of any related employee benefit plan can be quite
important. A brief discussion of some of these is set out under "Federal Tax
Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the
Statement of Additional Information, but such discussion is not comprehensive.
Therefore, you should consider these matters carefully and consult a qualified
tax adviser before making purchase payments or taking any other action in
connection with a contract or any related employee benefit plan. Failure to do
so could result in serious adverse tax consequences which might otherwise have
been avoided.
QUESTIONS AND OTHER COMMUNICATIONS
Any question about procedures of the contract should be directed to your sales
representative, or Fortis Benefits' home office: P.O. Box 64295, St. Paul,
Minnesota, 55164: 1-800-827-5877. Purchase payments and written requests should
be mailed or delivered to the same home office address. All communications
should include the contract number, the contract owner's name and, if different,
the Annuitant's name. The number for telephone transfers is 1-800-827-5877.
Any purchase payment or other communication, except a free-look cancellation
notice, is deemed received at Fortis Benefit's home office on the actual date of
receipt there in proper form unless received (1) after the close of regular
trading on The New York Stock Exchange, or (2) on a date that is not a Valuation
Date. In either of these two cases, the date of receipt will be deemed to be the
next Valuation Date.
6
FINANCIAL AND PERFORMANCE INFORMATION
The information presented below reflects the Accumulation Unit information for
the available subaccounts of the Variable Account through December 31, 1998.
DECEMBER 31,
DECEMBER 31, 1998 DECEMBER 31, 1997 1996
-------------------------- -------------------------- ------------
ACCUMULATION ACCUMULATION ACCUMULATION
UNITS IN ACCUMULATION UNITS IN ACCUMULATION UNITS IN
FORCE UNIT VALUE FORCE UNIT VALUE FORCE
------------ ------------ ------------ ------------ ------------
Alliance Money Market Portfolio....................... 1,459,472 11.348 649,382 $10.861561 539,196
Alliance International Portfolio...................... 97,422 12.173 245,490 $10.818424 28,337
Alliance Premier Growth Portfolio..................... 375,294 23.170 127,363 $15.729195 19,611
American Century V.P. Balanced Fund................... 91,205 14.567 44,869 $12.639353 10,307
American Century V.P. Capital Appreciation Fund....... 14,731 8.829 15,641 $ 9.061024 7,475
Federated US Govt Securities.......................... 93,034 11.331 19,937 $10.704721
Federated High Income Bond Fund II.................... 291,909 12.720 207,634 $12.441253 83,778
Federated Utility Fund II............................. 70,928 15.375 121,809 $13.550370 18,507
Federated American Leaders Fund II.................... 94,738 17.581 212,945 $15.012052 43,455
Fortis S&P 500 Index Series........................... 147,275 16.447 206,843 $12.896250 20,189
INVESCO -- Health Sciences Fund....................... 119,097 15.685 13,819 $11.006864 --
INVESCO Equity Income Fund............................ 38,817 13.925 27,808 $12.136873 --
INVESCO Technology Fund............................... 86,462 14.331 14,794 $11.445543 --
Lexington Natural Resources Trust..................... 51,807 10.284 90,146 $12.853076 64,788
MFS Emerging Growth Series............................ 493,984 13.744 303,026 $13.756132 180,147
MFS High Income Series................................ 351,903 9.971 55,017 $12.342449 36,197
MFS Global Governments Series......................... 29,522 11.009 10,694 $10.248705 4,084
Neuberger & Berman Limited Maturity Bond Portfolio.... 61,900 10.911 32,024 $10.497834
Neuberger & Berman Partners Portfolio................. 65,873 12.947 47,329 $12.477670
Montgomery Emerging Markets Fund...................... 47,224 6.547 62,541 $10.526513 17,917
Montgomery Growth Fund................................ 46,194 16.633 115,144 $16.232262 70,482
SAFECO Equity Portfolio............................... 151,516 15.105 118,412 $12.151817 20,103
SAFECO Growth Portfolio............................... 367,234 15.190 255,499 $14.992831 18,249
Strong Discovery Fund II.............................. 40,736 11.909 21,234 $11.153400 9,105
Strong International Stock Fund II.................... 37,361 8.580 36,546 $ 9.049000 34,083
Van Eck Worldwide Bond Fund........................... 74,895 11.778 26,552 $10.492666 3,565
Van Eck Worldwide Hard Assets Fund.................... 55,190 6.731 135,426 $ 9.774884 47,229
ACCUMULATION
UNIT VALUE
------------
Alliance Money Market Portfolio....................... $ 10.378
Alliance International Portfolio...................... $ 10.517
Alliance Premier Growth Portfolio..................... $ 11.803
American Century V.P. Balanced Fund................... $ 10.972
American Century V.P. Capital Appreciation Fund....... $ 9.412
Federated US Govt Securities..........................
Federated High Income Bond Fund II.................... $ 10.978
Federated Utility Fund II............................. $ 10.748
Federated American Leaders Fund II.................... $ 11.395
Fortis S&P 500 Index Series........................... $ 9.790
INVESCO -- Health Sciences Fund....................... --
INVESCO Equity Income Fund............................ --
INVESCO Technology Fund............................... --
Lexington Natural Resources Trust..................... $ 12.050
MFS Emerging Growth Series............................ $ 11.335
MFS High Income Series................................ $ 10.912
MFS Global Governments Series......................... $ 10.411
Neuberger & Berman Limited Maturity Bond Portfolio....
Neuberger & Berman Partners Portfolio.................
Montgomery Emerging Markets Fund...................... $ 10.632
Montgomery Growth Fund................................ $ 12.688
SAFECO Equity Portfolio............................... $ 9.778
SAFECO Growth Portfolio............................... $ 10.398
Strong Discovery Fund II.............................. $ 10.058
Strong International Stock Fund II.................... $ 10.509
Van Eck Worldwide Bond Fund........................... $ 10.293
Van Eck Worldwide Hard Assets Fund.................... $ 9.992
Audited financial statements of the available subaccounts of the Variable
Account are included in the Statement of Additional Information.
Advertising and other sales materials may include yield and total return figures
for the subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total Return" is
the total change in value of an investment in the subaccount over a period of
time specified in the advertisement. The rate of return shown would produce that
change in value over the specified period, if compounded annually. Yield and
total return figures do not reflect premium tax charges. This makes the
performance shown more favorable.
Financial information concerning Fortis Benefits is included in this prospectus
under "Additional Information About Fortis Benefits" and "Fortis Benefits
Financial Statements."
FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER
Fortis Benefits Insurance Company is the issuer of the contracts. At the end of
1998, Fortis Benefits had approximately 99 billion of total life insurance in
force. Fortis Benefits is a Minnesota corporation founded in 1910. It is
qualified to sell life insurance and annuity contracts in the District of
Columbia and in all states except New York. Fortis Benefits is an indirectly
wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by
Fortis (NL)N.V. and 50% by Fortis (B). Fortis, Inc. manages the United States
operations for these two companies.
Fortis Benefits is a member of the Fortis Financial Group. This group is a joint
effort by Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and
Fortis Insurance Company, to offer financial products through the management,
marketing, and servicing of mutual funds, annuities, and life insurance and
disability income products.
Fortis (NL)N.V. is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
(B) is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis (NL)N.V. and
Fortis (B) have merged their
7
operating companies under the trade name of Fortis. The Fortis group of
companies is active in insurance, banking and financial services, and real
estate development in The Netherlands, Belgium, the United States, Western
Europe, and the Pacific Rim. The Fortis group of companies had approximately 390
billion in assets at the end of 1998.
All of the guarantees and commitments under the contracts are general
obligations of Fortis Benefits regardless of whether you have allocated the
contract value to the Variable Account or to the fixed account. None of Fortis
Benefits' affiliated companies has any legal obligation to back Fortis Benefits'
obligations under the contracts.
THE VARIABLE ACCOUNT
The Variable Account is a segregated investment account of Fortis Benefits.
Fortis Benefits established Variable Account D under Minnesota insurance law as
of October 14, 1987. The Variable Account is an integral part of Fortis
Benefits. However, the Variable Account is registered with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940. Assets in the Variable Account representing reserves and liabilities
under these contracts and other variable annuity contracts issued by Fortis
Benefits will not be chargeable with liabilities arising out of any other
business of Fortis Benefits.
The Variable Account has subaccounts. The assets in each subaccount are invested
exclusively in one of the portfolios listed on page one of this prospectus.
Income and both realized and unrealized gains or losses from the assets of each
subaccount of the Variable Account are credited to or charged against that
subaccount without regard to income, gains or losses, from any other subaccount
of the Variable Account or arising out of any other business we may conduct. We
may add or eliminate new subaccounts as new portfolios are added or eliminated.
THE PORTFOLIOS
You may choose from among a number of different portfolios. Each portfolio is a
mutual fund available for purchase only as a funding vehicle for benefits under
variable life insurance and variable annuity products. These variable life
insurance and variable annuity products are issued by Fortis Benefits and by
other life insurance companies. Each portfolio corresponds to one of the
subaccounts of the Variable Account. The assets of each portfolio are separate
from the assets of other portfolios. In addition, each portfolio operates as a
separate investment portfolio whose investment performance has no effect on the
investment performance of any other portfolio. We offer more detailed
information for each investment portfolio. This information includes the
investment policies, investment restrictions, charges, and risks attendant to
investing in each portfolio. This information also includes other aspects of
each portfolio's operations. You may find this information in the current
prospectus for each portfolio. These portfolio prospectuses must accompany this
prospectus, and you should read them in conjunction with it. You may obtain a
copy of each prospectus from us, free of charge, by calling 1-800-827-5877, or
by writing P.O. Box 64295, St. Paul, Minnesota 55164.
As noted, the investment portfolios may be available to registered separate
accounts of other participating insurance companies. These portfolios may also
be available to the Variable Account and other separate accounts of Fortis
Benefits. Although Fortis Benefits does not anticipate any disadvantages to
this, there is a possibility that a material conflict may arise between the
interest of the Variable Account and one or more of the other separate accounts
participating in the portfolios. For example, a conflict may occur due to (1) a
change in law affecting the operations of variable life and variable annuity
separate accounts, (2) differences in the voting instructions of the contract
owners and those of other companies, or (3) some other reason. In the event of
conflict, Fortis Benefits will take any steps necessary to protect the contract
owners and variable annuity payees.
Fortis Benefits purchases and redeems portfolios' shares for the Variable
Account at their net asset value without any sales or redemption charges. We
automatically reinvest dividends or capital gain distributions attributable to
contracts in shares of the portfolio from which they are received at the
portfolio's net asset value on the date paid. These dividends and distributions
will have the effect of reducing the new asset value of each share of the
corresponding portfolio and increasing, by an equivalent value, the number of
shares outstanding of the portfolio. However, the value of your interest in the
corresponding subaccount will not change as a result of any such dividends and
distributions.
The portfolios available for investment by the Variable Account are listed on
the cover page of this prospectus.
See Appendix C for a summary of the investment objectives of each portfolio.
THE FIXED ACCOUNT
This prospectus offers interests in either of two fixed accounts, depending upon
your state. The fixed accounts are (1) a Guarantee Periods Fixed Account or (2)
a General Account Fixed Account. This prospectus refers to both of these fixed
accounts as the fixed account unless a distinction is not relevant.
We offer a Guaranteed Periods Fixed Account in most states. However, in a
limited number of states we offer a General Account Fixed Account in lieu of the
Guarantee Periods Fixed Account. You should ask Fortis Benefits or your account
representative to determine which fixed account is available in your state.
Charges under the contract are the same as when you allocate monies to the
Variable Account, except that we do not impose the Variable Account charges for
mortality and expense risk and administrative expenses (see Charges and
Deductions--Charges Against the Variable Account) on amounts of Contract Value
in the fixed account.
GUARANTEE PERIODS FIXED ACCOUNT
Any amount you allocate to the fixed account 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. At
the end of your guarantee period, your contract value, including accrued
interest, will be allocated to a new guarantee period of equal length. However,
you may reallocate
8
your contract value to a different guarantee period (or periods) or to one (or
more) of the subaccounts of the Variable Account. 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 those for other guarantee
periods. From time to time we will, 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. Please
note, when you allocate or transfer an amount to a guarantee period, a new
guarantee period begins running with respect to that amount. Therefore, the
amount you allocate will earn a guaranteed interest rate that will not change
until the end of that period. In addition, the guaranteed interest rate will
never be less than 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 chosen guarantee
period at the time we receive a purchase payment from you, or at the time we
execute a transfer you have requested , or at the time a guarantee period is
renewed.
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 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. See
"Investments by Fortis Benefits". In addition, when we determine guaranteed
interest rates, we may consider: (1) the duration of a guarantee period, (2)
regulatory and tax requirements, (3) sales and administrative expenses we bear,
(4) risks we assume, (5) our profitability objectives, and (6) general economic
trends.
FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED
INTEREST RATES WE DECLARE. WE CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE
GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL RATE OF 3%.
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.
MARKET VALUE ADJUSTMENT
Except as described below, we will apply a Market Value Adjustment to contract
value allocated to the Guarantee Periods Fixed Account that is:
- surrendered,
- transferred, or
- otherwise paid out
BEFORE the end of the guarantee period in which it is being held.
For example, we will apply a Market Value Adjustment to fixed account value that
we pay:
- as a death benefit pursuant to a contract,
- as an amount applied to an annuity option, and
- as an amount paid as a single sum in lieu of an annuity.
The Market Value Adjustment we apply may increase or decrease the fixed account
value that is withdrawn or transferred. We determine whether the fixed account
value is increased or decreased by performing a comparison of two guaranteed
interest rates.
The first rate we compare is the guaranteed interest rate for the fixed account
value that is withdrawn or transferred from the existing guarantee period. The
second rate we compare 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. After comparing these two rates, we determine
whether the fixed account value is increased or decreased as follows:
- If the first rate exceeds the second rate by more than 1/2%, the Market
Value Adjustment produces an INCREASE in the fixed account value withdrawn
or transferred.
- If the first rate does not exceed the second rate by at least 1/2%, the
Market Value Adjustment produces a DECREASE in the fixed account value
withdrawn or transferred.
We will determine the Market Value Adjustment by multiplying the fixed account
value that is withdrawn or transferred from the existing guarantee period
(before deduction of any applicable surrender charge) by the following factor:
1 + I n / 12
( ----------) - 1
1 + J + .005
where,
- I is the guaranteed interest rate we credit to the fixed 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).
You will find sample Market Value Adjustment calculations in Appendix A.
9
We do not apply a Market Value Adjustment to withdrawals and transfers of fixed
account value under TWO exceptions. We describe these exceptions below.
We will NOT apply a Market Value Adjustment to fixed 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
fixed account value was being held,
and that:
- ENDS 15 DAYS AFTER the end date of the guarantee period in which the fixed
account value was being held.
In addition, we will NOT apply a Market Value Adjustment to fixed 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 Benefits program for the withdrawal or transfer of fixed
account value.
We may impose CONDITIONS AND LIMITATIONS on any formal Fortis Benefits program
for the withdrawal or transfer of fixed account value. Ask your Fortis Benefits
representative about the availability of such a program in your state. In
addition, if such a program is available in your state, your Fortis Benefits
representative can inform you about the conditions and limitations that may
apply to that program.
GENERAL ACCOUNT FIXED ACCOUNT
We hold amounts that you allocate to the General Account Fixed Account in the
general account of Fortis Benefits. We have not registered interests in the
General Account Fixed Account under the Securities Act of 1933, and we have not
registered the General Account Fixed Account as an investment company under the
Investment Company Act of 1940, because of exemptive and exclusionary
provisions. Accordingly, neither the General Account Fixed Account nor any
interests in that account are subject to these Acts and, the staff of the
Securities and Exchange Commission has not reviewed the disclosures in the
prospectus relating to the General Account Fixed Account. Disclosures regarding
the fixed account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses. For contracts with amounts
allocated to the General Account Fixed Account, this prospectus serves as a
disclosure document only for the aspects of the contract involving the Variable
Account. This prospectus contains only selected information regarding the
General Account Fixed Account. You can get more information about the General
Account Fixed Account from Fortis Benefits' home office or from your sales
representative.
Fortis Benefits guarantees that the contract value in the General Account Fixed
Account will accrue interest at an effective annual rate of at least 3%,
independent of the actual investment experience of the general account. We may,
at our sole discretion, credit higher rates of interest. However, we have no
obligation to credit interest in excess of the guaranteed rate of 3% per year.
We will not modify any interest rate in excess of 3% per year for any amount in
the General Account Fixed Account more than once each calendar year. We will
quote any higher rate of interest at an effective annual rate. The rate of any
excess interest that we initially or subsequently credit to any amount can in
many cases vary, depending on when you originally allocated that amount to the
General Account Fixed Account. Once credited, we:
- make such interest part of the contract value in the General Account Fixed
Account,
- guarantee the interest, and
- subject the interest to applicable fees and charges.
GENERAL ACCOUNT FIXED ACCOUNT TRANSFERS
Transfers out of the General Account Fixed Account have special limitations.
Prior to the annuity commencement date, you may transfer all or part of the
contract value from the General Account Fixed Account to the Variable Account,
provided that:
(1) no more than one such transfer is made each contract year,
(2) no more than 50% of the General Account Fixed Account value is transferred
at any time (unless the balance in the General Account Fixed Account after
the transfer would be less than $1,000, in which case we may transfer up to
the entire balance),
(3) at least $1,000 is transferred at any one time (or, if less, the entire
amount in the General Account Fixed Account), and
(4) you may not make a transfer into the General Account Fixed Account within
six months after a transfer out of that account.
We may, in our discretion, permit a continuing request for transfer of lesser
specified amounts automatically on a periodic basis. However, we reserve the
right to discontinue or modify any such arrangements in our discretion. You may
make no transfer from the General Account Fixed Account after the annuity
commencement date.
INVESTMENTS BY FORTIS BENEFITS
Fortis Benefits' legal obligations with respect to the Guarantee Periods Fixed
Account and the General Account Fixed Account 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 both fixed accounts are the property of Fortis Benefits, 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 and in the
fixed account. Neither our general account nor the fixed account is subject to
registration under the Investment Company Act of 1940.
We will invest amounts in our general account, and amounts in the fixed 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,
- real estate, and
- certain other investments.
10
See "Fortis Benefits' Financial Statements" for information on our investments.
Investment management for amounts in our general account and in the fixed
account is provided to us by Fortis Advisors, Inc.
When we establish guaranteed interest rates, we will consider the available
return on the instruments in which we invest amounts allocated to the fixed
account. However, this return is only one of many factors we consider when we
establish the guaranteed interest rates. See "Guarantee Periods Fixed Account".
Generally, we expect to invest amounts allocated to the fixed account in debt
instruments. We expect that these debt instruments will approximately match our
liabilities with regard to the guarantee periods for purchase payments allocated
to Guarantee Periods Fixed Accounts and with regard to expected holding periods
for purchase payments allocated to the General Account Fixed Account. 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 fixed account according to any
particular strategy, See "Regulation and Reserves".
ACCUMULATION PERIOD
ISSUANCE OF A CONTRACT AND PURCHASE PAYMENTS
We reserve the right to reject any application for a contract or any purchase
payment for any reason. If we accept your issuing instructions in the form
received, we will credit the initial purchase payment within two Valuation Dates
after the later of (1) receipt of the issuing instructions or (2) receipt of the
initial purchase payment at our home office. If we cannot apply the initial
purchase payment within five Valuation Dates after receipt because the issuing
instructions are incomplete, we will return the initial purchase payment unless
you consent to our retaining the initial purchase payment and applying it as of
the end of the Valuation Period in which the necessary requirements are
fulfilled. The initial purchase payment must be at least $5,000 ($2,000 for a
contract issued pursuant to a qualified plan).
The date that we apply the initial purchase payment to the purchase of the
contract is also the contract issue date. The contract issue date is the date
used to determine contract years, regardless of when we deliver the contract.
Our crediting of investment experience in the Variable Account, or a fixed rate
of return in the fixed account, generally begins as of the contract issue date.
We will accept additional purchase payments at any time after the contract issue
date and prior to the annuity commencement date, as long as the Annuitant is
living. You must transmit purchase payments (together with any required
information identifying the proper contracts and accounts to be credited with
purchase payments) to our home office. We apply additional purchase payments to
the contract, and add to the contract value as of the end of the Valuation
Period in which we receive the payments.
Each additional purchase payment under a contract must be at least $50. The
total of all purchase payments for all Fortis Benefits annuities having the same
owner or Annuitant, may not exceed $1 million (not more than $500,000 allocated
to the fixed account) without our prior approval. We reserve the right to modify
this limitation at any time.
You may make purchase payments in excess of the initial minimum by monthly draft
against a bank account if you have completed and returned to us a special
authorization form. You may get the form from your sales representative or from
our home office. We can also arrange for you to make purchase payments by wire
transfer, payroll deduction, military allotment, direct deposit and billing.
Purchase payments by check should be made payable to Fortis Benefits Insurance
Company.
If the contract value is less than $1,000, we may cancel the contract on any
Valuation Date. We will notify you of our intention to cancel the contract at
least 90 days in advance of the cancellation date. If we do cancel your
contract, we consider such cancellation a full surrender of the contract.
CONTRACT VALUE
Contract value is the total of any Variable Account value in all the subaccounts
of the Variable Account, plus any fixed account value.
The contract does not guarantee a minimum Variable Account value. You bear the
entire investment risk for the contract value that you allocate to the Variable
Account.
DETERMINATION OF VARIABLE ACCOUNT VALUE. A contract's Variable Account value is
based on the number of Accumulation Units and on Accumulation Unit values, which
are determined on each Valuation Date. The value of an Accumulation Unit for a
subaccount on any Valuation Date is equal to the previous value of that
subaccount's Accumulation Unit multiplied by that subaccount's net investment
factor (discussed directly below) for the Valuation Period ending on that
Valuation Date. At the end of any Valuation Period, a contract's Variable
Account value in a subaccount is equal to the number of Accumulation Units in
the subaccount times the value of one Accumulation Unit for that subaccount.
The number of Accumulation Units in each subaccount is equal to
- Accumulation Units purchased at the time that any purchase payments or
transferred amounts are allocated to the subaccount; less
11
- Accumulation Units redeemed to pay for the portion of any transfers from
or partial surrenders allocated to the subaccount; less
- Accumulation Units redeemed to pay charges under the contract.
NET INVESTMENT FACTOR. The net investment factor for a subaccount is determined
by dividing (1) the net asset value per share of the portfolio shares held by
the subaccount, determined at the end of the current Valuation Period, plus the
per share amount of any dividend or capital gains distribution made with respect
to the portfolio shares held by the subaccount during the current Valuation
Period, minus a per share charge for the increase, plus a per share credit for
the decrease, in any income taxes assessed which we determine to have resulted
from the investment operation of the subaccount or any other taxes which are
attributable to this contract, by (2) the net asset value per share of the
portfolio shares held in the subaccount as determined at the end of the previous
Valuation Period, and subtracting from that result a factor representing the
mortality risk, expense risk and administrative expense charge.
If a subaccount's net investment factor is GREATER THAN ONE, the subaccount's
Accumulation Unit value has INCREASED. If a subaccount's net investment factor
is LESS THAN ONE, the subaccount's Accumulation Unit value has DECREASED.
DETERMINATION OF FIXED ACCOUNT VALUE. A contract's fixed account value is
guaranteed by Fortis Benefits. Therefore, we bear the investment risk with
respect to amounts allocated to the fixed account, except to the extent that (1)
we may vary the guaranteed interest rate for future guarantee periods for
Guarantee Periods Fixed Accounts and the current interest for General Account
Fixed Accounts (subject to the 3% effective annual minimum) and (2) the Market
Value Adjustment for Guarantee Periods Fixed Accounts imposes investment risks
on you.
The contract's fixed account value on any Valuation Date is equal to the
following amounts, in each case increased by accrued interest:
- The amount of purchase payments or transferred amounts allocated to the
fixed account; less
- The amount of any transfers or surrenders out of the fixed account.
ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE
ALLOCATION OF PURCHASE PAYMENTS. In your application for a contract, you may
allocate purchase payments, or portions of payments, to the:
- available subaccounts of the Variable Account, or
- to the fixed account (and to guarantee periods within the fixed account
for contracts issued in states where the Guarantee Periods Fixed Account
is offered), or
- to a combination of the previous options.
Percentages must be in whole numbers and the total allocation must equal 100%.
The percentage allocations for future purchase payments may be changed, without
charge, at any time by sending a written request to Fortis Benefits' home
office. Changes in the allocation of future purchase payments will be effective
on the date we receive your written request.
TRANSFERS. You may transfer contract value:
- from one available subaccount to another available subaccount, or
- from one available subaccount to the fixed account, or
- from the fixed account to an available subaccount, or
- from one guarantee period to another guarantee period (in the case of
Guarantee Periods Fixed Account transfers).
You must request transfers by (1) a written request to Fortis Benefits' home
office, or by (2) a telephone transfer as described below. Currently, we do not
charge for any transfer. However, transfers from a guarantee period of a
Guarantee Period Fixed Account that are (1) more than 15 days before or 15 days
after the expiration of the existing guarantee period, or are (2) not a part of
a formal Fortis Benefits program for the transfer of fixed account value are
subject to a Market Value Adjustment. See "Market Value Adjustment". Transfers
of contract value from the General Account Fixed Account are restricted in both
amount and timing. See "Fixed Account-General Account Fixed Account-General
Account Fixed Account Transfers".
The MINIMUM transfer from a subaccount or guarantee period is the LESSER of:
- $1,000, or
- all of the contract value in the subaccount or fixed account.
However, we may permit a continuing request for transfers of lesser specified
amounts automatically on a periodic basis. We reserve the right to restrict the
frequency of transfers or to otherwise condition, terminate, or impose charges
(not to exceed $25 per transfer) upon transfers. Where you make all your
transfer requests at the same time, as part of one request, we will count all
transfers between and among the subaccounts of the Variable Account and the
fixed account as one transfer. We will execute the transfers, and determine all
values in connection with the transfers, at of the end of the Valuation Period
in which we receive the transfer request. The amount of any positive or negative
Market Value Adjustment associated with a transfer from a Guarantee Periods
Fixed Account will be added to or deducted from the transferred amount.
Certain restrictions on very substantial allocations to any one subaccount are
set forth under "Limitations on Allocations" in the Statement of Additional
Information.
TOTAL AND PARTIAL SURRENDERS
TOTAL SURRENDERS. You may surrender all of the cash surrender value at any time
during the life of the Annuitant and prior to the annuity commencement date. If
you choose to make a total surrender, you must do so by written request sent to
our home office. We reserve the right to require that the contract be returned
to us prior to making payment, although this will not affect our determination
of the amount of the cash surrender value. Cash surrender value is:
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- the contract value at the end of the Valuation Period during which we
receive the written request for the total surrender at our home office,
plus or minus
- any applicable Market Value Adjustment.
See "Market Value Adjustment".
We must receive written consent of all collateral assignees and irrevocable
beneficiaries prior to any total surrender. We will generally pay surrenders
from the Variable Account within seven days of the date of receipt by our home
office of the written request. However, we may postpone payments in certain
circumstances. See "Postponement of Payment".
The amount we pay upon total surrender of the cash surrender value (taking into
account any prior partial surrenders) may be more or less than the total
purchase payments you made. After a surrender of the cash surrender value or at
any time the contract value is zero, all rights of the owner, Annuitant, or any
other person will terminate.
PARTIAL SURRENDERS. At any time during the life of the Annuitant and prior to
the annuity commencement date, you may surrender a portion of the fixed account
and/or the Variable Account. You must request partial surrender by a written
request sent to Fortis Benefits' home office. We will not accept a partial
surrender request from you unless the net proceeds payable to you, as a result
of the request, are at least $1,000. We will surrender the entire cash surrender
value under the contract if the total contract value in both the Variable
Account and fixed account would be less than $1,000 after the partial surrender.
You should specify the subaccounts of the Variable Account or guarantee periods
of the fixed account that you wish to partially surrender. If you do not
specify, we take the partial surrender from the subaccounts and from the
guarantee periods of the fixed account on a pro rata basis.
We will surrender Accumulation Units from the Variable Account and/ or dollar
amounts from the fixed account so that the total am ount of the partial
surrender equals the dollar amount of the partial surrender request. If the
surrender is from a guarantee period, we will reduce the partial surrender by
the amount of any applicable negative Market Value Adjustment, or we will
increase the amount payable to you by any positive Market Value Adjustment
UNLESS the surrender is (1) within 15 days before or 15 days after the
expiration of a guarantee period, or (2) is a part of a formal Fortis Benefits
program for the transfer of fixed account value. The partial surrender will be
effective at the end of the Valuation Period in which we receive the written
request for partial surrender at our home office. Payments will generally be
made within seven days of the effective date of such request, although certain
delays are permitted. See "Postponement of Payment".
The Internal Revenue Code provides that a penalty tax will be imposed on certain
premature surrenders. For a discussion of this and other tax implications of
total and partial surrenders, including withholding requirements, see "Federal
Tax Matters". Also, under tax deferred annuity contracts pursuant to Section
403(b) of the Internal Revenue Code, no distributions of voluntary salary
reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death, disability or hardship. (Hardship distributions will be limited
to the lesser of the amount of the hardship or the amount of salary reduction
contributions, exclusive of earnings thereon.)
TELEPHONE TRANSACTIONS
You or your representative may make certain requests under the contract by
telephone if we have a written telephone authorization on file. These include
requests for (1) transfers, (2) withdrawals, and (3) changes in purchase payment
allocation instructions, dollar-cost averaging, portfolio rebalancing programs
and systematic withdrawals. Our home office will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures may include, among others, (1) requiring some form of personal
identification such as your address and social security number prior to acting
upon instructions received by telephone, (2) providing written confirmation of
such transactions, and/or (3) tape recording of telephone instructions. Your
request for telephone transactions authorizes us to record telephone calls. We
may be liable for any losses due to unauthorized or fraudulent instructions if
we do not employ reasonable procedures. If we do employ reasonable procedures,
we will not be liable for any losses due to unauthorized or fraudulent
instructions. We reserve the right to place limits, including dollar limits, on
telephone transactions.
BENEFIT PAYABLE ON DEATH OF CONTRACT OWNER OR ANNUITANT
If the contract owner or Annuitant dies prior to the annuity commencement date,
we will pay a death benefit to the beneficiary. If more than one Annuitant has
been named, we will pay the death benefit payable upon the death of an Annuitant
only upon the death of the last survivor of the persons so named.
The death benefit will equal the greater of:
(1) the sum of all purchase payments made less all prior surrenders and any
applicable prior negative Market Value Adjustments (in the case of a
contract having a Guarantee Periods Fixed Account), or
(2) the contract value adjusted by any applicable Market Value Adjustment (in
the case of a contract having a Guarantee Periods Fixed Account), as of the
date used for valuing the death benefit.
The value of the death benefit is determined as of the end of the Valuation
Period in which we receive, at our home office, proof of death and the written
request as to the manner of payment. Upon receipt of these items, the death
benefit generally will be paid within seven days. Under certain circumstances,
payment of the death benefit may be postponed. See "Postponement of Payment." If
we do not receive a written request for a settlement method, we will pay the
death benefit in a single sum, based on values determined at that time.
The beneficiary may (1) receive a single sum payment, which terminates the
contract, or (2) select an annuity option. If the beneficiary selects an annuity
option, he or she will have all the rights and privileges of a payee under the
contract. If the beneficiary desires an annuity option, the election should be
made within 60 days of the date
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the death benefit becomes payable. Failure to make a timely election can result
in unfavorable tax consequences. For further information, see "Federal Tax
Matters."
We accept any of the following as proof of death: (1) a copy of a certified
death certificate; (2) a copy of a certified decree of a court of competent
jurisdiction as to the finding of death; or (3) a written statement by a medical
doctor who attended the deceased at the time of death.
The Internal Revenue Code requires that a Non-Qualified Contract contain certain
provisions about an owner's death. We discuss these provisions below under
"Federal Tax Matters--Required Distributions for Non-Qualified Contracts." It is
imperative that written notice of the death of the owner be promptly transmitted
to us at our home office, so that we can make arrangements for distribution of
the entire interest in the contract to the beneficiary in a manner that
satisfies the Internal Revenue Code requirements. Failure to satisfy these
requirements may result in the contract not being treated as an annuity contract
for federal income tax purposes with possible adverse tax consequences.
THE ANNUITY PERIOD
ANNUITY COMMENCEMENT DATE
You may specify an annuity commencement date in your application. The annuity
commencement date marks the beginning of the period during which an Annuitant or
other payee designated by the owner receives annuity payments under the
contract. We reserve the right to prohibit an annuity commencement date that is
on or after the Annuitant's 75th birthday. You should consult your Fortis
Benefits representative in this regard
The Internal Revenue Code may impose penalty taxes on amounts distributed either
too soon or too late depending on the type of retirement arrangement involved.
See "Federal Tax Matters". You should consider this carefully in selecting or
changing an annuity commencement date.
You must submit a written request during the Annuitant's lifetime in order to
advance or defer the annuity commencement date. We must receive the request at
our home office at least 30 days before the then-scheduled annuity commencement
date. The new annuity commencement date must also be at least 30 days after we
receive the written request. You have no right to make any total or partial
surrender during the Annuity Period.
COMMENCEMENT OF ANNUITY PAYMENTS
We may pay the entire contract value, rather than apply the amount to an annuity
option if the contract value at the end of the Valuation Period which contains
the annuity commencement date is less than $1,000. We would make the payment in
a single sum to the Annuitant or other payee chosen by the owner and cancel the
contract. We would not impose any charge other than the premium tax charge.
Otherwise, we will apply (1) the fixed account value to provide a Fixed Annuity
Option and (2) the Variable Account value in any subaccount to provide a
Variable Annuity Option using the same subaccount, unless you have notified us
by written request to apply the fixed account value and Variable Account value
in different proportions. We must receive written request at our home office at
least 30 days before the annuity commencement date.
We will make annuity payments under a Fixed or Variable Annuity Option on a
monthly basis to the Annuitant or other properly-designated payee, unless we
agree to a different payment schedule. If you name more than one person as an
Annuitant, you may elect to name one of such persons to be the sole Annuitant as
of the annuity commencement date. We reserve the right to change the frequency
of any annuity payment so that each payment will be at least $50 ($20 in Texas).
The amount of each annuity payment will depend on (1) the amount of contract
value applied to an annuity option, (2) the form of annuity selected, and (3)
the age of the Annuitant. For information concerning the relationship between
the Annuitant's sex and the amount of annuity payments, including special
requirements in connection with employee benefits plans, see "Calculations of
Annuity Payments" in the Statement of Additional Information. The Statement of
Additional Information also contains detailed information about how the amount
of each annuity payment is computed.
The dollar amount of any fixed annuity payments is specified during the entire
period of annuity payments according to the provisions of the annuity option
selected. The dollar amount of variable annuity payments varies during the
Annuity Period based on changes in Annuity Unit values for the subaccounts that
you choose to use in connection with your payments.
RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE
ANNUITY PAYMENTS
The amount of an annuity payment depends on the average effective net investment
return of a subaccount during the period since the preceding payment as follows:
- if the return is HIGHER than 3% annually, the Annuity Unit value will
INCREASE, and the second payment will be HIGHER than the first; and
- if the return is LOWER than 3% annually, the Annuity Unit value will
DECREASE, and the second payment will be LOWER than the first.
"Net investment return," for this purpose, refers to the subaccount's overall
investment performance after deduction of the mortality and expense risk and
administrative expense charges, which are assessed at an annual rate of .45%.
We guarantee that the amount of each variable annuity payment after the first
payment will not be affected by variations in our mortality experience or our
expenses.
TRANSFERS. A person receiving annuity payments may make up to four transfers a
year among subaccounts. The current procedures for and conditions on these
transfers are the same as we describe above under
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"Allocation of Purchase Payments and Contract Value--Transfers". We do not
permit transfers from a Fixed Annuity Option during the Annuity Period.
ANNUITY OPTIONS
You may select an annuity option or change a previous selection by written
request. We must receive your request at least 30 days before the annuity
commencement date. You may select one annuity form, although payments under that
form may be on a combination fixed and variable basis. If no annuity form
selection is in effect on the annuity commencement date, we usually
automatically apply Option B (described below), with payments guaranteed for ten
years. However, federal pension law may require that we make default payments
under certain retirement plans pursuant to plan provisions and/or federal law.
Tax laws and regulations may impose further restrictions to assure that the
primary purpose of the plan is distribution of the accumulated funds to the
employee.
Your contract offers the following options for fixed and variable annuity
payments. Under each of the options, we make payments as of the first Valuation
Date of each monthly period, starting with the annuity commencement date.
OPTION A, LIFE ANNUITY. We do not make payments after the annuitant dies. It is
possible for the annuitant to receive only one payment under this option, if the
annuitant dies before the second payment is due.
OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20 YEARS. We
continue payments as long as the annuitant lives. If the annuitant dies before
we have made all of the guaranteed payments, we continue installments of the
guaranteed payments to the beneficiary.
OPTION C, JOINT AND FULL SURVIVOR ANNUITY. We continue payments as long as
either the annuitant or the joint annuitant is alive. We stop payments when both
the annuitant and the joint annuitant have died. It is possible for the payee or
payees to receive only one payment under this option if both annuitants die
before the second payment is due.
OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. We continue payments
as long as either the annuitant or the joint annuitant is alive. If the
annuitant dies first, we continue payments to the joint annuitant at one-half
the original amount. If the joint annuitant dies first, we continue payments to
the annuitant at the original full amount. We stop payments when both the
annuitant and the joint annuitant have died. It is possible for the payee or
payees to receive only one payment under this option if both annuitants die
before the second payment is due.
We also have other annuity options available. You can get information about them
from your sales representative or by calling or writing to our home office.
DEATH OF ANNUITANT OR OTHER PAYEE
Under most annuity options offered by us, the amounts, if any, payable on the
death of the Annuitant during the Annuity Period are the continuation of annuity
payments for any remaining guarantee period or for the life of any joint
Annuitant. In all such cases, the person entitled to receive payments also
receives any rights and privileges under the annuity form in effect.
Additional rules applicable to such distributions under Non-Qualified Contracts
are described under "Federal Tax Matters--Required Distributions for
Non-Qualified Contracts". Though the rules there described do not apply to
contracts issued in connection with qualified plans, similar rules apply to the
plans themselves.
CHARGES AND DEDUCTIONS
PREMIUM TAXES
We deduct state premium taxes as follows:
- when imposed on purchase payments, we pay the amount on your behalf and
deduct the amount from your contract value upon (1) our payment of
surrender proceeds or death benefit or (2) annuitization of a contract, or
- when imposed at the time annuity payments begin, we deduct the amount from
your contract value.
Applicable premium tax rates depend upon your place of residence. Rates can
change by legislation, administrative interpretations, or judicial acts.
CHARGES AGAINST THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We assess each subaccount of the Variable
Account with a daily charge for mortality and expense risk. This charge is a
nominal annual rate of .45% of the average daily net assets of the Variable
Account. It consists of approximately .30% for mortality risk and approximately
.15% for expense risk. We guarantee not to increase this charge for the duration
of the contract. This charge is assessed during both the Accumulation Period and
the Annuity Period.
The mortality risk borne by us arises from our obligation to make annuity
payments (determined in accordance with the annuity tables and other provisions
contained in the contract) for the full life of all Annuitants regardless of how
long all Annuitants or any individual Annuitant might live. In addition, we bear
a mortality risk in that we guarantee to pay a death benefit upon the death of
an Annuitant or owner prior to the annuity commencement date.
The expense risk we assume is that actual expenses incurred in connection with
issuing and administering the contract will exceed the limits on administrative
charges set in the contract.
We bear the loss if the administrative charges and the mortality and expense
risk charge are insufficient to cover the expenses and costs assumed.
Conversely, we profit if the amount deducted proves more than sufficient.
ANNUAL ADMINISTRATIVE CHARGE
A $30 annual administrative charge is deducted from the contract value on each
anniversary of the contract issue date. This charge helps to cover
administrative costs incurred in:
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- issuing contracts,
- establishing and maintaining records relating to contracts,
- making regulatory filings and furnishing confirmation notices,
- voting materials and other communications,
- providing computer, actuarial and accounting services, and
- processing contract transactions.
We do not anticipate any profit from this charge, and we will initially waive
this charge during the Annuity Period, although we reserve the right to
reinstitute it at any time.
We will deduct the annual administrative charge by redeeming Accumulation Units
from each subaccount of the Variable Account and by redeeming Accumulation Units
from the fixed account. Contract value is the total value of the Variable
Account and the fixed account. We will redeem Accumulation Units in proportion
to the allocation of contract value among both:
- the subaccounts of the Variable Account, and
- the fixed account
If you totally surrender the contract, we will deduct the full annual
administration charge at the time of surrender.
TAX CHARGE
We currently impose no charge for taxes payable by us in connection with the
contract, other than for applicable premium taxes. We reserve the right to
impose a charge for any other taxes that may become payable by us in the future
for the contracts or the Variable Account.
The annual administrative charge and charges against the Variable Account
described above are for the purposes described. We may receive a profit as a
result of these charges.
MISCELLANEOUS
The Variable Account invests in shares of the portfolios. Therefore, the net
assets of the Variable Account will reflect the investment advisory fees and
certain other expenses incurred by the portfolios and described in their
prospectuses.
GENERAL PROVISIONS
THE CONTRACTS
The entire contract includes any application, amendment, rider, endorsement, and
revised contract pages. Only an officer of Fortis Benefits can agree to change
or waive any provision of a contract. Any change or waiver must be in writing
and signed by an officer of Fortis Benefits.
The contracts are non-participating and do not share in dividends or earnings of
Fortis Benefits.
POSTPONEMENT OF PAYMENT
We may defer for up to 15 days the payment of any amount attributable to a
purchase payment made by check to allow the check reasonable time to clear. For
a description of other circumstances in which amounts payable out of Variable
Account assets could be deferred, see "Postponement of Payments" in the
Statement of Additional Information. We may also defer payment of surrender
proceeds payable out of the fixed account for a period of up to 6 months.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the Annuitant's age or sex was misstated, we pay the amount that the purchase
payments paid would have purchased at the correct age and sex. If we make any
overpayment because of incorrect information about age or sex, or any other
miscalculation, we deduct the overpayment from the next payment due. We add
underpayments to the next payment. We credit or charge the amount of any
adjustment with interest at the rate of 3% annually.
ASSIGNMENT
Owners and payees may assign their rights and interests under a Qualified
Contract only in certain narrow circumstances referred to in the contract.
Owners and other payees may assign their rights and interests under
Non-Qualified Contracts, including their ownership rights.
We take no responsibility for the validity of any assignment. Owners and payees
must make a change in ownership rights in writing and send it to our home
office. The change will be effective on the date made, although we are not bound
by a change until the date we record it.
The rights under a contract are subject to any assignment of record at our home
office. An assignment or pledge of a contract may have adverse tax consequences.
See below under "Federal Tax Matters".
BENEFICIARY
You may name or change a beneficiary or a contingent beneficiary before the
annuity commencement date, and while the Annuitant is living. You must send a
written request of the change to Fortis Benefits. Certain retirement programs
may require spousal consent to name or change a beneficiary. Applicable tax laws
and regulations may limit the right to name a beneficiary other than the spouse.
We are not responsible for the validity of any change. A change will take effect
as of the date it is signed but will not affect any payments we make or action
we take before receiving the written request. We also need the consent of any
irrevocably named person before making a requested change.
Upon the death of an owner, or Annuitant, prior to the annuity commencement
date, the beneficiary will be deemed as follows:
- If there is any surviving owner, the surviving owner will be the
beneficiary (this overrides any other beneficiary designation).
- If there is no surviving owner, the beneficiary will be the beneficiary
designated by the owner.
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- If there is no surviving owner and no surviving beneficiary who has been
designated by the owner, then the estate of the last surviving owner will
be the beneficiary.
REPORTS
We will mail to the owner (or to the person receiving payments during the
Annuity Period), at the last known address of record, any report and
communication required by any applicable law or regulation. You should therefore
give us prompt written notice of any address change. This will include annual
audited financial statements of the portfolios, but not necessarily of the
Variable Account or Fortis Benefits.
RIGHTS RESERVED BY FORTIS BENEFITS
We reserve the right to make certain changes if, in our judgment, they would
best serve the interests of owners and Annuitants or would be appropriate in
carrying out the purposes of the contracts. We will make any change only as
permitted by applicable laws. We will obtain your approval of the changes and
approval from any appropriate regulatory authority if required by law. Examples
of the changes we may make include:
- To operate the Variable Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any subaccount to another subaccount, or to one
or more separate accounts, or to the fixed account; or to add, combine, or
remove subaccounts in the Variable Account.
- To substitute, for the portfolio shares held in any subaccount, the shares
of another portfolio or the shares of another investment company or any
other investment permitted by law.
- To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the contract as an
annuity.
- To change the time or time of day at which a Valuation Date is deemed to
have ended.
- To make any other necessary technical changes in the contract in order to
conform with any action the above provisions permit us to take, including
to change the way we assess charges, but without increasing as to any then
outstanding contract the aggregate amount of the types of charges that we
have guaranteed.
DISTRIBUTION
The contracts are sold by individuals who are (1) licensed by state insurance
authorities to sell the contracts of Fortis Benefits, and (2) representatives of
Waterhouse National Bank. The representatives of Waterhouse National Bank are
authorized to sell the contracts by means of a dealer agreement with Fortis
Investors, Inc., the principal underwriter of the contracts. Fortis Investors is
registered as a broker-dealer with the Securities and Exchange Commission under
the Securities Exchange Act of 1934. Fortis Investors is also a member of the
National Association of Securities Dealers, Inc.
We compensate Waterhouse National Bank for distributing the contracts by paying
Waterhouse National Bank a fee. This fee is based upon a formula, and we do not
expect this fee to exceed .10% per annum of the average daily contract value of
the contracts sold by representatives of Waterhouse National Bank.
We did not pay any amount associated with distribution of the contracts to
Fortis Investors in 1997 or 1998. In our distribution agreement with Fortis
Investors, we have agreed to indemnify Fortis Investors (and its agents,
employees, and controlling persons) for certain damages and expenses, including
those arising under federal securities laws.
See Note 13 to the Notes to Fortis Benefits' Financial Statements as to amounts
we have paid to Fortis, Inc. for various services.
Fortis Investors is an indirect subsidiary of Fortis (NL)N.V. and Fortis (B).
Fortis Investors is under common control with Fortis Benefits. Fortis Investors'
principal business address is the same as that of our home office. Fortis
Investors is not obligated to sell any specific amount of interests under the
contracts. $75,000,000 of interests in the Guarantee Periods Fixed Account and
an indefinite amount of interests in the Variable Account have been registered
with the Securities and Exchange Commission.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes. These rules are based on laws, regulations and
interpretations that are subject to change at any time. This summary is not
comprehensive. We do not intend it as tax advice. Federal estate and gift tax
considerations, as well as state and local taxes, may also be material. You
should consult a qualified tax adviser as to the tax implications of taking any
action under a contract or related retirement plan.
NON-QUALIFIED CONTRACTS
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Neither you nor any other person may exclude or deduct
purchase payments under Non-Qualified Contracts from gross income. However, you
are not currently taxed, until receipt, on any increase in the accumulated value
of a Non-Qualified Contract that results from (1) the investment performance of
the Variable Account, or (2) interest credited to the fixed account. Owners who
are not natural persons are taxed annually on any increase in the contract value
subject to exceptions. You may wish to discuss this with your tax adviser.
The following discussion applies generally to contracts owned by natural
persons.
In general, surrenders or partial withdrawals under contracts are taxed as
ordinary income to the extent of the accumulated income or gain under the
contract. If you assign or pledge any part of the value of a contract, you pay
on the value so pledged or assigned to the same extent as a partial withdrawal.
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With respect to annuity payment options, the tax consequences may vary depending
on the option elected under the contract. Until the "investment in the contract"
is recovered, generally only the portion of the annuity payment that represents
the amount by which the contract value exceeds the "investment in the contract"
will be taxed. In general, "investment in the contract" is the aggregate amount
of purchase payments made. After recovery of an Annuitant's or other payee's
"investment in the contract," the full amount of any additional annuity payments
is taxable.
For variable annuity payments, in general, the taxable portion of each annuity
payment (prior to recovery of the "investment in the contract") is the amount of
the payment less the nontaxable portion. The nontaxable portion of each payment
is the "investment in the contract" divided by the total number of expected
annuity payments.
For fixed annuity payments, in general, prior to recovery of the "investment in
the contract," there is no tax on the amount of each payment that bears the same
ratio to that payment as the "investment in the contract" bears to the total
expected value of the annuity payments for the term of the payments. However,
the remainder of each annuity payment is taxable. The taxable portion of a
distribution (in the form of an annuity or a single sum payment) is taxed as
ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all contracts and other annuity contracts we or our affiliates
issue to you within the same calendar year will be treated as if they were a
single contract.
You, or any other payee, will pay a 10% penalty on the taxable portion of a
"premature distribution." Generally, an amount is a "premature distribution"
unless the distribution is:
- made on or after you or another payee reach age 59 1/2, or is
- made to a beneficiary on or after your death, or is
- made upon your disability or that of another payee, or is
- part of a series of substantially equal annuity payments for your life or
life expectancy, or is
- part of a series of substantially equal annuity payments for the life or
life expectancy of you and your beneficiary.
Premature distributions may result, for example, from:
- an early annuity commencement date
- an early surrender or partial surrender of a contract
- an assignment of a contract
- the early death of an Annuitant other than you or another person receiving
annuity payments under the contract
If you transfer ownership of a contract, or designate an Annuitant or payee
other than yourself, you may have certain income or gift tax consequences that
are beyond the scope of this discussion. If you are contemplating any transfer
or assignment of a contract, you should contact a competent tax adviser.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS
In order that a Non-Qualified Contract be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires:
- if any person receiving annuity payments dies on or after the annuity
commencement date but prior to the time the entire interest in the
contract has been distributed, the remaining portion of such interest will
be distributed at least as rapidly as under the method of distribution
being used as of the date of the person's death; and
- if you die prior to the annuity commencement date, the entire interest in
the contract will be distributed:
- within five years after your death, or
- as annuity payments that will begin within one year of your death and
will be made over your designated beneficiary's life or over a period
not extending beyond the life expectancy of that beneficiary.
However, if the owner's designated beneficiary is the surviving spouse, the
surviving spouse may continue the contract as the new contract owner. Where the
owner or other person receiving payments is not a natural person, the required
distributions under Section 72(A) apply on the death of the primary Annuitant.
The Internal Revenue Service has not issued regulations interpreting the
requirements of Section 72(s) (although it has issued proposed regulations
interpreting similar requirements for qualified plans). We intend to review and
modify the contract if necessary to ensure that it complies with the
requirements of Section 72(s) when clarified by regulation or otherwise.
Generally, the above requirements will be satisfied with a single sum payment
where the death occurs prior to the annuity commencement date. A single sum
payment will be subject to proof of the owner's death. The beneficiary, however,
may elect by written request to receive an annuity option instead of a lump sum
payment. However, if the election is not made within 60 days of the date the
single sum death benefit otherwise becomes payable, the IRS may disregard the
election for tax purposes and tax the beneficiary as if a single sum payment had
been made.
QUALIFIED CONTRACTS
The contracts may be used with several types of tax-qualified plans. The tax
rules applicable to owners, Annuitants, and other payees vary according to the
type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a tax qualified plan on your behalf are excludable
from your gross income during the Accumulation Period. The portion, if any, of
any purchase payment that is not excluded from your gross income during the
Accumulation Period constitutes your "investment in the contract".
When annuity payments begin, you will receive back your "investment in the
contract" if any, as a tax-free return of capital. The Code
18
provides which portion of each payment is taxable and which portion is tax free.
These rules may vary depending on the type of tax qualified plan.
The contracts are available in connection with the following types of retirement
plans:
- Section 403(b) annuity plans for employees of certain tax-exempt
organizations and public education institutions;
- Section 401 or 403(a) qualified pension, profit-sharing, or annuity plans;
- Individual retirement annuities ("IRAs") under Section 408(b);
- Simplified employee pension plans ("SEPs") under Section 408(k);
- SIMPLE IRA Plans under Section 408(p); and
- Section 457 unfunded deferred compensation plans of tax-exempt
organizations and private employer unfunded deferred compensation plans.
The tax implications of these plans are further discussed in the Statement of
Additional Information under the heading "Taxation Under Certain Retirement
Plans".
WITHHOLDING
Annuity payments and other amounts received under contracts are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Despite the recipient's election, the Code may require withholding from certain
payments outside the United States. The Code may also require withholding from
certain distributions from certain types of qualified retirement plans, unless
the proceeds are transferred directly from the qualified plan to another
qualified retirement plan. Moreover, special "backup withholding" rules may
require us to disregard the recipient's election if the recipient fails to
supply us with a "TIN" or taxpayer identification number (social security number
for individuals), or if the Internal Revenue Service notifies us that the TIN
provided by the recipient is incorrect.
PORTFOLIO DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code that set forth diversification requirements for investments
underlying Non-Qualified Contracts. We believe that the investments will satisfy
these requirements. Failure to do so would result in immediate taxation to you
or another person of all income credited to Non-Qualified Contracts. Also,
current regulations do not provide guidance as to any circumstances in which
control over allocation of values among different investment alternatives may
cause you or another person receiving annuity payments to be treated as the
owners of Variable Account assets for tax purposes. We reserve the right to
amend the contracts in any way necessary to avoid any such result. The Treasury
Department may establish standards in this regard through regulations or
rulings. Such standards may apply only prospectively, although retroactive
application is possible if the Treasury Department considered such standards not
to embody a new position.
CERTAIN EXCHANGES
Section 1035 of the Code provides generally that no gain or loss will be
recognized under the exchange of a life insurance or annuity contract for an
annuity contract. Thus, a properly completed exchange pursuant to the special
annuity contract exchange form we provide for this purpose is not generally a
taxable event under the Code. Moreover, your investment in the contract will be
the same as your investment in the product you exchanged out of.
Because of the complexity of these and other tax aspects in connection with an
exchange, you should consult a tax adviser before making any exchange.
TAX LAW RESTRICTIONS AFFECTING SECTION 403(B) PLANS
Section 403(b)(11) of the Internal Revenue Code restricts the distribution under
Section 403(b) annuity contracts of:
(1) elective contributions made for years beginning after December 31, 1988;
(2) earnings on those contributions; and
(3) earnings on amounts held as of December 31, 1988.
Distribution of these amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, we may not distribute income attributable to elective
contributions made after December 31, 1988.
19
FURTHER INFORMATION ABOUT FORTIS BENEFITS
GENERAL
We offer and sell insurance products, including fixed and variable life
insurance policies, fixed and variable annuity contracts, and group life,
accident and health insurance policies. We market our products to small
businesses and individuals through a national network of independent agents,
brokers, and financial institutions.
OWNERSHIP OF SECURITIES
All of Fortis Benefits' outstanding shares are owned by Fortis Insurance, Inc.,
515 West Wells, Milwaukee, Wisc. 53201, which is itself wholly owned by Fortis,
Inc., One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is
wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB
1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan
10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis
(NL)N.V. and 50% owned, through certain subsidiaries, by Fortis (B), Boulevard
Emile Jacqmain 53, 1000 Brussels, Belgium.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of Fortis Benefits. This
summary has been derived in part from the financial statements of Fortis
Benefits included elsewhere in this prospectus. You should read the following
along with these financial statements.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA
Premiums and policy charges.............................. $1,299,770 $1,238,006 $1,295,878 $1,232,329 $1,022,446
Net investment income.................................... 234,043 228,724 206,023 203,537 162,514
Net realized gains (losses) on investment................ 52,404 41,101 25,731 55,080 (28,815)
Other income............................................. 44,671 36,458 31,725 33,085 35,958
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES......................................... $1,630,888 $1,544,289 $1,559,357 $1,524,031 $1,192,103
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total benefits and expenses.............................. $1,538,604 $1,442,059 $1,470,066 $1,442,270 $1,157,651
Federal Income taxes..................................... 30,402 35,120 31,099 27,891 11,595
Net income............................................... 61,882 67,110 58,192 53,870 22,857
BALANCE SHEET DATA
Total assets............................................. $7,598,196 $6,819,484 $5,951,876 $5,143,012 $4,043,914
Total liabilities........................................ 6,712,728 5,939,378 5,171,203 4,431,914 3,569,717
Total shareholder's equity............................... 885,468 880,106 780,673 711,098 474,197
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1998 COMPARED TO 1997
REVENUES
The Company's major products are group disability and dental, group medical,
group life, and annuity and individual life insurance coverages sold through a
network of independent agents and brokers. 1998 total group disability and
dental, group medical, group life, and annuity and individual life premiums
represented 38%, 36%, 19% and 7% respectively of total premium in 1998 and 34%,
38%, 21% and 7% respectively in 1997. Strong group sales over the last three
quarters of 1997 and throughout 1998, in both the long term disability and
dental products is the primary reason for the increase in group disability and
dental premium. Additionally, short term disability products had a larger than
usual upswing in sales during the second and third quarters of 1998. The
decrease in group medical premium is the result of a decision in 1996 to
discontinue new sales of certain medical products coupled with higher than
normal lapses of current medical business.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1998 and 1997
resulted in recognition of realized gains and losses.
BENEFITS
The total year-to-date policyholder benefit to premium ratio remained relatively
flat increasing to 83% in 1998 from 82% in 1997. The group disability and
dental, group medical, group life, and annuity and individual life benefit to
premium ratios for the year ended December 31, were 83%, 85%, 73% and 108%
respectively in 1998 and 82%, 77%, 76% and 124% respectively in 1997. The group
medical business experienced a higher premium to benefit ratio due to higher
incurred benefits than anticipated. Group life experienced favorable year-to-
date experience in 1998 compared to 1997. The annuity and individual life
business also experienced lower mortality experience in 1998
20
compared to 1997, in addition to higher interest crediting on the Company's
steadily increasing policy base of interest sensitive and investment products.
EXPENSES
The Company's general and administrative expense to premium ratio has increased
slightly to 23% in 1998, up from 22% in 1997. Commission rates remained level
from 1997 to 1998.
YEAR 2000
INTRODUCTION. The Company relies heavily on information technology ("IT")
systems to conduct its business. These IT systems include both internally
developed and vendor-supplied systems. The Company also has business
relationships with numerous entities including but not limited to financial
institutions, financial intermediaries, third party administrators and other
critical vendors as well as regulators and customers. These entities are
themselves reliant on their IT systems to conduct their businesses. Therefore,
there is a supply chain of dependency among and between all involved entities.
STATE OF READINESS. In 1997, the Fortis parent company organized a
multi-disciplinary Year 2000 Project Team ("Team"). The Company is a part of the
Team. The Team consists of employees at each subsidiary, audit, legal and
outside consultants. The Team has developed and is currently executing a
comprehensive plan designed to make the Company's IT systems Year 2000 ready.
The plan covers four stages including (i) inventory, (ii) assessment, (iii)
programming, and (iv) testing and certification. The Company has completed the
inventory stage for its internal hardware, software and telecommunications
systems (mainframe and client/server applications). The assessment process is
also complete and the Company is utilizing both internal and external resources
to reprogram or replace the systems where necessary, and testing the
applications for Year 2000 readiness. Programming, testing and certification of
these systems and applications are targeted for completion by the end of 1999.
COSTS. The cost of the Company portion of the Year 2000 project is estimated at
$27.7 million (pre-tax) and is being funded through operating cash flows. Total
Year 2000 project costs are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. Costs to upgrade and replace systems in the normal course of business
are not included in this estimate. As of December 31, 1998, approximately $15.5
million (pre-tax) had already been expensed. The Company believes that its Year
2000 project generally is on schedule.
RISKS. The Company is attempting to limit the potential impact of the Year 2000
by monitoring the progress of its own Year 2000 project and those of its
critical external relationships and by developing contingency/recovery plans.
The Company cannot guarantee that it will be able to identify and/or resolve all
of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company
or its external relationships, however, could have a material adverse effect on
the Company's results of operations, liquidity or financial condition. If the
Company's Year 2000 issues were unresolved, potential consequence would include,
among other possibilities, the inability to accurately and timely process
benefit claims, update customer's accounts, process financial transactions, bill
customers, assess exposure to risks, determine liquidity requirements or report
accurate data to management, shareholders, customers, regulators and others as
well as business interruptions or shutdowns, financial losses, harm to its
reputation, increased scrutiny by regulators and litigation related to Year 2000
issues.
CONTINGENCY PLANS. Consistent with prudent due diligence efforts, the Company
has defined contingency plans aimed at ensuring the continuity of critical
business functions before and after December 31, 1999, should there be an
unexpected system failure. The Company has developed plans that are designed to
reduce the negative impact on Fortis, and provide methods of returning to normal
operations, if failure occurs.
1997 COMPARED TO 1996
FINANCIAL POSITION
Total invested assets of Fortis Benefits Insurance Company (the "Company")
increased to $3.3 billion in 1997 compared to $3.1 billion in 1996. As of
December 31, 1997, 96% of the Company's fixed maturity securities consisted of
investment grade bonds. Mortgage loans represent 18.1% of total invested assets
compared to 18.9% in 1996. The Company believes that adequate reserves have been
established for potential delinquencies and foreclosures. The mortgage loan
portfolio consists generally of small loans on commercial properties, dispersed
throughout the United States. The Company's delinquency and foreclosure rate are
well below industry averages.
RESULTS OF OPERATIONS
REVENUES
The Company's major products are group medical, group disability and dental,
group life, and annuity and individual life insurance coverages sold through a
network of independent agents and brokers. Total group medical, group disability
and dental, group life, and annuity and individual life premiums represented
37%, 35%, 21% and 7% respectively of total premium in 1997 and 45%, 30%, 19% and
6% respectively in 1996. The decrease in group medical premium is the result of
a decision in 1996 to discontinue new sales of certain medical products.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1997, 1996, and
1995 resulted in recognition of realized gains and losses.
BENEFITS
Policyholder benefit to premium ratio decreased from 84% in 1996 to 82% in 1997,
as a result of general improved experience. The primary improvement was in the
group life business which experienced these mortality declines consistently
throughout 1997. Annuity and individual life also experienced lower mortality
experience in 1997 in addition to higher interest crediting on the Company's
steadily increasing
21
policy base of interest sensitive and investment products. Group medical, group
disability and dental, group life, and annuity and individual life benefit to
premium ratio was 77%, 82%, 76% and 124% respectively in 1997 and 78%, 84%, 86%,
and 131% respectively in 1996.
EXPENSES
The Company's general and administrative expense to premium ratio has increased
in 1997 to 22% from 19% in 1996. Enabling the application systems to be Year
2000 compliant and managed dental initiatives are the primary reasons for this
increase. Included in the managed dental initiative expense is an $13.5 million
write-off of the expenses incurred on behalf of a company that provides the
managed care services.
Commission rates have increased from the levels in 1996. This is primarily due
to changes in the mix of business by product lines as well as the change in
first year versus renewal premiums.
LIQUIDITY AND CAPITAL RESOURCES
The market value of cash, short-term investments and publicly traded bonds and
stocks is at least equal to all policyholder reserves and liabilities. The
Company's portfolio is readily marketable and convertible to cash to a degree
sufficient to provide for short-term needs. The Company consistently monitors
its liability durations and invests assets accordingly. The Company has no
material commitments or off-balance sheet financing arrangements which would
reduce sources of funds in the upcoming year.
The National Association of Insurance Commissioners has implemented risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards require
the computation of a risk-based capital amount which is then compared to a
company s actual total adjusted capital. Based upon current calculation using
these risk-based capital standards, the Company's percentage of total adjusted
capital is in excess of ratios which would require regulatory attention.
The Company's fixed maturity investments consisted of 96% investment grade bonds
as of December 31, 1998 and the Company does not expect this percentage to
change significantly in the future.
MARKET RISK
Interest rate risk is the Company's primary market risk exposure. Substantial
and sustained increases and decreases in market interest rates can affect the
profitability of insurance products and market value of investments. The yield
realized on new investments generally increases or decreases in direct
relationship with interest rate changes. The market value of the Company's fixed
maturity and mortgage loan portfolios generally increases when interest rates
decrease, and decreases when interest rates increase.
Interest rate risk is monitored and controlled through asset/liability
management. As part of the risk management process, different economic scenarios
are modeled, including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet projected
liability cash flows. A major component of the Company's asset/liability
management program is structuring the investment portfolio with cash flow
characteristics consistent with the cash flow characteristics of the Company's
insurance liabilities.
The Company uses computer models to perform simulations of the cash flow
generated from existing insurance policies under various interest rate
scenarios. Information from these models is used in the determination of
interest crediting strategies and investment strategies. The asset/liability
management discipline includes strategies to minimize exposure to loss as market
interest rates change. On the basis of these analyses, management believes there
is no material solvency risk to the Company with respect to interest rate
movements up or down of 100 basis points from year end levels.
Equity market risk exposure is not significant. Equity investments in the
general account are not material enough to threaten solvency and contractowners
bear the investment risk related to the variable products. Therefore, the risks
associated with the investments supporting the variable separate accounts are
assumed by contractowners, not by the Company. The Company provides certain
minimum death benefits that depend on the performance of the variable separate
accounts. Currently the majority of these death benefit risks are reinsured
which then protects the Company from adverse mortality experience and prolonged
capital market decline.
VOTING PRIVILEGES
In accordance with our view of current applicable law, we will vote shares of
each of the portfolios attributable to a contract at regular and special
meetings of the shareholders of the portfolios. We will vote those shares in
proportion to instructions we receive from the persons having the voting
interest in the contract as of the record date for the corresponding portfolio
shareholders meeting. Owners have the voting interest during the Accumulation
Period, persons receiving annuity payments have the voting interest during the
Annuity Period, and beneficiaries have the voting interest after the death of
the Annuitant or owner. However, if the Investment Company Act of 1940 or any
rules thereunder should be amended or if the present interpretation thereof
should change, and as a result we determine that we are permitted to vote shares
of the portfolios in our own right, we may elect to do so.
We determine the number of shares of a portfolio attributable to a contract as
follows:
- During the Accumulation Period, we divide the amount of contract value in
a subaccount by the net asset value of one share of the portfolio
corresponding to that subaccount. We make this calculation as of the
record date for the applicable portfolio.
- During the Annuity Period, or after the death of the Annuitant or owner,
we make a similar calculation. However, for subaccount value we use the
liability for future variable annuity payments allocable to that
subaccount as of the record date for the applicable portfolio. We
calculate the liability for future variable annuity payments on the basis
of the following on the record date:
- mortality assumptions,
22
- the assumed interest rate used in determining the number of Annuity
Units under the contract, and
- the applicable Annuity Unit value
During the Annuity Period, the number of votes attributable to a contract will
generally decrease since funds set aside to make the annuity payments will
decrease.
We will vote shares for which we have not received timely instructions, and any
shares attributable to excess amounts we have accumulated in the related
subaccount, in proportion to the voting instructions which we receive for all
contracts and other variable annuity contracts participating in a portfolio. To
the extent that we or any affiliated company holds any shares of a portfolio,
those shares will be voted in the same proportion as instructions for that
portfolio from all our policy holders holding voting interests in that
portfolio. Shares held by separate accounts other than the Variable Account will
in general be voted in accordance with instructions of owners in such other
separate accounts. This diminishes the relative voting influence of the
contracts.
Each person having a voting interest in a subaccount of the Variable Account
will receive proxy material, reports and other materials relating to the
appropriate portfolio. Under the procedures described above, these persons may
give instructions regarding:
- the election of the Board of Directors of the portfolios,
- ratification of the selection of a portfolio's independent auditors,
- the approval of the investment managers of a portfolio,
- changes in fundamental investment policies of a portfolio, and
- all other matters that are put to a vote of portfolio shareholders
LEGAL MATTERS
David A. Peterson, Esquire, Vice President and Assistant General Counsel with
our legal department has passed on the legality of the contracts described in
this prospectus. Messrs. Freedman, Levy, Kroll & Simonds, Washington, D.C., have
advised Fortis Benefits on certain federal securities law matters.
YEAR 2000 ISSUES
At Fortis Benefits, we use computer systems to process policy transactions and
valuations. We need to adjust these computer systems so that we may continue to
administer policies after the Year 2000. Fortis Benefits is devoting all
resources necessary to make these systems modifications, and we expect that the
necessary changes will be completed on time, with no disruption to our policy
servicing operations. However, as with most system conversion projects, risks
and uncertainties exist. In part, this is due to our necessary reliance on third
party vendors. Nonperformance by any of these entities, or other unforeseen
circumstances, could have a material adverse impact on our ability to service
policies. As such, we are closely monitoring these entities to avoid any
unforeseen circumstances. See the Note entitled "Year 2000" in the Fortis
Benefits Financial Statements.
OTHER INFORMATION
We have filed Registration Statements with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
contracts discussed in this prospectus. We have not included in the prospectus
all of the information set forth in the Registration Statement, amendments, and
exhibits thereto. We intend statements contained in this prospectus about the
content of the contracts and other legal instruments to be summaries. For a
complete statement of the terms of these documents, you should refer to the
instruments filed with the Securities and Exchange Commission.
A Statement of Additional Information is available upon request. Its contents
are as follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Fortis Benefits and the Variable Account..............................
Calculation of Annuity Payments.......................................
Postponement of Payments..............................................
Services..............................................................
- -Safekeeping of Variable Account Assets...............................
- -Experts..............................................................
- -Principal Underwriter................................................
Taxation Under Certain Retirement Plans...............................
Withholding...........................................................
Other Information.....................................................
Variable Account Financial Statements.................................
APPENDIX A--Perfomance Information....................................
FORTIS BENEFITS FINANCIAL STATEMENTS
The financial statements of Fortis Benefits that are included in this prospectus
should be considered primarily as bearing on our ability to meet our obligations
under the contracts. The contracts are not entitled to participate in our
earnings, dividends or surplus.
23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying balance sheets of Fortis Benefits Insurance
Company, an indirect, wholly-owned subsidiary of Fortis (B) and Fortis (NL)
N.V., as of December 31, 1998 and 1997, and the related statements of income,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
February 19, 1999
Minneapolis, MN
F-1
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
-------------------------
1998 1997
----------- -----------
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost
1998--$2,315,904; 1997--$2,325,589)...................... $ 2,402,343 $ 2,415,915
Equity securities, at fair value (cost 1998--$141,947;
1997--$88,719)........................................... 157,851 109,832
Mortgage loans on real estate, less allowance for possible
losses (1998 and 1997--$11,085).......................... 610,131 602,064
Policy loans.............................................. 74,950 68,566
Short-term investments.................................... 31,868 70,537
Real estate and other investments......................... 56,297 55,035
----------- -----------
3,333,440 3,321,949
Cash and cash equivalents................................... 668 9,901
Receivables:
Uncollected premiums...................................... 61,883 74,220
Reinsurance recoverable on unpaid and paid losses......... 14,853 13,852
Other..................................................... 17,641 19,762
----------- -----------
94,377 107,834
Accrued investment income................................... 42,831 47,376
Deferred policy acquisition costs........................... 331,938 291,742
Property and equipment at cost, less accumulated
depreciation............................................... 30,712 42,773
Deferred federal income taxes............................... 17,904 15,037
Other assets................................................ 3,923 4,250
Assets held in separate accounts............................ 3,742,403 2,978,622
----------- -----------
TOTAL ASSETS................................................ $ 7,598,196 $ 6,819,484
----------- -----------
----------- -----------
See accompanying notes.
F-2
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
-------------------------
1998 1997
----------- -----------
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance.............................. $ 450,776 $ 449,017
Interest sensitive and investment products.............. 1,238,125 1,264,227
Accident and health..................................... 861,334 792,249
----------- -----------
2,550,235 2,505,493
Unearned revenues......................................... 13,393 10,653
Other policy claims and benefits payable.................. 255,350 260,596
Policyholder dividends payable............................ 8,189 8,197
----------- -----------
2,827,167 2,784,939
Debt...................................................... 20,141 26,433
Accrued expenses.......................................... 57,860 49,909
Current income taxes payable.............................. 4,168 10,549
Other liabilities......................................... 86,226 113,222
Due to affiliates......................................... 9,479 6,925
Liabilities related to separate accounts.................. 3,707,687 2,947,401
----------- -----------
TOTAL POLICY RESERVES AND LIABILITIES....................... 6,712,728 5,939,378
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common Stock, $5 par value:
Authorized, issued and outstanding shares--1,000,000.... 5,000 5,000
Additional paid-in capital................................ 468,000 468,000
Retained earnings......................................... 344,605 332,723
Accumulated other comprehensive income.................... 67,863 74,383
----------- -----------
TOTAL SHAREHOLDER'S EQUITY.................................. 885,468 880,106
----------- -----------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S
EQUITY..................................................... $ 7,598,196 $ 6,819,484
----------- -----------
----------- -----------
See accompanying notes.
F-3
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES
Insurance operations:
Traditional life insurance premiums........................................ $ 260,567 $ 269,540 $ 258,496
Interest sensitive and investment product policy charges................... 85,551 77,429 63,336
Accident and health insurance premiums..................................... 953,652 891,037 974,046
--------- --------- ---------
1,299,770 1,238,006 1,295,878
Net investment income........................................................ 234,043 228,724 206,023
Net realized gains on investments............................................ 52,404 41,101 25,731
Other income................................................................. 44,671 36,458 31,725
--------- --------- ---------
TOTAL REVENUES............................................................. 1,630,888 1,544,289 1,559,357
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance................................................. 189,337 204,497 220,227
Interest sensitive investment products..................................... 96,178 103,077 90,358
Accident and health claims................................................. 798,036 707,113 778,439
--------- --------- ---------
1,083,551 1,014,687 1,089,024
Policyholder dividends......................................................... 3,486 2,935 4,169
Amortization of deferred policy acquisition costs.............................. 33,365 43,931 39,325
Insurance commissions.......................................................... 118,710 107,378 94,723
General and administrative expenses............................................ 299,492 273,128 242,825
--------- --------- ---------
TOTAL BENEFITS AND EXPENSES................................................ 1,538,604 1,442,059 1,470,066
--------- --------- ---------
Income before federal income taxes............................................. 92,284 102,230 89,291
Federal income taxes........................................................... 30,402 35,120 31,099
--------- --------- ---------
NET INCOME..................................................................... $ 61,882 $ 67,110 $ 58,192
--------- --------- ---------
--------- --------- ---------
See accompanying notes.
F-4
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME
------------ ------------ ------------ ------------- ---------------
Balance, January 1, 1996........................ $ 711,098 $ 5,000 $408,000 $207,421 $ 90,677
Comprehensive income (loss):
Net income.................................. 58,192 -- -- 58,192 --
Change in unrealized gains (losses) on
investments, net........................... (48,617) -- -- -- (48,617)
------------
Total Comprehensive income (loss)............. 9,575
Additional paid-in capital.................... 60,000 -- 60,000 -- --
------------ ------ ------------ ------------- -------
Balance, December 31, 1996...................... 780,673 5,000 468,000 265,613 42,060
Comprehensive income:
Net income.................................. 67,110 -- -- 67,110 --
Change in unrealized gains (losses) on
investments, net........................... 32,323 -- -- -- 32,323
------------ ------ ------------ ------------- -------
Total Comprehensive income.................... 99,433
------------
Balance, December 31, 1997...................... 880,106 5,000 468,000 332,723 74,383
Comprehensive income (loss):
Net income.................................. 61,882 -- -- 61,882 --
Change in unrealized gains (losses) on
investments, net........................... (6,520) -- -- -- (6,520)
------------
Total Comprehensive income (loss)............. 55,362
Dividend...................................... (50,000) -- -- (50,000) --
------------ ------ ------------ ------------- -------
Balance, December 31, 1998...................... $ 885,468 $ 5,000 $468,000 $344,605 $ 67,863
------------ ------ ------------ ------------- -------
------------ ------ ------------ ------------- -------
See accompanying notes.
F-5
STATEMENTS OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
OPERATING ACTIVITIES
Net income.................................................................... $ 61,882 $ 67,110 $ 58,192
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase (decrease) in future policy benefit reserves for traditional,
interest sensitive and acc and health policies............................. 106,135 (2,496) 26,193
(Decrease) increase in other policy claims and benefits and policyholder
dividends payable.......................................................... (2,514) 68,070 18,638
Provision for deferred federal income taxes................................. 417 (6,449) (1,094)
(Decrease) increase in income taxes payable................................. (6,381) (6,875) 12,049
Amortization of deferred policy acquisition costs........................... 33,365 43,931 39,325
Policy acquisition costs deferred........................................... (73,147) (69,694) (66,515)
Provision for mortgage loan losses.......................................... -- 1,388 1,344
Provision for depreciation.................................................. 12,409 14,351 17,312
Write-off of investment..................................................... -- 3,000 --
Amortization of investment (discounts) premiums, net........................ (3,200) (466) 1,821
Change in receivables, accrued investment income, unearned premiums, accrued
expenses and other liabilities............................................. (4,455) (2,720) 38,614
Net realized gains on investments........................................... (52,404) (41,101) (25,731)
Other....................................................................... 169 (12,496) (261)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 72,276 55,553 119,887
INVESTING ACTIVITIES
Purchases of fixed maturity investments....................................... (2,380,511) (3,611,770) (2,778,352)
Sales and repayments of fixed maturity investments............................ 2,428,207 3,378,898 2,652,887
Decrease (increase) in short-term investments................................. 38,669 112,280 (29,318)
Purchases of other investments................................................ (408,998) (209,771) (210,182)
Sales of other investments.................................................... 352,873 205,084 163,569
Purchases of property and equipment........................................... (356) (4,242) (10,992)
Other......................................................................... -- (617) --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..................... 29,884 (130,138) (212,388)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received..................................................... 215,693 200,760 128,446
Surrenders and death benefits............................................... (326,457) (190,361) (125,274)
Interest credited to policyholders.......................................... 49,371 53,613 49,802
Dividend...................................................................... (50,000) -- --
Additional paid-in capital from shareholder................................... -- -- 60,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..................... (111,393) 64,012 112,974
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents................................ ( 9,233) (10,573) 20,473
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................... 9,901 20,474 1
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $ 668 $ 9,901 $ 20,474
----------- ----------- -----------
----------- ----------- -----------
NON CASH ACTIVITY
Investment acquired through issuance of debt.................................. $ 11,948 $ 18,100 --
----------- ----------- -----------
See accompanying notes.
F-6
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
DECEMBER 31, 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Fortis Benefits Insurance Company (the Company) is an indirect, wholly-owned
subsidiary of Fortis (B) and Fortis (NL) N.V. The Company is incorporated in
Minnesota and distributes its products in all states except New York. To date,
the majority of the Company's revenues have been derived from group employee
benefits products and the remainder from individual life and annuity products.
BASIS OF STATEMENT PRESENTATION
During 1998, the Company adopted Statement of Financial Accounting Standards
Board (SFAS) 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this SFAS had no impact on the Company's net income or
shareholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholder's equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company follows generally accepted accounting principles which differ in
certain respects from statutory accounting practices prescribed or permitted by
regulatory authorities. The more significant of these principles are:
REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance are recognized as revenues when due over
the premium-paying period. Reserves for future policy benefits are computed
using the net level method and include investment yield, mortality, withdrawal,
and other assumptions based on the Company's experience, modified as necessary
to reflect anticipated trends and to include provisions for possible unfavorable
deviations.
Revenues for interest sensitive and investment products consist of charges
assessed against policy account balances during the period for the cost of
insurance, policy administration, and surrender charges. Future policy benefit
reserves are computed under the retrospective deposit method and consist of
policy account balances before applicable surrender charges. Policy benefits
charged to expense during the period include amounts paid in excess of policy
account balances and interest credited to policy account balances. Interest
crediting rates for universal life and investment products ranged from 2.5% to
8.75% in 1998, 1997 and 1996.
Premiums for accident and health insurance products, including medical, long and
short-term disability and dental insurance products, are recognized as revenues
ratably over the contract period in proportion to the risk insured. Reserves for
future disability benefits are based on the 1964 Commissioners Disability Table
at 6% interest. Calculated reserves are modified based on the Company's actual
experience.
CLAIMS AND BENEFITS PAYABLE
Other policy claims and benefits payable for reported and incurred but not
reported claims and related claims adjustment expenses are determined using
case-basis estimates and past experience. The methods of making such estimates
and establishing the related liabilities are continually reviewed and updated.
Any adjustments resulting therefrom are reflected in income currently.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are directly related to
the production of new business, are deferred to the extent recoverable and
amortized. For traditional life insurance and long-term care products (included
as accident and health products), such costs are amortized over the premium
paying period. For interest sensitive and investment products, such costs are
amortized in relation to expected future gross profits. For accident and health
(excluding long-term care) and group life insurance products, these costs
represent the present value at the acquisition of these lines in the October 1,
1991 purchase (see Note 2) of future profits which are amortized against the
expected premium revenues of the lines acquired. Estimation of future gross
profits requires significant management judgment and are reviewed periodically.
As excess amounts of deferred costs over future premiums or gross profits are
identified, such excess amounts are expensed.
INVESTMENTS
The Company's investment strategy is developed based on many factors including
insurance liability matching, rate of return, maturity, credit risk, tax
considerations and regulatory requirements.
All fixed maturity investments and all marketable equity securities are
classified as available-for-sale and carried at fair value.
Changes in fair values of available for sale securities, after related deferred
income taxes and after adjustment for the changes in pattern of amortization of
deferred policy acquisition costs and participating policyholder dividends are
reported directly in shareholder's equity as accumulated other comprehensive
income and, accordingly, have no effect on net income. The unrealized
appreciation or depreciation is net of deferred policy acquisition cost
amortization and taxes that would have been required as a charge or credit to
income had such unrealized amounts been realized.
F-7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Mortgage loans constitute first liens on commercial real estate and other income
producing properties. The insurance statutes in Minnesota generally require that
the initial principal loaned not exceed 80% of the appraised value of the
property securing the loan. The Company's policy fully complies with this
statute. Mortgage loans on real estate are reported at unpaid balance, adjusted
for amortization of premium or discount, less allowance for possible losses. The
change in the allowance for possible losses is recorded with realized gains and
losses on investments.
Policy loans are reported at their unpaid balance. Short term investments are at
cost which approximates fair value.
Real estate and other investments consists principally of property acquired in
satisfaction of debt and limited partnerships, respectively. Real estate is
recorded at cost less allowances for depreciation. The Company provides for
depreciation on a straight-line basis over the estimated useful lives. Other
investments are accounted for using the equity basis of accounting.
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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation. The
Company provides for depreciation principally on the straight-line method over
the estimated useful lives of the related property.
INCOME TAXES
Income taxes have been provided using the liability method. Deferred tax assets
and liabilities are determined based on the temporary differences between the
financial reporting and the tax bases and are measured using the enacted tax
rates.
SEPARATE ACCOUNTS
Revenues and expenses related to the separate account assets and liabilities are
excluded from the amounts reported in the accompanying statements of operations.
Assets and liabilities associated with the separate accounts relate to deposits
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 and represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners.
The Company receives mortality and expense risk fees from the separate accounts.
The Company also deducts monthly cost of insurance charges, and receives minimum
death benefit guarantee fees and issue and administrative fees from the variable
life insurance separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
GUARANTY FUND ASSESSMENTS
There are a number of insurance companies that are currently under regulatory
supervision. This may result in future assessments by state guaranty fund
associations to cover losses to policyholders of insolvent or rehabilitated
companies. These assessments can be partially recovered through a reduction in
future premium taxes in some states. The Company believes it has adequately
provided for the impact of future assessments relating to current insolvencies.
STATEMENTS OF CASH FLOWS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost which approximates fair value.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation.
2. ACQUIRED BUSINESS
In 1991, the Company purchased certain assets and assumed certain
liabilities from The Mutual Benefit Life Insurance Company in Rehabilitation
(MBL). The seller transferred to the Company, the assets and liabilities
relating to the group life, accident and health, disability and dental insurance
business of MBL. The acquisition was accounted for as a purchase. The original
purchase price of the acquisition was $318,000,000. Subsequent additional
payments of $20,850,000 were made in 1994. These additional payments, as well as
$126,515,000 of the original purchase price represent the estimated present
value of future profits on the lines of business acquired at the date of
acquisition and have been accounted for as deferred policy acquisition costs
(see Note 4).
F-8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the available-for-sale securities (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- --------- --------- -----------
December 31, 1998
Fixed maturities:
Governments.................................. $ 321,047 $ 5,994 $ 436 $ 326,605
Public utilities............................. 190,792 7,769 1,704 196,857
Industrial and miscellaneous................. 1,723,183 79,137 6,451 1,795,869
Other........................................ 80,882 2,181 51 83,012
----------- --------- --------- -----------
Total fixed maturities....................... 2,315,904 95,081 8,642 2,402,343
Equity securities............................ 141,947 18,238 2,334 157,851
----------- --------- --------- -----------
Total...................................... $ 2,457,851 $113,319 $ 10,976 $ 2,560,194
----------- --------- --------- -----------
----------- --------- --------- -----------
December 31, 1997
Fixed maturities:
Governments.................................. $ 228,856 $ 8,698 $ 30 $ 237,524
Public utilities............................. 121,128 4,217 13 125,332
Industrial and miscellaneous................. 1,932,894 77,442 1,625 2,008,711
Other........................................ 42,711 1,637 -- 44,348
----------- --------- --------- -----------
Total fixed maturities....................... 2,325,589 91,994 1,668 2,415,915
Equity securities............................ 88,719 24,769 3,656 109,832
----------- --------- --------- -----------
Total...................................... $ 2,414,308 $116,763 $ 5,324 $ 2,525,747
----------- --------- --------- -----------
----------- --------- --------- -----------
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 1998, by contractual maturity, are shown below (in
thousands).
AMORTIZED FAIR
COST VALUE
----------- -----------
Due in one year or less............................................... $ 89,349 $ 89,935
Due after one year through five years................................. 759,046 775,131
Due after five years through ten years................................ 614,280 640,042
Due after ten years................................................... 853,229 897,235
----------- -----------
Total................................................................. $ 2,315,904 $ 2,402,343
----------- -----------
----------- -----------
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
MORTGAGE LOANS
The Company has issued commercial mortgage loans on properties located
throughout the United States. Approximately 36% and 37% of outstanding principal
is concentrated in the states of New York, California and Florida, at December
31, 1998 and 1997, respectively. Loan commitments outstanding totaled
$11,590,000 at December 31, 1998.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $19,978,000 and $2,548,000 at
December 31, 1998 and 1997, respectively, on deposit with various governmental
authorities as required by law.
INVESTMENT IN MANAGED DENTAL INITIATIVE
In 1997, the Company acquired a 99% ownership in a managed dental initiative
called Dental Health Alliance, Inc. (DHA). Based on an analysis of future DHA
profitability, the entire investment of $8,132,000 was written-off at December
31, 1997.
F-9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS (CONTINUED)
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) on investments recorded in
accumulated other comprehensive income for the year ended December 31, are set
forth below (in thousands):
TAX
BEFORE-TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
----------- ----------- -----------
December 31, 1998
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ 32,614 $ (11,562) $ 21,052
Decrease (increase) in amortization of deferred policy
acquisition costses..................................... 414 (145) 269
Reclassification adjustment for gains realized in net
income.................................................. (42,832) 14,991 (27,841)
----------- ----------- -----------
Other comprehensive income (loss).......................... $ (9,804) $ 3,284 $ (6,520)
----------- ----------- -----------
----------- ----------- -----------
December 31, 1997
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ 93,826 $ (33,796) $ 60,030
Decrease (increase) in amortization of deferred policy
acquisition costs....................................... (2,096) 771 (1,325)
Reclassification adjustment for gains realized in net
income.................................................. (40,587) 14,205 (26,382)
----------- ----------- -----------
Other comprehensive income................................. $ 51,143 $ (18,820) $ 32,323
----------- ----------- -----------
----------- ----------- -----------
December 31, 1996
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ (61,450) $ 24,823 $ (36,627)
Decrease (increase) in amortization of deferred policy
acquisition costs....................................... 3,376 (1,316) 2,060
Reclassification adjustment for gains realized in net
income.................................................. (21,615) 7,565 (14,050)
----------- ----------- -----------
Other comprehensive loss................................... $ (79,689) $ 31,072 $ (48,617)
----------- ----------- -----------
----------- ----------- -----------
NET INVESTMENT INCOME AND NET REALIZED GAINS ON INVESTMENTS
Major categories of net investment income and realized gains on investments for
each year were as follows (in thousands):
1998 1997 1996
--------- --------- ---------
NET INVESTMENT INCOME
Fixed maturities................................................ $ 160,163 $ 160,444 $ 141,973
Equity securities............................................... 8,656 9,306 6,682
Mortgage loans on real estate................................... 57,031 54,662 52,949
Policy loans.................................................... 4,653 4,144 3,195
Short-term investments.......................................... 1,701 2,851 5,175
Real estate and other investments............................... 8,194 4,635 5,358
--------- --------- ---------
240,398 236,042 215,332
Expenses........................................................ (6,355) (7,318) (9,309)
--------- --------- ---------
$ 234,043 $ 228,724 $ 206,023
--------- --------- ---------
--------- --------- ---------
NET REALIZED GAINS ON INVESTMENTS
Fixed maturities................................................ $ 34,320 $ 13,827 $ 3,334
Equity securities............................................... 8,512 26,760 18,281
Mortgage loans on real estate................................... (198) 301 (144)
Short-term investments.......................................... 5 -- 57
Real estate and other investments............................... 9,765 213 4,203
--------- --------- ---------
$ 52,404 $ 41,101 $ 25,731
--------- --------- ---------
--------- --------- ---------
Proceeds from sales of investments in fixed maturities were $2,460,316,000,
$3,360,682,000 and $2,652,887,000 in 1998, 1997 and 1996, respectively. Gross
gains of $44,360,000, $30,860,000 and $28,606,000 and gross losses of
$10,040,000, $17,033,000 and $25,272,000 were realized on the sales in 1998,
1997 and 1996, respectively.
F-10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
4. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows
(in thousands):
INTEREST
SENSITIVE AND ACCIDENT
TRADITIONAL INVESTMENT AND
LIFE PRODUCTS HEALTH TOTAL
----------- --------------- ----------- ---------
Balance January 1, 1997..................... $ 33,157 $ 221,036 $ 13,882 $ 268,075
Acquisition costs deferred.................. -- 69,694 -- 69,694
Acquisition costs amortized................. (10,988) (24,251) (8,692) (43,931)
Increased amortization of deferred
acquisition costs from unrealized gains on
available-for-sale securities.............. -- (2,096) -- (2,096)
----------- --------------- ----------- ---------
Balance, December 31, 1997.................. 22,169 264,383 5,190 291,742
Acquisition costs deferred.................. -- 69,921 3,226 73,147
Acquisition costs amortized................. (7,609) (20,256) (5,500) (33,365)
Decreased amortization of deferred
acquisition costs from unrealized gains on
available-for-sale securities.............. -- 414 -- 414
----------- --------------- ----------- ---------
Balance, December 31, 1998.................. $ 14,560 $ 314,462 $ 2,916 $ 331,938
----------- --------------- ----------- ---------
----------- --------------- ----------- ---------
Included within total deferred policy acquisition costs at December 31, 1997 is
$10,434,000 of present value of future profits (PVP) resulting from acquisitions
accounted for as a purchase. All remaining PVP was amortized in 1998.
During 1998, 1997 and 1996, the Company sold portions of its investment
portfolio and in accordance with FASB Statement 97, the recognition of the
realized net capital gains resulted in additional amortization of deferred
acquisition costs of $3,357,000, $732,000 and $1,894,000, respectively.
5. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year follows (in
thousands):
1998 1997
--------- ---------
Land..................................................................... $ 1,900 $ 1,900
Building and improvements................................................ 24,319 24,148
Furniture and equipment.................................................. 87,714 87,537
--------- ---------
113,933 113,585
Less accumulated depreciation............................................ (83,221) (70,812)
--------- ---------
Net property and equipment............................................... $ 30,712 $ 42,773
--------- ---------
--------- ---------
6. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims is
summarized as follows (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
Balance as of January 1, net of reinsurance recoverables....... $ 988,036 $ 947,711 $ 928,832
Add: Incurred losses related to:
Current year................................................. 826,009 773,316 865,907
Prior years.................................................. (27,973) (59,634) (64,094)
--------- --------- ---------
Total incurred losses...................................... 798,036 713,682 801,813
Deduct: Paid losses related to:
Current year................................................. 469,881 437,405 549,144
Prior years.................................................. 254,308 235,952 233,790
--------- --------- ---------
Total paid losses.......................................... 724,189 673,357 782,934
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables..... $1,061,883 $ 988,036 $ 947,711
--------- --------- ---------
--------- --------- ---------
The table above compares to the amounts reported on the balance sheet in the
following respects: (1) the table above is presented net of ceded reinsurance
and the accident and health reserves reported on the balance sheet are gross of
ceded reinsurance; and (2) the table above includes accident and health benefits
payable which are included with other policy claims and benefits payable
reported on the balance sheet.
The liability for unpaid accident and health claims includes $915,368,000,
$854,940,000 and $805,510,000 of total disability income reserves as of December
31, 1998, 1997 and 1996, respectively, which were discounted for anticipated
interest earnings assuming a 6.0% interest rate.
F-11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
6. ACCIDENT AND HEALTH RESERVES (CONTINUED)
In each of the years presented above, the accident and health insurance line of
business experienced overall favorable development on claims reserves
established as of the previous year end. The favorable development was a result
of lower medical costs due to less uncertainty in the health business and a
reduction of loss reserves due to lower than anticipated inflation in medical
costs.
7. FEDERAL INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of Fortis, Inc. (Fortis). 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.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial statement purposes and
for income tax purposes.
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
--------- ---------
Deferred tax assets:
Separate account assets/liabilities.................................... $ 87,300 $ 56,620
Reserves............................................................... 27,586 43,143
Claims and benefits payable............................................ 8,089 15,238
Accrued liabilities.................................................... 10,113 8,785
Investments............................................................ 3,861 4,795
Other.................................................................. 2,723 3,042
--------- ---------
Total deferred tax assets............................................ 139,672 131,623
Deferred tax liabilities:
Deferred policy acquisition costs...................................... 82,031 72,369
Unrealized gains....................................................... 35,591 39,015
Fixed assets........................................................... 3,150 3,914
Investments............................................................ 982 1,220
Other.................................................................. 14 68
--------- ---------
Total deferred tax liabilities....................................... 121,768 116,586
--------- ---------
Net deferred tax asset............................................... $ 17,904 $ 15,037
--------- ---------
--------- ---------
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset 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.
The Company's tax expense (benefit) for the year ended December 31 is shown as
follows (in thousands):
1998 1997 1996
--------- --------- ---------
Current............................................................ $ 30,232 $ 41,569 $ 32,193
Deferred........................................................... 170 (6,449) (1,094)
--------- --------- ---------
$ 30,402 $ 35,120 $ 31,099
--------- --------- ---------
--------- --------- ---------
Federal income tax payments and refunds resulted in net payments of $36,367,000,
$58,859,000 and $16,434,000 in 1998, 1997 and 1996, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
1998 1997 1996
--- --- ---
Statutory income tax rate................................................ 35.0% 35.0% 35.0%
Other, net............................................................... (2.1) (.6) (.2)
--- --- ---
32.9% 34.4% 34.8%
--- --- ---
--- --- ---
F-12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
8. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets at December 31 were as follows (in thousands):
1998 1997
---------- ----------
Premium and annuity considerations for the variable annuity products
and variable universal life products for which the contract holder,
rather than the Company, bears the investment risk................... $3,707,687 $2,947,401
Assets of the separate accounts owned by the Company, at fair value... 34,716 31,221
---------- ----------
$3,742,403 $2,978,622
---------- ----------
---------- ----------
9. REINSURANCE
In the second quarter of 1996, First Fortis Life Insurance Company (First
Fortis), an affiliate, received approval from the New York State Insurance
Department for a reinsurance agreement with the Company. The agreement, which
became effective as of January 1, 1996, decreased First Fortis' long-term
disability reinsurance retention from a $10,000 net monthly benefit to a $2,000
net monthly benefit for claims incurred on and after January 1, 1996. The
Company has assumed $5,601,000, $5,742,000 and $6,144,000 of premium from First
Fortis in 1998, 1997 and 1996, respectively. The Company has assumed $9,315,000,
$5,452,000 and $3,599,000 of reserves in 1998, 1997 and 1996, respectively, from
First Fortis.
The maximum amount that the Company retains on any one life is $500,000 of life
insurance including accidental death. Amounts in excess of $500,000 are
reinsured with other life insurance companies on a yearly renewable term basis.
Ceded reinsurance premiums for the year ended December 31 were as follows (in
thousands):
1998 1997 1996
--------- --------- ---------
Life insurance..................................................... $ 6,983 $ 8,159 $ 8,680
Accident and health insurance...................................... 13,862 13,712 6,793
--------- --------- ---------
$ 20,845 $ 21,871 $ 15,473
--------- --------- ---------
--------- --------- ---------
Recoveries under reinsurance contracts for the year ended December 31 were as
follows (in thousands):
1998 1997 1996
--------- --------- ---------
Life insurance..................................................... $ 4,549 $ 2,973 $ 7,225
Accident and health insurance...................................... 9,465 14,781 5,993
--------- --------- ---------
$ 14,014 $ 17,754 $ 13,218
--------- --------- ---------
--------- --------- ---------
Reinsurance ceded would become a liability of the Company in the event the
reinsurers are unable to meet the obligations assumed under the reinsurance
agreement. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers.
10. DIVIDEND RESTRICTIONS
Dividend distributions to parent are restricted as to amount by state
regulatory requirements. The Company had $47,341,000 free from such restrictions
as December 31, 1998. Distributions in excess of this amount would require
regulatory approval.
11. REGULATORY ACCOUNTING REQUIREMENTS
Statutory-basis financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Minnesota Department of
Commerce. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. While the NAIC
has recently completed a project to codify statutory accounting practices, which
may result in changes to the accounting practices that insurance enterprises use
to prepare their statutory-basis financial statements, adoption by Minnesota is
not anticipated before 2001.
Insurance enterprises are required by State Insurance Departments to adhere to
minimum risk-based capital ("RBC") requirements developed by
the NAIC. The Company exceeds the minimum RBC requirements.
F-13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
11. REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED)
Reconciliations of net income and shareholder's equity on the basis of statutory
accounting to the related amounts presented in the accompanying statements were
as follows (in thousands):
NET INCOME (LOSS) SHAREHOLDER'S EQUITY
------------------------------- --------------------
1998 1997 1996 1998 1997
--------- --------- --------- --------- ---------
Based on statutory accounting practices.... $ 14,841 $ 62,593 $ 55,046 $ 478,405 $ 528,671
Deferred policy acquisition costs.......... 39,782 25,763 27,190 331,938 291,742
Investment valuation differences........... 745 (497) (2,219) 100,165 80,245
Deferred and uncollected premiums.......... (103,982) (107,194) (4,096) (7,246) (7,453)
Policy reserves............................ 97,452 89,895 (19,873) (156,889) (150,649)
Commissions................................ -- (3,171) (1,639) -- --
Current income taxes payable............... 925 6,450 2,386 (10,920) 3,712
Deferred income taxes...................... (417) 6,449 (1,094) 17,904 (520)
Realized gains on investments.............. 356 251 2,599 -- --
Realized gains transferred to the Interest
Maintenance Reserve (IMR), net of tax..... 22,748 9,644 2,335 -- --
Amortization of IMR, net of tax............ (7,128) (6,315) (6,130) -- --
Write-off of investment.................... -- (11,705) -- -- --
Pension expense............................ 81 (4,153) -- (6,440) (6,137)
Guaranty Funds............................. -- -- 3,023 -- --
Property and equipment..................... -- -- -- 5,951 15,520
Interest maintenance reserve............... -- -- -- 68,968 53,348
Asset valuation reserve.................... -- -- -- 90,986 75,939
Mortgage loans on real estate.............. -- -- -- (20,141) --
Other, net................................. (3,521) (900) 664 (7,213) (4,312)
--------- --------- --------- --------- ---------
As reported herein......................... $ 61,882 $ 67,110 $ 58,192 $ 885,468 $ 880,106
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis and its affiliates. These
services include assistance in benefit plan administration, corporate insurance,
accounting, tax, auditing, investment and other administrative functions. The
fees paid to Fortis, Inc. for these services for years ended December 31, 1998,
1997 and 1996, were $13,077,000, $12,015,000 and $13,319,000, respectively.
During 1997 Fortis, Inc. began providing information technology services to the
Company. Information technology expenses were $55,910,000 and $28,525,000 for
years ended December 31, 1998 and 1997, respectively.
In conjunction with the marketing of its variable annuity products, the Company
paid $72,638,000, $72,105,000 and $68,616,000 in commissions to its affiliate,
Fortis Investors, Inc., for the years ended December 31, 1998, 1997 and 1996,
respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on a separate
company basis.
13. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
The fair values for fixed maturity securities and equity securities are 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.
Mortgage loans are reported at unpaid principal balance less allowances for
possible losses. The fair values of mortgage loans are estimated using
discounted cash flow analyses, using 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 amount of policy loans reported in the Balance Sheet approximates fair
value. For short-term investments, the carrying amount is a reasonable estimate
of fair value. The fair values for the Company's policy reserves under the
investment products are determined using cash surrender value. As the debt was
underwritten in 1998 and 1997, the outstanding balance is considered a
reasonable estimate of fair value. Separate account assets and liabilities are
reported at their estimated fair values in the Balance Sheet.
F-14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
13. FAIR VALUE DISCLOSURES (CONTINUED)
The fair values 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.
(IN THOUSANDS)
DECEMBER 31
-----------------------------------------------------
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
Assets:
Investments:
Securities available-for-sale:
Fixed maturities...................................... $ 2,402,343 $ 2,402,343 $ 2,415,915 $ 2,415,915
Equity securities..................................... 157,851 157,851 109,832 109,832
Mortgage loans on real estate............................. 610,131 662,984 602,064 661,055
Policy loans.............................................. 74,950 74,950 68,566 68,566
Short-term investments.................................... 31,868 31,868 70,537 70,537
Assets held in separate accounts.......................... 3,742,403 3,742,403 2,978,622 2,978,622
Liabilities:
Individual and group annuities (subject to discretionary
withdrawal).............................................. $ 923,102 $ 894,019 $ 977,495 $ 945,558
Debt...................................................... 20,141 20,141 26,433 26,433
Liabilities related to Separate Accounts.................. 3,707,687 3,707,687 2,947,401 2,947,401
14. COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. These actions have been
considered in establishing policy benefit and loss reserves. Management and its
legal counsel are of the opinion that the settlement of these actions will not
have a material adverse effect on the Company's financial position or results of
operations.
15. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company is an indirect wholly-owned subsidiary of Fortis, which sponsors
a defined benefit pension plan covering employees and certain agents who meet
eligibility requirements as to age and length of service. The benefits are based
on years of service and career compensation. Fortis' 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 approximately
$1,627,000, $1,594,000 and $1,354,000 for 1998, 1997 and 1996, respectively.
The Company participates in a contributory profit sharing plan, sponsored by
Fortis, covering employees and certain agents who meet eligibility requirements
as to age and length of service. Benefits are payable to participants on
retirement or disability and to the beneficiaries of participants in the event
of death. The first three percent of an employee's contribution is matched 200%
by the Company. The amount expensed was approximately $3,610,000, $3,926,000 and
$3,913,000 for 1998, 1997 and 1996, respectively.
In addition to retirement benefits, the Company participates in other health
care and life insurance benefit plans ("postretirement benefits") for retired
employees, sponsored by Fortis. Health care benefits, either through a
Fortis-sponsored retiree plan for retirees under age 65 or through a cost offset
for individually purchased Medigap policies for retirees over age 65, are
available to employees who retire on or after January 1, 1993, at age 55 or
older, with 15 years or more service. Life insurance, on a retiree pay all
basis, is available to those who retire on or after January 1, 1993.
Net postretirement benefit costs allocated to the Company for the years ended
December 31, 1998, 1997 and 1996 were $0, $304,000 and $290,000, respectively,
and includes the expected cost of such benefits for newly eligible or vested
employees, interest cost, gains and losses arising from differences between
actuarial assumptions and actual experience, and amortization of the transition
obligation. The Company made contributions to the plans of approximately
$(5,200), $20,000 and $8,000 in 1998, 1997 and 1996, respectively, as claims
were incurred.
F-15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
16. DEBT
A summary of debt at December 31 for each year follows (in thousands):
1998 1997
--------- ---------
Mortgage note bearing a floating interest rate of 200 basis points over
LIBOR, (5.07% at December 31, 1998 and 5.84% at December 31, 1997)
adjustable every six months, principal and interest due monthly, matures
July 2001................................................................. $ 3,088 $ 3,150
Mortgage note bearing fixed interest at 7.6% principal and interest due
monthly, matures October 2002............................................. 5,105 5,183
Mortgage note bearing fixed interest at 6.52%, principal and interest due
monthly, matures July 2009................................................ 5,000 --
Mortgage note bearing fixed interest at 7.14%, principal and interest due
monthly, matures April 2008............................................... 6,948 --
Mortgage note bearing a floating interest rate of 225 basis points over
LIBOR..................................................................... -- 18,100
--------- ---------
$ 20,141 $ 26,433
--------- ---------
--------- ---------
Maturities of the debt as of December 31, 1998 are as follows (in thousands):
1998............................................................................... $ 280
1999............................................................................... 344
2000............................................................................... 3,328
2001............................................................................... 5,030
2002............................................................................... 251
Thereafter......................................................................... 10,908
---------
$ 20,141
---------
---------
These mortgage notes are collateralized by certain real estate investments
included in real estate and other investments in the balance sheet.
Interest expense paid by the Company during 1998 and 1997 on this debt was
approximately $1,362,000 and $1,075,000, respectively.
17. YEAR 2000 (UNAUDITED)
INTRODUCTION. The Company relies heavily on information technology ("IT")
systems to conduct its business. These IT systems include both internally
developed and vendor-supplied systems. The Company also has business
relationships with numerous entities including but not limited to financial
institutions, financial intermediaries, third party administrators and other
critical vendors as well as regulators and customers. These entities are
themselves reliant on their IT systems to conduct their businesses. Therefore,
there is a supply chain of dependency among and between all involved entities.
STATE OF READINESS. In 1997, the Fortis parent company organized a
multi-disciplinary Year 2000 Project Team ("Team"). The Company is a part of the
Team. The Team consists of employees at each subsidiary, audit, legal and
outside consultants. The Team has developed and is currently executing a
comprehensive plan designed to make the Company's IT systems Year 2000 ready.
The plan covers four stages including (i) inventory, (ii) assessment, (iii)
programming, and (iv) testing and certification. The Company has completed the
inventory stage for its internal hardware, software and telecommunications
systems (mainframe and client/server applications). The assessment process is
also complete and the Company is utilizing both internal and external resources
to reprogram or replace the systems where necessary, and testing the
applications for Year 2000 readiness. Programming, testing and certification of
these systems and applications are targeted for completion by the end of 1999.
COSTS. The cost of the Company portion of the Year 2000 project is estimated at
$27.7 million (pre-tax) and is being funded through operating cash flows. Total
Year 2000 project costs are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. Costs to upgrade and replace systems in the normal course of business
are not included in this estimate. As of December 31, 1998, approximately $15.5
million (pre-tax) had already been expensed. The Company believes that its Year
2000 project generally is on schedule.
RISKS. The Company is attempting to limit the potential impact of the Year 2000
by monitoring the progress of its own Year 2000 project and those of its
critical external relationships and by developing contingency/recovery plans.
The Company cannot guarantee that it will be able to identify and/or resolve all
of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company
or its external relationships, however, could have a material adverse effect on
the Company's results of operations, liquidity or financial condition. If the
Company's Year 2000 issues were unresolved, potential consequence would include,
among other possibilities, the inability to accurately and timely process
benefit claims, update customer's accounts, process financial transactions, bill
customers, assess exposure to risks, determine liquidity requirements or report
accurate data to management, shareholders, customers, regulators and others as
well as business interruptions or shutdowns, financial losses, harm to its
reputation, increased scrutiny by regulators and litigation related to Year 2000
issues.
CONTINGENCY PLANS. Consistent with prudent due diligence efforts, the Company
has defined contingency plans aimed at ensuring the continuity of critical
business functions before and after December 31, 1999, should there be an
unexpected system failure. The Company has developed plans that are designed to
reduce the negative impact on Fortis, and provide methods of returning to normal
operations, if failure occurs.
F-16
APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is:
1 + I n/12
( ---------) - 1
1 + J + .005
Sample Calculation 1: Positive Adjustment
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
Market Value Adjustment
1 + .08 60/12
$10,000 X [( ----------) - 1] = $234.73
1 + .07 + .005
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,234.73
Sample Calculation 2: Negative Adjustment
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
Market Value Adjustment:
1 + .08 60/12
$10,000 X [( ----------) - 1] = - $666.42
1 + .09 + .005
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,333.58
Sample Calculation 3: Negative Adjustment
Amount withdrawn or transferred $10,000
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
Market Value Adjustment:
1 + .08 60/12
$10,000 X [( ------------)] - 1] = - $114.94
1 + .0775 + .005
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,885.06
- ------------------------
* Assumed for illustrative purposes only.
A-1
APPENDIX B--EXPLANATION OF EXPENSE CALCULATIONS
The expense for a given year is calculated by multiplying the projected
beginning of the year policy value by the total expense rate. The total expense
rate is the sum of the variable account expense rate plus the total portfolio
expense rate plus the annual administrative charge rate.
The policy values are projected by assuming a single payment of $1,000 grows at
an annual rate equal to 5% reduced by the total expense rate described above.
For example, the 3 year expense for the Alliance Money Market Portfolio is
calculated as follows:
Total Variable Account Annual Expenses 0.45%
+ Total Portfolio Operating Expenses 0.68%
+ Annual Administrative Charges (see below) 0.06%
= Total Expense Rate 1.19%
The Annual Administrative Charge rate is calculated by dividing the total Annual
Contract Charges we collected in 1998 on similar contracts by the average policy
value in force in 1998 on such contracts.
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = $1000.00 X 0.0119 = $11.90
Year 2 Beginning Policy Value = $1038.10
Year 2 Expense = $1038.10 X 0.0119 = $12.35
Year 3 Beginning Policy Value = $1077.66
Year 3 Expense = $1077.66 X 0.0119 = $12.82
So the cumulative expenses for years 1-3 for the Alliance Money Market Portfolio
are equal to:
$11.90 + $12.35 + $12.82 = $37.07
B-1
APPENDIX C--PARTICIPATING PORTFOLIOS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
The Alliance Variable Products Series Fund, 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.
ALLIANCE MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE: Seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
ALLIANCE INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE: 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.
ALLIANCE PREMIER GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is a 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 of
American Century Portfolios.
AMERICAN CENTURY VP BALANCED FUND
INVESTMENT OBJECTIVE: Capital growth and current income. Seeks to achieve its
investment objective by maintaining approximately 60% of the assets in common
stocks that are considered to have better-then-average prospects for
appreciation and the remaining assets in bonds and other fixed income
securities.
AMERICAN CENTURY VP CAPITAL APPRECIATION FUND
INVESTMENT OBJECTIVE: Capital Growth. Seeks to achieve its investment objective
by investing primarily in common stocks that are considered to have
better-than-average prospects for appreciation.
FEDERATED INSURANCE SERIES
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 Advisers is the investment adviser.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
INVESTMENT OBJECTIVE: Seeks to provide current income. Under normal
circumstances, the portfolio pursues its investment objective by investing at
least 65% of the value of its total assets in securities issued or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities.
AMERICAN LEADERS FUND II
INVESTMENT OBJECTIVE: To achieve long-term growth of capital and to provide
income.
UTILITY FUND II
INVESTMENT OBJECTIVE: To achieve high current income and moderate capital
appreciation.
HIGH INCOME BOND FUND II
INVESTMENT OBJECTIVE: To seek high current income.
FORTIS SERIES FUND, INC.
The Fortis Series Fund, Inc. is an open-end series investment fund. It was
incorporated under Minnesota law in 1986. Fortis Advisers, Inc. serves as the
fund's manager.
FORTIS S&P 500 INDEX SERIES
INVESTMENT OBJECTIVE: Seeks to replicate the total return of the Standard &
Poor's 500 Composite Stock Price Index primarily through investment in equity
securities.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The INVESCO Variable Investment Funds, Inc. is an open-end series management
investment company. It was incorporated under Maryland law on August 19, 1993.
INVESCO Funds Group, Inc. serves as the Fund's manager.
INVESCO EQUITY INCOME FUND
INVESTMENT OBJECTIVE: 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. The portfolio
normally invests at least 65% of its total assets in dividend-paying common
stocks.
INVESCO HEALTH SCIENCES FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies that develop,
produce, or distribute products or services related to health care.
INVESCO TECHNOLOGY FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of
C-1
companies in technology-related industries such as computers, communications,
video, electronics, oceanography, office and factory automation, and robotics.
LEXINGTON NATURAL RESOURCES TRUST
The Lexington Natural Resources Trust is an open-end management investment
company. It was organized as a Massachusetts business trust on October 7, 1988.
Lexington Management Corporation is the Investment Adviser of the fund.
INVESTMENT OBJECTIVE: To seek long-term growth of capital through investment
primarily in common stocks of companies that own or develop natural resources
and other basic commodities, or supply goods and services to such companies.
LEXINGTON EMERGING MARKETS FUND, INC.
The Lexington Emerging Markets Fund, Inc. is an open-end management investment
company. It was organized as a corporation under Maryland law on December 27,
1993. Lexington Management Corporation is the fund's investment adviser.
INVESTMENT OBJECTIVE: To seek long-term growth of capital primarily through
investment in equity securities of companies domiciled in, or doing business in,
emerging countries and emerging markets.
MFS VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust is an open-end management investment company. It
was organized as a business trust under the laws of the Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994. Massachusetts
Financial Services Company manages each series.
MFS EMERGING GROWTH SERIES
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital. The series'
policy is to invest primarily in common stocks of small and medium-sized
companies that are early in their life cycle but which have the potential to
become major enterprises.
MFS HIGH INCOME SERIES
INVESTMENT OBJECTIVE: Seeks high current income by investing primarily in a
professionally managed portfolio of fixed income securities, some of which may
involve equity features.
MFS GLOBAL GOVERNMENTS SERIES
INVESTMENT OBJECTIVE: Seeks to provide income and capital appreciation. The
series invests, under normal market conditions, at least 65% of its total assets
in debt obligations that are issued or guaranteed as to principal and interest
by either (i) the U.S. Government, its agencies, authorities or
instrumentalities or (ii) the governments of foreign countries (including
emerging markets). The series may also invest in corporate bonds (including
lower rated bonds commonly known as junk bonds) and mortgage-backed and
assets-backed securities.
THE MONTGOMERY FUNDS III
The Montgomery Funds III is an open-end investment company. This Delaware
business trust was organized on August 24, 1994. The trust is managed by
Montgomery Asset Management, L.P.
MONTGOMERY VARIABLE SERIES: GROWTH FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities, usually common stock, of domestic companies of all sizes.
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies in countries having economies and markets
generally considered by the World Bank or the United Nations to be emerging or
developing.
NEUBERGER & BERMAN ADVISERS MANAGERS TRUST
Neuberger & Berman Advisers Managers 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 Incorporated serves as manager of
the Fund.
NEUBERGER & BERMAN LIMITED MATURITY BOND PORTFOLIO
INVESTMENT OBJECTIVE: Seeks highest current income consistent with low risk to
principal and liquidity; and secondarily, total return. Principal investments
are short-to-intermediate term debt securities, primarily investment grade.
NEUBERGER & BERMAN PARTNERS PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital growth. Principal investments are common
stocks and other equity securities of established companies.
SAFECO RESOURCE SERIES TRUST
The SAFECO Resource Series Trust is an open-end series management investment
company. It is a Delaware business trust established by a trust instrument dated
May 13, 1993. SAFECO Asset Management Company is the fund's manager.
SAFECO EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital and reasonable current
income. The Equity Portfolio ordinarily invests principally in common stocks or
securities convertible into common stocks.
SAFECO GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital and the increased income that
ordinarily follows from such growth. The Growth Portfolio ordinarily invests in
a preponderance of its assets in common stock selected for potential
appreciation.
C-2
STRONG VARIABLE INSURANCE FUNDS, INC.
The Strong Variable Insurance Funds, Inc. is an open-end management investment
company. It was incorporated in Wisconsin. Strong Capital Management, Inc. is
the investment adviser.
THE STRONG DISCOVERY FUND II
INVESTMENT OBJECTIVE: Seeks to identify emerging investment trends and
attractive growth opportunities.
THE STRONG INTERNATIONAL STOCK FUND II
INVESTMENT OBJECTIVE: Seeks capital growth. The fund invests primarily in the
equity securities of issuers located outside of the United States.
VAN ECK WORLDWIDE INSURANCE TRUST
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 the two funds listed below.
WORLDWIDE HARD ASSETS FUND
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investing
globally, primarily in (i) precious metals, (ii) ferrous and non-ferrous metals,
(iii) oil and gas, (iv) forest products, (v) real estate, and (vi) other basic
non-agricultural commodities.
WORLDWIDE BOND FUND
INVESTMENT OBJECTIVE: Seeks high total return through a flexible policy of
investing globally, primarily in debt securities.
C-3
(This page has been left blank intentionally.)
CERTIFICATES UNDER
FLEXIBLE PREMIUM DEFERRED
COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
THE WATERHOUSE VARIABLE ANNUITY
Issued by
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
This Statement of Additional Information is not a Prospectus. It is intended
that this Statement of Additional Information be read in conjunction with the
Prospectus for certificates under flexible premium deferred combination variable
and fixed annuity contracts ("Certificates"), dated May 1, 1999. A copy of
the Prospectus may be obtained without charge from Fortis Investors, Inc.
1-800-827-5877, mailing address: P.O. Box 64272, St. Paul, MN 55164. You have
the option of receiving benefits under a Contract through Fortis Benefits'
Variable Account D or through Fortis Benefits' Guarantee Periods Fixed Account
or its General Account Fixed Account.
TABLE OF CONTENTS
Fortis Benefits and the Variable Account . . . . . . . . . . . . . . . . . . 1
Calculation of Annuity Payments. . . . . . . . . . . . . . . . . . . . . . . 2
Postponement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
- Safekeeping of Variable Account Assets . . . . . . . . . . . . . . . . . 3
- Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
- Principal Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . 4
Taxation Under Certain Retirement Plans. . . . . . . . . . . . . . . . . . . 4
Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Variable Account Financial Statements. . . . . . . . . . . . . . . . . . . . 9
Appendix A -- Performance Information. . . . . . . . . . . . . . . . . . . A-1
In order to supplement the description in the Prospectus, the following provides
additional information about the Certificates and other matters which may be of
interest to you. Terms used in this Statement of Additional Information have
the same meanings as are defined in the Prospectus under the heading "Special
Terms Used in This Prospectus."
FORTIS BENEFITS AND THE VARIABLE ACCOUNT
Fortis Benefits Life Insurance Company, the issuer of the Certificates, is a
Minnesota corporation qualified to sell life insurance and annuity contracts in
the District of Columbia and in all states except New York. Fortis Benefits is
a wholly-owned subsidiary of Fortis Insurance Company, a stock company organized
under the laws of Wisconsin, which itself is a wholly-owned subsidiary of
Fortis, Inc. Fortis, Inc. is a corporation based in New York, which manages
the United States operations of Fortis (NL) N.V. and Fortis (B).
1
Fortis (NL) N.V. has been in business since 1847 and is a publicly-traded,
multi-national insurance, real estate, and financial services group
headquartered in The Netherlands. It is one of the largest holding companies in
Europe, with subsidiary companies in twelve countries on four continents.
Fortis (NL) N.V. is the third largest insurance company in the Netherlands.
Fortis (B) is a multi-national insurance, real estate and financial services
firm that has been in business since 1824. It has subsidiary companies in eight
countries. Fortis (B) is one of the largest life insurance companies in
Belgium. Fortis (NL) N.V. and Fortis (B) have combined assets of approximately
$167 billion.
The assets allocated to the Variable Account are the exclusive property of
Fortis Benefits. Registration of the Variable Account under the Investment
Company Act of 1940 does not involve supervision of the management or investment
practices or policies of the Variable Account or of Fortis Benefits by the
Securities and Exchange Commission. Fortis Benefits may accumulate in the
Variable Account proceeds from charges under the Certificates and other amounts
in excess of the Variable Account assets representing reserves and liabilities
under Certificates and other variable annuity contracts issued by Fortis
Benefits. Fortis Benefits may from time to time transfer to its General Account
any of such excess amounts. Under certain remote circumstances the assets of
one Subaccount may not be insulated from liability associated with another
Subaccount.
Best's Insurance Reports has assigned Fortis Benefits a rating of A (Excellent)
for financial position and operating performance. Fortis Benefits has a rating
of AA from Standard & Poor's. As defined by Standard & Poor's, insurers rated
AA offer "excellent financial security." These ratings represent such rating
agencies' independent opinion of Fortis Benefits' financial strength and ability
to meet policy holder obligations, but have no relevance to the performance and
quality of the assets in Subaccounts of the Variable Account.
CALCULATION OF ANNUITY PAYMENTS
FIXED ANNUITY OPTION
The amount of each annuity payment under a Fixed Annuity Option is fixed and
guaranteed by Fortis Benefits. Monthly fixed annuity payments will start as of
the end of the Valuation Period that contains the Annuity Commencement Date. At
that time, the Contract Value , after any Market Value Adjustment, is computed
and that portion of the Contract Value which will be applied to the Fixed
Annuity Option selected is determined. The amount of the first monthly payment
under the Fixed Annuity Option selected will be at least as large as would
result from using the annuity tables contained in the Contract to apply such
amount of Contract Value to the annuity form selected. The dollar amounts of
any fixed annuity payments after the first are specified during the entire
period of annuity payments according to the provisions of the annuity form
selected.
VARIABLE ANNUITY OPTION
ANNUITY UNITS. To the extent a Variable Annuity Option has been selected, we
convert the Accumulation Units for each Subaccount of the Variable Account into
Annuity Units for each Subaccount at their values determined as of the end of
the Valuation Period which contains the Annuity Commencement Date. As of such
time, any Fixed Account Value to be applied to a Variable Annuity Option is also
converted, after any Market Value Adjustment, to Annuity Units in the
Subaccounts selected based on the then-current Annuity Unit value. The initial
number of Annuity Units in each Subaccount is determined by dividing the amount
of the initial monthly variable annuity payment (see "Variable Annuity Option --
Variable Annuity Payments," below) allocable to that Subaccount by the value of
one Annuity Unit in that Subaccount as of the time of the conversion. The
number of Annuity Units for each Subaccount will remain constant, as long as an
annuity remains in force and the allocation among the Subaccounts has not
changed.
The value of each Subaccount's Annuity Units will vary to reflect the investment
experience of the Subaccount as well as charges deducted from the Subaccount.
The value of each Subaccount's Annuity Units is equal to the prior value of the
Subaccount's Annuity Units multiplied by the net investment factor for that
Subaccount (discussed in the Prospectus under "Contract Value") for the
Valuation Period ending on that Valuation Date, with an offset for the 3%
assumed interest rate used in the annuity tables of the Contract.
2
VARIABLE ANNUITY PAYMENTS. Variable annuity payments start at the end of the
Valuation Period that contains the Annuity Commencement Date, and will vary in
amount as the related Annuity Unit values vary. The amount of the first monthly
payment is shown on the annuity tables contained in the Contract for each $1,000
of Contract Value applied to the Variable Annuity Option selected as of the end
of such Valuation Period. The first variable annuity payment is, in effect,
allocated among the Subaccounts in the same proportion as the Contract Value is
allocated among the Subaccounts upon commencement of annuity payments.
Payments after the first will vary in amount and are determined on the first
Valuation Date of each subsequent monthly period. If the monthly payment under
the annuity form selected is based on the value of Annuity Units of a single
Subaccount, the monthly payment is found by multiplying the number of the
Contract's Annuity Units for the Subaccount by the Annuity Unit value of such
Subaccount as of the first Valuation Date in each monthly period following the
Annuity Commencement Date. If the monthly payment under the Variable Annuity
Option selected is based upon the value of Annuity Units in more than one
Subaccount, this is repeated for each applicable Subaccount. The sum of these
payments is the variable annuity payment.
GENDER OF ANNUITANT
The amount of each annuity payment ordinarily will be higher for a male
Annuitant than for a female Annuitant with an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males. However, there will be no differences between male and female
Annuitants in any jurisdiction, including Montana, where such differences are
not permitted. We will also make available Certificates with no such
differences in connection with certain employer-sponsored benefit plans.
Employers should be aware that, under most such plans, Certificates that make
distinctions based on gender are prohibited by law.
POSTPONEMENT OF PAYMENTS
With respect to amounts in the Subaccounts of the Variable Account, payment of
any amount due upon a total or partial surrender, death or under an annuity
option will ordinarily be made within seven days after all documents required
for such payment are received by Fortis Benefits at its Home Office. However,
Fortis Benefits may defer the determination, application or payment of any death
benefit, transfer, partial or total surrender or annuity payment, to the extent
dependent on Accumulation or Annuity Unit Values, for any period during which
the New York Stock Exchange is closed (other than customary weekend and holiday
closings) or trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission, for any period during which any
emergency exists as a result of which it is not reasonably practicable for
Fortis Benefits to determine the investment experience for the Contract, or for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of investors.
SERVICES
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
Title to the assets of the Variable Account is held by Fortis Benefits. The
assets of the Variable Account are kept segregated and held separate and apart
from Fortis Benefits' other assets.
EXPERTS
The financial statements of Fortis Benefits Insurance Company at
December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and the statements of net assets of Fortis Benefits
Insurance Company Variable Account D at December 31, 1998 and the related
statements of changes in net assets for each of the two years in the period
ended December 31, 1998, appearing in the Prospectus, this Statement of
Additional Information and Registration Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such authority
as experts in accounting and auditing.
3
PRINCIPAL UNDERWRITER
Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the
Certificates, is a Minnesota corporation and a member of the Securities
Investors Protection Corporation. The offering of the Certificates is
continuous, and Fortis Investors does not anticipate discontinuing the offering
of the Certificates, although it reserves the right to do so. Certificates
generally will be issued for Annuitants from ages zero to ninety in all states.
TAXATION UNDER CERTAIN RETIREMENT PLANS
Federal income tax information concerning the purchase of Certificates for
specific types of retirement plans is set forth below. You should also refer to
"Federal Tax Matters" in the Prospectus. The tax information provided is not
comprehensive, and you should consult a qualified tax adviser before taking any
action in connection with a retirement plan.
SECTION 403(b) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS
OR PUBLIC EDUCATIONAL INSTITUTIONS
PURCHASE PAYMENTS. Under Section 403(b) of the Internal Revenue Code ("Code"),
payments made by certain employers (i.e., tax-exempt organizations meeting the
requirements of Section 501(c)(3) of the Code, or public educational
institutions) to purchase Certificates for their employees are excludible from
the gross income of employees to the extent that such aggregate purchase
payments do not exceed certain limitations prescribed by the Code. This is the
case whether the purchase payments are a result of voluntary salary reduction
amounts or employer contributions. Salary reduction payments are, however,
subject to FICA (social security) taxes.
TAXATION OF DISTRIBUTIONS. Distributions from a Section 403(b) tax-deferred
annuity are taxed as ordinary income to the recipient as described under
"Federal Tax Matters" in the Prospectus. Taxable distributions received before
the employee attains age 59 1/2 generally are subject to a 10% penalty tax in
addition to regular income tax. Certain distributions are excepted from this
penalty tax, including distributions following the employee's death, disability,
separation from service after age 55, separation from service at any age if the
distribution is in the form of an annuity for the life (or life expectancy) of
the employee (or the employee and Beneficiary) and distributions not in excess
of deductible medical expenses. In addition, no distributions of voluntary
salary reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death , disability or hardship. (Hardship distributions will be
limited to the lesser of the amount of the hardship or the amount of salary
reduction contributions, exclusive of earnings thereon.)
REQUIRED DISTRIBUTIONS. Generally, distributions from Section 403(b) annuities
must commence not later than April 1 of the calendar year following the calendar
year in which the employee attains age 70 1/2, and such distributions must be
made over a period that does not exceed the life expectancy of the employee (or
the employee and Beneficiary). A penalty tax of 50% would be imposed on any
amount by which the minimum required distribution in any year exceeded the
amount actually distributed in that year. In addition, in the event that the
employee dies before his or her entire interest in the Contract has been
distributed, the employee's entire interest must be distributed in accordance
with rules similar to those applicable upon the death of the Participant or
Payee in the case of a Non-Qualified Contract, as described in the Prospectus.
Certain of these and other provisions are incorporated in a special endorsement
attached to Certificates that are intended to qualify under Section 403(b), and
reference should be made to that endorsement for its complete terms.
TAX-FREE EXCHANGES AND ROLLOVERS. The Code provides for the tax-free transfer
of one Section 403(b) annuity for another Section 403(b) annuity, and the
IRS has ruled (Revenue Ruling 90-24) that amounts transferred may qualify as
tax-free transfers under certain circumstances. In addition, Section 403(b)(8)
of the code permits tax-free rollovers from Section 403(b) programs to
individual retirement annuities or other Section 403(b) programs under certain
circumstances.
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
PURCHASE PAYMENTS. Subject to certain limitations prescribed by the Code,
purchase payments made by an employer (or a self-employed individual) under a
pension, profit-sharing or annuity plan qualified under Section 401 or Section
403(a) of
4
the Code are generally deductible by the employer and excluded from the
taxable income of the employee for federal income tax purposes, whether made
under a salary reduction agreement or directly by employer contributions.
Salary reduction payments are, however, subject to FICA (social security) taxes.
Purchase payments made directly by an employee generally are made on an
after-tax basis.
TAXATION OF DISTRIBUTIONS. Distributions from Certificates purchased under
these qualified plans are taxable as ordinary income, except to the extent
allocable to an employee's after-tax contributions, as described under "Federal
Tax Matters -- Qualified Plans," in the Prospectus. However, if an employee or
other payee receives a "lump sum" distribution, as defined in the Code, from an
exempt employees' trust, the taxable portion of the distribution may be subject
to special tax treatment. For most individuals receiving lump sum distributions
after attaining age 59 1/2, the rate of tax may be determined under a special
5-year income averaging provision. Those who attained age 50 by January 1, 1986
may instead elect to use a 10-year income averaging provision based on the
income tax rates in effect for 1986. Taxable distributions received prior to
attainment of age 59 1/2 under a Contract purchased under a qualified plan are
subject to the same 10% penalty tax (and the same exceptions) as described above
with respect to Section 403(b) annuities.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these
qualified plans are generally the same as described above with respect to
Section 403(b) annuities.
TAX-FREE ROLLOVERS. If, within 60 days of receipt, an employee who receives a
single sum distribution transfers all of the taxable amount received to another
plan qualified under Section 401 or 403(a), or to an individual retirement
account or annuity as provided for under the Code, the transferred amount will
not be taxed in the year of distribution. Certain "partial" distributions may
also qualify for tax-free rollover treatment, but only if transferred to an
individual retirement account or annuity. However, income tax may be withheld
from the distribution unless the distribution is transferred directly from the
qualified plan to the individual retirement account or individual retirement
annuity.
INDIVIDUAL RETIREMENT ANNUITIES
PURCHASE PAYMENTS. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
(and whose spouses are not) active participants in another retirement plan,
(2) are unmarried and have adjusted gross income of $25,000 or less, or (3) are
married and have adjusted gross income of $40,000 or less. An individual may
also establish an IRA for his or her spouse if they file a joint return for the
taxable year and his or her spouse earns less than the individual does for that
year. The annual purchase payments for both spouses' Contracts cannot exceed
the lesser of $4,000 or 100% of the couple's combined earned income, and no more
than $2,000 may be contributed to either spouse's IRA for any year. Individuals
who are active participants in other retirement plans and whose adjusted gross
income (with certain special adjustment) exceed the cut-off point ($25,000 for
unmarried, $40,000 for married persons filing jointly, and $0 for married
persons filing a separate return) by less than $10,000 are entitled to make
deductible IRA contributions in proportionately reduced amounts. For example, a
married individual who is an active participant in another retirement plan and
files a separate tax return is entitled to a partial IRA deduction if the
individual's adjusted gross income is less than $10,000 and no IRA deduction if
his or her adjusted gross income is equal to or greater than $10,000.
An individual may make non-deductible IRA contributions to the extent of (1) the
lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of compensation
over (2) the IRA deductible contribution made with respect to the individual.
An individual may not make any contributions to his/her own IRA for the year
in which he/she reaches age 70 1/2 or for any year thereafter. Contributions to
a spouse's IRA may not be made for any year in which that spouse reaches age
70 1/2 or for any year thereafter.
TAXATION OF DISTRIBUTIONS. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax including distributions following the owner's death or
disability or distribution in the form of an annuity for the life (or life
expectancy) of the owner (or the owner and beneficiary), or distributions not in
excess of
5
deductible medical expenses or certain distributions to pay health insurance
premiums after an extended period of unemployment.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for IRAs are
generally the same as described above with respect to Section 403(b) annuities.
Certain of these and other provisions are incorporated in a special endorsement
attached to IRA Certificates, and reference should be made to that endorsement
for its complete terms.
TAX-FREE ROLLOVERS. The Code permits funds to be transferred in a tax-free
rollover from a qualified employer pension, profit-sharing, annuity, bond
purchase or tax-deferred annuity plan to an IRA Contract if certain conditions
are met, and if the rollover of assets is completed within 60 days after the
distribution from the qualified plan is received. In addition, not more
frequently than once every twelve months, amounts may be rolled over tax-free
from one IRA to another, subject to the 60-day limitation and other
requirements. The once-per-year limitation on rollovers does not apply to
direct transfers of funds between IRA custodians or trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS
PURCHASE PAYMENTS. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% of
the employee's earned income. Employees of certain small employers may have
contributions made to a special kind of SEP (SARSEP) on their behalf on a salary
reduction basis if the SARSEP plan was in effect on December 31, 1996. These
salary reduction contributions may not exceed $9,500 in 1997, which is indexed
for inflation. Employees of tax-exempt organizations and state or local
government agencies have never been eligible for the salary reduction type of
SEP.
TAXATION OF DISTRIBUTIONS. Generally, distribution payments from SEPs are
subject to the same distribution rules described above for IRAs.
REQUIRED DISTRIBUTIONS. SEP distributions are subject to the same minimum
required distribution rules described above for IRAs.
TAX-FREE ROLLOVERS. Generally, rollovers and direct transfers may be made to
and from SEPs in the same manner as described above for IRAs, subject to the
same conditions and limitations. Rollovers to other IRAs, excluding SIMPLE IRAs
are also possible. Special rules apply if the rollover is from a SARSEP IRA.
SECTION 408(p) SIMPLE IRA PLANS
PURCHASE PAYMENTS: Under Section 408(p) of the Code, small employers may
establish a type of IRA plan referred to as a Savings Incentive Match Plan for
Employees (SIMPLE Plan). An employee may contribute annually through his or her
employer a pre-tax salary reduction contribution not to exceed the lesser of
$6,000 or 100% of compensation. The employer must annually either (1) match the
employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay
contribution for each eligible employee regardless of whether the employee makes
any salary reduction contribution. In two out of every five years, the employer
has the option to reduce the matching contribution as low as 1% of pay but
advance notice must be provided to employees.
TAXATION OF DISTRIBUTIONS: Generally, distributions from SIMPLE IRA Plans are
subject to the same distribution rules described above for IRAs. However, if an
individual withdraws any amount from his SIMPLE IRA Plan within the first two
years of his or her commencement of participation in the employer's SIMPLE IRA
Plan, the 10% penalty tax for premature distribution, if such tax applies, will
be increased to 25%.
REQUIRED DISTRIBUTIONS: SIMPLE distributions are subject to the same minimum
distribution rules described above for IRAs.
TAX-FREE ROLLOVERS: Generally, rollovers and direct transfers may be made to
and from SIMPLE IRAs in the same manner as described above for IRAs, subject to
the same conditions and limitations. Rollovers or transfers to other IRAs, other
than
6
SIMPLE IRAs, are also possible but only after the second anniversary of
commencement of participation in the employer's SIMPLE IRA Plan.
SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS
AND TAX-EXEMPT ORGANIZATIONS
PURCHASE PAYMENTS. Under Section 457 of the Code, all individuals who perform
services for a state or local government or governmental agency may participate
in a deferred compensation program. Other tax-exempt employers may establish
unfunded deferred compensation plans under Section 457 for employees and/or
independent contractors.
Though not actually a qualified plan as that term is normally used, this type of
program allows individuals to defer the receipt of compensation that otherwise
would be currently payable and therefore to defer the payment of federal income
taxes on such amounts. Assuming that the program meets the requirements to be
considered an eligible deferred compensation plan (an "EDCP"), an individual may
contribute (and thereby defer from current income for tax purposes) the lesser
of $7,500 or 33-1/3% of the individual's includible compensation. (Includible
compensation means compensation from the employer which would be currently
includible in gross income for federal tax purposes.) In addition, during the
last three years before an individual attains normal retirement age, additional
"catch-up" deferrals are permitted.
The amounts which are deferred may be used by the employer to purchase the
Certificates offered by this Prospectus. The Contract is owned by the employer
and is subject to the claims of the employer's creditors. The employee has no
rights or interest in the Contract and is entitled only to payment in accordance
with the EDCP provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from an EDCP are
includible in gross income for the taxable year in which such amounts are paid
or otherwise made available.
DISTRIBUTIONS BEFORE SEPARATION FROM SERVICE. Distributions generally are not
permitted under an EDCP prior to separation from service or reaching age 70 1/2,
except in cases of severe financial hardship. Hardship distributions are
includible in the gross income of the individual in the year in which paid.
REQUIRED DISTRIBUTIONS. The distribution requirements for these qualified plans
are generally the same as described above with respect to Section 403(b)
annuities. However, if distributions do not commence before the employee's
death, the entire interest in the Contract must be distributed within 15 years
if the beneficiary is not the employee's surviving spouse.
TAX-FREE TRANSFERS. The Code permits the tax-free direct transfer of EDCP
amounts to another EDCP, subject to certain conditions. Any transfers must be
with employer consent.
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
PURCHASE PAYMENTS. Private taxable employers may establish unfunded,
non-qualified deferred compensation plans for a select group of management
or highly compensated employees and/or for independent contractors. Certain
arrangements of tax-exempt employers entered into prior August 16, 1986, and
not subsequently modified, are also subject to the rules for private taxable
employer deferred compensation plans discussed below. (Unfunded deferred
compensation plans of other tax-exempt employers are generally subject to the
requirements of Section 457.)
These types of programs allow individuals to defer receipt of up to 100% of
compensation which would otherwise be includible in income and therefore to
defer the payment of federal income taxes on such amounts. Purchase payments
made by the employer, however are not immediately deductible by the employer,
and the employer is currently taxed on any increase in Contract Value.
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Contract is owned
by the employer and is subject to the claims of the employer's creditors. The
individual has no right or interest in the Contract and is entitled only to
payment from the employer's general assets in accordance with plan provisions.
7
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
WITHHOLDING
Annuity payments and other amounts received under Certificates are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and, with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly to another qualified
retirement plan. Moreover, special "backup withholding" rules may require
Fortis Benefits to disregard the recipient's election if the recipient fails to
supply Fortis Benefits with a "TIN" or taxpayer identification number (social
security number for individuals), or if the Internal Revenue Service notifies
Fortis Benefits that the TIN provided by the recipient is incorrect.
VARIABLE ACCOUNT FINANCIAL STATEMENTS
8
FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT D
YEAR ENDED DECEMBER 31, 1998
Fortis Benefits Insurance Company
Variable Account D
Financial Statements
Year ended December 31, 1998
CONTENTS
Report of Independent Auditors..........................................1
Audited Financial Statements
Statements of Net Assets................................................3
Statements of Changes in Net Assets.....................................6
Notes to Financial Statements..........................................21
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying individual and combined statements of net
assets of the segregated asset subaccounts of Fortis Benefits Insurance
Company Variable Account D (comprised of the Fortis Series Fund, Inc.'s
Growth Stock, U.S. Government Securities, Money Market, Asset Allocation,
Diversified Income, Global Growth, Aggressive Growth, Growth & Income, High
Yield, Global Asset Allocation, Global Bond, International Stock, Value, S &
P 500, Blue Chip Stock, Mid Cap Stock, Large Cap Growth, and Small Cap Value
Subaccounts; the Norwest Select Fund's ValuGrowth, Income, Small Company
Stock and Income Equity Subaccounts; the Scudder Variable Life Investment
Fund's International Subaccount; the AIM Variable Insurance Funds' V.I. Value
and V.I. International Equity Subaccounts; the Alliance Variable Product
Series' Money Market, International and Premier Growth Subaccounts; the
SAFECO Resource Series' Growth and Equity Subaccounts; the Federated
Insurance Series' U.S. Government Securities II, High Income Bond Fund II,
Utility II and American Leaders II Subaccounts; the Lexington Funds, Inc.'s
Natural Resources Trust and Emerging Markets Subaccounts; the MFS Variable
Insurance Trusts' Emerging Growth, High Income and World Government
Subaccounts; the Montgomery Variable Fund's Emerging Markets and Growth
Subaccounts; the Strong Variable Insurance Funds' Discovery II and
International II Subaccounts; the American Century Investments' VP Balanced
and VP Growth Subaccounts; the Van Eck Worldwide Insurance Trust's Worldwide
Bond Fund and Worldwide Hard Assets Fund Subaccounts; the Neuberger & Berman,
Inc.'s AMT Limited Maturity Bond and AMT Partners Subaccounts; and INVESCO,
Inc.'s Health & Sciences, Industrial Income and Technology Subaccounts) as of
December 31, 1998, and the related statements of changes in net assets for
each of the two years in the period then ended, except for the Federated
Insurance Series' U.S. Government Securities II Subaccount; the Neuberger &
Berman, Inc.'s AMT Limited Maturity Bond and AMT Partners Subaccounts; and
INVESCO, Inc.'s Health & Sciences, Industrial Income and Technology
Subaccounts which are for the period from May 1, 1997 to December 31, 1997
and the Fortis Mid Cap Stock, Large Cap Growth and Small Cap Value
Subaccounts which are for the period May 1, 1998 (commencement of operations)
to December 31, 1998. These financial statements are the responsibility of
the management of Fortis Benefits Insurance Company. Our responsibility is to
express an opinion on these financial statements based on our audits.
1
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
Our procedures included confirmation of securities owned as of December 31,
1998 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the individual and combined financial position of the
segregated asset subaccounts of Fortis Benefits Insurance Company Variable
Account D at December 31, 1998, and the individual and combined changes in
its net assets for the periods described above, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 19, 1999
2
Fortis Benefits Insurance Company
Variable Account D
Statements of Net Assets
December 31, 1998
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS AT INSURANCE
SHARES COST MARKET VALUE COMPANY
----------------------------------------------------------------------
Investments in Fortis Series Fund, Inc.:
Growth Stock 13,182,400 $ 304,612,551 $ 541,637,137 $ -
U.S. Government Securities 12,972,929 139,984,673 141,769,466 -
Money Market 6,066,668 67,233,393 67,119,187 -
Asset Allocation 25,429,403 386,417,417 536,384,948 -
Diversified Income 8,949,806 105,443,140 106,628,884 -
Global Growth 11,604,190 166,333,148 261,882,193 -
Aggressive Growth 5,866,648 74,710,338 97,976,544 -
Growth & Income 12,530,359 184,542,458 265,983,185 -
High Yield 6,516,027 66,579,853 64,546,458 -
Global Asset Allocation 4,152,609 51,348,582 59,470,739 4,289,789
Global Bond 1,956,513 21,442,048 22,618,464 5,997,500
International Stock 5,344,515 68,059,314 77,403,542 -
Value 5,049,921 65,418,627 72,593,625 -
S & P 500 10,627,627 159,615,684 200,164,981 -
Blue Chip Stock 7,854,812 112,868,995 145,914,116 6,352,455
Mid Cap Stock 1,179,582 10,821,273 11,366,916 3,999,212
Large Cap Growth 1,237,860 12,646,130 14,909,298 4,998,441
Small Cap Value 1,523,604 14,080,298 14,138,583 3,851,404
Investments in Norwest Select Fund:
ValuGrowth 1,794,765 25,899,534 35,751,725 -
Income 1,931,703 23,371,139 22,156,639 -
Small Company Stock 1,221,712 15,755,762 13,292,225 -
Income Equity 5,378,564 72,198,232 86,057,023 -
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY
VARIABLE ANNUITY UNITS CONTRACTS PER
CONTRACTS OUTSTANDING ACCUMULATION UNIT
-----------------------------------------------------
Investments in Fortis Series Fund, Inc.:
Growth Stock $ 541,637,137 136,880,970 $ 3.96
U.S. Government Securities 141,769,466 7,783,287 18.21
Money Market 67,119,187 40,111,614 1.67
Asset Allocation 536,384,948 160,947,627 3.33
Diversified Income 106,628,884 51,414,422 2.07
Global Growth 261,882,193 12,352,444 21.20
Aggressive Growth 97,976,544 6,201,905 15.80
Growth & Income 265,983,185 12,274,208 21.67
High Yield 64,546,458 5,048,995 12.78
Global Asset Allocation 55,180,950 3,357,472 16.44
Global Bond 16,620,964 1,257,641 13.22
International Stock 77,403,542 4,837,037 16.00
Value 72,593,625 4,940,205 14.69
S & P 500 200,164,981 10,826,253 18.49
Blue Chip Stock 139,561,661 7,720,323 18.08
Mid Cap Stock 7,367,704 765,338 9.63
Large Cap Growth 9,910,857 842,995 11.76
Small Cap Value 10,287,179 1,098,102 9.37
Investments in Norwest Select Fund:
ValuGrowth 35,751,725 1,814,816 19.70
Income 22,156,639 1,663,176 13.32
Small Company Stock 13,292,225 975,631 13.62
Income Equity 86,057,023 5,406,120 15.92
SEE ACCOMPANYING NOTES.
3
Fortis Benefits Insurance Company
Variable Account D
Statements of Net Assets (continued)
December 31, 1998
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS AT INSURANCE
SHARES COST MARKET VALUE COMPANY
-------------------------------------------------------------------
Investments in Scudder Variable Life Investment
Fund:
International 576,026 $ 7,545,857 $ 8,386,931 $ -
Investment in AIM Variable Insurance Funds, Inc.:
AIM V.I. Value 189,419 4,512,103 4,972,260 -
AIM V.I. International Equity 80,243 1,551,323 1,574,363 -
Investments in Alliance Variable Product Series:
Money Market 16,561,373 16,561,373 16,561,373 -
International 73,343 1,166,959 1,185,950 -
Premier Growth 280,237 7,469,617 8,695,749 -
Investments in SAFECO Resource Series:
Growth 262,623 6,069,354 5,578,102 -
Equity 76,363 2,145,904 2,288,591 -
Investments in Federated Insurance Series:
U.S. Government Securities II 94,546 1,043,181 1,054,187 -
High Income Bond Fund II 340,033 3,592,424 3,713,159 -
Utility II 71,414 1,039,405 1,090,491 -
American Leaders II 76,825 1,488,642 1,665,573 -
Investments in Lexington Funds, Inc.:
Natural Resources Trust 48,305 691,407 532,800 -
Emerging Markets 10,424 65,395 58,894 -
Investments in MFS Variable Insurance Trust:
Emerging Growth 316,230 5,874,837 6,789,451 -
High Income 304,319 3,550,267 3,508,800 -
World Government 29,872 323,759 325,006 -
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY
VARIABLE ANNUITY UNITS CONTRACTS PER
CONTRACTS OUTSTANDING ACCUMULATION UNIT
-------------------------------------------------------------
Investments in Scudder Variable Life Investment
Fund:
International $ 8,386,931 507,370 $16.53
Investment in AIM Variable Insurance Funds, Inc.:
AIM V.I. Value 4,972,260 431,724 11.52
AIM V.I. International Equity 1,574,363 161,048 9.78
Investments in Alliance Variable Product Series:
Money Market 16,561,373 1,459,472 11.35
International 1,185,950 97,422 12.17
Premier Growth 8,695,749 375,294 23.17
Investments in SAFECO Resource Series:
Growth 5,578,102 367,234 15.19
Equity 2,288,591 151,516 15.10
Investments in Federated Insurance Series:
U.S. Government Securities II 1,054,187 93,034 11.33
High Income Bond Fund II 3,713,159 291,909 12.72
Utility II 1,090,491 70,928 15.37
American Leaders II 1,665,573 94,738 17.58
Investments in Lexington Funds, Inc.:
Natural Resources Trust 532,800 51,807 10.28
Emerging Markets 58,894 9,929 5.93
Investments in MFS Variable Insurance Trust:
Emerging Growth 6,789,451 493,984 13.74
High Income 3,508,800 351,903 9.97
World Government 325,006 29,522 11.01
4
Fortis Benefits Insurance Company
Variable Account D
Statements of Net Assets (continued)
December 31, 1998
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS AT INSURANCE
SHARES COST MARKET VALUE COMPANY
-------------------------------------------------------------------
Investments in Montgomery Variable Funds:
Emerging Markets 46,914 $ 304,633 $ 309,163 $ -
Growth 49,924 734,623 768,330 -
Investments in Strong Variable Insurance Funds:
Discovery II 38,137 478,071 485,106 -
International II 36,511 319,377 320,567 -
Investments in American Century Investments:
VP Balanced 159,306 1,240,933 1,328,610 -
VP Growth 14,419 105,138 130,057 -
Investments in Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 71,832 875,627 882,098 -
Worldwide Hard Assets Fund 40,379 477,482 371,483 -
Investments in Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 48,871 670,521 675,400 -
AMT Partners 45,054 881,251 852,869 -
Investments in INVESCO, Inc.:
Health & Sciences 122,178 1,693,908 1,868,095 -
Industrial Income 29,045 521,251 540,536 -
Technology 86,405 1,084,265 1,239,047 -
-------------------------------------------------
Totals $2,223,461,476 $2,937,518,919 $29,488,801
-------------------------------------------------
-------------------------------------------------
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY
VARIABLE ANNUITY UNITS CONTRACTS PER
CONTRACTS OUTSTANDING ACCUMULATION UNIT
-------------------------------------------------------------
Investments in Montgomery Variable Funds:
Emerging Markets $ 309,163 47,224 $ 6.55
Growth 768,330 46,194 16.63
Investments in Strong Variable Insurance Funds:
Discovery II 485,106 40,736 11.91
International II 320,567 37,361 8.58
Investments in American Century Investments:
VP Balanced 1,328,610 91,205 14.57
VP Growth 130,057 14,731 8.83
Investments in Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 882,098 74,895 11.78
Worldwide Hard Assets Fund 371,483 55,190 6.73
Investments in Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 675,400 61,900 10.91
AMT Partners 852,869 65,873 12.95
Investments in INVESCO, Inc.:
Health & Sciences 1,868,095 119,097 15.69
Industrial Income 540,536 38,817 13.93
Technology 1,239,047 86,462 14.33
----------------------------------
Totals $2,908,030,118 484,339,100
----------------------------------
----------------------------------
SEE ACCOMPANYING NOTES.
5
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets
Year ended December 31, 1998
FORTIS U.S.
FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET
STOCK SECURITIES MARKET ALLOCATION
-------------------------------------------------------------------
OPERATIONS
Dividend income $ 26,467,526 $ 8,254,423 $ 2,881,782 $ 944,495
Mortality and expense and administrative charges (7,108,278) (1,819,718) (754,138) (6,446,486)
Net realized gain (loss) on investments 34,160,134 378,287 317,058 5,833,283
Net unrealized appreciation (depreciation) of
investments during the period 29,707,787 2,601,264 (332,026) 80,554,775
-------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 83,227,169 9,414,256 2,112,676 80,886,067
CAPITAL TRANSACTIONS
Purchase of Variable Account units 8,096,970 29,320,325 56,925,744 38,225,062
Redemption of Variable Account units (83,484,018) (31,609,712) (41,411,119) (27,638,570)
Mortality and expense and administrative charges
redeemed 7,108,278 1,819,718 754,138 6,446,486
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-------------------------------------------------------------------
Net (decrease) increase from capital transactions (68,278,770) (469,669) 16,268,763 17,032,978
Net assets at beginning of period 526,688,738 132,824,879 48,737,748 438,465,903
-------------------------------------------------------------------
Net assets at end of period $541,637,137 $141,769,466 $67,119,187 $536,384,948
-------------------------------------------------------------------
-------------------------------------------------------------------
FORTIS FORTIS
DIVERSIFIED FORTIS GLOBAL AGGRESSIVE
INCOME GROWTH GROWTH
-----------------------------------------------------
OPERATIONS
Dividend income $ 6,770,367 $ 295,915 $ 171,175
Mortality and expense and administrative charges (1,387,204) (3,706,532) (1,205,738)
Net realized gain (loss) on investments 248,128 15,447,835 1,786,779
Net unrealized appreciation (depreciation) of
investments during the period (806,741) 12,596,119 15,717,735
-----------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,824,550 24,633,337 16,469,951
CAPITAL TRANSACTIONS
Purchase of Variable Account units 11,808,123 5,585,488 6,778,089
Redemption of Variable Account units (9,454,092) (47,585,475) (13,235,104)
Mortality and expense and administrative charges
redeemed 1,387,204 3,706,532 1,205,738
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-----------------------------------------------------
Net (decrease) increase from capital transactions 3,741,235 (38,293,455) (5,251,277)
Net assets at beginning of period 98,063,099 275,542,311 86,757,870
-----------------------------------------------------
Net assets at end of period $106,628,884 $261,882,193 $97,976,544
-----------------------------------------------------
-----------------------------------------------------
SEE ACCOMPANYING NOTES.
6
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
FORTIS GROWTH FORTIS HIGH FORTIS GLOBAL FORTIS GLOBAL
& INCOME YIELD ASSET ALLOCATION BOND
---------------------------------------------------------------------
OPERATIONS
Dividend income $ 74,701 $ 5,211,819 $ 4,126,850 $ 963,909
Mortality and expense and administrative charges (3,367,889) (833,772) (659,482) (190,032)
Net realized gain (loss) on investments 3,162,729 117,060 501,769 158,614
Net unrealized appreciation (depreciation) of
investments during the period 26,107,816 (5,113,753) 3,060,304 1,473,210
---------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 25,977,357 (618,646) 7,029,441 2,405,701
CAPITAL TRANSACTIONS
Purchase of Variable Account units 34,565,822 17,120,211 9,260,170 6,259,719
Redemption of Variable Account units (12,370,869) (6,968,139) (3,266,333) (4,791,843)
Mortality and expense and administrative charges
redeemed 3,367,889 833,772 659,482 190,032
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - (265,877) (241,695)
---------------------------------------------------------------------
Net increase (decrease) from capital transactions 25,562,842 10,985,844 6,387,442 1,416,213
Net assets at beginning of period 214,442,986 54,179,260 46,053,856 18,796,550
---------------------------------------------------------------------
Net assets at end of period $265,983,185 $64,546,458 $59,470,739 $22,618,464
---------------------------------------------------------------------
---------------------------------------------------------------------
FORTIS
INTERNATIONAL FORTIS
STOCK FORTIS VALUE S & P 500
-------------------------------------------------
OPERATIONS
Dividend income $ 5,327,524 $ 1,608,314 $ 2,986,482
Mortality and expense and administrative charges (950,221) (871,723) (1,887,000)
Net realized gain (loss) on investments 2,690,314 700,432 3,863,409
Net unrealized appreciation (depreciation) of
investments during the period 2,473,473 2,820,051 29,200,375
-------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 9,541,090 4,257,074 34,163,266
CAPITAL TRANSACTIONS
Purchase of Variable Account units 16,782,466 26,693,597 100,704,775
Redemption of Variable Account units (8,715,471) (5,550,357) (19,641,461)
Mortality and expense and administrative charges
redeemed 950,221 871,723 1,887,000
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount (4,534,143) (1,111,186) (6,137,363)
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-------------------------------------------------
Net increase (decrease) from capital transactions 4,483,073 20,903,777 76,812,951
Net assets at beginning of period 63,379,379 47,432,774 89,188,764
-------------------------------------------------
Net assets at end of period $77,403,542 $72,593,625 $200,164,981
-------------------------------------------------
-------------------------------------------------
SEE ACCOMPANYING NOTES.
7
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
FORTIS BLUE FORTIS FORTIS FORTIS
CHIP MID CAP LARGE CAP SMALL CAP
STOCK STOCK* GROWTH* VALUE*
--------------------------------------------------------------------
OPERATIONS
Dividend income $ 2,429,183 $ 19,450 $ 3,827 $ 189,053
Mortality and expense and administrative charges (1,324,309) (22,225) (6,487) (41,502)
Net realized gain (loss) on investments 368,440 (12,512) (8,719) (17,305)
Net unrealized appreciation (depreciation) of
investments during the period 23,595,863 545,643 2,263,168 58,284
--------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 25,069,177 530,356 2,251,789 188,530
CAPITAL TRANSACTIONS
Purchase of Variable Account units 57,253,131 6,896,405 8,728,546 10,421,155
Redemption of Variable Account units (2,538,109) (225,181) (226,237) (610,438)
Mortality and expense and administrative charges
redeemed 1,324,309 22,225 6,487 41,502
Funding of subaccount by Fortis Benefits Insurance
Company - 4,150,000 4,150,000 4,150,000
Redemption of Fortis Benefits Insurance Company
investment in subaccount (182,209) - - -
Dividend income distribution to Fortis Benefits
Insurance Company (106,437) (6,889) (1,287) (52,166)
--------------------------------------------------------------------
Net increase (decrease) from capital transactions 55,750,685 10,836,560 12,657,509 13,950,053
Net assets at beginning of period 65,094,254 - - -
--------------------------------------------------------------------
Net assets at end of period $145,914,116 $11,366,916 $14,909,298 $14,138,583
--------------------------------------------------------------------
--------------------------------------------------------------------
NORWEST NORWEST
NORWEST INCOME SMALL COMPANY
VALUGROWTH BOND STOCK
------------------------------------------------
OPERATIONS
Dividend income $ 238,581 $ 1,098,033 $ 39,626
Mortality and expense and administrative charges (411,392) (207,725) (168,037)
Net realized gain (loss) on investments 14,844 58,241 222,258
Net unrealized appreciation (depreciation) of
investments during the period 5,752,937 (1,238,385) (2,310,701)
------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 5,594,970 (289,836) (2,216,854)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 9,841,845 14,092,379 6,325,057
Redemption of Variable Account units (1,757,906) (1,034,235) (779,846)
Mortality and expense and administrative charges
redeemed 411,392 207,725 168,037
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - (1,710,197)
Dividend income distribution to Fortis Benefits
Insurance Company - - -
------------------------------------------------
Net increase (decrease) from capital transactions 8,495,331 13,265,869 4,003,051
Net assets at beginning of period 21,661,424 9,180,606 11,506,028
------------------------------------------------
Net assets at end of period $35,751,725 $22,156,639 $13,292,225
------------------------------------------------
------------------------------------------------
* For the period from May 1, 1998 to December 31, 1998.
SEE ACCOMPANYING NOTES.
8
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
AIM V.I.
NORWEST INCOME SCUDDER AIM V.I. INTERNATIONAL
EQUITY INTERNATIONAL VALUE EQUITY
------------------------------------------------------------------
OPERATIONS
Dividend income $ 1,056,309 $ 896,543 $ 211,271 $ 12,369
Mortality and expense and administrative charges (888,643) (109,417) (18,617) (7,795)
Net realized gain (loss) on investments 230,940 30,845 847 (627)
Net unrealized appreciation (depreciation) of
investments during the period 8,996,308 252,510 460,156 23,040
------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 9,394,914 1,070,481 653,657 26,987
CAPITAL TRANSACTIONS
Purchase of Variable Account units 37,762,541 1,811,004 4,403,159 1,598,178
Redemption of Variable Account units (1,797,881) (788,697) (103,173) (58,597)
Mortality and expense and administrative charges
redeemed 888,643 109,417 18,617 7,795
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
------------------------------------------------------------------
Net increase (decrease) from capital transactions 36,853,303 1,131,724 4,318,603 1,547,376
Net assets at beginning of period 39,808,806 6,184,726 - -
------------------------------------------------------------------
Net assets at end of period $86,057,023 $8,386,931 $4,972,260 $1,574,363
------------------------------------------------------------------
------------------------------------------------------------------
ALLIANCE
ALLIANCE MONEY ALLIANCE PREMIER
MARKET INTERNATIONAL GROWTH
------------------------------------------------------
OPERATIONS
Dividend income $ 1,519,027 $ 275,640 $ 43,994
Mortality and expense and administrative charges (71,287) (9,699) (21,589)
Net realized gain (loss) on investments - 670,420 539,395
Net unrealized appreciation (depreciation) of
investments during the period - (11,830) 1,207,289
------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 1,447,740 924,531 1,769,089
CAPITAL TRANSACTIONS
Purchase of Variable Account units 275,790,809 112,885,826 44,398,125
Redemption of Variable Account units (267,800,970) (115,289,922) (39,496,646)
Mortality and expense and administrative charges
redeemed 71,287 9,699 21,589
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
------------------------------------------------------
Net increase (decrease) from capital transactions 8,061,126 (2,394,397) 4,923,068
Net assets at beginning of period 7,052,507 2,655,816 2,003,592
------------------------------------------------------
Net assets at end of period $ 16,561,373 $ 1,185,950 $ 8,695,749
------------------------------------------------------
------------------------------------------------------
SEE ACCOMPANYING NOTES.
9
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
FEDERATED U.S. FEDERATED
SAFECO SAFECO GOVERNMENT HIGH INCOME BOND
GROWTH EQUITY SECURITIES II FUND II
----------------------------------------------------------------------
OPERATIONS
Dividend income $ 611,481 $ 107,105 $ 1,490 $ 145,006
Mortality and expense and administrative charges (23,023) (8,994) (3,497) (14,352)
Net realized (loss) gain on investments (298,311) 106,229 38,761 102,512
Net unrealized appreciation (depreciation) of
investments during the period 20,810 181,464 10,223 70,747
----------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 310,957 385,804 46,977 303,913
CAPITAL TRANSACTIONS
Purchase of Variable Account units 38,247,904 5,017,777 8,903,906 12,041,460
Redemption of Variable Account units (36,738,247) (4,563,051) (8,113,615) (11,229,632)
Mortality and expense and administrative charges
redeemed 23,023 8,994 3,497 14,352
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
----------------------------------------------------------------------
Net increase (decrease) from capital transactions 1,532,680 463,720 793,788 826,180
Net assets at beginning of period 3,734,465 1,439,067 213,422 2,583,066
----------------------------------------------------------------------
Net assets at end of period $ 5,578,102 $2,288,591 $1,054,187 $ 3,713,159
----------------------------------------------------------------------
----------------------------------------------------------------------
FEDERATED LEXINGTON
FEDERATED AMERICAN NATURAL RESOURCES
UTILITY II LEADERS II TRUST
---------------------------------------------------
OPERATIONS
Dividend income $ 17,235 $ 233,707 $ 43,384
Mortality and expense and administrative charges (3,159) (12,652) (3,193)
Net realized (loss) gain on investments (30,623) 274,612 (119,305)
Net unrealized appreciation (depreciation) of
investments during the period 3,687 77,514 (105,350)
---------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (12,860) 573,181 (184,464)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 6,829,897 26,396,563 1,760,109
Redemption of Variable Account units (7,379,883) (28,510,268) (2,202,365)
Mortality and expense and administrative charges
redeemed 3,159 12,652 3,193
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
---------------------------------------------------
Net increase (decrease) from capital transactions (546,827) (2,101,053) (439,063)
Net assets at beginning of period 1,650,178 3,193,445 1,156,327
---------------------------------------------------
Net assets at end of period $1,090,491 $ 1,665,573 $ 532,800
---------------------------------------------------
---------------------------------------------------
SEE ACCOMPANYING NOTES.
10
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
LEXINGTON
EMERGING MFS EMERGING MFS HIGH MFS WORLD
MARKETS GROWTH INCOME GOVERNMENT
------------------------------------------------------------------
OPERATIONS
Dividend income $ 6,180 $ 14,899 $ 68,432 $ 1,291
Mortality and expense and administrative charges (496) (10,192) (4,620) (565)
Net realized (loss) gain on investments (9,637) 533,200 (9,817) 3,733
Net unrealized (depreciation) appreciation of
investments during the period (21,006) 819,762 (69,962) 1,201
------------------------------------------------------------------
Net (decrease) increase in net assets resulting from
operations (24,959) 1,357,669 (15,967) 5,660
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,654,144 29,085,014 5,754,624 1,429,924
Redemption of Variable Account units (2,210,494) (27,832,016) (2,913,514) (1,219,491)
Mortality and expense and administrative charges
redeemed 496 10,192 4,620 565
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
------------------------------------------------------------------
Net (decrease) increase from capital transactions (555,854) 1,263,190 2,845,730 210,998
Net assets at beginning of period 639,707 4,168,592 679,037 108,348
------------------------------------------------------------------
Net assets at end of period $ 58,894 $ 6,789,451 $3,508,800 $ 325,006
------------------------------------------------------------------
------------------------------------------------------------------
MONTGOMERY STRONG
EMERGING MONTGOMERY DISCOVERY
MARKETS GROWTH FUND II
--------------------------------------------------
OPERATIONS
Dividend income $ 1,019 $ 27,444 $ 28,115
Mortality and expense and administrative charges (2,277) (5,823) (2,038)
Net realized (loss) gain on investments (251,784) 63,647 17,142
Net unrealized (depreciation) appreciation of
investments during the period 12,116 (104,066) 17,556
--------------------------------------------------
Net (decrease) increase in net assets resulting from
operations (240,926) (18,798) 60,775
CAPITAL TRANSACTIONS
Purchase of Variable Account units 3,568,166 958,991 8,735,012
Redemption of Variable Account units (3,677,901) (2,080,709) (8,549,511)
Mortality and expense and administrative charges
redeemed 2,277 5,823 2,038
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
--------------------------------------------------
Net (decrease) increase from capital transactions (107,458) (1,115,895) 187,539
Net assets at beginning of period 657,547 1,903,023 236,792
--------------------------------------------------
Net assets at end of period $ 309,163 $ 768,330 $ 485,106
--------------------------------------------------
--------------------------------------------------
SEE ACCOMPANYING NOTES.
11
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
AMERICAN AMERICAN
STRONG CENTURY VP CENTURY VP
INTERNATIONAL II BALANCED GROWTH
--------------------------------------------------
OPERATIONS
Dividend income $ 4,316 $ 97,253 $ 5,760
Mortality and expense and administrative charges (1,711) (2,774) (2,218)
Net realized gain (loss) on investments 62,354 (77,370) 67,659
Net unrealized appreciation (depreciation) of
investments during the period 9,766 86,667 32,986
--------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 74,725 103,776 104,187
CAPITAL TRANSACTIONS
Purchase of Variable Account units 11,439,550 3,176,516 22,191,371
Redemption of Variable Account units (11,526,224) (2,521,079) (22,309,476)
Mortality and expense and administrative charges
redeemed 1,711 2,774 2,218
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
--------------------------------------------------
Net (decrease) increase from capital transactions (84,963) 658,211 (115,887)
Net assets at beginning of period 330,805 566,623 141,757
--------------------------------------------------
Net assets at end of period $ 320,567 $ 1,328,610 $ 130,057
--------------------------------------------------
--------------------------------------------------
VAN ECK NEUBERGER &
VAN ECK WORLDWIDE BERMAN AMT NEUBERGER &
WORLDWIDE BOND HARD ASSETS LIMITED MATURITY BERMAN AMT
FUND FUND BOND PARTNERS
-----------------------------------------------------------------
OPERATIONS
Dividend income $ 7,031 $ 146,361 $ 23,272 $ 123,635
Mortality and expense and administrative charges (2,373) (3,044) (2,433) (4,346)
Net realized gain (loss) on investments 45,162 (314,422) (4,949) (90,988)
Net unrealized appreciation (depreciation) of
investments during the period 5,746 (47,362) 3,288 (45,410)
-----------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 55,566 (218,467) 19,178 (17,109)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 3,619,169 4,113,612 1,490,835 1,326,782
Redemption of Variable Account units (3,073,617) (4,849,914) (1,173,233) (1,051,703)
Mortality and expense and administrative charges
redeemed 2,373 3,044 2,433 4,346
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
-----------------------------------------------------------------
Net (decrease) increase from capital transactions 547,925 (733,258) 320,035 279,425
Net assets at beginning of period 278,607 1,323,208 336,187 590,553
-----------------------------------------------------------------
-----------------------------------------------------------------
Net assets at end of period $ 882,098 $ 371,483 $ 675,400 $ 852,869
-----------------------------------------------------------------
-----------------------------------------------------------------
SEE ACCOMPANYING NOTES.
12
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1998
INVESCO INVESCO
HEALTH & INDUSTRIAL INVESCO COMBINED VARIABLE
SCIENCES INCOME TECHNOLOGY ACCOUNT
--------------------------------------------------------------------------
OPERATIONS
Dividend income $ 45,713 $ 25,527 $ 5,212 $ 75,909,056
Mortality and expense and administrative charges (4,325) (2,272) (2,193) (34,619,507)
Net realized gain (loss) on investments 83,990 (17,099) (30,307) 71,607,287
Net unrealized appreciation (depreciation) of
investments during the period 170,413 32,862 160,236 240,978,559
--------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 295,791 39,018 132,948 353,875,395
CAPITAL TRANSACTIONS
Purchase of Variable Account units 5,191,549 1,055,446 4,726,295 1,169,049,337
Redemption of Variable Account units (3,777,233) (893,692) (3,791,287) (950,418,556)
Mortality and expense and administrative charges
redeemed 4,325 2,272 2,193 34,619,507
Funding of subaccount by Fortis Benefits Insurance
Company - - - 12,450,000
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - (13,675,098)
Dividend income distribution to Fortis Benefits
Insurance Company - - - (674,351)
--------------------------------------------------------------------------
Net increase (decrease) from capital transactions 1,418,641 164,026 937,201 251,350,839
Net assets at beginning of period 153,663 337,492 168,898 2,332,292,685
--------------------------------------------------------------------------
Net assets at end of period $ 1,868,095 $ 540,536 $ 1,239,047 $2,937,518,919
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
13
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets
Year ended December 31, 1997
FORTIS U.S.
FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET
STOCK SECURITIES MARKET ALLOCATION
---------------------------------------------------------------
OPERATIONS
Dividend income $ 49,675 $ 9,784,129 $ 2,375,151 $ 60,002,739
Mortality and expense and administrative charges (7,089,187) (1,875,555) (750,583) (5,433,367
Net realized gain (loss) on investments 20,147,178 (347,001) 820,447 6,303,022
Net unrealized appreciation (depreciation) of
investments during the period 41,012,209 2,402,114 (304,737) 7,447,945
---------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 54,119,875 9,963,687 2,140,278 68,320,339
CAPITAL TRANSACTIONS
Purchase of Variable Account units 11,292,630 5,975,823 49,678,086 25,706,170
Redemption of Variable Account units (53,729,345) (38,528,792) (58,875,709) (27,015,058
Mortality and expense and administrative
charges redeemed 7,089,187 1,875,555 750,583 5,433,367
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
---------------------------------------------------------------
Net (decrease) increase from capital transactions (35,347,528) (30,677,414) (8,447,040) 4,124,479
Net assets at beginning of period 507,916,391 153,538,606 55,044,510 366,021,085
---------------------------------------------------------------
Net assets at end of period $526,688,738 $132,824,879 $ 48,737,748 $438,465,903
---------------------------------------------------------------
---------------------------------------------------------------
FORTIS FORTIS
DIVERSIFIED FORTIS GLOBAL AGGRESSIVE
INCOME GROWTH GROWTH
-----------------------------------------------
OPERATIONS
Dividend income $ 6,905,359 $ - $ 1,231
Mortality and expense and administrative charges (1,307,512) (3,682,512) (1,052,753)
Net realized gain (loss) on investments 177,507 5,836,551 102,856
Net unrealized appreciation (depreciation) of
investments during the period 2,515,054 12,455,062 2,161,309
-----------------------------------------------
Net increase (decrease) in net assets resulting
from operations 8,290,408 14,609,101 1,212,643
CAPITAL TRANSACTIONS
Purchase of Variable Account units 3,115,896 19,063,321 14,369,199
Redemption of Variable Account units (14,932,392) (19,838,860) (5,395,939)
Mortality and expense and administrative
charges redeeme 1,307,512 3,682,512 1,052,753
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-----------------------------------------------
Net (decrease) increase from capital transactions (10,508,984) 2,906,973 10,026,013
Net assets at beginning of period 100,281,675 258,026,237 75,519,214
-----------------------------------------------
Net assets at end of period $ 98,063,099 $275,542,311 $ 86,757,870
-----------------------------------------------
-----------------------------------------------
SEE ACCOMPANYING NOTES.
14
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
FORTIS GROWTH FORTIS HIGH FORTIS GLOBAL FORTIS GLOBAL
& INCOME YIELD ASSET ALLOCATION BOND
--------------------------------------------------------------
OPERATIONS
Dividend income $ 6,654,164 $ 71,851 $ 2,358,159 $ 805,285
Mortality and expense and administrative charges (2,311,419) (641,985) (489,857) (172,763)
Net realized gain (loss) on investments 1,120,673 85,907 218,706 (68,168)
Net unrealized appreciation (depreciation) of
investments during the period 33,449,045 4,156,960 2,537,910 (676,900)
--------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 38,912,463 3,672,733 4,624,918 (112,546)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 56,082,796 14,037,885 9,248,738 2,704,435
Redemption of Variable Account units (4,951,613) (3,986,387) (1,791,957) (2,463,332)
Mortality and expense and administrative
charges redeemed 2,311,419 641,983 489,857 172,763
Funding of subaccount by Fortis Benefits
Insurance Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - (193,973) (128,042)
--------------------------------------------------------------
Net increase (decrease) from capital transactions 53,442,602 10,693,483 7,752,665 285,824
Net assets at beginning of period 122,087,921 39,813,044 33,676,273 18,623,272
--------------------------------------------------------------
Net assets at end of period $214,442,986 $ 54,179,260 $ 46,053,856 $ 18,796,550
--------------------------------------------------------------
--------------------------------------------------------------
FORTIS
INTERNATIONAL FORTIS
STOCK FORTIS VALUE S & P 500
-----------------------------------------------
OPERATIONS
Dividend income $ 2,559,479 $ 2,718,491 $ 1,361,090
Mortality and expense and administrative charges (684,830) (377,532) (607,630)
Net realized gain (loss) on investments 309,917 61,399 831,297
Net unrealized appreciation (depreciation) of
investments during the period 2,974,721 3,471,343 9,928,599
-----------------------------------------------
Net increase (decrease) in net assets resulting
from operations 5,159,287 5,873,701 11,513,356
CAPITAL TRANSACTIONS
Purchase of Variable Account units 16,326,079 29,249,997 82,381,056
Redemption of Variable Account units (2,103,233) (695,317) (23,769,708)
Mortality and expense and administrative
charges redeemed 684,830 377,532 607,630
Funding of subaccount by Fortis Benefits
Insurance Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company (157,141) (21,662) (79,618)
-----------------------------------------------
Net increase (decrease) from capital transactions 14,750,535 28,910,550 59,139,360
Net assets at beginning of period 43,469,557 12,648,523 18,536,048
-----------------------------------------------
Net assets at end of period $ 63,379,379 $ 47,432,774 $ 89,188,764
-----------------------------------------------
-----------------------------------------------
SEE ACCOMPANYING NOTES.
15
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
NORWEST NORWEST
FORTIS BLUE NORWEST INTERMEDIATE SMALL COMPANY
CHIP STOCK VALUGROWTH BOND STOCK
---------------------------------------------------------------
OPERATIONS
Dividend income $ 293,654 $ 579,724 $ 633,659 $ 1,503,400
Mortality and expense and administrative charges (447,570) (221,359) (101,678) (95,073)
Net realized gain (loss) on investments 107,559 104,535 2,550 25,285
Net unrealized appreciation (depreciation) of
investments during the period 8,118,339 2,305,264 165,968 (863,445)
---------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 8,071,982 2,768,164 700,499 570,167
CAPITAL TRANSACTIONS
Purchase of Variable Account units 42,777,440 8,653,105 3,293,135 5,021,855
Redemption of Variable Account units (832,257) (476,484) (779,906) (276,048)
Mortality and expense and administrative
charges redeemed 447,570 221,359 101,678 95,073
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company (58,517) - - -
---------------------------------------------------------------
Net increase (decrease) from capital transactions 42,334,236 8,397,980 2,614,907 4,840,880
Net assets at beginning of period 14,688,036 10,495,280 5,865,200 6,094,981
---------------------------------------------------------------
Net assets at end of period $ 65,094,254 $ 21,661,424 $ 9,180,606 $ 11,506,028
---------------------------------------------------------------
---------------------------------------------------------------
NORWEST
INCOME SCUDDER ALLIANCE MONEY
EQUITY INTERNATIONAL MARKET
-----------------------------------------------
OPERATIONS
Dividend income $ 330,791 $ 89,071 $ 375,670
Mortality and expense and administrative charges (305,439) (66,114) (33,431)
Net realized gain (loss) on investments 38,572 40,064 -
Net unrealized appreciation (depreciation) of
investments during the period 4,243,198 164,076 -
-----------------------------------------------
Net increase (decrease) in net assets resulting
from operations 4,307,122 227,097 342,239
CAPITAL TRANSACTIONS
Purchase of Variable Account units 25,830,279 2,768,738 168,171,990
Redemption of Variable Account units (309,223) (302,454) (167,088,962)
Mortality and expense and administrative
charges redeemed 305,439 66,114 33,431
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-----------------------------------------------
Net increase (decrease) from capital transactions 25,826,495 2,532,398 1,116,459
Net assets at beginning of period 9,675,189 3,425,231 5,593,809
-----------------------------------------------
Net assets at end of period $ 39,808,806 $ 6,184,726 $ 7,052,507
-----------------------------------------------
-----------------------------------------------
SEE ACCOMPANYING NOTES.
16
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
ALLIANCE ALLIANCE SAFECO SAFECO
INTERNATIONAL PREMIER GROWTH GROWTH EQUITY
--------------------------------------------------------------
OPERATIONS
Dividend income $ 19,713 $ 954 $ 506,511 $ 102,844
Mortality and expense and administrative charges (4,653) (4,656) (4,146) (4,251)
Net realized gain (loss) on investments 524,319 185,183 260,166 21,442
Net unrealized appreciation (depreciation) of
investments during the period 25,774 12,341 (501,499) (19,125)
--------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 565,153 193,822 261,032 100,910
CAPITAL TRANSACTIONS
Purchase of Variable Account units 65,480,879 13,005,720 13,595,285 4,689,201
Redemption of Variable Account units (63,692,893) (11,432,296) (10,315,753) (3,551,876)
Mortality and expense and administrative
charges redeemed 4,653 4,656 4,146 4,251
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
--------------------------------------------------------------
Net increase (decrease) from capital transactions 1,792,639 1,578,080 3,283,678 1,141,576
Net assets at beginning of period 298,024 231,690 189,755 196,581
--------------------------------------------------------------
Net assets at end of period $ 2,655,816 $ 2,003,592 $ 3,734,465 $ 1,439,067
--------------------------------------------------------------
--------------------------------------------------------------
FEDERATED U.S. FEDERATED
GOVERNMENT HIGH INCOME FEDERATED
SECURITIES II * BOND FUND II UTILITY II
-------------------------------------------------
OPERATIONS
Dividend income $ 3,957 $ 67,548 $ 4,035
Mortality and expense and administrative charges (265) (3,413) (1,118)
Net realized gain (loss) on investments (1,381) 120,901 48,748
Net unrealized appreciation (depreciation) of
investments during the period 784 31,419 44,341
-------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 3,095 216,455 96,006
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,957,483 7,473,177 8,386,519
Redemption of Variable Account units (1,747,421) (6,024,386) (7,031,477)
Mortality and expense and administrative
charges redeemed 265 3,413 1,118
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-------------------------------------------------
Net increase (decrease) from capital transactions 210,327 1,452,204 1,356,160
Net assets at beginning of period - 914,407 198,012
-------------------------------------------------
Net assets at end of period $ 213,422 $ 2,583,066 $ 1,650,178
-------------------------------------------------
-------------------------------------------------
*For the period from May 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
17
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
LEXINGTON
FEDERATED NATURAL LEXINGTON
AMERICAN RESOURCES EMERGING
LEADERS II TRUST MARKETS
------------------------------------------------
OPERATIONS
Dividend income $ 11,802 $ 37,809 $ 238
Mortality and expense and administrative charges (6,487) (4,044) (1,766)
Net realized gain (loss) on investments 366,916 147,314 22,277
Net unrealized appreciation (depreciation) of
investments during the period 87,367 (60,160) 13,703
------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 459,598 120,919 34,452
CAPITAL TRANSACTIONS
Purchase of Variable Account units 20,909,386 7,675,556 10,873,736
Redemption of Variable Account units (18,677,016) (7,422,947) (10,335,967)
Mortality and expense and administrative
charges redeemed 6,487 4,044 1,766
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
------------------------------------------------
Net increase (decrease) from capital transactions 2,238,857 256,653 539,535
Net assets at beginning of period 494,990 778,755 65,720
------------------------------------------------
Net assets at end of period $ 3,193,445 $ 1,156,327 $ 639,707
------------------------------------------------
------------------------------------------------
MONTGOMERY
MFS EMERGING MFS HIGH MFS WORLD EMERGING
GROWTH INCOME GOVERNMENT MARKETS
---------------------------------------------------------------
OPERATIONS
Dividend income $ 5,222 $ - $ 3,011 $ 585
Mortality and expense and administrative charges (8,094) (3,208) (888) (2,178)
Net realized gain (loss) on investments 278,077 64,089 (9,538) 17,971
Net unrealized appreciation (depreciation) of
investments during the period 124,482 28,378 (237) (9,020)
---------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 399,687 89,259 (7,652) 7,358
CAPITAL TRANSACTIONS
Purchase of Variable Account units 50,380,648 2,109,055 4,223,973 7,351,843
Redemption of Variable Account units (48,657,063) (1,917,469) (4,151,384) (6,894,401)
Mortality and expense and administrative
charges redeemed 8,094 3,208 888 2,178
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
---------------------------------------------------------------
Net increase (decrease) from capital transactions 1,731,679 194,794 73,477 459,620
Net assets at beginning of period 2,037,226 394,984 42,523 190,569
---------------------------------------------------------------
Net assets at end of period $ 4,168,592 $ 679,037 $ 108,348 $ 657,547
---------------------------------------------------------------
---------------------------------------------------------------
SEE ACCOMPANYING NOTES.
18
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
STRONG STRONG
MONTGOMERY DISCOVERY GOVERNMENT STRONG
GROWTH FUND II SECURITIES II ADVANTAGE II
--------------------------------------------------------------
OPERATIONS
Dividend income $ 80,509 $ - $ 4,238 $ 6,644
Mortality and expense and administrative charges (2,758) (673) (446) (122)
Net realized gain (loss) on investments 110,597 6,584 1,688 6,199
Net unrealized appreciation (depreciation) of
investments during the period 156,818 (12,707) 277 1,352
--------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 345,166 (6,796) 5,757 14,073
CAPITAL TRANSACTIONS
Purchase of Variable Account units 4,720,065 1,491,187 192,449 40,789
Mortality and expense and administrative
charges redeemed (4,059,313) (1,339,858) (267,953) (356,157)
Mortality and expense and administrative
charges redeemed 2,758 673 446 122
Funding of subaccount by Fortis Benefits Insurance
Company - - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - - -
--------------------------------------------------------------
Net increase (decrease) from capital transactions 663,510 152,002 (75,058) (315,246)
Net assets at beginning of period 894,347 91,586 69,301 301,173
--------------------------------------------------------------
Net assets at end of period $ 1,903,023 $ 236,792 $ - $ -
--------------------------------------------------------------
--------------------------------------------------------------
AMERICAN AMERICAN
STRONG CENTURY VP CENTURY
INTERNATIONAL II BALANCED VP GROWTH
-------------------------------------------------
OPERATIONS
Dividend income $ 25,600 $ 8,363 $ 2,139
Mortality and expense and administrative charges (2,462) (1,284) (355)
Net realized gain (loss) on investments (1,178) (65,865) 32,718
Net unrealized appreciation (depreciation) of
investments during the period (11,451) 51 (7,181)
-------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 10,509 (58,735) 27,321
CAPITAL TRANSACTIONS
Purchase of Variable Account units 13,896,848 9,336,521 5,761,482
Mortality and expense and administrative
charges redeemed (13,937,360) (8,825,530) (5,717,321)
Mortality and expense and administrative
charges redeemed 2,462 1,284 355
Funding of subaccount by Fortis Benefits Insurance
Company - - -
Redemption of Fortis Benefits Insurance Company
investment in subaccount - - -
Dividend income distribution to Fortis Benefits
Insurance Company - - -
-------------------------------------------------
Net increase (decrease) from capital transactions (38,050) 512,275 44,516
Net assets at beginning of period 358,346 113,083 69,920
-------------------------------------------------
Net assets at end of period $ 330,805 $ 566,623 $ 141,757
-------------------------------------------------
-------------------------------------------------
SEE ACCOMPANYING NOTES.
19
Fortis Benefits Insurance Company
Variable Account D
Statements of Changes in Net Assets (continued)
Year ended December 31, 1997
VAN ECK NEUBERGER &
VAN ECK WORLDWIDE BERMAN AMT NEUBERGER &
WORLDWIDE HARD ASSETS LIMITED BERMAN AMT
BOND FUND FUND MATURITY BOND* PARTNERS*
---------------------------------------------------------------
OPERATIONS
Dividend income $ 1,403 $ 21,541 $ - $ -
Mortality and expense and administrative
charges (1,009) (4,933) (742) (1,259)
Net realized gain (loss) on investments 15,991 176,670 8,178 12,902
Net unrealized appreciation (depreciation)
of investments during the period 325 (76,669) 1,593 17,027
---------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 16,710 116,609 9,029 28,670
CAPITAL TRANSACTIONS
Purchase of Variable Account units 2,437,708 13,173,938 3,132,473 1,237,645
Redemption of Variable Account units (2,213,520) (12,443,877) (2,806,057) (677,021)
Mortality and expense and administrative
charges redeemed 1,009 4,933 742 1,259
Funding of subaccount by Fortis Benefits
Insurance Company - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - -
---------------------------------------------------------------
Net increase (decrease) from capital
transactions 225,197 734,994 327,158 561,883
Net assets at beginning of period 36,700 471,605 - -
---------------------------------------------------------------
Net assets at end of period $ 278,607 $ 1,323,208 $ 336,187 $ 590,553
---------------------------------------------------------------
---------------------------------------------------------------
INVESCO INVESCO
HEALTH & INDUSTRIAL INVESCO COMBINED
SCIENCES* INCOME* TECHNOLOGY* VARIABLE ACCOUNT
------------------------------------------------------------
OPERATIONS
Dividend income $ 1,508 $ 23,677 $ - $ 100,392,623
Mortality and expense and administrative
charges (293) (361) (393) (27,814,406)
Net realized gain (loss) on investments (3,047) 5,339 1,683 38,273,799
Net unrealized appreciation (depreciation)
of investments during the period 3,774 (13,577) (5,452) 137,496,762
------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,942 15,078 (4,162) 248,348,778
CAPITAL TRANSACTIONS
Purchase of Variable Account units 664,230 512,375 1,293,756 871,752,580
Redemption of Variable Account units (512,802) (190,322) (1,121,089) (684,463,505)
Mortality and expense and administrative
charges redeemed 293 361 393 27,814,406
Funding of subaccount by Fortis Benefits
Insurance Company - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - (638,953)
------------------------------------------------------------
Net increase (decrease) from capital
transactions 151,721 322,414 173,060 214,464,528
Net assets at beginning of period - - - 1,869,479,379
------------------------------------------------------------
Net assets at end of period $ 153,663 $ 337,492 $ 168,898 $2,332,292,685
------------------------------------------------------------
------------------------------------------------------------
*For the period from May 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
20
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements
December 31, 1998
1. GENERAL
FORTIS BENEFITS INSURANCE COMPANY
Variable Account D (the "Account") was established as a segregated asset
account of Fortis Benefits Insurance Company ("Fortis Benefits") on October
14, 1987 under Minnesota law. The Account is registered under the Investment
Company Act of 1940 as a unit investment trust. The variable annuity
contracts are sold under the names of EmPower Variable Annuity, Opportunity
Variable Annuity, Norwest Passage Variable Annuity, Masters Variable Annuity
and Value Advantage Plus Variable Annuity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The assets of the Account are segregated from Fortis Benefits' other assets.
The operations of the Account are part of Fortis Benefits. The following is a
summary of significant accounting policies consistently followed by the
Account in the preparation of its financial statements.
INVESTMENT TRANSACTIONS
Capital gain distributions from subaccounts are recorded on the ex-dividend
date and reinvested upon receipt.
INVESTMENT INCOME
Dividend income distributions from subaccounts are recorded on the
ex-dividend date and reinvested upon receipt.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of net assets at the date of the financial
statements and the reported amounts of net increase and decrease in net
assets from operations during the reporting period. Actual results could
differ from these estimates.
21
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS
There were fifty-two subaccounts within the Account. Investment in shares of
the Fortis Series Fund, Inc. (the Series) subaccounts are stated at market
value, which is based on the percentage owned by the Account of the net asset
value of the respective portfolios of these Series. The Series' net asset
value is based on market quotations of the securities held in the portfolio.
Investments in the other subaccounts are valued at the net asset (market)
value per share at the close of business on December 31, as reported by the
respective mutual fund.
The cost of investments sold and redeemed is determined on the average cost
method. Unrealized appreciation or depreciation of investments represents the
Account's share of the subaccounts' undistributed net investment income,
undistributed realized gains or losses and unrealized appreciation or
depreciation.
Purchases and sales of shares of the Fund are recorded on the trade date. The
number of shares and aggregate cost of purchases, including reinvested
dividends and realized capital gains, and aggregate cost of investments sold
or redeemed were as follows:
YEAR ENDED DECEMBER 31, 1998
SHARES
---------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
-------------------------------------------------------------------
Fortis Series Fund, Inc.:
Growth Stock 1,004,034 2,196,640 $ 34,564,496 $ 49,323,884
U.S. Government Securities 3,437,980 2,901,372 37,574,748 31,231,425
Money Market 5,363,997 3,716,023 59,807,526 41,094,061
Asset Allocation 2,001,168 1,458,017 39,169,557 21,805,287
Diversified Income 1,549,018 782,457 18,578,490 9,205,964
Global Growth 285,660 2,261,137 5,881,403 32,137,640
Aggressive Growth 487,885 901,804 6,949,264 11,448,325
Growth & Income 1,726,589 629,713 34,640,523 9,208,139
High Yield 2,152,596 667,421 22,332,030 6,851,079
Global Asset Allocation 936,706 250,285 13,387,020 3,303,440
Global Bond 631,500 440,320 7,223,628 4,874,924
International Stock 1,503,232 902,541 22,109,990 10,559,299
Value 1,993,402 477,833 28,301,911 5,961,110
S & P 500 6,188,109 1,534,358 103,691,257 21,915,415
Blue Chip Stock 3,595,998 155,356 59,682,314 2,458,315
Mid Cap Stock 1,205,928 26,346 11,065,855 244,582
Large Cap Growth 1,260,680 22,820 12,882,373 236,243
Small Cap Value 1,598,441 74,837 14,760,208 679,909
22
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
SHARES
---------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
-------------------------------------------------------------------
Norwest Select Fund:
ValuGrowth 660,500 120,742 $ 10,080,966 $ 1,743,062
Income Bond 1,183,655 82,025 15,190,412 975,994
Small Company Stock 517,603 197,617 6,364,683 2,267,785
Income Equity 2,588,219 119,655 38,818,850 1,566,941
Scudder Variable Life Investment
Fund:
International 195,728 58,024 2,707,547 757,852
AIM Variable Insurance Funds, Inc.:
V.I. Value Fund 193,718 4,299 4,614,430 102,326
V.I. International Equity 83,290 3,047 1,610,547 59,224
Alliance Variable Product Series:
Money Market 277,309,836 267,800,970 277,309,836 267,800,970
International 6,931,865 7,035,341 113,161,466 114,619,502
Premier Growth 1,715,690 1,530,908 44,442,119 38,957,251
SAFECO Resource Series:
Growth 1,515,642 1,412,953 38,859,385 37,036,558
Equity 184,338 165,126 5,124,882 4,456,822
Federated Insurance Series:
U.S. Government Securities II 820,671 746,374 8,905,396 8,074,854
High Income Bond Fund II 1,126,285 1,022,148 12,186,466 11,127,120
Utility II 479,568 523,631 6,847,132 7,410,506
American Leaders II 1,344,922 1,430,779 26,630,270 28,235,656
Lexington Funds, Inc.:
Natural Resources Trust 126,536 155,785 1,803,493 2,321,670
Emerging Markets 200,566 261,939 1,660,324 2,220,131
MFS Variable Insurance Trust:
Emerging Growth 1,634,214 1,576,261 29,099,913 27,298,816
High Income 494,434 245,098 5,823,056 2,923,331
World Government 135,626 116,366 1,431,215 1,215,758
Montgomery Variable Funds:
Emerging Markets 454,651 469,946 3,569,185 3,929,685
Growth 63,835 140,023 986,435 2,017,062
Strong Variable Insurance Funds:
Discovery II 675,218 656,764 8,763,127 8,532,369
International II 1,257,834 1,256,817 11,443,866 11,463,870
23
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
SHARES
---------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
--------------------------------------------------------------------
American Century Investments:
VP Balanced 407,610 317,069 $ 3,273,769 $ 2,598,449
VP Growth 2,372,711 2,372,936 22,197,131 22,241,817
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 305,599 259,118 3,626,200 3,028,455
Worldwide Hard Assets Fund 328,539 372,387 4,259,973 5,164,336
Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 110,676 85,614 1,514,107 1,178,182
AMT Partners 73,345 56,959 1,450,417 1,142,691
INVESCO, Inc.:
Health & Sciences 396,457 288,098 5,237,262 3,693,243
Industrial Income 59,410 50,171 1,080,973 910,791
Technology 377,427 305,735 4,731,507 3,821,594
YEAR ENDED DECEMBER 31, 1997
SHARES
---------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
--------------------------------------------------------------------
Fortis Series Fund, Inc.:
Growth Stock 335,736 1,531,197 $ 11,342,305 $ 33,582,166
U.S. Government Securities 1,516,213 3,606,464 15,759,952 38,875,792
Money Market 4,699,565 5,310,661 52,053,237 58,055,261
Asset Allocation 4,812,001 1,449,334 85,708,909 20,712,037
Diversified Income 865,982 1,255,212 10,021,255 14,754,885
Global Growth 995,381 999,116 19,063,321 14,002,309
Aggressive Growth 1,136,613 420,068 14,370,430 5,293,083
Growth & Income 3,670,172 288,495 62,736,960 3,830,940
High Yield 1,365,421 386,498 14,109,736 3,900,480
Global Asset Allocation 869,773 147,998 11,606,897 1,767,225
Global Bond 309,549 239,582 3,509,720 2,659,542
International Stock 1,405,870 168,466 18,885,558 1,950,457
Value 2,474,886 56,145 31,968,488 655,579
S & P 500 6,117,672 1,766,129 83,742,146 23,018,029
Blue Chip Stock 3,219,587 67,752 43,071,094 783,215
Norwest Select Fund:
ValuGrowth 552,655 28,517 9,232,829 371,949
Intermediate Bond 353,877 70,931 3,926,794 777,355
Small Company Stock 451,498 19,700 6,525,255 250,763
Income Equity 2,067,474 24,292 26,161,070 270,651
24
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SHARES
---------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
--------------------------------------------------------------------
Scudder Variable Life Investment
Fund:
International 201,696 21,882 $ 2,857,809 $ 262,389
Alliance Variable Product Series:
Money Market 168,743,834 167,088,962 168,547,660 167,088,962
International 4,259,167 4,102,363 65,500,592 63,168,574
Premier Growth 659,976 579,278 13,006,674 11,247,113
SAFECO Resource Series:
Growth 558,931 408,849 14,101,796 10,055,588
Equity 200,558 150,645 4,792,045 3,530,435
Federated Insurance Series:
U.S. Government Securities II 189,579 169,330 1,961,440 1,748,802
High Income Bond Fund II 717,728 571,130 7,540,725 5,903,485
Utility II 654,493 555,782 8,390,554 6,982,730
American Leaders II 1,176,026 1,045,781 20,921,188 18,310,100
Lexington Funds, Inc.:
Natural Resources Trust 514,330 491,272 7,713,365 7,275,632
Emerging Markets 1,022,290 957,013 10,873,974 10,313,690
MFS Variable Insurance Trust:
Emerging Growth 3,384,527 3,280,119 50,385,870 48,378,986
High Income 180,043 161,398 2,109,055 1,853,381
World Government 415,944 409,351 4,226,984 4,160,922
Montgomery Variable Funds:
Emerging Markets 610,961 569,631 7,352,428 6,876,431
Growth 360,865 307,287 4,800,574 3,948,716
Strong Variable Insurance Funds:
Discovery II 122,063 110,861 1,491,187 1,333,274
Government Securities II 19,685 26,896 196,687 266,265
Advantage II 4,923 35,492 47,433 349,958
International II 1,239,125 1,235,541 13,922,448 13,938,538
American Century Investments:
VP Balanced 1,182,715 1,128,948 9,344,884 8,891,395
VP Growth 566,923 559,107 5,763,621 5,684,603
25
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SHARES
---------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
--------------------------------------------------------------------
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 227,792 205,747 $ 2,439,111 $ 2,197,529
Worldwide Hard Assets Fund 807,446 751,425 13,195,479 12,267,207
Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 226,730 202,921 3,132,473 2,797,879
AMT Partners 62,683 34,016 1,237,645 664,119
INVESCO, Inc.:
Health & Sciences 63,755 49,852 665,738 515,849
Industrial Income 30,556 10,750 536,052 184,983
Technology 114,405 99,648 1,293,756 1,119,404
Fortis Benefits' investment in the subaccounts represented the following
number of shares of the Funds held and aggregate cost of amounts invested at
December 31, 1998:
COST OF
SHARES SHARES
----------------------------------------
Fortis Series Fund, Inc.:
Global Asset Allocation 295,866 $ 3,157,156
Global Bond 518,788 5,284,827
Blue Chip Stock 341,964 3,476,065
Mid Cap Stock 415,011 4,149,550
Large Cap Growth 415,001 4,150,216
Small Cap Value 415,035 4,144,455
26
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES
ORGANIZATION EXPENSES
Fortis Benefits assumes all organizational expenses of the Account.
ADMINISTRATION CHARGE
A $35 annual contract administrative charge is deducted each contract year
from the value of each Opportunity Variable Annuity and Masters Variable
Annuity and $30 for each EmPower Variable Annuity, Norwest Passage Variable
Annuity and Value Advantage Plus Variable Annuity on each anniversary of the
contract date and upon total surrender of the contract. This charge will be
waived during the accumulation period if the contract value at the end of the
contract year (or upon total surrender) is $25,000 or more, for the
Opportunity Variable Annuity, Masters Variable Annuity and Norwest Passage
Variable Annuity and $100,000 for the EmPower Variable Annuity.
In addition, Fortis Benefits assesses each subaccount of the Opportunity
Variable Annuity and Masters Variable Annuity a daily charge for
administrative expense at annual rate of 0.10% of the net assets. For the
EmPower Variable Annuity and Norwest Passage Variable Annuity the daily
charge is assessed at an annual rate of 0.15%.
MORTALITY AND EXPENSE RISK CHARGE
Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity,
Masters Variable Annuity and Norwest Passage Variable Annuity a daily charge
for mortality and expense risk at an annual rate of 1.25% of the net assets.
For the EmPower Variable Annuity, the mortality and expense risk charge is
assessed at an annual rate of 1.10%. For the Value Advantage Plus Variable
Annuity the mortality and expense risk charge is assessed at an annual rate
of 0.45%.
27
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
5. SURRENDER AND PREMIUM TAX CHARGES
FREE SURRENDERS
The following amounts can be withdrawn from the contract without a surrender
charge:
- Any purchase payments received more than five years prior to the surrender
date for Opportunity Variable Annuity and seven years for Masters Variable
Annuity and have not been previously surrendered.
- In any contract year, up to 10% of the purchase payments received less
than five years prior to the surrender date for Opportunity Variable
Annuity and seven years prior to the surrender date for Masters Variable
Annuity.
- For Masters Variable Annuity any earnings that have not been previously
surrendered.
- For EmPower Variable Annuity and Value Advantage Plus Variable Annuity
there is no surrender charge.
AMOUNT OF SURRENDER CHARGE
Surrender charges apply only if the amount being withdrawn exceeds the sum of
the amounts listed above under Free Surrenders. The surrender charge is based
on a percentage of the amount of purchase payments surrendered. The
percentage of payments is set at 5% during the first five years on the
Opportunity Variable Annuity and Norwest Passage Variable Annuity contracts
with a sliding scale down to zero by the end of the fifth year, and is set at
7% during the first seven years of the Masters Variable Annuity contracts,
with a sliding scale down to zero by the end of the seventh year.
28
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
5. SURRENDER AND PREMIUM TAX CHARGES (CONTINUED)
PREMIUM TAXES
Where premium taxes or similar assessments are imposed by states or other
jurisdiction upon receipt of purchase payments, Fortis Benefits pays such
taxes on behalf of the contract owner and then will deduct a charge for these
amounts from the contract value upon surrender, death of the annuitant or
contract owner, or annuitization of the contract. In jurisdiction where
premium taxes or similar assessments are imposed at the time annuity payments
begin, Fortis Benefits will deduct a charge on a pro rata basis from the
contract value at that time.
Surrender and premium tax charges are included in redemptions and are paid
directly to Fortis Benefits. The surrender and premium tax charges collected
by Fortis Benefits were $4,332,105 and $3,567,880 in 1998 and 1997,
respectively.
6. FEDERAL INCOME TAXES
The operations of the Account form part of, and are taxed with, the
operations of Fortis Benefits, which is taxed as a life insurance company
under the Internal Revenue Code. As a result, the net asset value of the
subaccounts are not affected by income taxes on income distributions received
by the subaccounts.
7. RELATED PARTY TRANSACTIONS
Fortis Advisers, Inc. (Fortis Advisers), an affiliate of Fortis Benefits,
provides investment management services to Fortis Series Fund, Inc. in
exchange for investment advisory and management fees. Investment advisory and
management fees are based on each portfolio's daily net assets and decrease
through reduced percentages as average daily net assets increase. The fees
represent an investment expense to Fortis Series Fund, Inc. which reduces the
portfolios' net assets. The fees charged by Fortis Advisers are not available
on an individual variable account basis. Fees for all variable accounts to
which Fortis Advisers provided investment management services amounted to
$17,790,513 and $14,415,172 in 1998 and 1997, respectively.
29
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
8. YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than 2000. This could result in the failure of major systems or
miscalculations, which could have a material impact on the operations of the
Account. The Account has no computer systems of its own but is dependent upon
the systems of Fortis Benefits Insurance Company, Fortis Advisers and certain
other third parties.
A comprehensive review of Fortis Benefits' and Fortis Advisers' computer
systems and business processes has been conducted to identify the major
systems that could be affected by the Year 2000 issue. Steps are being taken
to resolve any potential problems including modification to existing software
and the purchase of new software. These measures are scheduled to be
completed and tested on a timely basis. Fortis Benefits' and Fortis Advisers'
goal is to complete internal remediation and testing of each system by mid
1999.
The costs related to the Year 2000 issue are not expected to have a material
impact on Fortis Benefits' and Fortis Advisers' results of operations or
financial condition. This expectation is subject to uncertainties that could
cause actual results to differ materially. Factors that could influence the
total costs to be incurred by Fortis Benefits and Fortis Advisers in
connection with the Year 2000 issue include the ability of Fortis Benefits
and Fortis Advisers to successfully identify systems containing two-digit
year codes, the nature and amount of programming required to fix the affected
programs, the related labor and consulting costs for such remediation, and
the ability of third parties that interface with Fortis Benefits and Fortis
Advisers to successfully address their Year 2000 issues.
Fortis Benefits and Fortis Advisers are evaluating the Year 2000 readiness of
advisors and other third parties whose system failures could have an impact
on Fortis Benefits' and Fortis Advisers' operations. The potential
materiality of any such impact is not entirely known at this time. Fortis
Benefits and Fortis Advisers are closely monitoring these entities to avoid
any unforeseen circumstances.
30
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
8. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
Fortis Benefits' and Fortis Advisers' Year 2000 project includes establishing
Year 2000 contingency plans for all key business units. These plans are being
developed and are expected to be substantially complete by the end of the
first quarter of 1999. These plans will continue to be refined throughout
1999 as additional information related to potential Year 2000 exposure is
gathered.
31
APPENDIX A
PERFORMANCE INFORMATION
In advertising and other sales material for the Certificates, yield and total
return information for the Subaccounts of the Variable Account may be included.
The information below provides investment results for the indicated Subaccounts
of the Variable Account. The results shown in this section are not an estimate
or guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Participant.
YIELD CALCULATIONS
Yield information for the Alliance Money Market Subaccount will be based on the
seven days ended on a specified date. It will be computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account (after the deduction of all asset based charges) having a
balance of one Accumulation Unit at the beginning of the period and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return , and multiplying the base period return by
(365/7), with the resulting yield figure carried to the nearest hundredth of one
percent. The seven day yield for the Alliance Money Market Subaccount as of
December 31, 1998 was 4.03%.
An effective yield may also be quoted for the Alliance Money Market Subaccount.
Effective yield is calculated by compounding the current yield as follows:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
The seven day effective yield for the Alliance Money Market Subaccount as of
December 31, 1998 was 4.11%.
Yield information for the other Subaccounts will be based on the thirty days
ended on a specified date and carried to the nearest hundredth of a percent,
according to the following formula:
6
A-B
2[( ---+1) -1]
CD
Where:
A = net investment income earned during the period by the Portfolio whose
shares are owned by the Subaccount,
B = expenses accrued for the period,
C = the average daily number of Accumulation Units outstanding during the
period, and
D = the offering price per Accumulation Unit at the end of the last day of the
period.
The following table sets figures for the thirty days ended December 31, 1998.
Subaccount Yield
---------- -----
Federated High Yield Bond . . . . . . . . . . . . . . . . . . . .2.49%
Federated U.S. Government Securities. . . . . . . . . . . . . . .2.74%
MFS High Income . . . . . . . . . . . . . . . . . . . . . . . . .9.16%
MFS World Governments . . . . . . . . . . . . . . . . . . . . . .1.54%
Van Eck Worldwide Bond. . . . . . . . . . . . . . . . . . . . . .1.60%
A-1
TOTAL RETURN CALCULATIONS
Total return information will be given for the one-year and five-year periods
ended on a specified date, provided that, if the registration statement has been
effective for a Subaccount only during a shorter period, then such shorter
period will be used.
AVERAGE ANNUAL TOTAL RETURN
Total average annual compounded rates of return for each period will be computed
to the nearest one hundredth of a percent, according to the following formula:
n
P(1 + T) = CSV
WHERE: P = a hypothetical initial purchase payment of $1,000,
T = average annual total return,
n = number of years, and
CSV = end of period Cash Surrender Value of hypothetical $1,000
purchase payment made at the beginning of the period, assuming
deduction of a proportionate amount of the annual administrative
charge (based on average Contract size).
The following table show total average annual rates of return for the periods
indicated:
Subaccount One Year Period Commencement to
Ended Dec. 31, 1998 Dec. 31, 1998
- ---------------------------------- ------------------- ---------------
Alliance International Portfolio 9.54% 5.14%
Alliance Premier Growth Portfolio 44.31% 32.15%
American Century VP Balanced Fund 12.25% 12.12%
American Century VP Capital -5.60% -6.47%
Appreciation Fund
Federated High Income Bond Fund II -0.76% 6.81%
Federated Utility II 10.47% 14.30%
Federated American Leaders II 14.09% 19.87%
Federated U.S. Government 4.17% 6.88%
Securities II
INVESCO Equity Income Fund 11.76% 20.40%
INVESCO Health Sciences Fund 39.22% 29.33%
INVESCO Technology Fund 22.13% 22.48%
Lexington Natural Resources Trust -22.96% -1.08%
Lexington Emerging Markets Fund -31.43% -19.33%
MFS Emerging Growth Series 30.57% 21.77%
MFS High Income Series -3.62% 5.42%
MFS Global Government Series 4.41% 1.38%
Montgomery Emerging Markets Fund -40.82% -16.31%
A-2
Montgomery Growth Fund -0.54% 17.54%
Neuberger & Berman Limited Maturity 0.75% 15.09%
Bond Portfolio
Neuberger & Berman Partners Portfolio 93.00% 3.62%
SAFECO Equity Portfolio 21.30% 19.58%
SAFECO Growth Portfolio 22.39% 17.04%
Strong Discovery Fund II 3.77% 4.30%
Strong International Stock Fund II -8.20% -7.44%
Van Eck Worldwide Bond Fund 9.25% 3.89%
Van Eck WorldwideHard Assets Fund -34.14% -15.43%
CUMULATIVE TOTAL RETURN
Total cumulative rates of return for each period will be computed to the nearest
one hundredth of a percent, according to the following formula:
CTR = (CSV - P) 100
-------
P
Where: P = a hypothetical initial purchase payment of $1,000,
CTR = cumulative total return, and
CSV = end of period Cash Surrender Value of hypothetical $1,000
purchase payment made at the beginning of the period, assuming
deduction of a proportional amount of the annual administrative charge
(based on average Contract size).
The following table shows cumulative total rates of return for the periods
indicated:
Subaccount One Year Period Commencement to
Ended Dec. 31, 1998 Dec. 31, 1998
- ----------------------------------- ------------------- ---------------
Alliance International Portfolio 9.54% 15.75%
Alliance Premier Growth Portfolio 44.31% 125.71%
American Century VP Balanced Fund 12.25% 39.67%
American Century VP Capital -5.60% -17.75%
Appreciation Fund
Federated High Income Bond Fund II -0.76% 21.20%
Federated Utility II 10.47% 47.75%
Federated American Leaders II 14.09% 69.77%
Federated U.S. Government 4.17% 11.73%
Securities II
INVESCO Equity Income Fund 11.76% 36.28%
INVESCO Health Sciences Fund 39.22% 53.54%
INVESCO Technology Fund 22.13% 40.22%
Lexington Natural Resources Trust -22.96% -3.12%
Lexington Emerging Markets Fund -31.43% -46.60%
MFS Emerging Growth Series 30.57% 77.74%
A-3
MFS High Income Series -3.62% 16.66%
MFS Global Government Series 4.41% 4.08%
Montgomery Emerging Markets Fund -40.82% -40.54%
Montgomery Growth Fund -0.54% -6.32%
Neuberger & Berman Limited Maturity 0.75% 26.46%
Bond Portfolio
Neuberger & Berman Partners Portfolio 93.00% 6.11%
SAFECO Equity Portfolio 21.30% 45.05%
SAFECO Growth Portfolio 22.39% 46.37%
Strong Discovery Fund II 3.77% 13.08%
Strong International Stock Fund II -8.20% -20.22%
Van Eck Worldwide Bond Fund 9.25% 11.78%
Van Eck Worldwide Hard Assets Fund -34.14% -38.69%
Yield figures do not reflect any surrender charge, and yield and total return
figures do not reflect any premium tax charge. Yield and total return figures do
reflect the reimbursement of certain Fortis Series expenses. Current Fixed
Account effective annual rates of interest may also be quoted in advertising and
other sales materials, and these rates do not reflect any deductions or charges.
First Fortis may advertise its relative performance as compiled by outside
organizations. Following is a list of ratings services which may be referred to
in advertisements, along with the category in which the applicable Subaccount is
included:
Rating Service Category
-------------- --------
Alliance Money Market Subaccount
Morningstar Publications, Inc.
Lipper Analytical Services, Inc.
Alliance International Subaccount
Morningstar Publications, Inc. International
Lipper Analytical Services, Inc. International
Alliance Premier Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Federated High Yield Bond Subaccount
Morningstar Publications, Inc. High Yield Bond
Lipper Analytical Services, Inc.
Federated Utility Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
A-4
Federated American Leaders Subaccount
Morningstar Publications, Inc. Growth & Income
Lipper Analytical Services, Inc.
Lexington Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
Lexington Emerging Markets Subaccount
Morningstar Publications, Inc. International Stock
Lipper Analytical Services, Inc.
MFS Emerging Growth Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Mid Cap Funds
MFS High Income Subaccount
Morningstar Publications, Inc. High Yield Bonds
Lipper Analytical Services, Inc. Mid Cap Funds
MFS Global Governments Subaccount
Morningstar Publications, Inc. International Bonds
Lipper Analytical Services, Inc.
Montgomery Emerging Markets Subaccount
Morningstar Publications, Inc. Diversified Emerging
Markets
Lipper Analytical Services, Inc. Emerging Markets Funds
Montgomery Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Strong Discovery Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Capital Appreciation Fund
Strong Government Securities Subaccount
Morningstar Publications, Inc. Government Bond - General
Lipper Analytical Services, Inc.
Strong Advantage Subaccount
Morningstar Publications, Inc. Corporate Bond - General
Lipper Analytical Services, Inc.
A-5
Strong International Stock Subaccount
Morningstar Publications, Inc. Foreign Stock
Lipper Analytical Services, Inc. International Fund
TCI Balanced Subaccount
Morningstar Publications, Inc. Balanced
Lipper Analytical Services, Inc.
TCI Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc.
Van Eck Worldwide Bond Subaccount
Morningstar Publications, Inc. International Bond
Lipper Analytical Services, Inc.
Van Eck Gold and Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc. Gold Oriented Fund
A-6
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The estimated expenses of the issuance and distribution of the
Contracts, other than commissions on sales of the Contracts are as follows:
Amount
------
Securities and Exchange Commission
registration fee $ 0
Printing and engraving $ 3,000.00
Accounting fees and expenses $ 1,500.00
Legal fees and expenses $ 3,000.00
Item 15. Indemnification of Directors and Officers
Section 300.083 of Minnesota Law General Provision provides in part
that a corporation organized under such law shall have power to indemnify anyone
made, or threatened to be made, a party to a threatened, pending or completed
proceeding, whether civil or criminal, administrative or investigative, because
he is or was a director or officer of the corporation, or served as a director
or officer of another corporation at the request of the corporation.
Indemnification in such a proceeding may extend to judgments, penalties, fines
and amounts paid in settlement, as well as to reasonable expenses, including
attorneys' fees and disbursements. In a civil proceeding, there can be no
indemnification under the statute, unless it appears that the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and its
shareholders and unless such person has received no improper personal benefit;
in a criminal proceeding, the person seeking indemnification must also have no
reasonable cause to believe his conduct was unlawful.
Article VI Section 5 of the By-laws of the Fortis Benefits Insurance
Company provides as follows:
Section 5. The Company shall indemnify (including therein the
prepayment of expenses) any person who is or was a director, officer or
employee, or who is or was serving at the request of the Company as a
director, officer or employee of another corporation, partnership,
joint venture, trust or other enterprise for expenses (including
attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him with respect to any threatened,
pending or completed action, suit or proceedings against him by reason
of the fact that he is or was such a director, officer or employee to
the extent and in the manner permitted by law.
Section 12 of the Principal Underwriter agreement incorporated as
exhibit 1 to this registration statement (which is incorporated herein by this
reference) provides that Fortis Investors, Inc. and Fortis Benefits will
indemnify each other, and each other's officers, directors and controlling
persons, with respect to certain types of misstatements or omissions in
connection with the offer and sale of the Certificates.
Certain officers, directors or controlling persons of Fortis Investors, Inc. are
also officers, directors and controlling persons of Fortis Benefits.
Pursuant to the Principal Underwriter and Servicing Agreement, Fortis
Investors has agreed to indemnify Variable Account D, Fortis Benefits, and each
of its officers, directors and controlling persons for
damages and expenses (1) arising out of certain material misstatements and
omissions in connection with the offer and sale of the Contracts, if the
misstatement or omission was based on information furnished by Fortis Investors
or (2) otherwise arising out of Fortis Investors' negligence, bad faith, willful
misfeasance or reckless disregard of its responsibilities. Pursuant to its
Dealer Sales Agreements, a form of which is filed as Exhibit 3(b) to this
registration statement and is incorporated herein by this reference, firms that
sell the contracts agree to indemnify Fortis Benefits, Fortis Investors, the
Separate Account, and their officers, directors, employees, agents, and
controlling persons from liabilities and expenses arising out of the wrongful
conduct or omissions of said selling firm or its officers, directors, employees,
controlling persons or agents.
Item 16. Exhibits and Financial Statement Schedule
a. Exhibits
1. (a) Form of Principal Underwriter and Servicing Agreement
(incorporated by reference from Form N-4 Registration
Statement of Fortis Benefits and its Variable Account D filed
on January 11, 1994, File No. 33-73986);
(b) Form of Amendment to Principal Underwriting (incorporated
by reference from Form N-4 Registration Statement of Fortis
Benefits and its Variable Account D filed on January 11, 1994,
File No. 33-73986).
2. Form of Asset Transfer and Acquisition Agreement dated August
28, 1991 and supplement thereto dated October 1, 1991
(incorporated by reference from Form 8-K filed on October 16,
1991 [as amended by Form 8 filed on October 21, 1991], File
No. 33-37576).
3. (a) Articles of Incorporation of Fortis Benefits Insurance
Company (incorporated by reference from Form S-6 Registration
Statement of Fortis Benefits and its Variable Account C filed
on March 17, 1986, File No. 33-03919);
(b) By-laws of Fortis Benefits Insurance Company (incorporated
by reference from Form S-6 Registration Statement of Fortis
Benefits and its Variable Account C filed on March 17, 1986,
File No. 33-03919);
(c) Amendment to Articles of Incorporation and By-laws dated
November 21, 1991 (incorporated by reference from
Post-Effective Amendment No. 1 to the Form N-4 Registration
Statement of Fortis Benefits and its Variable Account D filed
on March 2, 1992, File No. 33-37577).
4. (a) Form of Combination Fixed and Variable Group Annuity
Contract (incorporated by reference from Form N-4 Registration
Statement of Fortis Benefits filed on November 2, 1995, File
No. 33-63935);
(b) Form of Certificate to be used in connection with Contract
filed as Exhibit 4 (a) (incorporated by reference from Form
N-4 Registration Statement of Fortis Benefits filed on
November 2, 1995, File No. 33-63935);
(c) Form of Combination Fixed and Variable Individual Annuity
Contract (General Account Fixed Account) (incorporated by
reference from Form N-4 Registration Statement of Fortis
Benefits filed on November 2, 1995, File No. 33-63935);
(d) Form of IRA Endorsement (incorporated by reference from
Pre-Effective Amendment No. 1 to the From N-4 Registration
Statement of Fortis Benefits and its Variable Account D filed
on March 28, 1991, File No. 33-37577);
(e) Form of Section 403(b) Annuity Endorsement (incorporated
by reference from Pre-Effective Amendment No. 1 to Form N-4
Registration Statement of Western Life and its Variable
Account D filed on March 28, 1991).
5. Opinion and consent of David A. Peterson, Esq., Assistant
General Counsel of Fortis Benefits Insurance Company, as to
the legality of the securities being registered (included as
part of the original filing of this Form S-1 Registration
Statement filed on October 31, 1995).
10. Fortis, Inc. Executive Incentive Compensation Plan
(incorporated by reference from Amendment No. 1 to Form S-1
Registration Statement of Fortis Benefits filed on March 28,
1991, File No. 33-37576).
23. Consent of Ernst & Young LLP - filed herewith.
24. Power of Attorney for Messrs. Freedman and Clayton
(incorporated by reference from Form S-6 Registration
Statement of Fortis Benefits and its Variable Account C filed
on December 17, 1993, File No. 33-73138).
b. Not applicable.
Item 17. Undertakings
The 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, including (but not
limited to) any addition or deletion of a managing
underwriter.
(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.
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 indemnification provision described in response
to Item 14, 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 governed by the final adjudication of such issue.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this amended Registration Statement to be signed
on its behalf in the City of St. Paul, State of Minnesota on this 19th day of
April, 1999.
FORTIS BENEFITS INSURANCE COMPANY
(Registrant)
By: /s/
------------------------------------
Robert Brian Pollock,
President
As required by the Securities Act of 1933 and the Investment Company Act of
1940, this Registration Statement has been signed by the following persons, in
the capacities indicated, on April 19, 1999.
Signature Title With Fortis Benefits
- --------- --------------------------
* Chairman of the Board
----------------------------------
Allen Royal Freedman
* Director
----------------------------------
J. Kerry Clayton
Director
----------------------------------
Arie Aristide Fakkert
Director
----------------------------------
Alan W. Feagin
/s/ Director
----------------------------------
Dean C. Kopperud
/s/ President and Director
---------------------------------- (Chief Executive Officer)
Robert Brian Pollock
/s/ Senior Vice President, Controller,
---------------------------------- Treasurer and Director (Principal
Michael John Peninger Accounting Officer and
Principal Financial Officer)
*By: /s/
----------------------------------
Robert Brian Pollock
Attorney-in-Fact
EXHIBIT INDEX
Item
Number Description
- ------ -----------
23 Consent of Accountants