<PAGE>
FORTIS WALL STREET SERIES VUL PROSPECTUS
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES (THE "POLICIES")
[LOGO]
ISSUED BY
FORTIS BENEFITS INSURANCE COMPANY ("FORTIS")
HOME OFFICE:
<TABLE>
<S> <C> <C>
Mailing Address: Street Address: Telephone:
P.O. Box 64284 500 Bielenberg Drive (800) 800-2000
St. Paul, MN 55164 Woodbury, MN 55125 Ext. 3028
</TABLE>
The flexible premium variable life insurance Policies offered by this Prospectus
are issued by Fortis Benefits Insurance Company. The Policies are designed to
- - provide lifetime insurance coverage on the insureds named in the Policies
- - allow flexibility in premium payments and death benefits
- - give you several variable investment options from which to choose
OTHER CHOICES YOU HAVE. During the insured person's lifetime, you can also
(1) change the amount of insurance, (2) borrow or withdraw amounts you have in
our investment options, (3) choose, within limits, when and how much you invest,
and (4) choose whether the amounts you have in our investment options will, upon
the insured person's death, be added to the insurance proceeds we otherwise will
pay to the beneficiary.
CHARGES AND EXPENSES. We deduct charges and expenses from the amounts you
invest. These are described beginning on page 5.
RIGHT TO RETURN. If for any reason you are not satisfied with your Policy,
you may return it to us for a full refund. To exercise your right to return your
Policy, you must mail it directly to the Home Office address shown above or
return it to the Fortis representative through whom you purchased the Policy
within 10 days after you receive it. In a few states, this period may be longer.
Because you have this right, we will invest your initial premium payment in the
Fortis general account for 20 days following the date the Policy is mailed to
you. Then we will automatically allocate your investment among the investment
options shown on page 3, as you have chosen. Any additional premium we receive
during the 20-day period will also be invested in the general account option and
allocated to your chosen investment options at the same time as your initial
premium.
THE POLICIES ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY. THEY ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT BANK GUARANTEED. THEY ARE
SUBJECT TO INVESTMENT RISKS AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
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.
THIS BOOKLET IS CALLED A "PROSPECTUS." ITS DATE IS APRIL 16, 1999.
<PAGE>
[LOGO]
and Fortis-SM- are registered servicemarks of Fortis (NL) N.V. and Fortis (B).
99987 (5/99)
<PAGE>
GUIDE TO THIS PROSPECTUS
BASIC INFORMATION. This prospectus contains information that you should
know before you purchase a variable universal life policy ("Policy") or exercise
any of your rights under a Policy.
Here are the page numbers in this prospectus where you may find answers to
most of your questions:
<TABLE>
<CAPTION>
PAGES TO SEE IN THIS
BASIC QUESTIONS YOU MAY HAVE PROSPECTUS
- ------------------------------------------------------------ -------------------------
<S> <C>
- -What are my investment options?............................ 3
- -How can I invest money in a Policy?........................ 3
- -How will the value of my investment in a Policy change over
time?...................................................... 4
- -What is the basic amount of insurance ("death benefit")
that Fortis pays when the insured person dies?............. 5
- -What charges will Fortis deduct from my investment in the
Policy?.................................................... 5
- -What charges and expenses will the Funds deduct from
amounts invested through my Policy?........................ 7
- -Must I invest any minimum amount in a Policy?.............. 8
- -How can I change my Policy's investment options?........... 9
- -How can I change my Policy's insurance coverage?........... 9
- -What additional rider benefits might I select?............. 10
- -How can I access my policy value?.......................... 11
- -Can I choose the form in which Fortis pays out the proceeds
from my Policy?............................................ 12
<CAPTION>
PAGES TO SEE IN THIS
BASIC QUESTIONS YOU MAY HAVE PROSPECTUS
- ------------------------------------------------------------ -------------------------
<S> <C>
- -To what extent can Fortis vary the terms and conditions of
the Policies in particular cases?.......................... 13
- -How will my Policy be treated for income tax purposes?..... 13
- -How do I communicate with Fortis?.......................... 13
</TABLE>
ILLUSTRATIONS OF A HYPOTHETICAL POLICY. Starting on page 14, we have
included some illustrations of how the values of a hypothetical Policy would
change over time, based on certain assumptions we have made. Because your
circumstances may vary considerably from our assumptions, your Fortis
representative will also provide you with a similar hypothetical illustration
that is more tailored to your own circumstances and wishes.
ADDITIONAL INFORMATION. You may find the answers to other questions you
have under "Additional Information" beginning on page 19, or in the forms of our
Policy and riders. A table of contents for the "Additional Information" portion
of this prospectus also appears on page 19. You can obtain copies of our Policy
and rider forms from (and direct any other questions to) your Fortis
representative or our Home Office (see page 1).
FORTIS' FINANCIAL STATEMENTS. We have included our financial statements in
this prospectus. These begin on page 30.
SPECIAL WORDS AND PHRASES. If you want more information about any words or
phrases that you read in this prospectus, you may wish to refer to the Index of
Words and Phrases that appears at the end of this prospectus (page 31). That
index will tell you on what page you can read more about many of the words and
phrases that we use.
2
<PAGE>
BASIC QUESTIONS YOU MAY HAVE
WHAT ARE MY INVESTMENT OPTIONS?
You can invest in any of the following variable investment options. You may
change your selections from time to time:
<TABLE>
<CAPTION>
DOMESTIC STOCK
------------------------------
<S> <C>
Small Cap Fortis-Aggressive Growth
Series
Berger-Small Cap Value Series
Mid Cap Fortis-Growth Stock Series
Dreyfus-Mid Cap Stock Series
Large Cap Alliance-Large Cap Growth
Series
T. Rowe Price-Blue Chip Stock
Series
Dreyfus-S&P 500 Index Series
Fortis-Growth & Income Series
Fortis-Value Series
Fortis-Asset Allocation Series
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL STOCK
------------------------------
<S> <C>
Lazard Freres-International Stock Series
Fortis-Global Growth Series
Morgan Stanley-Global Asset Allocation Series
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC BONDS
------------------------------
<S> <C>
Fortis-High Yield Series
Fortis-Diversified Income Series
Fortis-U.S. Gov't Securities Series
</TABLE>
<TABLE>
<CAPTION>
CASH
------------------------------
<S> <C>
Fortis-Money Market Series
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL BONDS
------------------------------
<S> <C>
Mercury-Global Bond Series
</TABLE>
The FBIC general account is the fixed rate investment option for these Policies.
A SEPARATE PROSPECTUS CONTAINS MORE INFORMATION ABOUT THE FORTIS SERIES FUND,
INC. ("FUND" OR "FUNDS") IN WHICH WE INVEST THE AMOUNT THAT YOU ALLOCATE TO ANY
OF THE ABOVE-LISTED VARIABLE INVESTMENT OPTIONS. YOUR INVESTMENT RESULTS IN ANY
SUCH OPTION WILL DEPEND ON THOSE OF THE RELATED FUND. THEREFORE, YOU SHOULD BE
SURE YOU ALSO READ THE FUND PROSPECTUS FOR ANY SUCH INVESTMENT OPTION YOU MAY BE
INTERESTED IN.
HOW CAN I INVEST MONEY IN A POLICY?
PREMIUM PAYMENTS. We call the investments you make in a Policy "premiums."
The amount we recommend as your first premium varies depending on the specifics
of your Policy and the insured person. We can refuse to accept a subsequent
premium payment that is less than $25.00. (Policies issued in some states or
automatic premium payment plans may have different minimums.) Otherwise, with a
few exceptions mentioned below, you can make premium payments at any time and in
any amount.
RECOMMENDED MONTHLY MINIMUM PREMIUM. We will recommend a monthly minimum
premium to you in your Policy. This monthly minimum premium is generally the
estimated monthly premium which would keep your Policy (or benefit change) in
force until the insured person reaches age 65, or for 5 years if the insured
person is older than age 60. We base our estimate on (1) the insured person's
age, sex and smoking habits and (2) reasonable assumptions for interest, cost of
insurance, and other charges.
LIMITS OF PREMIUM PAYMENTS. Federal tax law limits your ability to make
certain very large amounts of premium payments (relative to the amount of your
Policy's insurance coverage) and may impose penalties on amounts you take out of
your Policy if you do not observe certain additional requirements. These tax law
requirements are summarized further under "Tax Effects" beginning on page 19. We
will monitor your premium payments to be sure that you do not exceed permitted
amounts or inadvertently incur any tax penalties. We reserve the right to impose
additional limits on the number or amount of premium payments. We currently have
no intention of imposing such limits, except when the insured person does not
provide us with adequate evidence that he/she continues to meet our requirements
for issuing insurance.
WAYS TO PAY PREMIUMS. Premiums must be by check or money order drawn on a
U.S. bank in U.S. dollars and made payable to "Fortis Benefits Insurance
Company." Premiums after the first premium must be sent directly to our Home
Office at the appropriate address shown on page 1. We also accept premium
payments by bank draft, wire, or by exchange from another insurance company. You
may obtain further information about how to make premium payments by any of
these methods from your Fortis representative or from our Home Office. Premium
payments from salary deduction plans may be made only if we agree.
DOLLAR COST AVERAGING. Dollar cost averaging is an investment strategy
designed to reduce the
3
<PAGE>
risks that result from market fluctuations. The strategy spreads the allocation
of your policy value over a period of time. This allows you to reduce the risk
of investing most of your funds at a time when prices are high. The success of
this strategy depends on market trends and your fund choices, and is not
guaranteed.
Under dollar cost averaging, we automatically make regular, periodic
transfers of your policy value from one investment option to one or more of the
other investment options that you choose. We make these transfers at the end of
the first day of each month. You must have at least $5,000 of policy value to
start dollar cost averaging. Each transfer under the program must be at least
$50. You cannot participate in dollar cost averaging while also using automatic
rebalancing (discussed below). Dollar cost averaging ceases upon your request,
or if your policy value in the option being transferred from becomes exhausted.
AUTOMATIC REBALANCING (Privileged Account Service). Privileged Account
Service is an investment strategy which recognizes that different investment
sectors perform relatively better at different times. The strategy periodically
examines your investment mix and adjusts it to maintain proportions you specify.
This is intended to increase your chance of realizing a gain on a fund that
shows a sudden improvement in performance. The success of this strategy depends
on market trends (and your fund choices) and is not guaranteed.
Under Privileged Account Service, we automatically rebalance the proportion
of your policy value in each investment option you specify. You tell us whether
you want us to do the rebalancing quarterly, semi-annually, or annually. We
rebalance on a calendar year basis. You must have a total accumulation value of
at least $2,000 to begin automatic rebalancing. Over time, the differing
investment results of each investment option will shift the percentage
allocations of your policy value. The rebalancing feature will automatically
transfer your policy value among the subaccounts back to the preset percentages
you have selected. You cannot participate in this program while also
participating in dollar cost averaging (discussed above). Rebalancing terminates
upon your request.
HOW WILL THE VALUE OF MY INVESTMENT IN A POLICY CHANGE OVER TIME?
YOUR POLICY VALUE. From each premium payment you make, we may deduct the
charges that we describe beginning on page 5, under "Deductions from each
premium payment." We invest the rest in one or more of the investment options
listed on page 3 according to your instructions. We call the amount that is at
any time invested under your Policy, your "policy value."
YOUR INVESTMENT OPTIONS. We invest the policy value that you have allocated
to any investment option (except our general account option) in shares of a Fund
that follows investment practices, policies and objectives that are appropriate
to that option. Over time, your policy value in any investment option will
increase or decrease by the same amount as if you had invested in the related
Fund's shares directly (and reinvested all dividends and distributions from the
Fund in additional Fund shares); except that your policy value will be reduced
by certain charges that we deduct. We describe these charges beginning on page
5, under "What charges will Fortis deduct from my investment in the Policy?"
Other important information about the Funds that you can choose is included
in the separate prospectus for those Funds. This includes information about the
investment performance that each Fund's investment manager has achieved.
Additional free copies of the Fund prospectus are available from your Fortis
representative or from our Home Office.
We invest any value you have allocated to our general account option as part
of our general assets. We credit a fixed rate of interest on that policy value,
which we declare from time to time. We guarantee that this will be at an
effective annual rate of at least 4%. Although this interest increases the
amount of any policy value that you have in our general account option, such
policy value will also be reduced by any charges that are allocated to this
option under the procedures described under "Allocation of charges" on page 7.
The "asset-based monthly charge" and the charges and expenses of the Funds
discussed below do not apply to our general account option.
4
<PAGE>
POLICIES ARE "NON-PARTICIPATING." The Policies are not "participating."
Therefore, you will not be entitled to any dividends from Fortis.
WHAT IS THE BASIC AMOUNT OF INSURANCE ("DEATH BENEFIT") THAT FORTIS PAYS WHEN
THE INSURED PERSON DIES?
YOUR FACE AMOUNT OF INSURANCE. In your application to buy a Policy, you
will tell us how much life insurance coverage you want on the life of the
insured person. We call this the "face amount" of insurance. The minimum face
amount of insurance is $50,000 for issue ages 0-70, and $100,000 for issue ages
71-80.
YOUR DEATH BENEFIT. The basic death benefit we will pay is reduced by any
outstanding loans. You choose whether the basic death benefit is
- Option A - The face amount on the date of the insured person's death
- Option B - The face amount plus the policy value on the date of death.
Under Option B, your death benefit will tend to be higher than under Option A.
However, the monthly insurance charge we deduct will also be higher to
compensate us for our additional risk. Because of this, your policy value will
tend to be higher under Option A than under Option B. Please read "How can I
change my Policy's insurance coverage" on page 9 of this prospectus to learn
about how to change your death benefit option.
We will automatically pay an alternative basic death benefit as described
below, if it is higher than the basic Option A or Option B death benefit
(whichever you have selected).
At issue, you may choose between two tests that may be used to determine if a
Policy qualifies as life insurance as defined by Section 7702 of the Internal
Revenue Code of 1986, as amended, (the "Code"). The test selected will determine
how the alternative death benefit is calculated. Once a test is selected it
cannot be changed. The two tests are the Guideline Premium Test and the Cash
Value Accumulation Test.
Under either test, the death benefit at any point must be greater than the
policy value times an applicable percentage. Under the Guideline Premium Test
those percentages are prescribed and vary only by the age of the insured. Under
the Cash Value Accumulation Test, the percentages vary by the age and
underwriting class of the insured. The applicable percentages for the Guideline
Premium Test are indicated in the following table:
<TABLE>
<CAPTION>
AGE OF INSURED APPLICABLE PERCENTAGE
AT DEATH OF POLICY VALUE
- --------------- -------------------------
<S> <C>
40 or less 250%
45 215%
50 185%
55 150%
60 130%
65 120%
70 115%
75 105%
80 105%
85 105%
90 105%
95+ 100%
</TABLE>
For ages not listed, the progression between the listed ages is constant.
The following table illustrates the estimated applicable percentages under the
Cash Value Accumulation Test for a male insured rated as standard non-smoker:
<TABLE>
<CAPTION>
APPLICABLE PERCENTAGE
AGE OF INSURED OF POLICY VALUE
- --------------------- -------------------------
<S> <C>
35 422%
45 303%
55 221%
65 168%
75 136%
</TABLE>
We reserve the right to increase the death benefit, limit a face decrease,
return premium or send you a withdrawal of policy value, to make sure the Policy
qualifies as life insurance under the test selected.
MATURITY OF YOUR POLICY. The maturity date of the Policy is the date of
death of the insured.
WHAT CHARGES WILL FORTIS DEDUCT FROM MY INVESTMENT IN THE POLICY?
ASSET-BASED MONTHLY CHARGE. We make a monthly deduction from your policy
value invested in any of the investment options (other than the general account
option). The charge is based on annual effective percentage rates as follows:
<TABLE>
<CAPTION>
UNLOANED
POLICY VALUE IN
VARIABLE SUBACCOUNTS YEARS 1-9 YEARS 10+
- -------------------------------------------- ------------- ---------------
<S> <C> <C>
$0 - $25,000................................ 1.10% .70%
$25,001 - $250,000.......................... .70% .30%
$250,001 or more............................ .35% .10%
</TABLE>
5
<PAGE>
The level of the annual effective percentage rate is not guaranteed. Rather,
we have the right at any time to raise this rate under your Policy to not more
than 1.2%.
The asset-based monthly charge is designed primarily to a) defray the
expenses of processing applications and issuing the Policies, b) reimburse us
for the cost of distributing the Policies, and c) compensate us for the risks we
assume under the Policy. See "More About Policy Charges" in the "Additional
Information" portion of the prospectus.
MONTHLY ADMINISTRATIVE CHARGE. We will deduct $5.00 per month from your
policy value. Also, we have the right to raise this charge at any time to not
more than $11.50 per month. While we do not currently do so, we also reserve the
right to impose an additional monthly charge of up to $.13 per thousand dollars
of face amount then in force. This charge is designed to compensate us for the
continuing administrative functions we perform in connection with the Policies.
MONTHLY INSURANCE CHARGE. Every month we will deduct from your policy value
a charge based on the cost of insurance rates applicable to your Policy on the
date of the deduction and our "amount at risk" on that date. Our amount at risk
is the difference between (a) the death benefit divided by 1.00327374, at the
beginning of the Policy month and (b) the total policy value at the beginning of
the Policy month. For otherwise identical Policies, a greater amount at risk
results in a higher monthly insurance charge.
For otherwise identical Policies, a higher cost of insurance rate also
results in a higher monthly insurance charge. Our cost of insurance rates are
guaranteed not to exceed those specified in your Policy. Our current rates are
lower for insured persons in most age and risk classes, although we have the
right at any time to raise these rates to not more than the guaranteed maximum.
In general, our cost of insurance rates increase with the insured person's
age. Therefore, the longer you own your Policy, the higher the cost of insurance
rate will be. Also, our cost of insurance rates will generally be lower if the
insured person is a female than if a male (except if the Policy is unisex).
Similarly, our current cost of insurance rates are generally lower for
non-smokers than smokers, and lower for persons that have other highly favorable
health characteristics, as compared to those that do not. On the other hand,
insured persons who present particular health, occupational or avocational risks
may be charged higher cost of insurance rates. Additional level amounts per
thousand dollars of face amount may be charged in such cases.
Finally, for otherwise identical Policies, our current cost of insurance
rates are lower for Policies having higher face amounts. The insurance charges
are tiered according to face amount. There are five tiers with each succeeding
tier being charged a lower cost of insurance rate than the rate for the
preceding tier as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF THE FIRST TIER CHARGES
--------------------------------------------
FACE AMOUNT TIER SMOKER NON-SMOKER PREFERRED
- --------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
$100,000 or less................. 100% 100% 100%
$100,001 - $300,000.............. 97% 99% 98%
$300,001 - 500,000............... 95% 97% 96%
$500,001 - $1,000,000............ 93% 95% 86%
$1,000,001 or more............... 90% 93% 82%
</TABLE>
This means that the cost of insurance rate per thousand will be lower for
the portion of the face amount of insurance within each succeeding tier. For
example, a Policy with a $350,000 face amount would have a cost of insurance
rate for the first $100,000, a lower rate for the next $200,000 of face amount
and a still lower rate for the remaining $50,000 of face amount.
DEDUCTIONS FROM EACH PREMIUM PAYMENT. While we don't currently have plans to
do so, we reserve the right to impose an additional charge of up to 2.5% that
would be deducted from each payment to more fully reimburse us for premium and
other taxes that may be payable and are attributable to the Policies.
GUARANTEED DEATH BENEFIT CHARGES. There is no charge for the first 5 years
(or if the insured is age 71 or more at issue, the greater of 2 years or until
age 75). If you select a longer guarantee period there is a monthly charge for
the rest of the guarantee period as follows:
(1) The current charge is $.01 per thousand of face amount in effect under
the Policy and any riders for the guarantee period that lasts until age
65;
6
<PAGE>
(2) The current charge is $.02 per thousand of face amount in effect under
the Policy and any riders for the guarantee period which lasts until age
85.
These charges may be raised, subject to a maximum of $.03 and $.06 per
thousand, respectively.
ADDITIONAL BENEFIT RIDERS CHARGE. We will deduct charges monthly from your
policy value, if you select certain additional benefit riders. These are
described beginning on page 10, under "What additional rider benefits might I
select?"
SURRENDER CHARGE. The Policies have a surrender charge that applies for the
first 14 Policy years (and the first 14 years after any requested increase in
the Policy's face amount). This charge is imposed when the Policy is surrendered
or lapsed. The amount of the surrender charge depends on the face amount and the
age of the insured person as follows:
<TABLE>
<CAPTION>
INSURED PERSON'S AGE AT SURRENDER CHARGE PER
TIME OF POLICY ISSUANCE THOUSAND DOLLARS OF
OR FACE AMOUNT OR
FACE AMOUNT INCREASE FACE AMOUNT INCREASE
- ----------------------- -----------------------
<S> <C>
0-27 $ 9.00
28-34 $ 10.00
35-38 $ 11.00
39-42 $ 12.00
43-45 $ 13.00
46-48 $ 14.00
49-51 $ 16.00
52-53 $ 18.00
54-55 $ 20.00
56-57 $ 22.00
58-59 $ 25.00
60-61 $ 29.00
62-63 $ 33.00
64-65 $ 38.00
66-80 $ 40.00
</TABLE>
Any amount of surrender charge decreases automatically by a constant amount
each year beginning in the sixth year of its 14 year period referred to above
until, in the fifteenth year, it is zero.
TRANSACTION FEE. We reserve the right to charge a transaction fee of up to
$25 for each partial withdrawal and transfer of policy value, although we have
no current plans to do so.
CHARGE FOR TAXES. We can charge you in the future for taxes we incur or
reserves we set aside for taxes in connection with your Policy. This charge
would reduce the investment experience of your policy value.
ALLOCATION OF CHARGES. You may choose from which of your investment options
we deduct all monthly charges except asset-based monthly charges. If you do not
specify a choice, or if you do not have enough policy value in any investment
option to comply with your selection, we will deduct these charges in proportion
to the amount of value you then have in each investment option. Asset-based
monthly charges will always be taken in proportion to the values in your
variable investment options.
WHAT CHARGES AND EXPENSES WILL THE FUNDS DEDUCT FROM AMOUNTS I INVEST THROUGH MY
POLICY?
The Fund pays its investment management fees and other operating expenses.
Because they reduce the investment return of a Fund, these fees and expenses
also will reduce indirectly the return you will earn on any value that you have
invested in that Fund. These charges and expenses for 1998 were as follows:
<TABLE>
<CAPTION>
FORTIS SERIES FUND ANNUAL EXPENSES AFTER EXPENSE
LIMITATIONS(a)
-------------------------------------------------
OTHER FUND TOTAL FUND
FUND MANAGEMENT OPERATING OPERATING
NAME OF FUND FEES EXPENSE EXPENSE
- ------------------------------------- ----------------- --------------- -------------
<S> <C> <C> <C>
Money Market Series.................. .30% .05% .35%
U.S. Government Securities Series.... .47% .04% .51%
Diversified Income Series............ .47% .05% .52%
Global Bond Series................... .75% .13% .88%
High Yield Series.................... .50% .06% .56%
Global Asset Allocation Series....... .90% .11% 1.01%
Asset Allocation Series.............. .47% .04% .51%
Value Series......................... .70% .06% .76%
Growth & Income Series............... .64% .03% .67%
S&P 500 Index Series................. .40% .06% .46%
Blue Chip Stock Series............... .89% .05% .94%
International Stock Series........... .85% .09% .94%
Mid Cap Stock Series................. .90% .35% 1.25%
Small Cap Value Series............... .90% .34% 1.24%
Global Growth Series................. .70% .05% .75%
Large Cap Growth Series.............. .90% .35% 1.25%
Growth Stock Series.................. .61% .04% .65%
Aggressive Growth Series............. .68% .04% .72%
</TABLE>
- ------------------------------
(a) For the Mid Cap Stock and Large Cap Growth Series there was a voluntary
undertaking to limit management fees to .90% and other fund expenses to
.35%. Had the waiver and reimbursement of expenses not been in effect the
other fund expenses would have been .50% for Mid Cap Stock Series, and .37%
for Large Cap Growth Series.
7
<PAGE>
Each of the investment options has a different investment objective and is
managed by Fortis Advisers, Inc. For several of the investment options Fortis
Advisers, Inc. has retained a sub-adviser to provide investment research, advice
and supervision. From its management fee, Fortis Advisers, Inc. pays the
sub-advisers a fee as follows:
<TABLE>
<CAPTION>
ANNUAL SUB-
NAME OF FUND SUB-ADVISER AVERAGE NET ASSETS ADVISORY FEE
- ---------------------------------------------- ----------------------------- --------------------------------- -------------
<S> <C> <C> <C>
Global Bond Series............................ Mercury Asset Management For the first $100 million .350%
International Ltd. For assets over $100 million .225%
Global Asset Allocation....................... Morgan Stanley Asset For the first $100 million .500%
Management Limited For assets over $100 million .400%
S&P 500 Index Series.......................... The Dreyfus Corporation All levels of assets .170%
Blue Chip Stock Series........................ T. Rowe Price For the first $100,000,000 .500%
For assets over $100,000,000 .450%
International Stock Series.................... Lazard Asset Management For the first $100 million .450%
For assets over $100 million .375%
Mid Cap Stock Series.......................... The Dreyfus Corporation For the first $100 million .500%
For the next $150 million .450%
For assets over $250 million .400%
Small Cap Value Series........................ Berger Associates, Inc. For the first $50 million .500%
For assets over $50 million .450%
Large Cap Growth Series....................... Alliance Capital Management For the first $100 million .500%
L.P. For the next $100 million .450%
For assets over $200 million .400%
</TABLE>
MUST I INVEST ANY MINIMUM AMOUNT IN A POLICY?
PLANNED PERIODIC PREMIUMS. Your Policy will specify a "Planned Periodic
Premium." This is the amount that you (within limits) choose to have us bill
you. Our current practice is to bill quarterly, semi-annually or annually. You
may also set up a monthly automatic bank draft. However, payment of these or any
other specific amounts of premiums is not mandatory. You need to invest only
enough to ensure either that your Policy's surrender value stays above zero
("Surrender value" is explained under "Full surrender" on page 11.) The less you
invest, the more likely it is that your Policy's surrender value could fall to
zero, as a result of the deductions we periodically make from your policy value.
POLICY LAPSE AND REINSTATEMENT. If your Policy's surrender value does fall
to zero, we will notify you and give you a grace period of 61 days to pay at
least the amount we estimate is necessary to keep your Policy in force until the
end of the grace period. If we don't receive your payment by the end of the
grace period, your Policy and all riders will terminate without value, and all
coverage under your Policy will cease. (The only exception is if the guarantee
is in effect that is described below under "Recommended monthly minimum premiums
for the Guaranteed Death Benefit"). Although you can apply to have your Policy
"reinstated" you must do this within 5 years, and you must present evidence that
the insured person still meets our requirements for issuing coverage. Also, you
would have to pay a premium sufficient to (a) pay any due and unpaid charges
through the end of the grace period and (b) keep the Policy in force for two
months following the date of reinstatement. The amount required would include
any increase in the surrender charge attributable to such premium. In the Policy
form itself, you will find additional information about the values and terms of
a Policy after it is reinstated.
RECOMMENDED MONTHLY MINIMUM PREMIUMS FOR THE GUARANTEED DEATH BENEFIT. The
Policy specifies a "Recommended Monthly Minimum Premium" and a "Death Benefit
Guarantee Period" in the policy schedule pages. On each monthly anniversary of
the Policy during the guarantee period, we check to see if the cumulative amount
of premiums actually paid is at least equal to the sum of the recommended
monthly minimum premiums for all Policy months to date, including the Policy
month then starting.
8
<PAGE>
So long as this test is met the Policy will not terminate (lapse) during the
guarantee period, even if the surrender value is not sufficient to pay the
monthly deduction.
If the test is not met we will send you a notice of the minimum amount
required to be paid. If this amount is not paid prior to the next monthly
anniversary the guaranteed death benefit will terminate and cannot be
reinstated.
At issue you can choose one of 3 options for a guarantee period: (a) 5 years
(or if the insured is age 71 or more at issue, the greater of 2 years or until
age 75); (b) to age 65; or (c) to age 85. If the insured is rated for higher
mortality only option (a) is available. The choice cannot be changed after the
Policy is issued. The guaranteed death benefit is not available in all states,
and the guarantee period may be shorter in some states due to state limitations.
The amount of premiums that must be paid to maintain the guaranteed death
benefit will be increased by the cumulative amount of any loans and partial
withdrawals you have taken from your Policy. The recommended monthly minimum
premiums also will be higher following any requested increase in face amount or
following the addition of (or increase in) certain rider benefits. On the other
hand, the recommended monthly minimum premium will be lower following any
requested face amount decrease, or the termination of (or decrease in) certain
riders. We will send you an amended schedule page that will tell you the amount
of your new recommended monthly minimum premium is. None of the above-mentioned
changes extends the guaranteed death benefit or establishes a new benefit
period.
Regardless of which option is chosen, there is no charge for the benefit
during the period described in option (a) above. After the period described in
option (a) has passed, the maximum monthly charge for the option (b) guarantee
period is $.03 per thousand dollars of face amount in effect under the Policy or
under any supplemental term insurance riders, and $.06 per thousand of such face
amount for the option (c) guarantee period.
Although we will bill you for planned premiums, we will not send any
specific bills for the amount of any recommended monthly minimum premium that is
due.
HOW CAN I CHANGE MY POLICY'S INVESTMENT OPTIONS?
FUTURE PREMIUM PAYMENTS. You may at any time change the investment options
in which future premiums you pay will be invested. Your allocation must,
however, be in whole percentages that total 100%.
TRANSFERS OF EXISTING POLICY VALUE. You may also transfer your existing
policy value from one investment option under the Policy to another. We reserve
the right to limit the number and amount of transfers, or to impose charges upon
transfers. If we limit the number of transfers, the limit will never be less
than four transfers per Policy year. Unless you are transferring the entire
amount you have in an investment option, each transfer must be at least $250.
See "Additional Rights That We Have" beginning on page 28.
You may make transfers at any time, except that transfers out of our general
account option are limited to one transfer per year, and may not be for more
than 50% of the general account policy value.
In any event you may transfer all of your policy value to the general
account (1) at any time during the first 2 Policy years; (2) within the first 2
years after a face amount increase; or (3) within 60 days after you receive a
notice of any material change in the investment options.
MAXIMUM NUMBER OF INVESTMENT OPTIONS. We can at any time limit the number
of investment options you may use. Our current rule is that you cannot use more
than 19 different options over the life of your Policy.
HOW CAN I CHANGE MY POLICY'S INSURANCE COVERAGE?
INCREASE IN COVERAGE. You may at any time request an increase in the face
amount of coverage under your Policy. The minimum requested face amount increase
is currently $5,000. You must, however, provide us with satisfactory evidence
that the insured person continues to meet our requirements for issuing insurance
coverage.
We treat an increase in face amount in many respects as if it were the
issuance of a new Policy. For example, the monthly insurance charge for the
increase will be based in part on the age and risk
9
<PAGE>
class of the insured person at the time of the increase. Also, an additional
surrender charge and recommended monthly minimum premium apply to the face
amount increase.
DECREASE IN COVERAGE. After the first Policy year, you may request a
reduction in the face amount of coverage. The minimum remaining face amount must
be $50,000 for issue ages 0-70, and $100,000 for issue ages over 70 (or, if
greater, the minimum amount that the tax law requires.)
CHANGE OF DEATH BENEFIT OPTION. Once each year you may request us to change
your coverage from death benefit Option A to B or vice-versa. If you change from
Option A to B, we automatically reduce your Policy's face amount of insurance by
the amount of your policy value (but not below the minimum face amount) at the
time of the change. Generally, you must provide us with satisfactory evidence
that the insured person continues to meet our requirements for issuing insurance
coverage. If you change from Option B to A, we automatically increase your
Policy's face amount by the amount of your Policy's policy value.
TAX CONSEQUENCES OF CHANGES IN INSURANCE COVERAGE. Please read "Tax
Effects" starting on page 19 of this prospectus to learn about possible tax
consequences of changing your insurance coverage under your Policy.
WHAT ADDITIONAL RIDER BENEFITS MIGHT I SELECT?
You can request that your Policy include the additional rider benefits
described below. For most of the riders that you choose, a charge, which will be
shown in the Policy schedule, will be deducted from your policy value on each
monthly deduction date. Charges for the disability and term life riders increase
from year to year. We may change the rates of these charges, but not above the
guaranteed maximum charges for the riders set forth in the Policy schedule or
rider. Eligibility for and changes in these benefits are subject to our rules
and procedures then in effect. More details are included in the rider itself,
which we suggest that you review if you choose any of these benefits.
Availability and features may vary by state.
- - WAIVER OF SELECTED AMOUNT RIDER, under which we will pay a monthly premium in
an amount you select, so long as the insured person is totally disabled (as
defined in the rider). The minimum amount you can select is $25. The maximum
amount is described in the rider, but is at least equal to the recommended
monthly minimum premium for your Policy (capped at the monthly recommended
minimum premium for a $2 million dollar Policy). See the rider for further
details.
- - WAIVER OF MONTHLY DEDUCTIONS RIDER, under which we will waive all monthly
charges under your Policy and riders that we otherwise would deduct from your
policy value, so long as the insured person is totally disabled (as defined
in the rider). While we are paying benefits under this rider we will not
permit you to request any increase in the face amount of your Policy's
coverage. Loan interest will not be paid for you under this rider, and the
Policy could, under certain circumstances, lapse for nonpayment of loan
interest.
You may not select both a Waiver of Selected Amount Rider and a Waiver of
Monthly Deductions Rider on the same Policy.
- - ADDITIONAL INSURED RIDER, which provides term life insurance on the life of
the insured person or on the life of one or more of the immediate family
members of the insured person. This rider is convertible to a variable
universal life policy available for conversions, under our published rules at
the time of conversion.
- - PRIMARY INSURED RIDER, which provides term life insurance on the life of the
insured person. This rider is available only when the Policy is first issued.
This rider is not convertible to another policy. However, you may exchange
the coverage under the rider for a face amount increase in the same amount
under the Policy.
- - COST OF LIVING ADJUSTMENT RIDER, which provides for automatic increases in
your Policy's face amount of insurance at certain specified dates and based
on a specified index. After you have met our eligibility requirements for
this rider, these increases will not require that evidence be provided to us
about whether the insured person continues to meet our requirements for
insurance coverage. These automatic increases are on the same terms
(including additional charges) as any
10
<PAGE>
other face amount increase you request (as described under "Increase in
coverage" on page 9), except that there is no minimum increase amount. There
is no additional charge for the rider itself, although the automatic
increases in the face amount will increase the monthly insurance charge
deducted from your policy value to pay for the additional coverage. The
monthly recommended minimum premium will also increase. This rider terminates
(1) when an increase is refused, (2) when there is a decrease in face amount,
or (3) the Policy anniversary following the date the insured reaches age 65.
- - CHILD INSURANCE RIDER, which provides term life insurance coverage on the
eligible children of the insured person under the Policy. This rider is
convertible to individual life policies (except for term coverage) available
for conversions, under our published rules at the time of conversion.
- - ACCELERATED BENEFIT RIDER, which provides for a benefit to be requested if
the Policy's insured person is diagnosed as having a terminal illness (as
defined in the rider). The maximum amount you may accelerate under this rider
prior to the insured person's death is $500,000. The accelerated payment will
be discounted for twelve months' interest, and will be reduced by any
outstanding policy loans. The interest rate discount will be equal to the
lesser of (1) the rate set out by the Internal Revenue Code; (2) the
statutory adjustable policy loan interest rate; or (3) 10%. There is no
charge for this rider, but an administrative fee (not to exceed $300) will be
charged at the time the benefit is paid.
The accelerated benefit rider which forms a part of the Policy should be
consulted for details regarding eligibility for, and the terms and
limitations of, the benefit. Fortis Benefits can also furnish further
information about the amount of the benefit available to you under your
Policy.
TAX CONSEQUENCES OF ADDITIONAL RIDER BENEFITS. Adding or deleting riders, or
increasing or decreasing coverage under existing riders can have tax
consequences. See "Tax Effects" starting on page 19. You should consult a
qualified tax adviser.
HOW CAN I ACCESS MY POLICY VALUE?
FULL SURRENDER. You may at any time surrender your Policy in full. If you
do, we will pay you the policy value, less any Policy loans and interest, and
less any surrender charge that then applies. We call this your "surrender
value." Because of the surrender charge, it is unlikely that a Policy will have
any surrender value during at least the first year unless you pay significantly
more than the recommended monthly minimum premiums.
PARTIAL WITHDRAWAL. After the first Policy year, you may make a partial
withdrawal of your Policy's surrender value. The minimum partial withdrawal
allowed is $250. We reserve the right to raise the minimum amount up to $1,000.
If the Option A death benefit is then in effect, we will also automatically
reduce your Policy's face amount of insurance by the amount of your withdrawal.
We will not permit a partial withdrawal if it would cause your Policy to
fail to qualify as life insurance under the tax laws or if it would cause your
face amount to fall below the minimum allowed.
You may choose the investment option or options from which money that you
withdraw will be taken. Otherwise, we will allocate the withdrawal in proportion
to the amount of policy value you then have in each investment option.
POLICY LOANS. You may at any time borrow from us an amount equal to 90% of
your policy value less surrender charges. In addition, our current practice is
that after the later of 10 years or the insured's age 70, you may borrow 100% of
the surrender value.
We will remove from your investment options an amount equal to your loan and
hold that amount as collateral for the loan. We will credit your Policy with
interest on this collateral amount at an effective annual rate of 4% (rather
than any amount you could otherwise earn in one of our investment options), and
we will charge you interest on your loan at an effective annual rate of not more
than 7%. Loan interest is payable annually, on the Policy anniversary, in
arrears. Any amount not paid by its due date will automatically be added to the
loan balance as an additional loan. In most cases interest you pay on Policy
loans will not be deductible on your tax returns.
11
<PAGE>
You may choose which of your investment options the loan will be taken from.
If you do not so specify, we will take the loan pro-rata from each investment
option that you then are using.
You may repay all or part of your loan at any time. You must designate any
loan repayment as such. Otherwise, we will treat it as a premium payment
instead. We will invest any loan repayments you make in the investment options
you request. In the absence of such a request we will invest the repayment in
the same proportion as you then have selected for premium payments that we
receive from you. Any unpaid loan will be deducted from the proceeds we pay
following the insured person's death.
REDUCED INTEREST RATE FOR POLICY LOANS. We will charge interest at a
reduced rate of 4%, payable in arrears, on one Policy loan of up to 10% of the
surrender value in each Policy year if (1) the surrender value is at least
$10,000 or (2) the Policy has been in force for 10 years. The 10% limitation is
raised to 15% for such loans obtained in Policy years in which the insured is
59 1/2 or older.
CAN I CHOOSE THE FORM IN WHICH FORTIS PAYS OUT THE PROCEEDS FROM MY POLICY?
CHOOSING A PAYMENT OPTION. You may choose to receive the full proceeds from
the Policy (and any riders) as a single sum. This includes proceeds that become
payable upon the death of the insured person, or upon full surrender of the
policy. Alternatively, you may elect that all or part of such proceeds be
applied to one or more of the following payment options:
Option 1. Interest Payments
We will pay interest for a period of time that you select. At the end of the
time selected we will pay the proceeds in a single sum or under another option
selected when this option is chosen.
Option 2. Payments of a Fixed Amount or for a Fixed Period
(1) We will make equal periodic payments for a period of time you select; or
(2) We will make equal periodic payments in an amount you select until all
proceeds are paid out.
Option 3. Life Income Payments
(1) Life Annuity: A monthly income during the life of the payee; or
(2) Life Annuity with a guaranteed Period: A monthly income with payments
guaranteed for either 10 or 20 years, as you choose, continuing during
the payee's lifetime.
(3) Refund Life annuity: A monthly income with payments guaranteed for the
number of months determined by dividing the proceeds by the first
monthly payment. The payments continue during the payee's lifetime.
Option 4. Joint Life Income Payments
You may name two payees to whom we will pay a joint monthly income during
their joint lifetime. After either payee's death, we will make monthly
payments equal to 2/3 of the joint monthly payment during the survivor's
lifetime.
For options 3 and 4 the amount of the monthly payments depends on the type of
income selected, the ages of the payees and the amount of the proceeds.
Additional payment options may also be available with our consent. We have the
right to veto any payment option, if the payee is a corporation or other entity.
You can read more about each of these options in the Policy and in the separate
form of payment contract that we issue when any such option takes effect.
Interest rates that we credit under each option will be at least 3%.
CHANGE OF PAYMENT OPTION. You may change any payment option you have
elected at any time while the Policy is in force. Within 60 days after the
insured person's death, any payee entitled to receive proceeds as a single sum
may generally elect one or more payment options. We reserve the right to pay the
proceeds to the payee in a single sum if (1) the proceeds payable are less than
$2,000; or (2) payments under the chosen payment option would be less than
$20.00 each.
TAX IMPACT. If a payment option is chosen you or your beneficiary may have
tax consequences. You therefore should consult with a
12
<PAGE>
qualified tax adviser before deciding whether to elect one or more payment
options.
TO WHAT EXTENT CAN FORTIS VARY THE TERMS AND CONDITIONS OF THE POLICIES IN
PARTICULAR CASES?
Listed below are some variations we may make in the terms of a Policy. Any
variations will be made only in accordance with uniform rules that we establish
from time to time and apply evenly to all our customers. See "Additional Rights
That We Have" on page 28.
POLICIES PURCHASED THROUGH "INTERNAL ROLLOVERS." We maintain published
rules that describe the procedures necessary to replace the other life insurance
we issue with one of the Policies. Not all types of other insurance we issue are
eligible to be replaced with one of the Policies.
POLICIES PURCHASED THROUGH TERM LIFE CONVERSIONS. Also, we maintain rules
about how to convert term insurance to a Policy. This is referred to as a term
conversion. Term conversions are available to owners of term life insurance we
have issued. Any right to a term conversion is stated in the term life insurance
policy.
STATE LAW REQUIREMENTS. Fortis is subject to the insurance laws and
regulations in every jurisdiction in which the Policies are sold. As a result,
various time periods and other terms and conditions described in this prospectus
may vary depending on where you reside. These variations will be reflected in
your Policy and riders, or related endorsements.
VARIATIONS IN EXPENSES OR RISKS. Fortis may vary the charges and other
terms of the Policies where special circumstances result in sales or
administrative expenses, mortality risks, or other risks that are different from
those normally associated with the Policies. These variations will not be
unfairly discriminatory to the interests of other Policy owners. Any increase in
fees will not exceed the maximums set out in this prospectus.
HOW WILL MY POLICY BE TREATED FOR INCOME TAX PURPOSES?
Generally, death benefits paid under a Policy are not subject to income tax,
and earnings on your policy value are not subject to income tax as long as we do
not pay them out to you. If we do pay any amount of your policy value upon
surrender or partial withdrawal, all or part of that distribution may be treated
as a return of the premiums you paid, and therefore not subject to income tax.
Amounts you receive as Policy loans are not taxable to you, unless you have
paid such a large amount of premiums that your Policy becomes what the tax law
calls a "modified endowment contract." In that case, the loan will be taxed as
if it were a partial withdrawal. Furthermore, loans, partial withdrawals and
other distributions from a modified endowment contract may require you to pay
additional taxes and penalties that otherwise would not apply.
For further information about the tax consequences of owning a Policy,
please read "Tax Effects" starting on page 19.
HOW DO I COMMUNICATE WITH FORTIS?
When we refer to "you" we mean the person who is duly authorized to take any
contemplated action with respect to a Policy. Generally, this is the owner named
in the Policy. Where a Policy has more than one owner, each owner generally must
join in any requested action, except for transfers and changes in the allocation
of future premiums or charges among the investment options.
GENERAL. You should mail or express checks and money orders for premium
payments and loan repayments directly to our Home Office at the appropriate
address shown on page 1.
The following requests must be made in writing, signed and dated by you:
transfer of policy value; loan; full surrender; partial withdrawal, change of
beneficiary or contingent beneficiary; change of allocation percentages for
premium payments, loan repayments or charges; change of death benefit option or
manner of death benefit payment; increase or decrease in face insurance amount;
addition or cancellation of, or other action with respect to, any rider
benefits; election of a payment option for Policy proceeds; tax withholding
elections; and telephone transaction privileges. You should mail these requests
to our Home Office. You should also communicate notice of the insured person's
death, and related documentation, to our Home Office.
13
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We have special forms which should be used for loans, assignments, partial
withdrawal and surrenders, changes of owner or beneficiary, and all other
contractual changes. A Service Request form covering many of these transactions
is attached to the back of this prospectus. You will be asked to return your
Policy when you request a full surrender. You may also obtain these forms from
our Home Office or from your Fortis representative. Each communication must
include your name, Policy number and, if you are not the insured person, that
person's name. We cannot process any requested action that does not include all
required information.
TELEPHONE TRANSACTIONS. If you have a completed telephone authorization
form on file with us, you may make transfers, or change the allocation of future
premium payments or deduction of charges, by telephone, subject to the terms of
the form. We will honor telephone instructions from any person who provides the
correct information, so there is a risk of possible loss to you if unauthorized
persons use this service in your name. Our current procedure is that only the
owner or your Fortis representative may make a transfer request by phone. We are
not liable for any acts or omissions based upon instructions that we reasonably
believe to be genuine. Our procedures include verification of the Policy number,
the identity of the caller, both the insured person's and owner's names, and a
form of personal identification from the caller. We will mail you a prompt
written confirmation of the transaction. If many people seek to make telephone
requests at or about the same time, or if our telephone equipment malfunctions,
it may be impossible for you to make a telephone request at the time you wish.
If this occurs, you should submit a written request. The phone number for
telephone requests is 1-800-800-2000, Ext. 3028.
ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS
To help clarify how our Policies work, we have prepared the following
tables:
<TABLE>
<CAPTION>
PAGE TO SEE IN THIS
TABLE PROSPECTUS
- --------------------------------------------------- -----------------------
<S> <C>
Death benefit Option A
Current charges.................................. 15
Guaranteed Maximum Charges....................... 16
Death Benefit Option B
Current Charges.................................. 17
Guaranteed Maximum Charges....................... 18
</TABLE>
The tables show how death benefits, policy values and surrender values ("the
Policy benefits") of the Policy would vary over time if the investment options
had constant hypothetical gross investment returns of 0%, 6% or 12% over the
years covered by the table.
The tables are based on a face amount of $150,000 for a 35 year-old male
non-smoker who is a better-than-average mortality risk. Planned premium payments
of $1,500 are assumed to be paid at the beginning of each Policy year. The
illustrations assume no Policy loan has been taken and that the Guideline
Premium Test is being used to determine the alternative death benefit. The
difference in the tables between policy values and surrender values during the
first fourteen Policy years is the amount of surrender charges.
Separate tables are included to illustrate both current and guaranteed
maximum charges for the Policy. The charges assumed in the current charge tables
include the asset-based monthly charge, current monthly insurance charges, and
the monthly administrative charge. The guaranteed maximum charge tables assume
that these charges will be an asset-based monthly charge at the annual effective
rate of 1.2%, guaranteed maximum insurance charges, a monthly administrative
charge of $11.50 plus $.13 per thousand of face amount, and a 2.5% charge on all
premium payments.
The charges assumed by both the current and guaranteed maximum charge tables
also include .78% for the expenses of the Funds, which is the average of the
advisory fees payable with respect to each Fund, after all reimbursements, plus
the average of all other operating expenses of each such Fund after all
reimbursements. In the absence of a voluntary agreement to waive a portion of
the fees and reimburse certain expenses the total fund operating expenses
assumed would have been .79%. Although voluntary, it is unlikely that this
voluntary agreement will be terminated prior to the point where actual operating
expenses do not exceed the voluntary limits. If this agreement were to be
discontinued the values would be lower in the illustrations that follow.
The second column of each table shows the effect of an amount equal to the
premiums invested to earn interest, after taxes, of 5% compounded annually.
INDIVIDUAL ILLUSTRATIONS. On request, we will send you a comparable
illustration based on your Policy's features.
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<PAGE>
MALE ISSUE AGE 35
PREFERRED NONSMOKER UNDERWRITING RISK
FACE AMOUNT: $150,000--DEATH BENEFIT OPTION A
CURRENT CHARGES
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN OF
------------------------------------------------------------------------------------
PREMIUMS 0% (1)(2) 6% (1)(2) 12% (1)(2)(3)
END OF ACCUMULATED --------------------------- -------------------------- ---------------------------
POLICY AT 5% INTEREST DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER
YEAR PER YEAR (1) BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------ -------------- ------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 150,000 1,191 0 150,000 1,271 0 150,000 1,351 0
2 3,229 150,000 2,329 679 150,000 2,563 913 150,000 2,806 1,156
3 4,965 150,000 3,432 1,782 150,000 3,891 2,241 150,000 4,390 2,740
4 6,788 150,000 4,504 2,854 150,000 5,265 3,615 150,000 6,125 4,475
5 8,703 150,000 5,579 3,929 150,000 6,719 5,069 150,000 8,058 6,408
6 10,713 150,000 6,659 5,174 150,000 8,259 6,774 150,000 10,213 8,728
7 12,824 150,000 7,739 6,419 150,000 9,883 8,563 150,000 12,607 11,287
8 15,040 150,000 8,806 7,651 150,000 11,580 10,425 150,000 15,248 14,093
9 17,367 150,000 9,834 8,844 150,000 13,329 12,339 150,000 18,139 17,149
10 19,810 150,000 10,854 10,029 150,000 15,178 14,353 150,000 21,374 20,549
15 33,986 150,000 15,166 15,166 150,000 25,178 25,178 150,000 43,048 43,048
20 52,079 150,000 17,985 17,985 150,000 36,672 36,672 150,000 78,753 78,753
25 75,170 150,000 18,702 18,702 150,000 49,772 49,772 185,914 138,742 138,742
40 190,260 0 0 0 150,000 100,062 100,062 721,978 674,746 674,746
</TABLE>
(1) Assumes annual premium payments of $1,500 paid in full at beginning of each
Policy year. The values would vary from those shown if the amount or
frequency of payments varies.
(2) Assumes that no Policy loan or partial withdrawal has been made and no
optional insurance riders have been selected. Zero values in the Death
Benefit column indicate Policy lapse in the absence of sufficient
additional premium payments.
(3) Alternative Death Benefit applies
15
<PAGE>
MALE ISSUE AGE 35
PREFERRED NONSMOKER UNDERWRITING RISK
FACE AMOUNT: $150,000--DEATH BENEFIT OPTION A
GUARANTEED CHARGES
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN OF
-------------------------------------------------------------------------------------
PREMIUMS 0% (1)(2) 6% (1)(2) 12% (1)(2)(3)
END OF ACCUMULATED --------------------------- --------------------------- ---------------------------
POLICY AT 5% INTEREST DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER
YEAR PER YEAR (1) BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------ -------------- ------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 150,000 813 0 150,000 879 0 150,000 946 0
2 3,229 150,000 1,596 0 150,000 1,780 130 150,000 1,973 323
3 4,965 150,000 2,348 698 150,000 2,700 1,050 150,000 3,084 1,434
4 6,788 150,000 3,068 1,418 150,000 3,639 1,989 150,000 4,288 2,638
5 8,703 150,000 3,755 2,105 150,000 4,597 2,947 150,000 5,592 3,942
6 10,713 150,000 4,406 2,921 150,000 5,570 4,085 150,000 7,003 5,518
7 12,824 150,000 5,019 3,699 150,000 6,557 5,237 150,000 8,530 7,210
8 15,040 150,000 5,595 4,440 150,000 7,559 6,404 150,000 10,185 9,030
9 17,367 150,000 6,132 5,142 150,000 8,573 7,583 150,000 11,978 10,988
10 19,810 150,000 6,626 5,801 150,000 9,596 8,771 150,000 13,920 13,095
15 33,986 150,000 8,381 8,381 150,000 14,772 14,772 150,000 26,388 26,388
20 52,079 150,000 8,537 8,537 150,000 19,611 19,611 150,000 45,218 45,218
25 75,170 150,000 6,033 6,033 150,000 22,931 22,931 150,000 74,113 74,113
40 190,260 0 0 0 0 0 0 335,385 313,444 313,444
</TABLE>
(1) Assumes annual premium payments of $1,500 paid in full at beginning of each
Policy year. The values would vary from those shown if the amount or
frequency of payments varies.
(2) Assumes that no Policy loan or partial withdrawal has been made and no
optional insurance riders have been selected. Zero values in the Death
Benefit column indicate Policy lapse in the absence of sufficient
additional premium payments.
(3) Alternative Death Benefit applies
16
<PAGE>
MALE ISSUE AGE 35
PREFERRED NONSMOKER UNDERWRITING RISK
FACE AMOUNT: $150,000--DEATH BENEFIT OPTION B
CURRENT CHARGES
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN OF
-------------------------------------------------------------------------------------
PREMIUMS 0% (1)(2) 6% (1)(2) 12% (1)(2)
END OF ACCUMULATED --------------------------- --------------------------- ---------------------------
POLICY AT 5% INTEREST DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER
YEAR PER YEAR (1) BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------ -------------- ------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 151,189 1,189 0 151,269 1,269 0 151,349 1,349 0
2 3,229 152,323 2,323 673 152,556 2,556 906 152,798 2,798 1,148
3 4,965 153,419 3,419 1,769 153,877 3,877 2,227 154,374 4,374 2,724
4 6,788 154,482 4,482 2,832 155,240 5,240 3,590 156,094 6,094 4,444
5 8,703 155,548 5,548 3,898 156,680 6,680 5,030 158,010 8,010 6,360
6 10,713 156,617 6,617 5,132 158,204 8,204 6,719 160,143 10,143 8,658
7 12,824 157,687 7,687 6,367 159,811 9,811 8,491 162,511 12,511 11,191
8 15,040 158,741 8,741 7,586 161,488 11,488 10,333 165,121 15,121 13,966
9 17,367 159,755 9,755 8,765 163,213 13,213 12,223 167,969 17,969 16,979
10 19,810 160,756 10,756 9,931 165,028 15,028 14,203 171,148 21,148 20,323
15 33,986 164,888 14,888 14,888 174,671 24,671 24,671 192,107 42,107 42,107
20 52,079 167,330 17,330 17,330 185,198 35,198 35,198 225,379 75,379 75,379
25 75,170 167,369 17,369 17,369 195,988 45,988 45,988 278,193 128,193 128,193
40 190,260 0 0 0 208,478 58,478 58,478 709,909 559,909 559,909
</TABLE>
(1) Assumes annual premium payments of $1,500 paid in full at beginning of each
Policy year. The values would vary from those shown if the amount or
frequency of payments varies.
(2) Assumes that no Policy loan or partial withdrawal has been made and no
optional insurance riders have been selected. Zero values in the Death
Benefit column indicate Policy lapse in the absence of sufficient
additional premium payments.
17
<PAGE>
MALE ISSUE AGE 35
PREFERRED NONSMOKER UNDERWRITING RISK
FACE AMOUNT: $150,000--DEATH BENEFIT OPTION B
GUARANTEED CHARGES
<TABLE>
<CAPTION>
VALUES BASED ON ASSUMED HYPOTHETICAL GROSS ANNUAL INVESTMENT RATES OF RETURN OF
-------------------------------------------------------------------------------------
PREMIUMS 0% (1)(2) 6% (1)(2) 12% (1)(2)
END OF ACCUMULATED --------------------------- --------------------------- ---------------------------
POLICY AT 5% INTEREST DEATH POLICY SURRENDER DEATH POLICY SURRENDER DEATH POLICY SURRENDER
YEAR PER YEAR (1) BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE
- ------ -------------- ------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 150,811 811 0 150,877 877 0 150,944 944 0
2 3,229 151,591 1,591 0 151,774 1,774 124 151,966 1,966 316
3 4,965 152,338 2,338 688 152,688 2,688 1,038 153,070 3,070 1,420
4 6,788 153,051 3,051 1,401 153,618 3,618 1,968 154,263 4,263 2,613
5 8,703 153,729 3,729 2,079 154,564 4,564 2,914 155,551 5,551 3,901
6 10,713 154,369 4,369 2,884 155,521 5,521 4,036 156,941 6,941 5,456
7 12,824 154,969 4,969 3,649 156,489 6,489 5,169 158,439 8,439 7,119
8 15,040 155,530 5,530 4,375 157,466 7,466 6,311 160,056 10,056 8,901
9 17,367 156,049 6,049 5,059 158,450 8,450 7,460 161,800 11,800 10,810
10 19,810 156,521 6,521 5,696 159,436 9,436 8,611 163,678 13,678 12,853
15 33,986 158,123 8,123 8,123 164,288 14,288 14,288 175,478 25,478 25,478
20 52,079 158,023 8,023 8,023 168,405 18,405 18,405 192,359 42,359 42,359
25 75,170 155,172 5,172 5,172 170,234 20,234 20,234 215,780 65,780 65,780
40 190,260 0 0 0 0 0 0 333,300 183,300 183,300
</TABLE>
(1) Assumes annual premium payments of $1,500 paid in full at beginning of each
Policy year. The values would vary from those shown if the amount or
frequency of payments varies.
(2) Assumes that no Policy loan or partial withdrawal has been made and no
optional insurance riders have been selected. Zero values in the Death
Benefit column indicate Policy lapse in the absence of sufficient
additional premium payments.
18
<PAGE>
ADDITIONAL INFORMATION
A general overview of the Policies appears at pages 1 through 18. The
additional information that follows gives more details, but generally does NOT
repeat what is set forth above.
<TABLE>
<CAPTION>
PAGE TO SEE
CONTENTS OF ADDITIONAL INFORMATION IN THIS PROSPECTUS
- -------------------------------------- -------------------
<S> <C>
Fortis Benefits/Fortis Financial
Group................................ 19
The Separate Account.................. 19
Tax Effects........................... 19
Voting Privileges..................... 23
Your Beneficiary...................... 23
Assigning Your Policy................. 24
More About Policy Charges............. 24
Effective Date of Policy and Related
Transactions......................... 25
More about Our General Account
Option............................... 26
Distribution of the Policies.......... 26
Payment of Policy Proceeds............ 27
Adjustments to Death Benefit.......... 28
Additional Rights That We Have........ 28
Performance Information............... 29
Our Reports to Policy Owners.......... 29
Fortis Management..................... 29
Legal Matters......................... 30
Independent Auditors.................. 30
Actuarial Experts..................... 30
Year 2000 Issues...................... 30
Financial Statements.................. 30
</TABLE>
SPECIAL WORDS AND PHRASES. If you want more information about any words or
phrases that you read in this prospectus, you may wish to refer to the Index of
words and Phrases that appears at the end of this prospectus (page 31). That
index will tell you on what page you can read more about many of the words and
phrases that we use.
FORTIS BENEFITS/FORTIS FINANCIAL GROUP
We are Fortis Benefits Insurance Company ("Fortis"), a stock life insurance
company that was founded in 1910. Fortis is a Minnesota corporation and is
qualified to sell life insurance and annuity contracts in all states except New
York. Fortis is an indirect, 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 is a member of the Fortis Financial Group, a joint effort of Fortis
Benefits, Fortis Advisers, Inc., Fortis Investors, Inc. and Fortis Insurance
Company, offering mutual funds, annuities and life insurance products.
Fortis (NL) N.V. of the Netherlands and Fortis (B) of Belgium, are
diversified financial services companies which began operations in the early
1800's. Fortis (NL) N.V. and Fortis (B) have merged their operating companies
under the trade name of Fortis.
THE SEPARATE ACCOUNT
We hold the Fund shares in which any of your policy value is invested in our
Variable Account C. Variable Account C is a "separate account," as defined by
the SEC and is registered as a unit investment trust with the SEC under the
Investment Company Act of 1940. We created the separate account on March 16,
1986 under Minnesota law.
For record keeping and financial reporting purposes, Variable Account C is
divided into separate subaccounts each corresponding to one of the available
investment options (other than our general account option). We hold the Fund
shares in which we invest your policy value for an investment option in its
corresponding subaccount.
The assets in the separate account are our property. Nevertheless, the
assets in the separate account would be available only to satisfy the claims of
owners of the Policies, to the extent they have allocated their policy value to
the separate account. Our other creditors could reach only those separate
account assets (if any) that are in excess of the amount of our reserves and
liabilities under the Policies with respect to the separate account.
TAX EFFECTS
This discussion is based on current federal income tax law and
interpretations. It assumes that the Policy owner is a natural person who is a
U.S. citizen and resident. The tax effects on
19
<PAGE>
corporate taxpayers, non-U.S. residents or non-U.S. citizens, may be different.
This discussion is general in nature, and should not be considered tax advice,
for which you should consult a qualified tax adviser.
GENERAL. A Policy will be treated as "life insurance" for federal income
tax purposes if (a) it meets the definition of life insurance under Section 7702
of the Internal Revenue Code of 1986 ("the Code"), and (b) for as long as the
investments made by the underlying Funds satisfy certain investment
diversification requirements under Section 817(h) of the Code. We believe it is
reasonable to conclude that the Policies will meet these requirements and that:
- - the death benefit received by the beneficiary under your Policy will not be
subject to federal income tax; and
- - increases in your policy value as a result of interest or investment
experience will not be subject to federal income tax unless and until there
are certain distributions from your Policy, such as a surrender or a partial
withdrawal.
The federal income tax consequences of a distribution from your Policy can be
affected by whether your Policy is determined to be a "modified endowment
contract" (which is discussed below). In all cases, however, the character of
all income that is described below as taxable to the payee will be ordinary
income (as opposed to capital gain).
DEFINITION OF LIFE INSURANCE. The manner in which the Section 7702
definition of life insurance test should be applied to certain features of the
Policy is not directly addressed by the Code, nor has guidance been issued to
date under Section 7702. In the absence of such guidance there is necessarily
some uncertainty as to whether a Policy will meet the definition of life
insurance, especially if it insures a substandard risk. In such an event, we
reserve the right to modify the Policy, to the extent possible and appropriate,
to qualify it as a life insurance contract under Section 7702. If a Policy were
determined not to be a life insurance contract, the Policy would not provide
most of the tax advantages normally provided by a life policy.
DIVERSIFICATION. Under Section 817(h) of the Code, the Treasury Department
has issued regulations that implement investment diversification requirements.
Failure by us to comply with these regulations would disqualify, your Policy as
a life insurance policy under Section 7702 of the Code. If this were to occur,
you would be subject to federal income tax on the income under the Policy for
the period of the disqualification and for subsequent periods. Our separate
account, through the Funds, intends to comply with these requirements.
In connection with the issuance of then temporary diversification
regulations, the Treasury Department stated that it anticipated the issuance of
guidelines prescribing the circumstances in which the ability of a policy owner
to direct his or her investment to particular Funds within a separate account
may cause the policy owner, rather than the insurance company, to be treated as
the owner of the assets in the account. If you were considered the owner of the
assets of the separate account, income and gains from the account would be
included in your gross income for federal income tax purposes. Under current
law, however, we believe that Fortis, and not the owner of a Policy, would be
considered the owner of the assets of our separate account.
MODIFIED ENDOWMENT CONTRACT STATUS. Your Policy will be a "modified
endowment contract" if, at any time during the first seven Policy years, you
have paid a cumulative amount of premiums that exceeds the premiums that would
have been paid by that time under a similar fixed-benefit insurance policy that
was designed (based on certain assumptions mandated under the Code) to provide
for paid-up future benefits after the payment of seven level annual premiums.
This is called the "seven-pay" test.
Whenever there is a "material change" under a Policy, the Policy will
generally be (a) treated as a new contract for purposes of determining whether
the Policy is a modified endowment contract, and (b) subjected to a new
seven-pay period and a new seven-pay limit. The new seven-pay limit would be
determined taking into account, under a prescribed formula, the policy value at
the time of such change. A materially changed Policy would be considered a
modified
20
<PAGE>
endowment if it failed to satisfy the new seven-pay limit. A material change for
these purposes could occur as a result of a change in death benefit option, the
selection of additional rider benefits, an increase in your Policy's face amount
of coverage, and certain other changes.
If your Policy's benefits are reduced during the first seven Policy years
(or within seven years after a material change), the calculated seven-pay
premium limit will be redetermined based on the reduced level of benefits and
applied retroactively for purposes of the seven-pay test. (Such a reduction in
benefits could include, for example, a decrease in face amount you request or,
in some cases, a partial withdrawal or termination of additional benefits under
a rider.) If the premiums previously paid are greater than the recalculated
seven-payment premium level limit, the Policy will become a modified endowment
contract. A life insurance policy that is received in tax-free exchange for a
modified endowment contract will also be considered a modified endowment
contract.
OTHER EFFECTS OF POLICY CHANGES. Changes made to your Policy (for example,
a decrease in benefits or a lapse or reinstatement of your Policy) may also have
other effects on your Policy. Such effects may include impacting the maximum
amount of premiums that can be paid under your Policy, as well as the maximum
amount of policy value that may be maintained under your Policy.
TAXATION OF PRE-DEATH DISTRIBUTION IF YOUR POLICY IS NOT A MODIFIED
ENDOWMENT CONTRACT. As long as your Policy remains in force during the insured
person's lifetime, as a non-modified endowment contract, a Policy loan will be
treated as indebtedness, and no part of the loan proceeds will be subject to
current federal income tax. Interest paid on the loan generally will not be tax
deductible.
After the first 15 Policy years, the proceeds from a partial withdrawal will
not be subject to federal income tax except to the extent such proceeds exceed
your "basis" in your Policy. Your basis generally will equal the premiums you
have paid, less the amount of any previous distributions from your Policy that
were not taxable. During the first 15 Policy years, the proceeds from a partial
withdrawal could be subject to federal income tax, under a complex formula, to
the extent that your policy value exceeds your basis in your Policy.
Upon full surrender, any excess in the amount of proceeds we pay (including
amounts we use to discharge any Policy loan) over your basis in the Policy, will
be subject to federal income tax. In addition, if a Policy terminates after a
grace period while there is a policy loan, the cancellation of such loan and
accrued loan interest will be treated as a distribution and could be subject to
tax under the above rules. Finally, If you make an assignment of rights or
benefits under your Policy you may be deemed to have received a distribution
from your Policy, all or part of which may be taxable.
TAXATION OF PRE-DEATH DISTRIBUTIONS IF YOUR POLICY IS A MODIFIED ENDOWMENT
CONTRACT. If your Policy is a modified endowment contract, any distribution
from your Policy during the insured person's lifetime will be taxed on an
"income-first" basis. Distributions for this purpose include a loan (including
any increase in the loan amount to pay interest on an existing loan or an
assignment or a pledge to secure a loan) or partial withdrawal. Any such
distributions will be considered taxable income to you to the extent your policy
value exceeds your basis in the Policy. For modified endowment contracts, your
basis is similar to the basis described above for other Policies, except that it
also would be increased by the amount of any prior loan under your Policy that
was considered taxable income to you. For purposes of determining the taxable
portion of any distribution, all modified endowment contracts issued by the same
insurer (or its affiliate) to the same owner (excluding certain qualified plans)
during any calendar year are aggregated. The U.S. Treasury Department has
authority to prescribe additional rules to prevent avoidance of "income-first"
taxation on distributions from modified endowment contracts.
A 10% penalty tax also will apply to the taxable portion of most
distributions from a Policy that is a modified endowment contract. The penalty
tax will not, however, apply to distributions (i) to taxpayers 59 1/2 years of
age or older, (ii) in the case of a disability (as defined in the Code) or (iii)
received as part of a series of substantially equal periodic annuity payments
for
21
<PAGE>
the life (or life expectancy) of the taxpayer or the joint lives (or joint life
expectancies) of the taxpayer and his or her beneficiary. If your Policy
terminates after a grace period while there is a Policy loan, the cancellation
of such loan will be treated as a distribution to the extent not previously
treated as such and could be subject to tax, including the 10% penalty tax, as
described above. In addition, upon a full surrender any excess of the proceeds
we pay (including any amounts we use to discharge any loan) over your basis in
the Policy, will be subject to federal income tax and, unless an exception
applies, the 10% penalty tax.
Distributions that occur during a Policy year in which your Policy becomes a
modified endowment contract, and during any subsequent Policy years, will be
taxed as described in the two preceding paragraphs. In addition, distributions
from a Policy within two years before it becomes a modified endowment contract
also will be subject to tax in this manner. This means that a distribution made
from a Policy that is not a modified endowment contract could later become
taxable as a distribution from a modified endowment contract. The Treasury
Department has been authorized to prescribe rules which would treat similarly
other distributions made in anticipation of a policy becoming a modified
endowment contract.
POLICY LAPSES AND REINSTATEMENTS. A Policy which has lapsed may have the
tax consequences described above, even though you may be able to reinstate that
Policy. For tax purposes, some reinstatements may be treated as the purchase of
a new insurance contract.
ACCELERATED BENEFIT RIDER. Amounts received under an insurance policy on
the life of an individual who is terminally ill, as defined by the Code, are
generally excludable from the payee's gross income. We believe that the benefits
provided under our accelerated benefit rider meet the Code's definition of
terminally ill and can qualify for this income tax exclusion. This exclusion
does not apply, however, to amounts paid to someone other than the insured
person, if the payee has an insurable interest in the insured person's life
because the insured is a director, officer or employee of the payee or by reason
of the insured person being financially interested in any trade or business
carried on by the payee.
ESTATE AND GENERATION SKIPPING TAXES. If the insured person is the Policy's
owner, the death benefit under a Policy will generally be includable in the
owner's estate for purposes of federal estate tax. If the owner is not the
insured person, under certain conditions, only an amount approximately equal to
the surrender value of the Policy would be includable. Federal estate tax is
integrated with federal gift tax under a unified rate schedule. In general,
estates less than $625,000 (or larger amounts specified in the Code to commence
in certain future years) will not incur a federal estate tax liability. In
addition, an unlimited marital deduction may be available for federal estate tax
purposes.
As a general rule, if a "transfer" is made to a person two or more
generations younger than the Policy's owner, a generation skipping tax may be
payable at rates similar to the maximum estate tax rate in effect at the time.
The generation skipping tax provisions generally apply to "transfers" that would
be subject to the gift and estate tax rules. Individuals are generally allowed
an aggregate generation skipping tax exemption of $1 million. Because these
rules are complex, you should consult with a qualified tax adviser for specific
information, especially where benefits are passing to younger generations.
The particular situation of each Policy owner, insured person or beneficiary
will determine how ownership or receipt of Policy proceeds will be treated for
purposes of federal estate and generation skipping taxes, as well as state and
local estate, inheritance and other taxes.
EMPLOYEE BENEFIT PROGRAMS. Complex rules may apply when a Policy is held by
an employer or a trust, or acquired by an employee, in connection with the
provision of employee benefits. These Policy owners must consider whether the
Policy was applied for by or issued to a person having an insurable interest
under applicable state law and with the insured person's consent. The lack of an
insurable interest or consent may, among other things, affect the qualification
of the Policy as life insurance for federal income tax purposes and the right of
the beneficiary to receive a death benefit.
22
<PAGE>
ERISA. Employers and employer-created trusts may be subject to reporting,
disclosure and fiduciary obligations under the Employee Retirement Income
Security Act of 1974. You should consult a qualified legal adviser.
OUR TAXES. The operations of our Variable Account C are reported in our
federal income tax return, but we currently pay no income tax on the separate
account's investment income and capital gains, because these items are, for tax
purposes, reflected in our variable life insurance policy reserves. Therefore,
no charge is currently being made to the separate account for taxes. We reserve
the right to make a charge in the future for taxes incurred; for example, a
charge to the separate account for income taxes incurred by us that are
attributable to the Policies.
We may have to pay state, local or other taxes in addition to applicable
taxes based on premiums. At present, these taxes are not substantial. If they
increase, charges may be made for such taxes when they are attributable to our
separate account or to the Policies.
The Funds in which your policy value is invested may elect to pass through
to Fortis taxes withheld by foreign taxing jurisdictions on foreign source
income. Such an election will result in additional taxable income and income tax
to Fortis. The amount of additional income tax, however, may be more than offset
by credits for the foreign taxes withheld which are also passed through. These
credits may provide a benefit to Fortis.
WHEN WE WITHHOLD INCOME TAXES. Generally, unless you provide us with an
election to the contrary before we make the distribution, we are required to
withhold income tax from any proceeds we distribute as part of a taxable
transaction under your Policy. In some cases, where generation skipping taxes
may apply, we may also be required to withhold for such taxes unless we are
provided satisfactory written notification that no such taxes are due.
TAX CHANGES. The U.S. Congress frequently considers legislation that, if
enacted, could change the tax treatment of life insurance policies. In addition,
the Treasury Department may amend existing regulations, issue regulations on the
qualification of life insurance and modified endowment contracts, or adopt new
interpretations of existing law. State and local tax law or, if you are not a
U.S. citizen and resident, foreign tax law, may also affect the tax consequences
to you, the insured person or your beneficiary, and are subject to change. Any
changes in federal state, local or foreign tax law or interpretation could have
a retroactive effect. We suggest you consult a qualified tax adviser.
VOTING PRIVILEGES
You will be entitled to instruct us how to vote the Fund shares held in the
subaccounts of Variable Account C and attributable to your Policy at meetings of
shareholders of the Funds. The number of votes for which you may give directions
will be determined as of the record date for the meeting. The number of votes
you are entitled to direct with respect to a particular subaccount is equal to
one vote for each $100 in policy value in that subaccount. Fractional votes will
be recognized. Variable Account C will vote all shares of each Fund that it
holds of record in the same proportions as those shares for which we have
received instructions from owners participating in that Fund through the
separate account.
If you are entitled to give us voting instructions, we will send you proxy
material and a form for providing such instructions. In certain cases, we may
disregard instructions relating to changes in a Fund's investment manager or its
investment policies. We will advise you if we do and detail the reasons in our
next report to Policy owners.
Fortis reserves the right to modify these procedures in any manner
consistent with applicable legal requirements and interpretations as in effect
from time to time.
YOUR BENEFICIARY
You name your beneficiary when you apply for a Policy. The beneficiary is
entitled to the insurance benefits of the Policy. You may change the beneficiary
during the insured person's lifetime. We also require the consent of any
irrevocably named beneficiary. A new beneficiary designation is effective as of
the date you sign it, but will not affect any payments we may make before we
receive it. If no beneficiary is living
23
<PAGE>
when the insured person dies, we will pay the insurance proceeds to the owner or
the owner's estate.
ASSIGNING YOUR POLICY
You may assign (transfer) your rights in a Policy to someone else as
collateral for a loan or for some other reason, if we agree. Two copies of the
assignment must be forwarded to us. We are not responsible for any payment we
make or any action taken before we receive due and complete notice of the
assignment in good order. Nor are we responsible for the validity of the
assignment. An absolute assignment is a change of ownership. All collateral
assignees of record must consent to any full surrender, partial withdrawal, loan
or payment from a Policy under an accelerated benefit rider. Because there may
be unfavorable tax consequences, including recognition of taxable income and the
loss of income tax-free treatment for any death benefit payable to the
beneficiary, you should consult a qualified tax adviser prior to making an
assignment.
MORE ABOUT POLICY CHARGES
PURPOSE OF OUR CHARGES. The charges under the Policies are designed to
cover, in the aggregate, our direct and indirect costs of selling, administering
and providing benefits under the Policies. They are also designed, in the
aggregate, to compensate us for the risks we assume and services that we provide
under the Policies. These include mortality risks (such as the risk that insured
persons will, on average, die before we expect, thereby increasing the amount of
claims we must pay); investment risks (such as the risk that adverse investment
performance will make it more costly for us to provide the guaranteed death
benefit or reduce the amount of our charge fee revenues below what we
anticipate); sales risks (such as the risk that the number of Policies we sell
and the premiums we receive, net of withdrawals, are less than we expect thereby
depriving us of expected economies of scale); regulatory risks (such as the risk
that tax or other regulations may be changed in ways adverse to issuers of
variable life insurance policies); and expense risks (such as the risk that the
costs of administrative services that the Policies require us to provide will
exceed what we currently project).
If the charges that we collect from the Policies exceed our total costs in
connection with the Policies, we will earn a profit. Otherwise we will incur a
loss.
The monthly administrative charge that we deduct has been designed primarily
to compensate us for the continuing administrative functions we perform in
connection with the Policies. The current monthly insurance charge has been
designed primarily to provide funds out of which we can make payments of death
benefits under the Policies as insured persons die.
Any excess from the charges discussed in the preceding paragraph, as well as
revenues from the asset-based monthly charge, are primarily intended (a) to
defray other expenses in connection with the Policies (such as the costs of
processing applications for Policies and other unreimbursed administrative
expenses, costs of paying sales commissions and other marketing expenses for the
Policies, and costs of paying death claims if the mortality experience of
insured persons is worse than we expect), (b) to compensate us for the risks we
assume under the Policies, or (c) to compensate us for state and local taxes we
have to pay when we receive a premium from you, as well as similar federal taxes
we incur as a result of premium payments or (d) otherwise to be retained by us
as profit. The surrender charge has also been designed primarily for these
purposes.
Although the preceding paragraphs describe the primary purposes for which
charges under the Policies have been designed, these distinctions are imprecise
and subject to considerable change over the life of a Policy. We have full
discretion to retain or use the revenues from any charge or charge increase for
any purpose, whether or not related to the Policies.
CHANGE OF SMOKER STATUS. If the person insured under your Policy is a
smoker, you may apply to us for an improved risk class if the insured person
meets our then applicable requirements for demonstrating that he or she has
ceased smoking for a sufficient period. Any change from smoker to non-smoker
risk class will take effect on the next monthly anniversary, and the non-smoker
rates for the coverage under the
24
<PAGE>
Policy will be applied retroactively for the 12 months prior to the date of the
change.
GENDER NEUTRAL POLICIES. Congress and the legislatures of various states
have from time to time considered legislation that would require insurance rates
to be the same for males and females of the same age, rating class and smoker
status. In addition, employers and employee organizations should consider, in
consultation with counsel, the impact of Title VII of the Civil Rights Act of
1964 on the purchase of a policy in connection with an employment-related
insurance or benefit plan. In a 1983 decision, the United States Supreme Court
held that, under Title VII, optional annuity benefits under a deferred
compensation plan could not vary on the basis of sex.
COST OF INSURANCE RATES. Because of face amount increases, different cost
of insurance rates may apply to different increments of face amount under your
Policy. If so, we attribute your policy value in proportion to the increments of
face amount in order to compute our net amount at risk at each cost of insurance
rate. See "Monthly Insurance Charge" beginning on page 6.
EFFECTIVE DATE OF POLICY AND RELATED TRANSACTIONS
VALUATION DATES, TIMES, AND PERIODS. We generally compute values under
Policies on each day that we are open for business except, with respect to any
investment option, days on which the related Fund does not value its shares. We
call each such day a "valuation date."
We compute policy values as of 3:00 p.m., Central time, on each valuation
date. We call this our "close of business." We call the time from the close of
business on one valuation date to the close of business of the next valuation
date a "valuation period."
DATE OF RECEIPT. Generally we consider that we have received a premium
payment or another communication from you on the day we actually receive it in
full and proper order at our Home Office. If we receive it after the close of
business on any valuation date, however, we consider that we have received it on
the day following that valuation date.
COMMENCEMENT OF INSURANCE COVERAGE. After you apply for a Policy, it can
sometimes take up to several weeks for us to gather and evaluate all the
information we need to decide whether to issue a Policy to you and if so, what
the insured person's insurance risk class should be. We will not pay a death
benefit under a Policy unless (a) it has been delivered to and accepted by the
owner and at least the first premium has been paid, and (b) at the time of such
delivery and payment, there have been no adverse developments in the insured
person's health or risk of death. However, if you pay at least the minimum first
premium payment with your application for a Policy, we will provide temporary
coverage of up to $300,000 if the insured person meets certain medical and risk
requirements. The terms and conditions of this coverage are described in our
"Temporary Insurance Agreement." You can obtain a copy from our Home Office by
writing to the address shown on the first page of this prospectus or from your
Fortis representative.
POLICY DATE, POLICY MONTHS AND YEARS. After we approve an application for a
Policy and assign an appropriate insurance risk class, we prepare the Policy.
The day we begin to deduct charges will appear on your Policy schedule and is
called the "policy date." When temporary insurance has been provided, the policy
date will ordinarily be the date of Part 1 of the insurance application. When no
temporary insurance has been provided, the policy date will ordinarily be three
days after the date the application is approved. Policy months and years are
measured from the policy date. In order to preserve a younger age at issue for
the insured person we may assign a policy date to a Policy that is up to 6
months earlier than otherwise would apply.
MONTHLY ANNIVERSARIES. Each charge that we deduct monthly is assessed
against your policy value at the close of business on the date of issue and at
the end of each subsequent valuation period that includes the first day of a
Policy month. We call these "monthly anniversaries."
COMMENCEMENT OF INVESTMENT PERFORMANCE. The first premium payment will be
allocated automatically to the general account as of the later of the policy
date or the date the payment is received, and assuming the Policy goes into
effect,
25
<PAGE>
will earn a rate of return. These payments will be held in the general account
generally until the twentieth day after the Policy is mailed for delivery. Then,
all premiums plus any earnings will be re-allocated among the general account
and the variable investment options according to the selections you have made.
EFFECTIVE DATE OF OTHER PREMIUM PAYMENTS AND REQUESTS THAT YOU
MAKE. Premium payments (after the first) and transactions implemented in
response to requests and elections made by you are generally effected at the end
of the valuation period in which we receive the payment, request or election and
based on prices and values computed as of that same time. Exceptions to this
general rule are as follows:
- - Increases or decreases you request in the face amount of insurance, or
changes in the death benefit option take effect on the policy's monthly
anniversary on or next following (1) the date we receive your request or (2)
if we require evidence of insurability, the date we approve your request;
- - reinstatements of Policies that have lapsed take effect on the Policy's
monthly anniversary on or next following our approval of the transactions;
- - reinstatements of Policies that have lapsed take effect on the Policy's
monthly anniversary on or next following our approval of the transaction;
- - We may return premium payments if we determine that such premiums would cause
your Policy to become a modified endowment contract or to cease to qualify as
life insurance under federal income tax law;
- - If you exercise the right to return your Policy described on the first page
of this prospectus, your coverage will end when you mail us your Policy or
deliver it to your Fortis representative; and
- - If you pay a premium in connection with a request which requires our
approval, your payment will be applied when received rather than following
the effective date of the change requested so long as your coverage is in
force and the amount paid will not cause you to exceed premium limitations
under the Code. If we do not approve your request, no premium will be
refunded to you except to the extent necessary to cure any violation of the
maximum premium limitations under the Code. This procedure will not apply to
premiums remitted in connection with reinstatement requests.
MORE ABOUT OUR GENERAL ACCOUNT OPTION
OUR GENERAL ACCOUNT. Our general account assets are all of our assets that
we do not hold in legally segregated separate accounts. Our general account
supports our obligations to you under your Policy's general account option.
Because of applicable exemptive provisions, no interest in this option has been
registered under the Securities Act of 1933; nor is our general account an
investment company under the Investment Company Act of 1940. We have been
advised that the staff of the SEC has not reviewed the disclosures that are
included in this prospectus for your information about our general account
option. Those disclosures, however, may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
HOW WE DECLARE INTEREST. We can at any time change the rate of interest we
are paying on any policy value allocated to our general account option, but it
will always be at an effective annual rate of at least 4%.
Under these procedures, it is likely that at any time different interest
rates will apply to different portions of your policy value, depending on when
each portion was allocated to our general account option. Any charges, partial
withdrawals, or loans that we take from any policy value that you have in our
account option will be taken from each portion in reverse chronological order
based on the date that policy value was allocated to this option.
DISTRIBUTION OF THE POLICIES
Fortis Investors, Inc. ("Investors") is the principal underwriter of the
Policies. Its principal office is 500 Bielenberg Drive, Woodbury, MN 55125.
Investors is a Minnesota Corporation
26
<PAGE>
organized March 15, 1968. It is registered with the SEC as a broker-dealer under
the Securities Exchange Act of 1934 ("1934 Act") and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). Investors is also the
principal underwriter for Variable Account D of Fortis Benefits, First Fortis
Life Insurance Company's Separate Account A and Variable Account C, Fortis
Advantage Portfolios, Inc., Fortis Capital Fund, Inc., Fortis Growth Fund, Inc.,
Fortis Tax-Free Portfolios, Inc., Fortis Money Fund, Inc., Fortis Income
Portfolios, Inc., Fortis Worldwide Portfolios, Inc., and Special Portfolios,
Inc.
Fortis has an agreement with Investors for promotion and distribution of the
Policies. Investors has sales agreements with its registered representatives, as
well as various broker-dealers and banks under which the Policies will be sold
by registered representatives of the broker-dealers or employees of the banks.
These registered representatives and employees are also required to be
authorized under applicable state regulations as life insurance agents to sell
variable life insurance. The broker-dealers are ordinarily required to be
registered with the SEC and must be members of the NASD.
As compensation for selling the Policies, Fortis will pay Investors 110.5%
of the premiums paid up to the first twelve recommended monthly minimum
premiums, 4% of all other premiums paid during the first six years of the Policy
and 2% of all premiums in excess of the target amount paid in Policy years seven
through ten. We also pay Investors .25% of unloaned policy value annually as a
service fee from the eleventh Policy year. We also pay a general marketing
allowance to Investors not to exceed an amount agreed to in advance by Fortis
and Investors ($5,241,700 for calendar year 1998) for all variable universal
life policies issued by Fortis.
Investors pays compensation not in excess of these amounts to other
broker-dealers and banks who sell the Policies. Fortis may pay alternative
amounts for sales of the Policies under a flexible compensation plan, but the
maximum value of any alternative amounts we pay is expected to be equivalent
over time to the amounts described above.
We pay a comparable amount of compensation for any increase of $25,000 or
more in the face amount of coverage that you request or for any increase due to
the Cost of Living Adjustment Index. In addition, we may pay expense allowances,
bonuses, wholesaler fees and training allowances.
We pay the compensation from our own resources. These payments do not result
in any additional charge to you that is not described in this prospectus. Each
broker-dealer firm or bank, in turn compensates its registered representative or
employee who acts as agent in selling you a Policy.
PAYMENT OF POLICY PROCEEDS
GENERAL. We will pay any death benefit, surrender value or loan proceeds
within seven days after we receive the last required form or request (and any
other documents that may be required for payment of death benefit). If we do not
have information about the desired manner of payment within 60 days after the
date we receive notification of the insured person's death, we will pay the
proceeds as a single sum, normally within seven days thereafter.
DELAY OF GENERAL ACCOUNT OPTION PROCEEDS. We have the right, however, to
defer death benefit payments derived from that portion of your policy value that
is allocated to the general account for up to two months; and all other payments
or transfers of amounts out of our general account option for up to six months.
If we delay more than 30 days in paying you such amounts, we will pay interest
at an annual rate of at least 3.5% from the date we receive all items we require
to make the payment.
DELAY FOR CHECK CLEARANCE. We reserve the right to defer payment of that
portion of your policy value that is attributable to a premium payment made by
check for a reasonable period of time (not to exceed 15 days) to allow the check
to clear the banking system.
DELAY OF SEPARATE ACCOUNT PROCEEDS. We reserve the right to defer payment
of any death benefit, loan or other distribution that is derived from that
portion of your policy value that is allocated to Variable Account C, if (a) the
New York Stock Exchange is closed other than
27
<PAGE>
customary weekend and holiday closings, or trading on the New York Stock
Exchange is restricted; (b) an emergency exists, as a result of which disposal
of securities is not reasonably practicable or it is not reasonably practicable
to fairly determine the policy value; or (c) the SEC by order permits the delay
for the protection of owners. Transfers and allocations of policy value among
the investment options may also be postponed under these circumstances. If we
need to defer calculation of separate account values for any of the foregoing
reasons, all delayed transactions will be processed at the next values that we
do compute.
DELAY TO CHALLENGE COVERAGE. We may challenge the validity of your
insurance Policy based on any material misstatements in your application and any
application for a change in coverage. However,
- - We cannot challenge the Policy after it has been in effect, during the
insured person's lifetime, for two years from the date the Policy was issued
or reinstated. (Some states may require that we measure this time in some
other way.)
- - We cannot challenge any Policy change that requires evidence of insurability
(such as an increase in face amount) after the change has been in effect for
two years during the insured person's lifetime.
- - We cannot challenge an additional benefit rider that provides benefits in the
event that the insured person becomes totally disabled, after two years from
the later of the Policy's date of issue or the date as of which the
additional benefit rider becomes effective.
ADJUSTMENTS TO DEATH BENEFIT
SUICIDE. If the insured person commits suicide within two years after the
date on which the Policy was issued, the death benefit will be limited to the
total of all premiums that have been paid to the time of death minus any
outstanding Policy loan and any partial withdrawals. If the insured person
commits suicide within two years after the effective date of an increase in face
amount that you requested, we will pay the death benefit based on the face
amount which was in effect before the increase, plus the monthly insurance
deductions for the increase. Some states require that we compute differently
these periods for non-contestability following a suicide.
WRONG AGE OR SEX. If the age or gender of the insured person was misstated
on your application for a Policy (or for any increase in benefits), we will
adjust any death benefit to be what the monthly insurance charge deducted for
the current month would have purchased based on the correct information.
DEATH DURING GRACE PERIOD. If the insured person dies during the Policy's
grace period, we will deduct any overdue monthly charges from the insurance
proceeds.
ADDITIONAL RIGHTS THAT WE HAVE
We have the right at any time to:
- - transfer the entire balance in an investment option in accordance with any
transfer request you make that would reduce your policy value for that option
to below $250;
- - terminate the automatic rebalancing feature if your policy value falls below
$2,000;
- - change the underlying Fund that any investment option uses;
- - add or delete investment options, combine two or more investment options, or
withdraw assets relating to the Policy from one investment option and put
them into another;
- - operate Variable Account C under the direction of a committee or discharge
such a committee at any time;
- - operate the separate account, or one or more investment options, in any other
form the law allows, including a form that allows us to make direct
investments. Our separate account may be charged an advisory fee if its
investments are made directly rather than through another investment company.
In that case, we may make any legal investments we wish;
- - do any of the following, if in our judgment necessary or appropriate to
ensure that the Policies continue to qualify for tax treatment as life
insurance: decline to change death benefit options or the face amount of
28
<PAGE>
insurance, refuse a partial withdrawal request, require you to pay additional
premiums, make distributions from your Policy (which could require payment of
taxes and penalties), or make any other changes in your Policy; or
- - make other changes in the Policies that do not reduce any surrender value,
death benefit, policy value, or other accrued rights or benefits.
PERFORMANCE INFORMATION
From time to time, we may quote performance information for the subaccounts
of the Variable Account C in advertisements, sales literature, or reports to
owners or prospective investors.
We may quote performance information in any manner permitted under
applicable law. We may, for example, present such information as a change in a
hypothetical owner's policy value or death benefit. We also may present the
yield or total return of the subaccount based on a hypothetical investment in a
Policy. The performance information shown may cover various periods of time;
including periods beginning with the commencement of the operations of the
subaccount or the Fund in which it invests. The performance information shown
may reflect the deduction of one or more charges, such as the asset-based
monthly charge or surrender charge. We generally expect to exclude cost of
insurance charges because of the individual nature of these charges.
We may compare a subaccount's performance to that of other variable life
separate accounts or investment products, as well as to generally accepted
indices or analyses, such as those provided by research firms and rating
services. In addition, we may use performance ratings that may be reported
periodically in financial publications, such as MONEY MAGAZINE, FORBES, BUSINESS
WEEK, FORTUNE, FINANCIAL RATING, and THE WALL STREET JOURNAL. We also may
advertise ratings of Fortis' financial strength or claims-paying ability as
determined by firms that analyze and rate insurance companies and by nationally
recognized statistical rating organizations.
Performance information for any subaccount reflects the performance of a
hypothetical Policy and are not illustrative of how actual investment
performance would affect the benefits under your Policy. Therefore, you should
not consider such performance information to be an estimate or guarantee of
future performance.
If there are any significant changes in the underlying investments of an
investment option that you are using, you will be notified as required by law.
We intend to comply with applicable law in making any changes and, if necessary,
we will seek Policy owner approval.
OUR REPORTS TO POLICY OWNERS
We will mail you a report annually that includes information about your
Policy's current death benefit, policy value, surrender value and policy loans.
Notices will be sent to you to confirm premium payments, transfers and certain
other Policy transactions. We will mail to you at your last known address of
record, these and any other reports and communications required by law. You
should therefore give us prompt written notice of any address change.
FORTIS MANAGEMENT
The directors and executive officers, to the extent responsible for variable
life insurance operations, of Fortis Benefits are listed below, together with
their principal occupations and business experience for the past five years:
<TABLE>
<CAPTION>
OFFICER-DIRECTORS
- ------------------------------
<S> <C>
Robert Brian Pollock (4)...... President and Chief Executive Officer.
Dean C. Kopperud (1).......... Executive Vice President--also officer
of affiliated companies.
Michael John Peninger (4)..... Executive Vice President-- Operations
and Finance, and Chief Financial
Officer
OTHER DIRECTORS
- ------------------------------
Allen Royal Freedman (2)...... Chairman and Chief Executive Officer of
Fortis, Inc.
J. Kerry Clayton (2).......... Executive Vice President of Fortis,
Inc.
Arie Aristide Fakkert (3)..... Assistant General Manager of Fortis
International N.V.
Alan W. Feagin (5)............ President and CEO of United Family Life
Insurance Company
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
OFFICER-DIRECTORS
- ------------------------------
<S> <C>
EXECUTIVE OFFICERS
- ------------------------------
Peggy Ettestad (1)............ Senior Vice President-- Operations;
before then Vice President, General
Electric Company
Rhonda J. Schwartz (1)........ Senior Vice President and General
Counsel, Fortis Financial Group; before
then Secretary and General Counsel of
Fortis, Inc.
Jon H. Nicholson (1).......... Senior Vice President--Custom Solutions
Group
Melinda S. Urion (1).......... Senior Vice President and Chief
Financial Officer, Fortis Financial
Group; before then Senior Vice
President-Finance & CFO of American
Express Financial Corporation
Dickson W. Lewis (1).......... Senior Vice President-- Distribution
and Marketing; before then President of
Hedstrom/Blessing Marketing.
</TABLE>
- ------------------------------
(1) Address: Fortis Benefits Insurance Company, P.O. Box 64271, St. Paul, MN
55164. Fortis Benefits is a wholly-owned subsidiary of Fortis Insurance
Company, 501 West Michigan, Milwaukee, WI 53201, which is itself
wholly-owned by Fortis, Inc.
(2) Address: Fortis, Inc., One Chase Manhattan Plaza, New York, NY 10005.
Fortis, Inc. is wholly owned by Fortis International, N.V., which is itself
wholly owned by AMEV/VSB 1990 N.V. The latter two companies share the same
address as Fortis (NL) N.V. AMEV/VSB 1900 N.V. is 50% owned by Fortis (NL)
N.V. and 50% owned by Fortis (B), Boulevard Emile Jacomain 53, Brussels,
Belgium.
(3) Address: Fortis (NL) N.V., Achimedeslaan 10, 3584 BA Utrecht, The
Netherlands.
(4) Address: 2323 Grand Avenue, Kansas City, MO 64108.
(5) Address: 230 John Wesley Dobbs Ave., Atlanta, GA 30303.
LEGAL MATTERS
We are not involved in any legal proceedings that would be considered
material with respect to a Policy owner's interest in Variable Account C.
Douglas R. Lowe, Associate General Counsel, has opined as to the validity of the
Policies. Freedman, Levy, Kroll & Simonds, Washington, D.C., has advised Fortis
about certain federal securities and tax law matters in connection with the
Policies.
INDEPENDENT AUDITORS
The Financial statements of Fortis and Variable Account C included in this
prospectus have been audited by Ernst & Young LLP, as stated in their reports.
The financial statements of Fortis have been included in reliance on the reports
of Ernst & Young LLP, independent accountants, given upon the authority of such
firm as experts in accounting and auditing.
ACTUARIAL EXPERTS
Actuarial matters in this prospectus have been examined by Kay M. Doughty,
ASA, MAAA, Staff Actuary. Her opinion on actuarial matters is filed as an
exhibit to the registration statement we have filed with the SEC in connection
with the Policies.
YEAR 2000 ISSUES
The computer systems we use to process Policy transactions and valuations
need to be adjusted to be able to continue to administer the Policies after Year
2000. Fortis is devoting all resources necessary to make these systems
modifications and expects that the necessary changes will be completed on time
and in a way that will result in no disruption to its policy servicing
operations. However, as is the case with most system conversion projects, risks
and uncertainties exist, due in part to reliance on third party vendors.
Nonperformance by any of these entities, or other unforeseen circumstances,
could have a material adverse impact on Fortis' ability to perform its policy
servicing operations. We are closely monitoring these entities to avoid any
unforeseen circumstances. See Note 17 to Fortis' financial statements.
FINANCIAL STATEMENTS
The financial statements of Fortis and Variable Account C included in this
Prospectus should be considered only as bearing upon the ability of Fortis to
meet its obligations under the Policies.
Fortis generally reinsures risks for non-group insurance in excess of
$500,000 per insured with other insurance companies. See Note 9 to Fortis'
financial statements.
30
<PAGE>
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
<PAGE>
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-2
<PAGE>
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME
------------ ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
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
------------ ------ ------------ ------------- -------
------------ ------ ------------ ------------- -------
</TABLE>
See accompanying notes.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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 --
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
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
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
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).
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
----------- ----------- -----------
<S> <C> <C> <C>
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)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
INTEREST
SENSITIVE AND ACCIDENT
TRADITIONAL INVESTMENT AND
LIFE PRODUCTS HEALTH TOTAL
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
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
----------- --------------- ----------- ---------
----------- --------------- ----------- ---------
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
6. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current............................................................ $ 30,232 $ 41,569 $ 32,193
Deferred........................................................... 170 (6,449) (1,094)
--------- --------- ---------
$ 30,402 $ 35,120 $ 31,099
--------- --------- ---------
--------- --------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
--- --- ---
<S> <C> <C> <C>
Statutory income tax rate................................................ 35.0% 35.0% 35.0%
Other, net............................................................... (2.1) (.6) (.2)
--- --- ---
32.9% 34.4% 34.8%
--- --- ---
--- --- ---
</TABLE>
F-12
<PAGE>
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):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Life insurance..................................................... $ 6,983 $ 8,159 $ 8,680
Accident and health insurance...................................... 13,862 13,712 6,793
--------- --------- ---------
$ 20,845 $ 21,871 $ 15,473
--------- --------- ---------
--------- --------- ---------
</TABLE>
Recoveries under reinsurance contracts for the year ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Life insurance..................................................... $ 4,549 $ 2,973 $ 7,225
Accident and health insurance...................................... 9,465 14,781 5,993
--------- --------- ---------
$ 14,014 $ 17,754 $ 13,218
--------- --------- ---------
--------- --------- ---------
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
NET INCOME (LOSS) SHAREHOLDER'S EQUITY
------------------------------- --------------------
1998 1997 1996 1998 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31
-----------------------------------------------------
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
16. DEBT
A summary of debt at December 31 for each year follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
Maturities of the debt as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................................... $ 280
1999............................................................................... 344
2000............................................................................... 3,328
2001............................................................................... 5,030
2002............................................................................... 251
Thereafter......................................................................... 10,908
---------
$ 20,141
---------
---------
</TABLE>
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
<PAGE>
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 C (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) as of December
31, 1998, and the related statements of changes in net assets for each of the
two years in the periods then ended, except for 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.
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 C 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
F-17
<PAGE>
STATEMENTS OF NET ASSETS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ATTRIBUTABLE TO FORTIS
NET ASSETS AT BENEFITS INSURANCE
SHARES COST MARKET VALUE COMPANY
------------ ------------- ------------- ----------------------
<S> <C> <C> <C> <C>
INVESTMENTS IN FORTIS SERIES FUND, INC.:
Growth Stock............................... 5,259,745 $ 135,621,415 $216,111,878 $ --
U.S. Government Securities................. 962,649 10,630,806 10,519,922 --
Money Market............................... 885,585 9,840,933 9,797,759 --
Asset Allocation........................... 2,541,055 40,774,876 53,598,723 --
Diversified Income......................... 727,878 8,688,513 8,672,011 --
Global Growth.............................. 3,879,500 62,495,772 87,552,169 --
Aggressive Growth.......................... 2,869,286 37,535,977 47,918,797 --
Growth & Income............................ 1,872,300 30,777,221 39,743,500 --
High Yield................................. 549,184 5,725,316 5,440,109 --
Global Asset Allocation.................... 563,901 7,252,056 8,075,798 --
Global Bond................................ 192,133 2,157,453 2,221,174 --
International Stock........................ 1,612,783 21,350,078 23,357,616 --
Value...................................... 905,950 12,167,683 13,023,205 --
S & P 500.................................. 2,373,943 36,766,925 44,711,787 --
Blue Chip Stock............................ 1,691,782 24,613,320 31,427,223 2,594,665
Mid Cap Stock.............................. 161,768 1,509,185 1,558,861 819,116
Large Cap Growth........................... 260,764 2,706,350 3,140,748 1,023,777
Small Cap Value............................ 241,306 2,244,928 2,239,252 788,842
------------- ------------- --------
Net assets................................... $ 452,858,807 $609,110,532 $5,226,400
------------- ------------- --------
------------- ------------- --------
<CAPTION>
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE LIFE
VARIABLE LIFE UNITS INSURANCE POLICIES PER
INSURANCE POLICIES OUTSTANDING ACCUMULATION UNIT
------------------ ------------ ----------------------
<S> <C> <C> <C>
INVESTMENTS IN FORTIS SERIES FUND, INC.:
Growth Stock............................... $216,111,878 7,307,257 $29.57
U.S. Government Securities................. 10,519,922 597,089 17.62
Money Market............................... 9,797,759 698,712 14.02
Asset Allocation........................... 53,598,723 1,970,079 27.21
Diversified Income......................... 8,672,011 477,587 18.16
Global Growth.............................. 87,552,169 4,062,037 21.55
Aggressive Growth.......................... 47,918,797 3,022,456 15.85
Growth & Income............................ 39,743,500 1,827,004 21.75
High Yield................................. 5,440,109 422,237 12.88
Global Asset Allocation.................... 8,075,798 494,405 16.33
Global Bond................................ 2,221,174 167,453 13.26
International Stock........................ 23,357,616 1,447,501 16.14
Value...................................... 13,023,205 877,605 14.84
S & P 500.................................. 44,711,787 2,381,279 18.78
Blue Chip Stock............................ 28,832,558 1,571,906 18.34
Mid Cap Stock.............................. 739,745 76,735 9.64
Large Cap Growth........................... 2,116,971 179,900 11.77
Small Cap Value............................ 1,450,410 154,731 9.37
------------------ ------------
Net assets................................... $603,884,132 27,735,973
------------------ ------------
------------------ ------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FORTIS U.S. FORTIS
FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET DIVERSIFIED
STOCK SECURITIES MARKET ALLOCATION INCOME
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income.............................. $ 10,011,623 $ 604,612 $ 417,836 $ 95,130 $ 516,581
Mortality and expense and policy advance
charges..................................... (2,172,350) (108,978) (97,182) (532,382) (89,921)
Net realized gain (loss) on investments...... 5,194,040 198,574 47,621 555,821 77,069
Net unrealized appreciation (depreciation) of
investments................................. 19,387,059 (18,374) (24,618) 8,022,659 (130,599)
------------- ------------ ------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations................... 32,420,372 675,834 343,657 8,141,228 373,130
CAPITAL TRANSACTIONS
Purchase of variable account units........... 16,114,322 4,401,606 15,648,521 6,247,649 2,923,619
Redemption of variable account units......... (14,790,719) (3,465,915) (14,377,114) (2,713,046) (1,482,876)
Mortality and expense charges redeemed....... 2,172,350 108,978 97,182 532,382 89,921
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.................. -- -- -- -- --
------------- ------------ ------------- ------------ ------------
Increase from capital transactions........... 3,495,953 1,044,669 1,368,589 4,066,985 1,530,664
Net assets at beginning of year.............. 180,195,553 8,799,419 8,085,513 41,390,510 6,768,217
------------- ------------ ------------- ------------ ------------
Net assets at end of year.................... $216,111,878 $10,519,922 $ 9,797,759 $53,598,723 $ 8,672,011
------------- ------------ ------------- ------------ ------------
------------- ------------ ------------- ------------ ------------
<CAPTION>
FORTIS FORTIS
GLOBAL AGGRESSIVE
GROWTH GROWTH
------------ ------------
<S> <C> <C>
OPERATIONS
Dividend income.............................. $ 92,908 $ 78,258
Mortality and expense and policy advance
charges..................................... (965,714) (457,512)
Net realized gain (loss) on investments...... 1,873,640 452,032
Net unrealized appreciation (depreciation) of
investments................................. 6,899,076 7,815,700
------------ ------------
Net increase (decrease) in net assets
resulting from operations................... 7,899,910 7,888,478
CAPITAL TRANSACTIONS
Purchase of variable account units........... 7,934,991 8,656,071
Redemption of variable account units......... (7,198,093) (4,140,981)
Mortality and expense charges redeemed....... 965,714 457,512
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.................. -- --
------------ ------------
Increase from capital transactions........... 1,702,612 4,972,602
Net assets at beginning of year.............. 77,949,647 35,057,717
------------ ------------
Net assets at end of year.................... $ 87,552,169 $ 47,918,797
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FORTIS FORTIS FORTIS
GROWTH & FORTIS HIGH GLOBAL ASSET FORTIS INTERNATIONAL
INCOME YIELD ALLOCATION GLOBAL BOND STOCK FORTIS VALUE
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income......................... $ 10,771 $ 428,836 $ 561,799 $ 94,052 $ 1,605,384 $ 283,540
Mortality and expense and policy advance
charges................................ (399,394) (61,285) (83,639) (22,737) (234,715) (119,375)
Net realized gain (loss) on
investments............................ 459,331 47,340 151,193 11,737 346,030 205,629
Net unrealized appreciation
(depreciation) of investments.......... 3,655,009 (463,439) 347,862 145,597 815,560 401,780
----------- ------------ ------------ ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations.............. 3,725,717 (48,548) 977,215 228,649 2,532,259 771,574
CAPITAL TRANSACTIONS
Purchase of variable account units...... 10,810,093 2,313,861 2,107,553 646,464 7,684,870 6,707,673
Redemption of variable account units.... (2,405,271) (1,552,255) (1,150,806) (456,482) (2,727,690) (914,596)
Mortality and expense charges
redeemed............................... 399,394 61,285 83,639 22,737 234,715 119,375
Funding of subaccount by Fortis Benefits
Insurance Company...................... -- -- -- -- -- --
Redemption of Fortis Benefits Insurance
Company investment in subaccount....... -- -- -- -- -- (453,865)
Dividend income distribution to Fortis
Benefits Insurance Company............. -- -- -- -- -- --
----------- ------------ ------------ ----------- ------------ ------------
Increase from capital transactions...... 8,804,216 822,891 1,040,386 212,719 5,191,895 5,458,587
Net assets at beginning of year......... 27,213,567 4,665,766 6,058,197 1,779,806 15,633,462 6,793,044
----------- ------------ ------------ ----------- ------------ ------------
Net assets at end of year............... $39,743,500 $ 5,440,109 $ 8,075,798 $ 2,221,174 $23,357,616 $ 13,023,205
----------- ------------ ------------ ----------- ------------ ------------
----------- ------------ ------------ ----------- ------------ ------------
</TABLE>
See accompanying notes.
F-20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FORTIS FORTIS FORTIS COMBINED
FORTIS S & P FORTIS BLUE MID CAP LARGE CAP SMALL CAP VARIABLE
500 CHIP STOCK STOCK GROWTH VALUE ACCOUNT
------------ ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income.................... $ 661,349 $ 526,017 $ 2,654 $ 803 $ 29,147 $ 16,021,300
Mortality and expense and policy
advance charges................... (353,094) (226,004) (1,146) (3,149) (2,269) (5,930,846)
Net realized gain (loss) on
investments....................... 1,417,959 163,987 (551) (599) (2,161) 11,198,692
Net unrealized appreciation
(depreciation) of investments..... 5,641,705 4,970,502 49,677 434,398 (5,675) 57,943,879
------------ ------------ ----------- ----------- ----------- -------------
Net increase (decrease) in net
assets resulting from
operations........................ 7,367,919 5,434,502 50,634 431,453 19,042 79,233,025
CAPITAL TRANSACTIONS
Purchase of variable account
units............................. 24,567,864 14,173,614 697,126 1,909,786 1,405,053 134,950,736
Redemption of variable account
units............................. (4,191,140) (856,152) (38,634) (53,376) (26,427) (62,541,573)
Mortality and expense charges
redeemed.......................... 353,094 226,004 1,146 3,149 2,269 5,930,846
Funding of subaccount by Fortis
Benefits Insurance Company........ -- -- 850,000 850,000 850,000 2,550,000
Redemption of Fortis Benefits
Insurance Company investment in
subaccount........................ (2,506,810) (74,424) -- -- -- (3,035,099)
Dividend income distribution to
Fortis Benefits Insurance
Company........................... -- (43,474) (1,411) (264) (10,685) (55,834)
------------ ------------ ----------- ----------- ----------- -------------
Increase from capital
transactions...................... 18,223,008 13,425,568 1,508,227 2,709,295 2,220,210 77,799,076
Net assets at beginning of year.... 19,120,860 12,567,153 -- -- -- 452,078,431
------------ ------------ ----------- ----------- ----------- -------------
Net assets at end of year.......... $ 44,711,787 $31,427,223 $ 1,558,861 $3,140,748 $2,239,252 $ 609,110,532
------------ ------------ ----------- ----------- ----------- -------------
------------ ------------ ----------- ----------- ----------- -------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FORTIS U.S. FORTIS
FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET DIVERSIFIED
STOCK SECURITIES MARKET ALLOCATION INCOME
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income.............................. $ 16,536 $ 600,561 $ 318,907 $ 5,630,084 $ 458,290
Mortality and expense and policy advance
charges..................................... (1,928,584) (91,178) (89,913) (435,946) (71,161)
Net realized gain (loss) on investments...... 3,421,669 173,173 (22,812) 526,622 56,634
Net unrealized appreciation (depreciation) of
investments................................. 16,067,592 (74,889) 117,253 496,493 101,815
------------- ------------ ------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations................... 17,577,213 607,667 323,435 6,217,253 545,578
CAPITAL TRANSACTIONS
Purchase of variable account units........... 18,101,571 2,337,630 11,107,675 5,874,956 1,770,902
Redemption of variable account units......... (10,430,951) (2,340,875) (10,678,593) (2,133,574) (1,053,700)
Mortality and expense charges redeemed....... 1,928,584 91,178 89,913 435,946 71,161
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.................. -- -- -- -- --
------------- ------------ ------------- ------------ ------------
Increase from capital transactions........... 9,599,204 87,933 518,995 4,177,328 788,363
Net assets at beginning of year.............. 153,019,136 8,103,819 7,243,083 30,995,929 5,434,276
------------- ------------ ------------- ------------ ------------
Net assets at end of year.................... $180,195,553 $ 8,799,419 $ 8,085,513 $41,390,510 $ 6,768,217
------------- ------------ ------------- ------------ ------------
------------- ------------ ------------- ------------ ------------
<CAPTION>
FORTIS FORTIS FORTIS
GLOBAL AGGRESSIVE GROWTH &
GROWTH GROWTH INCOME
------------ ------------ ------------
<S> <C> <C> <C>
OPERATIONS
Dividend income.............................. $ -- $ 473 $ 836,584
Mortality and expense and policy advance
charges..................................... (840,959) (325,707) (219,629)
Net realized gain (loss) on investments...... 1,027,708 28,215 145,502
Net unrealized appreciation (depreciation) of
investments................................. 3,834,048 1,389,881 3,656,481
------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations................... 4,020,797 1,092,862 4,418,938
CAPITAL TRANSACTIONS
Purchase of variable account units........... 15,303,244 12,628,674 11,389,955
Redemption of variable account units......... (4,139,111) (1,470,664) (743,822)
Mortality and expense charges redeemed....... 840,959 325,707 219,629
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.................. -- -- --
------------ ------------ ------------
Increase from capital transactions........... 12,005,092 11,483,717 10,865,762
Net assets at beginning of year.............. 61,923,758 22,481,138 11,928,867
------------ ------------ ------------
Net assets at end of year.................... $ 77,949,647 $ 35,057,717 $ 27,213,567
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-22
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FORTIS
GLOBAL FORTIS
FORTIS HIGH ASSET FORTIS INTERNATIONAL FORTIS
YIELD ALLOCATION GLOBAL BOND STOCK VALUE
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income.............................. $ 6,334 $ 308,250 $ 74,264 $ 625,067 $ 374,828
Mortality and expense and policy advance
charges..................................... (43,646) (55,228) (19,097) (139,293) (37,738)
Net realized gain (loss) on investments...... 84,353 47,142 (1,793) 134,574 56,719
Net unrealized appreciation (depreciation) of
investments................................. 260,719 259,453 (62,340) 524,447 361,973
------------ ----------- ----------- ------------ -----------
Net increase (decrease) in net assets
resulting from operations................... 307,760 559,617 (8,966) 1,144,795 755,782
CAPITAL TRANSACTIONS
Purchase of variable account units........... 2,950,385 2,349,695 752,268 6,913,720 5,531,019
Redemption of variable account units......... (1,371,034) (472,728) (623,679) (1,225,184) (734,522)
Mortality and expense charges redeemed....... 43,646 55,228 19,097 139,293 37,738
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.................. -- -- -- -- (8,848)
------------ ----------- ----------- ------------ -----------
Increase from capital transactions........... 1,622,997 1,932,195 147,686 5,827,829 4,825,387
Net assets at beginning of year.............. 2,735,009 3,566,385 1,641,086 8,660,838 1,211,875
------------ ----------- ----------- ------------ -----------
Net assets at end of year.................... $ 4,665,766 $6,058,197 $ 1,779,806 $15,633,462 $ 6,793,044
------------ ----------- ----------- ------------ -----------
------------ ----------- ----------- ------------ -----------
<CAPTION>
COMBINED
FORTIS S & P FORTIS BLUE VARIABLE
500 CHIP STOCK ACCOUNT
------------- ------------ -------------
<S> <C> <C> <C>
OPERATIONS
Dividend income.............................. $ 294,610 $ 52,416 $ 9,597,204
Mortality and expense and policy advance
charges..................................... (100,810) (57,714) (4,456,603)
Net realized gain (loss) on investments...... 200,711 16,021 5,894,438
Net unrealized appreciation (depreciation) of
investments................................. 1,996,353 1,516,126 30,445,405
------------- ------------ -------------
Net increase (decrease) in net assets
resulting from operations................... 2,390,864 1,526,849 41,480,444
CAPITAL TRANSACTIONS
Purchase of variable account units........... 16,661,529 8,266,243 121,939,466
Redemption of variable account units......... (3,472,986) (109,173) (41,000,596)
Mortality and expense charges redeemed....... 100,810 57,714 4,456,603
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.................. (32,520) (23,901) (65,269)
------------- ------------ -------------
Increase from capital transactions........... 13,256,833 8,190,883 85,330,204
Net assets at beginning of year.............. 3,473,163 2,849,421 325,267,783
------------- ------------ -------------
Net assets at end of year.................... $ 19,120,860 $12,567,153 $ 452,078,431
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
VARIABLE ACCOUNT C
DECEMBER 31, 1998
1. GENERAL
FORTIS BENEFITS INSURANCE COMPANY
Variable Account C (the "Account") was established as a segregated asset account
of Fortis Benefits Insurance Company ("Fortis Benefits") on March 13, 1986 under
Minnesota law. The Account is registered under the Investment Company Act of
1940 as a unit investment trust. Fortis Benefits serves as distributor of the
Harmony Investment Life and Wall Street Series policies.
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.
3. INVESTMENTS
There are eighteen subaccounts within the Account, each of which invests
only in a corresponding portfolio of Fortis Series Fund, Inc. (the Series).
Investments in shares of the Series 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.
The cost of investments sold and redeemed is determined using the average cost
method. Unrealized appreciation or depreciation of investments represents the
Account's share of the subaccount's undistributed net investment income,
undistributed realized gains and losses and unrealized appreciation or
depreciation.
Purchases and sales of shares of the Funds 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:
<TABLE>
<CAPTION>
SHARES
----------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Fortis Series Fund, Inc.:
Growth Stock................ 729,677 388,040 $ 26,125,945 $ 9,596,679
U.S. Government
Securities................. 456,835 318,071 5,006,218 3,267,341
Money Market................ 1,455,023 1,287,790 16,066,357 14,329,493
</TABLE>
F-24
<PAGE>
3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998: (CONTINUED)
<TABLE>
<CAPTION>
SHARES
----------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
---------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Asset Allocation............ 334,518 142,687 $ 6,342,779 $ 2,157,225
Diversified Income.......... 285,468 122,389 3,440,200 1,405,807
Global Growth............... 376,880 339,005 8,027,899 5,324,453
Aggressive Growth........... 615,389 283,998 8,734,329 3,688,949
Growth & Income............. 541,513 120,216 10,820,864 1,945,940
High Yield.................. 263,774 147,833 2,742,697 1,504,915
Global Asset Allocation..... 188,040 80,102 2,669,352 999,613
Global Bond................. 65,856 40,879 740,516 444,745
International Stock......... 627,164 184,515 9,290,254 2,381,660
Value....................... 494,519 94,739 6,991,213 1,162,832
S&P 500..................... 1,494,482 401,256 25,229,213 5,279,991
Blue Chip Stock............. 896,941 57,169 14,699,631 810,063
Mid Cap Stock............... 166,528 4,760 1,549,780 40,596
Large Cap Growth............ 266,175 5,412 2,760,589 54,239
Small Cap Value............. 245,700 4,393 2,284,200 39,273
</TABLE>
YEAR ENDED DECEMBER 31, 1997:
<TABLE>
<CAPTION>
SHARES
--------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
---------- -------- ------------ --------------
<S> <C> <C> <C> <C>
Fortis Series Fund, Inc.:
Growth Stock................ 523,134 299,772 $ 18,118,107 $ 7,009,282
U.S. Government
Securities................. 276,469 218,751 2,938,191 2,167,703
Money Market................ 1,034,680 963,476 11,426,582 10,701,404
Asset Allocation............ 649,160 113,966 11,505,040 1,606,952
Diversified Income.......... 189,118 88,862 2,229,192 997,065
Global Growth............... 787,179 205,436 5,303,244 3,111,402
Aggressive Growth........... 1,000,432 113,159 12,629,147 1,442,450
Growth & Income............. 706,056 41,743 12,226,539 598,320
High Yield.................. 286,488 131,597 2,956,719 1,286,680
Global Asset Allocation..... 203,227 36,183 2,657,945 425,586
Global Bond................. 76,577 57,378 826,532 625,473
International Stock......... 564,562 90,535 7,538,787 1,090,609
Value....................... 453,158 55,272 5,905,847 686,651
S&P 500..................... 1,245,489 270,028 16,956,139 3,304,795
Blue Chip Stock............. 617,149 9,949 8,318,659 117,053
</TABLE>
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:
<TABLE>
<CAPTION>
NUMBER OF COST OF
SHARES SHARES
--------- -----------
<S> <C> <C>
Fortis Series Fund, Inc.:
Blue Chip Stock........................... 139,675 $ 1,419,801
Mid Cap Stock............................. 85,002 849,908
Large Cap Growth.......................... 85,000 850,044
Small Cap Value........................... 85,007 848,864
</TABLE>
F-25
<PAGE>
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES
ORGANIZATIONAL EXPENSES
Fortis Benefits assumes all organizational expenses of the Account.
PREMIUM EXPENSE CHARGE
For Wall Street Series VUL 100, VUL 220, VUL 500 and Survivor policies, there is
currently no premium expense charge to reimburse Fortis Benefits for premium
taxes or similar expenses it may have to pay. However, Fortis Benefits reserves
the right to impose a charge of 3.0% of premium for the Wall Street Series
Survivor and a charge of 2.5% for all other Wall Street Series Policies.
For Harmony Investment Life policies, a 5% sales charge and a 2.2% state premium
tax is deducted from each premium payment received by Fortis Benefits. The
resulting net premiums are allocated to the subaccounts of the Account and/or to
the Fortis Benefits general account.
MONTHLY DEDUCTIONS FROM POLICY VALUE
Monthly deductions from the net assets attributed to each policy are as follows:
- Monthly cost of insurance.
- Monthly cost of any optional insurance benefits added by rider.
For Wall Street Series VUL 100, VUL 220, VUL 500 and Survivor policies, the
monthly deductions from policy value are as follows:
- For Wall Street Series VUL 100, VUL 220 and VUL 500 a monthly
administrative charge of $4.50 per policy. For Wall Street Series
Survivor a monthly administrative charge of $6.00 per policy. Fortis
Benefits reserves the right to change this administrative charge, but it
will never exceed $7.50 per month.
- For VUL 220 and VUL 500, a monthly sales, premium tax and policy advance
charge of $4.00 per policy.
For Harmony Investment Life policies, the monthly deductions from policy value
are as follows:
- Monthly administrative charge of $5.00 per policy ($3.00 for policies
applied for prior to July 1, 1988).
- For policies issued subsequent to July 1, 1988, Fortis Benefits reserves
the right to impose an expense charge of not more than $15.00 per month
and an additional per-thousand-of-face amount of insurance expense
charge of not more than $.08 per month for insureds age 29 or less and
$.25 per month for insureds age 30 and over during the first twelve
policy months. Fortis Benefits currently does not impose any of the
expense charges described in the preceding sentence.
- For policies issued prior to July 1, 1988, Fortis Benefits currently
imposes an expense charge of $10.00 per month and an additional
per-thousand-of-face amount of insurance expense charge of $0.06 per
month for insureds age 29 or less and $0.20 per month for insureds age
30 and over during the first twelve policy months.
ACCOUNT VALUE BASED CHARGES
Fortis Benefits deducts a daily mortality and expense risk charge from the
Account at an annual rate of 0.75% of the net assets of Harmony Investment Life
policyholders, 0.90% of the net assets of Wall Street Series VUL 100, VUL 220
and VUL 500 policyholders, and 1.00% of the net assets of Wall Street Series
Survivor policyholders. These charges will be deducted by Fortis Benefits in
return for its assumption of expenses arising from adverse mortality experience
or excess administrative expenses in connection with policies issued. Fortis
Benefits also deducts a sales, premium tax and policy advance charge from the
Account at an annual rate of 0.27% of net assets of Wall Street Series VUL 220
and VUL 500 policyholders, and 0.35% of net assets of Wall Street Series
Survivor policyholders.
5. SURRENDER CHARGES
For Wall Street Series VUL 100, VUL 220 and VUL 500 policies surrendered
within the first eleven years of issuance, Fortis Benefits assesses a surrender
charge. The charge is the sum of any sales, premium tax, and policy advance
charges not
F-26
<PAGE>
5. SURRENDER CHARGES (CONTINUED)
previously deducted on a monthly or daily basis. For VUL 220 and VUL 500, there
is an additional surrender charge of $5.00 per thousand of the policy's initial
face amount plus a maximum percentage of the annualized net minimum premiums.
The percentage is 12% for VUL 220 and 22% for VUL 500. The surrender charge for
all Wall Street policies is limited to certain maximums based on the insured
person's age at the time of issuance and decreases at a constant rate on the
fifth and subsequent anniversary until it reaches zero on the eleventh policy
anniversary. A similar schedule of surrender charges is imposed on face amount
increases.
For Harmony Investment Life policies surrendered within the first nine years of
issuance of the policy or face increase, a surrender charge is assessed. The
charge is a maximum of 25% of the annualized net premium and decreases at a
constant rate on the fifth and subsequent anniversary until it reaches zero on
the ninth policy anniversary.
Surrender charges are included in redemptions and are paid directly to Fortis
Benefits. Surrender charges collected by Fortis Benefits were $5,034,170 and
$4,221,397 in 1998 and 1997, respectively.
6. FEDERAL INCOME TAXES
The operations of the Account form a 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 values of the subaccounts
are not affected by federal income taxes on income distributions received by the
subaccounts.
7. RELATED PARTY TRANSACTIONS
Fortis Advisers, Inc. (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 in 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. These fees
charged by Fortis Advisers, Inc. are not available on an individual variable
account basis. Fees for all variable accounts to which Fortis Advisers, Inc.
provided investment management services amounted to $17,790,513 and $14,415,172
in 1998 and 1997, respectively.
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, 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 the 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.
F-27
<PAGE>
8. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
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.
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.
F-28
<PAGE>
INDEX OF WORDS AND PHRASES
This index should help you to locate more information about some of the
terms and phrases used in this prospectus.
<TABLE>
<CAPTION>
PAGE TO SEE IN
DEFINED TERM THIS PROSPECTUS
- ------------------------------------- ---------------------
<S> <C>
alternative death benefit............ 5
amount at risk....................... 6
asset-based monthly charge........... 5
automatic rebalancing................ 4
basis................................ 21
beneficiary.......................... 23
close of business.................... 25
Code................................. 20
cost of insurance rates.............. 6
death benefit........................ 5
dollar cost averaging................ 3
face amount.......................... 5
Fortis............................... 19
full surrender....................... 11
Fund................................. 3
general account option............... 26
grace period......................... 8
guaranteed death benefit............. 8
guaranteed death benefit charge...... 6
insured person....................... 5
investment option.................... 3
lapse................................ 8
monthly anniversary.................. 25
maturity, maturity date.............. 5
modified endowment contract.......... 13
monthly insurance charge............. 6
monthly administrative charge........ 6
monthly deduction.................... 5
owner................................ 13
partial withdrawal................... 11
<CAPTION>
PAGE TO SEE IN
DEFINED TERM THIS PROSPECTUS
- ------------------------------------- ---------------------
<S> <C>
payment option....................... 12
planned periodic premium............. 8
Policy anniversary................... 25
policy date.......................... 25
Policy loan.......................... 11
policy value......................... 4
premium payments..................... 3
premiums............................. 3
prospectus........................... 2
recommended monthly minimum
premiums........................... 3
reduced interest rate for Policy
loan............................... 12
reinstate, reinstatement............. 8
rider................................ 10
separate account..................... 19
Separate Account C................... 19
seven-pay test....................... 20
subaccounts.......................... 19
surrender............................ 11
surrender charge..................... 7
surrender value...................... 11
telephone transfers.................. 14
transfers............................ 9
valuation date, period............... 25
we................................... 19
you, your............................ 13
</TABLE>
We have filed a registration statement relating to Variable Account C and
the Policies with the SEC. The registration statement, which is required by the
Securities Act of 1933, includes additional information that is not required in
this prospectus. If you would like the additional information, you may obtain it
from the SEC's main office in Washington, D.C. You will have to pay a fee for
the material.
THE POLICIES 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, OR ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL
SALES MATERIAL AUTHORIZED BY FORTIS BENEFITS.
31
