SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-46620
FORTIS BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of
incorporation or organization)
81-0170040
(IRS Identification No.)
500 BIELENBERG DRIVE, WOODBURY, MN 55125
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 612-738-5590
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C>
September30, December 31,
1995 1994
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost: $1,910,119 at September 30, 1995,
$1,749,347 at December 31, 1994) $ 1,974,730 $ 1,674,782
Equity securities, at fair value (cost:
$61,330 at September 30, 1995, $51,937 at
December 31, 1994) 78,033 64,552
Mortgage loans on real estate 546,562 452,547
Policy loans 52,382 49,221
Short-term investments 151,277 117,562
Real estate and other investments 13,530 13,441
2,816,514 2,372,105
Cash 11,657 10,888
Receivables:
Uncollected premium 53,991 40,667
Reinsurance recoverable on paid and unpaid losses 10,960 6,845
Due from affiliates 832 2,220
Other 8,158 12,593
73,941 62,325
Accrued investment income 41,639 38,584
Deferred policy acquisition costs 234,467 232,198
Property and equipment, at cost, less
accumulated depreciation 59,068 56,939
Deferred federal income taxes 5,771 48,509
Other assets 1,338 1,120
Assets held in separate accounts 1,698,693 1,212,910
$ 4,943,088 $ 4,035,578
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, December 31,
1995 1994
(unaudited)
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Traditional life insurance $ 399,837 $ 373,469
Interest sensitive and investment products 1,081,187 912,653
Accident and health 812,618 791,745
2,293,642 2,077,867
Unearned premiums 17,169 16,145
Other policy claims and benefits payable 202,762 169,864
Policyholder dividends payable 7,276 6,793
2,520,849 2,270,669
Accrued expenses 51,494 45,905
Current income taxes payable 3,546 4,352
Other liabilities 78,773 32,416
Liabilities related to separate accounts 1,674,467 1,208,039
4,329,129 3,561,381
SHAREHOLDER'S EQUITY
Common stock, $5 par value, 1,000,000
shares authorized, issued and outstanding 5,000 5,000
Additional paid-in capital 358,000 358,000
Retained earnings 199,339 153,551
Unrealized gain (loss) on available-for-sale
securities, net of deferred tax expense of
$26,323 at September 30, 1995 and tax benefit of
$23,104 at December 31, 1994 48,885 (42,908)
Unrealized gain on assets held in separate
accounts, net of deferred taxes of $1,472 at
September 30, 1995 and $298 at December 31, 1994 2,735 554
613,959 474,197
$ 4,943,088 $ 4,035,578
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three months ended
September 30,
1995 1994
REVENUES
Insurance operations:
Traditional life insurance premiums $ 64,723 $ 54,228
Interest sensitive and investment product
policy charges 11,312 9,604
Accident and health premiums 239,727 198,192
315,762 262,024
Net investment income 50,494 40,488
Realized gains (losses) on investments 17,128 (6,919)
Other income 10,408 8,406
TOTAL REVENUES 393,792 303,999
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 55,230 44,220
Interest sensitive and investment products 20,142 12,395
Accident and health 201,343 154,770
276,715 211,385
Policyholder dividends 990 524
Amortization of deferred policy acquisition costs 9,932 7,762
Insurance commissions 24,883 21,403
General and administrative expenses 62,594 50,647
TOTAL BENEFITS AND EXPENSES 375,114 291,721
INCOME BEFORE INCOME TAXES 18,678 12,278
INCOME TAX EXPENSE (BENEFITS)
Current 11,101 4,300
Deferred (4,844) (1,726)
6,257 2,574
NET INCOME $ 12,421 $ 9,704
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(unaudited)
Nine months ended
September 30,
1995 1994
REVENUES
Insurance operations:
Traditional life insurance premiums $ 184,808 $ 152,682
Interest sensitive and investment policy
charges 33,875 27,333
Accident and health premiums 682,547 576,213
901,230 756,228
Net investment income 147,311 117,506
Realized gains (losses) on investments 40,679 (8,047)
Other income 27,575 26,218
TOTAL REVENUES 1,116,795 891,905
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 152,535 121,394
Interest sensitive and investment products 53,695 38,503
Accident and health 555,816 461,914
762,046 621,811
Policyholder dividends 2,866 1,932
Amortization of deferred policy acquisition costs 30,924 25,026
Insurance commissions 70,975 61,903
General and administrative expenses 180,612 151,824
TOTAL BENEFITS AND EXPENSES 1,047,423 862,496
INCOME BEFORE INCOME TAX EXPENSE 69,372 29,409
INCOME TAX EXPENSE (BENEFITS)
Current 31,447 11,010
Deferred (7,863) (3,618)
23,584 7,392
NET INCOME $ 45,788 $ 22,017
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Nine months ended
September 30,
1995 1994
OPERATING ACTIVITIES
Net income $ 45,788 $ 22,017
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves for
traditional and interest sensitive products 40,160 59,211
Increase in other policy claims, benefits
and policyholder dividends payable 33,381 4,902
Decrease in deferred federal income taxes (7,863) (3,618)
Increase (decrease) in income taxes payable (806) 8,083
Amortization of policy acquisition costs 9,932 25,026
Policy acquisition costs deferred (21,328) (40,725)
Provision for depreciation 11,328 8,853
Accrual of discount, net (858) (376)
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities 38,299 37,203
Realized (gains) losses on investments (40,679) 8,047
Other 419 (212)
NET CASH PROVIDED BY OPERATING ACTIVITIES 107,773 128,411
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,753,300) (1,541,196)
Sales or maturities of fixed maturity investments 1,629,940 1,409,084
Increase in short-term investments (33,703) (10,454)
Purchase of other investments (165,622) (151,224)
Sales or maturities of other investments 69,523 77,990
Purchase of property and equipment (13,672) (9,741)
Other (15,785) 112
NET CASH USED BY INVESTING ACTIVITIES (282,619) (225,429)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 180,185 138,427
Surrenders and death benefits (40,354) (20,475)
Interest credited to policyholders 35,784 22,212
Dividends paid to shareholder 0 0
NET CASH PROVIDED BY FINANCING ACTIVITIES 175,615 140,164
INCREASE IN CASH 769 43,146
Cash and cash equivalents at beginning of period 10,888 6,675
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,657 $ 49,821
See accompanying notes.
/TABLE
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1995
(unaudited)
General: The accompanying unaudited financial statements
of Fortis Benefits Insurance Company contain all
adjustments necessary to present fairly the balance sheet
as of September 30, 1995 and the related statement of
income for the nine months ended September 30, 1995 and
1994, and cash flows for the nine months ended September
30, 1995 and 1994.
Acquired Business: In October, 1991 the Company
purchased certain assets and assumed certain liabilities
from the Mutual Benefit Life Insurance Company in
Rehabilitation (MBL). The seller transferred to Fortis
Benefits 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.
Fortis Benefits purchased this business for $318 million
and issued a promissory note in the maximum amount of
$200 million. Most of the purchase price was funded by
a capital contribution of $225 million from Fortis, Inc.
In accordance with the contractual agreement, additional
payments were paid to MBL based upon the persistency of
the long term disability portion of the business. Under
terms of this agreement, the Company paid $6,644,000,
$5,521,000 and $8,685,000 in 1994, 1993, and 1992,
respectively. This additional purchase price was
accounted for as deferred policy acquisition costs. No
additional payments will be made.
Income tax payments for the nine months ended September
30, 1995 and September 30, 1994 were $32,253,506 and $2,
926,679, respectively.
The classification of fixed maturity investments is to be
made at the time of purchase and, prospectively, that
classification is expected to be reevaluated as of each
balance sheet date. At September 30, 1995, all fixed
maturity and equity securities are classified as
available-for-sale and carried at fair value.
The amortized cost and fair values of investments
available-for-sale were as follows at September 30, 1995
(in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 452,244 $ 20,087 $ 999 $ 471,332
Public Utilities 55,747 3,848 62 59,533
Industrial and
miscellaneous 1,386,441 44,229 4,014 1,426,656
Other 15,687 1,525 3 17,209
Total 1,910,119 69,689 5,078 1,974,730
Equity Securities 61,330 19,491 2,788 78,033
$1,971,449 $ 89,180 $ 7,866 $2,052,763
</TABLE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1995
(unaudited)
The amortized cost and fair value of fixed maturities at
September 30, 1995, by contractual maturity, are shown
below (in thousands). 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.
<TABLE>
<S> <C> <C>
Amortized Fair
Cost Value
Due in one year or less $ 82,936 $ 83,338
Due after one year through five years 486,182 494,268
Due after five years through ten years 640,634 660,628
Due after ten years 700,367 736,496
$ 1,910,119 $ 1,974,730
</TABLE>
Proceeds from sales and maturities of investments in
fixed maturities in the nine-month period ended September
30, 1995 were $1,594,820,505, and $35,120,187
respectively. Gross gains of $46,647,640 and gross losses
of $10,177,587 were realized on sales.
Mortgage Loans: The Company has issued commercial
mortgage loans on properties located throughout the
country. Currently, approximately 28% of outstanding
principal is concentrated in the states of California,
Florida and Illinois. The Company has a diversified loan
portfolio with a small average size, which greatly
reduces any loss exposure. The Company has established a
reserve for mortgage loans.
In 1995 the Company adopted FASB 114 and 118, "Accounting
by Creditors for Impairment of a Loan." Statements 114
and 118 require that impaired loans are to be valued at
the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as
a practical expedient, at the loan's observable market
price, or the fair market value of the collateral if the
loan is collateral dependent. Adoption of these
statements did not materially impact the financial
position or operating results of the Company.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 1995
(unaudited)
Net Investment Income and Realized Gains (Losses) on
Investments: Major categories of net investment income
and realized gains and losses on investments for the
first nine months of each year were as follows (in
thousands):
<TABLE>
<S> <C> <C>
Investment Realized Gain (Loss)
Income on Investments
1995 1994 1995 1994
Fixed maturities $ 99,998 $ 87,038 $ 36,470 $ (8,717)
Preferred stocks 326 180 485 542
Common stocks 1,199 1,169 2,129 732
Mortgage loans on
real estate 36,283 26,896 (242) (1,150)
Policy loans 2,247 1,927
Short-term investments 9,289 3,300 (3) (51)
Real estate and other
investments 2,642 1,331 1,840 597
151,984 121,841 $ 40,679 $ (8,047)
Expenses (4,673) (4,335)
$147,311 $117,506
</TABLE>
Subsequent Event: On October 24, 1995, the Company
announced that it will cease selling certain group
medical products effective January 1, 1996. The Company
will continue to renew and service existing medical
business. Management is currently analyzing the
potential impact, but does not believe there will be a
significant adverse financial statement impact throughout
the remaining life of this business.
<PAGE>
Management's Discussion and Analysis of Financial
Conditions and Results of Operations
September Year-to-Date and Third Quarter 1995 Compared to
September Year-to-Date and Third Quarter 1994
Traditional life insurance premiums increased to $184.8
million in first three quarters of 1995 from $152.7
million in the same period of 1994. Premiums for the
third quarter were $64.7 million versus $54.2 million in
1994. Group life premiums increased more than 20% for
both the quarter and year to date due to higher sales of
this product. Revenues from interest sensitive and
investment product charges, which consist primarily of
cost of insurance charges on these policies, increased to
$33.9 million for the first three quarters of 1995,
compared to $27.3 million for the same period in 1994.
Also, these policy charges increased to $11.3 million for
the third quarter 1995, compared to $9.6 million in 1994.
Continued sales of interest sensitive and investment
products has steadily increased the policy base on which
these charges are assessed. Accident and health premiums
increased to $682.5 million for the first three quarters
of 1995 versus $576.2 for the same period in 1994.
Accident and health premiums increased 19% to $239.7
million for the third quarter of 1995 versus $198.2
million in 1994, led by strong sales of the Company's
disability and medical products.
Total revenues increased to $1.1 billion in the first
nine months of 1995 compared with $891.9 million in 1994.
Included in the revenues were capital gains of $40.7
million in 1995 compared to capital losses of $8.0
million in 1994. Revenues for the third quarter were
$393.8 million versus $304.0 million in 1994. All of the
1995 gains occurred in the second and third quarters due
to improved investment market conditions.
Traditional life insurance benefits increased to $152.5
million in first three quarters of 1995 from $121.4
million in the same period of 1994. This increase is
consistent with the increase in life premiums noted
above. Benefits for the third quarter of 1995 were
$55.2 million, an increase of $11.0 million versus the
third quarter of 1994. Interest sensitive and investment
product benefits increased to $53.7 million for the first
nine months of 1995, compared with $38.5 million for the
same period in 1994. For the third quarter, these
benefits increased to $20.1 million compared to $12.4
million for the same period in 1994. This increase was
the result of higher interest crediting, resulting from
higher fixed account sales and transfers from variable
accounts to fixed accounts. Accident and health benefits
increased by $93.9 million to $555.8 million for the nine
months ended September 30, 1995 due to rising claims
costs and increased premium volume.
Commission expense in the first three quarters of 1995
increased by $9.1 million over the same period of 1994
which is consistent with increased revenues by product
line. Commission expense for the third quarter rose to
$24.9 million from $21.4 million over the same period of
1994. Amortization of deferred policy acquisition costs
were $30.9 million for the first nine months of 1995
versus $25.0 million in 1994. The increase is due
primarily to the amortization of costs on individual
products deferred in the past year. General and
administrative expenses were $180.6 million in the first
three quarters of 1995 versus $151.8 million in 1994.
This increase was due to advertising, information systems
enhancements, and expenses that change in relation to
revenues.
<PAGE>
Federal income taxes were $23.6 million in first three
quarters of 1995 compared to $7.4 million in the first
nine months of 1994. The higher income tax expense is
due to higher pre-tax income and lower tax exempt
investment income.
In summary, net income was $45.8 million for the first
nine months 1995 compared to $22.0 million for the same
period of 1994. The net income for the third quarter of
1995 was $12.4 versus $9.7 million for the same period
in 1994.
Liquidity and Capital Resources
The liquidity requirements of the company have been met
by funds provided from operations.
The primary uses of funds are to provide policy benefits
and reserves, operating expenses, commissions, and to
purchase new investments. The company expects its
investment and operating activities to generate
sufficient funds for these purposes.
The NAIC has implemented risk-based capital standards to
determine the capital requirements of a life insurance
company based upon the risks inherent in its operations.
These standards require the computation of a risk-based
capital amount which is then compared to a company's
actual total adjusted capital. The computation involves
applying factors to various financial data to address
four primary risks: asset default, adverse insurance
experience, interest rate risk and external events.
These standards provide for regulatory intervention when
the percentage of total adjusted capital to authorized
control level risk-based capital is below certain levels.
Based upon current calculations of the risk-based capital
standards, the Company's percentage of total adjusted
capital is well in excess of ratios which would require
regulatory attention.
Fortis Benefits has no long or short term debt. Less
than 2% of the Company's assets consisted of non-
investment grade bonds as of September 30, 1995 and the
Company does not expect this percentage to increase
significantly in future years.
As explained in the notes to the financial statements,
the Company is classifying all fixed maturity securities
as available-for-sale and carrying them at fair value.
The unrealized gain or loss is recorded as a component of
shareholder's equity. At September 30, 1995, the Company
recognized an unrealized gain, net of taxes, of $48.8
million and at December 31, 1994, an unrealized loss, net
of taxes, of $42.9 million. This change of $91.8
million, in addition to the net income of $45.8 million,
has resulted in an increase in shareholder's equity to
$614.0 million at September 30, 1995, from $474.2 million
at December 31, 1994.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security
Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. No Forms 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
Fortis Benefits Insurance Company
(Registrant)
Date: November 10, 1995
/s/ Michael J. Peninger
Senior Vice President, Controller and Treasurer (on
behalf of the Registrant and as its principal financial
and chief accounting officer)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000823533
<NAME> FORTIS BENEFITS INSURANCE COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 1,974,730
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 78,033
<MORTGAGE> 546,562
<REAL-ESTATE> 13,530
<TOTAL-INVEST> 2,816,514
<CASH> 11,657
<RECOVER-REINSURE> 10,960
<DEFERRED-ACQUISITION> 234,467
<TOTAL-ASSETS> 4,943,088
<POLICY-LOSSES> 2,293,642
<UNEARNED-PREMIUMS> 17,169
<POLICY-OTHER> 202,762
<POLICY-HOLDER-FUNDS> 7,276
<NOTES-PAYABLE> 0
<COMMON> 5,000
0
0
<OTHER-SE> 608,959
<TOTAL-LIABILITY-AND-EQUITY> 4,943,088
901,230
<INVESTMENT-INCOME> 147,311
<INVESTMENT-GAINS> 40,679
<OTHER-INCOME> 27,575
<BENEFITS> 762,046
<UNDERWRITING-AMORTIZATION> 30,924
<UNDERWRITING-OTHER> 254,453
<INCOME-PRETAX> 69,372
<INCOME-TAX> 23,584
<INCOME-CONTINUING> 45,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,788
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 2,077,867
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
