<PAGE>
VALUE
ADVANTAGE
PLUS
VARIABLE
ANNUITY
Certificates Under Flexible
Premium Deferred
Combination Variable and
Fixed Annuity Contracts
[LOGO]
PROSPECTUS DATED
May 1, 1996
FORTIS-Registered Trademark-
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-827-5877
P.O. BOX 64295 500 BIELENBERG DRIVE
ST. PAUL WOODBURY
MINNESOTA 55164 MINNESOTA 55125
This Prospectus describes interests under flexible premium deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by Fortis Benefits Insurance Company ("Fortis Benefits").
Participation in a group contract will be accounted for by the issuance of a
certificate showing your interest under the group contract. Participation in an
individual contract is shown by the issuance of an individual annuity contract.
The certificate and the individual contract are hereafter both referred to as
the "Certificate". The minimum under a Certificate is generally $5,000 for the
initial and $500 for each subsequent purchase payment.
A Certificate allows you to accumulate funds on a tax-deferred basis. You may
elect a guaranteed interest accumulation option through the Fixed Account or a
variable return accumulation option through Variable Account D (the "Variable
Account") of Fortis Benefits, or a combination of these two options. Under the
variable rate accumulation option, you can choose among the following Portfolios
(see "The Portfolios" for limitations on the availability of certain Portfolios
in certain states):
Alliance Money Market Portfolio Montgomery Emerging Markets Fund
Alliance International Portfolio Montgomery Growth Fund
Alliance Premier Growth Portfolio Strong Discovery Fund II
Federated High Income Bond Fund II Strong Government Securities Fund II
Federated Utility Fund II Strong Advantage Fund II
Federated American Leaders Fund II Strong International Stock Fund II
Lexington Natural Resources Trust TCI Balanced Fund
Lexington Emerging Markets Fund TCI Growth Fund
MFS Emerging Growth Series Van Eck Worldwide Bond Fund
MFS High Income Series Van Eck Gold and Natural Resources
MFS World Governments Series Fund
The accompanying Prospectus for these Portfolios describes the investment
objectives, policies and risks of each of the Portfolios. In the states where
Guarantee Periods Fixed Accounts are offered (see "FIXED ACCOUNTS"), you can
choose among 10 different guarantee periods under the guaranteed interest
accumulation option, each of which has its own interest rate. In states where
Guarantee Periods Fixed Accounts are not offered, you can choose an interest in
the General Account Fixed Account with guaranteed interest.
You have the right to examine a Certificate during a "free look" period after
you receive the Certificate and return it for a refund of the amount of the then
current Certificate Value. However, in certain states where required by state
law the refund will be in the amount of all purchase payments that have been
made, without interest or appreciation or depreciation.
The "free look" period is generally 10 days unless a longer time is specified on
the face page of your Certificate.
For Certificates requiring a refund of all purchase payments, Fortis Benefits
will allocate all Net Purchase Payments made as a part of the purchase of the
Certificate to the Alliance Money Market Portfolio until the following number of
days after Fortis Benefits mails the Certificate to you: (1) the number of days
in the "free look" period, plus (2) five days. After the expiration of such
period, the Certificate Value will be allocated to the Fixed Account and the
Portfolios as directed by you.
The Certificate provides several different types of retirement and death
benefits, including fixed and variable annuity income options. You may make
partial surrenders of the Certificate Value or may totally surrender the
Certificate for its Cash Surrender Value.
This Prospectus gives prospective investors information about the Certificates
that they should know before investing. This Prospectus must be accompanied by a
current Prospectus of the Portfolios. These Prospectuses should be read
carefully and kept for future reference.
A Statement of Additional Information, dated May 1, 1996, about certain aspects
of the Certificates has been filed with the Securities and Exchange Commission
and is available without charge, from Fortis Benefits at the address and phone
number printed above. The Table of Contents for the Statement of Additional
Information appears on page 25 of this Prospectus.
THESE POLICIES ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK,
CREDIT UNION, BROKER-DEALER OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY; AND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FORTIS-Registered Trademark- and Fortis-Registered Trademark- are registered
servicemarks of Fortis AMEV and Fortis AG.
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TABLE OF CONTENTS
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PAGE
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Special Terms Used in this Prospectus................................. 3
Information Concerning Fees and Charges............................... 4
Summary of Certificate Features....................................... 6
Fortis Benefits/Fortis Financial Group Member......................... 7
The Variable Account.................................................. 8
The Portfolios........................................................ 8
The Fixed Account..................................................... 8
- Guarantee Interest Periods Fixed Account........................ 8
- Market Value Adjustment......................................... 9
- General Account Fixed Account................................... 9
- General Account Fixed Account Transfers......................... 10
- Investments by Fortis Benefits.................................. 10
Fixed Account Value................................................... 10
Accumulation Period................................................... 10
- Issuance of a Certificate and Purchase Payments................. 10
- Certificate Value............................................... 11
- Allocation of Purchase Payments and Certificate Value........... 11
- Total and Partial Surrenders.................................... 12
- Benefit Payable on Death of Annuitant or Participant............ 13
The Annuity Period.................................................... 13
- Annuity Commencement Date....................................... 13
- Commencement of Annuity Payments................................ 13
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 14
- Annuity Forms................................................... 14
- Death of Annuitant or Other Payee............................... 14
Charges and Deductions................................................ 14
- Premium Taxes................................................... 14
- Charges Against the Variable Account............................ 15
- Annual Administrative Charge.................................... 15
- Tax Charge...................................................... 15
- Miscellaneous................................................... 15
General Provisions.................................................... 15
- The Certificates................................................ 15
- Postponement of Payments........................................ 15
- Misstatement of Age or Sex and Other Errors..................... 15
- Assignment...................................................... 15
- Beneficiary..................................................... 16
- Reports......................................................... 16
Rights Reserved By Fortis Benefits.................................... 16
Distribution.......................................................... 16
Federal Tax Matters................................................... 17
Further Information about Fortis Benefits............................. 19
- General......................................................... 19
- Selected Financial Data......................................... 19
- Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 19
- Liquidity and Capital Resources................................. 21
- Competition..................................................... 21
- Regulation and Reserves......................................... 21
- Employees and Facilities........................................ 22
- Directors and Executive Officers................................ 23
- Executive Compensation.......................................... 24
- Ownership of Securities......................................... 25
Voting Privileges..................................................... 25
Legal Matters......................................................... 25
Other Information..................................................... 26
Contents of Statement of Additional Information....................... 26
Fortis Benefits Financial Statements.................................. 26
Appendix A--Sample Market Value Adjustment Calculations............... A-1
Appendix B--Explanation of Expense Calculations....................... B-1
Appendix C--Participating Portfolios.................................. C-1
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THE CERTIFICATES ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT
INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR
ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY
FORTIS BENEFITS.
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SPECIAL TERMS USED IN THIS PROSPECTUS
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ACCUMULATION The time period under a Certificate between the Certificate Issue Date and the Annuity
PERIOD Commencement Date.
ACCUMULATION A unit of measure used to calculate the Participants' interest in the Variable Account during
UNIT the Accumulation Period.
ANNUITANT A person during whose life annuity payments are to be made by Fortis Benefits under the
Certificate.
ANNUITY The date on which the Annuity Period commences.
COMMENCEMENT
DATE
ANNUITY PERIOD The time period following the Accumulation Period, during which annuity payments are made by
Fortis Benefits.
ANNUITY UNIT A unit of measurement used to calculate variable annuity payments.
BENEFICIARY The person entitled to receive benefits under the terms of the Certificate.
CASH SURRENDER The amount payable to the Participant on surrender of the Certificate after all applicable
VALUE adjustments and deduction of all applicable charges.
CERTIFICATE The date on which the Certificate becomes effective as shown on the Certificate Data Page.
ISSUE DATE
CERTIFICATE The sum of the Fixed Account Value and the Variable Account Value.
VALUE
FIXED ACCOUNT The Guarantee Periods Fixed Account or the General Account Fixed Account.
FIXED ACCOUNT The amount of your Certificate Value which is in the Fixed Account.
VALUE
FIXED ANNUITY An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
OPTION that you designate one or more fixed payments.
GENERAL ACCOUNT All assets of Fortis Benefits other than those in the Variable Account, and other than those
in any other legally segregated separate account established by Fortis Benefits.
GENERAL The name of the alternative under which purchase payments are allocated to Fortis Benefits
ACCOUNT FIXED General Account.
ACCOUNT
GUARANTEED The rate of interest we credit during any Guarantee Period, on an effective annual basis.
INTEREST RATE
GUARANTEE The period for which a Guaranteed Interest Rate is credited.
PERIOD
GUARANTEE The non-unitized separate account that Fortis Benefits uses to account for amounts allocated
PERIODS FIXED to Guarantee Periods.
ACCOUNT
HOME OFFICE Our office at 500 Bielenberg Drive, Woodbury, Minnesota 55125; 1-800-827-5877; Mailing
address: P.O. Box 64295, St. Paul, MN 55164.
MARKET VALUE Positive or negative adjustment in Fixed Account Value that we make if such value is paid out
ADJUSTMENT more than fifteen days before or after the end of a Guarantee Period in which it was being
held.
NET PURCHASE The gross amount of a purchase payment less any applicable premium taxes or similar
PAYMENT governmental assessments.
NON-QUALIFIED Certificates that do not qualify for the special federal income tax treatment applicable in
CERTIFICATES connection with certain retirement plans.
PARTICIPANT The person or company named in the application for a Certificate, who is entitled to exercise
all rights and privileges of ownership under the Certificate during the Accumulation Period.
PORTFOLIO Each separate investment portfolio eligible for investment by the Variable Account.
QUALIFIED Certificates that are qualified for the special federal income tax treatment applicable in
CERTIFICATES connection with certain retirement plans.
SUBACCOUNTS The several Subaccounts of the Variable Account, each of which invests its assets in a
different Portfolio.
VALUATION DATE All business days except, with respect to any Subaccount, days on which the related Portfolio
does not value its shares. Generally, the Portfolios value their shares on each day the New
York Stock Exchange is open.
VALUATION The period that starts at the close of regular trading on the New York Stock Exchange on a
PERIOD Valuation Date and ends at the close of regular trading on the exchange on the next succeeding
Valuation Date.
VARIABLE The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance
ACCOUNT Company established to receive and invest purchase payments under Certificates.
VARIABLE The amount of your Certificate Value in the Subaccounts of the Variable Account.
ACCOUNT VALUE
VARIABLE An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
ANNUITY OPTION chosen by you one or more payments which vary in amount in accordance with the net investment
experience of the Subaccounts selected by the Annuitant.
WRITTEN REQUEST A written, signed and dated request, in form and substance satisfactory to Fortis Benefits and
received at our Home Office.
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3
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INFORMATION CONCERNING FEES AND CHARGES
PARTICIPANT TRANSACTION CHARGES
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Front-End Sales Charge Imposed on Purchases............... 0%
Maximum Surrender Charge for Sales Expenses............... 0%
Other Surrender Fees...................................... 0%
Exchange Fee.............................................. 0%
ANNUAL CERTIFICATE ADMINISTRATION CHARGE......................... $30
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge......................... .45%
Variable Account Administrative Charge.................... 0%
----
Total Variable Account Annual Expenses.................. .45%
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MARKET VALUE ADJUSTMENT WITH RESPECT TO GUARANTEE PERIODS FIXED ACCOUNT
Surrenders and other withdrawals from the Guarantee Periods Fixed Account more
than fifteen days from the end of a Guarantee Period are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the Fixed
Account Value. It is computed pursuant to a formula that is described in more
detail under "Market Value Adjustment."
PORTFOLIO ANNUAL EXPENSES (A) (B)
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TOTAL PORTFOLIO
OPERATING
INVESTMENT EXPENSES
ADVISORY AND OTHER (*AFTER EXPENSE
MANAGEMENT FEE EXPENSES REIMBURSEMENT)
-------------- -------- -----------------
<S> <C> <C> <C>
Alliance Money Market Portfolio............................. 0.38% 0.57% 0.95%*
Alliance International Portfolio............................ 0.00% 0.95% 0.95%*
Alliance Premier Growth Portfolio........................... 0.71% 0.24% 0.95%*
Federated High Income Bond Fund II.......................... 0.00% 0.80% 0.80%*
Federated Utility Fund II................................... 0.00% 0.85% 0.85%*
Federated American Leaders Fund II.......................... 0.00% 0.85% 0.85%*
Lexington Natural Resources Trust........................... 1.00% 0.47% 1.47%
Lexington Emerging Markets Fund............................. 0.85% 0.47% 1.32%*
MFS Emerging Growth Series.................................. 0.75% 0.25% 1.00%*
MFS High Income Series...................................... 0.75% 0.25% 1.00%*
MFS World Governments Series................................ 0.75% 0.25% 1.00%*
Montgomery Emerging Markets Fund............................ 1.25% 0.50% 1.75%
Montgomery Growth Fund...................................... 1.00% 0.25% 1.25%
Strong Discovery Fund....................................... 1.00% 0.31% 1.31%
Strong Government Securities Fund........................... 0.60% 0.42% 1.02%
Strong Advantage Fund....................................... 0.60% 0.40% 1.00%
Strong International Stock Fund............................. 1.00% 1.00% 2.00%
TCI Balanced Fund........................................... 1.00% 0.00% 1.00%
TCI Growth Fund............................................. 1.00% 0.00% 1.00%
Van Eck Worldwide Bond Fund................................. 0.75% 0.23% 0.98%
Van Eck Gold and Natural Resources Fund..................... 0.75% 0.21% 0.96%
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(a) As a percentage of Portfolio average net assets based on historical data
for the fiscal year ended December 31, 1995 (April 30, 1995 for the two Van
Eck Portfolios), except that the expenses of the Montgomery Portfolios and
Strong Government Securities Fund are based upon an estimate of 1996
expenses. In the absence of expense and fee waivers or expense
reimbursements by the Portfolio investment adviser, the total expenses of
the following Portfolios would have been as hereafter indicated rather than
as listed above: Alliance Money Market Portfolio--1.07%; Alliance
International Portfolio--2.99%; Alliance Premier Growth Portfolio--1.19%;
Federated High Income Bond Fund II--4.20%; Federated Utility Fund
II--3.09%; Federated American Leaders Fund II--2.21%; Lexington Emerging
Markets Fund--4.09%; MFS Emerging Growth Series--2.91%; MFS High Income
Series--4.38%; and MFS World Governments Series--1.99%. The information set
forth in this table was provided to Fortis Benefits by the Portfolio
managers and Fortis Benefits has not independently verified such
information.
(b) Certain of the unaffiliated investment advisers of the Portfolios reimburse
Fortis Benefits for costs incurred in connection with administering the
Portfolios as variable funding options by payment of an amount based on
assets in the Portfolios attributable to the Certificates. These amounts
are not charged to the Portfolios or the holders of the Certificates.
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EXAMPLES*
If you COMMENCE AN ANNUITY payment option, or whether you DO or DO NOT surrender
your Certificate or commence an annuity payment option, you would pay the
following cumulative expenses on a $1,000 investment, assuming a 5% annual
return on assets:
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IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Alliance Money Market Portfolio............................. 15 48 83 180
Alliance International Portfolio............................ 15 48 83 180
Alliance Premier Growth Portfolio........................... 15 48 83 180
Federated High Income Fund II............................... 14 43 75 166
Federated Utility Fund II................................... 14 45 77 171
Federated American Leaders Fund II.......................... 14 45 77 171
Lexington Natural Resources Trust........................... 21 64 109 230
Lexington Emerging Markets Fund............................. 19 59 102 216
MFS Emerging Growth Series.................................. 16 49 85 185
MFS High Income Series...................................... 16 49 85 185
MFS World Governments Series................................ 16 49 85 185
Montgomery Emerging Markets Fund............................ 23 72 123 255
Montgomery Growth Fund...................................... 18 57 98 209
Strong Discovery Fund II.................................... 19 59 101 215
Strong Government Securities Fund II........................ 16 50 86 187
Strong Advantage Fund II.................................... 16 49 85 185
Strong International Stock Fund II.......................... 26 80 136 278
TCI Balanced Fund........................................... 16 49 85 185
TCI Growth Fund............................................. 16 49 85 185
Van Eck Worldwide Bond Fund................................. 16 49 84 183
Van Eck Gold and Natural Resources Fund..................... 16 48 83 181
Fixed Account............................................... 1 4 7 15
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* For purposes of these examples, the effect of the annual Certificate
administration charge has been computed based on the average total Contract
Value during the year ended December 31, 1994 of similar contracts issued by
Fortis Benefits and the total actual amount of annual contract administration
charges collected during the year on those contracts. For the purpose of these
examples, Portfolio annual expenses are assumed to continue at the rates set
forth in the table above.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
------------------------
The foregoing tables and examples are included to assist you in understanding
the transaction and operating expenses imposed directly or indirectly under the
Certificates and the Portfolios. Amounts for state premium taxes or similar
assessments will also be deducted, where applicable.
See Appendix C for an explanation of the calculation of the amounts set forth
above.
5
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SUMMARY OF CERTIFICATE FEATURES
The following summary should be read in conjunction with the detailed
information in this Prospectus. Variations from the information appearing in
this Prospectus due to requirements particular to your state are described in
supplements which are attached to this Prospectus, or in endorsements to the
Certificate as appropriate.
The Certificates are designed to provide individuals with retirement benefits
through the accumulation of Net Purchase Payments on a fixed or variable basis,
and by the application of such accumulations to provide fixed or variable
annuity payments.
"We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your"
mean a reader of this Prospectus who is contemplating making purchase payments
or taking any other action in connection with a Certificate.
PURCHASE PAYMENTS
The initial purchase payment under a Certificate must be at least $5,000 ($2,000
for a Certificate pursuant to a qualified contract). Additional purchase
payments under a Certificate must be at least $500. See "Issuance of a
Certificate and Purchase Payments."
On the Certificate Issue Date, except as hereafter explained, the initial
purchase payment is allocated, as specified by the Participant in the
Certificate application, among one or more of the Subaccounts of the Variable
Account, or to one or more of the Guarantee Periods in the Guarantee Periods
Fixed Account (or to the General Account Fixed Account if the Participant
resides in a state in which the Guaranteed Periods Fixed Account is not
offered), or to a combination thereof. As previously indicated, if the
Participant resides in a state requiring a refund of all purchase payments under
the "free look" privilege, the initial purchase payment will be allocated to the
Alliance Money Market Portfolio until the expiration of the time period
described under "Allocation of Purchase Payments and Certificate Value"
hereafter. Thereafter, it will be allocated as specified by the Participant.
Subsequent purchase payments are allocated in the same way, or pursuant to
different allocation percentages that the Participant may subsequently request
In Writing.
VARIABLE ACCOUNT INVESTMENT OPTIONS
Each of the Subaccounts of the Variable Account invests in shares of a
Portfolio. Certificate Value in each of the Subaccounts of the Variable Account
will vary to reflect the investment experience of each of the corresponding
Portfolios, as well as deductions for certain charges.
Each Portfolio has a separate and distinct investment objective. A full
description of the Portfolios and their investment objectives, policies, risks
and expenses can be found in the current Prospectus for the Portfolio, which
accompanies this Prospectus, and the Statement of Additional Information for the
Portfolio which is available upon request.
FIXED ACCOUNT INVESTMENT OPTIONS
Either a Guarantee Periods Fixed Account or a General Account Fixed Account is
available, depending upon your state of residence.
Any amount allocated by the Participant to the Guarantee Periods Fixed Account
earns a Guaranteed Interest Rate. The level of the Guaranteed Interest Rate
depends on the length of the Guarantee Period selected by the Participant. We
currently make available ten different Guarantee Periods, ranging from one to
ten years. If amounts are transferred, surrendered or otherwise paid out more
than fifteen days before or after the end of the applicable Guarantee Period, a
Market Value Adjustment will be applied to increase or decrease the amount that
is paid out. Accordingly, the Market Value Adjustment can result in gains or
losses to you.
Any amount allocated to the General Account Fixed Account will accrue interest
at a minimum effective annual rate plus such additional excess interest rate
which we may declare from time-to-time.
For a more complete discussion of the Fixed Accounts investment option and the
Market Value Adjustment, see "The Fixed Account."
TRANSFERS
During the Accumulation Period, you can transfer all or part of your Certificate
Value from one Subaccount to another or into the Fixed Account and, subject to
any Market Value Adjustment, from one Guarantee Period of a Guarantee Periods
Fixed Account to another or into a Subaccount. There are limitations on the
frequency and amounts of transfers from the General Account Fixed Account. There
is currently no charge for these transfers. We reserve the right to restrict the
frequency of, or otherwise condition, terminate, or impose charges upon,
transfers from a Subaccount during the Accumulation Period. During the Annuity
Period the person receiving annuity payments may make up to four transfers (but
not from a Fixed Annuity Option) during each year of the Annuity Period. For a
description of certain limitations on transfer rights, see "Allocations of
Purchase Payments and Certificate Value Transfers."
TOTAL OR PARTIAL SURRENDERS
Subject to certain conditions, all or part of the Certificate Value may be
surrendered by the Participant before the earlier of the Annuitant's death or
the Annuity Commencement Date. Amounts surrendered from the Guarantee Periods
Fixed Account may be subject to a Market Value Adjustment. See "Total and
Partial Surrenders" and "Market Value Adjustment." Particular attention should
be paid to the tax implications of any surrender, including possible penalties
for premature distributions. See "Federal Tax Matters."
CHARGES AND DEDUCTIONS
Fortis Benefits deducts daily charges at a rate of .45 % per annum of the value
of the average net assets in the Variable Account for the mortality and expense
risks it assumes. There is also an annual administrative charge each year for
Certificate administration and maintenance. This charge is $30 per year (subject
to any applicable state law limitations) and is deducted on each anniversary of
the Certificate Issue Date and upon total surrender of the Certificate. Also,
there may be state premium tax charges deducted from your Certificate Value. See
"Charges and Deductions."
6
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ANNUITY PAYMENTS
The Certificate provides several types of annuity benefits to Participants or
other persons they properly designate to receive such payments, including Fixed
and Variable Annuity Options. The Participant has considerable flexibility in
choosing the Annuity Commencement Date. However, the tax implications of an
Annuity Commencement Date must be carefully considered, including the
possibility of penalties for commencing benefits either too soon or too late.
See "Annuity Commencement Date," "Annuity Forms" and "Federal Tax Matters" in
this Prospectus and "Taxation Under Certain Retirement Plans" in the Statement
of Additional Information.
DEATH BENEFIT
In the event that the Annuitant or Participant dies prior to the Annuity
Commencement Date, a death benefit is payable to the Beneficiary. See "Benefit
Payable on Death of Annuitant or Participant."
RIGHT TO EXAMINE THE CONTRACT
A Participant may elect during a "free look" period to cancel the Certificate
and receive a refund. See the cover page of this Prospectus.
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a Certificate may be limited by
the terms of any applicable employee benefit plan. These limitations may
restrict such things as total and partial surrenders, the amount or timing of
purchase payments that may be made, when annuity payments must start and the
type of annuity options that may be selected. Accordingly, you should
familiarize yourself with these and all other aspects of any retirement plan in
connection with which a Certificate is issued.
The record owner of the group variable annuity contract pursuant to which
Certificates may be issued will be a bank trustee whose sole function is to hold
record ownership of the contract or an employer (or the employer's designee) in
connection with an employee benefit plan. In the latter cases, certain rights
that a Participant otherwise would have under a Certificate may be reserved
instead by the employer.
TAX IMPLICATIONS
The tax implications for Participants or any other persons who may receive
payments under a Certificate, and those of any related employee benefit plan can
be quite important. A brief discussion of some of these is set out under
"Federal Tax Matters" in this Prospectus and "Taxation Under Certain Retirement
Plans" in the Statement of Additional Information, but such discussion is not
comprehensive. Therefore, you should consider these matters carefully and
consult a qualified tax adviser before making purchase payments or taking any
other action in connection with a Certificate or any related employee benefit
plan. Failure to do so could result in serious adverse tax consequences which
might otherwise have been avoided.
QUESTIONS AND OTHER COMMUNICATIONS
Any question about procedures of the Certificate should be directed to your
sales representative, or Fortis Benefits' Home Office: P.O. Box 64295, St. Paul,
Minnesota, 55164: 1-800-827-5877. Purchase payments and Written Requests should
be mailed or delivered to the same Home Office address. All communications
should include the Certificate number, the Participant's name and, if different,
the Annuitant's name. The number for telephone transfers is 1-800-827-5877.
Any purchase payment or other communication, except a free-look cancellation
notice, is deemed received at Fortis Benefit's Home Office on the actual date of
receipt there in proper form unless received (1) after the close of regular
trading on The New York Stock Exchange, or (2) on a date that is not a Valuation
Date. In either of these two cases, the date of receipt will be deemed to be the
next Valuation Date.
FINANCIAL AND PERFORMANCE INFORMATION
This Prospectus contains no Accumulation Unit Information for the applicable
Subaccounts of the Variable Account as of December 31, 1995 because no
Certificates have been sold and no Accumulation Units had been issued as of that
date.
Audited financial statements of the available Subaccounts of the Variable
Account are not included in the Statement of Additional Information because
those Subaccounts had not yet commenced operations, had no assets or
liabilities, and had received no income nor incurred any expenses as of that
date.
Advertising and other sales materials may include yield and total return figures
for the Subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the Subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total return" is
the total change in value of an investment in the Subaccount over a period of
time specified in the advertisement. The rate of return shown would produce that
change in value over the specified period, if compounded annually. Yield and
total return figures do not reflect premium tax charges. This makes the
performance shown more favorable.
Financial information concerning Fortis Benefits is included in this Prospectus
under "Additional Information About Fortis Benefits" and "Fortis Benefits
Financial Statements."
FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER
Fortis Benefits Insurance Company, the issuer of the Certificates, was founded
in 1910. At the end of 1994, Fortis Benefits had approximately $86 billion of
total life insurance in force. Fortis Benefits is a Minnesota corporation and is
qualified to sell life insurance and annuity contracts in the District of
Columbia and in all states except New York. Fortis Benefits is an indirectly
wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by
Fortis AMEV and 50% by Fortis AG. Fortis, Inc. manages the United States
operations for these two companies.
Fortis Benefits is a member of the Fortis Financial Group, a joint effort by
Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and
7
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Time Insurance Company, offering financial products through the management,
marketing and servicing of mutual funds, annuities and life insurance and
disability income products.
Fortis AMEV is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
AG is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis AMEV and Fortis AG
have merged their operating companies under the trade name of Fortis. The Fortis
group of companies is active in insurance, banking and financial services, and
real estate development in The Netherlands, Belgium, the United States, Western
Europe, and the Pacific Rim. The Fortis group of companies had approximately
$140 billion in assets as of year-end 1994.
All of the guarantees and commitments under the Certificates are general
obligations of Fortis Benefits, regardless of whether the Certificate Value has
been allocated to the Variable Account or to the Fixed Account. None of Fortis
Benefits' affiliated companies has any legal obligation to back Fortis Benefits'
obligations under the Certificates.
THE VARIABLE ACCOUNT
The Variable Account, which is a segregated investment account of Fortis
Benefits, was established as Variable Account D by Fortis Benefits pursuant to
the insurance laws of Minnesota as of October 14, 1987. Although the Variable
Account is an integral part of Fortis Benefits, the Variable Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Assets in the Variable Account
representing reserves and liabilities under Certificates and other variable
annuity contracts issued by Fortis Benefits will not be chargeable with
liabilities arising out of any other business of Fortis Benefits.
There are a number of Subaccounts in the Variable Account. The assets in each
Subaccount are invested exclusively in one of the Portfolios listed on page one
of this Prospectus. Income and both realized and unrealized gains or losses from
the assets of each Subaccount of the Variable Account are credited to or charged
against that Subaccount without regard to income, gains or losses from any other
Subaccount of the Variable Account or arising out of any other business we may
conduct. New Subaccounts may be added as new Portfolios are added and made
available. Correspondingly, if any Portfolios are eliminated, Subaccounts may be
eliminated from the Variable Account.
THE PORTFOLIOS
Certificate holders may choose from among a number of different Portfolios, each
of which is a mutual fund available for purchase only as a funding vehicle for
benefits under variable life insurance and variable annuities issued by Fortis
Benefits and other life insurance companies. (See Appendix C which contains a
summary of the investment objectives of each Portfolio.) Each Portfolio
corresponds to one of the Subaccounts of the Variable Account. The assets of
each Portfolio are separate from the others and each Portfolio operates as a
separate investment portfolio whose performance has no effect on the investment
performance of any other Portfolio. More detailed information for each Portfolio
offered, such as its investment policies and restrictions, charges, risks
attendant to investing in it, and other aspects of its operations, may be found
in the current prospectus for each Portfolio. Such a prospectus for the
Portfolios being considered must accompany this Prospectus and should be read in
conjunction herewith. The Strong Discovery Fund II portfolio is not available as
an investment option for Certificates issued in the State of California. A copy
of each prospectus may be obtained without charge from Fortis Benefits by
calling 1-800-827-5877, or writing P.O. Box 64295, St. Paul, Minnesota 55164.
Fortis Benefits purchases and redeems Portfolios' shares for the Variable
Account at their net asset value without the imposition of any sales or
redemption charges. Any dividend or capital gain distributions attributable to
Certificates are automatically reinvested in shares of the Portfolio from which
they are received at the Portfolio's net asset value on the date paid. Such
dividends and distributions will have the effect of reducing the net asset value
of each share of the corresponding Portfolio and increasing, by an equivalent
value, the number of shares outstanding of the Portfolio. However, the value of
your interest in the corresponding Subaccount will not change as a result of any
such dividends and distributions.
As indicated, Portfolios may also be available to registered separate accounts
offering variable annuity and variable life products of other participating
insurance companies, as well as to the Variable Account and other separate
accounts of Fortis Benefits. Although Fortis Benefits does not anticipate any
disadvantages to this, there is a possibility that a material conflict may arise
between the interest of the Variable Account and one or more of the other
separate accounts participating in the Portfolios. A conflict may occur due to a
change in law affecting the operations of variable life and variable annuity
separate accounts, differences in the voting instructions of the Participants
and those of other companies, or some other reason. In the event of conflict,
Fortis Benefits will take any steps necessary to protect the Participants and
variable annuity payees.
THE FIXED ACCOUNT
Interests in either of two different Fixed Accounts are offered by this
Prospectus, depending upon the state of residence of the Certificate applicant:
a Guarantee Periods Fixed Account or a General Account Fixed Account. Both of
these Fixed Accounts are referred to as the Fixed Account elsewhere in this
prospectus where a distinction is not relevant. A Guaranteed Periods Fixed
Account is offered to Certificate applicants in most states. However, in a
limited number of states, a General Account Fixed Account is offered in lieu of
the Guarantee Periods Fixed Account. Applicants should inquire of Fortis
Benefits or their account representative to determine which Fixed Account is
available in their state. Charges under the Certificate are the same as when the
Variable Account is being used, except that the .45% per annum charged for
mortality and expense risk and administrative expenses is not imposed on amounts
of Certificate Value in the Fixed Account.
GUARANTEE PERIODS FIXED ACCOUNT
Any amount allocated by the Participant to the Fixed Account earns a Guaranteed
Interest Rate commencing with the date of such allocation. This Guaranteed
Interest Rate continues for a number of years (not to exceed ten) selected by
the Participant. At the end of this
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Guarantee Period, the Participant's Certificate Value in that Guarantee Period,
including interest accrued thereon, will be allocated to a new Guarantee Period
of the same length unless Fortis Benefits has received a Written Request from
the Participant to allocate this amount to a different Guarantee Period or
periods or to one or more of the Subaccounts. We must receive this Written
Request at least three business days prior to the end of the Guarantee Period.
The first day of the new Guarantee Period (or other reallocation) will be the
day after the end of the prior Guarantee Period. We will notify the Participant
at least 45 days and not more than 75 days prior to the end of any Guarantee
Period.
We currently make available ten different Guarantee Periods, ranging from one to
ten years. Each Guarantee Period has its own Guaranteed Interest Rate, which may
differ from those for other Guarantee Periods. From time to time we will, at our
discretion, change the Guaranteed Interest Rate for future Guarantee Periods of
various lengths. These changes will not affect the Guaranteed Interest Rates
being paid on Guarantee Periods that have already commenced. Each allocation or
transfer of an amount to a Guarantee Period commences the running of a new
Guarantee Period with respect to that amount, which will earn a Guaranteed
Interest Rate that will continue unchanged until the end of that period. The
Guaranteed Interest Rate will never be less than an effective annual rate of 3%.
Fortis Benefits declares the Guaranteed Interest Rates from time to time as
market conditions dictate. Fortis Benefits advises a Participant of the
Guaranteed Interest Rate for a chosen Guarantee Period at the time a purchase
payment is received, a transfer is effectuated or a Guarantee Period is renewed.
Fortis Benefits has no specific formula for establishing the Guaranteed Interest
Rates for the Guarantee Periods. The rate may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with amounts allocated to the Guarantee Period. See
"Investments by Fortis Benefits." Fortis Benefits in determining Guaranteed
Interest Rates, may also consider, among other factors, the duration of a
Guarantee Period, regulatory and tax requirements, sales and administrative
expenses borne by Fortis Benefits, risks assumed by Fortis Benefits, Fortis
Benefits' profitability objectives, and general economic trends.
FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED
INTEREST RATES TO BE DECLARED. FORTIS BENEFITS CANNOT PREDICT OR ASSURE THE
LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL
RATE OF 3%.
Information concerning the Guaranteed Interest Rates applicable to the various
Guarantee Periods at any time may be obtained from our Home Office or from your
sales representative.
MARKET VALUE ADJUSTMENT
For Certificates with allocations to the Guarantee Periods Fixed Account, if any
Fixed Account Value is surrendered, transferred or otherwise paid out before the
end of the Guarantee Period in which it is being held, a Market Value Adjustment
will be applied. However, NO Market Value Adjustment will be applied to amounts
that are paid out during the period beginning fifteen days before and ending
fifteen days after the end of a Guarantee Period in which it was being held.
This generally includes amounts that are paid out as a death benefit pursuant to
the Certificate, amounts applied to an annuity option, and amounts paid as a
single sum in lieu of an annuity.
The Market Value Adjustment may increase or decrease the amount of Fixed Account
Value being withdrawn or transferred. The comparison of two Guaranteed Interest
Rates determines whether the Market Value Adjustment produces an increase or a
decrease. The first rate to compare is the Guaranteed Interest Rate for the
amount being transferred or withdrawn. The second rate is the Guaranteed
Interest Rate then being offered for new Guarantee Periods of the same duration
as that remaining in the Guarantee Period from which the funds are being
withdrawn or transferred. If the first rate exceeds the second by more than
1/2%, the Market Value Adjustment produces an increase. If the first rate does
not exceed the second by at least 1/2%, the Market Value Adjustment produces a
decrease. Sample calculations are shown in Appendix A.
The Market Value Adjustment will be determined by multiplying the amount being
withdrawn or transferred from the Guarantee Period (before deduction of any
applicable surrender charge) by the following factor:
( 1 + I ) n / 12
----------- - 1
( 1 + J + .005 )
where,
- I is the Guaranteed Interest Rate being credited to the amount being
withdrawn from the existing Guarantee Period,
- J is the Guaranteed Interest Rate then being offered for new Guarantee
Periods with durations equal to the number of years remaining in the
existing Guarantee Period (rounded up to the next higher number of years),
and
- N is the number of months remaining in the existing Guarantee Period
(rounded up to the next higher number of months).
GENERAL ACCOUNT FIXED ACCOUNT
Accounts allocated to the General Account Fixed Account are held in the General
Account of Fortis Benefits. Because of exemptive and exclusionary provisions,
interests in the General Account Fixed Account have not been registered under
the Securities Act of 1933 and the General Account Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the General Account Fixed Account nor any interests therein
are subject to the provisions of these acts and, as a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosures in the
Prospectus relating to the General Account Fixed Account. Disclosures regarding
the Fixed Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses. For Certificates with amounts
allocated to the General Account Fixed Account, this Prospectus is generally
intended to serve as a disclosure document only for the aspects of the
Certificate involving the Variable Account and contains only selected
information regarding the General Account Fixed Account. More information
regarding the General Account Fixed Account may be obtained from Fortis
Benefits' Home Office or from your sales representative.
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Fortis Benefits guarantees that Certificate Value in the General Account Fixed
Account will accrue interest at an effective annual rate of at least 3%,
independent of the actual investment experience of the General Account. We may,
at our sole discretion, credit higher rates of interest, although we are not
obligated to credit interest in excess of the guaranteed rate of 3% per year.
Any interest rate in excess of 3% per year with respect to any amount in the
General Account Fixed Account pursuant to a Certificate will not be modified
more than once each calendar year. Any higher rate of interest will be quoted at
an effective annual rate. The rate of any excess interest initially or
subsequently credited to any amount can in many cases vary, depending on when
that amount was originally allocated to the General Account Fixed Account. Once
credited, such interest will be guaranteed and will become part of Certificate
Value in the General Account Fixed Account from which deductions for fees and
charges may be made.
GENERAL ACCOUNT FIXED ACCOUNT TRANSFERS
Transfers out of the General Account Fixed Account have special limitations.
Prior to the Annuity Commencement Date, Participants may transfer part or all of
the Certificate Value from the General Account Fixed Account to the Variable
Account, provided that (1) no more than one such transfer is made each
Certificate year, (2) no more than 50% of the General Account Fixed Account
Value is transferred at any time (unless the balance in the General Account
Fixed Account after the transfer would be less than $1,000, in which case up to
the entire balance may be transferred), (3) at least $1,000 is transferred at
any one time (or, if less, the entire amount in the General Account Fixed
Account), and (4) you may not make a transfer into the General Account Fixed
Account within six months after a transfer out of such account. Irrespective of
the above, we may in our discretion permit a continuing request for transfer of
lesser specified amounts automatically on a periodic basis. However, we reserve
the right to discontinue or modify any such arrangements at our discretion. No
transfers from the General Account Fixed Account may be made after the Annuity
Commencement Date.
INVESTMENTS BY FORTIS BENEFITS
Our obligations with respect to the Guarantee Periods Fixed Account and the
General Account Fixed Account are legal obligations of Fortis Benefits and are
supported by our General Account assets, which also support obligations incurred
by us under other insurance and annuity contracts. Investments purchased with
amounts allocated to both Fixed Accounts are the property of Fortis Benefits and
Participants have no legal rights in such investments. Subject to applicable
law, we have sole discretion over the investment of assets in our General
Account and in the Fixed Account.
Amounts in the Fortis Benefits' General Account and the Fixed Account will be
invested in compliance with applicable state insurance laws and regulations
concerning the nature and quality of investments for the General Account. Within
specified limits and subject to certain standards and limitations, these laws
generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments. See Fortis Benefits' Financial Statements" for
information on Fortis Benefits' investments. Investment management for amounts
in the General Account and in the Fixed Account is provided to Fortis Benefits
by Fortis Advisers, Inc.
Fortis Benefits intends to consider the return available on the instruments in
which it intends to invest amounts allocated to the Fixed Account when it
establishes Guaranteed Interest Rates. Such return is only one of many factors
considered in establishing the Guaranteed Interest Rates. See "Guarantee Periods
Fixed Account."
Fortis Benefits expects that amounts allocated to the Fixed Account generally
will be invested in debt instruments that approximately match Fortis Benefits'
liabilities with regard to the Guarantee Periods for Net Purchase Payments
allocated to Guarantee Periods Fixed Accounts and with regard to expected
holding periods for Net Purchase Payments allocated to the General Account Fixed
Account. Fortis Benefits expects that these will include primarily the following
types of debt instruments: (1) securities issued by the United States Government
or its agencies or instrumentalities, which securities may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa),
Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any
other nationally recognized rating service; (3) other debt instruments
including, but not limited to, issues of or guaranteed by banks or bank holding
companies and corporations, which obligations although not rated by Moody's or
Standard & Poor's, are deemed by Fortis Benefits to have an investment quality
comparable to securities which may be purchased as stated above; and (4) other
evidences of indebtedness secured by mortgages or deeds of trust representing
liens upon real estate. Notwithstanding the foregoing, Fortis Benefits is not
obligated to invest amounts allocated to the Fixed Account according to any
particular strategy, except as may be required by applicable state insurance
laws and regulations. See "Regulation and Reserves."
FIXED ACCOUNT VALUE
The Certificate's Fixed Account Value on any Valuation Date is the sum of the
Net Purchase Payments allocated to the Fixed Account, plus any transfers from
the Variable Account, plus interest credited to the Fixed Account, less any
surrender charges or annual administrative charges allocated to the Fixed
Account or transfers to the Variable Account.
ACCUMULATION PERIOD
ISSUANCE OF A CERTIFICATE AND PURCHASE PAYMENTS
Fortis Benefits reserves the right to reject any application for a Certificate
or any purchase payment for any reason. If the issuing instructions can be
accepted in the form received, the initial purchase payment will be credited
within two Valuation Dates after the later of receipt of the issuing
instructions or receipt of the initial purchase payment at Fortis Benefits' Home
Office. If the initial purchase payment cannot be credited within five Valuation
Dates after receipt because the issuing instructions are incomplete, the initial
purchase
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payment will be returned unless the applicant consents to our retaining the
initial purchase payment and crediting it as of the end of the Valuation Period
in which the necessary requirements are fulfilled. The initial purchase payment
must be at least $5,000 ($2,000 for a Certificate issued pursuant to a qualified
plan).
The date that the initial purchase payment is applied to the purchase of the
Certificate is also the Certificate Issue Date. The Certificate Issue Date is
the date used to determine Certificate years, regardless of when the Certificate
is delivered. The crediting of investment experience in the Variable Account, or
a fixed rate of return in the Fixed Account, begins as of the Certificate Issue
Date.
The Participant may make additional purchase payments at any time after the
Certificate Issue Date and prior to the Annuity Commencement Date, as long as
the Annuitant is living. Purchase payments (together with any required
information identifying the proper Certificates and account to be credited with
purchase payments) must be transmitted to our Home Office. Additional purchase
payments are credited to the Certificate and added to the Certificate Value as
of the end of the Valuation Period in which they are received in good order.
Each additional purchase payment under a Certificate must be at least $500. The
total of all purchase payments for all Fortis Benefits annuities having the same
owner or participant, or annuitant, may not exceed $1 million (not more than
$500,000 allocated to the Fixed Account) without Fortis Benefits' prior
approval, and we reserve the right to modify this limitation at any time.
Purchase payments in excess of the initial minimum may be made by monthly draft
against the bank account of any Participant who has completed and returned to us
a special "Thrift-O-Matic" authorization form that may be obtained from your
sales representative or from our Home Office. Arrangements can also be made for
purchase payments by wire transfer, payroll deduction, military allotment,
direct deposit and billing. Purchase payments by check should be made payable to
Fortis Benefits Insurance Company.
If the Certificate Value is less than $1,000, we may cancel the Certificate on
any Valuation Date. We will notify the Participant at least 90 days in advance
of our intention to cancel the Certificate. Such cancellation would be
considered a full surrender of the Certificate.
CERTIFICATE VALUE
Certificate Value is the total of any Variable Account Value in all the
Subaccounts of the Variable Account pursuant to the Certificate, plus any Fixed
Account Value.
There is no guaranteed minimum Variable Account Value. To the extent Certificate
Value is allocated to the Variable Account, you bear the entire investment risk.
DETERMINATION OF VARIABLE ACCOUNT VALUE. A Certificate's Variable Account Value
is based on Accumulation Unit values, which are determined on each Valuation
Date. The value of an Accumulation Unit for a Subaccount on any Valuation Date
is equal to the previous value of that Subaccount's Accumulation Unit multiplied
by that Subaccount's net investment factor (discussed directly below) for the
Valuation Period ending on that Valuation Date. At the end of any Valuation
Period, a Certificate's Variable Account Value in a Subaccount is equal to the
number of Accumulation Units in the Subaccount times the value of one
Accumulation Unit for that Subaccount.
The number of Accumulation Units in each Subaccount is equal to:
- Accumulation Units purchased at the time that any Net Purchase Payments or
transferred amounts are allocated to the Subaccount; less
- Accumulation Units redeemed to pay for the portion of any transfers from
or partial surrenders allocated to the Subaccount; less
- Accumulation Units redeemed to pay charges under the Contract.
NET INVESTMENT FACTOR. If a Subaccount's net investment factor is greater than
one, the Subaccount's Accumulation Unit value has increased. If the net
investment factor is less than one, the Subaccount's Accumulation Unit value has
decreased. The net investment factor for a Subaccount is determined by dividing
(1) the net asset value per share of the Portfolio shares held by the
Subaccount, determined at the end of the current Valuation Period, plus the per
share amount of any dividend or capital gains distribution made with respect to
the Portfolio shares held by the Subaccount during the current Valuation Period,
minus a per share charge for the increase, plus a per share credit for the
decrease, in any income taxes assessed which we determine to have resulted from
the investment operation of the subaccount or any other taxes which are
attributable to this Certificate, by (2) the net asset value per share of the
Portfolio shares held in the Subaccount as determined at the end of the previous
Valuation Period, and subtracting from that result a factor representing the
mortality risk, expense risk and administrative expense charge.
DETERMINATION OF FIXED ACCOUNT VALUE. A Certificate's Fixed Account Value is
guaranteed by Fortis Benefits. Therefore, Fortis Benefits bears the investment
risk with respect to amounts allocated to the Fixed Account, except to the
extent that (a) Fortis Benefits may vary the Guaranteed Interest Rate for future
Guarantee Periods for Guarantee Periods Fixed Accounts and the current interest
for General Account Fixed Accounts (subject to the 3% effective annual minimum)
and (b) the Market Value Adjustment for Guarantee Periods Fixed Accounts imposes
investment risks on the Participant.
The Certificate's Fixed Account Value on any Valuation Date is equal to the
following amounts, in each case increased by accrued interest:
- The amount of Net Purchase Payments or transferred amounts allocated to
the Fixed Account; less
- The amount of any transfers or surrenders out of the Fixed Account.
ALLOCATION OF PURCHASE PAYMENTS AND CERTIFICATE VALUE
ALLOCATION OF PURCHASE PAYMENTS. In the application for a Certificate, the
Participant can allocate Net Purchase Payments, or portions thereof, to the
available Subaccounts of the Variable Account or to the Fixed Account (and to
Guarantee Periods within the Fixed Account for
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Certificates issued in states where the Guarantee Periods Fixed Account is
offered), or a combination thereof. Percentages must be in whole numbers and the
total allocation must equal 100%. The percentage allocations for future Net
Purchase Payments may be changed, without charge, at any time by sending a
Written Request to Fortis Benefits' Home Office. Changes in the allocation of
future Net Purchase Payments will be effective on the date we receive the
Participant's Written Request.
TRANSFERS. Transfers of Certificate Value from one available Subaccount to
another or into the Fixed Account, or from the Fixed Account to one of the
available Subaccounts, or in the case of a Guarantee Periods Fixed Account
transfers from one Guarantee Period to another Guarantee Period, can be made by
the Participant in Written Request to Fortis Benefits' Home Office, or by
telephone transfer as described below. There is currently no charge for any
transfer, although transfers from a Guarantee Period of a Guarantee Period Fixed
Account that are more than 15 days before or after the expiration thereof are
subject to a Market Value Adjustment. See "Market Value Adjustment." Transfers
of Certificate Value from the General Account Fixed Account are restricted in
both amount and timing. See "Fixed Account -- General Account Fixed Account --
General Account Fixed Account Transfers."
The minimum transfer from a Subaccount or Guarantee Period is the lesser of
$1,000 or all of the Certificate Value in the Subaccount or Fixed Account.
Irrespective of the above we may permit a continuing request for transfers of
lesser specified amounts automatically on a periodic basis. However, we reserve
the right to restrict the frequency of or otherwise condition, terminate or
impose charges (not to exceed $25 per transfer) upon transfers. We will count
all transfers between and among the Subaccounts of the Variable Account and the
Fixed Account as one transfer, if all the transfer requests are made at the same
time as part of one request. We will execute the transfers and determine all
values in connection with transfers as of the end of the Valuation Period in
which we receive the transfer request. The amount of any positive or negative
Market Value Adjustment associated with a transfer from a Guarantee Period of
the Guarantee Periods Fixed Account, respectively, will be added to or deducted
from the transferred amount.
If you complete and return the telephone transfer section of the application,
transfers may be made pursuant to telephone instructions. We will honor
telephone transfer instructions from any person who provides the correct
identifying information. Fortis Benefits will not be responsible for, and you
will bear the risk of loss from, oral instructions, including fraudulent
instructions, which are reasonably believed to be genuine. We will employ
reasonable procedures to confirm that telephone instructions are genuine, but if
such procedures are not deemed reasonable, we may be liable for any losses due
to unauthorized or fraudulent instructions. Our procedures are to verify address
and social security number, tape record the telephone call, and provide written
confirmation of the transaction. We may modify or terminate our telephone
transfer procedures at any time. The number for telephone transfers is
1-800-827-5877.
Certain restrictions on very substantial investments in any one Subaccount are
set forth under "Limitations on Allocations" in the Statement of Additional
Information.
TOTAL AND PARTIAL SURRENDERS
TOTAL SURRENDERS. The Participant may surrender all of the Cash Surrender Value
at any time during the life of the Annuitant and prior to the Annuity
Commencement Date by a Written Request sent to Fortis Benefits' Home Office. We
reserve the right to require that the Certificate be returned to us prior to
making payment, although this will not affect our determination of the amount of
the Cash Surrender Value. Cash Surrender Value is the Certificate Value at the
end of the Valuation Period during which the Written Request for the total
surrender is received by Fortis Benefits at its Home Office, plus or minus any
applicable Market Value Adjustment. See "Market Value Adjustment."
The written consent of all collateral assignees and irrevocable beneficiaries
must be obtained prior to any total surrender. Surrenders from the Variable
Account will generally be paid within seven days of the date of receipt by
Fortis Benefits' Home Office of the Written Request. Postponement of payments
may occur, however, in certain circumstances. See "Postponement of Payment."
The amount paid upon total surrender of the Cash Surrender Value (taking into
account any prior partial surrenders) may be more or less than the total Net
Purchase Payments made. After a surrender of the Cash Surrender Value or at any
time the Certificate Value is zero, all rights of the Participant, Annuitant, or
any other person will terminate.
PARTIAL SURRENDERS. At any time prior to the Annuity Commencement Date and
during the lifetime of the Annuitant, the Participant may surrender a portion of
the Fixed Account Value and/or the Variable Account Value by sending to Fortis
Benefits' Home Office a Written Request. We will not accept a partial surrender
request unless the net proceeds payable to you as a result of the request are at
least $1,000. If the total Certificate Value in both the Variable Account and
Fixed Account would be less than $1,000 after the partial surrender, Fortis
Benefits will surrender the entire Cash Surrender Value under the Certificate.
In order for a request to be processed, the Participant must specify from which
Subaccounts of the Variable Account or Guarantee Periods of the Fixed Account,
if applicable, a partial surrender should be made.
We will surrender Accumulation Units from the Variable Account and/ or dollar
amounts from the Fixed Account so that the total amount of the partial surrender
equals the dollar amount of the partial surrender request. The amount payable to
the Participant will be reduced by any applicable negative Market Value
Adjustment, or increased by any positive Market Value Adjustment. The partial
surrender will be effective at the end of the Valuation Period in which Fortis
Benefits receives the Written Request for partial surrender at its Home Office.
Payments will generally be made within seven days of the effective date of such
request, although certain delays are permitted. See "Postponement of Payment."
The Internal Revenue Code provides that a penalty tax will be imposed on certain
premature surrenders. For a discussion of this and other tax implications of
total and partial surrenders, including withholding requirements, see "Federal
Tax Matters." Also, under tax deferred annuity Certificates pursuant to Section
403(b) of the Internal Revenue Code, no distributions of voluntary salary
reduction amounts will
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be permitted prior to one of the following events: attainment of age 59 1/2 by
the employee or the employee's separation from service, death, disability or
hardship. (Hardship distributions will be limited to the lesser of the amount of
the hardship or the amount of salary reduction contributions, exclusive of
earnings thereon.)
BENEFIT PAYABLE ON DEATH OF ANNUITANT OR PARTICIPANT
If the Annuitant or Participant dies prior to the Annuity Commencement Date, a
death benefit will be paid to the Beneficiary. If more than one Annuitant has
been named, the death benefit payable upon the death of an Annuitant will only
be paid upon the death of the last survivor of the persons so named. The death
benefit will equal the greater of:
(1) the sum of all Net Purchase Payments made less all prior
surrenders and any applicable prior negative Market Value Adjustments (in
the case of a Certificate having a Guarantee Periods Fixed Account), or
(2) the Certificate Value adjusted by any applicable Market Value
Adjustment (in the case of a Certificate having a Guarantee Periods Fixed
Account), as of the date used for valuing the death benefit.
The value of the death benefit is determined as of the end of the Valuation
Period in which we receive, at our Home Office, proof of death and the written
request as to the manner of payment. Upon receipt of these items, the death
benefit generally will be paid within seven days. Under certain circumstances,
payment of the death benefit may be postponed. See "Postponement of Payment." If
we do not receive a Written Request for a settlement method, we will pay the
death benefit in a single sum, based on values determined at that time.
The Beneficiary may (a) receive a single sum payment, which terminates the
Certificate, or (b) select an annuity option. If the Beneficiary selects an
annuity option, he or she will have all the rights and privileges of a payee
under the Certificate. If the Beneficiary desires an Annuity option, the
election should be made within 60 days of the date the death benefit becomes
payable. Failure to make a timely election can result in unfavorable tax
consequences. For further information, see "Federal Tax Matters."
We accept any of the following as proof of death: a copy of a certified death
certificate; a copy of a certified decree of a court of competent jurisdiction
as to the finding of death; or a written statement by a medical doctor who
attended the deceased at the time of death.
If the Participant dies before the Annuitant and before the Annuity Commencement
Date with respect to a Non-Qualified Certificate certain additional requirements
are mandated by the Internal Revenue Code, which are discussed below under
"Federal Tax Matters-- Required Distributions for Non-Qualified Certificates."
It is imperative that Written Notice of the death of the Participant be promptly
transmitted to Fortis Benefits at its Home Office, so that arrangements can be
made for distribution of the entire interest in the Certificate to the
Beneficiary in a manner that satisfies the Internal Revenue Code requirements.
Failure to satisfy these requirements may result in the Certificate not being
treated as an annuity contract for federal income tax purposes, which could have
adverse tax consequences.
THE ANNUITY PERIOD
ANNUITY COMMENCEMENT DATE
The Participant may specify an Annuity Commencement Date in the application. The
Annuity Commencement Date marks the beginning of the period during which an
Annuitant or other payee designated by the Participant receives annuity payments
under the Certificate. We reserve the right to not permit an Annuity
Commencement Date which is on or after the Annuitant's 75th birthday.
Depending on the type of retirement arrangement involved, amounts that are
distributed either too soon or too late may be subject to penalty taxes under
the Internal Revenue Code. See "Federal Tax Matters." You should consider this
carefully in selecting or changing an Annuity Commencement Date.
In order to advance or defer the Annuity Commencement Date, the Participant must
submit a Written Request during the Annuitant's lifetime. The request must be
received at our Home Office at least 30 days before the then-scheduled Annuity
Commencement Date. The new Annuity Commencement Date must also be at least 30
days after the Written Request is received. There is no right to make any total
or partial surrender during the Annuity Period.
COMMENCEMENT OF ANNUITY PAYMENTS
If the Certificate Value at the end of the Valuation Period which contains the
Annuity Commencement Date is less than $1,000, we may pay the entire Certificate
Value, without the imposition of any charges other than the premium tax charge,
if applicable, in a single sum payment to the Annuitant or other payee chosen by
the Participant and cancel the Certificate.
Otherwise, Fortis Benefits will apply (1) the Fixed Account Value to provide a
Fixed Annuity Option and (2) the Variable Account Value in any Subaccount to
provide a Variable Annuity Option using the same Subaccount, unless the
Participant has notified us by Written Request to apply the Fixed Account Value
and Variable Account Value in different proportions. Any such Written Request
must be received by us at our Home Office at least 30 days before the Annuity
Commencement Date.
Annuity payments under a Fixed or Variable Annuity Option will be made on a
monthly basis to the Annuitant or other properly-designated payee, unless we
agree to a different payment schedule. If more than one person is named as an
Annuitant, the Participant may elect to name one of such persons to be the sole
Annuitant as of the Annuity Commencement Date. We reserve the right to change
the frequency of any annuity payment so that each payment will be at least $50
($20 in Texas). There is no right to make any total or partial surrender during
the Annuity Period.
The amount of each annuity payment will depend on the amount of Certificate
Value applied to an annuity option, the form of annuity selected and the age of
the Annuitant. Information concerning the
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relationship between the Annuitant's sex and the amount of annuity payments,
including special requirements in connection with employee benefits plans, is
set forth under "Calculations of Annuity Payments" in the Statement of
Additional Information. The Statement of Additional Information also contains
detailed information about how the amount of each annuity payment is computed.
The dollar amount of any fixed annuity payments is specified during the entire
period of annuity payments according to the provisions of the annuity form
selected. The dollar amount of variable annuity payments varies during the
annuity period based on changes in Annuity Unit Values for the Subaccounts that
you choose to use in connection with your payments.
RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE
ANNUITY PAYMENTS
If a Subaccount on which a variable annuity payment is based has an average
effective net investment return higher than 3% per annum during the period
between two such annuity payments, the Annuity Unit Value will increase, and the
second payment will be higher than the first. Conversely, if the Subaccount's
average effective net investment return over the period between the annuity
payments is less than 3% per annum, the Annuity Unit Value will decrease, and
the second payment will be lower than the first. "Net investment return," for
this purpose, refers to the Subaccount's overall investment performance, net of
the mortality and expense risk and administrative expense charges, which are
assessed at a nominal aggregate annual rate of .45%. We guarantee that the
amount of each variable annuity payment after the first payment will not be
affected by variations in our mortality experience or our expenses.
TRANSFERS. During the Annuity Period, the person receiving annuity payments may
make up to four transfers a year among Subaccounts. The current procedures for
and conditions on these transfers are the same as described above under
"Allocation of Purchase Payments and Certificate Value Transfers." Transfers
from a Fixed Annuity Option are not permitted during the Annuity Period.
ANNUITY FORMS
The Participant may select an annuity form or change a previous selection by
Written Request, which must be received by us at least 30 days before the
Annuity Commencement Date. One annuity form may be selected, although as
discussed above, payments under that form may be received on a combination fixed
and variable basis. If no annuity form selection is in effect on the Annuity
Commencement Date, in most cases we automatically apply Option B (described
below), with payments guaranteed for 10 years. If the Certificate is issued
under certain retirement plans, however, federal pension law may require that
payments be made pursuant to Option D (described below), unless otherwise
elected. Tax laws and regulations may impose further restrictions to assure that
the primary purpose of the plan is distribution of the accumulated funds to the
employee.
The following options are available for fixed annuity payments and for variable
annuity payments.
OPTION A, LIFE ANNUITY. Payments are made as of the first Valuation Date of each
monthly period during the Annuitant's life, starting with the Annuity
Commencement Date. No payments will be made after the Annuitant dies. It is
possible for the payee to receive only one payment under this option, if the
Annuitant dies before the second payment is due.
OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20
YEARS. Payments are made as of the first Valuation Date of each monthly period
starting on the Annuity Commencement Date. Payments will continue as long as the
Annuitant lives. If the Annuitant dies before all of the guaranteed payments
have been made, we will continue installments of the guaranteed payments to the
Beneficiary.
OPTION C, JOINT AND FULL SURVIVOR ANNUITY. Payments are made as of the first
Valuation Date of each monthly period starting with the Annuity Commencement
Date. Payments will continue as long as either the Annuitant or the joint
Annuitant is alive. Payments will stop when both the Annuitant and the joint
Annuitant have died. It is possible for the payee or payees under this option to
receive only one payment, if both Annuitants die before the second payment is
due.
OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. Payments are made as
of the first Valuation Date of each monthly period starting with the Annuity
Commencement Date. Payments will continue as long as either the Annuitant or the
joint Annuitant is alive. If the Annuitant dies first, payments will continue to
the joint Annuitant at one-half the original amount. If the joint Annuitant dies
first, payments will continue to the Annuitant at the original full amount.
Payments will stop when both the Annuitant and the joint Annuitant have died. It
is possible for the payee or payees under this option to receive only one
payment if both Annuitants die before the second payment is due.
We also have other annuity forms available and information about them can be
obtained from your sales representative or by calling or writing to our Home
Office.
DEATH OF ANNUITANT OR OTHER PAYEE
Under most annuity forms offered by Fortis Benefits, the amounts, if any,
payable on the death of the Annuitant during the Annuity Period are the
continuation of annuity payments for any remaining guarantee period or for the
life of any joint Annuitant. In all such cases, the person entitled to receive
payments also receives any rights and privileges under the annuity form in
effect.
Additional rules applicable to such distributions under Non-Qualified
Certificates are described under "Federal Tax Matters--Required Distributions
for Non-Qualified Certificates." Though the rules there described do not apply
to Certificates issued in connection with qualified plans, similar rules apply
to the plans themselves.
CHARGES AND DEDUCTIONS
PREMIUM TAXES
The states of South Dakota and Wyoming impose a premium tax upon the receipt of
a purchase payment. In these states, and in any other state or jurisdiction
where premium taxes or similar assessments are imposed upon the receipt of
purchase payments, Fortis Benefits will pay such taxes on behalf of the
Participant and then deduct a charge for these amounts from the Certificate
Value upon the surrender, death of annuitant or Participant, or annuitization of
the Certificate. In
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jurisdictions where premium taxes or similar assessments are imposed at the time
annuity payments begin, Fortis Benefits will deduct a charge for such amounts
from the Certificate Value at that time. In such jurisdictions, the charge will
be deducted on a pro-rata basis from the then-current Fixed Account Value and,
by redemption of Accumulation Units, the then-current Variable Account Value in
each Subaccount. Similarly, Fortis Benefits may deduct premium taxes from
Certificate Value when no deduction was made from purchase payments, but is
subsequently determined to be due. Conversely, Fortis Benefits will credit to
the Certificate Value the amount of any deductions for premium taxes or similar
assessments that are subsequently determined not to be owed.
Applicable premium tax rates depend upon the Participant's then-current place of
residence. Applicable rates are subject to change by legislation, administrative
interpretations or judicial acts.
CHARGES AGAINST THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We will assess each Subaccount of the
Variable Account with a daily charge for mortality and expense risk at a nominal
annual rate of .45% of the average daily net assets of the Variable Account
(consisting of approximately .30% for mortality risk and approximately .15% for
expense risk). This charge is assessed during both the Accumulation Period and
the Annuity Period. We guarantee not to increase this charge for the duration of
the Certificate.
The mortality risk borne by Fortis Benefits arises from its obligation to make
annuity payments (determined in accordance with the annuity tables and other
provisions contained in the Certificate) for the full life of all Annuitants
regardless of how long all Annuitants or any individual Annuitant might live. In
addition, Fortis Benefits bears a mortality risk in that it guarantees to pay a
death benefit upon the death of an Annuitant or Participant prior to the Annuity
Commencement Date.
The expense risk assumed is that actual expenses incurred in connection with
issuing and administering the Certificate will exceed the limits on
administrative charges set in the Certificate.
If the administrative charges and the mortality and expense risk charge are
insufficient to cover the expenses and costs assumed, the loss will be borne by
the Company. Conversely, if the amount deducted proves more than sufficient, the
excess will be profit to the Company. The Company expects a profit from the
mortality and expense risk charge.
ANNUAL ADMINISTRATIVE CHARGE
A $30 annual administrative charge is deducted each Certificate year from the
Certificate Value on each anniversary of the Certificate Issue Date. (This
charge will be lower to the extent legally required in some states.) This charge
is to help cover administrative costs such as those incurred in issuing
Certificates, establishing and maintaining the records relating to Certificates,
making regulatory filings and furnishing confirmation notices, voting materials
and other communications, providing computer, actuarial and accounting services,
and processing Certificate transactions. We do not anticipate any profit from
this charge. This charge will initially be waived during the Annuity Period,
although Fortis Benefits reserves the right to reinstitute it at any time.
The annual administrative charge will be deducted by redemption of Accumulation
Units from each Subaccount of the Variable Account and from the Fixed Account in
the same proportion as the then-current Certificate Value is then allocated
among those alternatives pursuant to the Certificate. If the Certificate is
totally surrendered, the full annual administrative charge will be deducted at
the time of surrender.
TAX CHARGE
We currently impose no charge for taxes payable by us in connection with the
Certificate, other than for premium taxes and similar assessments when
applicable. We reserve the right to impose a charge for any other taxes that may
become payable by us in the future in connection with the Certificates or the
Separate Account.
MISCELLANEOUS
Because the Variable Account invests in shares of the Portfolios, the net assets
of the Variable Account will reflect the investment advisory fees and certain
other expenses incurred by the Portfolios that are described in their
prospectuses.
GENERAL PROVISIONS
THE CERTIFICATES
The Certificate, copies of any applications, amendments, riders, or endorsements
attached to the Certificate and copies of any supplemental applications,
amendments, endorsements, or revised Certificate pages which are mailed to you
are the entire Certificate. Only an officer of Fortis Benefits can agree to
change or waive any provisions of a Certificate. Any change or waiver must be in
writing and signed by an officer of Fortis Benefits. The Certificates are
non-participating and do not share in dividends or earnings of Fortis Benefits.
POSTPONEMENT OF PAYMENT
Fortis Benefits may defer for up to 15 days the payment of any amount
attributable to a purchase payment made by check to allow the check reasonable
time to clear. For a description of other circumstances in which amounts payable
out of Variable Account assets could be deferred, see "Postponement of Payments"
in the Statement of Additional Information. Fortis Benefits may also defer
payment of surrender proceeds payable out of the Fixed Account for a period of
up to 6 months.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of the Annuitant has been misstated, any amount payable will
be that which the purchase payments paid would have purchased at the correct age
and sex. If we have made any overpayments because of incorrect information about
age or sex, or any other miscalculation, Fortis Benefits will deduct the
overpayment from the next payment or payments due. We add underpayments to the
next payment. The amount of any adjustment will be credited or charged with
interest at the effective annual rate of 3% per year.
ASSIGNMENT
Rights and interests under a Qualified Certificate may be assigned only in
certain narrow circumstances referred to in the Certificate. Participants and
other payees may assign their rights and interests under Non-Qualified
Certificates, including their ownership rights.
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We take no responsibility for the validity of any assignment. A change in
ownership rights must be made in writing and a copy must be sent to Fortis
Benefits' Home Office. The change will be effective on the date it was made,
although we are not bound by a change until the date we record it.
The rights under a Certificate are subject to any assignment of record at the
Home Office of Fortis Benefits. An assignment or pledge of a Certificate may
have adverse tax consequences. See below under "Federal Tax Matters."
BENEFICIARY
Before the Annuity Commencement Date and while the Annuitant is living, the
Participant may name or change a beneficiary or a contingent beneficiary by
sending a Written Request of the change to Fortis Benefits. Under certain
retirement programs, however, spousal consent may be required to name or change
a beneficiary, and the right to name a beneficiary other than the spouse may be
subject to applicable tax laws and regulations. We are not responsible for the
validity of any change. A change will take effect as of the date it is signed
but will not affect any payments we make or action we take before receiving the
Written Request. We also need the consent of any irrevocably named person before
making a requested change.
In the event of the death of a Participant or Annuitant prior to the Annuity
Commencement date the Beneficiary will be determined as follows:
- If there is any surviving Participant, the surviving Participant will be
the Beneficiary (this overrides any other beneficiary designation).
- If there is no surviving Participant, the Beneficiary will be the
beneficiary designated by the Participant.
- If there is no surviving Participant and no surviving beneficiary who has
been designated by the Participant, then the estate of the last surviving
Participant will be the Beneficiary.
REPORTS
We will mail to the Participant (or to the person receiving payments during the
annuity period), at the last known address of record, any reports and
communications required by any applicable law or regulation. You should
therefore give us prompt written notice of any address change. This will include
annual audited financial statements of the Portfolios, but not necessarily of
the Variable Account or Fortis Benefits.
RIGHTS RESERVED BY FORTIS BENEFITS
Fortis Benefits reserves the right to make certain changes if, in its judgment,
they would best serve the interests of Participants and Annuitants or would be
appropriate in carrying out the purposes of the Certificates. Any changes will
be made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, Fortis Benefits will obtain your approval of the changes
and approval from any appropriate regulatory authority. Such approval may not be
required in all cases, however. Examples of the changes Fortis Benefits may make
include:
- To operate the Variable Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any Subaccount to another Subaccount, or to one
or more separate accounts, or to the Fixed Account; or to add, combine or
remove Subaccounts in the Variable Account.
- To substitute, for the Portfolio shares held in any Subaccount, the shares
of another Portfolio or the shares of another investment company or any
other investment permitted by law.
- To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the Certificate as an
annuity.
- To change the time or time of day at which a Valuation Date is deemed to
have ended.
- To make any other necessary technical changes in the Certificate in order
to conform with any action the above provisions permit Fortis Benefits to
take, including to change the way Fortis Benefits assesses charges, but
without increasing as to any then outstanding Certificate the aggregate
amount of the types of charges which Fortis Benefits has guaranteed.
DISTRIBUTION
The Certificates will be sold by individuals who, in addition to being licensed
by state insurance authorities to sell the Certificates of Fortis Benefits, are
also registered representatives of Jack White & Company, an unaffiliated
broker-dealer. The selling activities of Jack White & Company are by means of a
dealer agreement with Fortis Investors, Inc., the principal underwriter of the
Certificates. Fortis Investors and Jack White & Company are registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 as
broker-dealers and are members of the National Association of Securities
Dealers, Inc.
As compensation for distributing the Certificates, Fortis Benefits pays Fortis
Investors, who in turn pays Jack White & Company, a fee not in excess of .40%
per annum of the average daily Certificate Value of the Certificates sold by it.
Fortis Benefits did not pay any amount to Fortis Investors in 1995 associated
with distribution of the Certificates since no Certificates were sold in 1995
and prior years. In the distribution agreement, Fortis Benefits has agreed to
indemnify Fortis Investors (and its agents, employees, and controlling persons)
for certain damages and expenses, including those arising under federal
securities laws.
See Note 13 to the Notes to Fortis Benefits' Financial Statements as to amounts
it has paid to Fortis, Inc. for various services.
Fortis Investors is an indirect subsidiary of Fortis AMEV and Fortis AG and is
therefore under common control with Fortis Benefits. Fortis Investors' principal
business address is the same as that of our Home Office. Fortis Investors is not
obligated to sell any specific amount of
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interests under the Certificates. $75,000,000 of interests in the Guarantee
Periods Fixed Account and an indefinite amount of interests in the Variable
Account have been registered with the Securities and Exchange Commission.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in the opinion of Fortis Benefits are
currently in effect. These rules are based on laws, regulations and
interpretations which are subject to change at any time. This summary is not
comprehensive and is not intended as tax advice. Federal estate and gift tax
considerations, as well as state and local taxes, may also be material. You
should consult a qualified tax adviser as to the tax implications of taking any
action under a Certificate or related retirement plan.
NON-QUALIFIED CERTIFICATES
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Purchase payments made under Non-Qualified Certificates
are not excludible or deductible from the gross income of the Participant or any
other person. However, any increase in the accumulated value of a Non-Qualified
Certificate resulting from the investment performance of the Variable Account or
interest credited to the Fixed Account is generally not taxable to the
Participant or other payee until received by him or her, as surrender proceeds,
death benefit proceeds, or otherwise. The exception to this rule is that,
generally, Participants who are not natural persons are taxed annually on any
increase in the Certificate Value. However, this exception does not apply in all
cases, and you may wish to discuss this with your tax adviser.
The following discussion applies generally to Certificates owned by natural
persons.
In general, surrenders or partial withdrawals under Certificates are taxed as
ordinary income to the extent of the accumulated income or gain under the
Certificate. If a Participant assigns or pledges any part of the value of a
Certificate, the value so pledged or assigned is taxed to the Participant as
ordinary income to the same extent as a partial withdrawal.
With respect to annuity payment options, although the tax consequences may vary
depending on the option elected under the Certificate, until the investment in
the Certificate is recovered, generally only the portion of the annuity payment
that represents the amount by which the Certificate Value exceeds the
"investment in the Certificate" will be taxed. In general, a person's
"investment in the Certificate" is the aggregate amount of purchase payments
made by him or her. After an Annuitant's or other payee's "investment in the
Certificate" is recovered, the full amount of any additional annuity payments is
taxable. For variable annuity payments, in general, the taxable portion of each
annuity payment (prior to recovery of the "investment in the Certificate") is
determined by a formula which establishes the specific dollar amount of each
annuity payment that is not taxed. This dollar amount is determined by dividing
the "investment in the Certificate" by the total number of expected annuity
payments. For fixed annuity payments, in general, prior to recovery of the
"investment in the Certificate," there is no tax on the amount of each payment
which bears the same ratio to that payment as the "investment in the
Certificate" bears to the total expected value of the annuity payments for the
term of the payments. However, the remainder of each annuity payment is taxable.
The taxable portion of a distribution (in the form of an annuity or a single sum
payment) is taxed as ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all Certificates and other annuity contracts issued by us or our
affiliates to the Participant within the same calendar year will be treated as
if they were a single Certificate.
There is a 10% penalty under the Code on the taxable portion of a "premature
distribution." Generally, an amount is a "premature distribution" unless the
distribution is (1) made on or after the Participant or other payee reaches age
59 1/2, (2) made to a Beneficiary on or after death of the Participant, (3) made
upon the disability of the Participant or other payee, or (4) part of a series
of substantially equal annuity payments for the life or life expectancy of the
Participant or the Participant and Beneficiary. Premature distributions may
result, for example, from an early Annuity Commencement Date, an early
surrender, partial surrender or assignment of a Certificate or the early
death of an Annuitant who is not also the Participant or other person receiving
annuity payments under the Certificate.
A transfer of ownership of a Certificate, or designation of an Annuitant or
other payee who is not also the Participant, may result in certain income or
gift tax consequences to the Participant that are beyond the scope of this
discussion. A Participant contemplating any transfer or assignment of a
Certificate should contact a competent tax adviser with respect to the potential
tax effects of such transaction.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CERTIFICATES
In order that a Non-Qualified Certificate be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires (a) if any
person receiving annuity payments dies on or after the Annuity Commencement Date
but prior to the time the entire interest in the Certificate has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of the
person's death; and (b) if any Participant dies prior to the Annuity
Commencement Date, the entire interest in the Certificate will be distributed
(1) within five years after the date of that person's death or (2) as annuity
payments which will begin within one year of that Participant's death and which
will be made over the life of the Participant's designated Beneficiary or over a
period not extending beyond the life expectancy of that Beneficiary. However, if
the Participant's designated Beneficiary is the surviving spouse of the
Participant, the Certificate may be continued with the surviving spouse deemed
to be the new Participant. Where the Participant or other person receiving
payments is not a natural person, the required distributions provided by Section
72(A) apply upon the death of the primary Annuitant.
No regulations interpreting the requirements of Section 72(s) have yet been
issued (although proposed regulations have been issued interpreting similar
requirements for qualified plans). Fortis Benefits intends to review and modify
the Certificate if necessary to ensure that it complies with the requirements of
Section 72(s) when clarified by regulation or otherwise.
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Generally, unless the Beneficiary elects otherwise, the above requirements will
be satisfied where the death occurs prior to the Annuity Commencement Date by
paying the death benefit in a single sum, subject to proof of the Participant's
death. The Beneficiary, however, may elect by Written Request to receive an
annuity option instead of a lump sum payment. However, if the election is not
made within 60 days of the date the single sum death benefit otherwise becomes
payable, particularly where the annuitant dies and the annuitant is not the
Participant, the IRS may disregard the election for tax purposes and tax the
Beneficiary as if a single sum payment had been made.
QUALIFIED CERTIFICATES
The Certificates may be used with several types of tax-qualified plans. The tax
rules applicable to Participants, Annuitants and other payees vary according to
the type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a retirement program recognized under the Code on
behalf of an individual are excludable from the individual's gross income for
tax purposes during the Accumulation Period. The portion, if any, of any
purchase payment made by or on behalf of an individual under a Certificate that
is not excluded from the individual's gross income for tax purposes during the
Accumulation Period constitutes the individual's "investment in the
Certificate." Aggregate deferrals under all plans at the employee's option may
be subject to limitations.
When annuity payments begin, the individual will receive back his or her
"investment in the Certificate" if any, as a tax-free return of capital. The
dollar amount of annuity payments received in any year in excess of such return
is taxable as ordinary income. When payments are received as an annuity, the
tax-free return of capital is treated as if received ratably over the entire
period of the annuity until fully recovered (as described above with respect to
Non-Qualified Certificates).
The Certificates are available in connection with the following types of
retirement plans: Section 403(b) annuity plans for employees of certain
tax-exempt organizations and public educational institutions; Section 401 or
403(a) qualified pension, profit-sharing or annuity plans; individual retirement
annuities ("IRAs") under Section 408(b); simplified employee pension plans
("SEPs") under Section 408(k); Section 457 unfunded deferred compensation plans
of public employers and tax-exempt organizations' and private employer unfunded
deferred compensation plans. The tax implications of these plans are further
discussed in the Statement of Additional Information under the heading "Taxation
Under Certain Retirement Plans."
WITHHOLDING
Annuity payments and other amounts received under Certificates are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly from the qualified plan to
another qualified retirement plan. Moreover, special "backup withholding" rules
may require Fortis Benefits to disregard the recipient's election if the
recipient fails to supply Fortis Benefits with a "TIN" or taxpayer
identification number (social security number for individuals), or if the
Internal Revenue Service notifies Fortis Benefits that the TIN provided by the
recipient is incorrect.
PORTFOLIO DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which set standards of diversification for the investments
underlying the Certificates, in order for the Certificates to be treated as
annuities. Fortis Benefits believes that these diversification standards will be
satisfied. Failure to do so would result in immediate taxation to Participants
or persons receiving annuity payments of all returns credited to Certificates,
except in the case of certain Qualified Certificates. Also, current regulations
do not provide guidance as to any circumstances in which control over allocation
of values among different investment alternatives may cause Participants or
persons receiving annuity payments to be treated as the owners of Variable
Account assets for tax purposes. Fortis Benefits reserves the right to amend the
Certificates in any way necessary to avoid any such result. The Treasury
Department may establish standards in this regard through regulations or
rulings. Such standards may apply only prospectively, although retroactive
application is possible if such standards were considered not to embody a new
position.
CERTAIN EXCHANGES
Section 1035 of the Code provides generally that no gain or loss will be
recognized under the exchange of a life insurance or annuity contract for an
annuity contract. Thus, a properly completed exchange from one of these types of
products into a Certificate pursuant to the special annuity contract exchange
form we provide for this purpose is not generally a taxable event under the
Code, and your investment in the Certificate will be the same as your investment
in the product you exchanged out of.
Because of the complexity of these and other tax aspects in connection with an
exchange, you should consult a tax adviser before making any exchange.
TAX LAW RESTRICTIONS AFFECTING SECTION 403(B) PLANS
Section 403(b)(12) of the Internal Revenue Code restricts the distribution under
Section 403(b) annuity contracts of:
(1) elective contributions made for years beginning after December 31, 1988;
(2) earnings on those contributions; and
(3) earnings on amounts held as of December 31, 1988.
Distribution of these amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions made after
December 31, 1988 may not be distributed in the case of hardship.
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FURTHER INFORMATION ABOUT FORTIS BENEFITS
GENERAL
Fortis Benefits is engaged in the offer and sale of insurance products,
including fixed and variable life insurance policies, fixed and variable annuity
contracts, and group life, accident and health insurance policies. The Company
markets its products to small business and individuals through a national
network of independent agents, brokers, and financial institutions.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of Fortis Benefits. This
summary has been derived in part from, and should be read in conjunction with,
the financial statements of Fortis Benefits included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1994 1993 1992 1991** 1990
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees.............. $ 1,232,329 $ 1,022,446 $ 955,053 $ 967,111 $ 439,348 $ 269,374
Net investment income................. 203,537 162,514 153,657 156,431 89,638 66,540
Realized investment gains (losses).... 55,080 (28,815) 73,623 37,928 5,234 (3,827)
Other income.......................... 33,085 35,958 27,100 26,176 6,668 1,813
----------- ----------- ----------- ----------- ----------- -----------
TOTAL REVENUES...................... 1,524,031 1,192,103 1,209,433 1,187,646 540,888 333,900
Total benefits and expenses........... 1,442,270 1,157,651 1,100,199 1,111,530 505,650 314,451
Income tax expense.................... 27,891 11,595 31,090 25,660 12,776 9,665
----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative effect of
accounting changes*.................. 53,870 22,857 78,144 50,456 22,462 9,784
NET INCOME.......................... $ 53,870 $ 22,857 $ 81,707 $ 50,456 $ 22,462 $ 9,784
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Total assets***....................... $ 5,143,012 $ 4,043,914 $ 3,584,139 $ 2,867,999 $ 2,409,881 $ 922,858
Total liabilities..................... 4,431,914 3,569,717 3,052,231 2,460,445 2,056,255 810,580
Total shareholder's equity***......... 711,098 474,197 531,908 407,554 353,626 112,278
</TABLE>
- ------------------------
* Prior-year data has not been restated for the adoption of Statements 109 and
106 in 1993 (See Note 2 of the financial statements).
** Includes the group life and health business acquired from Mutual Benefit
Life Insurance in 1991 (See Note 3 of the financial statements).
*** The years ended December 31, 1995, 1994 and 1993, reflect the impact of the
adoption of Statement 115 (See Note 1 of the financial statements).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1995 COMPARED TO 1994
FINANCIAL CONDITION
Total assets rose to $5,143 million from $4,044 million in 1994. Half of the
increase was due to the assets held in separate accounts which grew from $1,213
million in 1994 to $1,781 million in 1995. Invested assets, excluding Separate
Accounts, increased from $2,372 million at December 31, 1994 to $2,936 million
at December 31, 1995 due to cash inflows and the appreciation of securities
available for sale. Fortis Benefits invests primarily in government and other
high-quality marketable fixed income securities with the objective of providing
reasonable returns while limiting liquidity and credit risk.
During 1995, the Company's mortgage loans on real estate increased $110 million
to $563 million. The Company has a high quality portfolio which has experienced
delinquency rates lower than the industry average. Similar to 1994, mortgage
loans represent 19% of the Company's invested assets.
Policy reserves and liabilities increased from $3,570 million at December 31,
1994 to $4,432 million at December 31, 1995. Aggregate reserves for traditional
life insurance and interest sensitive and investment products increased $222
million from $1,288 million at December 31, 1994 to $1,510 million at December
31, 1995. This increase in traditional life reserves is the result of strong
sales of the Company's group insurance and growth in the policyholder's
accumulations associated with interest sensitive products.
Policy reserves and claim liabilities for accident and health policies increased
by $35 million to nearly $833 million at December 31, 1995. This increase
reflects increased volume of business and increased liability costs for existing
disabilitants as reflected in the Company's disability reserves. Medical
reserves grew somewhat faster than premiums.
Liabilities related to separate accounts increased from $1,208 million at
December 31, 1994 to $1,757 million at December 31, 1995. This increase is
primarily the result of the increased sales of the Company's variable life and
annuity products and market appreciation during 1995.
19
<PAGE>
RESULTS OF OPERATIONS
Total revenues were $1,524 million in 1995 compared to $1,192 million in 1994.
Increased premiums and policy charges in the last two years and higher-yielding
mortgage loans, offset by lower interest rates, increased the Company's net
investment income $41 million to $204 million. The favorable market conditions
generated realized gains on securities sold of $55 million in 1995 compared with
realized losses on investments of $29 million in 1994.
Traditional life premiums and policy charges increased by $52 million to $297
million in 1995. Traditional life insurance premiums increased by 21% during
1995 to $251 million. The Company has experienced strong sales of group life
products due to competitive pricing and marketing emphasis. Interest sensitive
and investment product policy charges, which consist primarily of cost of
insurance and expense charges on interest sensitive insurance policies,
increased 22% to $46 million in 1995 due to continued growth in these products.
Accident and health premiums increased $158 million in 1995 to $935 million from
$777 million in 1994 primarily as a result of increased medical and disability
sales. Disability insurance accounted for approximately one fourth of the
Company's group accident and health insurance revenues. The Company is one of
the leading writers of group disability coverages in the United States. This
market has been intensely competitive. The Company's strategy has been to
emphasize its claim management activities and refine its pricing to better
reflect the risks of various industries and occupations.
New regulations in several states have adversely affected current and future
profitability of certain medical lines. 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. In the long-term, the Company expects this decision to have a
favorable impact on its capital position. In the short-term, management believes
this product line change will not have a material impact on the Company's
operating results.
Total benefits to policyholders increased by $209 million in 1995 to $1,046
million. Traditional life, interest sensitive and investment products' claims
and benefits increased by $59 million to $276 million in 1995 reflecting
increased in-force group coverages and a larger in-force block of interest
sensitive and investment products.
Accident and health benefits increased to $770 million in 1995 from $620 million
in 1994. The increase is due primarily to increased disability business.
Amortization of deferred policy acquisition costs increased to $41 million in
1995 from $35 million in 1994. The increase in the amortization of interest
sensitive and investment products of $7 million to $17 million in 1995 from $10
million in 1994 is primarily due to amortization of costs related to products
sold in recent years.
Insurance commissions, net of deferrals, increased to $96 million from $86
million in 1994. These additional commissions resulted primarily from an
increase in sales of group coverages. General and administrative expenses
increased 29% to $255 million in 1995 from $197 million in 1994, approximately
in line with the increase in revenue. The increased expenses related primarily
to additional staffing and systems integration required to service the increased
amount of group insurance business written in 1995.
Income before federal income taxes and cumulative effect of accounting changes
totaled $82 million in 1995 compared to $34 million in 1994. Federal income
taxes were $28 million in 1995 compared to $12 million in 1994. The Company's
effective tax rate was comparable between years.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company have been met by funds provided from
operations and investment activity.
The primary uses of funds are to provide policy benefits, operating expenses,
commissions, and to purchase new investments. The Company expects its investment
and operating activities to continue to generate sufficient funds for these
purposes.
The National Association of Insurance Commissioners (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 the 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 is below certain levels. Based on 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 December 31, 1995. The
Company received additional contributed capital of $50 million in 1995 and $13
million in 1994 from its parent company. Total shareholder's equity was $711
million as of December 31, 1995 compared to $474 million as of December 31,
1994. The net change in unrealized gains on investments accounted for $131
million of the increase.
1994 COMPARED TO 1993
FINANCIAL CONDITION
Total assets rose to $4.0 billion from $3.6 billion in 1993. The increase was
due in a large part to the increase in the assets held in separate accounts from
$975 million in 1993 to $1,213 million in 1994. Invested assets, excluding
Separate Accounts, increased from $2.3 billion at December 31, 1993 to $2.4
billion at December 31, 1994. Fortis Benefits invests primarily in government
and other high-quality marketable fixed income securities with the objective of
providing reasonable returns while limiting liquidity and credit risk.
During 1994, the Company's mortgage loans on real estate increased nearly $100
million to $450 million. The Company has a high quality
20
<PAGE>
portfolio which has experienced delinquency rates lower than the industry
average. Mortgage loans represent approximately 19% of the Company's invested
assets.
Policy reserves and liabilities increased from $3.0 billion at December 31, 1993
to $3.6 billion at December 31, 1994. Aggregate reserves for traditional life
insurance and interest sensitive and investment products contracts increased
$200 million from $1.1 billion at December 31, 1993 to $1.3 billion at December
31, 1994. This increase in traditional life reserves is the result of continued
strong sales of the Company's deferred income annuities and accumulation in
value of its interest sensitive products.
Policy reserves and claim liabilities for accident and health policies increased
by $47 million to nearly $800 million at December 31, 1994. This increase
reflects increased volume of business and increased liability costs for existing
disabilitants as reflected in the Company's disability reserves. Medical
reserves grew more slowly primarily due improved experience in its fully insured
line while overall reserves increased due to volume growth.
Liabilities related to separate accounts increased from $970 million at December
31, 1993 to $1.2 billion at December 31, 1994. This increase is the result of
new sales of the Company's variable life and annuity products during 1994.
RESULTS OF OPERATIONS
Total revenues were $1.2 billion in 1994. Deteriorating investment market
conditions in 1994 resulting from higher interest rates increased the Company's
investment income $9 million to $163 million while generating realized losses on
securities sold of $29 million. Realized gains were $74 million in 1993.
Premiums and policy charges increased by $67 million to $1,022 million in 1994.
Traditional life insurance premiums increased by 11% during 1994 to $208
million. The Company has experienced strong sales of life products due to
competitive pricing and marketing emphasis.
Interest sensitive and investment product policy charges, which consist
primarily of cost of insurance charges on interest sensitive insurance policies,
increased 31% to $38 million in 1994 due to continued growth in these products.
The Company is one of the leading writers of group disability coverages in the
United States. This market has been intensely competitive. The Company's
strategy has been to emphasize its claim management activities and refine its
pricing to better reflect the risks of various industries and occupations.
Medical premium growth has slowed over the past several years. The Company's
response has been to heavily emphasize its managed care products and focus on
the sale of partially self-funded coverages to larger employers. Accident and
health premiums increased in 1994 to $777 million from $738 million in 1993 as a
result of more aggressive pricing aided by less uncertainty in the market place.
Benefits and expenses increased by $58 million in 1994 to $1,158 million.
Traditional life, interest sensitive and investment products' claims and
benefits increased by $20 million to $217 million in 1994 reflecting increased
inforce group coverages and inforce block of interest sensitive and investment
products.
Accident and health benefits increased to $620 million in 1994 from $598 million
in 1993. The experience on the Company's medical products has improved in 1994
due to less uncertainty in the marketplace.
Amortization of deferred policy acquisition costs decreased slightly to $35
million in 1994 from $37 million in 1993. The majority of this, $23 million in
1994 and $24 million in 1993, is amortization relating to the block of business
acquired from Mutual Benefit Life in 1991.
Insurance commissions, net of deferrals, increased to $86 million from $77
million in 1993. The Company deferred $52 million of commissions in 1994
compared to $44 million in 1993. This additional deferral resulted from an
increase in sales of interest sensitive and investment products. General and
administrative expenses increased 6% to $197 million in 1994 from $186 million
in 1993 consistent with revenue growth from insurance operations.
Income before federal income taxes and cumulative effect of accounting changes
totaled $34 million in 1994 compared to $109 million in 1993. Federal income
taxes were $12 million in 1994 compared to $31 million in 1993. The decrease in
taxes was due primarily to tax credits resulting from realized losses in 1994
versus tax expense related to realized gains in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the company have been met by funds provided from
operations and investment activity.
The primary uses of funds are to provide policy benefits and reserves, pay
operating expenses and commissions, and to purchase new investments. The company
expects its investments and operating activities to continue to generate
sufficient funds for these purposes.
The National Association of Insurance Commissioners (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 the 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 on current calculations of the risk-based
capital standards, the Company's percentage to 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 December 31, 1994 and the
Company does not expect this percentage
21
<PAGE>
to increase significantly in future years. The company received additional
contributed capital of $13 million in 1994 from its parent company. Total
shareholder's equity was $474 million as of December 31, 1994 compared to $532
million as of December 31, 1993.
COMPETITION
Fortis Benefits seeks to compete primarily on the basis of customer service,
product design, and, in the case of products funded through Series Fund, the
investment results achieved by Fortis Advisers, Inc. Many other insurance
companies compete with Fortis Benefits in each of its markets, including on the
basis of price. Many of these companies, which include some of the largest and
best known insurance companies, have considerably greater resources than Fortis
Benefits.
REGULATION AND RESERVES
The Company is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. Fortis Benefits'
operations and accounts are subject to periodic examination by insurance
regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of Fortis Benefits under these laws cannot be reasonably estimated.
Most of these laws do provide, however, that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include health care reform, employee benefit regulation, controls on
medicare costs and medical entitlement programs, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Pursuant to state insurance laws and regulations, Fortis Benefits is obligated
to carry on its books, as liabilities, reserves to meet its obligations under
outstanding insurance contracts. These reserves are based on assumptions about,
among other things, future claims experience and investment returns. Neither the
reserve requirements nor the other aspects of state insurance regulation provide
absolute protection to holders of insurance contracts, including the
Certificates, if Fortis Benefits were to incur claims or expenses at rates
significantly higher than expected (due, for example, to acquired immune
deficiency syndrome or other infectious diseases or catastrophes) or significant
unexpected losses on its investments.
EMPLOYEES AND FACILITIES
Fortis Benefits has approximately 2,000 employees and considers its employee
relations to be excellent; Fortis Benefits owns its Home Office building,
consisting of 295,000 square feet in Woodbury, Minnesota. It also has
administrative offices in Kansas City, Missouri. Fortis Benefits leases a
portion of that building consisting of 297,000 square feet. In addition Fortis
Benefits has several regional claims and sales offices throughout the United
States. Fortis Benefits occupies approximately 100% of its home office and 70%
of its administration building, which it expects will be adequate for its
purposes for the foreseeable future.
22
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Set forth is information concerning the Company's directors and executive
officers, to the extent responsible for its variable annuity operations,
together with their business experience and principal occupations for the past
five years:
<TABLE>
<S> <C>
OFFICER-DIRECTORS
Dean C. Kopperud, 43 President--Fortis Financial Group; also officer of affiliated companies.
Director since 1995
Robert Brian Pollock, 41 President and Chief Executive Officer; before then Senior Vice President--Life and
Director Since 1988 Disability.
Thomas Michael Keller, 48 President--Fortis Healthcare; before then Senior Vice President of Fortis, Inc.
Director since 1990
OTHER DIRECTORS
Allen Royal Freedman, 56 Chairman and Chief Executive Officer of Fortis, Inc.
Chairman of the Board since
1995
Henry Carroll Mackin, 54 Executive Vice President of Fortis, Inc.
Director Since 1990
Arie Aristide Fakkert, 52 Assistant General Manager of Fortis International N.V.
Director Since 1987
EXECUTIVE OFFICERS
Rhonda Schwartz, 31 Senior Vice President and General Counsel--Life and Investment Products; before
then Secretary and General Counsel of Fortis, Inc.; before then Norris, McLaughlin
& Marcus--attorneys.
Larry A. Medin, 46 Senior Vice President--Sales; before then Senior Vice President--Western
Divisional Officer, Colonial Group, Inc.
Michael John Peninger, 41 Senior Vice President and Chief Financial Officer
Jon H. Nicholson, 46 Vice President--Annuities.
Anthony J. Rotondi, 50 Senior Vice President--Life Operations.
</TABLE>
Fortis Benefits' officers serve at the pleasure of the board of directors, and
members of the board serve without compensation (except for expenses of
attending board meetings), until their successors are duly elected and
qualified.
Mr. Freedman is a director of Systems and Computer Technology Corporation. Mr.
Freedman is also a director of the following registered investment companies:
Fortis Equity Portfolios, Inc.; Fortis Growth Fund, Inc.; Fortis Fiduciary Fund,
Inc., Fortis Income Portfolios, Inc.; Fortis Securities, Inc.; Fortis Tax-Free
Portfolios, Inc.; Fortis Money Portfolios, Inc.; Fortis Advantage Portfolios,
Inc.; Fortis World Wide Portfolios, Inc.; Fortis Series Fund, Inc.; Special
Portfolios, Inc.
23
<PAGE>
EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation of the
executive officers of Fortis Benefits.
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------
OTHER ANNUAL LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION PAYOUTS COMPENSATION (1)
- ------------------------------------------- --------- --------- --------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Pollock 1995 $ 300,888 $ 84,000 $ 0 $ 0 $ 14,851
President and Chief Executive Officer 1994 200,000 84,000 0 0 14,150
1993 140,908 60,000 0 40,907 11,328
- -----------------------------------------------------------------------------------------------------------------------------
James R. Faust 1995 301,121 37,150 0 47,494 14,829
Executive Vice President-- 1994 200,000 37,150 0 51,236 12,346
Marketing and Sales 1993 189,785 102,100 0 0 14,150
- -----------------------------------------------------------------------------------------------------------------------------
Anthony J. Rotondi 1995 213,672 54,375 0 0 12,667
Sr. Vice President-- 1994 150,000 54,375 0 0 12,866
Manufacturing and Information Technology 1993 142,000 54,400 0 0 11,816
- -----------------------------------------------------------------------------------------------------------------------------
William D. Greiter 1995 210,771 38,808 0 0 12,528
Senior Vice President 1994 144,000 36,750 0 0 10,834
1993 138,000 105,570 0 61,063 8,994
- -----------------------------------------------------------------------------------------------------------------------------
Michael John Peninger 1995 206,703 39,150 0 0 12,249
Senior Vice President and 1994 135,000 39,150 0 0 10,116
Chief Financial Officer 1993 125,487 33,594 0 25,708 8,994
</TABLE>
- ------------------------
1 This column includes contributions made by Fortis Benefits for the year for
the benefit for the named individual to a defined contribution retirement
plans.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
(LONG-TERM INCENTIVE PLAN(1) AWARDS IN LAST FISCAL YEAR)
<TABLE>
<CAPTION>
PERFORMANCE OR
OTHER PERIOD ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF UNTIL NON-STOCK PRICE BASED PLANS
SHARES, UNITS OR MATURATION OR ----------------------------------
NAME OTHER RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM
- --------------------------------------------------- ---------------- --------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Robert B. Pollock.................................. 172 Units 3 years 0 Units 348 Units 447 Units
James R. Faust..................................... 232 Units 3 years 0 Units 284 Units 852 Units
Anthony J. Rotondi................................. 216 Units 3 years 0 Units 170 Units 510 Units
William D. Greiter................................. 140 Units 3 years 0 Units 184 Units 552 Units
Michael John Peninger.............................. 151 Units 3 years 0 Units 178 Units 534 Units
</TABLE>
- ------------------------
1 Units shown in this table represent performance units granted pursuant to an
Executive Incentive Compensation Plan in which officers and managers of
Fortis Benefits participate. Awards are made pursuant to this plan based on
the employee's position with Fortis Benefits and salary level and the extent
to which the employee and Fortis Benefits meet certain performance
objectives over 1- and 3-year periods. Employees may elect to defer awards
payable to them under this plan.
As additional compensation to its employees and executive officers, Fortis
Benefits has an Employees' Uniform Retirement Plan and an Executive Retirement
Plan which generally provide an annual annuity benefit upon retirement at age 65
(or a reduced benefit upon early retirement) equal to: .9% of the employee's
Average Annual compensation up to the employee's social security covered
compensation, plus 1.3% of compensation above the social security covered
compensation, up to $235,840, as adjusted by an index, multiplied by the
employee's years of credited services.
In addition, Fortis Benefits provides an unfunded Supplemental Executive
Retirement Plan for certain executives of Fortis Benefits. Mr. Pollock is the
only named executive currently covered by the Plan. Under the Supplemental
Executive Retirement Plan, the annual benefit is calculated by subtracting the
benefit payable under the Employees' Uniform Retirement Plan and the estimated
Social Security benefit from the "Target Benefit." The "Target Benefit" is equal
to 50% of Final Average Salary (average salary over the final 36 consecutive
months of employment) reduced for less than 20 years of service at
24
<PAGE>
retirement. Upon retirement prior to age 65 and after attaining age 55 with 10
years of service, special early retirement rules apply. The salary used to
calculate the Final Average Salary consists of regular compensation and the
annual target incentive bonus of the participant. The estimated annual benefit
of Mr. Pollock, based on current compensation levels, under this plan is
$33,504.
The following table illustrates the COMBINED estimated life annuity benefit
payable from the Employees' Uniform Retirement Plan and Executive Retirement
Plan to employees with the specified Final Average Salary and years of service
upon retirement.
PENSION PLAN TABLE*
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------
FINAL AVERAGE SALARY 10 15 20 25 30 35
- --------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$125,000................... $ 15,213 $ 22,820 $ 30,426 $ 38,033 $ 45,640 $ 53,246
150,000................... 18,463 27,695 36,926 46,158 55,390 64,621
175,000................... 21,713 32,570 43,426 54,283 65,140 75,996
200,000................... 24,963 37,445 49,926 62,408 74,890 87,371
225,000................... 28,141 42,211 56,282 70,352 84,423 98,493
250,000+.................. 29,557 44,336 59,115 73,894 88,672 103,451
</TABLE>
- ------------------------
*The table excludes social security benefits. In general, for the purposes of
these plans, compensation includes salary and bonuses. The credited years of
service with Fortis Benefits for these individuals named in the Summary
Compensation Table above are as follows: 14, 4, 21, 10, and 9, respectively.
OWNERSHIP OF SECURITIES
All of Fortis Benefits' outstanding shares are owned by Time Insurance Company,
515 West Wells, Milwaukee, Wisc. 53201, which is itself wholly owned by Fortis,
Inc., One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is
wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB
1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan
10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis
AMEV and 50% owned, through certain subsidiaries, by Fortis AG, Boulevard Emile
Jacqmain 53, 1000 Brussels, Belgium.
VOTING PRIVILEGES
In accordance with its view of current applicable law, Fortis Benefits will vote
shares of each of the Portfolios which are attributable to a Certificate at
regular and special meetings of the shareholders of Series Fund in proportion to
instructions received from the persons having the voting interest in the
Certificate as of the record date for the corresponding Series Fund shareholders
meeting. Participants have the voting interest during the Accumulation Period,
persons receiving annuity payments during the Annuity Period, and Beneficiaries
after the death of the Annuitant or Participant. However, if the Investment
Company Act of 1940 or any rules thereunder should be amended or if the present
interpretation thereof should change, and as a result Fortis Benefits determines
that it is permitted to vote shares of the Portfolios in its own right, it may
elect to do so.
During the Accumulation Period, the number of shares of a Portfolio attributable
to a Certificate is determined by dividing the amount of Certificate Value in
the corresponding Subaccount pursuant to the Certificate as of the record date
for the shareholders meeting by the net asset value of one Portfolio share as of
that date. During the Annuity Period, or after the death of the Annuitant or
Participant, the number of Portfolio shares deemed attributable to the
Certificate will be computed in a comparable manner, based on the liability for
future variable annuity payments allocable to that Subaccount under the
Certificate as of the record date. Such liability for future payments will be
calculated on the basis of the mortality assumptions and the assumed interest
rate used in determining the number of Annuity Units credited to the Certificate
and the applicable Annuity Unit value on the record date. During the Annuity
Period, the number of votes attributable to a Certificate will generally
decrease since funds set aside to make the annuity payments will decrease.
Fortis Benefits will vote shares for which it has received no timely
instructions, and any shares attributable to excess amounts Fortis Benefits has
accumulated in the related Subaccount, in proportion to the voting instructions
which it receives with respect to all Certificates and other variable annuity
contracts participating in a Portfolio. To the extent that Fortis Benefits or
any affiliated company holds any shares of a Portfolio, they will be voted in
the same proportion as instructions for that Portfolio that are received from
persons holding the voting interest with respect to all Fortis Benefits separate
accounts participating in that Portfolio. Shares held by separate accounts other
than the Variable Account will in general be voted in accordance with
instructions of participants in such other separate accounts. This diminishes
the relative voting influence of the Certificates.
Each person having a voting interest in a Subaccount of the Separate Account
will receive proxy material, reports and other materials relating to the
appropriate Portfolio. Pursuant to the procedures described above, these persons
may give instructions regarding the election of the Board of Directors of Series
Fund, ratification of the selection of its independent auditors, the approval of
the investment managers of a Portfolio, changes in fundamental investment
policies of a Portfolio and all other matters that are put to a vote by Series
Fund shareholders.
LEGAL MATTERS
The legality of the Certificates described in this Prospectus has been passed
upon by David A. Peterson, Esquire, Assistant General Counsel
25
<PAGE>
with the law department of Fortis Benefits. Messrs. Freedman, Levy, Kroll &
Simonds, Washington, D.C., have advised Fortis Benefits on certain federal
securities law matters.
OTHER INFORMATION
Registration Statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
Certificates discussed in this Prospectus. Not all of the information set forth
in the Registration Statement, amendments and exhibits thereto has been included
in this Prospectus. Statements contained in this Prospectus concerning the
content of the Certificates and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
A Statement of Additional Information is available upon request. Its contents
are as follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Fortis Benefits and the Variable Account....... 2
Calculation of Annuity Payments................ 2
Postponement of Payments....................... 3
Services....................................... 4
- Safekeeping of Variable Account Assets..... 4
- Experts.................................... 4
- Principal Underwriter...................... 4
Limitations on Allocations..................... 4
Change of Investment Adviser or Investment
Policy........................................ 4
Taxation Under Certain Retirement Plans........ 5
Withholding.................................... 9
Terms of Exemptive Relief in Connection With
Mortality and Expense Risk Charge............. 9
Variable Account Financial Statements.......... 10
APPENDIX A--Performance Information............ A-1
</TABLE>
FORTIS BENEFITS FINANCIAL STATEMENTS
The financial statements of Fortis Benefits that are included in this Prospectus
should be considered primarily as bearing on the ability of Fortis Benefits to
meet its obligations under the Certificates. The Certificates are not entitled
to participate in earnings, dividends or surplus of Fortis Benefits.
26
<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 as of December 31, 1995 and 1994, and the related statements of income,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
In 1993, as discussed in Note 2 to the financial statements, the Company changed
its method of accounting for income taxes, postretirement benefits other than
pensions and certain investments in debt and equity securities.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 14, 1996
27
<PAGE>
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Investments--Note 4
Fixed maturities, at fair value (amortized cost 1995--$1,951,204; 1994--$1,749,347)... $ 2,075,624 $ 1,674,782
Equity securities, at fair value (cost 1995--$60,935; 1994--$59,010).................. 78,852 64,552
Mortgage loans on real estate, less allowance for possible losses (1995--$8,353;
1994--$7,429)........................................................................ 562,697 452,547
Policy loans.......................................................................... 53,863 49,221
Short-term investments................................................................ 153,499 117,562
Real estate and other investments..................................................... 11,918 13,441
------------ ------------
2,936,453 2,372,105
Cash.................................................................................... 1 10,888
Receivables:
Uncollected premiums.................................................................. 55,992 40,667
Reinsurance recoverable on unpaid and paid losses..................................... 11,812 15,181
Due from affiliates................................................................... 388 2,220
Other................................................................................. 14,581 12,593
------------ ------------
82,773 70,661
Accrued investment income............................................................... 41,209 38,584
Deferred policy acquisition costs--Note 5............................................... 237,509 232,198
Property and equipment at cost, less accumulated depreciation--Note 6................... 60,031 56,939
Deferred federal income taxes--Note 8................................................... -- 48,509
Other assets............................................................................ 3,551 1,120
Assets held in separate accounts--Note 9................................................ 1,781,485 1,212,910
------------ ------------
TOTAL ASSETS............................................................................ $ 5,143,012 $ 4,043,914
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
28
<PAGE>
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
POLICY RESERVES, LIABILITIES, AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Traditional life insurance............................................................ $ 407,706 $ 375,257
Interest sensitive and investment products............................................ 1,101,931 912,653
Accident and health................................................................... 832,925 798,293
------------ ------------
2,342,562 2,086,203
Unearned premiums....................................................................... 13,044 16,145
Other policy claims and benefits payable................................................ 196,403 169,864
Policyholder dividends payable.......................................................... 7,930 6,793
------------ ------------
2,559,939 2,279,005
Accrued expenses........................................................................ 68,441 45,905
Current income taxes payable............................................................ 5,375 4,352
Deferred federal income taxes--Note 8................................................... 9,538 --
Other liabilities....................................................................... 31,145 32,416
Liabilities related to separate accounts................................................ 1,757,476 1,208,039
------------ ------------
TOTAL POLICY RESERVES AND LIABILITIES..................................................... 4,431,914 3,569,717
SHAREHOLDER'S EQUITY--Notes 1, 10 and 12
Common stock, $5 par value, 1,000,000 shares authorized, issued and outstanding......... 5,000 5,000
Additional paid-in capital.............................................................. 408,000 358,000
Retained earnings....................................................................... 207,421 153,551
Unrealized gains (losses) on investments, net--Note 4................................... 88,131 (42,908)
Unrealized gains on assets held in separate accounts net of deferred taxes of $1,371 in
1995
and $298 in 1994....................................................................... 2,546 554
------------ ------------
TOTAL SHAREHOLDER'S EQUITY................................................................ 711,098 474,197
------------ ------------
TOTAL RESERVES, LIABILITIES, AND SHAREHOLDER'S EQUITY..................................... $ 5,143,012 $ 4,043,914
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
29
<PAGE>
STATEMENTS OF INCOME
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Insurance operations
Traditional life insurance premiums......................................... $ 251,353 $ 207,824 $ 187,863
Interest sensitive and investment product policy charges.................... 46,076 37,823 28,778
Accident and health premiums................................................ 934,900 776,799 738,412
------------ ------------ ------------
1,232,329 1,022,446 955,053
Net investment income--Note 4................................................. 203,537 162,514 153,657
Realized gains (losses) on investments--Note 4................................ 55,080 (28,815) 73,623
Other income.................................................................. 33,085 35,958 27,100
------------ ------------ ------------
TOTAL REVENUES............................................................ 1,524,031 1,192,103 1,209,433
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance.................................................. 202,911 162,168 145,958
Interest sensitive and investment products.................................. 73,676 55,026 50,935
Accident and health......................................................... 769,588 620,367 598,146
------------ ------------ ------------
1,046,175 837,561 795,039
Policyholder dividends........................................................ 4,305 1,986 5,855
Amortization of deferred policy acquisition costs--Note 5..................... 41,291 34,566 36,503
Insurance commissions......................................................... 95,559 86,111 76,816
General and administrative expenses........................................... 254,940 197,427 185,986
------------ ------------ ------------
TOTAL BENEFITS AND EXPENSES............................................... 1,442,270 1,157,651 1,100,199
------------ ------------ ------------
Income before federal income taxes and cumulative effect of accounting
changes........................................................................ 81,761 34,452 109,234
Federal income taxes--Note 8.................................................... 27,891 11,595 31,090
------------ ------------ ------------
Income before cumulative effect of accounting changes........................... 53,870 22,857 78,144
Cumulative effect of change in accounting for income taxes--Note 2............ -- -- 4,814
Cumulative effect of change in accounting for postretirement benefits other
than pensions,
net of tax--Note 2........................................................... -- -- (1,251)
------------ ------------ ------------
NET INCOME................................................................ $ 53,870 $ 22,857 $ 81,707
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
30
<PAGE>
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
UNREALIZED GAINS ON
ADDITIONAL GAINS ASSETS HELD
COMMON PAID-IN RETAINED (LOSSES) ON IN SEPARATE
STOCK CAPITAL EARNINGS INVESTMENTS ACCOUNTS TOTAL
----------- ----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993......................... $ 5,000 $ 345,000 $ 52,634 $ 4,263 $ 657 $ 407,554
Net income...................................... -- -- 81,707 -- -- 81,707
Dividends to shareholder........................ -- -- (4,000) -- -- (4,000)
Other........................................... -- -- 353 -- -- 353
Change in unrealized gains on investments,
net............................................ -- -- -- 2,099 -- 2,099
Change in unrealized gains on investments, net,
resulting from initial adoption of FASB
115--Note 1.................................... -- -- -- 43,782 -- 43,782
Change in unrealized gain on assets held in
separate account, net of deferred tax expense
of $238........................................ -- -- -- -- 413 413
----- ----------- ----------- ----------- ----- ---------
Balance December 31, 1993....................... 5,000 345,000 130,694 50,144 1,070 531,908
Net income...................................... -- -- 22,857 -- -- 22,857
Additional paid-in capital...................... -- 13,000 -- -- -- 13,000
Change in unrealized losses on investments,
net............................................ -- -- -- (93,052) -- (93,052)
Change in unrealized gain on assets held in
separate account, net of deferred tax benefit
of $277........................................ -- -- -- -- (516) (516)
----- ----------- ----------- ----------- ----- ---------
Balance December 31, 1994....................... 5,000 358,000 153,551 (42,908) 554 474,197
Net income...................................... -- -- 53,870 -- -- 53,870
Additional paid-in capital...................... -- 50,000 -- -- -- 50,000
Change in unrealized gains on investments,
net............................................ -- -- -- 131,039 -- 131,039
Change in unrealized gain on assets held in
separate account, net of deferred tax expense
of $1,073...................................... -- -- -- -- 1,992 1,992
----- ----------- ----------- ----------- ----- ---------
Balance December 31, 1995....................... $ 5,000 $ 408,000 $ 207,421 $ 88,131 $ 2,546 $ 711,098
----- ----------- ----------- ----------- ----- ---------
----- ----------- ----------- ----------- ----- ---------
</TABLE>
31
<PAGE>
STATEMENT OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................. $ 53,870 $ 22,857 $ 81,707
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of accounting changes................................... -- -- (3,563)
Increase in future policy benefit reserves for traditional, interest
sensitive and accident and health policies............................... 80,478 79,014 58,299
Increase (decrease) in other policy claims and benefits and policyholder
dividends payable........................................................ 27,676 10,075 (15,868)
Decrease in deferred federal income taxes................................. (13,584) (2,356) (9,776)
Increase (decrease) in income taxes payable............................... 1,023 3,283 (12,733)
Amortization of policy acquisition costs.................................. 41,291 34,566 36,503
Policy acquisition costs deferred......................................... (56,391) (54,349) (45,841)
Provision for mortgage loan losses........................................ 924 1,105 1,648
Provision for depreciation................................................ 15,654 12,267 9,399
Accrual of discount, net.................................................. (239) (914) 72
Change in receivables, accrued investment income, unearned premiums,
accrued expenses and other liabilities................................... 3,427 (36,650) 5,751
Net realized (gains) losses on investments................................ (55,080) 28,815 (73,623)
Other..................................................................... (2,431) (135) 164
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 96,618 97,578 32,139
INVESTING ACTIVITIES
Purchase of fixed maturity investments...................................... (2,151,133) (1,943,697) (2,337,842)
Sales or maturities of fixed maturity investments........................... 2,000,068 1,798,184 2,358,288
(Increase) decrease in short-term investments............................... (35,908) (44,266) 28,756
Purchase of other investments............................................... (240,264) (211,836) (201,601)
Sales or maturities of other investments.................................... 112,598 104,399 75,539
Purchase of property and equipment.......................................... (19,975) (16,164) (13,155)
Purchase of group insurance business........................................ -- (6,644) (5,521)
Other....................................................................... 1,229 500 49
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES................................... (333,385) (319,524) (95,487)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received................................................... 187,484 200,499 68,943
Surrenders and death benefits............................................. (60,522) (19,207) (37,262)
Interest credited to policyholders........................................ 48,918 31,867 30,024
Additional paid-in capital from shareholder................................. 50,000 13,000 --
Dividends paid to shareholder............................................... -- -- (4,000)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................... 225,880 226,159 57,705
------------- ------------- -------------
INCREASE (DECREASE) IN CASH............................................. (10,887) 4,213 (5,643)
Cash at beginning of year..................................................... 10,888 6,675 12,318
------------- ------------- -------------
CASH AT END OF YEAR..................................................... $ 1 $ 10,888 $ 6,675
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Fortis Benefits Insurance Company (the Company) is an
affiliate of the worldwide Fortis group of companies owned by Fortis AMEV of the
Netherlands and Fortis AG of Belgium. 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: The financial statements are presented in
conformity with generally accepted accounting principles. Certain amounts
included in the 1993 and 1994 financial statements have been reclassified to
conform to the 1995 presentation.
RECOGNITION OF REVENUES, POLICY RESERVES AND LIABILITIES AND POLICY ACQUISITION
COSTS: 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:
Premiums for long-duration traditional life policies are recognized as
revenues when due over the premium-paying period. Liabilities for future
policy benefits and expenses 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 universal life 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 and
certain deferred policy initiation fees that are being recognized in income
over the term of the policies. Policy benefits charged to expense during the
period include amounts paid in excess of policy account balances and
interest credited to policy account balances. Interest credit rates for
universal life and investment products ranged from 4% to 7.80% in 1995 and
1994.
Premiums for long-term disability, short-term traditional life, and accident
and health are recognized as revenues ratably over the contract period in
proportion to the risk insured. Liabilities for future disability income
policy benefits are based on the 1964 Commissioners Disability Table at 6
percent interest. Calculated reserves are modified based on the Company's
actual experience. Claims and benefits payable for reported and incurred but
not reported losses and related loss 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 earnings
currently.
For interest sensitive and investment products, deferred policy acquisition
costs are amortized in relation to profits. For group life, accident and
health, disability, and dental insurance business acquired on October 1,
1991 (see Note 3), the Company recorded the present value of future profits
as deferred policy acquisition costs. These costs are amortized in
proportion to premium revenue over the estimated premium paying period of
the related policies and, if required, are expensed when such costs are
deemed not to be recoverable from future policy revenues, including the
related investment income.
For insurance products issued subsequent to December 31, 1984, 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 from
future profits, and amortized against income. The period of amortization
varies depending upon the product. For traditional life products, the policy
acquisition costs are deferred and amortized over the premium paying period
of the contracts. For interest sensitive and investment products, the policy
acquisition costs are deferred and amortized in relation to the present
value of estimated future gross profits.
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.
Prior to December 31, 1993, the Company classified fixed maturity investments as
available-for-sale recorded at the lower of amortized cost or market, computed
on a portfolio basis. Equity securities were carried at fair value. At December
31, 1993, all fixed maturity securities were classified as available-for-sale
and carried at fair value. The effect of adopting Statement 115 at December 31,
1993 was to increase the carrying amount of fixed maturities by $76,309,000,
policyholder dividends payable by $2,684,000, deferred income taxes by
$23,575,000 and shareholder's equity by $43,782,000 and to reduce the carrying
amount of deferred policy acquisition costs by $6,268,000. Beginning in 1994,
the classification of fixed maturity investments between available-for-sale or
held to maturity is made at the time of each purchase and, prospectively, that
classification is reevaluated as of each balance sheet date.
Changes in market values of available-for-sale securities, after deferred income
taxes and after adjustment for the amortization of deferred policy acquisition
costs, and participating policyholders' share of earnings are reported as
unrealized gains (losses) on investments directly in shareholder's equity and,
accordingly, have no effect on net income. The offsets to the unrealized
appreciation or depreciation represent valuation
33
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adjustments relating to amounts of additional deferred policy acquisition costs
or amortization of deferred policy acquisition costs and the additional
liabilities established for future policyholder benefits and participating
policyholders' share of the Company's earnings that would have been required as
a charge or credit to operations had such unrealized amounts been realized.
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 balances, 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 unpaid balance.
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 in
accordance with Financial Accounting Standards Board ("FASB") Statement 109,
ACCOUNTING FOR INCOME TAXES. Deferred tax assets and liabilities are determined
based on the differences between the financial reporting and the tax bases and
are measured using the enacted tax rates.
SEPARATE ACCOUNTS: Assets and liabilities associated with separate accounts
relate to premium and annuity considerations for variable life and annuity
products for which the contract holder, rather than the Company, bears the
investment risk. Separate account assets are reported at fair value.
GUARANTY FUND ASSESSMENTS: The economy and other factors have caused an increase
in the number of insurance companies that are under regulatory supervision. This
circumstance may result in an increase in assessments by state guaranty funds,
or voluntary payments by solvent insurance companies, to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments can
be partially recovered through a reduction in future premium taxes in some
states. The Company is not able to reasonably estimate the impact of future
assessments on its financial position but does not believe that the impact will
be material.
USE OF ESTIMATES: The preparation of financial statements in conformity of
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.
2. CHANGES IN ACCOUNTING PRINCIPLES
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: Effective
January 1, 1993, the Company adopted FASB Statement 106, EMPLOYERS' ACCOUNTING
FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company elected to
immediately recognize the cumulative effect of this change in accounting for
postretirement benefits of $1,895,000 ($1,251,000 net of deferred income tax
benefit), which represents the accumulated postretirement benefit obligation
existing at January 1, 1993. The impact of Statement 106 on operating results
for 1993 was not material.
ACCOUNTING FOR INCOME TAXES: Effective January 1, 1993, the Company adopted FASB
Statement 109, ACCOUNTING FOR INCOME TAXES. Statement 109 provides for a balance
sheet approach in determining deferred income tax assets and liabilities. The
cumulative effect of adopting Statement 109 increased the Company's deferred tax
asset and net income by approximately $4,814,000 in 1993.
ACCOUNTING AND REPORTING FOR REINSURANCE OF SHORT-DURATION AND LONG-DURATION
CONTRACTS: In 1993, the Company adopted FASB Statement 113, ACCOUNTING AND
REPORTING FOR REINSURANCE OF SHORT-DURATION AND LONG-DURATION CONTRACTS. Under
Statement 113, amounts paid or deemed to have been paid for reinsurance
contracts are recorded as reinsurance recoverables.
ACCOUNTING FOR CERTAIN DEBT AND EQUITY SECURITIES: The Company adopted FASB
Statement 115, ACCOUNTING FOR CERTAIN DEBT AND EQUITY SECURITIES, as of December
31, 1993. Under Statement 115, all fixed maturities are classified as
available-for-sale and carried at fair value, while equity securities continue
to be carried at fair value. Adoption of Statement 115 had no effect on net
income in 1993.
3. 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 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 Company
purchased this business for $318,000,000. Per 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.
34
<PAGE>
4. 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
COST GAIN LOSS FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1995:
Fixed Income Securities:
Governments.................................... $ 453,406 $ 36,938 $ 142 $ 490,202
Public utilities............................... 55,793 4,617 -- 60,410
Industrial & miscellaneous..................... 1,420,374 82,705 1,282 1,501,797
Other.......................................... 21,631 1,586 2 23,215
------------ ------------ ------ ------------
Total........................................ 1,951,204 125,846 1,426 2,075,624
Equity Securities................................ 60,935 20,321 2,404 78,852
------------ ------------ ------ ------------
Total........................................ $ 2,012,139 $ 146,167 $ 3,830 $ 2,154,476
------------ ------------ ------ ------------
------------ ------------ ------ ------------
December 31, 1994:
Fixed Income Securities:
Governments.................................... $ 829,607 $ 1,129 $ 40,642 $ 790,094
Public utilities............................... 60,885 1,132 1,389 60,628
Industrial & miscellaneous..................... 847,018 3,184 38,505 811,697
Other.......................................... 11,837 764 238 12,363
------------ ------------ ------ ------------
Total........................................ 1,749,347 6,209 80,774 1,674,782
Equity Securities................................ 59,010 9,896 4,354 64,552
------------ ------------ ------ ------------
Total........................................ $ 1,808,357 $ 16,105 $ 85,128 $ 1,739,334
------------ ------------ ------ ------------
------------ ------------ ------ ------------
</TABLE>
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 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>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------ ------------
<S> <C> <C>
Due in one year or less.................................................. $ 80,474 $ 80,960
Due after one year through five years.................................... 472,741 487,764
Due after five years through ten years................................... 687,374 727,723
Due after ten years...................................................... 710,615 779,177
------------ ------------
Total................................................................ $ 1,951,204 $ 2,075,624
------------ ------------
------------ ------------
</TABLE>
MORTGAGE LOANS: The Company has issued commercial mortgage loans on properties
located throughout the country. Approximately 35% of outstanding principal is
concentrated in the states of California, Florida and New York at December 31,
1995 as compared to concentrated interests in California, Florida, and Texas of
34% at December 31, 1994. Loan commitments outstanding totaled $10,030,000 at
December 31, 1995.
In May 1993, FASB issued Statement 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN, which becomes effective for fiscal years beginning after December 15,
1994, and which the Company adopted in 1995. Statement 114 requires 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. The impact of adoption was
not material to the Company's financial position or operating results.
INVESTMENTS ON DEPOSIT: The Company had fixed maturities and mortgage loans on
real estate carried at $2,385,000 and $8,132,000, respectively, at December 31,
1995, and $2,635,000 and $8,132,000 respectively, at December 31, 1994 on
deposit with various governmental authorities as required by law.
35
<PAGE>
4. INVESTMENTS (CONTINUED)
NET UNREALIZED GAINS (LOSSES): The adjusted net unrealized gains (losses)
recorded in shareholder's equity were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Change in unrealized gains (losses) before adjustment for the following
items:.................................................................... $ 214,452 $ (155,923) $ 80,288
Capitalization (amortization) of deferred policy acquisition costs....... (9,789) 9,288 (6,268)
Participating policyholders' share of earnings........................... -- 2,684 (2,684)
Deferred income taxes.................................................... (71,632) 50,383 (25,042)
------------ ------------ ------------
Change in net unrealized gains (losses).................................... 133,031 (93,568) 46,294
Net unrealized gains, beginning of the year................................ (42,354) 51,214 4,920
------------ ------------ ------------
Net unrealized gains (losses), end of year................................. $ 90,677 $ (42,354) $ 51,214
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NET INVESTMENT INCOME AND REALIZED GAINS (LOSSES) ON INVESTMENTS: Major
categories of net investment income and realized gains (losses) on investments
for each year were as follows (in thousands):
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
NET INVESTMENT INCOME ON INVESTMENTS
------------------------------- -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities........................................... $ 139,062 $ 119,668 $ 120,844 $ 50,393 $ (27,854) $ 70,626
Equity securities.......................................... 2,026 1,937 1,490 2,830 1,352 3,955
Mortgage loans on real estate.............................. 49,227 36,816 28,370 (242) (2,992) (1,805)
Policy loans............................................... 2,797 2,731 3,004 -- -- --
Short-term investments..................................... 11,863 4,671 4,282 (3) (60) 1
Real estate & other investments............................ 4,750 2,138 1,171 2,102 739 846
--------- --------- --------- --------- --------- ---------
Tota1.................................................. 209,725 167,961 159,161 $ 55,080 $ (28,815) $ 73,623
--------- --------- ---------
--------- --------- ---------
Expenses................................................... (6,188) (5,447) (5,504)
--------- --------- ---------
$ 203,537 $ 162,514 $ 153,657
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from sales of investments in fixed maturities were $2,000,068,000,
$1,798,185,000, and $2,335,230,000 in 1995, 1994 and 1993, respectively. Gross
gains of $61,070,000, $16,618,000, and $75,133,000 and gross losses of
$10,677,000, $44,472,000, and $4,507,000 were realized on the sales in 1995,
1994, and 1993, respectively.
5. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows (in
thousands):
<TABLE>
<CAPTION>
INTEREST
SENSITIVE AND
TRADITIONAL INVESTMENT ACCIDENT AND
LIFE PRODUCTS HEALTH TOTAL
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Balance January 1, 1994................................ $ 61,474 $ 87,946 $ 47,063 $ 196,483
Acquisition costs deferred:
Acquired business.................................... -- -- 6,644 6,644
Other business....................................... -- 54,349 -- 54,349
Acquisition costs amortized............................ (11,564) (10,274) (12,728) (34,566)
Allowance for additional amortization from unrealized
gains on available-for-sale securities................ -- 9,288 -- 9,288
----------- ------------- ------------- ---------
Balance December 31, 1994.............................. $ 49,910 $ 141,309 $ 40,979 $ 232,198
Acquisition costs deferred:
Other business....................................... -- 56,391 -- 56,391
Acquisition costs amortized............................ (11,378) (17,071) (12,842) (41,291)
Additional amortization of deferred acquisition costs
from unrealized losses on available-for-sale
securities............................................ -- (9,789) -- (9,789)
----------- ------------- ------------- ---------
Balance December 31, 1995.............................. $ 38,532 $ 170,840 $ 28,137 $ 237,509
----------- ------------- ------------- ---------
----------- ------------- ------------- ---------
</TABLE>
Included within total deferred policy acquisition costs at December 31, 1995 is
$46,750,000 of present value of future profits (PVP) resulting from acquisitions
accounted for as a purchase. The estimated amount of PVP to be amortized during
each of the next three years is as follows: 1996-- $19,210,000;
1997--$17,262,000; 1998--$10,278,000.
36
<PAGE>
5. DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
During 1995, 1994, and 1993, the Company sold portions of its investment
portfolio and in accordance with FASB Statement 97, the recognition of the
realized capital (losses) gains resulted in (reduced) additional amortization of
acquisition costs deferred of $4,825,000, $(935,000), and $5,400,000,
respectively. In addition, the Company (reduced) recorded policyholder dividends
payable of $1,095,000 in 1995, $(761,000) in 1994 and $2,800,000 in 1993.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment for each year follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Land................................................................................. $ 1,900 $ 1,900
Building and improvements............................................................ 23,319 23,084
Furniture and equipment.............................................................. 85,592 68,017
--------- ---------
110,811 93,001
Less accumulated depreciation........................................................ (50,780) (36,062)
--------- ---------
Net property and equipment........................................................... $ 60,031 $ 56,939
--------- ---------
--------- ---------
</TABLE>
7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity for the liability for unpaid accident and health claims and claims
adjustment expense is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverables.................... $ 838,810 $ 806,538 $ 776,194
Add: Incurred losses related to:
Current year.............................................................. 827,261 656,052 612,621
Prior years............................................................... (28,520) (58,218) (41,619)
--------- --------- ---------
Total incurred losses................................................... 798,741 597,834 571,002
Deduct: Paid losses related to:
Current year.............................................................. 492,460 377,595 353,124
Prior years............................................................... 216,259 187,967 187,534
--------- --------- ---------
Total paid losses....................................................... 708,719 565,562 540,658
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables.................. $ 928,832 $ 838,810 $ 806,538
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1995, the accident/health business experienced overall unfavorable claims
experience. The unfavorable experience was the result of medical cost trends and
the negative impact of medical premium rate restrictions in certain states. In
1994 and 1993, the accident/health 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, a reduction of loss reserves which
considered historically high inflation in medical costs and, in 1994, a
refinement in the claims reserve estimates.
8. FEDERAL INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of Fortis, Inc. Income tax
expense or credits are allocated among the affiliated subsidiaries by applying
corporate income tax rates to taxable income or loss determined on a separate
return basis according to a Tax Allocation Agreement.
The cumulative effect of adopting Statement 109 as of January 1, 1993 was to
increase net income for 1993 by $4,814,000. An increase in the tax rate from 34%
to 35% was effective in the third quarter of 1993 and resulted in a $305,000
increase in net income from the recalculation of the deferred liability account.
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.
37
<PAGE>
8. FEDERAL INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves........................................................... $ 54,346 $ 42,715
Separate account assets/liabilities................................ 34,386 27,663
Unrealized losses.................................................. -- 22,806
Accrued liabilities................................................ 13,781 14,565
Claims and benefits payable........................................ 2,626 1,976
Other.............................................................. 123 1,393
--------- ---------
Total deferred tax assets........................................ 105,262 111,118
Deferred tax liabilities:
Unrealized gains................................................... 48,826 --
Deferred policy acquisition costs.................................. 60,930 55,329
Investments........................................................ -- 1,194
Fixed assets....................................................... 5,044 6,086
--------- ---------
Total deferred tax liabilities................................... 114,800 62,609
--------- ---------
Net deferred tax asset (liability)............................... $ (9,538) $ 48,509
--------- ---------
--------- ---------
</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 before cumulative effect of accounting changes is
shown as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current....................................................... $ 39,660 $ 15,046 $ 35,747
Deferred...................................................... (11,769) (3,451) (4,657)
--------- --------- ---------
$ 27,891 $ 11,595 $ 31,090
--------- --------- ---------
--------- --------- ---------
</TABLE>
Tax payments were made of $47,711,000, $18,080,000 and $53,600,000 in 1995,
1994, and 1993, respectively. Tax refunds were received of $7,258,000 and
$7,729,000 in 1995 and 1994, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory income tax rate.......................................... 35.0% 35.0% 35.0%
Tax audit provision................................................ 0.0% 0.8% (4.6)%
Other, net......................................................... (0.9)% (2.1)% (1.9)%
--- --- ---
34.1% 33.7% 28.5%
--- --- ---
--- --- ---
</TABLE>
9. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Premium and annuity considerations for the variable annuity
products and variable universal life product for which the
contract holder, rather than the Company, bears the investment
risk............................................................. $ 1,757,476 $ 1,208,038
Assets of the separate accounts owned by the Company, at fair
value............................................................ 24,009 4,872
------------ ------------
$ 1,781,485 $ 1,212,910
------------ ------------
------------ ------------
</TABLE>
38
<PAGE>
10. STATUTORY ACCOUNTING PRACTICES
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>
SHAREHOLDER'S EQUITY
NET INCOME
------------------------------- --------------------
1995 1994 1993 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Based on statutory accounting practices.......................... $ 30,576 $ 49,759 $ 46,605 $ 377,040 $ 304,231
Deferred policy acquisition costs................................ 15,100 19,783 9,338 237,509 232,198
Investment valuation differences................................. 330 370 520 114,413 (85,944)
Deferred and uncollected premiums................................ 303 (14) 1,655 (7,372) (8,393)
Unearned premiums................................................ 1,829 1,126 7,035 (11,179) (13,008)
Loading and equity in unearned premiums.......................... (56) 316 (179) 94 85
Property and equipment........................................... (178) (204) (63) 27,172 22,027
Policy reserves.................................................. (31,011) (26,655) (38,558) (103,174) (72,192)
Current income taxes payable..................................... (1,294) -- 4,656 (7,895) (4,786)
Deferred income taxes............................................ 11,769 2,356 9,776 (9,538) 48,509
Realized gains (losses) on investments........................... 1,938 (1,052) 3,651 -- --
Realized gains (losses) transferred to the Interest Maintenance
Reserve (IMR), net of tax....................................... 31,711 (18,456) 40,459 -- --
Amortization of IMR, net of tax.................................. (5,261) (5,479) (3,777) -- --
Interest maintenance reserve..................................... -- -- -- 53,814 27,364
Asset valuation reserve.......................................... -- -- -- 48,507 32,011
Cumulative effect of accounting changes.......................... -- -- 3,563 -- --
Other, net....................................................... (1,886) 1,007 (2,974) (8,293) (7,905)
--------- --------- --------- --------- ---------
$ 53,870 $ 22,857 $ 81,707 $ 711,098 $ 474,197
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
11. REINSURANCE
The maximum amount that the Company retains on any one life is $750,000 of life
insurance including accidental death. Amounts in excess of $750,000 are
reinsured with other life insurance companies on a yearly renewable term basis.
Ceded reinsurance premiums were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Life Insurance................................................ $ 4,661 $ 5,571 $ 4,366
Accident & Health Insurance................................... 3,410 36,782 37,088
--------- --------- ---------
$ 8,071 $ 42,353 $ 41,454
--------- --------- ---------
--------- --------- ---------
</TABLE>
Recoveries under reinsurance contracts were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Life Insurance................................................ $ 2,489 $ 1,650 $ 6,963
Accident & Health Insurance................................... 8,807 19,913 15,448
--------- --------- ---------
$ 11,296 $ 21,563 $ 22,411
--------- --------- ---------
--------- --------- ---------
</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
agreements. 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.
12. STATUTORY INFORMATION
Dividend distributions to parent are restricted as to amount by state regulatory
requirements. The Company had $37,204,000 free from such restrictions at
December 31, 1995. Distributions in excess of this amount would require
regulatory approval.
Statutory-basis financial statements are prepared in accordance with accounting
practices prescribed or permitted by Minnesota Insurance regulatory authorities.
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. The NAIC is currently in the
process of codifying statutory accounting practices. This project, which is
expected to be completed in 1996, may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory-basis
financial statements.
39
<PAGE>
12. STATUTORY INFORMATION (CONTINUED)
Insurance enterprises are required by State Insurance Departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. All of
the Company's insurance subsidiaries exceed minimum RBC requirements.
13. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis, Inc. 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 the years ended December 31, 1995, 1994, and
1993, were $10,074,000 , $8,944,000, and $8,595,000 respectively.
In conjunction with the marketing of its variable annuity products, the Company
paid $59,308,000, $57,307,000, and $27,931,000, in commissions to its affiliate,
Fortis Investors, Inc. for the years ended December 31, 1995, 1994, and 1993,
respectively.
14. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS: Investments are reported in the accompanying
balance sheets on the following basis:
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. Loans with similar
characteristics are aggregated for purposes of the calculations. The fair values
for the Company's policy reserves under investment products are determined using
cash surrender value.
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>
DECEMBER 31
---------------------------------------------------------
1995 1994
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturities............................... $ 2,075,624 $ 2,075,624 $ 1,674,782 $ 1,674,782
Equity securities.............................. 78,852 78,852 64,552 64,552
Mortgage loans on real estate.................... 562,697 605,501 452,547 434,503
Policy loans..................................... 53,863 53,863 49,221 49,221
Short-term investments........................... 153,499 153,499 117,562 117,562
Cash............................................. 1 1 10,888 10,888
Assets held in separate accounts................. 1,781,485 1,781,485 1,212,910 1,212,910
Liabilities:
Individual and group annuities (subject to
discretionary withdrawal)......................... 865,623 834,621 692,196 657,454
</TABLE>
15. 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.
16. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company participates in the Fortis, Inc. noncontributory defined benefit
pension plan covering substantially all of its employees. Benefits are based on
years of service and the employee's compensation during such years of service.
Fortis, Inc. is not able to segregate Company specific benefit obligations or
plan assets. On an aggregate basis, the fair value of plan assets exceeded the
accumulated benefit obligations as of December 31, 1995.
The Company has a profit sharing plan covering substantially all employees which
provides benefits payable to participants on retirement or disability and to
beneficiaries of participants in event of the participant's death. Amounts
contributed to the plan and expensed by the Company were $3,765,000, $3,536,000
and $3,399,000 in 1995, 1994, and 1993, respectively.
40
<PAGE>
APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is:
( 1 + I ) n/12
---------- - 1
( 1 + J + .005 )
Sample Calculation 1: Positive Adjustment
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 7%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment
1 + .08 60/12
$10,000 x ------------- - 1] = $234.73
[( 1 + .07 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,234.73
Sample Calculation 2: Negative Adjustment
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 9%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 x ------------- - 1] = - $666.42
[( 1 + .09 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,333.58
Sample Calculation 3: Negative Adjustment
<TABLE>
<S> <C>
Amount withdrawn or transferred $10,000
Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 7.75%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment:
</TABLE>
1 + .08 60/12
$10,000 x --------------- - 1] = - $114.94
[( 1 + .0775 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,885.06
- ------------------------
*Assumed for illustrative purposes only.
A-1
<PAGE>
APPENDIX B--EXPLANATION OF EXPENSE CALCULATIONS
The expense for a given year is calculated by multiplying the projected
beginning of the year policy value by the total expense rate. The total expense
rate is the sum of the variable account expense rate plus the total Portfolio
expense rate plus the annual administrative charge rate.
The policy values are projected by assuming a single payment of $1,000 grows at
an annual rate equal to 5% reduced by the total expense rate described above.
For example, the 3 year expense for the Alliance Money Market Portfolio is
calculated as follows:
<TABLE>
<S> <C> <C>
Total Variable Account Annual Expenses 0.45%
+ Total Portfolio Operating Expenses 0.95%
+ Annual Administrative Charges (see below) 0.14%
= Total Expense Rate 1.54%
</TABLE>
The Annual Administrative Charge rate is calculated by dividing the total Annual
Contract Charges we collected in 1995 on similar contracts by the average policy
value in force in 1995 on such contracts.
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = 1000.00 x 0.0154 = $15.40
Year 2 Beginning Policy Value = $1034.60
Year 2 Expense = 1034.60 x 0.0154 = $15.93
Year 3 Beginning Policy Value = $1070.40
Year 3 Expense = 1070.40 x 0.0154 = $16.48
So the cumulative expenses for years 1-3 for the Alliance Money Market Portfolio
are equal to:
$15.40 + $15.93 + $16.48 = $47.81
B-1
<PAGE>
APPENDIX C--PARTICIPATING FUNDS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
The Alliance Variable Products Series Fund, Inc. is an open-ended series
investment company. It was incorporated under Maryland law on November 17, 1987.
Alliance Capital Management L.P. serves as the Fund's manager.
ALLIANCE MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE: Seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
ALLIANCE INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
ALLIANCE PREMIER GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth.
INSURANCE MANAGEMENT SERIES (FEDERATED)
Insurance Management Series is an open-end management investment company. It was
established as a Massachusetts business trust under a Declaration of Trust dated
September 15, 1993. Federated Advisers is the investment adviser.
AMERICAN LEADERS FUND II
INVESTMENT OBJECTIVE: To achieve long-term growth of capital and to provide
income.
UTILITY FUND II
INVESTMENT OBJECTIVE: To achieve high current income and moderate capital
appreciation.
HIGH INCOME BOND FUND II
INVESTMENT OBJECTIVE: To seek high current income.
LEXINGTON NATURAL RESOURCES TRUST
The Lexington Natural Resources Trust is an open-end management investment
company. It was organized as a Massachusetts business trust on October 7, 1988.
Lexington Management Corporation is the Investment Adviser of the fund.
INVESTMENT OBJECTIVE: To seek long-term growth of capital through investment
primarily in common stocks of companies that own or develop natural resources
and other basic commodities, or supply goods and services to such companies.
LEXINGTON EMERGING MARKETS FUND, INC.
The Lexington Emerging Markets Fund, Inc. is an open-end management investment
company. It was organized as a corporation under Maryland law on December 27,
1993. Lexington Management Corporation is the fund's investment adviser.
INVESTMENT OBJECTIVE: To seek long-term growth of capital primarily through
investment in equity securities of companies domiciled in, or doing business in,
emerging countries and emerging markets.
C-1
<PAGE>
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust is an open-end management investment company. It
was organized as a business trust under the laws of the Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994. Massachusetts
Financial Services Company manages each series.
MFS EMERGING GROWTH SERIES
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital. The series'
policy is to invest primarily in common stocks of small and medium-sized
companies that are early in their life cycle but which have the potential to
become major enterprises.
MFS HIGH INCOME SERIES
INVESTMENT OBJECTIVE: Seeks high current income by investing primarily in a
professionally managed portfolio of fixed income securities, some of which may
involve equity features.
MFS WORLD GOVERNMENTS SERIES
INVESTMENT OBJECTIVE: Seeks preservation and growth of capital, together with
moderate current income. The series attempts to provide investors with an
opportunity to enhance the value and increase the protection of their investment
against inflation and otherwise by taking advantage of investment opportunities
in the U.S. as well as in other countries where opportunities may be more
rewarding.
THE MONTGOMERY FUNDS III
The Montgomery Funds III is an open-end investment company. This Delaware
business trust was organized on August 24, 1994. The trust is managed by
Montgomery Asset Management, L.P.
MONTGOMERY VARIABLE SERIES: GROWTH FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities, usually common stock, of domestic companies of all sizes.
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies in countries having economies and markets
generally considered by the World Bank or the United Nations to be emerging or
developing.
STRONG VARIABLE INSURANCE FUNDS, INC.
The Strong Variable Insurance Funds, Inc. is an open-end management investment
company. It was incorporated in Wisconsin. Strong Capital Management, Inc. is
the investment adviser.
THE STRONG DISCOVERY FUND II
INVESTMENT OBJECTIVE: Seeks to identify emerging investment trends and
attractive growth opportunities.
THE STRONG GOVERNMENT SECURITIES FUND II
INVESTMENT OBJECTIVE: Seeks total return by investing for a high level of
current income with a moderate degree of share-price fluctuation.
THE STRONG ADVANTAGE FUND II
INVESTMENT OBJECTIVE: Seeks current income with a very low degree of share-price
fluctuation.
THE STRONG INTERNATIONAL STOCK FUND II
INVESTMENT OBJECTIVE: Seeks capital growth. The fund invests primarily in the
equity securities of issuers located outside of the United States.
TCI PORTFOLIOS, INC.
TCI Portfolios, Inc. is a open-end management investment company. It was
organized as a Maryland corporation on June 4, 1987. TCI Portfolios, Investors
Research Corporation serves as the investment manager of TCI Portfolios.
C-2
<PAGE>
TCI BALANCED FUND
INVESTMENT OBJECTIVE: Capital growth and current income. Seeks to achieve its
investment objective by maintaining approximately 60% of the assets in common
stocks that are considered to have better-then-average prospects for
appreciation and the remaining assets in bonds and other fixed income
securities.
TCI GROWTH FUND
INVESTMENT OBJECTIVE: Capital Growth. Seeks to achieve its investment objective
by investing primarily in common stocks that are considered to have
better-than-average prospects for appreciation.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company.
It was organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the two funds listed below.
GOLD AND NATURAL RESOURCES FUND
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investment in
equity and debt securities of companies engaged in the exploration, development,
production and distribution of gold and other natural resources such as
strategic and other metals, minerals, forest products, oil, natural gas and
coal.
WORLDWIDE BOND FUND
INVESTMENT OBJECTIVE: Seeks high total return through a flexible policy of
investing globally, primarily in debt securities.
C-3
