<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1995
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM: COMMISSION FILE NUMBER:
33-46620
------------------------
FORTIS BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its charter
MINNESOTA 81-0170040
State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
500 BIELENBERG DRIVE, WOODBURY, MN 55125
(Address of principal executive offices)
Registrant's telephone number: (612) 738-5590
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/X/ Yes / / No
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Form S-1 Amended Registration Statement to be filed by the
Registrant are incorporated by reference into Parts I, II, III.
PART I
ITEM 1. BUSINESS
"Fortis Benefits/Fortis Financial Group Member" on page 8, and Further
Information About Fortis Benefits" on pages 17 through 23 of the prospectus
attached hereto as Exhibit No. 99 are incorporated herein.
ITEM 2. PROPERTIES
"Employees and Facilities" from page 21 of the prospectus attached hereto as
Exhibit No. 99 is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various lawsuits, none of which, in the
opinion of the Company counsel, will result in a material liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" from page 18 of the prospectus attached hereto as
Exhibit No. 99, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 18 through 23 of the prospectus attached hereto as Exhibit
No. 99 is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
"FORTIS BENEFITS Financial Statements" contained in the prospectus attached
hereto as Exhibit No. 99 is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Directors and Executive Officers of the Registrant" on page 21 of the
prospectus attached hereto as Exhibit No. 99 is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" on pages 22 and 23 of the prospectus attached
hereto as Exhibit No. 99 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES VOTING SHARES
- -------------------------------------------------- ----------- ------------------
<S> <C> <C>
Fortis, Inc. 1,000,000 100%
One World Trade Center
Suite 5001
New York, NY 10048
</TABLE>
- ------------------------
(1) All of Fortis Benefits' outstanding shares are owned by Time Insurance
Company, 515 West Wells, Milwaukee, WI, 53201, which is itself wholly owned
by Fortis, Inc., One World Trade Center, Suite 5001, New York, NY 10048.
Fortis, Inc. in turn is wholly owned by Fortis International, Inc., which is
wholly owned by AMEV/VSB 1990 N.B. both of which share the same address with
N.V. AMEV., Archimiedeslaan 10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB
1990 N.V. is 50% owned by N.V. AMEV and 50% owned, through certain
subsidiaries, by Compaignie Financiere et de Reassurance du Groupe AG,
Boulevard Emile Jacqmain 53, 1000 Brussels, Belgium.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)The following financial statements of Fortis Benefits Insurance Company
are included in Item 8:
Report of Independent Auditors
Balance Sheets at December 31, 1995 and 1994
Statements of Income for the years ended December 31, 1995, 1994 and 1993
Statements of Changes in Shareholder's Equity for the years ended December
31, 1995, 1994 and 1993
Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993.
Notes to Financial Statements
(2) The following financial statement schedules of Fortis Benefits Insurance
Company are included in Item 8:
I. Summary of Investments--Other than investments in Related Parties.
IV. Reinsurance.
V. Valuation and Qualifying Accounts.
All other schedules to the financial statements required by Article 7 of the
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Listing of Exhibits
3.(a) Articles of Incorporation of Fortis Benefits Insurance Company
(incorporated by reference from Form S-6 Registration Statement of Fortis
Benefits and its Variable Account C filed on March 17, 1986, File No.
33-03919);
(b) By-laws of Fortis Benefits Insurance Company (incorporated by
reference from Form S-6 Registration Statement of Fortis Benefits and its
Variable Account C filed on March 17, 1986, File No. 33-03919);
(c) Amendments to Articles of Incorporation and By-laws dated November
21, 1991 (incorporated by reference from Post-Effective Amendment No. 1 to
the Form N-4 Registration Statement of Fortis Benefits and its Variable
Account D filed on March 2, 1992, File No. 33-37577).
4.(a) Form of Combination Fixed and Variable Group Annuity Contract
(incorporated by reference from Post-Effective Amendment No. 1 to the Form
N-4 Registration Statement of Fortis Benefits and its Variable Account D
filed on March 2, 1992, File No. 33-37577);
(b) Form of Certificate to be used in connection with Contract filed as
Exhibit 4(a) (incorporated by reference from the Post-Effective Amendment
No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its
Variable Account D filed on March 2, 1992, File No. 33-37577);
(c) Form of Application to be used in connection with Certificate filed
as Exhibit 4(b) (incorporated by reference from Post-Effective Amendment
No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its
Variable Account D filed on March 2, 1992, File No. 33-37577);
(d) Form of IRA Endorsement (incorporated by reference from Pre-Effective
Amendment No. 1 to Form N-4 Registration Statement of Fortis Benefits and
its Variable Account D filed on March 28, 1991, File No. 33-37577);
<PAGE>
(e) Form of Section 403(b) Annuity Endorsement (incorporated by reference
from Post-Effective Amendment No. 3 to the Form N-4 Registration Statement
of Fortis Benefits and its Variable Account D filed on March 1, 1990, File
No. 33-19421);
(f) Annuity Contract Exchange Form (incorporated by reference from
Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement of
Fortis Benefits and its Variable Account D filed on April 19, 1988, File
No. 33-19421).
10. Fortis, Inc. Executive Incentive Compensation Plan (incorporated by
reference from Amendment No. 1 to Form S-1 Registration Statement of
Fortis Benefits filed on March 28, 1991, File No. 33-37576).
24. Power of Attorney for Messrs. Freedman, Gaddy, Mackin, Meler, Mahoney,
Clancy, Keller, Greiter and Clayton (incorporated by reference from
Exhibit 11 to Form S-6 registration statement of Fortis Benefits, File No.
33-73138 filed on December 17, 1993).
99. Form of prospectus to be filed as part of Form S-1 Amended
Registration Statement of Fortis Benefits.
(b) Reports on Form 8-K filed in the fourth quarter of 1995
None
(c) Exhibits
Included in 14 (a)(3) above
(d) Financial Statements Schedules
Included in 14 (a)(2) above
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FORTIS BENEFITS INSURANCE COMPANY
Registrant
March 28, 1996 By -----------------------------------------
Robert B. Pollock,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
March 28, 1996 By
-----------------------------------------
Michael J. Peninger,
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. The following
persons represent a majority of the Board of Directors of Fortis Benefits
Insurance Company:
By* ------------------------------------- Chairman of the March 28, 1996
Allen Royal Freedman Board
By ------------------------------------- President and Chief March 28, 1996
Robert B. Pollock Executive Officer
By ------------------------------------- Senior Vice March 28, 1996
Dean C. Kopperud President
By* ------------------------------------- Executive Vice March 28, 1996
Thomas Michael Keller President
By* ------------------------------------- Director March 28, 1996
Henry Carrol Mackin
By* -------------------------------------
Robert B. Pollock,
ATTORNEY-IN-FACT
<PAGE>
FORTIS
MASTERS
VARIABLE
ANNUITY
Certificates Under Flexible
Premium Deferred
Combination Variable and
Fixed Annuity Contracts
PROSPECTUS DATED
May 1, 1996
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-800-2638
P.O. BOX 64272 500 BIELENBERG DRIVE EXTENSION 3057
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 $1,000 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 Fortis Benefits' 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 one or more of
the following investment portfolios of Fortis Series Fund, Inc. (the "Series
Fund"): Money Market Series, U.S. Government Securities Series, Diversified
Income Series, Global Bond Series, High Yield Series, Asset Allocation Series,
Global Asset Allocation Series, Value Series, Growth & Income Series, S&P 500
Index Series, Blue Chip Stock Series, Global Growth Series, Growth Stock Series,
International Stock Series, and Aggressive Growth Series. The accompanying
Prospectus for Fortis Series Fund describes the investment objectives, policies
and risks of each of the Portfolios. Under the guaranteed interest accumulation
option, you can choose among ten different guarantee periods, each of which has
its own interest rate.
The Certificate provides several different types of retirement and death
benefits, including fixed and variable annuity income options. Within limits,
you may make partial surrenders of the Certificate Value or may totally
surrender the Certificate for its Cash Surrender Value.
You have the right to examine a Certificate for ten days from the time you
receive the Certificate and return it for a refund of all purchase payments that
have been made, without interest or appreciation or depreciation. However, in
certain states where permitted by state law the refund will be in the amount of
the then current Certificate 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 Fortis Series Fund, Inc. Both 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 23 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-
95961 (Ed. 5/95)
<PAGE>
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 64272, St. Paul,
Minnesota, 55164: 1-800-800-2638, extension 3057. 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
1-800-800-2638 (extension 3057).
Any purchase payment or other communication, except a 10-day 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
The information presented below reflects the Accumulation Unit information for
subaccounts of the Separate Account through December 31, 1995.
<TABLE>
<CAPTION>
U.S. GOV'T DIVERSIFIED ASSET
MONEY MARKET SECURITIES INCOME GLOBAL BOND HIGH YIELD ALLOCATION
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Accumulation Units in
Force............... 26,915,975 10,989,914 59,213,865 574,142 2,321,419 148,700,081
Accumulation Unit
Value............... $1.367592 $15.805335 $1.753817 $11.743159 $10.941082 $2.134216
JANUARY 2, 1995*
Accumulation Unit
Value............... -- -- -- $10.0000 -- --
DECEMBER 31, 1994
Accumulation Units in
Force............... 30,697,754 12,271,738 62,744,615 -- 1,216,957 137,642,102
Accumulation Unit
Value............... $1.311084 $13.483809 $1.515603 -- $9.834124 $1.773397
MAY 1, 1994
Accumulation Unit
Value............... -- -- -- -- $10.0000 --
DECEMBER 31, 1993
Accumulation Units in
Force............... 21,315,022 15,601,818 56,005,709 -- -- 106,834,367
Accumulation Unit
Value............... $1.2789 $14.6095 $1.6211 -- -- $1.7970
DECEMBER 31, 1992
Accumulation Units in
Force............... 20,674,556 9,505,984 19,353,521 -- -- 49,688,937
Accumulation Unit
Value............... $1.2614 $13.5294 $1.4572 -- -- $1.6646
MAY 1, 1992*
Accumulation Unit
Value............... -- -- -- -- -- --
DECEMBER 31, 1991
Accumulation Units in
Force............... 7,235,168.03 3,595,759.23 6,056,976.03 -- -- 17,772,322.83
Accumulation Unit
Value............... $1.2370 $12.9216 $1.3794 -- -- $1.5778
DECEMBER 31, 1990
Accumulation Units in
Force............... 5,632,146.27 747,992.12 2,352,517.74 -- -- 8,249,373.75
Accumulation Unit
Value............... $1.1837 $11.4501 $1.2195 -- -- $1.2529
DECEMBER 31, 1989
Accumulation Units in
Force............... 754,306.35 70,701.23 1,306,717.80 -- -- 2,760,936.67
Accumulation Unit
Value............... $1.1123 $10.7564 $1.1355 -- -- $1.2450
MAY 1, 1989*
Accumulation Unit
Value............... -- 10.0000 -- -- -- --
DECEMBER 31, 1988
Accumulation Units in
Force............... 92,261.56 -- 493,007.87 -- -- 703,763.76
Accumulation Unit
Value............... $1.0302 -- $1.0247 -- -- $1.0198
MAY 2, 1988*
Accumulation Unit
Value............... $1.0000 -- $1.0000 -- -- $1.0000
<CAPTION>
GLOBAL ASSET GROWTH & GLOBAL INTERNATIONAL AGGRESSIVE
ALLOCATION INCOME GROWTH GROWTH STOCK STOCK GROWTH
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Accumulation Units in
Force............... 1,117,596 4,204,164 10,769,830 160,247,280 1,157,064 3,033,587
Accumulation Unit
Value............... $11.590086 $12.904129 $15.754217 $2.587482 $11.271900 $12.461083
JANUARY 2, 1995*
Accumulation Unit
Value............... $10.0000 -- -- -- $10.0000 --
DECEMBER 31, 1994
Accumulation Units in
Force............... -- 1,489,517 10,055,959 148,657,108 -- 1,115,647
Accumulation Unit
Value............... -- $10.083309 $12.236773 $2.054211 -- $9.723523
MAY 1, 1994
Accumulation Unit
Value............... -- $10.0000 -- -- -- $10.0000
DECEMBER 31, 1993
Accumulation Units in
Force............... -- -- 5,108,957 118,720,649 -- --
Accumulation Unit
Value............... -- -- $12.7842 $2.1425 -- --
DECEMBER 31, 1992
Accumulation Units in
Force............... -- -- 698,720 79,582,321 -- --
Accumulation Unit
Value............... -- -- $10.9889 $1.9963 -- --
MAY 1, 1992*
Accumulation Unit
Value............... -- -- 10.0000 -- -- --
DECEMBER 31, 1991
Accumulation Units in
Force............... -- -- -- 42,946,178.33 -- --
Accumulation Unit
Value............... -- -- -- $1.9658 -- --
DECEMBER 31, 1990
Accumulation Units in
Force............... -- -- -- 14,690,313.64 -- --
Accumulation Unit
Value............... -- -- -- $1.2980 -- --
DECEMBER 31, 1989
Accumulation Units in
Force............... -- -- -- 3,507,971.91 -- --
Accumulation Unit
Value............... -- -- -- $1.3578 -- --
MAY 1, 1989*
Accumulation Unit
Value............... -- -- -- -- -- --
DECEMBER 31, 1988
Accumulation Units in
Force............... -- -- -- 684,667.95 -- --
Accumulation Unit
Value............... -- -- -- $1.0083 -- --
MAY 2, 1988*
Accumulation Unit
Value............... -- -- -- $1.0000 -- --
</TABLE>
- ------------------------------
* Accumulation Unit Value at Date of initial registration statement
effectiveness
Audited financial statements of the Variable Account are included in the
Statement of Additional Information.
Advertising and other sales materials may include yield and total return figures
for the Subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the Subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total return" is
the total change in value of an investment in the Subaccount over a period of
time specified in the advertisement. The rate of return shown would produce that
change in value over the specified period, if compounded annually. Yield figures
do not reflect the surrender charge and 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 1995, 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 Time
Insurance Company, offering financial products through the management, marketing
and servicing of mutual funds, annuities and life insurance.
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 1995.
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 Separate 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
7
<PAGE>
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 twelve Subaccounts in the Variable Account. The assets in each
Subaccount are invested exclusively in a distinct class (or series) of stock
issued by Series Fund, each of which represents a separate investment Portfolio
within Series Fund. 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 to Series Fund
and made available. Correspondingly, if any Portfolios are eliminated from
Series Fund, Subaccounts may be eliminated from the Variable Account.
SERIES FUND
Series Fund is a "series" type of mutual fund which is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940.
Series Fund has served as the investment medium for the Variable Account since
the Variable Account commenced operations. Series Fund is also the investment
medium for Variable Account C of Fortis Benefits, through which variable life
insurance policies are issued. Although we do not foresee any conflict between
the interests of Participants and life insurance policy owners, Series Fund'
Board of Directors will monitor to identify any material irreconcilable
conflicts which may develop and to determine what action, if any, should be
taken in response. If it becomes necessary for any separate account to replace
shares of any Portfolio with another investment, the Portfolio may have to
liquidate securities on a disadvantageous basis.
Fortis Benefits purchases and redeems Series Fund shares for the Variable
Account at their net asset value without the imposition of any sales or
redemption charges. Such shares represent interests in the nine Portfolios of
Series Fund available for investment by the Variable Account. 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.
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.
The Portfolios of Series Fund available for investment by the Variable Account
are Money Market Series, U.S. Government Securities Series, Diversified Income
Series, Global Bond Series, High Yield Series, Asset Allocation Series, Global
Asset Allocation Series, Value Series, Growth & Income Series, S&P 500 Index
Series, Blue Chip Stock Series, Growth Stock Series, Global Growth Series,
International Stock Series, and Aggressive Growth Series. A full description of
the Portfolios, their investment policies and restrictions, the charges, the
risks attendant to investing in them, and other aspects of their operations is
contained in the Prospectus for Series Fund accompanying this Prospectus and in
the Statement of Additional Information for Series Fund referred to therein.
Additional copies of these documents may be obtained from your sales
representative or from our Home Office. The complete risk disclosure in the
Prospectus for the Diversified Income Series, High Yield Series, Asset
Allocation Series, and Global Asset Allocation Series should be read before
selection of them for investment.
THE FIXED ACCOUNT
GUARANTEED INTEREST RATES/GUARANTEE PERIODS
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 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 4%.
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
8
<PAGE>
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,
----------------------------------------------------------
(IN THOUSANDS) 1995 1994 1993 1992 1991**
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy charges.............................. $1,232,329 $1,022,446 $ 955,053 $ 967,111 $ 439,348
Net investment income.................................... 203,537 162,514 153,657 156,431 89,638
Realized gains (losses) on investment.................... 55,080 (28,815) 73,623 37,928 5,234
Other income............................................. 33,085 35,958 27,100 26,176 6,668
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES......................................... $1,524,031 $1,192,103 $1,209,433 $1,187,646 $ 540,888
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total benefits and expenses.............................. $1,442,270 $1,157,651 $1,100,199 $1,111,530 $ 505,650
Federal Income taxes..................................... 27,891 11,595 31,090 25,660 12,776
Income before cumulative effect of accounting changes*... 53,870 22,857 78,144 50,456 22,462
Net income............................................... 53,870 22,857 81,707 50,456 22,462
BALANCE SHEET DATA
Total assets***.......................................... $5,143,012 $4,043,914 $3,584,139 $2,867,999 $2,409,881
Total liabilities........................................ 4,431,914 3,569,717 3,052,231 2,460,445 2,056,255
Total shareholder's equity***............................ 711,098 474,197 531,908 407,554 353,626
</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).
** The group life and health business of Mutual Benefit Life Insurance was
acquired 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.
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.
18
<PAGE>
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 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 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
19
<PAGE>
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. Best's Insurance Reports,
Life-Health Edition, 1994 assigned Fortis Benefits one of its highest ratings,
A+ (Superior), as of December 31, 1993, for financial position and operating
performance.
Fortis Benefits has a rating of AA from Standard & Poor's. As defined by
Standard & Poor's, insurers rated AA offer "excellent financial security."
These ratings represent such rating agency's independent opinion of Fortis
Benefit's financial strength and ability to meet its policyholder obligations,
but have no relevance to the performance or quality of the assets in the
Variable Account.
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.
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 Senior Vice President--Marketing and Sales; also
Director since 1995 officer of affiliated companies; before then Senior
Vice President of Integrated Resources, Inc.
Robert Brian Pollock, 41 President and Chief Executive Officer; before then
Director Since 1988 Senior Vice President--Life and Disability.
Thomas Michael Keller, 48 Executive Vice President; before then Senior Vice
Director since 1990 President of Fortis, Inc.
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
Director Since 1987 N.V.
EXECUTIVE OFFICERS
Rhonda Schwartz, 37 Senior Vice President and General Counsel--Life and
Investment Products; before then secretary and
General Counsel of Fortis Inc.
Anthony J. Rotondi, 50 Senior Vice President--Manufacturing and Information
Technology; also officer of affiliated companies.
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 Senior Vice President--Annuities.
</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.
20
<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 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 World Trade Center, Suite 5001, New York, N.Y. 10048. 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
21
<PAGE>
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.
22
<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. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). 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. Also, in our opinion,
the related financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
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
24
<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.
25
<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.
26
<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.
27
<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>
28
<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.
29
<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 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.
30
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
31
<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.
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>
32
<PAGE>
4. INVESTMENTS (CONTINUED)
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.
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.
33
<PAGE>
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.
34
<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>
35
<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.
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.
36
<PAGE>
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 $3,399,000 in 1995, 1994, and 1993, respectively.
37
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
SCHEDULE I--SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES ($ THOUSANDS)
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNT AT WHICH
FAIR SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- -------------------------------------------------------------------------- --------- --------- ---------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies and authorities...... $ 460,143 $ 497,917 $ 497,917
All other corporate bonds............................................. 1,491,061 1,577,707 1,577,707
--------- --------- ---------------
Total fixed maturities.................................................... 1,951,204 $2,075,624 2,075,624
---------
---------
Equity securities......................................................... 60,935 $ 78,852 78,852
---------
---------
Mortgage loans on real estate............................................. 571,050 562,697*
Policy loans.............................................................. 53,863 53,863
Short term investments.................................................... 153,499 153,499
Real Estate and other investments......................................... 11,918 11,918
--------- ---------------
Total investments......................................................... $2,802,451 $2,936,453
--------- ---------------
--------- ---------------
</TABLE>
- ------------------------
* Differences between cost and carrying values result from certain valuation
allowances and declines in value that are other than temporary.
38
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
SCHEDULE IV--REINSURANCE ($ THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ASSUMED
DIVIDED
GROSS AMOUNT CEDED ASSUMED NET BY NET
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
For the year ended 12/31/95
Life Insurance in Force................. $ 87,069,238 $ 1,446,218 $ 492,018 $ 86,115,038 0.57%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
REVENUES:
Life and Annuity...................... $ 253,785 $ 2,492 $ 60 $ 251,353 0.02%
Interest Sensitive and Investment..... 48,245 2,169 -- 46,076 0.00%
A & H................................. 934,838 3,410 3,472 934,900 0.37%
------------ ------------ ------------ ------------
TOTAL................................. $ 1,236,868 $ 8,071 $ 3,532 $ 1,232,329 0.29%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
For the year ended 12/31/94
Life Insurance in Force................. $ 62,187,163 $ 1,719,637 $ 448,854 $ 60,916,380 0.74%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
REVENUES:
Life and Annuity...................... $ 212,623 $ 4,035 $ (764) $ 207,824 -0.37%
Interest Sensitive and Investment..... 38,782 959 -- 37,823 0.00%
A & H................................. 811,733 37,224 2,290 776,799 0.29%
------------ ------------ ------------ ------------
TOTAL................................. $ 1,063,138 $ 42,218 $ 1,526 $ 1,022,446 0.15%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
For the year ended 12/31/93
Life Insurance in Force................. $ 54,426,139 $ 1,849,797 $ 370,422 $ 52,946,764 0.70%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
REVENUES:
Life and Annuity...................... $ 189,420 $ 2,450 $ 893 $ 187,863 0.48%
Interest Sensitive and Investment..... 29,756 978 -- 28,778 0.00%
A & H................................. 775,509 37,097 -- 738,412 0.00%
------------ ------------ ------------ ------------
TOTAL................................. $ 994,685 $ 40,525 $ 893 $ 955,053 0.09%
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
39
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS ($ THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO
BEGINNING COSTS & CHARGED TO OTHER DEDUCTION- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCTS DESCRIBE DESCRIBE END OF PERIOD
- ---------------------------------------- ----------- ------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended 12/31/95
Reserve for Mortgage Loans............ $ 7,429 $ 924 $ 0 $ 0 $ 8,353
For the year ended 12/31/94
Reserve for Mortgage Loans............ 6,324 1,105 0 0 7,429
For the year ended 12/31/93
Reserve for Mortgage Loans............ 4,676 1,648 0 0 6,324
</TABLE>
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 2,075,624
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 78,852
<MORTGAGE> 562,697
<REAL-ESTATE> 11,918
<TOTAL-INVEST> 2,738,476
<CASH> 1
<RECOVER-REINSURE> 11,812
<DEFERRED-ACQUISITION> 237,509
<TOTAL-ASSETS> 5,143,012
<POLICY-LOSSES> 2,559,939
<UNEARNED-PREMIUMS> 13,044
<POLICY-OTHER> 196,403
<POLICY-HOLDER-FUNDS> 7,930
<NOTES-PAYABLE> 0
0
0
<COMMON> 5,000
<OTHER-SE> 706,098
<TOTAL-LIABILITY-AND-EQUITY> 5,143,012
1,524,031
<INVESTMENT-INCOME> 203,537
<INVESTMENT-GAINS> 55,080
<OTHER-INCOME> 33,085
<BENEFITS> 1,046,175
<UNDERWRITING-AMORTIZATION> 41,291
<UNDERWRITING-OTHER> 354,804
<INCOME-PRETAX> 81,761
<INCOME-TAX> 27,891
<INCOME-CONTINUING> 53,870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,870
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 838,810
<PROVISION-CURRENT> 827,261
<PROVISION-PRIOR> (28,520)
<PAYMENTS-CURRENT> 492,460
<PAYMENTS-PRIOR> 216,259
<RESERVE-CLOSE> 928,832
<CUMULATIVE-DEFICIENCY> (31,769)
</TABLE>