<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-46620
FORTIS BENEFITS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
MINNESOTA 81-0170040
(State or other jurisdiction of (IRS Identification No.)
incorporation or organization)
500 BIELENBERG DRIVE, WOODBURY, MN 55125
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 612-738-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost 1998--$2,314,989; 1997--$2,325,589) $2,396,600 $2,415,915
Equity securities, at fair value (cost
1998--$88,637; 1997--$11,087) 109,477 109,832
Mortgage loans on real estate, less allowance
for possible losses (1998 and 1997--$11,085) 618,505 602,064
Policy loans 70,557 68,566
Short-term investments 91,622 70,537
Real estate and other investments 30,824 55,035
---------- ----------
3,317,585 3,321,949
Cash and cash equivalents (32,272) 9,901
Receivables:
Uncollected premium 70,361 74,220
Reinsurance recoverable on paid and
unpaid losses 15,745 13,852
Other 20,979 19,762
---------- ----------
107,085 107,834
Accrued investment income 45,845 47,376
Deferred policy acquisition costs 296,089 291,742
Property and equipment, at cost, less
accumulated depreciation 39,396 42,773
Deferred federal income taxes 18,428 15,037
Other assets 5,120 4,250
Assets held in separate accounts 3,347,449 2,978,622
---------- ----------
$7,144,725 $6,819,484
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited)
<S> <C> <C>
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Life insurance $ 454,464 $ 449,017
Interest sensitive and investment products 1,263,726 1,264,227
Accident and health 803,084 792,249
---------- ----------
2,521,274 2,505,493
Unearned premiums 11,527 10,653
Other policy claims and benefits payable 255,987 260,596
Policyholder dividends payable 8,321 8,197
---------- ----------
Total policy reserves and liabilities 2,797,109 2,784,939
Debt 8,299 26,433
Accrued expenses 41,965 49,909
Current income taxes payable 20,171 10,549
Other liabilities 56,800 113,222
Due to Affiliates 13,480 6,925
Liabilities related to separate accounts 3,312,884 2,947,401
---------- ----------
6,250,708 5,939,378
SHAREHOLDER'S EQUITY
Common stock, $5 par value, 1,000,000
shares authorized, issued and outstanding 5,000 5,000
Additional paid-in capital 468,000 468,000
Retained earnings 351,269 332,723
Unrealized gain on available-for-sale
securities (net of deferred taxes 1998--
$34,925; 1997--$38,463) 62,173 68,981
Unrealized gain on assets held in separate
accounts (net of deferred taxes 1998--$2,515;
1997--$1,345 7,575 5,402
---------- ----------
Total Shareholder's equity 894,017 880,106
---------- ----------
Total policy reserves, liabilities &
Shareholder's equity $7,144,725 $6,819,484
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
<S> <C> <C>
REVENUES
Insurance operations:
Life insurance premiums $ 63,816 $ 63,028
Interest sensitive and investment product
policy charges 21,047 18,245
Accident and health premiums 229,314 221,300
-------- --------
314,177 302,573
Net investment income 58,731 54,914
Realized gains on investments 18,054 13,312
Other income 10,589 7,841
-------- --------
TOTAL REVENUES 401,551 378,640
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 49,823 51,648
Interest sensitive and investment products 25,244 25,623
Accident and health 188,450 173,192
-------- --------
263,517 250,463
Policyholder dividends 1,005 1,219
Amortization of deferred policy acquisition
costs 10,343 9,723
Insurance commissions 24,952 24,064
General and administrative expenses 73,201 60,489
-------- --------
TOTAL BENEFITS AND EXPENSES 373,018 345,958
-------- --------
INCOME BEFORE INCOME TAXES 28,533 32,682
INCOME TAX EXPENSE (BENEFITS)
Current 11,010 11,955
Deferred (1,023) (517)
-------- --------
9,987 11,438
-------- --------
NET INCOME $ 18,546 $ 21,244
-------- --------
-------- --------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,546 $ 21,243
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves 21,835 11,565
Increase (decrease)in other policy claims,
benefits and policyholder dividends payable (3,611) 4,979
Provision for deferred federal income taxes (1,024) (517)
Increase (decrease) in income taxes payable 9,622 3,670
Amortization of policy acquisition costs 10,343 9,723
Policy acquisition costs deferred (16,038) (17,604)
Provision for depreciation 3,459 4,193
Amortization of investment premiums(discounts), net (806) 152
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities (74,534) (114,229)
Realized gains on investments (18,054) (13,312)
Other - (56)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (50,262) (90,193)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (495,951) (1,232,671)
Sales or maturities of fixed maturity investments 514,820 1,143,043
Decrease (increase) in short-term investments (21,085) 91,278
Purchase of other investments (507,456) (801,253)
Sales or maturities of other investments 523,898 805,230
Purchase of property and equipment (83) (1,086)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES 14,143 4,541
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 53,825 44,543
Surrenders and death benefits (73,298) (34,639)
Interest credited to policyholders 13,419 12,969
---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (6,054) 22,873
---------- ----------
INCREASE IN CASH (42,173) (62,779)
Cash and cash equivalents at beginning of period 9,901 20,474
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ (32,272) $ (42,305)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1998
(unaudited)
General: The accompanying unaudited financial statements of Fortis Benefits
Insurance Company contain all adjustments necessary to present fairly the
balance sheet as of March 31, 1998 and the related statement of income for the
three months ended March 31, 1998 and 1997, and cash flows for the three months
ended March 31, 1998 and 1997.
Income tax payments for the three months ended March 31, 1998 and March 31, 1997
were $1,388,000 and $8,300,000, respectively.
The classification of fixed maturity investments is to be made at the time of
purchase and, prospectively, that classification is expected to be reevaluated
as of each balance sheet date. At March 31, 1998, all fixed maturity and equity
securities are classified as available-for-sale and carried at fair value.
The amortized cost and fair values of investments available-for-sale were as
follows at March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
Fixed Income Securities:
Governments $ 280,162 $ 7,854 $ 448 $ 287,568
Public Utilities 117,328 3,635 70 120,893
Industrial and
miscellaneous 1,884,661 72,043 2,915 1,953,789
Other 32,838 1,513 1 34,350
---------- ---------- ---------- ----------
Total 2,314,989 85,045 3,434 2,396,600
Equity Securities 88,637 21,747 907 109,477
---------- ---------- ---------- ----------
$2,403,626 $ 106,792 $ 4,341 $2,506,077
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1998
(unaudited)
The amortized cost and fair value of fixed maturities at March 31, 1998, 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 Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 68,870 $ 69,175
Due after one year through
five years 848,074 862,845
Due after five years through
ten years 457,606 473,451
Due after ten years 940,439 991,129
---------- ----------
$2,314,989 $2,396,600
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales and maturities of investments in fixed maturities in the
three-month period ended March 31,1998 were $505,490,000, and $9,330,000
respectively. Gross gains of $10,326,000 and gross losses of $2,868,000 were
realized on sales.
Mortgage Loans: The Company has issued commercial mortgage loans on properties
located throughout the country. Currently, approximately 36% of outstanding
principal is concentrated in the states of Florida, California and New York.
The Company has a diversified loan portfolio with a small average size, which
greatly reduces any loss exposure. The Company has established a reserve for
mortgage loans.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1998
(unaudited)
Net Investment Income and Realized Gains (Losses) on Investments: Major
categories of net investment income and realized gains and losses on investments
for the first three months of each year were as follows (in thousands):
<TABLE>
<CAPTION>
Investment Realized Gain (Loss)
Income on Investments
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fixed maturities $40,920 $38,544 $ 7,458 $ (397)
Preferred stocks 42 78 282 345
Common stocks 1,933 1,853 7,066 13,309
Mortgage loans on
real estate 13,733 13,244 (123) (8)
Policy loans 1,129 992 - -
Short-term investments 477 719 - -
Real estate and other
investments 2,046 1,276 3,371 63
------- ------- ------- -------
60,280 56,706 $18,054 $13,312
------- -------
------- -------
Expenses (1,549) (1,792)
------- -------
$58,731 $54,914
------- -------
------- -------
</TABLE>
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS MARCH 31, 1998 COMPARED TO MARCH 31, 1997
REVENUES
The Company's major products are group medical, group disability and dental,
group life, and annuity and individual life insurance coverages sold through a
network of independent agents and brokers. First quarter total group disability
and dental, group medical, group life, and annuity and individual life premiums
represented 38%, 36%, 18% and 8% respectively of total premium in 1998 and 33%,
41%, 19% and 7% respectively in 1997. Strong group sales over the last three
quarters of 1997 and first quarter of 1998, in both the long term disability and
dental products is the primary reason for the increase in group disability and
dental premium. The decrease in group medical premium is the result of a
decision in 1996 to discontinue new sales of certain medical products coupled
with higher than normal lapses of current medical business.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1997, 1996, and
1995 resulted in recognition of realized gains and losses.
BENEFITS
The total first quarter policyholder benefit to premium ratio increased from 83%
in 1997 to 84% in 1998. The group disability and dental, group medical, group
life, and annuity and individual life benefit to premium ratios for the three
months ended March 31, were 80%, 84%, 81% and 111% respectively in 1998 and 85%,
72%, 82% and 139% respectively in 1997. Contributing to the decrease in the
group disability and dental loss ratio is the lapsation of long term disability
cases with poor experience and improved termination experience on the long term
disability inforce block. The group medical business experienced a higher
premium to benefit ratio due to higher incurred benefits than anticipated. The
annuity and individual life business also experienced lower mortality experience
in the first quarter of 1998 compared to the same period in 1997, in addition to
higher interest crediting on the Company's steadily increasing policy base of
interest sensitive and investment products.
EXPENSES
The Company's general and administrative expense to premium ratio has increased
in the first three months of 1998 to 23% from 20% during the same period in
1997. Enabling the application systems to be Year 2000 compliant and increased
efforts during 1997 to improve administrative systems are the primary reasons
for this increase. The first three months of 1997 reflect lower general
expenses compared to the balance of 1997
<PAGE>
due to unusually low adminstrative expenses.
Commission rates have increased from the levels in 1997. This is primarily due
to changes in the mix of business by product lines as well as the change in
first year versus renewal premiums.
YEAR 2000
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Company and any of
its businesses or subsidiaries. All of the Company's major businesses are
heavily dependent upon internal computer systems, and many have significant
interaction with systems of third parties.
A comprehensive review of the Company's computer systems and business processes
has been conducted to identify the major systems that could be affected by the
Year 2000 issue. Steps are being taken to resolve any potential problems
including modification to existing software and the purchase of new software.
These measures are scheduled to be completed and tested on a timely basis. The
Company's goal is to complete internal remediation and testing of each system by
early 1999.
Factors that could influence the total costs to be incurred by the Company in
connection with the Year 2000 issue include the ability of the Company to
successfully identify systems containing two-digit year codes, the nature and
amount of programming required to fix the affected programs, the related labor
and consulting costs for such remediation, and the ability of third parties that
interface with the Company to successfully address their Year 2000 issues.
The Company is evaluating the Year 2000 readiness of advisors and other third
parties whose system failures could have an impact on the Company's operations.
The potential materiality of any such impact is not entirely known at this time.
The Company is closely monitoring these entities to avoid any unforseen
circumstances.
LIQUIDITY AND CAPITAL RESOURCES
The market value of cash, short-term investments and publicly traded bonds and
stocks is at least equal to all policyholder reserves and
<PAGE>
liabilities. The Company's portfolio is readily marketable and convertible to
cash to a degree sufficient to provide for short-term needs. The Company
consistently monitors its liability durations and invests assets accordingly.
The Company has no material commitments or off-balance sheet financing
arrangements which would reduce sources of funds in the upcoming year.
The National Association of Insurance Commissioners has implemented risk-based
capital standards to determine the capital requirements of a life insurance
company based upon the risks inherent in its operations. These standards
require the computation of risk-based capital amount which is then compared to a
company s actual total adjusted capital. Based upon current calculation using
these risk-based capital standards, the Company's percentage of total adjusted
capital is in excess of ratios which would require regulatory attention.
The Company's fixed maturity investments consisted of 96% investment grade bonds
as of March 31, 1998 and the Company does not expect this percentage to change
significantly in the future.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. None
<PAGE>
b. No Forms 8-K have been filed during the quarter for which this report is
filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fortis Benefits Insurance Company
(Registrant)
Date: May 13, 1998
/s/ Michael J. Peninger
Senior Vice President, Controller and Treasurer (on
behalf of the Registrant and as its principal financial and chief accounting
officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<CIK> 0000823533
<NAME> FORTIS BENEFITS INSURANCE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 2,396,600
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 109,477
<MORTGAGE> 618,505
<REAL-ESTATE> 30,824
<TOTAL-INVEST> 3,317,585
<CASH> (32,272)
<RECOVER-REINSURE> 15,745
<DEFERRED-ACQUISITION> 296,089
<TOTAL-ASSETS> 7,144,725
<POLICY-LOSSES> 2,521,274
<UNEARNED-PREMIUMS> 11,527
<POLICY-OTHER> 255,987
<POLICY-HOLDER-FUNDS> 8,321
<NOTES-PAYABLE> 0
5,000
0
<COMMON> 0
<OTHER-SE> 889,017
<TOTAL-LIABILITY-AND-EQUITY> 7,144,725
314,177
<INVESTMENT-INCOME> 58,731
<INVESTMENT-GAINS> 18,054
<OTHER-INCOME> 10,589
<BENEFITS> 263,517
<UNDERWRITING-AMORTIZATION> 10,343
<UNDERWRITING-OTHER> 98,153
<INCOME-PRETAX> 28,533
<INCOME-TAX> 9,987
<INCOME-CONTINUING> 18,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,546
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 988,036
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>