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 June 30, 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
(State or other jurisdiction of
incorporation or organization)
81-0170040
(IRS Identification No.)
500 BIELENBERG DRIVE, WOODBURY, MN 55125
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: 651-738-4000
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>
<S> <C> <C>
June 30, December 31,
1998 1997
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost 1998--$2,251,589; 1997--$2,325,589) $2,343,094 $2,415,915
Equity securities, at fair value (cost
1998--$104,967; 1997--$88,719) 117,324 109,832
Mortgage loans on real estate, less allowance
for possible losses (1998 and 1997--$11,085) 614,905 602,064
Policy loans 72,932 68,566
Short-term investments 151,169 70,537
Real estate and other investments 52,022 55,035
3,351,446 3,321,949
Cash and cash equivalents (31,387) 9,901
Receivables:
Uncollected premium 67,523 74,220
Reinsurance recoverable on paid and
unpaid losses 18,209 13,852
Other 15,990 19,762
101,722 107,834
Accrued investment income 44,365 47,376
Deferred policy acquisition costs 297,990 291,742
Property and equipment, at cost, less
accumulated depreciation 36,058 42,773
Deferred federal income taxes 22,708 15,037
Other assets 5,358 4,250
Assets held in separate accounts 3,486,592 2,978,622
TOTAL ASSETS $7,314,852$6,819,484
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
June 30,December 31,
1998 1997
(unaudited)
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Life insurance $ 448,380 $ 449,017
Interest sensitive and investment products 1,257,335 1,264,227
Accident and health 821,810 792,249
2,527,525 2,505,493
Unearned premiums 11,575 10,653
Other policy claims and benefits payable 251,479 260,596
Policyholder dividends payable 8,446 8,197
2,799,025 2,784,939
Debt 20,261 26,433
Accrued expenses 43,586 49,909
Current income taxes payable 21,055 10,549
Other liabilities 58,526 113,222
Due to Affiliates 8,569 6,925
Liabilities related to separate accounts 3,453,523 2,947,401
Total policy reserves and liabilities 6,404,545
5,939,378
SHAREHOLDER'S EQUITY:
Common stock, $5 par value:
Authorized, issued and outstanding shares--
1,000,000 5,000 5,000
Additional paid-in capital 468,000
468,000
Retained earnings 371,028 332,723
Unrealized gain on available-for-sale
securities (net of deferred taxes 1998--
$34,925; 1997--$38,463) 62,503 68,981
Unrealized gain on assets held in separate
accounts (net of deferred taxes 1998--$2,515;
1997--$1,345 3,776 5,402
Total Shareholder's equity 910,307 880,106
Total policy reserves, liabilities &
Shareholder's equity $7,314,852 $6,819,484
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Six months ended
June 30,
1998 1997
REVENUES
Insurance operations:
Life insurance premiums $128,061 $130,461
Interest sensitive and investment product
policy charges 42,902 37,832
Accident and health premiums 464,033 441,911
Total Insurance Revenue 634,996 610,204
Net investment income 119,113 111,958
Net realized gains on investments 41,019 17,093
Other income 22,532 16,752
TOTAL REVENUES 817,660 756,007
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 95,026 104,167
Interest sensitive and investment products 47,882 51,936
Accident and health 383,869 348,380
526,777 504,483
Policyholder dividends 2,034 2,214
Amortization of deferred policy acquisition
costs 25,896 19,330
Insurance commissions 51,690 50,852
General and administrative expenses 152,305 126,029
TOTAL BENEFITS AND EXPENSES 758,702 702,908
INCOME BEFORE INCOME TAXES 58,958 53,099
INCOME TAX EXPENSE (BENEFITS)
Current 24,104 24,434
Deferred (3,451) (5,849)
20,653 18,585
NET INCOME 38,305 34,514
OTHER COMPREHENSIVE LOSS:
Unrealized loss on investments (8,104) (10,255)
COMPREHENSIVE INCOME $ 30,201 $ 24,259
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months ended
June 30,
1998 1997
REVENUES
Insurance operations:
Life insurance premiums $ 64,245 $67,433
Interest sensitive and investment product
policy charges 21,855 19,587
Accident and health premiums 234,719 220,611
Total Insurance Revenue 320,819 307,631
Net investment income 60,382 57,044
Net realized gains on investments 22,965 3,781
Other income 11,943 8,911
TOTAL REVENUES 416,109 377,367
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 45,203 52,519
Interest sensitive and investment products 22,638 26,313
Accident and health 195,419 175,188
263,260 254,020
Policyholder dividends 1,029 995
Amortization of deferred policy acquisition
costs 15,553 9,607
Insurance commissions 26,738 26,788
General and administrative expenses 79,104 65,540
TOTAL BENEFITS AND EXPENSES 385,684 356,950
INCOME BEFORE INCOME TAXES 30,425 20,417
INCOME TAX EXPENSE (BENEFITS)
Current 13,094 12,479
Deferred (2,428) (5,332)
10,666 7,147
NET INCOME 19,759 13,270
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on investments (3,469) 33,405
COMPREHENSIVE INCOME $ 16,290$ 46,675
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Six months ended
June 30,
1998 1997
OPERATING ACTIVITIES
Net income $ 38,305 $ 34,514
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves 46,090 26,977 Increase
(decrease)in other policy claims,
benefits and policyholder dividends payable (7,946) 17,366
Provision for deferred federal income taxes (3,451) (5,849)
Increase (decrease) in income taxes payable 10,506 (7,666)
Amortization of policy acquisition costs 25,896 19,330
Policy acquisition costs deferred (34,388)(35,035)
Provision for depreciation 6,798 1,127 Amortization of
investment premiums(discounts), net(2,210) 133
Change in uncollected premiums, accrued investment
income, reinsurance recoverable, other receivables,
unearned premiums, other assets, debt, accrued
expenses, and other liabilities (57,532)( 81,793)
Realized gains on investments (41,019)(17,093)
Other - 20
NET CASH PROVIDED BY OPERATING ACTIVITIES (18,951) (47,969)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,202,720) (2,446,316)
Sales or maturities of fixed maturity investments 1,296,952 2,325,418
Decrease (increase) in short-term investments (80,632) 40,019
Purchase of other investments (167,227) ( 93,090)
Sales or maturities of other investments 155,431 106,859
Purchase of property and equipment (83) 3,187
NET CASH USED BY INVESTING ACTIVITIES 1,721 (63,923)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 107,035 112,162
Surrenders and death benefits (156,686)(75,513)
Interest credited to policyholders 25,593 26,073
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (24,058) 62,722
INCREASE IN CASH (41,288)(49,170)
Cash and cash equivalents at beginning of period 9,901 20,474
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(31,387)$(28,696)
See accompanying notes.
/TABLE
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 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 June 30, 1998 and the
related statement of income for the six months ended June 30, 1998
and 1997, and cash flows for the six months ended June 30, 1998 and
1997.
Income tax payments for the six months ended June 30,1998 and June
30, 1997 were $13,598,000 and $32,115,000, 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 June
30, 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 June 30, 1998 (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 211,036 $ 10,391 $ 131 $ 221,296
Public Utilities 169,451 5,177 447 174,181
Industrial and
miscellaneous 1,803,223 76,847 2,133 1,877,937
Other 67,879 1,814 13 69,680
Total 2,251,589 94,229 2,724 2,343,094
Equity Securities 104,967 18,893 6,536 117,324
$2,356,556 $113,122 $9,260 $2,460,418
</TABLE>
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1998
(unaudited)
The amortized cost and fair value of fixed maturities at June 30,
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>
<S> <C> <C>
Amortized Fair
Cost Value
Due in one year or less $ 105,329 $ 105,969
Due after one year through
five years 883,480 899,179
Due after five years through
ten years 506,551 525,019
Due after ten years 756,229 812,927
$2,251,589 $2,343,094
</TABLE>
Proceeds from sales and maturities of investments in fixed
maturities in the six-month period ended June 30,1998 were
$1,282,068,000, and $14,884,000 respectively. Gross gains of
$21,917,000 and gross losses of $3,910,000 were realized on sales.
Mortgage Loans: The Company has issued commercial mortgage loans on
properties located throughout the country. Currently,
approximately 37% 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
June 30, 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 six months of each year were as
follows (in thousands):
<TABLE>
<S> <C> <C>
Investment Realized Gain (Loss)
Income on Investments
1998 1997 1998 1997
Fixed maturities $80,894 $78,255 $18,007 $ 1,398
Preferred stocks 58 154 381 359
Common stocks 4,605 4,495 13,099 15,282
Mortgage loans on
real estate 29,073 26,692 (123) (8)
Policy loans 2,326 522 - -
Short-term investments 965 3,470 - -
Real estate and other
investments 4,392 2,052 9,655 62
122,313 115,640 $41,019 $17,093
Expenses 3,200 3,682
$119,113 $111,958
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations June 30, 1998
Compared to June 30, 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. Six months
total group disability and dental, group medical, group
life, and annuity and individual life premiums
represented 38%, 35%, 19% and 8% respectively of total
premium in 1998 and 34%, 39%, 20% and 7% respectively in
1997. Strong group sales over the last three quarters of
1997 and first two quarters of 1998, in both the long
term disability and dental products is the primary reason
for the increase in group disability and dental premium.
Additionally, short term disability products had a larger
than usual upswing in sales during the second quarter.
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 1998 and 1997 resulted
in recognition of realized gains and losses.
Benefits
The total second quarter policyholder benefit to premium
ratio remained relatively flat at 83% from 1997 to 1998.
The group disability and dental, group medical, group
life, and annuity and individual life benefit to premium
ratios for the six months ended June 30, were 81%, 85%,
75% and 104% respectively in 1998 and 84%, 75%, 79% and
131% 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. Group
life experienced favorable year-to-date experience in
1998 compared to 1997. The annuity and individual life
business also experienced lower mortality experience in
the first two quarters 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 six months of
1998 to 24% from 21% 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 six months of 1997 reflect lower
general expenses compared to the balance of 1997 due to
unusually low administrative 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 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 June 30, 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
a. On April 1, 1998, the Annual Fortis Benefit
Insurance Company Shareholder Meeting was held.
b. All 1,000,000 outstanding shares of the Company's
common stock were cast for the election of each
director (J. Kerry Clayton, Arie A. Fakkert, Allen
R. Freedman, Thomas M. Keller, Dean C. Kopperud,
and Robert B. Pollock).
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. No Forms 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
Fortis Benefits Insurance Company
(Registrant)
Date: August 14, 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>
<ARTICLE> 7
<CIK> 0000823533
<NAME> FORTIS BENEFITS INSURANCE COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 2,343,094
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 117,324
<MORTGAGE> 614,905
<REAL-ESTATE> 52,022
<TOTAL-INVEST> 3,351,446
<CASH> (31,387)
<RECOVER-REINSURE> 18,209
<DEFERRED-ACQUISITION> 297,990
<TOTAL-ASSETS> 7,314,852
<POLICY-LOSSES> 2,527,525
<UNEARNED-PREMIUMS> 11,575
<POLICY-OTHER> 251,479
<POLICY-HOLDER-FUNDS> 8,446
<NOTES-PAYABLE> 0
<COMMON> 5,000
0
0
<OTHER-SE> 905,307
<TOTAL-LIABILITY-AND-EQUITY> 7,314,852
634,996
<INVESTMENT-INCOME> 119,113
<INVESTMENT-GAINS> 41,019
<OTHER-INCOME> 22,532
<BENEFITS> 526,777
<UNDERWRITING-AMORTIZATION> 25,896
<UNDERWRITING-OTHER> 203,995
<INCOME-PRETAX> 58,958
<INCOME-TAX> 20,653
<INCOME-CONTINUING> 38,305
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,305
<EPS-PRIMARY> 0
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<RESERVE-OPEN> 988,036
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</TABLE>
