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, 1999
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
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share amounts)
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June 30,
December 31,
1999
1998
(unaudited)
ASSETS
Investments:
Fixed maturities, at fair value (amortized
cost 1999--$2,290,275; 1998--$2,315,904) $2,261,131
$2,402,343
Equity securities, at fair value (cost
1999--$173,812; 1998--$141,947)
187,473 157,851
Mortgage loans on real estate, less allowance
for possible losses (1999 and 1998--$11,085)
621,937 610,131
Policy loans 78,827
74,950
Short-term investments 38,532
31,868
Real estate and other investments
61,095 56,297
3,248,995
3,333,440
Cash and cash equivalents
(48,230) 668
Receivables:
Uncollected premium
67,782 61,883
Reinsurance recoverable on paid and
unpaid losses
21,576 14,853
Other 13,755
17,641
103,113
94,377
Accrued investment income
43,825 42,831
Deferred policy acquisition costs
365,184 331,938
Property and equipment, at cost, less
accumulated depreciation 26,848
30,712
Deferred federal income taxes 53,188
17,904
Other assets 9,418
3,923
Assets held in separate accounts 4,139,989
3,742,403
TOTAL ASSETS $7,942,330
$7,598,196
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
June 30,
December 31,
1999 1998
(unaudited)
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance $
450,258 $ 450,776
Interest sensitive and investment products 1,202,770 1,238,125
Accident and health 897,568
861,334
2,550,596
2,550,235
Unearned revenues 21,224 13,393
Other policy claims and benefits payable 258,629
255,350
Policyholder dividends payable 8,201
8,189
2,838,650 2,827,167
Debt 27,172
20,141
Accrued expenses 50,033
57,860
Current income taxes payable 5,779 4,168
Other liabilities 61,007
86,226
Due to Affiliates 20,809
9,479
Liabilities related to separate accounts 4,099,695
3,707,687
Total policy reserves and liabilities 7,103,145
6,712,728
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 369,405
344,605
Unrealized gain on available-for-sale
securities (net of deferred taxes 1999--
$(4,919); 1998--$33,961)
(9,135) 63,071
Unrealized gain on assets held in separate
accounts (net of deferred taxes 1999--$3,185;
1998--$2,580 5,915
4,792
Total Shareholder=s equity 839,185
885,468
Total policy reserves, liabilities &
Shareholder=s equity $7,942,330
$7,598,196
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Six months ended
June 30,
1999 1998
REVENUES
Insurance operations:
Traditional life insurance premiums $131,614
$128,061
Interest sensitive and investment product
policy charges 47,447
42,902
Accident and health premiums 502,974
464,033
Total Insurance Revenue 682,035
634,996
Net investment income 111,389
119,113
Net realized (losses) gains on investments 12,069
41,019
Other income 25,449 22,532
TOTAL REVENUES 830,942 817,660
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 97,296
95,026
Interest sensitive and investment products 45,336
47,882
Accident and health 414,809
383,869
557,441 526,777
Policyholder dividends 1,726
2,034
Amortization of deferred policy acquisition
costs 18,254 25,896
Insurance commissions 50,871
51,690
General and administrative expenses 165,950
152,305
TOTAL BENEFITS AND EXPENSES 794,242
758,702
INCOME BEFORE INCOME TAXES 36,700
58,958
INCOME TAX EXPENSE (BENEFITS)
Current 9,411
24,104
Deferred 2,489 (3,451)
11,900
20,653
NET INCOME 24,800
38,305
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized loss on investments (71,083)
(8,104)
COMPREHENSIVE (LOSS) INCOME $(48,006)
$ 30,201
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months
ended
June 30,
1999 1998
REVENUES
Insurance operations:
Traditional life insurance premiums $65,461
$64,245
Interest sensitive and investment product
policy charges 23,576 21,855
Accident and health premiums 251,812
234,719
Total Insurance Revenue 340,849
320,819
Net investment income 55,782
60,382
Net realized gains on investments
(990) 2,965
Other income 12,996 11,943
TOTAL REVENUES 408,638 416,109
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 46,883
45,203
Interest sensitive and investment products 21,381
22,638
Accident and health 201,657
195,419
269,921 263,260
Policyholder dividends 699
1,029
Amortization of deferred policy acquisition
costs 9,121 15,553
Insurance commissions 23,261
26,738
General and administrative expenses
88,312 79,104
TOTAL BENEFITS AND EXPENSES 391,314
385,684
INCOME BEFORE INCOME TAXES 17,323
30,425
INCOME TAX EXPENSE (BENEFITS)
Current 5,736 13,094
Deferred (618) (2,428)
5,118 10,666
NET INCOME 12,205
19,759
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized gain (loss) on investments (33,684) (3,469)
COMPREHENSIVE (LOSS) INCOME $ (21,479)
$ 16,290
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Six months ended
June 30,
1999 1998
OPERATING ACTIVITIES
Net income $24,800
$38,305
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves
42,489 46,090
Increase (decrease)in other policy claims,
benefits and policyholder dividends payable
3,291 (7,946)
Provision for deferred federal income taxes 2,489
(3,451)
Increase in income taxes payable 1,611
10,506
Amortization of policy acquisition costs
18,254 25,896
Policy acquisition costs deferred
(45,003) (34,388)
Provision for depreciation 4,212
6,798
Amortization of investment discounts, net 76
(2,210)
Change in uncollected premiums, accrued investment income,
reinsurance recoverable, other receivables, other
assets, debt, accrued expenses, and other liabilities (22,079)
(57,532)
Realized gains on investments (12,069)
(41,019)
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 18,071
(18,951)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,023,173)
(1,202,720)
Sales or maturities of fixed maturity investments 1,047,529 1,296,952
Increase in short-term investments (6,664)
(80,632)
Purchase of other investments (217,763)
(167,227)
Sales or maturities of other investments
175,582 155,431
Purchase of property and equipment (340)
(83)
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (24,829)
1,721
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 131,094
107,035
Surrenders and death benefits (193,860) (156,686)
Interest credited to policyholders 20,626
25,593
NET CASH (USED) BY FINANCING ACTIVITIES (42,140) (24,058)
DECREASE IN CASH (48,898) (41,288)
Cash and cash equivalents at beginning of period 668 9,901
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(48,230)
$(31,387)
See accompanying notes.
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FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(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, 1999 and the related statement of
income for the six and three months ended June 30, 1999
and 1998, and cash flows for the six months ended June
30, 1999 and 1998.
Income tax payments for the six months ended June 30,
1999 and June 30, 1998 were $7,800,000 and $13,598,000,
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, 1999, 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, 1999 (in
thousands):
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Gross
Gross
Amortized Unrealized
Unrealized Fair
Cost Gain
Loss Value
Fixed Income Securities:
Governments $ 105,716 $ 217 $
1,512 $ 104,421
Public Utilities 213,193 1,246
7,593 206,846
Industrial and
miscellaneous 1,801,099 20,319
36,623 1,784,795
Other 170,267 629
5,827 165,069
Total 2,290,275 22,411
51,555 2,261,131
Equity Securities 173,812 16,735
3,074 187,473
$2,464,087 $38,309
$54,629 $2,447,767
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FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(unaudited)
The amortized cost and fair value of fixed maturities
at June 30, 1999, 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.
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Amortized
Fair
Cost
Value
Due in one year or less $ 90,630$
91,338
Due after one year through
five years 677,188
679,529
Due after five years through
ten years 653,244
641,499
Due after ten years 869,213
848,765
$2,290,275
$2,261,131
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Proceeds from sales and maturities of investments in
fixed maturities in the six-month period ended June 30,
1999 were $1,047,529,000, and $39,119,000 respectively.
Gross gains of $9,882,000 and $21,917,000 and gross
losses of $11,344,000 and $3,910,000 were realized on
sales during the six month period ended June 30, 1999
and 1998, respectively.
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.
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FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(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):
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Investment
Realized Gain (Loss)
Income on
Investments
1999 1998
1999 1998
Fixed maturities $ 78,475 $
80,894 $ (1,463) $18,007
Preferred stocks 7 58
3 381
Common stocks 3,953 4,605
13,516 13,099
Mortgage loans on
real estate 27,541 29,073
- - (123)
Policy loans 2,564 2,326
- - -
Short-term investments 480 965
- - -
Real estate and other
investments 1,271 4,392
13 9,655
114,291 122,313
$12,069 $41,019
Expenses 2,902 3,200
$111,389 $119,113
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Fortis Benefits Insurance Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations June 30, 1999
Compared to June 30, 1998
Revenues
The Company's major products are group disability and
dental, group medical, group life, and annuity and
individual life insurance coverages sold through a
network of independent agents and brokers. The Company
began issuing individual long term care products which
has caused a slight shift in the product premium mix in
the first six months of 1999. Year-to-date second
quarter group disability and dental, group medical,
group life, annuity and individual life, and long term
care premiums represented 38%, 34%, 19%, 8% and 1%,
respectively of premium in 1999 and 38%, 35%, 19%, 8%
and 0% respectively in 1998. The decrease in group
medical premium is the result of a decision in 1996 to
discontinue new sales of certain medical products.
The Company continues to match investment portfolio
composition to liquidity needs and capital
requirements. Changes in interest rates during 1999 and
1998 resulted in recognition of realized gains and
losses upon sales of securities.
Benefits
The second quarter policyholder benefit to premium
ratio remained relatively flat, decreasing to 81.7% in
1999 from 83.0% in 1998. The group disability and
dental, group medical, group life, annuity and
individual life, and long term care benefit to premium
ratios for the six months ended June 30, were 85%, 81%,
72%, 98%, and 46% respectively in 1999 and 81%, 85%,
75%, 104%, and 52% respectively in 1988. Group
disability had a higher than expected claim incidence
coupled with longer than expected claim payment
periods. Group life had favorable experience in the
first six months of 1999 compared to the same period in
1998. The annuity and individual life business also
experienced lower mortality experience in the first two
quarters of 1999 compared to the same period in 1998,
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 is relatively flat, increasing to 24.6%
in the first six months of 1999 from 24.0% in the same
period in 1998. The Company continued to monitor
expenses, striving to improve the expense to premium
ratio, while maintaining quality and timely services to
policyholders.
Commission rates have decreased from the levels in
1998. 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.
Market Risk and Risk Management
Interest rate risk is the Company's primary market risk
exposure. Substantial and sustained increases and
decreases in market interest rates can affect the
profitability of insurance products and market value of
investments. The yield realized on new investments
generally increases or decreases in direct relationship
with interest rate changes. The market value of the
Company's fixed maturity and mortgage loan portfolios
generally increases when interest rates decrease, and
decreases when interest rates increase.
Interest rate risk is monitored and controlled through
asset/liability management. As part of the risk
management process, different economic scenarios are
modeled, including cash flow testing required for
insurance regulatory purposes, to determine that
existing assets are adequate to meet projected
liability cash flows. A major component of the
Company's asset/liability management program is
structuring the investment portfolio with cash flow
characteristics consistent with the cash flow
characteristics of the Company's insurance liabilities.
The Company uses computer models to perform simulations
of the cash flow generated from existing insurance
policies under various interest rate scenarios.
Information from these models is used in the
determination of interest crediting strategies and
investment strategies. The asset/liability management
discipline includes strategies to minimize exposure to
loss as market interest rates change. On the basis of
these analyses, management believes there is no
material solvency risk to the Company with respect to
interest rate movements up or down of 100 basis points
from year end levels.
Equity market risk exposure is not significant. Equity
investments in the general account are not material
enough to threaten solvency and contractowners bear the
investment risk related to the variable products.
Therefore, the risks associated with the investments
supporting the variable separate accounts are assumed
by contractowners, not by the Company. The Company
provides certain minimum death benefits that depend on
the performance of the variable separate accounts.
Currently the majority of these death benefit risks are
reinsured which then protects the Company from adverse
mortality experience and prolonged capital market
decline.
Year 2000
Introduction. The information provided in this section
and in other communications is to keep the reader
informed about Fortis, Inc. and its subsidiaries
("Fortis") Year 2000 effort. A list of the Fortis, Inc.
subsidiaries is attached hereto as Exhibit A. This
information reflects Fortis' understanding and
expectations as of the date we provide it, but the
situation could change over time. This document is
designated as a Year 2000 Readiness Disclosure and the
information contained herein is provided in accordance
with the Year 2000 Information and Readiness Disclosure
Act (112 Stat. 2386).
Fortis relies heavily on information technology ("IT")
systems to conduct its business. These Fortis IT
systems include both internally developed and vendor-
supplied systems. Fortis also relies on the non-IT
systems including the embedded technology and facility
related systems. In addition, Fortis has business
relationships with numerous entities including but not
limited to financial institutions, financial
intermediaries, third party administrators and other
critical vendors as well as regulators and customers.
These entities are themselves reliant on their IT
systems to conduct their businesses. Therefore, there
is a supply chain of dependency among and between all
involved entities.
State of Readiness. In 1997, the Fortis parent company
organized a multi-disciplinary Year 2000 Project Team
("Team"). The Team consists of employees at each
subsidiary, audit, legal and outside consultants. The
Team and Fortis have developed and are currently
executing a comprehensive plan (APlan@) designed to
make Fortis' IT systems Year 2000 ready. The Plan
covers four stages including (i) inventory, (ii)
assessment, (iii) programming, and (iv) testing and
certification. Fortis has completed the inventory stage
for its internal hardware, software and
telecommunications systems (mainframe and client/server
applications). The assessment process is also complete
and Fortis is utilizing both internal and external
resources to reprogram or replace the systems where
necessary, and testing the applications for Year 2000
readiness. Fortis has also inventoried its various
facility locations and the systems that relate thereto
including embedded technologies. Fortis is proceeding
with actions to ensure Year 2000 readiness of those
systems. Programming, testing and certification of all
systems and applications are targeted for completion by
the end of 1999.
Fortis is also in the process of identifying third
parties with which they have a material relationship in
both sending and receiving information from those
entities with respect to current Year 2000 readiness,
additional actions which need to be taken and potential
opportunities to share specific, detailed information
and possible test results.
Costs. The cost of the Fortis Year 2000 project is
estimated at $84.8 million (pre-tax) and is being
funded through operating cash flows. Total Year 2000
project costs are based on management's best estimates,
which were derived utilizing numerous assumptions of
future events, including the continued availability of
certain resources, third party modification plans and
other factors. Costs to upgrade and replace systems in
the normal course of business are not included in this
estimate. As of June 30, 1999, approximately $64.3
million (pre-tax) had already been expensed to Fortis.
Fortis believes that its Year 2000 project generally is
on schedule.
Risks. Fortis is attempting to limit the potential
impact of the Year 2000 by monitoring the progress of
its own Year 2000 project and those of its critical
external relationships (both I/T and non-I/T) and by
developing contingency/recovery plans. Those
contingency plans have identified the mission critical
systems and relationships and have put action plans in
place to address a Year 2000 issue. Fortis cannot
guarantee that it will be able to identify and/or
resolve all of its Year 2000 issues. Any critical
unresolved Year 2000 issues at Fortis or its external
relationships, however, could have a material adverse
effect on the Fortis' results of operations, liquidity
or financial condition. If Fortis' Year 2000 issues
were unresolved, potential consequences would include,
among other possibilities, the inability to accurately
and timely process benefit claims; update customer's
accounts; process financial transactions; bill
customers; assess exposure to risks; determine
liquidity requirements or report accurate data to
management, shareholders, customers, regulators and
others; as well as business interruptions or shutdowns,
financial losses, harm to its reputation, increased
scrutiny by regulators and litigation related to Year
2000 issues. However, Fortis is using methods
recognized and adopted in the general business
community to ensure that any Year 2000 issue will be
addressed promptly and any damages will be mitigated.
Contingency Plans. Consistent with prudent due
diligence efforts, Fortis has defined contingency plans
aimed at ensuring the continuity of critical business
functions before and after December 31, 1999, should
there be an unexpected system failure. Fortis has
developed plans that are designed to reduce the
negative impact on Fortis, and provide methods of
returning to normal operations, if failure occurs.
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EXHIBIT A
FORTIS, INC. SUBSIDIARIES
First Fortis Life Insurance Company
Fortis Insurance Company
Fortis Benefits Insurance Company
American Security Insurance Company
Union Security Life Insurance Company
Standard Guaranty Insurance Company
Insureco, Inc.
Fortis Advisers Inc.
Fortis Investors, Inc.
United Family Life Insurance Company
Adultcare, Inc.
Dental Health Alliance, L.L.C.
Remembrance Institute, Inc.
Associated California State Insurance Agencies/Ardiel
Insurance Services, Inc.
John Alden Financial Corporation
John Alden Life Insurance Company
Houston National Life Insurance Company
Pierce National Life Insurance Company
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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 a risk-based
capital amount which is then compared to a company's
actual total adjusted capital. Based upon current
calculations 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
99% investment grade bonds as of June 30, 1999 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
b. A Form 8-K was filed April 8, 1999, wherein a
change in control of the Registrant was reported.
The change in ownership was part of an internal
reorganization of the parent company, Fortis, Inc.
The ultimate controlling persons of the Registrant
remain Fortis, Inc. and its two parent companies,
Fortis (NL) and Fortis (B).
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 13, 1999
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its principal
financial and chief accounting officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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