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, 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 <PAGE>
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<S> <C> <C>
March 31, December 31,
1999 1998
(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized
cost 1999--$2,299,214; 1998--$2,315,904) $2,335,199 $2,402,343
Equity securities, at fair value (cost
1999--$152,151; 1998--$141,947) 157,571
157,851
Mortgage loans on real estate, less allowance
for possible losses (1999 and 1998--$11,085) 618,478 610,131
Policy loans 76,917 74,950
Short-term investments 48,729 31,868
Real estate and other investments 60,167 56,297
3,297,061 3,333,440
Cash and cash equivalents (54,152) 668
Receivables:
Uncollected premium 68,890 61,883
Reinsurance recoverable on paid and
unpaid losses 19,031 14,853
Other 13,451 17,641
101,372 94,377
Accrued investment income 43,016 42,831
Deferred policy acquisition costs 347,063
331,938
Property and equipment, at cost, less
accumulated depreciation 28,527
30,712
Deferred federal income taxes 34,388
17,904
Other assets 3,620 3,923
Assets held in separate accounts 3,850,113
3,742,403
$7,651,008 $7,598,196
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
March 31, December
31,
1999 1998
(unaudited)
POLICY RESERVES AND LIABILITIES
Future policy benefit reserves:
Life insurance $ 449,726 $
450,776
Interest sensitive and investment products 1,215,741 1,238,125
Accident and health 881,414
861,334
2,546,881
2,550,235
Unearned premiums 13,590 13,393
Other policy claims and benefits payable 260,915
255,350
Policyholder dividends payable
8,371 8,189
Total policy reserves and liabilities 2,829,757 2,827,167
Debt 24,005 20,141
Accrued expenses 53,247
57,860
Current income taxes payable 7,843 4,168
Other liabilities 51,687 86,226
Due to Affiliates 11,439
9,479
Liabilities related to separate accounts 3,812,306
3,707,687
6,790,284
6,712,728
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 357,200 344,605
Unrealized gain on available-for-sale
securities (net of deferred taxes 1999--
$19,836; 1998--$3,039) 25,988 63,071
Unrealized gain on assets held in separate
accounts (net of deferred taxes 1999--$(245);
1998--$245 4,536 4,792
Total Shareholder's equity 860,724
885,468
Total policy reserves, liabilities &
Shareholder's equity $7,651,008 $7,598,196
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three months ended
March 31,
1999 1998
REVENUES
Insurance operations:
Life insurance premiums $ 66,153$
63,816
Interest sensitive and investment product
policy charges 23,871 21,047
Accident and health premiums 251,162
229,314
341,186 314,177
Net investment income 55,607
58,731
Realized gains on investments 13,059 18,054
Other income 12,453 10,589
TOTAL REVENUES 422,305 401,551
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 50,413
49,823
Interest sensitive and investment products 23,955
25,244
Accident and health 213,152
188,450
287,520 263,517
Policyholder dividends 1,027
1,005
Amortization of deferred policy acquisition
costs 9,133 10,343
Insurance commissions 27,610
24,952
General and administrative expenses
77,638 73,201
TOTAL BENEFITS AND EXPENSES 402,928
373,018
INCOME BEFORE INCOME TAXES 19,377 28,533
INCOME TAX EXPENSE (BENEFITS)
Current 3,675 11,010
Deferred 3,107 (1,023)
6,782 9,987
NET INCOME $12,595
$ 18,546
OTHER COMPREHENSIVE LOSS:
Unrealized loss on investments (37,339)
(4,635)
COMPREHENSIVE INCOME $(24,744)
$13,911
See accompanying notes.<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
Three months ended
March 31,
1999 1998
OPERATING ACTIVITIES
Net income $ 12,595
$ 18,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves 22,084
21,835 Increase (decrease) in other policy claims,
benefits and policyholder dividends payable 5,944
(3,611)
Provision for deferred federal income taxes
3,107 (1,024)
Increase in income taxes payable 3,676
9,622
Amortization of policy acquisition costs 9,133
10,343
Policy acquisition costs deferred (20,250)
(16,038)
Provision for depreciation (1,684)
3,459
Amortization of investment (discount), net (4,442)
(806)
Change in uncollected premiums, accrued investment
income, other receivables, unearned premiums,
accrued expenses, and other liabilities (47,052)
(74,534)
Realized gains on investments (13,056)
(18,054)
Loss on sale of property and equipment
380 -
NET CASH PROVIDED BY OPERATING ACTIVITIES
(29,565) (50,262)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (606,812)
(495,951)
Sales or maturities of fixed maturity investments 627,561
514,820
Increase in short-term investments
(16,861) ( 21,085)
Purchase of other investments
(130,723) (507,456)
Sales or maturities of other investments
118,649 523,898
Sale or (purchase)of property and equipment 3,489
(83)
NET CASH USED BY INVESTING ACTIVITIES (4,697) 14,143
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 59,586
53,825
Surrenders and death benefits (95,453)
(73,298)
Interest credited to policyholders 10,429
13,419
NET CASH USED BY FINANCING ACTIVITIES (25,438)
(6,054)
INCREASE IN CASH (59,700)
(42,173)
Cash and cash equivalents at beginning of period 5,548
9,901
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(54,152)
$(32,272)
See accompanying notes.
/TABLE
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 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 March 31, 1999 and the
related statement of income for the three months ended March 31,
1999 and 1998, and cash flows for the three months ended March 31,
1999 and 1998.
Income tax payments for the three months ended March 31,1999 and
March 31, 1998 were $0 and $1,388,000, 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, 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 March 31, 1999 (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 156,886 $ 482 $2,860 $ 154,508
Public Utilities 194,357 4,031 2,171 196,217
Industrial and
miscellaneous 1,766,110 50,351 13,343 1,803,118
Other 181,861 1,431 1,936 181,356
Total 2,299,214 56,295 20,310
2,335,199
Equity Securities 152,151 9,647 4,227 157,571
$2,451,365 $ 65,942 $24,537
$2,492,770
</TABLE>
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 1999
(unaudited)
The amortized cost and fair value of fixed maturities at March 31,
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.
<TABLE>
<S> <C> <C>
Amortized
Fair
Cost Value
Due in one year or less $ 80,205 $
80,580
Due after one year through
five years 710,126
719,796
Due after five years through
ten years 629,020
639,977
Due after ten years 879,863
894,846
$2,299,214
$2,335,199
</TABLE>
Proceeds from sales and maturities of investments in fixed
maturities in the three-month period ended March 31,1999 were
$609,616,000, and $17,945,000 respectively. Gross gains of
$8,468,000 and $10,326,000 and gross losses of $4,709,000 and
$2,868,000 were realized on the sales during the three month period
ended March 31, 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.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 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 three months of each year were
as follows (in thousands):
<TABLE>
<S> <C> <C>
Investment Realized Gain (Loss)
Income on Investments
1999 1998 1999 1998
Fixed maturities $39,156 $40,920 $ 3,759
$ 7,458
Preferred stocks 7 42
3 282
Common stocks 2,323 1,933 9,297 7,066
Mortgage loans on
real estate 13,398 13,733 - (123)
Policy loans 1,293 1,129 - -
Short-term investments 238 477 -
-
Real estate and other
investments 639 2,046 - 3,371
57,054 60,280 $13,059 $18,054
Expenses 1,447 (1,549)
$55,607 $58,731
</TABLE>
<PAGE>
Fortis Benefits Insurance Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations
March 31, 1999 Compared to March 31, 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 three months of 1999. First 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
First quarter policyholder benefit to premium ratio
remained relatively flat increasing to 84.3% in 1999 from
83.9% 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 three
months ended March 31, were 85%, 86%, 74%, 103%, and 43%
respectively in 1999 and 80%, 85%, 80%, 111%, and 0%
respectively in 1998. Group disability had a higher than
expected claim incidence coupled with longer than
expected claim payment periods. Group life experienced
favorable first quarter experience in 1999 compared to
1998. The annuity and individual life business also
experienced lower mortality experience in the first three
months 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.
<PAGE>
Expenses
The Company's general and administrative expense to
premium ratio is relatively flat, decreasing to 22.8% in
the first quarter of 1999 from 23.3% in the same period
in 1998. The Company continues to monitor expenses,
striving to improve the expense to premium ratio, while
maintaining quality and timely services to policyholders.
Commission rates remained level from March 31, 1998 to
March 31, 1999.
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, and the
situation could change over time. This information is
designated as a Year 2000 Readiness Disclosure pursuant
to the Year 2000 Information and Readiness Disclosure
Act.
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 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 ("Plan") 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. The
Plan covers both I/T systems (telecommunications,
mainframe and client/server applications) and non I/T
systems (i.e. embedded chip systems - elevators,
security systems, heating ventilation and air
conditioning systems etc.) in its scope.
Fortis' progress with respect to the Plan is on target.
Critical dates have been identified and we remain on
schedule with the Plan. 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. Programming, testing and certification of
these systems and applications are targeted for
completion by the end of 1999. Those I/T systems which
have been through all phases of the Plan have been put
back into production and are currently being maintained
and tested to ensure continued Year 2000 readiness. The
non-I/T systems have been identified and are currently
being upgraded to a vendor represented Year 2000
compliant version, or are being replaced with new systems
which are represented as Year 2000 compliant. Completion
of this task is scheduled for the end of 1999.
The Plan considers the Year 2000 compliance of those
significant business relationships stated above. Letters
have been sent requesting the status of compliance and
are reviewed as part of the Plan's methodology. Also as
part of the Plan methodology, Fortis does file
comparisons of the I/T systems for records going out to
the businesses to assure consistency and validates record
layouts for the input/output of data. These tasks are
part of the programming, testing and certification of the
systems and applications which are targeted for
completion by the end of 1999.
Costs. The c/st 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 December 31, 1998, approximately $44.5
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 and by developing contingency/recovery
plans. 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.
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. Each company has
identified its mission critical systems using a
consistent set of requirements. Contingency plans have
then been developed (or are in the process of being
developed) for each of these mission critical systems.
These plans include identification of key I/T and
business personnel that will be on-site or on-call the
week of January 1, 2000. Vacations for all I/T staff
have been limited during December, 1999 through February,
2000 in order to monitor the first month end closing for
the Year 2000. There will be SWAT teams identified to
concentrate on any programming issues that arise with the
systems. Plans for manual processing have also been
identified for the mission critical systems.
<PAGE>
EXHIBIT A
FORTIS, INC. SUBSIDIARIES
First Fortis Life Insurance Company
Fortis Insurance Company (formerly known as Time
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
<PAGE>
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. 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 14, 1999
/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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 2,335,199
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 157,571
<MORTGAGE> 618,478
<REAL-ESTATE> 60,167
<TOTAL-INVEST> 3,297,061
<CASH> (54,152)
<RECOVER-REINSURE> 19,031
<DEFERRED-ACQUISITION> 347,063
<TOTAL-ASSETS> 7,651,008
<POLICY-LOSSES> 2,546,881
<UNEARNED-PREMIUMS> 13,590
<POLICY-OTHER> 260,915
<POLICY-HOLDER-FUNDS> 8,371
<NOTES-PAYABLE> 0
<COMMON> 5,000
0
0
<OTHER-SE> 855,724
<TOTAL-LIABILITY-AND-EQUITY> 7,651,008
341,186
<INVESTMENT-INCOME> 55,607
<INVESTMENT-GAINS> 13,059
<OTHER-INCOME> 12,453
<BENEFITS> 287,520
<UNDERWRITING-AMORTIZATION> 9,133
<UNDERWRITING-OTHER> 106,275
<INCOME-PRETAX> 19,377
<INCOME-TAX> 6,782
<INCOME-CONTINUING> 12,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,595
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 1,061,883
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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</TABLE>
