SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15
(d) OF SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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 share data)
September December
30, 31, 1999
2000
(unaudited)
Assets
Investments:
Fixed maturities, at fair value (amortized
Cost 2000--$2,652,619; 1999-- $
$2,802,697) 2,583,643 $2,706,372
Equity securities, at fair value (cost 2000-
-$91,078; 93,892 85,021
1999--$81,554)
Mortgage loans on real estate, less
allowance for 822,979 754,514
Possible losses (2000 and 1999--$11,085)
Policy loans 98,201 83,439
Short-term investments 49,786 115,527
Real estate and other investments 42,938 47,502
3,691,439 3,792,375
Cash and cash equivalents (47,736) 18,670
Receivables:
Uncollected premiums 72,789 62,938
Reinsurance recoverable on unpaid and paid 45,226 23,471
losses
Other 30,998 19,406
149,013 105,815
Accrued investment income 53,662 55,464
Deferred policy acquisition costs 457,999 430,192
Property and equipment at cost, less
accumulated 21,645 25,118
depreciation
Deferred federal income taxes 48,317 52,467
Other assets 1,744 1,582
Due from affiliates - 8,304
Assets held in separate accounts 5,707,894 5,120,152
Total assets $10,083,977 $9,610,139
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
September December
30, 2000 31,
1999
(unaudited
)
Policy reserves, liabilities and
shareholders' equity
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional life insurance $ 1,151,980 $1,106,269
Interest sensitive and investment products 1,001,728 1,147,657
Accident and health 965,350 940,865
3,119,058 3,194,791
Unearned revenues 30,914 28,673
Other policy claims and benefits payable 242,103 265,486
Policyholder dividends payable 7,328 7,939
3,399,403 3,496,889
Accrued expense 62,460 59,409
Current income taxes payable 10,340 1,838
Other liabilities 58,948 120,110
Due to affiliates 5,029 -
Liabilities related to separate accounts 5,669,595 5,082,341
Total policy reserves and liabilities 9,205,775 8,760,587
Shareholder's equity:
Common Stock, $5 par value:
Authorized, issued and outstanding shares - 5,000 5,000
1,000,000
Additional paid-in capital 468,000 468,000
Retained earnings 442,369 427,811
Unrealized loss on available-for-sale
Securities (net of deferred taxes 2000--
$(21,208); 1999--$(31,077)) (39,387) (57,715)
Unrealized gain on assets held in separate
Accounts (net of deferred taxes
2000-$1,195;
1999--$3,476) 2,220 6,456
Total shareholder's equity 878,202 849,552
Total policy reserves, liabilities and $10,083,977 $9,610,139
shareholder's equity
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2000 1999
Revenues
Insurance operations:
Traditional life insurance premiums $ 319,323 $ 197,979
Interest sensitive and investment
product policy charges 79,125 71,306
Accident and health insurance premiums 712,805 756,299
1,111,253 1,025,584
Net investment income 209,479 169,081
Net realized (losses) gains on (18,819) 11,924
investments
Other income 50,895 38,611
Total revenues 1,352,808 1,245,200
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 249,455 143,701
Interest sensitive and investment 67,834 69,081
products
Accident and health claims 560,114 622,439
877,403 835,221
Policyholder dividends - 2,390
Amortization of deferred policy 37,901 30,475
acquisition costs
Insurance commissions 97,233 77,906
General and administrative expenses 247,465 235,337
Total benefits and expenses 1,260,002 1,181,329
Income before income taxes 92,806 63,871
Income tax expense (benefit)
Current 32,174 8,737
Deferred (3,213) 11,299
28,961 20,036
Net income 63,845 43,835
Other comprehensive income (loss):
Unrealized gain (loss) on investments 14,091 (96,307)
Comprehensive income (loss) $ $
77,936 (52,472)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
September 30,
2000 1999
Revenues
Insurance operations:
Traditional life insurance premiums $111,161 $ 66,365
Interest sensitive and investment
product policy charges 27,213 23,859
Accident and health insurance premiums 236,318 253,325
374,692 343,549
Net investment income 68,229 57,692
Net realized losses on investments (14,030) (145)
Other income 17,622 13,162
Total revenues 446,513 414,258
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 89,009 46,405
Interest sensitive and investment 22,791 23,745
products
Accident and health claims 178,196 207,630
289,996 277,780
Policyholder dividends - 664
Amortization of deferred policy 6,853 12,221
acquisition costs
Insurance commissions 32,961 27,035
General and administrative expenses 84,633 69,387
Total benefits and expenses 414,443 387,087
Income before income taxes 32,070 27,171
Income tax expense (benefit)
Current 8,246 (674)
Deferred 304 8,810
8,550 8,136
Net income 23,520 19,035
Other comprehensive income (loss):
Unrealized gain (loss) on investments 30,032 (25,224)
Comprehensive income (loss) $ 53,552 $
(6,189)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2000 1999
Operating activities
Net income $ $
63,845 43,835
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves 98,922 63,995
(Decrease) increase in other policy claims
and benefits and policyholder dividends (21,753) 15,305
payable
Provision for deferred federal income taxes(3,213) 11,299
Increase in income taxes payable 8,502 936
Amortization of deferred policy acquisition37,901 31,352
costs
Policy acquisition costs deferred (64,209) (68,444)
Provision for depreciation 8,483 6,112
Amortization of investment premiums, net 1,649 (1,699)
Change in uncollected premiums, accrued
investment income, reinsurance
recoverable, other receivables, other (86,336) 7,265
assets, accrued expenses, and other
liabilities
Net realized losses (gains) on investments 18,819 (11,924)
Net cash provided by operating activities 62,610 98,032
Investing activities
Purchases of fixed maturity investments (1,156,940 (1,244,672
) )
Sales or maturity of fixed maturity 1,276,824 1,270,319
investments
Decrease (increase) in short-term 65,741 (9,907)
investments
Purchases of other investments (184,287) (265,668)
Sales or maturities of other investments 98,597 205,698
Purchase of property and equipment (5,010) (908)
Net cash provided by (used in) investing 94,925 (45,138)
activities
Financing activities
Activities related to investment products:
Considerations received 178,889 185,164
Surrenders and death benefits (378,797) (304,791)
Interest credited to policyholders 25,253 30,291
Dividend (49,286) -
Net cash used in financing activities (223,941) (89,336)
Decrease in cash and cash equivalents (66,406) (36,442)
Cash and cash equivalents at beginning of 18,670 668
year
Cash and cash equivalents at end of period $ $
(47,736) (35,774)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 2000
(unaudited)
General: The accompanying unaudited financial statements of
Fortis Benefits Insurance Company contain all adjustments
necessary to present fairly the balance sheet as of
September 30, 2000 and the related statement of income for
the nine months ended September 30, 2000 and 1999, and cash
flows for the nine months ended September 30, 2000 and 1999.
Income tax payments for the nine months ended September 30,
2000 and September 30, 1999 were $23,672,000 and $7,800,000,
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 September 30, 2000, 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 September 30, 2000 (in
thousands):
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gain Loss Value
Fixed Income
Securities:
Governments $ $ 2,156 $ 1,575 $
396,006 396,587
Public utilities 232,514 484 7,451 216,547
Industrial and
miscellaneous 1,800,928 6,811 67,757 1,739,9822
Other 232,171 1,549 3,193 230,527
Total 2,652,619 11,000 79,976 2,583,643
Equity securities 91,078 7,575 4,761 93,892
$2,743,697 $18,575 $84,737 $2,677,535
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 2000
(unaudited)
The amortized cost and fair value in fixed maturities at
September 30, 2000, 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.
Amortized Fair
Cost Value
Due in one year or less $ $
138,736 138,405
Due after one year through five years 596,559 588,201
Due after five years through ten years 852,683 829,639
Due after ten years 1,064,641 1,027,398
Total $2,652,619 $2,583,643
Proceeds from sales and maturities of investments in fixed
maturities in the nine-month period ended September 30, 2000
and September 30, 1999 were $1,276,824,000 and
$1,270,319,000 respectively. Gross gains of $7,311,000 and
$10,925,000 and gross losses of $39,269,000 and $14,986,000
were realized on sales during the nine month period ended
September 30, 2000 and 1999, respectively.
Mortgage Loans: The Company has issued commercial mortgage
loans on properties located throughout the country.
Currently, approximately 34% of outstanding principal is
concentrated in the states of New York, California and
Florida. 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.
.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
September 30, 2000
(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 nine
months of each year were as follows (in thousands):
Realized
(Loss)Gain Investment Income
on Investments
2000 1999 2000 1999
Fixed maturities $145,869 $118,381 $ (31,958) $ (4,061)
Preferred stocks - 7 - 3
Common stocks 11,043 5,116 3,369 15,969
Mortgage loans on real 50,909 41,178 - -
estate
Policy loans 4,874 3,896 - -
Short-term investments 442 612 - -
Real estate and other 1,265 4,201 9,770 13
investments
214,402 173,391 $ (18,819) $11,924
Expenses 4,923 4,310
$209,479 $169,081
Fortis Benefits Insurance Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations September 30, 2000 Compared to
September 30, 1999
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. In the fourth quarter of
1999, the Company assumed a block of business from an
affiliated company, United Family Life Insurance Company.
This assumed business is primarily pre-need life insurance
designed to pre-fund funeral expenses and is sold as
individual and group life and annuity products. Pre-need
business represents $112 million in gross premium in the
three-quarters of 2000. For the nine months ended September
30, group disability and dental, group medical, group life,
pre-need, and annuity and individual life represented 39%,
25%, 18%, 10% and 8%, respectively of premium in 2000 and
40%, 33%, 19%, 0% and 8% respectively in 1999.
The Company continues to match investment portfolio
composition to liquidity needs and capital requirements.
Changes in interest rates during 2000 and 1999 resulted in
recognition of realized gains and losses upon sales of
securities. The Company had net capital losses from fixed
income investments of $31 million for the first nine months
of 2000 as compared to net capital losses of $4 million for
the same period in 1999.
Benefits
The total year-to-date policyholder benefit to premium ratio
decreased to 79% in 2000 from 81% in 1999. The group
disability and dental, group medical, group life, pre-need,
and annuity and individual life benefit to premium ratios
for the nine months ended September 30, were 82%, 74%, 69%,
100% and 79% respectively in 2000 and 84%, 82%, 72%, 0% and
97% respectively in 1999. Group long term disability
continues to see an increase in claim terminations. The
group medical business experienced a lower premium to
benefit ratio due to rate increases and better management of
claims. Group life had improved mortality in 2000. The pre-
need business did not exist at the end of the third quarter
1999 as it was assumed from an affiliated Company during the
last quarter of 1999. The annuity and individual life
business experienced strong market performance in addition
to lower interest crediting on the Company's interest
sensitive and investment products.
Expenses
Commission rates have increased from the levels in 1999.
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.
The Company's general and administrative expense to premium
ratio decreased to 22.0% in the third quarter of 2000 from
23% in 1999. Lower general administrative expenses relative
to premium associated with the newly assumed pre-need
business is partially responsible for the decrease. General
cost monitoring and efficiencies accounts for the remainder
of the decrease. The Company continues to monitor expenses,
striving to improve the expense to premium ratio, while
maintaining quality and timely services to policyholders.
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 contract owners bear the investment
risk related to the variable products. Therefore, the risks
associated with the investments supporting the variable
separate accounts are assumed by contract owners, 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
The Company utilizes computer systems to process Company
businesses. Fortis Inc., the Company's parent ("Fortis"),
created a Year 2000 Project Office which was dedicated to
ensuring that all of the systems for Fortis and its
subsidiaries and affiliates were ready for year 2000. The
estimated total cost of the Fortis Year 2000 Project was
approximately $85 million. The cost of the Company's
portion is estimated at $28.6 million. Approximately $1.4
million was expensed by the Company in 2000.
As of December 20, 1999, 100% of the computer system lines
of code that had been identified were renovated and tested
and were ready for year 2000. Although there have been
several minor matters, as of September 30, 2000, no
significant disruptions resulting from the century date
change have been detected. The Company will continue to
monitor the status of and exposure to any potential Year
2000 issues.
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 98%
investment grade bonds as of September 30, 2000 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
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly
caused this report to be signed on it's behalf by the undersigned
thereunto duly authorized.
Fortis Benefits Insurance Company
(Registrant)
Date: November 14, 2000
/s/ Larry Cains
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its principal financial and
chief accounting officer)
