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 March 31, 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 33-63799
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)
March 31, December
2000 31, 1999
(unaudited)
Assets
Investments:
Fixed maturities, at fair value (amortized
Cost 2000--$2,765,938; 1999--$2,802,697)
$2,677,663 $2,706,372
Equity securities, at fair value (cost 2000-
- -$85,042; 1999--$81,554) 89,976 85,021
Mortgage loans on real estate, less
allowance for possible losses (2000 and 758,447 754,514
1999--$11,085)
Policy loans 88,289 83,439
Short-term investments 100,001 115,527
Real estate and other investments 47,634 47,502
3,762,010 3,792,375
Cash and cash equivalents (53,487) 18,670
Receivables:
Uncollected premiums 62,375 62,938
Reinsurance recoverable on unpaid and paid 39,053 23,471
losses
Other 23,353 19,406
124,781 105,815
Accrued investment income 56,170 55,464
Deferred policy acquisition costs 424,994 430,192
Property and equipment at cost, less
accumulated 23,769 25,118
depreciation
Deferred federal income taxes 57,048 52,467
Other assets 1,729 1,582
Due from affiliates - 8,304
Assets held in separate accounts 5,573,678 5,120,152
Total assets $9,970,692 $9,610,139
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
March 31, December
2000 31,
(unaudited 1999
)
Policy reserves, liabilities and
shareholder's equity
Policy reserves and liabilities:
Future policy benefit reserves:
Traditional life insurance $1,118,211 $ 1,106,269
Interest sensitive and investment 1,089,081 1,147,657
products
Accident and health 944,110 940,865
3,151,402 3,194,791
Unearned revenues 29,878 28,673
Other policy claims and benefits payable 256,744 265,486
Policyholder dividends payable 7,566 7,939
3,445,590 3,496,889
Accrued expenses 54,884 59,409
Current income taxes payable 9,305 1,838
Other liabilities 52,107 120,110
Due to affiliates 8,265 -
Liabilities related to separate accounts 5,533,967 5,082,341
Total policy reserves and liabilities 9,104,118 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 439,354 427,811
Unrealized gain on available-for-sale
Securities (net of deferred taxes 2000--
$(28,820); 1999--$31,077) (53,523) (57,715)
Unrealized gain on assets held in separate
Accounts (net of deferred taxes 2000--
$4,169;
1999--$3,476) 7,743 6,456
Total shareholder's equity 866,574 849,552
Total policy reserves, liabilities and $9,970,692 $9,610,139
shareholder's equity
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended
March 31,
2000 1999
Revenues
Insurance Operations:
Traditional life insurance premiums $101,715 $ 66,153
Interest sensitive and investment
products policy charges 26,277 23,871
Accident and health insurance premiums 239,290 251,162
367,282 341,186
Net investment income 72,039 55,607
Net realized gains on investments (11,548) 13,059
Other income 15,736 12,453
Total revenues 443,509 422,305
Benefits and expenses
Benefits to policyholders:
Traditional life insurance 83,004 50,413
Interest sensitive and investment 23,319 23,955
products
Accident and health claims 187,401 213,152
293,724 287,520
Policyholder dividends 441 1,027
Amortization of deferred policy 10,576 9,133
acquisition costs
Insurance commissions 31,109 27,610
General and administrative expenses 90,127 77,638
Total benefits and expenses 425,977 402,928
Income before income taxes 17,532 19,377
Income tax expense (benefits)
Current 13,520 3,675
Deferred (7,531) 3,107
5,989 6,782
Net income 11,543 12,595
Other comprehensive income (loss):
Unrealized gain (loss) on 5,479 (37,339)
investments
Comprehensive income (loss) $ $
17,022 (24,744)
See accompanying notes.
Fortis Benefits Insurance Company
Statements of Cash Flows
(In thousands)
Three Months ended
March 31,
2000 1999
Operating activities
Net income $ $
11,543 12,595
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in future policy benefit 25,850 22,084
reserves
(Decrease) increase in other policy
claims and benefits and policyholder (7,910) 5,944
dividends payable
Provision for deferred federal income (7,531) 3,107
taxes
Increase (decrease) in income taxes 7,466 3,676
payable
Amortization of deferred policy 10,576 9,133
acquisition costs
Policy acquisition costs deferred (8,447) (20,250)
Provision for depreciation 1,273 (1,684)
Amortization of investment premiums, (594) (4,442)
net
Change in uncollected premiums,
accrued investment income,
reinsurance recoverable, other
receivables, other assets, debt, (75,778) (47,052)
accrued expenses, and other
liabilities
Net realized gains on investments 11,548 (13,056)
Loss on sale of property and -0- 380
equipment
Net cash provided by operating (32,004) (29,565)
activities
Investing activities
Purchases of fixed maturity (422,661) (606,812)
investments
Sales or maturity of fixed maturity 447,363 627,561
investments
Increase in short-term investments 15,527 (16,861)
Purchases of other investments (28,796) (130,723)
Sales or maturities of other 17,577 118,649
investments
Sale or (purchase) of property and 76 3,489
equipment
Net cash provided (used by) by 29,086 (4,697)
investing activities
Financing activities
Activities related to investment
products:
Considerations received 53,876 59,586
Surrenders and death benefits (131,880) (95,453)
Interest credited to policyholders 8,765 10,429
Net cash used in financing activities (69,239) (25,438)
Decrease in cash and cash equivalents (72,157) (59,700)
Cash and cash equivalents at 18,670 5,548
beginning of period
Cash and cash equivalents at end of $ $
period (53,487) (54,152)
See accompanying notes.
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 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 March 31, 2000 and the related statement of
income for the three months ended March 31, 2000 and
1999, and cash flows for the three months ended March
31, 2000 and 1999.
Income tax payments for the three months ended March
31, 2000 and March 31, 1999 were $7,098,000 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 March 31, 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 March 31, 2000
(in thousands):
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gain Loss Value
Fixed Income
Securities:
Governments 175,458 4,691 (1,454) 178,695
Public utilities 240,200 199 (10,005) 230,394
Industrial and
miscellaneous 2,109,549 5,544 (80,457) 2,034,636
Other 240,731 338 (7,131) 233,938
Total 2,765,938 10,772 (99,047) 2,677,663
Equity securities 85,042 8,186 (3,252) 89,976
2,850,980 18,958 (102,299) 2,767,639
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
March 31, 2000
(unaudited)
The amortized cost and fair value in fixed maturities
at March 31, 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 $ $
87,696 87,470
Due after one year through five years 681,883 667,319
Due after five years through ten years 834,506 805,913
Due after ten years 1,161,853 1,116,961
Total $2,765,938 $2,677,663
Proceeds from sales and maturities of investments in
fixed maturities in the three month period ended March
31, 2000 and March 31, 1999 were $ 447,061,000 and
$609,616,000 respectively. Gross gains of $1,696,000
and $8,468,000 and gross losses of $14,412,000 and
$4,709,000 were realized on sales during the three
month period ended March 31, 2000 and 1999,
respectively.
Mortgage Loans: The Company has issued commercial
mortgage loans on properties located throughout the
country. Currently, approximately 35% 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
March 31, 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 three months of each year were as follows (in
thousands):
Realized Gain (Loss)
Investment
Income on Investments
2000 1999 2000 1999
Fixed maturities $50,297 $39,156 $(12,716) $ 3,759
Preferred stocks - 7 - 3
Common stocks 2,575 2,323 1,246 9,297
Mortgage loans on real 16,109 13,398 66 -
estate
Policy loans 1,570 1,293 - -
Short-term investments 115 238 - -
Real estate and other 2,923 639 (144) -
investments
73,589 57,054 $(11,548) $13,059
Expenses 1,550 1,447
$72,039 $55,607
Fortis Benefits Insurance Company
Management's Discussion and Analysis of Financial
Condition and Results of Operations March 31, 2000
Compared to March 31, 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 $34
million in gross premium in the first quarter of 2000.
For the three months ended March 31, group disability
and dental, group medical, group life, pre-need, and
annuity and individual life represented 39%, 26%, 18%,
10% and 8%, respectively of premium in 2000 and 39%,
34%, 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
$12,716,000 for the first three months of 2000 as
compared to net capital gains of $3,759,000 for the
same period in 1999.
Benefits
The total year-to-date policyholder benefit to premium
ratio decreased to 80% in 2000 from 84% in 1999. The
group disability and dental, group medical, group life,
pre-need, and annuity and individual life benefit to
premium ratios for the three months ended March 31,
were 82%, 77%, 72%, 105% and 82% respectively in 2000
and 85%, 86%, 74%, 0% and 103% 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 first 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 increased to 24.5% in the first quarter
of 2000 from 22.8% in 1999. Administrative system
conversions and development and costs associated with
increased sales activity account for this increase.
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 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
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 March 31,
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 March 31, 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
a. None
b. 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: May 12, 2000
/s/ Larry Cains
Larry Cains
Controller and Treasurer
(on behalf of the Registrant and as its principal financial
and chief accounting officer)
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