<PAGE>
As filed with the Securities and Exchange Commission on December 18, 1998.
Registration Nos. 333-65233
811-5439
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
Post-Effective Amendment No. ____
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 58
VARIABLE ACCOUNT D
OF
FORTIS BENEFITS INSURANCE COMPANY
(Exact Name of Registrant)
---------------------------------
FORTIS BENEFITS INSURANCE COMPANY
(Name of Depositor)
500 Bielenberg Drive
Woodbury, Minnesota 55125
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code:
651-738-5000
---------------------------------
RHONDA J. SCHWARTZ, ESQ.
500 Bielenberg Drive
Woodbury, Minnesota 55125
(Name and Address of Agent for Service)
<PAGE>
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
-----------------------------------
It is proposed that this filing will be come effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule 485.
-----
on January 1, 1999 pursuant to paragraph (b) of Rule 485.
-----
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
-----
on _____________ pursuant to paragraph (a)(1) of Rule 485.
-----
If appropriate, check the following box:
This post-effective amendment designated a new effective date for
----- a previously filed post-effective amendment.
--------------------------------------
<PAGE>
VARIABLE ACCOUNT D OF
FORTIS BENEFITS INSURANCE COMPANY
Cross Reference Sheet Showing Location
of Information in Prospectus or
Statement of Additional Information
---------------------------------------
Form N-4 Prospectus Caption
- -------- ------------------
1. Cover Page Cover Page
2. Definitions Special Terms Used in This
Prospectus
3. Synopsis of Highlights Summary of Contract Features
4. Condensed Financial Further Information About Fortis
Information Benefits
5. General Description of Cover Page; Summary of Contract
Registrant, Depositor and Features; Fortis Benefits/Fortis
Portfolio Companies Financial Group Member; The Variable
Account; The Portfolios; The Fixed
Account; Further Information about
Fortis Benefits
6. Deductions Summary of Contract Features;
Charges and Deductions
7. General Description of Accumulation Period; General
Variable Annuity Contracts Provisions
8. Annuity Period The Annuity Period
9. Death Benefit Summary of Contract Features;
Accumulation Period
10. Purchase and Contract Accumulation Period
Value
11. Redemptions Summary of Contract Features;
Total and Partial Surrenders
12. Taxes Summary of Contract Features;
Federal Tax Matters
13. Legal Proceedings None
14. Table of Contents of the Contents of the Statement of
Statement of Additional Additional Information
Information
<PAGE>
Form N-4 Statement of Additional
(cont'd.) Information Caption
- --------- -----------------------
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and Ownership of Securities
History (in Prospectus)
18. Services Services
19. Purchase of Securities Distribution (in Prospectus)
Being Offered
20. Underwriters Services
21. Calculation of Performance Appendix A to Statement of
Data Additional Information
22. Annuity Payments Calculation of Annuity Payments
23. Financial Statements Variable Account
Financial Statements
<PAGE>
VARIABLE ACCOUNT D OF
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-963-9222
P.O. BOX 64273 500 BIELENBERG DRIVE
ST. PAUL WOODBURY
MINNESOTA 55164 MINNESOTA 55125
This prospectus describes interests under flexible premium deferred combination
variable and fixed annuity contracts issued by Fortis Benefits Insurance Company
("Fortis Benefits").
These contracts allow you to accumulate funds on a tax-deferred basis. You may
elect a guaranteed interest accumulation option through a fixed account or a
variable return accumulation option through a variable account or a combination
of these two options. Under the variable return accumulation option, you can
choose among the following investment portfolios:
<TABLE>
<S> <C>
Federated American Leaders Fund II Federated High Income Bond Fund II
Federated Equity Income Fund II Federated International Equity Fund II
Federated Fund for U.S. Government Securities II Federated Prime Money Fund II
Federated Growth Strategies Fund II Federated Utility Fund II
</TABLE>
The accompanying prospectus for these investment
portfolios describes the investment objectives, policies
and risks of each of the portfolios. You can choose among
different guarantee periods under the guaranteed interest
accumulation option, each of which has its own current
interest rate which is guaranteed for the entire
guarantee period. In states where guarantee periods fixed
accounts are not offered, you can choose an interest in a
fixed account which has a minimum interest rate guarantee
and a higher current rate which can be changed from time
to time.
There are two different forms of contract offered by this
prospectus. One form is offered where all of the proposed
owners of the contract are less than 61 years old when
the contract is purchased. A second form is offered where
one or more of the proposed owners are 61 years old, or
older. The differences between the two forms of contracts
are: (1) the death benefit provided; (2) the provision
for withdrawals from the contract without a surrender
charge during the surrender charge period, and (3) the
mortality and expense risk charge imposed. These
provisions are discussed in this prospectus under the
sections entitled (1) Accumulation Period--Benefit
Payable on Death of Owner (or Annuitant); (2) Charges and
Deductions--Surrender Charge--Free Surrenders; and (3)
Charges and Deductions--Charges Against the Variable
Account.
This prospectus gives you information about the contracts
you should know before investing. This prospectus must be
accompanied by a current prospectus of the available
investment portfolios. These prospectuses should be read
carefully and kept for future reference.
A Statement of Additional Information, dated January 1,
1999, about certain aspects of the contracts has been
filed with the Securities and Exchange Commission and is
available without charge from Fortis Benefits at the
address and phone number printed above. The Table of
Contents for the Statement of Additional Information
appears on page 25 of this prospectus.
THESE CONTRACTS ARE NOT OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, CREDIT UNION, BROKER-DEALER OR
OTHER FINANCIAL INSTITUTION. THEY ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. THEY
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
FORTIS-Registered Trademark- and Fortis-Registered
Trademark- are registered servicemarks of Fortis AMEV
and Fortis AG.
TRIPLE
CROWN
VARIABLE
ANNUITY
Contracts Under Flexible
Premium Deferred
Combination Variable and
Fixed Annuity Contracts
PROSPECTUS DATED
January 1, 1999
[LOGO]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms Used in this Prospectus................................. 3
Information Concerning Fees and Charges............................... 4
Summary of Contract Features.......................................... 6
Fortis Benefits/Fortis Financial Group Member......................... 7
The Variable Account.................................................. 8
The Portfolios........................................................ 8
The Fixed Account..................................................... 8
- Guarantee Periods Fixed Account................................. 9
- Market Value Adjustment......................................... 9
- General Account Fixed Account................................... 10
- General Account Fixed Account Transfers......................... 10
- Investments by Fortis Benefits.................................. 10
Accumulation Period................................................... 11
- Issuance of a Contract and Purchase Payments.................... 11
- Contract Value.................................................. 11
- Allocation of Purchase Payments and Contract Value.............. 12
- Total and Partial Surrenders.................................... 12
- Telephone Transactions.......................................... 13
- Benefit Payable on Death of Owner (or Annuitant)................ 13
The Annuity Period.................................................... 14
- Annuity Commencement Date....................................... 14
- Commencement of Annuity Payments................................ 14
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 15
- Annuity Options................................................. 15
- Death of Annuitant or Other Payee............................... 15
- Contract Owner Services......................................... 15
- Dollar Cost Averaging....................................... 15
- Rebalancing................................................. 16
Charges and Deductions................................................ 16
- Premium Taxes................................................... 16
- Charges Against the Variable Account............................ 16
- Tax Charge...................................................... 16
- Surrender Charge................................................ 16
- Free Surrenders............................................. 17
- Nursing Care/Hospitalization Waiver of Surrender Charges.... 17
- Miscellaneous................................................... 17
General Provisions.................................................... 17
- The Contracts................................................... 17
- Postponement of Payment......................................... 18
- Misstatement of Age or Sex and Other Errors..................... 18
- Assignment...................................................... 18
- Beneficiary..................................................... 18
- Reports......................................................... 18
Rights Reserved By Fortis Benefits.................................... 18
Distribution.......................................................... 19
Federal Tax Matters................................................... 19
Further Information about Fortis Benefits............................. 22
- General......................................................... 22
- Ownership of Securities......................................... 22
- Selected Financial Data......................................... 22
- Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 22
Voting Privileges..................................................... 24
Legal Matters......................................................... 25
Other Information..................................................... 25
Contents of Statement of Additional Information....................... 25
Fortis Benefits Financial Statements.................................. 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Appendix A--Sample Market Value Adjustment Calculations............... A-1
Appendix B--Explanation of Expense Calculations....................... B-1
Appendix C--Sample Death Benefit Calculations......................... C-1
Appendix D--Participating Portfolios.................................. D-1
Appendix E--Pro Rata Adjustments...................................... E-1
</TABLE>
THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT
INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR
ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY
FORTIS BENEFITS.
<PAGE>
SPECIAL TERMS USED IN THIS PROSPECTUS
<TABLE>
<S> <C>
Accumulation The time period under a contract between the contract issue date and the Annuity Commencement
Period Date.
Accumulation A unit of measure used to calculate the owners' interest in the Variable Account during the
Unit Accumulation Period.
Annuitant A person during whose life annuity payments are to be made by Fortis Benefits under the
contract. The Annuitant is the person named in the application for the contract. If such
person dies before the Annuity Commencement Date and there is an additional annuitant named in
the application, the additional annuitant shall become the Annuitant. If there is no named
additional annuitant, or the additional annuitant has predeceased the annuitant who is named
in the application, the owner, if he or she is a natural person, shall become the Annuitant.
Annuity The date on which the Annuity Period commences.
Commencement
Date
Annuity Period The time period following the Accumulation Period, during which annuity payments are made by
Fortis Benefits.
Annuity Unit A unit of measurement used to calculate variable annuity payments.
Beneficiary The person entitled to receive the death benefits under the terms of the contract.
Fixed Account The Guarantee Periods Fixed Account or the General Account Fixed Account.
Fixed Annuity An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
Option that you designate one or more fixed payments.
General The name of the alternative under which purchase payments are allocated to Fortis Benefits'
Account Fixed general account.
Account
Guarantee The non-unitized separate account that Fortis Benefits uses to account for amounts allocated
Periods Fixed to guarantee periods.
Account
Market Value Positive or negative adjustment in Guarantee Periods Fixed Account value that we make if such
Adjustment value is paid out more than fifteen days before or after the end of a guarantee period in
which it was being held.
Non-Qualified Contracts that do not qualify for the special federal income tax treatment applicable in
Contracts connection with certain retirement plans.
Portfolio Each separate investment portfolio eligible for investment by the Variable Account as set
forth on the cover page of this prospectus.
Qualified Contracts that are qualified for the special federal income tax treatment applicable in
Contracts connection with certain retirement plans.
Valuation Date All business days except, with respect to any subaccount of the Variable Account, days on
which the related Portfolio does not value its shares. Generally, the Portfolios value their
shares on each day the New York Stock Exchange is open.
Valuation The period that starts at the close of regular trading on the New York Stock Exchange on a
Period Valuation Date and ends at the close of regular trading on the exchange on the next succeeding
Valuation Date.
Variable The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance
Account Company established to receive and invest purchase payments under contracts.
Variable An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
Annuity Option chosen by you one or more payments which vary in amount in accordance with the net investment
experience of the subaccounts selected by the Annuitant.
</TABLE>
3
<PAGE>
INFORMATION CONCERNING FEES AND CHARGES
CONTRACTOWNER TRANSACTION CHARGES
<TABLE>
<S> <C>
Front-End Sales Charge Imposed on
Purchases................................... 0%
Maximum Surrender Charge for Sales
Expenses.................................... 7%
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF YEARS SURRENDER CHARGE AS A
SINCE PURCHASE PERCENTAGE OF PURCHASE
PAYMENT WAS APPLIED PAYMENT
- -------------------- -------------------------
<S> <C>
Less than 3 7%
At least 3 but less
than 4 5%
At least 4 but less
than 5 4%
At least 5 but less
than 6 3%
At least 6 but less
than 7 2%
7 or more 0%
</TABLE>
<TABLE>
<S> <C>
Other Surrender Fees....................... 0%
Exchange Fee............................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE............. $0
</TABLE>
<TABLE>
<CAPTION>
ALL CONTRACT ONE OR MORE CONTRACT
OWNERS UNDER 61 OWNERS 61 OR OLDER
--------------- ---------------------
<S> <C> <C>
VARIABLE ACCOUNT ANNUAL CHARGES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge............... 1.10% 1.30%
Variable Account Administrative Charge.......... 0.10% 0.10%
--- ---
Total Variable Account Annual Expenses........ 1.20% 1.40%
</TABLE>
MARKET VALUE ADJUSTMENT WITH RESPECT TO GUARANTEE PERIODS FIXED ACCOUNT
Surrenders and other withdrawals from the Guarantee Periods Fixed Account more
than fifteen days from the end of a guarantee period are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the Fixed
Account value. It is computed pursuant to a formula that is described in more
detail under "Market Value Adjustment."
PORTFOLIO ANNUAL EXPENSES
The following table illustrates the advisory fees and other expenses applicable
to the Portfolios. Except as noted, the following figures are a percentage of
average net assets and are based on figures for the year ended December 31,
1997. The information set forth in this table was provided to Fortis Benefits by
the Portfolio managers and Fortis Benefits has not independently verified such
information. These expenses are reflected in the Portfolio's net asset value and
are not deducted from a contract's account value.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO
OPERATING
INVESTMENT EXPENSES
ADVISORY AND OTHER (AFTER EXPENSE
MANAGEMENT FEE EXPENSES REIMBURSEMENT)(a)
-------------- -------- -----------------
<S> <C> <C> <C>
Federated American Leaders Fund II.......................... 0.66% 0.19% 0.85%
Federated Equity Income Fund II (b)......................... 0.00% 0.85% 0.85%
Federated Fund for U.S. Government Securities II............ 0.15% 0.65% 0.80%
Federated Growth Strategies Fund II......................... 0.08% 0.77% 0.85%
Federated High Income Bond Fund II.......................... 0.51% 0.29% 0.80%
Federated International Equity Fund II...................... 0.02% 1.21% 1.23%
Federated Prime Money Fund II............................... 0.30% 0.50% 0.80%
Federated Utility Fund II................................... 0.48% 0.37% 0.85%
</TABLE>
- ------------------------
(a) The total operating expenses of each of the funds, absent the voluntary
waiver of a portion of the management fee, would have been: 0.94% for the
American Leaders Fund II; 2.29% for the Equity Income Fund II; 1.25% for
the Fund for U.S. Government Securities II; 1.52% for the Growth Strategies
Fund II; 0.89% for the High Income Bond Fund II; 2.21% for the
International Equity Fund II; 1.00% for the Prime Money Fund II; and 1.12%
for the Utility Fund II.
(b) This Portfolio has adopted a Rule 12b-1 distribution plan but has no
present intention of paying or accruing the 12b-1 fee under the plan. If
the Portfolio were paying or accruing the 12b-1 fee, the Portfolio would be
able to pay up to 0.25% of its average daily net Portfolio assets for the
12b-1 fee. See "Distribution of Fund Shares" in the Portfolio prospectus.
4
<PAGE>
EXAMPLES*
A. CONTRACTS/ALL OWNERS UNDER 61
If you SURRENDER your contract, you would pay the following cumulative expenses
on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Federated American Leaders Fund II.......................... 84 117 145 234
Federated Equity Income Fund II............................. 84 117 145 234
Federated Fund for U.S. Gov't Securities II................. 83 116 142 229
Federated Growth Strategies Fund II......................... 84 117 145 234
Federated High Income Bond Fund II.......................... 83 116 142 229
Federated International Equity Fund II...................... 87 129 164 273
Federated Prime Money Fund II............................... 83 116 142 229
Federated Utility Fund II................................... 84 117 145 234
</TABLE>
If you COMMENCE AN ANNUITY payment option, or DO NOT SURRENDER your contract,
you would pay the following cumulative expenses on a $1000 investment, assuming
a 5% annual return on assets:
<TABLE>
<CAPTION>
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Federated American Leaders Fund II.......................... 21 63 109 234
Federated Equity Income Fund II............................. 21 63 109 234
Federated Fund for U.S. Gov't Securities II................. 20 62 106 229
Federated Growth Strategies Fund II......................... 21 63 109 234
Federated High Income Bond Fund II.......................... 20 62 106 229
Federated International Equity Fund II...................... 24 75 128 273
Federated Prime Money Fund II............................... 20 62 106 229
Federated Utility Fund II................................... 21 63 109 234
</TABLE>
B. CONTRACTS/ONE OR MORE OWNERS 61 OR OLDER
If you SURRENDER your contract, you would pay the following cumulative expenses
on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Federated American Leaders Fund II.......................... 86 123 155 255
Federated Equity Income Fund II............................. 86 123 155 255
Federated Fund for U.S. Gov't Securities II................. 85 122 152 250
Federated Growth Strategies Fund II......................... 86 123 155 255
Federated High Income Bond Fund II.......................... 85 122 152 250
Federated International Equity Fund II...................... 89 135 174 293
Federated Prime Money Fund II............................... 85 122 152 250
Federated Utility Fund II................................... 86 123 155 255
</TABLE>
If you COMMENCE AN ANNUITY payment option, or DO NOT SURRENDER your contract,
you would pay the following cumulative expenses on a $1000 investment, assuming
a 5% annual return on assets:
<TABLE>
<S> <C> <C> <C> <C>
Federated American Leaders Fund II.......................... 23 69 119 255
Federated Equity Income Fund II............................. 23 69 119 255
Federated Fund for U.S. Gov't Securities II................. 22 68 116 250
Federated Growth Strategies Fund II......................... 23 69 119 255
Federated High Income Bond Fund II.......................... 22 68 116 250
Federated International Equity Fund II...................... 26 81 138 293
Federated Prime Money Fund II............................... 22 68 116 250
Federated Utility Fund II................................... 23 69 119 255
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
------------------------
The foregoing tables and examples are included to assist you in understanding
the transaction and operating expenses imposed directly or indirectly under the
contracts and the Portfolios. Amounts for state premium taxes or similar
assessments will also be deducted, where applicable.
See Appendix B for an explanation of the calculation of the amounts set forth
above.
5
<PAGE>
SUMMARY OF CONTRACT FEATURES
The following summary should be read in conjunction with the detailed
information in this prospectus. Variations from the information appearing in
this prospectus due to requirements particular to your state are described in
supplements which are attached to this prospectus, or in endorsements to the
contract as appropriate.
The contracts are designed to provide individuals with retirement benefits
through the accumulation of purchase payments on a fixed or variable basis, and
by the application of such accumulations to provide fixed or variable annuity
payments.
"We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your"
mean a reader of this prospectus who is contemplating making purchase payments
or taking any other action in connection with a contract.
Depending on the state that you live in, the contract that is issued to you may
be as a part of a group contract or as an individual contract. Participation in
a group contract will be evidenced by the issuance of a certificate showing your
interest under the group contract. In other states, an individual contract will
be issued to you. Both the certificate and the contract are referred to as a
"contract" in this prospectus.
FREE LOOK
You have the right to examine a contract during a "free look" period after you
receive the contract and return it for a refund of the amount of the then
current contract value. However, in certain states where required by state law
the refund will be in the amount of all purchase payments that have been made,
without interest or appreciation or depreciation. The "free look" period is
generally 10 days unless a longer time is specified on the face page of your
contract.
PURCHASE PAYMENTS
The initial purchase payment under a contract must be at least $5,000 ($2,000
for a contract which is a part of a qualified plan). Additional purchase
payments under a contract must be at least $500 (or $50 if part of a systematic
investment plan). See "Issuance of a Contract and Purchase Payments."
ALLOCATION OF PURCHASE PAYMENTS
On the date that the contract is issued, except as hereafter explained, the
initial purchase payment is allocated, as specified by you in the contract
application, among one or more of the Portfolios, or to one or more of the
guarantee periods in the Guarantee Periods Fixed Account (or to the General
Account Fixed Account if the owner resides in a state in which the Guaranteed
Periods Fixed Account is not offered), or to a combination thereof. If you
reside in a state requiring a refund of all purchase payments under the "free
look" privilege, the initial purchase payment will be allocated to the Federated
Prime Money Fund II until the following number of days after we mail the
contract to you: (1) the number of days in the "free look" period, plus (2) five
days. After the expiration of the period, the contract value will be allocated
to the fixed account and the Portfolios as directed by you. Subsequent purchase
payments are allocated in the same way, or pursuant to different allocation
percentages that you may subsequently request in writing.
VARIABLE ACCOUNT INVESTMENT OPTIONS
Each of the subaccounts of the Variable Account invests in shares of a
Portfolio. Contract value in each of the subaccounts of the Variable Account
will vary to reflect the investment experience of each of the corresponding
Portfolios, as well as deductions for certain charges.
Each Portfolio has a separate and distinct investment objective. A full
description of the Portfolios and their investment objectives, policies, risks
and expenses can be found in the current prospectus for the Portfolio, which
accompanies this prospectus, and the Statement of Additional Information for the
Portfolio which is available upon request. (See Appendix D which contains a
summary of the investment objectives of each Portfolio.)
FIXED ACCOUNT INVESTMENT OPTIONS
Either a Guarantee Periods Fixed Account or a General Account Fixed Account is
available, depending upon your state of residence.
Any amount allocated by the owner to the Guarantee Periods Fixed Account earns a
guaranteed interest rate. The level of the guaranteed interest rate depends on
the length of the guarantee period selected by the owner. We currently make
available ten different guarantee periods, ranging from one to ten years (less
in some states where required by state limitations). If amounts are transferred,
surrendered or otherwise paid out more than fifteen days before or after the end
of the applicable guarantee period other than the one-year guarantee period, a
Market Value Adjustment will be applied to increase or decrease the amount that
is paid out. Accordingly, the Market Value Adjustment can result in gains or
losses to you.
Any amount allocated to the General Account Fixed Account will accrue interest
at a minimum effective annual rate plus such additional excess interest rate
which we may declare from time-to-time.
For a more complete discussion of the Fixed Accounts investment option and the
Market Value Adjustment, see "The Fixed Account."
TRANSFERS
During the Accumulation Period, you can transfer all or part of your contract
value from one subaccount to another or into the Fixed Account and, subject to
any Market Value Adjustment, from one guarantee period of a Guarantee Periods
Fixed Account to another or into a subaccount. There are limitations on the
frequency and amounts of transfers from the General Account Fixed Account. There
is currently no charge for these transfers. We reserve the right to restrict the
frequency of, or otherwise condition, terminate, or impose charges upon,
transfers from a subaccount during the Accumulation Period. During the Annuity
Period the person receiving annuity payments may make up to four transfers (but
not from a Fixed Annuity Option) during each year of the Annuity Period. For a
description of certain limitations on transfer rights, see "Allocations of
Purchase Payments and Contract Value Transfers."
TOTAL OR PARTIAL SURRENDERS
Subject to certain conditions, all or part of the contract value may be
surrendered by you before the earlier of (1) the Annuity Commencement Date, or
(2) if the owner is a non-natural person, the Annuitant's
6
<PAGE>
death. Amounts surrendered from the Guarantee Periods Fixed Account may be
subject to a Market Value Adjustment. See "Total and Partial Surrenders" and
"Market Value Adjustment." Particular attention should be paid to the tax
implications of any surrender, including possible penalties for premature
distributions. See "Federal Tax Matters."
CHARGES AND DEDUCTIONS
We deduct daily charges at a percentage rate per annum of the value of the
average net assets in the Variable Account for the mortality and expense risks
we assume. The percentage rate for contracts issued where all owners are less
than 61 years old at the time of purchase is 1.20%. The percentage rate for
contracts issued where one or more owner is 61 years old, or older, at the time
of purchase is 1.40%. Also, there may be state premium tax charges deducted from
your contract value. See "Charges and Deductions."
ANNUITY PAYMENTS
The contract provides several types of annuity benefits to you or other persons
you properly designate to receive such payments, including Fixed and Variable
Annuity Options. You have considerable flexibility in choosing the Annuity
Commencement Date. However, the tax implications of an Annuity Commencement Date
must be carefully considered, including the possibility of penalties for
commencing benefits either too soon or too late. See "Annuity Commencement
Date," "Annuity Options" and "Federal Tax Matters" in this prospectus and
"Taxation Under Certain Retirement Plans" in the Statement of Additional
Information.
DEATH BENEFIT
In the event of the death of the owner, or the Annuitant if the owner is a
non-natural person, prior to the Annuity Commencement Date, a death benefit is
payable. See "Benefit Payable on Death of Owner (or Annuitant)."
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a contract may be limited by the
terms of any applicable employee benefit plan. These limitations may restrict
such things as total and partial surrenders, the amount or timing of purchase
payments that may be made, when annuity payments must start and the type of
annuity options that may be selected. Accordingly, you should familiarize
yourself with these and all other aspects of any retirement plan in connection
with which a contract is issued.
The record owner of the group variable annuity contract pursuant to which group
certificates may be issued will be a bank trustee whose sole function is to hold
record ownership of the contract or an employer (or the employer's designee) in
connection with an employee benefit plan. In the latter cases, certain rights
that a owner otherwise would have under a contract may be reserved instead by
the employer.
TAX IMPLICATIONS
The tax implications for you or any other persons who may receive payments under
a contract, and those of any related employee benefit plan can be quite
important. A brief discussion of some of these is set out under "Federal Tax
Matters" in this prospectus and "Taxation Under Certain Retirement Plans" in the
Statement of Additional Information, but such discussion is not comprehensive.
Therefore, you should consider these matters carefully and consult a qualified
tax adviser before making purchase payments or taking any other action in
connection with a contract or any related employee benefit plan. Failure to do
so could result in serious adverse tax consequences which might otherwise have
been avoided.
QUESTIONS AND OTHER COMMUNICATIONS
Any question about procedures of the contract should be directed to your sales
representative, or Fortis Benefits' home office: P.O. Box 64273, St. Paul,
Minnesota, 55164: 1-800-963-9222. Purchase payments and written requests should
be mailed or delivered to the same home office address. All communications
should include the contract number, the owner's name and, if different, the
Annuitant's name. The number for telephone transfers is 1-800-963-9222.
Any purchase payment or other communication, except a free-look cancellation
notice, is deemed received at Fortis Benefit's home office on the actual date of
receipt there in proper form unless received (1) after the close of regular
trading on The New York Stock Exchange, or (2) on a date that is not a Valuation
Date. In either of these two cases, the date of receipt will be deemed to be the
next Valuation Date.
FINANCIAL AND PERFORMANCE INFORMATION
This prospectus contains no Accumulation Unit Information for the applicable
subaccounts of the Variable Account because no contracts have been sold and
therefore no Accumulation Units have been issued.
Audited financial statements of the available subaccounts of the Variable
Account are not included in the Statement of Additional Information because
those subaccounts have not yet commenced operations, have no assets or
liabilities, and have received no income nor incurred any expenses as of the
date of this prospectus.
Advertising and other sales materials may include yield and total return figures
for the subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total return" is
the total change in value of an investment in the subaccount over a period of
time specified in the advertisement. The rate of return shown would produce that
change in value over the specified period, if compounded annually. Yield and
total return figures do not reflect premium tax charges. This makes the
performance shown more favorable.
Financial information concerning Fortis Benefits is included in this prospectus
under "Further Information About Fortis Benefits" and "Fortis Benefits Financial
Statements."
FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER
Fortis Benefits Insurance Company is the issuer of the contracts. At the end of
1997, Fortis Benefits had approximately $94 billion of total life insurance in
force. Fortis Benefits is a Minnesota corporation
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founded in 1910. It is qualified to sell life insurance and annuity contracts in
the District of Columbia and in all states except New York. Fortis Benefits is
an indirectly wholly-owned subsidiary of Fortis, Inc., which is itself
indirectly owned 50% by Fortis (NL)N.V. and 50% by Fortis (B). Fortis, Inc.
manages the United States operations for these two companies.
Fortis Benefits is a member of the Fortis Financial Group. That Group is a joint
effort by Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and
Fortis Insurance Company to offer financial products through the management,
marketing and servicing of mutual funds, annuities and life insurance, and
disability income products.
Fortis (NL)N.V. is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
(B) is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis (NL)N.V. and
Fortis (B) have merged their operating companies under the trade name of Fortis.
The Fortis group of companies is active in insurance, banking and financial
services, and real estate development in The Netherlands, Belgium, the United
States, Western Europe, and the Pacific Rim. The Fortis group of companies had
approximately $167 billion in assets at the end of 1997.
All of the guarantees and commitments under the contracts are general
obligations of Fortis Benefits, regardless of whether you have allocated the
contract value to the Variable Account or to the Fixed Account. None of Fortis
Benefits' affiliated companies has any legal obligation to back Fortis Benefits'
obligations under the contracts.
THE VARIABLE ACCOUNT
The Variable Account is a segregated investment account of Fortis Benefits.
Fortis Benefits established Variable Account D under Minnesota insurance law as
of October 14, 1987. The Variable Account is an integral part of Fortis
Benefits. However, the Variable Account is registered with the Securities and
Exchange Commission as a unit investment trust under the Investment Company Act
of 1940. Assets in the Variable Account representing reserves and liabilities
under these contracts and other variable annuity contracts issued by Fortis
Benefits will not be chargeable with liabilities arising out of any other
business of Fortis Benefits.
The Variable Account has a number of subaccounts. The assets in each subaccount
are invested exclusively in one of the Portfolios listed on page one of this
prospectus. Income and both realized and unrealized gains or losses from the
assets of each subaccount of the Variable Account are credited to or charged
against that subaccount without regard to income, gains or losses from any other
subaccount of the Variable Account or arising out of any other business we may
conduct. We may add or eliminate new subaccounts as new Portfolios are added or
eliminated.
THE PORTFOLIOS
You may choose from among a number of Portfolios. Each is a mutual fund
available for purchase only as a funding vehicle for benefits under variable
life insurance and variable annuities issued by Fortis Benefits and other life
insurance companies. (See Appendix D for a summary of the investment objectives
of each Portfolio.) Each Portfolio corresponds to one of the subaccounts of the
Variable Account. The assets of each Portfolio are separate from the others, and
each Portfolio operates as a separate investment portfolio whose performance has
no effect on the investment performance of any other Portfolio. See the
prospectus for each Portfolio for more detailed information for each Portfolio,
such as its investment policies and restrictions, charges, risks associated with
investing in it, and other aspects of its operations. A prospectus for the
Portfolios you are considering must accompany this prospectus and you should
read it together with this prospectus. Federated Advisers is the investment
adviser for all of the Portfolios other than Federated International Equity Fund
II, which is advised by Federated Global Research Corp. You may obtain any
prospectus without charge from Fortis Benefits by calling 1-800-963-9222, or
writing P.O. Box 64273, St. Paul, Minnesota 55164.
Fortis Benefits purchases and redeems Portfolios' shares for the Variable
Account at their net asset value without any sales or redemption charges. We
automatically reinvest any dividend or capital gain distributions attributable
to contracts in shares of the Portfolio from which they are received at the
Portfolio's net asset value on the date paid. These dividends and distributions
will have the effect of reducing the net asset value of each share of the
corresponding Portfolio and increasing, by an equivalent value, the number of
shares outstanding of the Portfolio. However, the value of your interest in the
corresponding subaccount will not change as a result of any of these dividends
and distributions.
Portfolios may also be available to registered separate accounts supporting
variable annuity and variable life products of other participating insurance
companies, as well as to the Variable Account and other separate accounts of
Fortis Benefits. Although Fortis Benefits does not anticipate any disadvantages
to this, there is a possibility that a material conflict may arise between the
interest of the Variable Account and one or more of the other separate accounts
participating in the Portfolios. A conflict may occur due to a change in law
affecting the operations of variable life and variable annuity separate
accounts, differences in the voting instructions of the owners and those of
other companies, or some other reason. In the event of conflict, Fortis Benefits
will take any steps necessary to protect you or your beneficiaries.
THE FIXED ACCOUNT
This prospectus offers interests in either of two Fixed Accounts, depending upon
your state. The Fixed Accounts are (1) a Guarantee Periods Fixed Account or (2)
a General Account Fixed Account. This prospectus refers to both of these Fixed
Accounts as the Fixed Account unless a distinction is not relevant.
We offer a Guaranteed Periods Fixed Account in most states. However, in a
limited number of states we offer a General Account Fixed Account in lieu of the
Guarantee Periods Fixed Account. You should ask Fortis Benefits or your account
representative to determine which Fixed Account is available in your state.
Charges under the contract are the same as when you allocate monies to the
Variable Account, except that we do not impose the Variable Account charges for
mortality and
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expense risk and administrative expenses (see Charges and Deductions--Charges
Against the Variable Account) on amounts of Contract Value in the Fixed Account.
GUARANTEE PERIODS FIXED ACCOUNT
Any amount that you allocate to the Guarantee Periods Fixed Account earns a
guaranteed interest rate beginning on the date of your allocation. This
guaranteed interest rate continues for a number of years (not to exceed ten)
that you select. At the end of this guarantee period, we will allocate your
contract value in that guarantee period, including accrued interest, to a new
guarantee period of the same length, unless we have received your written
request to allocate this amount to a different guarantee period or periods or to
one or more of the subaccounts. We must receive this written request at least
three business days prior to the end of the guarantee period. The first day of
the new guarantee period (or other reallocation) will be the day after the end
of the prior guarantee period. We will notify you at least 45 days, and not more
than 75 days, prior to the end of any guarantee period.
We currently make available ten different guarantee periods, ranging from one to
ten years. All ten of these guarantee periods may not be available in some
states because of state limitations. Each guarantee period has its own
guaranteed interest rate, which may differ from those for other guarantee
periods. From time to time we will, at our discretion, change the guaranteed
interest rate for future guarantee periods of various lengths. These changes
will not affect the guaranteed interest rates being paid on guarantee periods
that have already commenced. Each allocation or transfer of an amount to a
guarantee period commences the running of a new guarantee period for that
amount. The amount will earn a guaranteed interest rate that will continue
unchanged until the end of that period. The guaranteed interest rate will never
be less than an effective annual rate of 3%.
Fortis Benefits declares the guaranteed interest rates from time to time as
market conditions dictate. Fortis Benefits advises you of the guaranteed
interest rate for a chosen guarantee period:
- at the time we receive a purchase payment; we effect a transfer, or we
renew a guarantee period.
Fortis Benefits has no specific formula for determining the guaranteed interest
rates for the guarantee periods. The rate may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with amounts allocated to the guarantee period. See
"Investments by Fortis Benefits." In determining guaranteed interest rates, may
also consider, among other factors,
- the duration of a guarantee period,
- regulatory and tax requirements,
- our sales and administrative expenses,
- our assumed risks,
- our profitability objectives, and
- general economic trends.
FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED
INTEREST RATES TO BE DECLARED. FORTIS BENEFITS CANNOT PREDICT OR ASSURE THE
LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL
RATE OF 3%.
You may get information about the guaranteed interest rates applicable to the
various guarantee periods at any time from our home office or from your sales
representative.
MARKET VALUE ADJUSTMENT
We usually apply a Market Value Adjustment:
- for contracts with amounts allocated to the Guarantee Periods Fixed
Account,
- to any Fixed Account Value that we (1) pay out on surrender, (2) transfer,
(3) apply to an annuity option, or (4) pay out as a single sum in lieu of
an annuity,
- before the end of the guarantee period in which we hold the Fixed Account.
However, we do not apply a Market Value Adjustment to any Fixed Account Value
that we:
- pay out during the period beginning fifteen days before, and 15 days
after, the end of a guarantee period in which we hold Fixed Account Value;
- we pay out, or transfer, to the Variable Account, on an automatic periodic
basis under a formal Fortis Benefits program for that purpose, which may
be subject to conditions and limitations in your state (see your sales
representative for information about program availability and conditions
and limitations in your state);
- pay out as a death benefit under a contract; or
- pay out, or transfer, from the one-year guarantee period.
The Market Value Adjustment may increase or decrease the amount of Fixed Account
Value being withdrawn or transferred. The comparison of two guaranteed interest
rates determines whether the Market Value Adjustment produces an increase or a
decrease. The first rate to compare is the guaranteed interest rate for the
amount being transferred or withdrawn. The second rate is the guaranteed
interest rate then being offered for new guarantee periods of the same duration
as that remaining in the guarantee period from which the Fixed Account Value are
being withdrawn or transferred. If the first rate exceeds the second by more
than 1/2%, the Market Value Adjustment produces an increase. If the first rate
does not exceed the second by at least 1/2%, the Market Value Adjustment
produces a decrease. Sample calculations are shown in Appendix A.
The Market Value Adjustment will be determined by multiplying the amount being
withdrawn or transferred from the guarantee period (before deduction of any
applicable surrender charge) by the following factor:
1 + I n / 12
( ----------) - 1
1 + J + .005
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where,
- I is the guaranteed interest rate being credited to the amount being
withdrawn from the existing guarantee period,
- J is the guaranteed interest rate then being offered for new guarantee
periods with durations equal to the number of years remaining in the
existing guarantee period (rounded up to the next higher number of years),
and
- N is the number of months remaining in the existing guarantee period
(rounded up to the next higher number of months).
GENERAL ACCOUNT FIXED ACCOUNT
We hold amounts that you allocate to the General Account Fixed Account in the
general account of Fortis Benefits. We have not registered interests in the
General Account Fixed Account under the Securities Act of 1933, and we have not
registered the General Account Fixed Account as an investment company under the
Investment Company Act of 1940, because of exemptive and exclusionary
provisions. Accordingly, neither the General Account Fixed Account nor any
interests in that Account are subject to these Acts and, the staff of the
Securities and Exchange Commission has not reviewed the disclosures in the
prospectus relating to the General Account Fixed Account. Disclosures regarding
the Fixed Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses. For contracts with amounts
allocated to the General Account Fixed Account, this prospectus serves as a
disclosure document only for the aspects of the contract involving the Variable
Account. This prospectus contains only selected information regarding the
General Account Fixed Account. You can get more information about the General
Account Fixed Account from Fortis Benefits' home office or from your sales
representative.
Fortis Benefits guarantees that the contract value in the General Account Fixed
Account will accrue interest at an effective annual rate of at least 3%,
independent of the actual investment experience of the general account. We may,
at our sole discretion, credit higher rates of interest. However, we have no
obligation to credit interest in excess of the guaranteed rate of 3% per year.
We will not modify any interest rate in excess of 3% per year for any amount in
the General Account Fixed Account more than once each calendar year. We will
quote any higher rate of interest at an effective annual rate. The rate of any
excess interest that we initially or subsequently credit to any amount can in
many cases vary, depending on when you originally allocated that amount to the
General Account Fixed Account. Once credited, we:
- make such interest part of the contract value in the General Account Fixed
Account,
- guarantee the interest, and
- subject the interest to applicable fees and charges.
GENERAL ACCOUNT FIXED ACCOUNT TRANSFERS
Transfers out of the General Account Fixed Account have special limitations.
Prior to the Annuity Commencement Date, you may transfer part or all of the
contract value from the General Account Fixed Account to the Variable Account,
provided that:
(1) no more than one such transfer is made each contract year,
(2) no more than 50% of the General Account Fixed Account value is
transferred at any time (unless the balance in the General Account Fixed
Account after the transfer would be less than $1,000, in which case we may
transfer up to the entire balance),
(3) at least $1,000 is transferred at any one time (or, if less, the
entire amount in the General Account Fixed Account), and
(4) you may not make a transfer into the General Account Fixed
Account within six months after a transfer out of that Account.
Nevertheless, we may, in our discretion, permit a continuing request for
transfer of lesser specified amounts automatically on a periodic basis.
However, we reserve the right to discontinue or modify any such
arrangements in our discretion. You may make no transfer from the General
Account Fixed Account after the Annuity Commencement Date.
INVESTMENTS BY FORTIS BENEFITS
Our obligations with respect to the Guarantee Periods Fixed Account and the
General Account Fixed Account are legal obligations of Fortis Benefits. Our
general account assets support the obligations, as well as the obligations we
incur under other insurance and annuity contracts. Investments purchased with
amounts allocated to both Fixed Accounts are the property of Fortis Benefits,
and you have no legal rights in such investments. We have sole discretion over
the investment of assets in our general account and in the Fixed Account,
subject to applicable law.
We will invest amounts in the Fortis Benefits' general account and the Fixed
Account in compliance with applicable state insurance laws and regulations
concerning the nature and quality of investments for the general account. These
laws generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments, within specified limits and subject to certain
standards and limitations. See "Fortis Benefits' Financial Statements" for
information on Fortis Benefits' investments. Fortis Advisers Inc. manages
amounts held in the general account and in the Fixed Account.
Fortis Benefits intends to consider the return available on the instruments in
which the Fixed Account invests, when Fortis Benefits establishes guaranteed
interest rates. This return is only one of many factors that we consider in
determining the guaranteed interest rates. See "Guarantee Periods Fixed
Account."
Fortis Benefits generally expects to invest the amounts that you allocate to the
Fixed Account in debt instruments that approximately match Fortis Benefits'
liabilities with regard to (1) the guarantee periods for purchase payments
allocated to Guarantee Periods Fixed Accounts and (2) expected holding periods
for purchase payments allocated to the General Account Fixed Account. Fortis
Benefits expects that these will include primarily the following types of debt
instruments:
(1) securities issued by the United States Government or its
agencies or instrumentalities, which securities may or may not be guaranteed by
the United States Government;
(2) debt securities which have an investment grade, at the time of
purchase, within the four highest grades assigned by Moody's
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Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's
Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other
nationally recognized rating service;
(3) other debt instruments including, but not limited to, issues of,
or guaranteed by banks or bank holding companies and corporations, which
obligations, although not rated by Moody's or Standard & Poor's, we deem to
have an investment quality comparable to securities that may be purchased
as stated above; and
(4) other evidences of indebtedness secured by mortgages or deeds
of trust representing liens upon real estate.
Nevertheless, Fortis Benefits has no obligation to invest amounts allocated to
the Fixed Account according to any particular strategy, except as may be
required by applicable state insurance laws and regulations.
ACCUMULATION PERIOD
ISSUANCE OF A CONTRACT AND PURCHASE PAYMENTS
Fortis Benefits reserves the right to reject any application for a contract or
any purchase payment for any reason. If we accept your issuing instructions in
the form received, we will credit the initial purchase payment within two
Valuation Dates after the later of (1) receipt of the issuing instructions or,
(2) receipt of the initial purchase payment at Fortis Benefits' home office. If
we cannot credit the initial purchase payment within five Valuation Dates after
receipt because the issuing instructions are incomplete, we will return the
initial purchase payment, unless you consent to our retaining the initial
purchase payment and crediting it as of the end of the Valuation Period in which
the necessary requirements are fulfilled. The initial purchase payment must be
at least $5,000 ($2,000 for a contract issued pursuant to a qualified plan).
The date that we apply the initial purchase payment to the purchase of the
contract is also the contract issue date. The contract issue date is the date
used to determine contract years, regardless of when we deliver the contract.
Our crediting of investment experience in the Variable Account, or a fixed rate
of return in the Fixed Account, generally begins as of the contract issue date.
You may make additional purchase payments at any time after the contract issue
date and prior to the Annuity Commencement Date, as long as the Annuitant is
living. You must transmit purchase payments (together with any required
information identifying the proper contracts and account to be credited with
purchase payments) to our home office. We credit additional purchase payments to
the contract, and add to the contract value, as of the end of the Valuation
Period in which we receive the payments in good order.
Each additional purchase payment must be at least $500 (or $50 if part of a
systematic investment plan). The total of all purchase payments for all Fortis
Benefits annuities having the same owner or annuitant, may not exceed $1 million
(not more than $500,000 allocated to the Fixed Account) without Fortis Benefits'
prior approval. We reserve the right to modify this limitation at any time.
You may make purchase payments in excess of the initial minimum by monthly draft
against a bank account, if you have completed and returned to us a special
systematic investment authorization form. You may get the form from your sales
representative or from our home office. We can also arrange for you to make
purchase payments by wire transfer, payroll deduction, military allotment,
direct deposit and billing. Purchase payments by check should be made payable to
Fortis Benefits Insurance Company.
We may cancel any contract with a contract value of less than $1,000 on any
Valuation Date. We will notify the owner at least 90 days in advance of our
intention to cancel the contract. We would consider a cancellation to be a full
surrender of the contract.
CONTRACT VALUE
Contract value is the total of any Variable Account value in all the subaccounts
of the Variable Account, plus any Fixed Account value.
The contract guarantees no minimum Variable Account value. You bear the entire
investment risk for the contract value that you allocate to the Variable
Account.
DETERMINATION OF VARIABLE ACCOUNT VALUE. A contract's Variable Account value is
based on (1) the number of Accumulation Units and (2) Accumulation Unit values
that we determine on each Valuation Date. The value of an Accumulation Unit for
a subaccount on any Valuation Date is equal to the previous value of that
subaccount's Accumulation Unit multiplied by that subaccount's net investment
factor (discussed below) for the Valuation Period ending on that Valuation Date.
At the end of any Valuation Period, a contract's Variable Account value in a
subaccount is equal to the number of Accumulation Units in the subaccount times
the value of one Accumulation Unit for that subaccount.
The number of Accumulation Units in each subaccount is equal to:
- Accumulation Units purchased at the time that any purchase payments or
transferred amounts are allocated to the subaccount; less
- Accumulation Units redeemed to pay for the portion of any transfers from
or partial surrenders allocated to the subaccount; less
- Accumulation Units redeemed to pay charges under the contract.
NET INVESTMENT FACTOR. The net investment factor for a subaccount is determined
by dividing (1) the net asset value per share of the Portfolio shares held by
the subaccount, determined at the end of the current Valuation Period, plus the
per share amount of any dividend or capital gains distribution made with respect
to the Portfolio shares held by the subaccount during the current Valuation
Period, minus a per share charge for the increase, plus a per share credit for
the decrease, in any income taxes assessed which we determine to have resulted
from the investment operation of the subaccount or any other taxes which are
attributable to this contract, by (2) the net asset value per share of the
Portfolio shares held in the subaccount as determined at the end of the previous
Valuation Period, and subtracting from that result a factor representing the
mortality risk, expense risk and administrative expense charge.
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If a subaccount's net investment factor is greater than one, the subaccount's
Accumulation Unit value has increased. If the net investment factor is less than
one, the subaccount's Accumulation Unit value has decreased.
DETERMINATION OF FIXED ACCOUNT VALUE. Fortis Benefits guarantees a contract's
Fixed Account value. Therefore, Fortis Benefits bears the investment risk for
amounts allocated to the Fixed Account, except to the extent that:
(1) Fortis Benefits may vary the guaranteed interest rate for future
guarantee periods for Guarantee Periods Fixed Accounts and the current
interest for General Account Fixed Accounts (subject to the 3% effective
annual minimum) and
(2) the Market Value Adjustment for Guarantee Periods Fixed
Accounts imposes investment risks on you.
The contract's Fixed Account value on any Valuation Date is equal to the
following amounts, in each case increased by accrued interest:
- The amount of purchase payments or transferred amounts allocated to the
Fixed Account; less
- The amount of any transfers or surrenders out of the Fixed Account.
ALLOCATION OF PURCHASE PAYMENTS AND CONTRACT VALUE
ALLOCATION OF PURCHASE PAYMENTS. In your application for a contract, you may
allocate purchase payments, or portions of payments, to the:
- available subaccounts of the Variable Account or
- the Fixed Account (and to guarantee periods within the Fixed Account for
contracts issued in states where the Guarantee Periods Fixed Account is
offered), or
- a combination of the Variable Account or Fixed Account. Percentages must
be in whole numbers. The total allocation must equal 100%. You may change
the percentage allocations for future purchase payments, without charge,
at any time by sending a written request to Fortis Benefits' home office.
Changes in the allocation of future purchase payments will be effective on
the date we receive your written request.
TRANSFERS. You may transfer contract value:
- from one available subaccount to another or into the Fixed Account,
- from the Fixed Account to one of the available subaccounts, or
- in the case of a Guarantee Periods Fixed Account, transfers from one
guarantee period to another guarantee period. You must request transfers
by written request to Fortis Benefits' home office, or by telephone
transfer as described below. We currently impose no charge for any
transfer. However, transfers from a guarantee period other than the
one-year guarantee period of a Guarantee Period Fixed Account that are (1)
more than fifteen days before or after the expiration thereof, or (2) are
not a part of a formal Fortis Benefits program for the transfer of
earnings of the Fixed Account, may be subject to a Market Value
Adjustment. See "Market Value Adjustment." We restrict transfers of
contract value from the general account Fixed Account in both amount and
timing. See "Fixed Account--General Account Fixed Account--General Account
Fixed Account Transfers."
The minimum transfer from a subaccount or guarantee period is the lesser of
$1,000 or all of the contract value in the subaccount or Fixed Account.
Nevertheless, we may permit a continuing request for transfers of lesser
specified amounts automatically on a periodic basis. However, we reserve the
right to restrict the frequency of transfers or to otherwise condition,
terminate or impose charges (not to exceed $25 per transfer) upon transfers. We
will count all transfers between and among the subaccounts of the Variable
Account and the Fixed Account as one transfer, if all the transfer requests are
made at the same time as part of one request. We will execute the transfers and
determine all values in connection with transfers as of the end of the Valuation
Period in which we receive the transfer request. We will add or deduct
respectively from the transferred amount the amount of any positive or negative
Market Value Adjustment associated with a transfer from a guarantee period of
the Guarantee Periods Fixed Account.
Certain restrictions on very substantial allocations to any one subaccount are
set forth under "Limitations on Allocations" in the Statement of Additional
Information.
TOTAL AND PARTIAL SURRENDERS
TOTAL SURRENDERS. You may surrender all of the cash surrender value at any time
during the life of the Annuitant and prior to the Annuity Commencement Date. You
must request total surrender by a written request sent to Fortis Benefits' home
office. We reserve the right to require that the contract be returned to us
prior to making payment, although this will not affect our determination of the
amount of the cash surrender value. Cash surrender value is:
- the contract value at the end of the Valuation Period during which Fortis
Benefits receives the written request for total surrender at its home
office, less
- any applicable surrender charge and plus or minus
- any applicable Market Value Adjustment. See "Market Value Adjustment."
We must receive the written consent of all collateral assignees and irrevocable
beneficiaries prior to any total surrender. We will generally pay surrenders
from the Variable Account within seven days of the date of receipt by Fortis
Benefits' home office of the written request. We may postpone payment, however,
in certain circumstances. See "Postponement of Payment."
The amount we pay upon total surrender of the cash surrender value (taking into
account any prior partial surrenders) may be more or less than the total
purchase payments you made. After a surrender of the cash surrender value or at
any time the contract value is zero, all rights of the owner, Annuitant, or any
other person will terminate.
PARTIAL SURRENDERS. You may surrender a portion of the Fixed Account value
and/or the Variable Account at any time during the life of the Annuitant and
prior to the Commencement Date. You must request partial surrender by a written
request sent to Fortis Benefits'
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home office. We will not accept a partial surrender request unless the net
proceeds payable to you are at least $1,000. Fortis Benefits will surrender the
entire cash surrender value under the contract, if the total contract value in
both the Variable Account and Fixed Account would be less than $1,000 after the
partial surrender.
You should specify the subaccounts of the Variable Account, or guarantee periods
of the Fixed Account if applicable, that you wish to partially surrender. If you
do not specify, we take the partial surrender from the subaccounts and the Fixed
Account on a pro rata basis.
We will surrender Accumulation Units from the Variable Account and/ or dollar
amounts from the Fixed Account so that the total amount of the partial surrender
equals the dollar amount of the partial surrender request. We will reduce the
amount payable to you by:
- any applicable surrender charge and
- if the surrender is from a guarantee period, other than the one-year
guarantee period, by any applicable negative Market Value Adjustment, or
increased by any positive Market Value Adjustment unless the surrender is
(1) within 15 days before or after the expiration of a guarantee period,
or (2) is a part of a formal Fortis Benefits program for the transfer of
earnings from the Fixed Account. The partial surrender will be effective
at the end of the Valuation Period in which Fortis Benefits receives the
written request for partial surrender at its home office. We will pay
partial surrenders as we describe above for total surrenders.
The Internal Revenue Code imposes a penalty tax on certain premature surrenders.
For a discussion of this and other tax implications of total and partial
surrenders, including withholding requirements, see "Federal Tax Matters." Also,
Section 403(b) of the Internal Revenue Code, bars distributions of voluntary
salary reduction amounts under tax deferred annuity contracts: prior to one of
the following events: (1) attainment of age 59 1/2 by the employee or, (2) the
employee's separation from service, death, disability or hardship. (Hardship
distributions will be limited to the lesser of the amount of the hardship or the
amount of salary reduction contributions, exclusive of earnings thereon.)
TELEPHONE TRANSACTIONS
You or your representative may make certain requests under the contract by
telephone if we have a written telephone authorization on file. These include
requests for (1) transfers, (2) withdrawals, and (3) changes in purchase payment
allocation instructions, dollar-cost averaging, Portfolio rebalancing program
and systematic withdrawal. Our home office will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures may include, among others, (1) requiring some form of personal
identification such as your address and social security number prior to acting
upon instructions received by telephone, (2) providing written confirmation of
such transactions, and/or (3) tape recording of telephone instructions. Your
request for telephone transactions authorizes us to record telephone calls. We
may be liable for any losses due to unauthorized or fraudulent instructions if
we do not employ reasonable procedures. If we do employ reasonable procedures,
we will not be liable for any losses due to unauthorized or fraudulent
instructions. We reserve the right to place limits, including dollar limits, on
telephone transactions.
BENEFIT PAYABLE ON DEATH OF OWNER (OR ANNUITANT)
If the owner dies prior to the Annuity Commencement Date, we will pay a death
benefit. If there is more than one owner, we will pay the death benefit upon the
first death. If the owner is a non-natural person, we will pay a death benefit
upon the death of the Annuitant prior to the Annuity Commencement Date. In this
case, if more than one Annuitant has been named, we will pay the death benefit
payable upon the death of an Annuitant only upon the death of the last survivor
of the Annuitants so named.
The term "decedent" in the death benefit description below refers to the death
of the owner unless the owner is a non-natural person. In that case, we will
read that term to refer to the death of the Annuitant. Also, the death benefit
description refers to the age of the owner. If the owner is a non-natural
person, the relevant age that we use will instead be that of the Annuitant.
Additionally, the death benefit description makes reference to "Pro Rata
Adjustments." A Pro Rata Adjustment is calculated separately for each
withdrawal, creating a decrease in the death benefit proportional to the
decrease the withdrawal makes in the contract value. Pro Rata Adjustments are
made for amounts withdrawn for partial surrenders and any associated surrender
charge (which we shall deem to be an amount withdrawn).
The death benefit will be different if all of the owners are less than 61 years
old than if one or more of them is 61 years old, or older, when the contract is
purchased.
BENEFIT/ALL OWNERS LESS THAN 61. If all of the owners are less than 61 years
old, when the contract is purchased, the death benefit will be the greatest of
(1), (2), or (3), as follows:
(1) The contract value as of the date used for valuing the death benefit.
(2) The highest Anniversary Value on each of the contract's anniversaries prior
to the earlier of: (a) the decedent's death, or (b) the owner's attainment
of age 80.
An Anniversary Value is equal to:
(i) the contract value on the anniversary, plus
(ii) any purchase payments made since the anniversary, reduced
by
(iii) pro rata adjustments for any withdrawals made since the
anniversary.
(3) If the decedent dies prior to the date the owner reaches age 80, the amount
of the death benefit is the sum of:
(i) the accumulation (without interest) of purchase payments,
reduced by pro rata adjustments for any withdrawals; plus
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(ii) an amount equal to interest on such net accumulation value,
as it is adjusted for each applicable purchase payment and pro rata
adjustment, at an effective annual rate of 4.0% (3% for policies issued
in the State of Washington).
The resulting amount will be referred to as the "Roll-up Amount."
If the decedent dies on or after the date the owner reaches age 80, the
amount of the death benefit is equal to:
(iii) the "Roll-up Amount" as of the date the owner reached age
80; plus
(iv) the accumulation (without interest) of purchase payments
made on or after the date the owner reach age 80; reduced by
(v) pro rata adjustments for any withdrawals made on or after
the date the owner reached age 80.
We describe the pro rata adjustments referred to above more fully in
Appendix E at the end of this prospectus.
BENEFIT/ONE OR MORE OWNERS 61. If one or more of the owners is 61 years old, or
older, when the contract is purchased, the death benefit will be the same as
provided above, except that all references to age 80 in (2) and (3) are changed
to age 75.
See Appendix C for sample death benefit calculations.
The value of the death benefit is determined as of the end of the Valuation
Period in which we receive, at our home office, proof of death and the written
request as to the manner of payment. Upon receipt of these items, the death
benefit generally will be paid within seven days. Under certain circumstances,
payment of the death benefit may be postponed. See "Postponement of Payment." If
we do not receive a written request for a settlement method, we will pay the
death benefit in a single sum, based on values determined at that time.
The Beneficiary may (1) receive a single sum payment, which terminates the
contract, or (2) select an annuity option. If the Beneficiary selects an annuity
option, he or she will have all the rights and privileges of a payee under the
contract. If the Beneficiary desires an annuity option, the election should be
made within 60 days of the date the death benefit becomes payable. Failure to
make a timely election can result in unfavorable tax consequences. For further
information, see "Federal Tax Matters."
We accept any of the following as proof of death: (1) a copy of a certified
death certificate; (2) a copy of a certified decree of a court of competent
jurisdiction as to the finding of death; or (3) a written statement by a medical
doctor who attended the deceased at the time of death.
The Internal Revenue Code requires that a Non-Qualified Contract contain certain
provisions about an owner's death. We discuss these provisions below under
"Federal Tax Matters--Required Distributions for Non-Qualified contracts." It is
imperative that Written Notice of the death of the owner be promptly transmitted
to us at our home office, so that we can make arrangements for distribution of
the entire interest in the contract to the Beneficiary in a manner that
satisfies the Internal Revenue Code requirements. Failure to satisfy these
requirements may result in the contract not being treated as an annuity contract
for federal income tax purposes, with possible adverse tax consequences.
THE ANNUITY PERIOD
ANNUITY COMMENCEMENT DATE
You may specify an Annuity Commencement Date, up to age 110, in your
application. The Annuity Commencement Date marks the beginning of the period
during which an Annuitant or other payee that you designate receives annuity
payments under the contract. The Annuity Commencement Date must be at least two
years after the date of issue of your contract.
The Internal Revenue Code may impose penalty taxes on amounts distributed either
too soon or too late, depending on the type of retirement arrangement involved.
See "Federal Tax Matters." You should consider this carefully in selecting or
changing an Annuity Commencement Date.
You must submit a written request to us in order to advance or defer the Annuity
Commencement Date. We must receive the request at our home office at least
thirty days before the then-scheduled Annuity Commencement Date. The new Annuity
Commencement Date must also be at least thirty days after we receive your
written request. You have no right to make any total or partial surrender during
the Annuity Period.
COMMENCEMENT OF ANNUITY PAYMENTS
We may pay the entire contract value, rather than apply the amount to an annuity
option, if the contract value at the end of the Valuation Period that contains
the Annuity Commencement Date is less than $1,000. We would make the payment in
a single sum to the Annuitant or other payee chosen by the owner and cancel the
contract. We would not impose any change other than the premium tax charge.
Otherwise, Fortis Benefits will apply (1) the Fixed Account value to provide a
Fixed Annuity Option and (2) the Variable Account value in any subaccount to
provide a Variable Annuity Option using the same subaccount, unless you have
notified us by written request to apply the Fixed Account value and Variable
Account value in different proportions. We must receive any written request at
our home office at least 30 days before the Annuity Commencement Date.
We will make annuity payments under a Fixed or Variable Annuity Option on a
monthly basis to the Annuitant or other properly-designated payee, unless we
agree to a different payment schedule. If you name more than one person as an
Annuitant, you may elect to name one of such persons to be the sole Annuitant as
of the Annuity Commencement Date. We reserve the right to change the frequency
of any annuity payment so that each payment will be at least $50 ($20 in Texas).
The amount of each annuity payment will depend on (1) the amount of contract
value applied to an annuity option, (2) the form of annuity selected and (3) the
age of the Annuitant. For information concerning
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the relationship between the Annuitant's sex and the amount of annuity payments,
including special requirements in connection with employee benefits plans, see
"Calculations of Annuity Payments" in the Statement of Additional Information.
The Statement of Additional Information also contains detailed information about
how the amount of each annuity payment is computed.
The dollar amount of any fixed annuity payments is specified during the entire
period of annuity payments according to the provisions of the annuity option
selected. The dollar amount of variable annuity payments varies during the
annuity period based on changes in Annuity Unit Values for the subaccounts that
you choose to use in connection with your payments.
RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE
ANNUITY PAYMENTS
The amount of an annuity payment depends on the average effective net interest
return of a subaccount during the period since the preceding payment, as
follows:
- if the return is HIGHER than 3% annually, the Annuity Unit Value will
INCREASE, and the second payment will be HIGHER than the first; and
- if the return is LOWER than 3% annually, the Annuity Unit Value will
DECREASE, and the second payment will be LOWER than the first.
"Net investment return," for this purpose, refers to the subaccount's overall
investment performance, after deduction of the mortality and expense risk and
administrative expense charges, (See "Charges and Deductions--Charges Against
the Variable Account.") We guarantee that the amount of each variable annuity
payment after the first payment will not be affected by variations in our
mortality experience or our expenses.
TRANSFERS. A person receiving annuity payments may make up to four transfers a
year among subaccounts. The current procedures and conditions for these
transfers are the same as we describe above under "Allocation of Purchase
Payments and Contract Value Transfers." We do not permit transfers from a Fixed
Annuity Option during the Annuity Period.
ANNUITY OPTIONS
You may select an annuity option, or change a previous selection, by written
request. We must receive your request at least 30 days before the Annuity
Commencement Date. You may select one annuity form, but payments under that form
may be on a combination fixed and variable basis. If no annuity form selection
is in effect on the Annuity Commencement Date, we usually automatically apply
Option B (described below), with payments guaranteed for ten years. However,
federal pension law may require that we make any default payments, under certain
retirement plans, pursuant to plan provisions and/or federal law. Tax laws and
regulations may impose further restrictions to assure that the primary purpose
of the plan is distribution of the accumulated funds to the employee.
Your contract offers the following options for fixed and variable annuity
payments. Under each of the options, we make payments as of the first Valuation
Date of each monthly period, starting with the Annuity Commencement Date.
OPTION A, LIFE ANNUITY. We make no payments after the annuitant dies. It is
possible for the Annuitant to receive only one payment under this option, if the
Annuitant dies before the second payment is due.
OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20 YEARS. We
continue payments as long as the Annuitant lives. If the Annuitant dies before
we have made all of the guaranteed payments, we continue installments of the
guaranteed payments to the beneficiary.
OPTION C, JOINT AND FULL SURVIVOR ANNUITY. We continue payments as long as
either the Annuitant or the joint Annuitant is alive. We stop payments when both
the Annuitant and the joint Annuitant have died. It is possible for the payee or
payees to receive only one payment under this option, if both Annuitants die
before the second payment is due.
OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. We continue payments
as long as either the Annuitant or the joint Annuitant is alive. If the
Annuitant dies first, we continue payments to the joint Annuitant at one-half
the original amount. If the joint Annuitant dies first, we continue payments to
the Annuitant at the original full amount. We stop payments when both the
Annuitant and the joint Annuitant have died. It is possible for the payee or
payees to receive only one payment under this option, if both Annuitants die
before the second payment is due.
We also have other annuity options available. You can get information about them
from your sales representative or by calling or writing to our home office.
DEATH OF ANNUITANT OR OTHER PAYEE
The amounts that we generally pay on the death of the annuitant during the
Annuity Period are the continuation of annuity payments (1) for any remaining
guarantee period or (2) for the life of any joint Annuitant. In all such cases,
the person entitled to receive payments also receives any rights and privileges
under the annuity option in effect.
We describe additional rules applicable to such distributions under
Non-Qualified contracts under "Federal Tax Matters--Required Distributions for
Non-Qualified Contracts." Our description does not apply to contracts issued in
connection with qualified plans, but similar rules apply to the plans
themselves.
CONTRACT OWNER SERVICES
DOLLAR COST AVERAGING. If you reside in a state where we offer the General
Account Fixed Account, you can elect when you apply for your contract to
allocate your initial purchase payment to a special account in the Fixed Account
where it will be credited with interest at a guaranteed fixed rate. Amounts will
be transferred from the special account to a designated Portfolio on a periodic
basis over a designated period of time. If you request a transfer (other than
the dollar cost averaging transfers) or a withdrawal from amounts in the special
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account, the dollar cost averaging program will end. Any amounts remaining in
the dollar cost averaging special account will, unless otherwise directed,
immediately be transferred to the other options according to your previous
allocation instructions we have on file.
You can also elect at any time to have money in one of the available investment
allocation options transferred on a systematic basis over a designated period of
time to one or more of the other available Portfolios.
Dollar cost averaging does not assure a profit or protect against a loss should
market prices decline. Transfers under this program do not count against any
limitations otherwise provided limiting transfers among the available investment
options. Ask your Fortis representative about the specific terms of the dollar
cost averaging programs currently available.
REBALANCING. You can have your contract value automatically readjusted among the
available investment allocation options on a selected periodic basis. The
amounts you have in each selected available investment allocation option will
grow or decline in value at different rates during each time period. Rebalancing
is intended to transfer amounts among the chosen available investment allocation
options in order to retain the allocation percentages you specify. Rebalancing
does not assure a profit or protect against a loss should market prices decline
and should be reviewed periodically, as your needs may change. Transfers under
this program do not count against any limitations otherwise provided limiting
transfers among the available investment options. Ask your Fortis representative
about the specific terms of the rebalancing program currently available.
CHARGES AND DEDUCTIONS
PREMIUM TAXES
We deduct state premium taxes as follows:
- when imposed on purchase payments, we pay the amount on your behalf and
deduct the amount from your contract value upon (1) our payment of
surrender proceeds or death benefit or (2) annuitization of a contract; or
- when imposed at the time annuity payments begin, we deduct the amount from
your contract value on a pro-rata basis from the then-current Fixed
Account value and, by redemption of Accumulation Units, the then-current
Variable Account value in each subaccount.
Applicable premium tax rates depend upon your place of residence. Rates can
change by legislation, administrative interpretations, or judicial acts.
CHARGES AGAINST THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We assess each subaccount of the Variable
Account with a daily charge for mortality and expense risk at a nominal annual
rate as follows:
- If all of the owners of a contract are less than 61 years old when the
contract is purchased, the rate is 1.10% of the average daily net assets
of the Variable Account.
- If one or more of the owners of the contract is 61 years old, or older,
the rate is 1.30% of the average daily net assets of the Variable Account.
We assess this charge during both the Accumulation Period and the Annuity
Period. We guarantee not to increase this charge for the duration of the
contract.
The mortality risk borne by Fortis Benefits arises from its obligation to make
annuity payments (determined in accordance with the annuity tables and other
provisions contained in the contract) for the full life of all Annuitants
regardless of how long all Annuitants or any individual Annuitant might live. In
addition, Fortis Benefits bears a mortality risk in that it guarantees to pay a
death benefit upon the death of an Annuitant or owner prior to the Annuity
Commencement Date.
The expense risk we assume is that actual expenses incurred in connection with
issuing and administering the contract will exceed the limits on administrative
charges set in the contract.
We bear the loss if the administrative charges and the mortality and expense
risk charge are insufficient to cover the expenses and costs assumed.
Conversely, we profit if the amount deducted proves more than sufficient.
ADMINISTRATIVE EXPENSE CHARGE. We assess each subaccount of the Variable Account
with a daily charge at an annual rate of .10% of the average daily net assets of
the subaccount. We assess this charge during both the Accumulation Period and
the Annuity Period. This charge helps cover administrative costs such as those
incurred in issuing contracts, establishing and maintaining the records relating
to contracts, making regulatory filings and furnishing confirmation notices,
voting materials and other communications, providing computer, actuarial and
accounting services, and processing contract transactions. There is no necessary
relationship between the amount of administrative charges assessed on a given
contract and the amount of expenses actually incurred for that contract.
TAX CHARGE
We currently impose no charge for taxes payable by us in connection with the
contract, other than for applicable premium taxes. We reserve the right to
impose a charge for any other taxes that may become payable by us in the future
for the contracts or the Variable Account.
The charges against the Variable Account described above are for the purposes
described and Fortis Benefits may receive a profit as a result of these charges.
SURRENDER CHARGE
We deduct no sales charge from purchase payments. We deduct a surrender charge
on certain total or partial surrenders. We use the revenues from the surrender
charge to partially pay our expenses in the sale of the contracts, including (1)
commissions, (2) promotional, distribution and marketing expenses, and (3) costs
of printing and distribution of prospectuses and sales material.
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FREE SURRENDERS. You can withdraw the following amounts from the contract
without a surrender charge:
- Any purchase payments that we received more than seven years before the
surrender date and that you have not previously surrendered;
- Any earnings that you have not previously surrendered;
- In any contract year, up to 10% of the purchase payments that we received
less than seven years before the surrender date (whether or not you have
been previously surrendered the purchase payments).
We calculate the free surrender amount by deeming amounts to be withdrawn in the
following order:
- For contracts issued where all of the owners of the contract were less
than 61 years old when the contract was purchased:
1. purchase payments that we received more than seven years
before the surrender date, and therefore not subject to a surrender
charge.
2. 10% of purchase payments that we received less than seven
years before the surrender date.
3. purchase payments that we received less than seven years
before the surrender date and that you have not previously surrendered.
4. earnings.
- For contracts issued where one or more of the owners of the contract was
61 years old, or older, when the contract was purchased:
1. earnings.
2. purchase payments that we received more than seven years
before the surrender date, and therefore not subject to a surrender
charge.
3. 10% of purchase payments that we received less than seven
years before the surrender date.
4. purchase payments that we received less than seven years
before the surrender date and that you have not previously surrendered.
We impose no surrender charge on (1) annuitization or (2) payment of a single
sum because less than the minimum required contract value is available to
provide an annuity at the Annuity Commencement Date, or (3) payment of any death
benefit.
In addition, we have an administrative policy to waive surrender charges for
full surrenders of contracts that have been in force for at least ten years if
the amount then subject to the surrender charge is less than 25% of the contract
value. We have offered the contracts only since 1999, and, therefore, we have
made no waivers. We reserve the right to change or terminate this practice at
any time, both for new and for previously issued contracts.
AMOUNT OF SURRENDER CHARGE. Surrender charges apply only if the amount being
withdrawn exceeds the sum of the amounts listed above under Free Surrenders
(that is, if the amount being withdrawn includes purchase payments that we
received made less than seven years before the surrender date). The surrender
charges are:
<TABLE>
<CAPTION>
NUMBER OF YEARS SURRENDER CHARGE
SINCE PURCHASE AS A PERCENTAGE OF
PAYMENT WAS APPLIED PURCHASE PAYMENT
- ----------------------- ---------------------
<S> <C>
Less than 3 7%
At least 3 but less
than 4 5%
At least 4 but less
than 5 4%
At least 5 but less
than 6 3%
At least 6 but less
than 7 2%
7 or more 0%
</TABLE>
We anticipate the surrender charge will not be sufficient to cover our
distribution expenses. To the extent the surrender charge is insufficient, we
will pay such costs from our general account assets. Those assets will include
any profit that we derive from the mortality and expense risk charge.
NURSING CARE/HOSPITALIZATION WAIVER OF SURRENDER CHARGES. We deduct no surrender
charge for a total or partial withdrawal
- after a covered person has been confined in a hospital or skilled health
care facility for at least 60 consecutive days and the covered person
continues to be confined in the hospital or skilled care facility when the
request is made; or
- within 60 days following a covered person's discharge from a hospital or
skilled health care facility after confinement of at least 60 consecutive
days.
Confinement must begin after the effective date of this provision.
Covered persons are the contract owner or owners and the spouse of any contract
owner if the spouse is the Annuitant. We will not waive surrender charges when a
confinement is due to (1) substance abuse or (2) mental or personality disorders
without a demonstrable organic disease. We consider a degenerative brain
disease, such as Alzheimer's Disease, to be an organic disease.
MISCELLANEOUS
The Variable Account invests in shares of the Portfolios. Therefore, the net
assets of the Variable Account will reflect the investment advisory fees and
certain other expenses incurred by the Portfolios and described in their
prospectuses.
GENERAL PROVISIONS
THE CONTRACTS
The entire contract includes any application, amendment, rider, endorsement and
revised contract page. Only an officer of Fortis Benefits can agree to change or
waive any provision of a contract. Any change or waiver must be in writing and
signed by an officer of Fortis Benefits. The contracts are non-participating and
do not share in dividends or earnings of Fortis Benefits.
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POSTPONEMENT OF PAYMENT
With respect to amounts in the Portfolios of the Variable Account, payment of
any amount due upon a total or partial surrender, death or under an annuity
option will ordinarily be made within seven days after all documents required
for such payment are received by us at our home office. However, Fortis Benefits
may defer the determination, application or payment of any death benefit,
transfer, partial or total surrender or annuity payment, to the extent dependent
on Accumulation or Annuity Unit Values as follows: (1) for any period during
which the New York Stock Exchange is closed (other than customary weekend and
holiday closings) or trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission, (2) for any period during
which any emergency exists as a result of which it is not reasonably practicable
for Fortis Benefits to determine the investment experience for the Contract, or
(3) for such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors.
Additionally, we may defer for up to 15 days the payment of any amount
attributable to a purchase payment made by check to allow the check reasonable
time to clear. Fortis Benefits may also defer payment of surrender proceeds
payable out of the Fixed Account for a period of up to 6 months.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the Annuitant's age or sex was misstated, we pay the amount that the purchase
payments paid would have purchased at the correct age and sex. If we make any
overpayment because of incorrect information about age or sex, or any other
miscalculation, we deduct the overpayment from the next payment due. We add
underpayments to the next payment. We will credit or charge the amount of any
adjustment with interest at the effective rate of 3% annually.
ASSIGNMENT
Owners and payees may assign their rights and interests under a Qualified
Contract only in certain narrow circumstances referred to in the contract.
Owners and other payees may assign their rights and interests under
Non-Qualified Contracts, including their ownership rights.
We take no responsibility for the validity of any assignment. Owners and payees
must make a change in ownership rights in writing and send to Fortis Benefits'
home office. The change will be effective on the date made, although we are not
bound by a change until the date we record it.
The rights under a contract are subject to any assignment of record at the home
office of Fortis Benefits. An assignment or pledge of a contract may have
adverse tax consequences. See below under "Federal Tax Matters."
BENEFICIARY
You may name or change a beneficiary or a contingent beneficiary before the
Annuity Commencement Date. You must send a written request of the change to
Fortis Benefits. Certain retirement programs may require spousal consent to name
or change a beneficiary. Applicable tax laws and regulations may limit the right
to name a beneficiary other than the spouse. We are not responsible for the
validity of any change. A change will take effect as of the date it is signed
but will not affect any payment we make or action we take before receiving the
written request. We also need the consent of any irrevocably named person before
making a requested change.
We will determine the Beneficiary, as follows, upon the death of an owner, or
the Annuitant if the owner is a non-natural person, prior to the Annuity
Commencement date:
- If there is any surviving owner, the surviving owner will be the
Beneficiary (this overrides any other beneficiary designation).
- If there is no surviving owner, the Beneficiary will be the beneficiary
designated by the owner.
- If there is no surviving owner and no surviving beneficiary who has been
designated by the owner, the estate of the last surviving owner will be
the Beneficiary.
REPORTS
We will mail to the owner (or to the person receiving payments during the
annuity period), at the last known address of record, any report and
communication required by applicable law or regulation. You should therefore
give us prompt written notice of any address change. This will include annual
audited financial statements of the Portfolios, but not necessarily of the
Variable Account or Fortis Benefits.
RIGHTS RESERVED BY FORTIS BENEFITS
Fortis Benefits reserves the right to make certain changes if, in its judgment,
they would best serve the interests of owners and Annuitants or would be
appropriate in carrying out the purposes of the contracts. We will make any
change only as permitted by applicable laws. Fortis Benefits will obtain your
approval of the changes and approval from any appropriate regulatory authority,
if required by law.
Examples of the changes Fortis Benefits may make include:
- To operate the Variable Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any subaccount to another subaccount, or to one
or more separate accounts, or to the Fixed Account; or to add, combine or
remove subaccounts in the Variable Account.
- To substitute, for the Portfolio shares held in any subaccount, the shares
of another Portfolio or the shares of another investment company or any
other investment permitted by law.
- To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the contract as an
annuity.
- To change the time or time of day at which a Valuation Date is deemed to
have ended.
- To make any other necessary technical changes in the contract in order to
conform with any action the above provisions permit Fortis Benefits to
take, including to change the way
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Fortis Benefits assesses charges, but without increasing, as to any then
outstanding contract, the aggregate amount of the types of charges that
Fortis Benefits has guaranteed.
DISTRIBUTION
Fortis Investors, Inc. ("Fortis Investors") is the principal underwriter of the
contracts. The contracts will be sold by individuals who (1) are licensed by
state insurance authorities to sell the contracts of Fortis Benefits and (2)
registered representatives of broker-dealer firms or representatives of other
firms that are exempt from broker dealer regulation. Fortis Investors and any
other broker-dealer firm are (1) registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 as broker-dealers and (2)
members of the National Association of Securities Dealers, Inc.
Fortis Investors will pay an allowance to selling brokers in varying amounts.
Fortis Investors does not expect the allowance, under normal circumstances, to
exceed 4.75% of purchase payments plus a servicing fee of .25% of contract value
per year, starting in the first contract year. Fortis Investors may, under
certain flexible compensation arrangements, pay lesser or greater allowances and
larger or smaller service fees to broker dealer firms than as set forth above.
However, in such case, such flexible compensation arrangements will have
actuarial present values that are approximately equivalent to the amounts of the
selling allowances and service fees set forth above. Additionally, broker-dealer
firms and exempt firms may qualify for additional compensation based upon
meeting certain production standards. Fortis Investors may charge back
commissions paid to others if the contract upon which the commission was paid is
surrendered or cancelled within certain specified time periods.
Fortis Benefits paid a total of $29,918,620, $30,567,607 and $37,024,997 to
Fortis Investors for annuity contract distribution services during 1995, 1996
and 1997, respectively. Of these amounts, $3,925,959 in 1995, $7,531,629 in 1996
and $5,091,431 in 1997 was not reallowed to other broker-dealers or exempt
firms. The distribution agreement provides for Fortis Benefits to indemnify
Fortis Investors (and its agents, employees, and controlling persons) for
certain damages and expenses, including those arising under federal securities
laws.
See Note 12 to the Notes to Fortis Benefits' Financial Statements for the
amounts Fortis Benefits has paid to Fortis Investors for various services.
Fortis Investors is an indirect subsidiary of Fortis AMEV and Fortis AG. Fortis
Investors is under common control with Fortis Benefits. Fortis Investors'
principal business address is the same as that of our home office. Fortis
Investors is not obligated to sell any specific amount of interests under the
contracts. $ of interests in the Guarantee Periods Fixed Account and an
indefinite amount of interests in the Variable Account have been registered with
the Securities and Exchange Commission.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes. These rules are based on laws, regulations and
interpretations that are subject to change at any time. This summary is not
comprehensive, and we do not intend it as tax advice. Federal estate and gift
tax considerations, as well as state and local taxes, may also be material. You
should consult a qualified tax adviser as to the tax implications of taking any
action under a contract or related retirement plan.
NON-QUALIFIED CONTRACTS
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Neither you nor any other person may exclude or deduct
purchase payments under Non-Qualified Contracts from gross income. However, you
are not currently taxed, until receipt, on any increase in the accumulated value
of a Non-Qualified Contract that results from (1) the investment performance of
the Variable Account or (2) interest credited to the Fixed Account. Owners who
are not natural persons are taxed annually on any increase in the contract value
subject to exceptions. You may wish to discuss this with your tax adviser.
The following discussion applies generally to contracts owned by natural
persons.
In general, surrenders or partial withdrawals under contracts are taxed as
ordinary income to the extent of the accumulated income or gain under the
contract. If you assign or pledge any part of the value of a contract, you pay
on the value so pledged or assigned to the same extent as a partial withdrawal.
With respect to annuity payment options, the tax consequences may vary depending
on the option elected under the contract. Until the investment in the contract
is recovered, generally only the portion of the annuity payment that represents
the amount by which the contract value exceeds the "investment in the contract"
will be taxed. In general, "investment in the contract" is the aggregate amount
of purchase payments made. After recovery of the "investment in the contract,"
the full amount of any additional annuity payments is taxable.
For variable annuity payments, in general, the taxable portion of each annuity
payment (prior to recovery of the "investment in the contract") is the amount of
the payment less the nontaxable portion. The nontaxable portion of each payment
is "investment in the contract" divided by the total number of expected annuity
payments.
For fixed annuity payments, in general, prior to recovery of the "investment in
the contract," there is no tax on the amount of each payment that bears the same
ratio to that payment as the "investment in the contract" bears to the total
expected value of the annuity payments for the term of the payments. However,
the remainder of each annuity payment is taxable. The taxable portion of a
distribution (in the form of an annuity or a single sum payment) is taxed as
ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all contracts and other annuity contracts we or our affiliates
issue to you within the same calendar year will be treated as if they were a
single contract.
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You or any other payee will pay a 10% penalty on the taxable portion of a
"premature distribution." Generally, an amount is a "premature distribution"
unless the distribution is:
- made on or after you or another payee reaches age 59 1/2
- made to a Beneficiary on or after your death,
- made upon your disability or that of another payee, or
- part of a series of substantially equal annuity payments for your life or
life expectancy or the life or life expectancy of you and your
Beneficiary.
Premature distributions may result, for example, from:
- an early Annuity Commencement Date
- an early surrender, partial surrender or assignment of a contract, or
- the early death of an Annuitant other than you or another person receiving
annuity payments under the contract.
If you transfer ownership of a contract, or designate an Annuitant or other
payee other than yourself, you may have certain income or gift tax consequences
that are beyond the scope of this discussion. If you are contemplating any
transfer or assignment of a contract you should contact a competent tax adviser.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CONTRACTS
For a Non-Qualified Contract to receive annuity tax treatment for federal income
tax purposes, Section 72(s) of the Code requires:
- if any person receiving annuity payments dies on or after the Annuity
Commencement Date but prior to the time the entire interest in the
contract has been distributed, the remaining portion of such interest will
be distributed at least as rapidly as under the method of distribution
being used as of the date of the person's death; and
- if you die prior to the Annuity Commencement Date, the entire interest in
the contract will be distributed
- within five years after your death or
- as annuity payments that will begin within one year of your death and
will be made over your designated Beneficiary's life or over a period
not extending beyond the life expectancy of that Beneficiary.
However, if the owner's designated Beneficiary is the surviving spouse, the
surviving spouse may continue the contract as the new owner. Where the owner or
other person receiving payments is not a natural person, the required
distributions under Section 72(s) apply on the death of the primary Annuitant.
The Internal Revenue Service has not issued regulations interpreting the
requirements of Section 72(s) (although it has issued proposed regulations
interpreting similar requirements for qualified plans). We intend to review and
modify the contract if necessary to ensure that it complies with the
requirements of Section 72(s), when clarified by regulation or otherwise.
Generally, the above requirements will be satisfied with a single sum payment,
where the death occurs prior to the Annuity Commencement Date. A single sum
payment will be subject to proof of the owner's death. The Beneficiary, however,
may elect by written request to receive an annuity option instead of a lump sum
payment. However, if the election is not made within 60 days of the date the
single sum death benefit otherwise becomes payable, the IRS may disregard the
election for tax purposes and tax the Beneficiary as if a single sum payment had
been made.
QUALIFIED CONTRACTS
The contracts may be used with several types of tax-qualified plans. The tax
rules applicable to owners, Annuitants and other payees vary according to the
type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a tax-qualified plan on your behalf are excludable
from your gross income during the Accumulation Period. The portion, if any, of
any purchase payment that is not excluded from your gross income during the
Accumulation Period constitutes your "investment in the contract."
When annuity payments begin, you will receive back your "investment in the
contract" if any, as a tax-free return of capital. The Code provides which
portion of each payment is taxable and which portion is tax-free. These rules
may vary depending on the type of tax-qualified plan.
The contracts are available in connection with the following types of retirement
plans:
- Section 403(b) annuity plans for employees of certain tax-exempt
organizations and public educational institutions;
- Section 401 or 403(a) qualified pension, profit-sharing or annuity plans;
- individual retirement annuities ("IRAs") under Section 408(b);
- simplified employee pension plans ("SEPs") under Section 408(k);
- SIMPLE IRA Plans under Section 408(p); and
- Section 457 unfunded deferred compensation plans of public employers and
tax-exempt organizations and private employer unfunded deferred
compensation plans. We discuss the tax implications of these plans in the
Statement of Additional Information under the heading "Taxation Under
Certain Retirement Plans."
WITHHOLDING
Annuity payments and other amounts received under contracts are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Despite the recipient's election, the Code may require withholding from certain
payments outside the United States. The Code may also require withholding from
certain distributions from certain types of qualified retirement plans, unless
the proceeds are transferred directly
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from the qualified plan to another qualified retirement plan. Moreover, special
"backup withholding" rules may require us to disregard the recipient's election
if the recipient fails to supply us with a "TIN" or taxpayer identification
number (social security number for individuals), or if the Internal Revenue
Service notifies us that the TIN provided by the recipient is incorrect.
PORTFOLIO DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code that set forth diversification requirements for the
investments underlying the Non-Qualified Contracts. We believe that the
investments will satisfy those requirements. Failure to do so would result in
immediate taxation to you or another person receiving annuity payments of all
income credited to Non-Qualified Contracts. Also, current regulations do not
provide guidance as to any circumstances in which control over allocation of
values among different investment alternatives may cause you or another person
receiving annuity payments to be treated as the owners of Variable Account
assets for tax purposes. We reserve the right to amend the contracts in any way
necessary to avoid any such result. The Treasury Department may establish
standards in this regard through regulations or rulings. Such standards may
apply only prospectively, although retroactive application is possible if the
Treasury Department considered such standards not to embody a new position.
CERTAIN EXCHANGES
Section 1035 of the Code provides generally that no gain or loss will be
recognized upon the exchange of a life insurance or annuity contract for an
annuity contract. Thus, a properly completed exchange pursuant to the special
annuity contract exchange form we provide for this purpose is not generally a
taxable event under the Code. Moreover, your investment in the contract will be
the same as your investment in the contract you exchanged out of.
Because of the complexity of these and other tax aspects in connection with an
exchange, you should consult a tax adviser before making any exchange.
TAX LAW RESTRICTIONS AFFECTING SECTION 403(B) PLANS
Section 403(b)(11) of the Internal Revenue Code restricts the distribution under
Section 403(b) annuity contracts of:
(1) elective contributions made for years beginning after December 31, 1988;
(2) earnings on those contributions; and
(3) earnings on amounts held as of December 31, 1988.
Distribution of these amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, we may not distribute income attributable to elective
contributions made after December 31, 1988.
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FURTHER INFORMATION ABOUT FORTIS BENEFITS
GENERAL
Fortis Benefits offers and sells insurance products, including fixed and
variable life insurance policies, fixed and variable annuity contracts, and
group life, accident and health insurance policies. Fortis Benefits markets its
products to small business and individuals through a national network of
independent agents, brokers, and financial institutions.
OWNERSHIP OF SECURITIES
All of Fortis Benefits' outstanding shares are owned by Fortis Insurance, 515
West Wells, Milwaukee, Wisc. 53201. Fortis Insurance is wholly owned by Fortis,
Inc., One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is
wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB
1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan
10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis
AMEV and 50% owned, through certain subsidiaries, by Fortis AG, Boulevard Emile
Jacqmain 53, 1000 Brussels, Belgium.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of Fortis Benefits. This
summary has been derived in part from the financial statements of Fortis
Benefits included elsewhere in this prospectus. You should read the following
along with these financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy charges.............................. $1,238,006 $1,295,878 $1,232,329 $1,022,446 $ 955,053
Net investment income.................................... 228,724 206,023 203,537 162,514 153,657
Net realized gains (losses) on investment................ 41,101 25,731 55,080 (28,815) 73,623
Other income............................................. 36,458 31,725 33,085 35,958 27,100
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES......................................... $1,544,289 $1,559,357 $1,524,031 $1,192,103 $1,209,433
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total benefits and expenses.............................. $1,442,059 $1,470,066 $1,442,270 $1,157,651 $1,100,199
Federal Income taxes..................................... 35,120 31,099 27,891 11,595 31,090
Income before cumulative effect of accounting changes.... 67,110 58,192 53,870 22,857 78,144
Net income............................................... 67,110 58,192 53,870 22,857 81,707
BALANCE SHEET DATA
Total assets............................................. $6,819,484 $5,951,876 $5,143,012 $4,043,914 $3,584,139
Total liabilities........................................ 5,939,378 5,171,203 4,431,914 3,569,717 3,052,231
Total shareholder's equity............................... 880,106 780,673 711,098 474,197 531,908
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1997 COMPARED TO 1996
FINANCIAL POSITION
Total invested assets of Fortis Benefits Insurance Company (the "Company")
increased to $3.3 billion in 1997 compared to $3.1 billion in 1996. As of
December 31, 1997, 96% of the Company's fixed maturity securities consisted of
investment grade bonds. Mortgage loans represent 18.1% of total invested assets
compared to 18.9% in 1996. The Company believes that adequate reserves have been
established for potential delinquencies and foreclosures. The mortgage loan
portfolio consists generally of small loans on commercial properties, dispersed
throughout the United States. The Company's delinquency and foreclosure rate are
well below industry averages.
RESULTS OF OPERATIONS
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. Total group medical, group disability
and dental, group life, and annuity and individual life premiums represented
37%, 35%, 21% and 7% respectively of total premium in 1997 and 45%, 30%, 19% and
6% respectively in 1996. 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 1997, 1996, and
1995 resulted in recognition of realized gains and losses.
BENEFITS
Policyholder benefit to premium ratio decreased from 84% in 1996 to 82% in 1997,
as a result of general improved experience. The primary
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improvement was in the group life business which experienced these mortality
declines consistently throughout 1997. Annuity and individual life also
experienced lower mortality experience in 1997 in addition to higher interest
crediting on the Company's steadily increasing policy base of interest sensitive
and investment products. Group medical, group disability and dental, group life,
and annuity and individual life benefit to premium ratio was 77%, 82%, 76% and
124% respectively in 1997 and 78%, 84%, 86%, and 131% respectively in 1996.
EXPENSES
The Company's general and administrative expense to premium ratio has increased
in 1997 to 17.5% from 15.3% in 1996. Enabling the application systems to be Year
2000 compliant and managed dental initiatives are the primary reasons for this
increase. Included in the managed dental initiative expense is an $13.5 million
write-off of the expenses incurred on behalf of a company that provides the
managed care services.
Commission rates have increased from the levels in 1996. 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 know at this time.
The Company is closely monitoring these entities to avoid any unforeseen
circumstances.
1996 COMPARED TO 1995
REVENUES
Traditional life insurance premiums of Fortis Benefits (the "Company") are
principally composed of group life coverages. Total life premiums increased over
1995 due primarily to group life sales in 1996. Interest sensitive and
investment product policy charges, which consist primarily of cost of insurance
charges, increased 37% from 1995 to 1996. Continued sales of interest sensitive
and investment products has steadily increased the policy base on which these
charges are assessed.
Total accident and health premiums increased in 1996 compared to 1995 due to an
increase in the group disability product sales and strong persistency. Partially
offsetting this increase was a 3% decrease in the group medical products driven
by a decision to roll the fully insured medical business into a common medical
plan and the decision to cease new sales of large group self funded medical
plans, effective January 1, 1996. Beginning April 1, 1996 and continuing into
1997, the groups will gradually be rolled to a third party administrator.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1996, 1995 and
1994 resulted in recognition of realized gains and losses.
BENEFITS
The Company's group life benefits which are included in the traditional life
benefits were higher in 1996 compared to 1995 as a result of increased
mortality. Interest sensitive and investment product benefits for the period
ended December 31, 1996 increased 23% from 1995. This increase was the result of
higher interest crediting on the Company's steadily increasing policy base in
1996 compared to 1995.
The accident and health claims to premium ratio improved from 1995 to 1996 due
primarily to the improved claim closure rates in the group disability lines.
EXPENSES
The commission rates have declined from the levels in 1995. This is primarily
due to change in the mix of business by product lines as well as the change in
the first year versus renewal premiums. Interest sensitive and investment
products commission increased from 1996 compared to 1995; however, the Company
deferred $62.4 million of these commissions in 1996, compared to $52.7 million
in 1995. The additional commission and deferral is the result of an increase in
sales of the company's variable life and variable annuity products. This
increase in deferred commissions more than offset the increase in paid
commissions and lowered the net commission expense for 1996.
In 1996, the Company consolidated the fully insured group medical business
administration processing. This has resulted in expense savings as demonstrated
by the reduction in the general and administrative expenses. Also contributing
to the expense reduction was the decision to discontinue issuing large group
self funded medical business.
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CASH FLOW AND LIQUIDITY
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 expects its operating
activities to continue to meet its capital resource 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' risk-based capital formula
helps to establish guidelines for capital levels. At December 31, 1997, the
Company's capital exceeded the minimum recommended risk-based capital level.
COMPETITION
Fortis Benefits seeks to compete primarily on the basis of customer service,
product design, and, in the case of products funded through Series Fund, the
investment results achieved by Fortis Advisers, Inc. Many other insurance
companies compete with Fortis Benefits in each of its markets, including on the
basis of price. Many of these companies, which include some of the largest and
best known insurance companies, have considerably greater resources than Fortis
Benefits.
REGULATION AND RESERVES
The Company is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. Fortis Benefits'
operations and accounts are subject to periodic examination by insurance
regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of Fortis Benefits under these laws cannot be reasonably estimated.
Most of these laws do provide, however, that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include health care reform, employee benefit regulation, controls on
medicare costs and medical entitlement programs, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Pursuant to state insurance laws and regulations, Fortis Benefits is obligated
to carry on its books, as liabilities, reserves to meet its obligations under
outstanding insurance contracts. These reserves are based on assumptions about,
among other things, future claims experience and investment returns. Neither the
reserve requirements nor the other aspects of state insurance regulation provide
absolute protection to holders of insurance contracts, including the contracts,
if Fortis Benefits were to incur claims or expenses at rates significantly
higher than expected (due, for example, to acquired immune deficiency syndrome
or other infectious diseases or catastrophes) or significant unexpected losses
on its investments.
EMPLOYEES AND FACILITIES
Fortis Benefits has approximately 2,000 employees and considers its employee
relations to be excellent; Fortis Benefits owns its home office building,
consisting of 295,000 square feet in Woodbury, Minnesota. It also has
administrative offices in Kansas City, Missouri. Fortis Benefits leases a
portion of that building consisting of 297,000 square feet. In addition Fortis
Benefits has several regional claims and sales offices throughout the United
States. Fortis Benefits occupies approximately 100% of its home office and 70%
of its administration building, which it expects will be adequate for its
purposes for the foreseeable future.
VOTING PRIVILEGES
In accordance with our view of current applicable law, we will vote shares of
each of the Portfolios attributable to a contract at regular and special
meetings of the shareholders of the Portfolios. We will vote those shares in
proportion to instructions we receive from the persons having the voting
interest in the contract as of the record date for the corresponding Portfolio
shareholders meeting. Owners have the voting interest during the Accumulation
Period. Persons receiving annuity payments, and Beneficiaries after the death of
the Annuitant or owner, have the voting interest during the annuity period.
However, if the Investment Company Act of 1940 or any rules thereunder should be
amended or if the present interpretation thereof should change, and as a result
Fortis Benefits determines that it is permitted to vote shares of the Portfolios
in its own right, it may elect to do so.
We determine the number of shares of a Portfolio attributable to a contract, as
follows:
- During the Accumulation Period, we divide the amount of contract value in
a subaccount by the net asset value of one share of the Portfolio
corresponding to that subaccount. We make this calculation as of the
record date for the applicable Portfolio.
- During the Annuity Period, or after the death of the Annuitant or owner,
we make a similar calculation. However, for subaccount value we use the
liability for future variable annuity payments allocable to that
subaccount as of the record date for the applicable Portfolio. We
calculate the liability for future variable annuity payments on the basis
of the following on the record date:
- mortality assumptions,
- the assumed interest rate used in determining the number of Annuity
Units under the contract, and
- the applicable Annuity Unit value
During the Annuity Period, the number of votes attributable to a contract will
generally decrease since funds set aside to make the annuity payments will
decrease.
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We will vote shares for which we have not received timely instructions, and any
shares attributable to excess amounts we have accumulated in the related
subaccount, in proportion to the voting instructions which we receive for all
contracts and other variable annuity contracts participating in a Portfolio. To
the extent that we or any affiliated company holds any shares of a Portfolio,
those shares will be voted in the same proportion as instructions for that
Portfolio from all our policy owners holding voting interests in that Portfolio.
Shares held by separate accounts other than the Variable Account will in general
be voted in accordance with instructions of participants in such other separate
accounts. This diminishes the relative voting influence of the contracts.
Each person having a voting interest in a subaccount of the Variable Account
will receive proxy material, reports and other materials relating to the
appropriate Portfolio. Under the procedures described above, these persons may
give instructions regarding:
- the election of the Board of Directors of the Portfolios,
- ratification of the selection of a Portfolio's independent auditors,
- the approval of the investment managers of a Portfolio,
- changes in fundamental investment policies of a Portfolio, and
- all other matters that are put to a vote of Portfolio shareholders
LEGAL MATTERS
David A. Peterson, Esquire, Vice President and Assistant General Counsel with
our law department has passed on the legality of the contracts described in this
prospectus. Messrs. Freedman, Levy, Kroll & Simonds, Washington, D.C., have
advised Fortis Benefits on certain federal securities law matters.
OTHER INFORMATION
We have filed Registration Statements with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
contracts discussed in this prospectus. We have not included in the prospectus
all of the information set forth in the Registration Statement, amendments and
exhibits thereto. We intend statements contained in this prospectus about the
content of the contracts and other legal instruments to be summaries. For a
complete statement of the terms of these documents, you should refer to the
instruments filed with the Securities and Exchange Commission.
A Statement of Additional Information is available upon request. Its contents
are as follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Fortis Benefits and the Variable Account.......
Calculation of Annuity Payments................
Services.......................................
- Safekeeping of Variable Account Assets.....
- Experts....................................
- Principal Underwriter......................
Taxation Under Certain Retirement Plans........
Withholding....................................
Variable Account Financial Statements..........
APPENDIX A--Performance Information............
</TABLE>
FORTIS BENEFITS FINANCIAL STATEMENTS
The financial statements of Fortis Benefits that are included in this prospectus
should be considered primarily as bearing on our ability to meet our obligations
under the contracts. The contracts are not entitled to participate in our
earnings, dividends or surplus.
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying balance sheets of Fortis Benefits Insurance
Company, an indirect, wholly-owned subsidiary of Fortis AMEV and Fortis AG, as
of December 31, 1997 and 1996, and the related statements of income, changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Minneapolis, Minnesota
February 27, 1998
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BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost
1997--$2,325,589; 1996--$2,078,438)...................... $2,415,915 $2,115,499
Equity securities, at fair value (cost 1997--$88,719;
1996--$84,144)........................................... 109,832 106,290
Mortgage loans on real estate, less allowance for possible
losses (1997--$11,085; 1996--$9,697)..................... 602,064 582,869
Policy loans.............................................. 68,566 60,722
Short-term investments.................................... 70,537 182,817
Real estate and other investments......................... 55,035 29,628
---------- ----------
3,321,949 3,077,825
Cash and cash equivalents................................... 9,901 20,474
Receivables:
Uncollected premiums...................................... 74,220 71,386
Reinsurance recoverable on unpaid and paid losses......... 13,852 12,939
Other..................................................... 19,762 9,045
---------- ----------
107,834 93,370
Accrued investment income................................... 47,376 39,519
Deferred policy acquisition costs........................... 291,742 268,075
Property and equipment at cost, less accumulated
depreciation............................................... 42,773 52,882
Deferred federal income taxes............................... 15,037 17,008
Other assets................................................ 4,250 8,005
Assets held in separate accounts............................ 2,978,622 2,374,718
---------- ----------
TOTAL ASSETS................................................ $6,819,484 $5,951,876
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
27
<PAGE>
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance.............................. $ 449,017 $ 434,378
Interest sensitive and investment products.............. 1,264,227 1,175,480
Accident and health..................................... 792,249 834,119
---------- ----------
2,505,493 2,443,977
Unearned revenues......................................... 10,653 12,622
Other policy claims and benefits payable.................. 260,596 191,940
Policyholder dividends payable............................ 8,197 8,783
---------- ----------
2,784,939 2,657,322
Debt...................................................... 26,433 --
Accrued expenses.......................................... 49,909 42,223
Current income taxes payable.............................. 10,549 17,424
Other liabilities......................................... 113,222 104,834
Due to affiliates......................................... 6,925 4,926
Liabilities related to separate accounts.................. 2,947,401 2,344,474
---------- ----------
TOTAL POLICY RESERVES AND LIABILITIES....................... 5,939,378 5,171,203
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......................................... 332,723 265,613
Unrealized gains on investments, net...................... 68,981 36,290
Unrealized gains on assets held in separate accounts,
net...................................................... 5,402 5,770
---------- ----------
TOTAL SHAREHOLDER'S EQUITY.................................. 880,106 780,673
---------- ----------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S
EQUITY..................................................... $6,819,484 $5,951,876
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
28
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
REVENUES
Insurance operations:
Traditional life insurance premiums....................................... $ 269,540 $ 258,496 $ 251,353
Interest sensitive and investment product policy charges.................. 77,429 63,336 46,076
Accident and health insurance premiums.................................... 891,037 974,046 934,900
---------- --------- ---------
1,238,006 1,295,878 1,232,329
Net investment income....................................................... 228,724 206,023 203,537
Net realized gains on investments........................................... 41,101 25,731 55,080
Other income................................................................ 36,458 31,725 33,085
---------- --------- ---------
TOTAL REVENUES............................................................ 1,544,289 1,559,357 1,524,031
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance................................................ 204,497 220,227 202,911
Interest sensitive investment products.................................... 103,077 90,358 73,676
Accident and health claims................................................ 707,113 778,439 769,588
---------- --------- ---------
1,014,687 1,089,024 1,046,175
Policyholder dividends........................................................ 2,935 4,169 4,305
Amortization of deferred policy acquisition costs............................. 43,931 39,325 41,291
Insurance commissions......................................................... 107,378 94,723 95,559
General and administrative expenses........................................... 273,128 242,825 254,940
---------- --------- ---------
TOTAL BENEFITS AND EXPENSES............................................... 1,442,059 1,470,066 1,442,270
---------- --------- ---------
Income before federal income taxes............................................ 102,230 89,291 81,761
Federal income taxes.......................................................... 35,120 31,099 27,891
---------- --------- ---------
NET INCOME.................................................................... $ 67,110 $ 58,192 $ 53,870
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
29
<PAGE>
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
UNREALIZED GAINS
GAINS (LOSSES) ON
ADDITIONAL (LOSSES) ON ASSETS HELD
COMMON PAID-IN RETAINED INVESTMENTS, IN SEPARATE
STOCK CAPITAL EARNINGS NET ACCOUNTS, NET TOTAL
------ ---------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995........................ $5,000 $358,000 $153,551 $(42,908) $ 554 $474,197
Net income...................................... -- -- 53,870 -- -- 53,870
Additional paid-in capital...................... -- 50,000 -- -- -- 50,000
Change in unrealized gains (losses) on
investments, net............................... -- -- -- 131,039 -- 131,039
Change in unrealized gains (losses) on assets
held in separate accounts, net................. -- -- -- -- 1,992 1,992
------ ---------- -------- ------------- ------ --------
Balance, December 31, 1995...................... 5,000 408,000 207,421 88,131 2,546 711,098
Net income...................................... -- -- 58,192 -- -- 58,192
Additional paid-in capital...................... -- 60,000 -- -- -- 60,000
Change in unrealized gains (losses) on
investments, net............................... -- -- -- (51,841) -- (51,841)
Change in unrealized gains (losses) on assets
held in separate accounts, net................. -- -- -- -- 3,224 3,224
------ ---------- -------- ------------- ------ --------
Balance, December 31, 1996...................... 5,000 468,000 265,613 36,290 5,770 780,673
Net income...................................... -- -- 67,110 -- -- 67,110
Change in unrealized gains (losses) on
investments, net............................... -- -- -- 32,691 -- 32,691
Change in unrealized gains (losses) on assets
held in separate account, net.................. -- -- -- -- (368) (368)
------ ---------- -------- ------------- ------ --------
Balance, December 31, 1997...................... $5,000 $468,000 $332,723 $ 68,981 $5,402 $880,106
------ ---------- -------- ------------- ------ --------
------ ---------- -------- ------------- ------ --------
</TABLE>
See accompanying notes.
30
<PAGE>
STATEMENTS OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
------------ ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 67,110 $ 58,192 $ 53,870
Adjustments to reconcile net income to net cash provided by operating
activities:
(Decrease)/increase in future policy benefit reserves for
traditional, interest sensitive and accident and health policies.... (2,496) 26,193 80,478
Increase in other policy claims and benefits and policyholder
dividends payable................................................... 68,070 18,638 27,676
Provision for deferred federal income taxes.......................... (6,449) (1,094) (13,584)
(Decrease)/increase in income taxes payable.......................... (6,875) 12,049 1,023
Amortization of deferred policy acquisition costs.................... 43,931 39,325 41,291
Policy acquisition costs deferred.................................... (69,694) (66,515) (56,391)
Provision for mortgage loan losses................................... 1,388 1,344 924
Provision for depreciation........................................... 14,351 17,312 15,654
Write-off of investment.............................................. 3,000 -- --
Amortization of investment (discounts) premiums, net................. (466) 1,821 (239)
Change in receivables, accrued investment income, unearned premiums,
accrued expenses and other liabilities.............................. (2,720) 38,614 3,427
Net realized gains on investments.................................... (41,101) (25,731) (55,080)
Other................................................................ (12,496) (261) (2,431)
------------ ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 55,553 119,887 96,618
INVESTING ACTIVITIES
Purchases of fixed maturity investments................................ (3,611,770) (2,778,352) (2,151,133)
Sales or maturities of fixed maturity investments...................... 3,378,898 2,652,887 2,000,068
Decrease (increase) in short-term investments.......................... 112,280 (29,318) (35,908)
Purchases of other investments......................................... (209,771) (210,182) (240,264)
Sales of other investments............................................. 205,084 163,569 112,598
Purchases of property and equipment.................................... (4,242) (10,992) (19,975)
Other.................................................................. (617) -- 1,229
------------ ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................ (130,138) (212,388) (333,385)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received.............................................. 200,760 128,446 187,484
Surrenders and death benefits........................................ (190,361) (125,274) (60,522)
Interest credited to policyholders................................... 53,613 49,802 48,918
Additional paid-in capital from shareholder............................ -- 60,000 50,000
------------ ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 64,012 112,974 225,880
------------ ---------- -----------
(Decrease) increase in cash and cash equivalents......................... (10,573) 20,473 (10,887)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................... 20,474 1 10,888
------------ ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 9,901 $ 20,474 $ 1
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
See accompanying notes.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
DECEMBER 31, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Fortis Benefits Insurance Company (the Company) is an indirect, wholly-owned
subsidiary of Fortis AMEV and Fortis AG. The Company is incorporated in
Minnesota and distributes its products in all states except New York. To date,
the majority of the Company's revenues have been derived from group employee
benefits products and the remainder from individual life and annuity products.
BASIS OF STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company follows generally accepted accounting principles which differ in
certain respects from statutory accounting practices prescribed or permitted by
regulatory authorities. The more significant of these principles are:
REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance are recognized as revenues when due over
the premium-paying period. Reserves for future policy benefits are computed
using the net level method and include investment yield, mortality, withdrawal,
and other assumptions based on the Company's experience, modified as necessary
to reflect anticipated trends and to include provisions for possible unfavorable
deviations.
Revenues for interest sensitive and investment products consist of charges
assessed against policy account balances during the period for the cost of
insurance, policy administration, and surrender charges. Future policy benefit
reserves are computed under the retrospective deposit method and consist of
policy account balances before applicable surrender charges. Policy benefits
charged to expense during the period include amounts paid in excess of policy
account balances and interest credited to policy account balances. Interest
crediting rates for universal life and investment products ranged from 2.5% to
8.75% in 1997 and 1996.
Premiums for accident and health insurance products, including medical, long and
short-term disability and dental insurance products, are recognized as revenues
ratably over the contract period in proportion to the risk insured. Reserves for
future disability benefits are based on the 1964 Commissioners Disability Table
at 6% interest. Calculated reserves are modified based on the Company's actual
experience.
CLAIMS AND BENEFITS PAYABLE
Other policy claims and benefits payable for reported and incurred but not
reported claims and related claims adjustment expenses are determined using
case-basis estimates and past experience. The methods of making such estimates
and establishing the related liabilities are continually reviewed and updated.
Any adjustments resulting therefrom are reflected in income currently.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are directly related to
the production of new business, are deferred to the extent recoverable and
amortized. For traditional life insurance products, such costs are amortized
over the premium paying period. For interest sensitive and investment products,
such costs are amortized in relation to expected future gross profits. For
accident and health and group life insurance products, these costs represent the
present value at the acquisition of these lines in the October 1, 1991 purchase
(see Note 2) of future profits which are amortized against the expected premium
revenues of the lines acquired. Estimation of future gross profits requires
significant management judgment and are reviewed periodically. As excess amounts
of deferred costs over future premiums or gross profits are identified, such
excess amounts are expensed.
INVESTMENTS
The Company's investment strategy is developed based on many factors including
insurance liability matching, rate of return, maturity, credit risk, tax
considerations and regulatory requirements.
All fixed maturity investments and all marketable equity securities are
classified as available-for-sale and carried at fair value.
Changes in fair values of available-for-sale securities, after related deferred
income taxes and after adjustment for the changes in pattern of amortization of
deferred policy acquisition costs and participating policyholder dividends are
reported directly in shareholder's equity as unrealized gains (losses) on
investments and, accordingly, have no effect on net income. The unrealized
appreciation or depreciation is net of deferred policy acquisition cost
amortization and taxes that would have been required as a charge or credit to
income had such unrealized amounts been realized.
Mortgage loans constitute first liens on commercial real estate and other income
producing properties. The insurance statutes in Minnesota generally require that
the initial principal loaned not exceed 80% of the appraised value of the
property securing the loan. The Company's policy fully complies with this
statute. Mortgage loans on real estate are reported at unpaid balance, adjusted
for amortization of premium or discount, less allowance for possible losses. The
change in the allowance for possible losses is recorded with realized gains and
losses on investments.
Policy loans are reported at their unpaid balance. Short term investments are at
cost which approximates fair value.
Realized gains and losses on sales of investments, and declines in value judged
to be other-than-temporary, are recognized on the specific identification basis.
Investment income is recorded as earned.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation. The
Company provides for depreciation principally on the straight-line method over
the estimated useful lives of the related property.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board ("FASB") Statement 109, ACCOUNTING FOR
INCOME TAXES. Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and the tax bases and are measured
using the enacted tax rates.
SEPARATE ACCOUNTS
Revenues and expenses related to the separate account assets and liabilities, to
the extent of benefits paid, are provided to the separate account policyholders
and are excluded from the amounts reported in the accompanying statements of
operations.
Assets and liabilities associated with the separate accounts relate to deposits
and annuity considerations for variable life and annuity products for which the
contract holder, rather than the Company, bears the investment risk. Separate
account assets are reported at fair value.
GUARANTY FUND ASSESSMENTS
There are a number of insurance companies that are currently under regulatory
supervision. This may result in future assessments by state guaranty fund
associations to cover losses to policyholders of insolvent or rehabilitated
companies. These assessments can be partially recovered through a reduction in
future premium taxes in some states. The Company believes it has adequately
provided for the impact of future assessments.
STATEMENTS OF CASH FLOWS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost which approximates fair value.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 defines the financial statement presentation for all changes in a
company's equity during a period except those resulting from investments by
owners and distributions to owners. SFAS No. 130 will be adopted by the Company
in the first quarter of 1998. Because the statement is merely a change in
presentation, the Company does not expect the adoption of this statement to have
a significant impact on the financial statements.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation.
2. ACQUIRED BUSINESS
In 1991, the Company purchased certain assets and assumed certain
liabilities from The Mutual Benefit Life Insurance Company in Rehabilitation
(MBL). The seller transferred to the Company, the assets and liabilities
relating to the group life, accident and health, disability and dental insurance
business of MBL. The acquisition was accounted for as a purchase. The original
purchase price of the acquisition was $318,000,000. Subsequent additional
payments of $20,850,000 were made ending in 1994. These additional payments, as
well as $126,515,000 of the original purchase price represent the estimated
present value of future profits on the lines of business acquired at the date of
acquisition and have been accounted for as deferred policy acquisition costs
(see Note 4).
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturities:
Governments.................................. $ 228,856 $ 8,698 $ 30 $ 237,524
Public utilities............................. 121,128 4,217 13 125,332
Industrial and miscellaneous................. 1,932,894 77,442 1,625 2,008,711
Other........................................ 42,711 1,637 -- 44,348
---------- -------- -------- ----------
Total fixed maturities....................... 2,325,589 91,994 1,668 2,415,915
Equity securities............................ 88,719 24,769 3,656 109,832
---------- -------- -------- ----------
Total...................................... $2,414,308 $116,763 $ 5,324 $2,525,747
---------- -------- -------- ----------
---------- -------- -------- ----------
December 31, 1996:
Fixed maturities:
Governments.................................. $ 321,574 $ 3,418 $ 1,323 $ 323,669
Public utilities............................. 92,116 2,758 403 94,471
Industrial and miscellaneous................. 1,656,420 38,413 6,527 1,688,306
Other........................................ 8,328 750 25 9,053
---------- -------- -------- ----------
Total fixed maturities....................... 2,078,438 45,339 8,278 2,115,499
Equity securities............................ 84,144 23,340 1,194 106,290
---------- -------- -------- ----------
Total...................................... $2,162,582 $68,679 $ 9,472 $2,221,789
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 1997, by contractual maturity, are shown below (in
thousands).
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................................... $ 75,748 $ 76,109
Due after one year through five years................................. 849,193 865,006
Due after five years through ten years................................ 543,847 562,900
Due after ten years................................................... 856,801 911,900
---------- ----------
Total................................................................. $2,325,589 $2,415,915
---------- ----------
---------- ----------
</TABLE>
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.
MORTGAGE LOANS
The Company has issued commercial mortgage loans on properties located
throughout the United States. Approximately 37% of outstanding principal is
concentrated in the states of New York, California and Florida, at December 31,
1997 as compared to concentrated interests in California, Texas and New York of
36% at December 31, 1996. Loan commitments outstanding totaled $34,235,000 at
December 31, 1997.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $2,548,000 and $2,537,000 at
December 31, 1997 and 1996, respectively, on deposit with various governmental
authorities as required by law.
INVESTMENT IN MANAGED DENTAL INITIATIVE
In 1997, the Company acquired a 99% ownership in a managed dental initiative
called Dental Health Alliance, Inc. (DHA). Based on an analysis of future DHA
profitability, the entire investment was written-off at December 31, 1997. The
income statement reflects $13,561,000 of general and administrative expenses
related to 1997 DHA losses and ownership write-off.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS (CONTINUED)
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) recorded in shareholder's equity for
the year ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Change in unrealized gains (losses) before adjustments............. $ 53,239 $ (83,065) $ 214,452
Adjustments:
Increase) decrease in amortization of deferred policy acquisition
costs............................................................. (2,096) 3,376 (9,789)
Deferred income taxes (expense) benefit............................ (18,820) 31,072 (71,632)
--------- --------- ---------
Change in net unrealized gains (losses)............................ 32,323 (48,617) 133,031
Net unrealized gains (losses), beginning of year................... 42,060 90,677 (42,354)
--------- --------- ---------
Net unrealized gains, end of year.................................. $ 74,383 $ 42,060 $ 90,677
--------- --------- ---------
--------- --------- ---------
</TABLE>
NET INVESTMENT INCOME AND NET REALIZED GAINS ON INVESTMENTS
Major categories of net investment income and realized gains on investments for
each year were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Fixed maturities................................................... $ 160,444 $ 141,973 $ 139,062
Equity securities.................................................. 9,306 6,682 2,026
Mortgage loans on real estate...................................... 54,662 52,949 49,227
Policy loans....................................................... 4,144 3,195 2,797
Short-term investments............................................. 2,851 5,175 11,863
Real estate and other investments.................................. 4,635 5,358 4,750
--------- --------- ---------
236,042 215,332 209,725
Expenses........................................................... (7,318) (9,309) (6,188)
--------- --------- ---------
$ 228,724 $ 206,023 $ 203,537
--------- --------- ---------
--------- --------- ---------
NET REALIZED GAINS ON INVESTMENTS
Fixed maturities................................................... $ 13,827 $ 3,334 $ 50,393
Equity securities.................................................. 26,760 18,281 2,830
Mortgage loans on real estate...................................... 301 (144) (242)
Short-term investments............................................. -- 57 (3)
Real estate and other investments.................................. 213 4,203 2,102
--------- --------- ---------
$ 41,101 $ 25,731 $ 55,080
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from sales of investments in fixed maturities were $3,360,682,000,
$2,652,887,000, and $2,000,068,000 in 1997, 1996 and 1995, respectively. Gross
gains of $30,860,000, $28,606,000 and $61,070,000 and gross losses of
$17,033,000, $25,272,000, and $10,677,000 were realized on the sales in 1997,
1996 and 1995, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows
(in thousands):
<TABLE>
<CAPTION>
INTEREST
SENSITIVE AND
TRADITIONAL INVESTMENT ACCIDENT
LIFE PRODUCTS AND HEALTH TOTAL
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1996....................... $ 38,532 $ 170,840 $ 28,137 $ 237,509
Acquisition costs deferred..................... -- 66,515 -- 66,515
Acquisition costs amortized.................... (5,375) (19,695) (14,255) (39,325)
Reduced amortization of deferred acquisition
costs from unrealized losses on
available-for-sale securities................. -- 3,376 -- 3,376
----------- --------------- ----------- ---------
Balance, January 1, 1997....................... 33,157 221,036 13,882 268,075
Acquisition costs deferred..................... 37,857 31,837 -- 69,694
Acquisition costs amortized.................... (20,738) (14,501) (8,692) (43,931)
Increased amortization of deferred acquisition
costs from unrealized gains on
available-for-sale securities................. -- (2,096) -- (2,096)
----------- --------------- ----------- ---------
Balance, December 31, 1997..................... $ 50,276 $ 236,276 $ 5,190 $ 291,742
----------- --------------- ----------- ---------
----------- --------------- ----------- ---------
</TABLE>
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
4. DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
Included within total deferred policy acquisition costs at December 31, 1997 is
$10,434,000 of present value of future profits (PVP) resulting from acquisitions
accounted for as a purchase. All remaining PVP will be amortized in 1998.
During 1997, 1996 and 1995, the Company sold portions of its investment
portfolio and in accordance with FASB Statement 97, the recognition of the
realized net capital gains resulted in additional amortization of deferred
acquisition costs of $732,000, $1,894,000 and $4,825,000, respectively. In
addition, the Company recorded policyholder dividends payable of $1,095,000 in
1995.
5. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land........................................................................ $ 1,900 $ 1,900
Building and improvements................................................... 24,148 25,133
Furniture and equipment..................................................... 87,537 95,370
--------- ---------
113,585 122,403
Less accumulated depreciation............................................... (70,812) (69,521)
--------- ---------
Net property and equipment.................................................. $ 42,773 $ 52,882
--------- ---------
--------- ---------
</TABLE>
6. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims and claims
adjustment expenses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverables........... $ 947,711 $ 928,832 $ 838,810
Add: Incurred losses related to:
Current year..................................................... 773,316 865,907 827,261
Prior years...................................................... (59,634) (64,094) (28,520)
--------- --------- ---------
Total incurred losses.......................................... 713,682 801,813 798,741
Deduct: Paid losses related to:
Current year..................................................... 437,405 549,144 492,460
Prior years...................................................... 235,952 233,790 216,259
--------- --------- ---------
Total paid losses.............................................. 673,357 782,934 708,719
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables......... $ 988,036 $ 947,711 $ 928,832
--------- --------- ---------
--------- --------- ---------
</TABLE>
The table above compares to the amounts reported on the balance sheet in the
following respects: (1) the table above is presented net of ceded reinsurance
and the accident and health reserves reported on the balance sheet are gross of
ceded reinsurance; (2) the table above includes claims adjustment expense
liabilities that are included in accrued expenses on the balance sheet; and (3)
the table above includes accident and health benefits payable which are included
with other policy claims and benefits payable reported on the balance sheet.
In each of the years presented above, the accident and health insurance line of
business experienced overall favorable development on claims reserves
established as of the previous year end. The favorable development was a result
of lower medical costs due to less uncertainty in the health business and a
reduction of loss reserves due to lower than anticipated inflation in medical
costs.
Management has incorporated the favorable reserve development into its current
estimates of reserve levels. Accordingly, future development on December 31,
1997 reserves is not expected to be as favorable as that experienced in the past
two years.
7. FEDERAL INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of Fortis, Inc. Income tax
expense or credits are allocated among the affiliated subsidiaries by applying
corporate income tax rates to taxable income or loss determined on a separate
return basis according to a Tax Allocation Agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial statement purposes and
for income tax purposes.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
7. FEDERAL INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Separate account assets/liabilities....................................... $ 56,620 $ 40,989
Reserves.................................................................. 43,143 51,271
Claims and benefits payable............................................... 15,238 7,764
Accrued liabilities....................................................... 8,785 8,439
Investments............................................................... 4,795 2,648
Other..................................................................... 3,042 1,549
--------- ---------
Total deferred tax assets............................................... 131,623 112,660
Deferred tax liabilities:
Deferred policy acquisition costs......................................... 72,369 67,850
Unrealized gains.......................................................... 39,015 20,402
Fixed assets.............................................................. 3,914 3,110
Investments............................................................... 1,220 1,942
Other..................................................................... 68 2,348
--------- ---------
Total deferred tax liabilities.......................................... 116,586 95,652
--------- ---------
Net deferred tax asset.................................................. $ 15,037 $ 17,008
--------- ---------
--------- ---------
</TABLE>
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets, and, therefore, no such valuation
allowance has been established.
The Company's tax expense (benefit) for the year ended December 31 is shown as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current.............................................................. $ 41,569 $ 32,193 $ 39,660
Deferred............................................................. (6,449) (1,094) (11,769)
--------- --------- ---------
$ 35,120 $ 31,099 $ 27,891
--------- --------- ---------
--------- --------- ---------
</TABLE>
Federal income tax payments and refunds resulted in net payments of $58,859,000,
$16,434,000, and $40,453,000 in 1997, 1996 and 1995, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory income tax rate............................................ 35.0% 35.0% 35.0%
Other, net........................................................... (.6) (.2) (0.9)
--------- --------- ---------
34.4% 34.8% 34.1%
--------- --------- ---------
--------- --------- ---------
</TABLE>
8. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Premium and annuity considerations for the variable annuity products and
variable universal life products for which the contract holder, rather
than the Company, bears the investment risk.............................. $2,947,401 $2,344,474
Assets of the separate accounts owned by the Company, at fair value....... 31,221 30,244
---------- ----------
$2,978,622 $2,374,718
---------- ----------
---------- ----------
</TABLE>
9. REINSURANCE
In the second quarter of 1996, First Fortis Life Insurance Company (First
Fortis), an affiliate, received approval from the New York State Insurance
Department for a reinsurance agreement with the Company. The agreement, which
became effective as of January 1, 1996, decreased First Fortis' long-term
disability reinsurance retention from a $10,000 net monthly benefit to a $2,000
net monthly benefit for claims incurred on and after January 1, 1996. The
Company has assumed $5,742,000 and $6,144,000 of premium from First Fortis in
1997 and 1996, respectively. The Company has assumed $5,452,000 and $3,599,000
of reserves in 1997 and 1996, respectively, from First Fortis.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
9. REINSURANCE (CONTINUED)
The maximum amount that the Company retains on any one life is $500,000 of life
insurance including accidental death. Amounts in excess of $500,000 are
reinsured with other life insurance companies on a yearly renewable term basis.
Ceded reinsurance premiums for the year ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Life insurance........................................................ $ 8,159 $ 8,680 $ 4,661
Accident and health insurance......................................... 13,712 6,793 3,410
--------- --------- ---------
$ 21,871 $ 15,473 $ 8,071
--------- --------- ---------
--------- --------- ---------
</TABLE>
Recoveries under reinsurance contracts for the year ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Life insurance........................................................ $ 2,973 $ 7,225 $ 2,489
Accident and health insurance......................................... 14,781 5,993 8,807
--------- --------- ---------
$ 17,754 $ 13,218 $ 11,296
--------- --------- ---------
--------- --------- ---------
</TABLE>
Reinsurance ceded would become a liability of the Company in the event the
reinsurers are unable to meet the obligations assumed under the reinsurance
agreement. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers.
10. DIVIDEND RESTRICTIONS
Dividend distributions to parent are restricted as to amount by state
regulatory requirements. The Company had $52,367,000 free from such restrictions
at December 31, 1997. Distributions in excess of this amount would require
regulatory approval.
11. REGULATORY ACCOUNTING REQUIREMENTS
Statutory-basis financial statements are prepared in accordance with
accounting practices prescribed or permitted by Minnesota insurance regulatory
authorities. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The NAIC is
currently in the process of codifying statutory accounting practices. This
project, which is not expected to be completed before 1999, may result in
changes to the accounting practices that insurance enterprises use to prepare
their statutory-basis financial statements.
Insurance enterprises are required by State Insurance Departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. The
Company exceeds the minimum RBC requirements.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
11. REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED)
Reconciliations of net income and shareholder's equity on the basis of statutory
accounting to the related amounts presented in the accompanying statements were
as follows (in thousands):
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDER'S EQUITY
------------------------------- --------------------
1997 1996 1995 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Based on statutory accounting practices........ $ 62,593 $ 55,046 $ 30,576 $ 528,671 $ 482,507
Deferred policy acquisition costs.............. 25,763 27,190 15,100 291,742 268,075
Investment valuation differences............... (497) (2,219) 330 80,245 31,326
Deferred and uncollected premiums.............. (107,194) (4,096) -- -- --
Policy reserves................................ 89,895 (19,873) (29,238) (150,649) (131,159)
Commissions.................................... (3,171) (1,639)
Current income taxes payable................... 6,450 2,386 (1,294) 3,712 (7,895)
Deferred income taxes.......................... 6,449 (1,094) 11,769 (520) 17,008
Realized gains on investments.................. 251 2,599 1,938 -- --
Realized gains transferred to the Interest
Maintenance Reserve (IMR), net of tax......... 9,644 2,335 31,711 -- --
Amortization of IMR, net of tax................ (6,315) (6,130) (5,261) -- --
Write-off of investment........................ (11,705) -- -- -- --
Pension expense................................ (4,153) -- --
Guaranty Funds................................. -- 3,023 --
Property and equipment......................... -- -- -- 15,520 20,481
Interest maintenance reserve................... -- -- -- 53,348 50,019
Asset valuation reserve........................ -- -- -- 75,939 62,961
Other, net..................................... (900) 664 (1,761) (17,902) (12,650)
--------- --------- --------- --------- ---------
As reported herein............................. $ 67,110 $ 58,192 $ 53,870 $ 880,106 $ 780,673
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis, Inc. and its affiliates.
These services include assistance in benefit plan administration, corporate
insurance, accounting, tax, auditing, investment and other administrative
functions. The fees paid to Fortis, Inc. for these services for years ended
December 31, 1997, 1996 and 1995, were $12,015,000, $13,319,000 and $10,074,00,
respectively.
In conjunction with the marketing of its variable annuity products, the Company
paid $72,105,000, $68,616,000 and $59,308,000 in commissions to its affiliate,
Fortis Investors, Inc., for the years ended December 31, 1997, 1996 and 1995,
respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on a separate
company basis.
Fortis Information Technology (Fortis IT) is a business unit within the Company
and is managed by Fortis, Inc. Based upon an agreement established with Fortis
Inc., over/under charges are transferred annually to Fortis, Inc. The amounts
transferred were $5,149,000 in 1997; $476,000 in 1996 and $0 in 1995. Effective
January 1, 1998, Fortis IT operations have been transferred to Fortis, Inc.
13. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
The fair values for fixed maturity securities and equity securities are based on
quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
Mortgage loans are reported at unpaid principal balance less allowances for
possible losses. The fair values of mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Mortgage loans with
similar characteristics are aggregated for purposes of the calculations. It is
not practicable to estimate the fair value of policy loans as repayment terms
are at the discretion of the policyholder. For short-term investments, the
carrying amount is a reasonable estimate of fair value. The fair values for the
Company's policy reserves under the investment products are determined using
cash surrender value. As the debt was underwritten in the current year, the
outstanding balance is a reasonable estimate of fair value.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
13. FAIR VALUE DISCLOSURES (CONTINUED)
The fair values under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, such that the Company's
exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31
----------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturities...................................... $2,415,915 $2,415,915 $2,115,499 $2,115,499
Equity securities..................................... 109,832 109,832 106,290 106,290
Mortgage loans on real estate............................. 602,064 661,055 582,869 614,555
Policy loans.............................................. 68,566 68,566 60,722 60,722
Short-term investments.................................... 70,537 70,537 182,817 182,817
Assets held in separate accounts.......................... 2,978,622 2,978,622 2,374,718 2,371,601
Liabilities:
Individual and group annuities (subject to discretionary
withdrawal).............................................. $ 977,495 $ 945,558 $ 916,754 $ 886,110
Debt...................................................... 26,433 26,433 -- --
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. These actions have been
considered in establishing policy benefit and loss reserves. Management and its
legal counsel are of the opinion that the settlement of these actions will not
have a material adverse effect on the Company's financial position or results of
operations.
15. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company is an indirect wholly-owned subsidiary of Fortis, Inc., which
sponsors a defined benefit pension plan covering employees and certain agents
who meet eligibility requirements as to age and length of service. The benefits
are based on years of service and career compensation. Fortis, Inc.'s funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes, and to charge each subsidiary an allocable amount
based on its employee census. Pension cost allocated to the Company amounted to
approximately $1,594,000, $1,354,000 and $1,179,000 for 1997, 1996 and 1995,
respectively. As of January 1, 1997, the Plan's total accumulated benefit
obligation determined in accordance with ERISA was approximately $56,838,000.
This amount was based on an assumed interest rate of 8.00% and included vested
benefits of approximately $54,831,000. The fair market value of the Plan assets
as of January 1, 1997 was approximately $60,004,000.
The Company participates in a contributory profit sharing plan, sponsored by
Fortis, Inc., covering employees and certain agents who meet eligibility
requirements as to age and length of service. Benefits are payable to
participants on retirement or disability and to the beneficiaries of
participants in the event of death. The first three percent of an employee's
contribution is matched 200% by the Company. The amount expensed was
approximately $3,926,000, $3,913,000 and 3,765,000 for 1997, 1996 and 1995,
respectively.
In addition to retirement benefits, the Company participates in other health
care and life insurance benefit plans ("postretirement benefits") for retired
employees, sponsored by Fortis, Inc. Health care benefits, either through a
Fortis Inc.-sponsored retiree plan for retirees under age 65 or through a cost
offset for individually purchased Medigap policies for retirees over age 65, are
available to employees who retire on or after January 1, 1993, at age 55 or
older, with 15 years or more service. Life insurance, on a retiree pay all
basis, is available to those who retire on or after January 1, 1993.
Net postretirement benefit costs allocated to the Company for the years ended
December 31, 1997, 1996 and 1995 were $304,000, $290,000 and $287,000,
respectively, and includes the expected cost of such benefits for newly eligible
or vested employees, interest cost, gains and losses arising from differences
between actuarial assumptions and actual experience, and amortization of the
transition obligation. The Company made contributions to the plans of
approximately $20,000, $8,000 and $0 in 1997, 1996 and 1995, respectively, as
claims were incurred.
At December 31, 1997 and 1996, the unfunded postretirement benefit obligation
for retirees and other fully eligible or vested plan participants was $1,148,000
and $844,000, respectively. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.5%. The health care cost
trend rate for those under age 65 was 12.8%, graded to 5.5% over 26 years. The
health care cost trend rate for those over age 65 was 12.0%, graded to 6.2% over
26 years.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
16. DEBT
The following is a summary of the debt at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Mortgage note bearing a floating interest rate of 200 basis points over LIBOR, (5.84%
at December 31, 1997) adjustable every six months, principal and interest due
monthly, matures July 2001........................................................... $ 3,150
Mortgage note bearing a floating interest rate of 225 basis points over LIBOR (5.84%
at December 31, 1997) adjustable every six months, principal and interest due
monthly, balloon payment due July 1998............................................... 18,100
Mortgage note bearing interest at 7.60%, principal and interest due monthly, matures
October 2002......................................................................... 5,183
---------
$ 26,433
---------
---------
</TABLE>
Maturities of the debt as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................................. $ 18,222
1999.................................................................................. 126
2000.................................................................................. 136
2001.................................................................................. 3,119
2002.................................................................................. 4,830
---------
26,433
---------
---------
</TABLE>
These mortgage notes are collateralized by certain real estate investments
included in real estate and other investments in the balance sheet.
Interest expense paid by the Company during 1997 on this debt was approximately
$1,075,000.
17. YEAR 2000 ISSUES (UNAUDITED)
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 unforeseen
circumstances.
41
<PAGE>
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments
Fixed maturities, at fair value (amortized cost 1998--$2,265,578;
1997--$2,325,589)............................................................. $ 2,383,784 $ 2,415,915
Equity securities, at fair value (cost 1998--$129,946; 1997--$88,719).......... 128,789 109,832
Mortgage loans on real estate, less allowance for possible losses (1998 and
1997--$11,085)................................................................ 619,615 602,064
Policy loans................................................................... 74,729 68,566
Short-term investments......................................................... 78,831 70,537
Real estate and other investments.............................................. 77,499 55,035
------------- -------------
3,363,247 3,321,949
Cash and cash equivalents........................................................ (26,411) 9,901
Receivables:
Uncollected premium............................................................ 77,354 74,220
Reinsurance recoverable on paid and unpaid losses.............................. 16,888 13,852
Due from affiliates............................................................ 1,028 --
Other.......................................................................... 15,529 19,762
------------- -------------
110,799 107,834
Accrued investment income........................................................ 45,695 47,376
Deferred policy acquisition costs................................................ 312,639 291,742
Property and equipment, at cost, less accumulated depreciation................... 33,060 42,773
Deferred federal income taxes.................................................... 15,595 15,037
Other assets..................................................................... 6,073 4,250
Assets held in separate accounts................................................. 3,200,004 2,978,622
------------- -------------
TOTAL ASSETS..................................................................... $ 7,060,701 $ 6,819,484
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
42
<PAGE>
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:................................................
Life insurance............................................................... $ 449,846 $ 449,017
Interest sensitive and investment products................................... 1,243,434 1,264,227
Accident and health.......................................................... 835,469 792,249
------------- -------------
2,528,749 2,505,493
Unearned premiums.............................................................. 11,132 10,653
Other policy claims and benefits payable....................................... 252,506 260,596
Policyholder dividends payable................................................. 8,374 8,197
------------- -------------
2,800,761 2,784,939
Debt........................................................................... 45,672 26,433
Accrued expenses............................................................... 50,070 49,909
Current income taxes payable................................................... 3,762 10,549
Other liabilities.............................................................. 84,226 113,222
Due to affiliates.............................................................. -- 6,925
Liabilities related to separate accounts....................................... 3,169,728 2,947,401
------------- -------------
TOTAL POLICY RESERVES AND LIABILITIES............................................ 6,154,219 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.............................................................. 360,219 332,723
Unrealized gain on available-for-sale securities (net of deferred taxes
1998--$39,843; 1997-- $38,463)................................................ 71,276 68,981
Unrealized gain on assets held in separate accounts (net of deferred taxes
1998--$(535); 1997-- $1,345).................................................. 1,987 5,402
------------- -------------
TOTAL SHAREHOLDER'S EQUITY....................................................... 906,482 880,106
------------- -------------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY...................... $ 7,060,701 $ 6,819,484
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
43
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Insurance operations:
Life insurance premiums............................................................... $ 193,002 $ 197,599
Interest sensitive and investment product policy charges.............................. 63,533 56,750
Accident and health premiums.......................................................... 705,467 664,882
--------- ---------
Total Insurance Revenue............................................................. 962,002 919,231
Net investment income................................................................... 176,177 169,227
Net realized gains on investments....................................................... 46,136 29,678
Other income............................................................................ 33,742 26,529
--------- ---------
TOTAL REVENUES...................................................................... 1,218,057 1,144,665
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance........................................................................ 141,304 157,152
Interest sensitive and investment products............................................ 71,118 77,004
Accident and health................................................................... 584,640 518,497
--------- ---------
797,062 752,653
Policyholder dividends.................................................................. 2,835 1,931
Amortization of deferred policy acquisition costs....................................... 30,883 30,099
Insurance commissions................................................................... 80,040 75,119
General and administrative expenses..................................................... 226,475 193,981
--------- ---------
TOTAL BENEFITS AND EXPENSES......................................................... 1,137,295 1,053,783
INCOME BEFORE INCOME TAXES................................................................ 80,762 90,882
INCOME TAX EXPENSE (BENEFITS)
Current................................................................................. 28,325 37,974
Deferred................................................................................ (58) (6,165)
--------- ---------
28,267 31,809
NET INCOME................................................................................ 52,495 59,073
--------- ---------
--------- ---------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on investments................................................... (1,120) 19,073
--------- ---------
COMPREHENSIVE INCOME...................................................................... $ 51,375 $ 78,146
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
44
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Insurance operations:
Life insurance premiums............................................................... $ 64,941 $ 67,138
Interest sensitive and investment product policy charges.............................. 20,631 18,919
Accident and health premiums.......................................................... 241,434 222,971
--------- ---------
Total Insurance Revenue............................................................. 327,006 309,028
Net investment income................................................................... 57,064 57,269
Net realized gains on investments....................................................... 5,117 12,585
Other income............................................................................ 11,210 9,777
--------- ---------
TOTAL REVENUES...................................................................... 400,397 388,659
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance........................................................................ 46,278 52,985
Interest sensitive and investment products............................................ 23,236 25,068
Accident and health................................................................... 200,771 170,117
--------- ---------
270,285 248,170
Policyholder dividends.................................................................. 801 (283)
Amortization of deferred policy acquisition costs....................................... 4,987 10,769
Insurance commissions................................................................... 28,350 24,267
General and administrative expenses..................................................... 74,170 67,952
--------- ---------
TOTAL BENEFITS AND EXPENSES......................................................... 378,593 350,875
--------- ---------
INCOME BEFORE INCOME TAXES................................................................ 21,804 37,784
INCOME TAX EXPENSE (BENEFITS)
Current................................................................................. 4,221 13,540
Deferred................................................................................ 3,393 (316)
--------- ---------
7,614 13,224
--------- ---------
NET INCOME................................................................................ 14,190 24,560
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on investments................................................... 6,984 29,328
--------- ---------
COMPREHENSIVE INCOME...................................................................... $ 21,174 $ 53,888
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
45
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................................ $ 52,495 $ 59,073
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in future policy benefit reserves.......................................... 64,625 41,325
Increase (decrease)in other policy claims, benefits and policyholder dividends
payable............................................................................ (7,434) 21,659
Provision for deferred federal income taxes......................................... (58) (14,937)
Increase (decrease) in income taxes payable......................................... (6,787) 1,807
Amortization of policy acquisition costs............................................ 30,883 30,099
Policy acquisition costs deferred................................................... (53,706) (52,527)
Provision for depreciation.......................................................... 14,924 11,473
Amortization of investment premiums(discounts), net................................. (2,757) 110
Change in uncollected premiums, accrued investment income, reinsurance recoverable,
other receivables, other assets, debt, accrued expenses, and other liabilities..... (38,816) 14,905
Realized gains on investments....................................................... (46,132) (29,678)
Other............................................................................... -- (113)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 7,237 83,196
INVESTING ACTIVITIES
Purchases of fixed maturity investments............................................... (1,655,160) (3,153,125)
Sales or maturities of fixed maturity investments..................................... 1,745,599 3,023,857
Decrease (increase) in short-term investments......................................... (8,295) 1,997,592
Purchase of other investments......................................................... (340,244) (2,190,370)
Sales or maturities of other investments 268,056 153,380
Purchase of property and equipment (164) (5,327)
---------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES................................ 9,792 (173,993)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 152,413 159,741
Surrenders and death benefits (243,419) (129,279)
Interest credited to policyholders 37,665 39,861
---------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (53,341) 70,323
---------- ---------
Increase in Cash...................................................................... (36,312) (20,474)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 9,901 20,474
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ (26,411) $ 0
---------- ---------
---------- ---------
</TABLE>
See accompanying notes.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
SEPTEMBER 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 September 30, 1998 and the related statement of income for the nine months
ended September 30, 1998 and 1997, and cash flows for the nine months ended
September 30, 1998 and 1997.
Income tax payments for the nine months ended September 30,1998 and September
30, 1997 were $35,112,000 and $44,955,000, 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 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 September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Fixed Income Securities:
Governments.................................. $ 277,560 $ 15,937 $ -- $ 293,497
Public Utilities............................. 172,861 8,505 2,069 179,297
Industrial and miscellaneous................. 1,735,949 96,813 3,984 1,828,778
Other........................................ 79,208 3,004 -- 82,212
--------- ----------- ----------- ---------
Total........................................ 2,265,578 124,259 6,053 2,383,784
Equity Securities............................ 129,946 8,353 9,510 128,789
--------- ----------- ----------- ---------
$2,395,524 $ 132,612 $ 15,563 $2,512,573
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The amortized cost and fair value of fixed maturities at September 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>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less............................................... $ 127,172 $ 128,115
Due after one year through five years................................. 834,212 859,918
Due after five years through ten years................................ 563,635 599,596
Due after ten years................................................... 740,559 796,155
--------- ---------
$2,265,578 $2,383,784
--------- ---------
--------- ---------
</TABLE>
Proceeds from sales and maturities of investments in fixed maturities in the
nine month period ended September 30,1998 were $1,745,599,000, and $20,033,000
respectively. Gross gains of $34,118,000 and $24,806,000 and gross losses of
$6,438,000 and $16,539,000 were realized on the sales during the nine month
period ended September 30, 1998 and 1997, 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.
47
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
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):
<TABLE>
<CAPTION>
REALIZED GAIN (LOSS)
INVESTMENT
INCOME ON INVESTMENTS
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fixed maturities......................................... $ 120,421 $ 118,995 $ 27,680 $ 8,267
Preferred stocks......................................... 88 233 14 622
Common stocks............................................ 6,811 6,837 8,985 20,735
Mortgage loans on real estate............................ 43,143 40,187 (198) (8)
Policy loans............................................. 3,444 3,116 -- --
Short-term investments................................... 1,451 2,088 -- --
Real estate and other investments........................ 5,680 3,265 9,655 62
--------- --------- --------- ---------
181,038 174,721 $ 46,136 $ 29,678
--------- ---------
--------- ---------
Expenses................................................. 4,861 5,494
--------- ---------
$ 176,177 $ 169,227
--------- ---------
--------- ---------
</TABLE>
48
<PAGE>
APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is:
1 + I n/12
( ---------) - 1
1 + J + .005
Sample Calculation 1: Positive Adjustment
Amount withdrawn or transferred $10,000
Existing guarantee period 7 years
Time of withdrawal or transfer beginning of 3rd year of existing
guarantee period
Guaranteed interest rate (I) 8%*
Guaranteed interest rate for
new 5-year guarantee (J) 7%*
Remaining guarantee period (N) 60 months
Market Value Adjustment
1 + .08 60/12
$10,000 x [( ----------) - 1] = $234.73
1 + .07 + .005
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,234.73
Sample Calculation 2: Negative Adjustment
Amount withdrawn or transferred $10,000
Existing guarantee period 7 years
Time of withdrawal or transfer beginning of 3rd year of existing
guarantee period
Guaranteed interest rate (I) 8%*
Guaranteed interest rate for
new 5-year guarantee (J) 9%*
Remaining guarantee period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 x [( ----------) - 1] = - $666.42
1 + .09 + .005
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,333.58
Sample Calculation 3: Negative Adjustment
Amount withdrawn or transferred $10,000
Guarantee period 7 years
Time of withdrawal or transfer beginning of 3rd year of existing
guarantee period
Guaranteed interest rate (I) 8%*
Guaranteed interest rate for
new 5-year guarantee (J) 7.75%*
Remaining guarantee period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 x [( ------------)] - 1] = - $114.94
1 + .0775 + .005
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,885.06
- ------------------------
*Assumed for illustrative purposes only.
A-1
<PAGE>
APPENDIX B--EXPLANATION OF EXPENSE CALCULATIONS
The expense for a given year is calculated by multiplying the projected
beginning of the year policy value by the total expense rate. The total expense
rate is the sum of the variable account expense rate plus the total Portfolio
expense rate plus the annual administrative charge rate.
The policy values are projected by assuming a single payment of $1,000 grows at
an annual rate equal to 5% reduced by the total expense rate described above.
For example, the 3 year expense for the Federated Prime Money Fund II for a
contract issued when all owners are less than 61 years old at the time of
purchase is calculated as follows:
<TABLE>
<S> <C> <C>
Total Variable Account Annual Expenses 1.20%
+ Total Portfolio Operating Expenses 0.80%
= Total Expense Rate 2.00%
</TABLE>
The Annual Administrative Charge rate is calculated by dividing the total Annual
Contract Charges we collected in 1997 on similar contracts by the average policy
value in force in 1997 on such contracts.
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = $1000.00 x 0.0200 = $20.00
Year 2 Beginning Policy Value = $1030.00
Year 2 Expense = $1030.00 x 0.0200 = $20.60
Year 3 Beginning Policy Value = $1060.90
Year 3 Expense = $1060.90 x 0.0200 = $21.22
So the cumulative expenses for years 1-3 for the Federated Prime Money Fund II
are equal to:
$20.00 + $20.60 + $21.22 = $61.82
If the contract is surrendered, the surrender charge is the surrender charge
percentage times the purchase payment minus the 10% free withdrawal amount:
Surrender Charge Percentage x (Initial Premium - 10% Free Withdrawal) =
Surrender Charge
0.07 x ($1000.00 - $100.00) = $63.00
So the total expense if surrendered is $61.82 + $63.00 = $124.82.
B-1
<PAGE>
APPENDIX C--SAMPLE DEATH BENEFIT CALCULATIONS
<TABLE>
<CAPTION>
Date of Death Assumed Premiums and Values: Example 1 Example 2 Example 3
----------- ----------- -----------
<S> <C> <C> <C>
a. Purchase payments made prior to death, accumulated at 4% $ 32,000 $ 32,000 $ 32,000
b. Contract Value on date of death $ 20,000 $ 36,000 $ 25,000
c. One year Ratchet Option Value $ 35,000 $ 36,000 $ 31,000
Death Benefit is Larger of a, b, and c. $ 35,000 $ 36,000 $ 32,000
</TABLE>
C-1
<PAGE>
APPENDIX D--PARTICIPATING PORTFOLIOS
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company. It was
established as a Massachusetts business trust under a Declaration of Trust dated
September 15, 1993. Federated Advisers is the investment adviser for all of its
portfolios other than Federated International Equity Fund II, which is advised
by Federated Global Research Corp.
AMERICAN LEADERS FUND II
INVESTMENT OBJECTIVE: Seeks to achieve long-term growth of capital with a
secondary objective to provide income. It invests, under normal conditions, at
least 65% of its total assets in common stock of "blue-chip" companies.
GROWTH STRATEGIES FUND II
INVESTMENT OBJECTIVE: Capital appreciation. It invests at least 65% of its
assets in equity securities of companies with prospects for above-average growth
in earnings and dividends or companies where significant fundamental changes are
taking place.
UTILITY FUND II
INVESTMENT OBJECTIVE: To achieve high current income and moderate capital
appreciation. It invests primarily in a professionally managed, diversified
portfolio of equity and debt securities of utility companies.
PRIME MONEY FUND II
INVESTMENT OBJECTIVE: To provide current income consistent with stability of
principal and liquidity. It invests exclusively in a portfolio of money market
instruments maturing in 397 days or less.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
INVESTMENT OBJECTIVE: Seeks to provide current income. Under normal
circumstances, it invests at least 65% of the value of its total assets in
securities issued or guaranteed as to payment of principal and interest by the
U.S. Government, its agencies or instrumentalists.
HIGH INCOME BOND FUND II
INVESTMENT OBJECTIVE: To seek high current income. It invests primarily in a
professionally managed, diversified portfolio of fixed income securities. The
fixed income securities in which it invests are lower-rated corporate debt
obligations, which are commonly referred to as "junk bonds."
INTERNATIONAL EQUITY FUND II
INVESTMENT OBJECTIVE: To obtain a total return on its assets. It invests at
least 65% of its assets (and under normal market conditions substantially all of
its assets) in equity securities of issuers located in at least three different
countries outside of the United States.
EQUITY INCOME FUND II
INVESTMENT OBJECTIVE: To provide above average income and capital appreciation.
It invests at least 65% of its assets in income-producing equity securities.
D-1
<PAGE>
APPENDIX E--PRO RATA ADJUSTMENTS
Pro rata adjustments are made for withdrawals in calculating the death benefit
payable under the contract. The benefit is described under the section of this
prospectus entitled Benefit Payable on Death of Owner (or Annuitant).
Under the death benefit set forth as (2) in that section, the pro rata
adjustment for a given withdrawal is equal to:
(a) the withdrawn amount, divided by
(b) the contract value immediately before the amount was withdrawn, the
result multiplied by
(c) the quantity equal to:
(i) the contract value on the anniversary, plus
(ii) purchase payments made since the anniversary and before the
withdrawal, plus
(iii) pro rata adjustments for withdrawals made since the anniversary
and before the given withdrawal.
Under the death benefit set forth as (3) in that section, the pro rata
adjustment for a given withdrawal is equal to:
(a) the withdrawn amount; divided by
(b) the contract value immediately before the amount was withdrawn; the
result multiplied by
(c) the quantity equal to:
(i) the Roll-up Amount prior to withdrawal; plus
(ii) any purchase payments made on or after the date the owner
reached age 80 and before the given withdrawal; reduced by
(iii) pro rata adjustments for any withdrawals made on or after the
date the owner reached age 80 and before the given withdrawal.
E-1
<PAGE>
CONTRACTS UNDER
FLEXIBLE PREMIUM DEFERRED
COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
TRIPLE CROWN VARIABLE ANNUITY
Issued by
FORTIS BENEFITS INSURANCE COMPANY
(AND ITS VARIABLE ACCOUNT D)
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1999
This Statement of Additional Information is not a Prospectus. It is intended
that this Statement of Additional Information be read in conjunction with the
Prospectus for Contracts under flexible premium deferred combination variable
and fixed annuity contracts ("Contracts"), dated January 1, 1999. A copy of the
Prospectus may be obtained without charge from Fortis Investors, Inc.
1-800-963-9222, mailing address: P.O. Box 64273, St. Paul, MN 55164. You have
the option of receiving benefits under a Contract through Fortis Benefits'
Variable Account D or through Fortis Benefits' Guarantee Periods Fixed Account
or its General Account Fixed Account.
TABLE OF CONTENTS
Fortis Benefits and the Variable Account . . . . . . . . . . . . . . . . .1
Calculation of Annuity Payments. . . . . . . . . . . . . . . . . . . . . .2
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
- Safekeeping of Variable Account Assets . . . . . . . . . . . . . . . .3
- Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
- Principal Underwriter . . . . . . . . . . . . . . . . . . . . . . . .4
Taxation Under Certain Retirement Plans. . . . . . . . . . . . . . . . . .4
Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Variable Account Financial Statements. . . . . . . . . . . . . . . . . . .9
Appendix A -- Performance Information. . . . . . . . . . . . . . . . . .A-1
In order to supplement the description in the Prospectus, the following provides
additional information about the Contracts and other matters which may be of
interest to you. Terms used in this Statement of Additional Information have
the same meanings as are defined in the Prospectus under the heading "Special
Terms Used in This Prospectus."
FORTIS BENEFITS AND THE VARIABLE ACCOUNT
Fortis Benefits Life Insurance Company, the issuer of the Contracts, is a
Minnesota corporation qualified to sell life insurance and annuity contracts in
the District of Columbia and in all states except New York. Fortis Benefits is
a wholly-owned subsidiary of Fortis Insurance Company, a stock company organized
under the laws of Wisconsin, which itself is a wholly-owned subsidiary of
Fortis, Inc. Fortis, Inc. is a corporation based in New York, which manages
the United States operations of Fortis (NL) N.V. and Fortis B.
1
<PAGE>
Fortis (NL) N.V. has been in business since 1847 and is a publicly-traded,
multi-national insurance, real estate, and financial services group
headquartered in The Netherlands. It is one of the largest holding companies
in Europe, with subsidiary companies in twelve countries on four continents.
Fortis (NL) N.V. is the third largest insurance company in the Netherlands.
Fortis B is a multi-national insurance, real estate and financial services
firm that has been in business since 1824. It has subsidiary companies in
eight countries. Fortis B is one of the largest life insurance companies in
Belgium. Fortis (NL) N.V. and Fortis B have combined assets of approximately
$167 billion.
The assets allocated to the Variable Account are the exclusive property of
Fortis Benefits. Registration of the Variable Account under the Investment
Company Act of 1940 does not involve supervision of the management or investment
practices or policies of the Variable Account or of Fortis Benefits by the
Securities and Exchange Commission. Fortis Benefits may accumulate in the
Variable Account proceeds from charges under the Contracts and other amounts in
excess of the Variable Account assets representing reserves and liabilities
under Contracts and other variable annuity contracts issued by Fortis Benefits.
Fortis Benefits may from time to time transfer to its general account any of
such excess amounts.
Best's Insurance Reports has assigned Fortis Benefits a rating of A (Excellent)
for financial position and operating performance. Fortis Benefits has a rating
of AA from Standard & Poor's. As defined by Standard & Poor's, insurers rated
AA offer "excellent financial security." These ratings represent such rating
agencies' independent opinion of Fortis Benefits' financial strength and ability
to meet policy holder obligations, but have no relevance to the performance and
quality of the assets in Subaccounts of the Variable Account.
CALCULATION OF ANNUITY PAYMENTS
FIXED ANNUITY OPTION
The amount of each annuity payment under a Fixed Annuity Option is fixed and
guaranteed by Fortis Benefits. Monthly fixed annuity payments will start as of
the end of the Valuation Period that contains the Annuity Commencement Date. At
that time, the Contract Value, after any Market Value Adjustment, is computed
and that portion of the Contract Value which will be applied to the Fixed
Annuity Option selected is determined. The amount of the first monthly payment
under the Fixed Annuity Option selected will be at least as large as would
result from using the annuity tables contained in the Contract to apply such
amount of Contract Value to the annuity form selected. The dollar amounts of
any fixed annuity payments after the first are specified during the entire
period of annuity payments according to the provisions of the annuity form
selected.
VARIABLE ANNUITY OPTION
ANNUITY UNITS. To the extent a Variable Annuity Option has been selected, we
convert the Accumulation Units for each Subaccount of the Variable Account into
Annuity Units for each chosen Subaccount at their values determined as of the
end of the Valuation Period which contains the Annuity Commencement Date. As of
such time, any Fixed Account Value to be applied to a Variable Annuity Option is
also converted, after any Market Value Adjustment, to Annuity Units in the
Subaccounts selected based on the then-current Annuity Unit value. The initial
number of Annuity Units in each Subaccount is determined by dividing the amount
of the initial monthly variable annuity payment (see "Variable Annuity Option --
Variable Annuity Payments," below) allocable to that Subaccount by the value of
one Annuity Unit in that Subaccount as of the time of the conversion. The
number of Annuity Units for each Subaccount will remain constant, as long as an
annuity remains in force and the allocation among the Subaccounts has not
changed.
The value of each Subaccount's Annuity Units will vary to reflect the investment
experience of the Subaccount as well as charges deducted from the Subaccount.
The value of each Subaccount's Annuity Units is equal to the prior value of the
Subaccount's Annuity Units multiplied by the net investment factor for that
Subaccount (discussed in the Prospectus
2
<PAGE>
under "Contract Value") for the Valuation Period ending on that Valuation Date,
with an offset for the 3% assumed interest rate used in the annuity tables of
the Contract.
VARIABLE ANNUITY PAYMENTS. Variable annuity payments start at the end of the
Valuation Period that contains the Annuity Commencement Date, and will vary in
amount as the related Annuity Unit values vary. The amount of the first monthly
payment is shown on the annuity tables contained in the Contract for each $1,000
of Contract Value applied to the Variable Annuity Option selected as of the end
of such Valuation Period. The first variable annuity payment is, in effect,
allocated among the Subaccounts in the same proportion as the Contract Value is
allocated among the Subaccounts upon commencement of annuity payments.
Payments after the first will vary in amount and are determined on the first
Valuation Date of each subsequent monthly period. If the monthly payment under
the annuity form selected is based on the value of Annuity Units of a single
Subaccount, the monthly payment is found by multiplying the number of the
Contract's Annuity Units for the Subaccount by the Annuity Unit value of such
Subaccount as of the first Valuation Date in each monthly period following the
Annuity Commencement Date. If the monthly payment under the Variable Annuity
Option selected is based upon the value of Annuity Units in more than one
Subaccount, this is repeated for each applicable Subaccount. The sum of these
payments is the variable annuity payment.
GENDER OF ANNUITANT
The amount of each annuity payment ordinarily will be higher for a male
Annuitant than for a female Annuitant with an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males. However, there will be no differences between male and female
Annuitants in any jurisdiction, including Montana, where such differences are
not permitted. We will also make available Contracts with no such differences
in connection with certain employer-sponsored benefit plans. Employers should
be aware that, under most such plans, Contracts that make distinctions based on
gender are prohibited by law.
SERVICES
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
Title to the assets of the Variable Account is held by Fortis Benefits. The
assets of the Variable Account are kept segregated and held separate and apart
from Fortis Benefits' other assets.
3
<PAGE>
EXPERTS
The financial statements of Fortis Benefits Insurance Company appearing in
the Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon also
appearing in the Prospectus or this Statement of Additional Information,
respectively, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
PRINCIPAL UNDERWRITER
Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the
Contracts, is a Minnesota corporation and a member of the Securities Investors
Protection Corporation. The offering of the Contracts is continuous, and Fortis
Investors does not anticipate discontinuing the offering of the Contracts,
although it reserves the right to do so. Contracts generally will be issued for
Annuitants from ages zero to ninety in all states.
TAXATION UNDER CERTAIN RETIREMENT PLANS
Federal income tax information concerning the purchase of Contracts for specific
types of retirement plans is set forth below. You should also refer to "Federal
Tax Matters" in the Prospectus. The tax information provided is not
comprehensive, and you should consult a qualified tax adviser before taking any
action in connection with a retirement plan.
SECTION 403(b) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS
OR PUBLIC EDUCATIONAL INSTITUTIONS
PURCHASE PAYMENTS. Under Section 403(b) of the Internal Revenue Code ("Code"),
payments made by certain employers (i.e., tax-exempt organizations meeting the
requirements of Section 501(c)(3) of the Code, or public educational
institutions) to purchase Contracts for their employees are excludible from the
gross income of employees to the extent that such aggregate purchase payments do
not exceed certain limitations prescribed by the Code. This is the case whether
the purchase payments are a result of voluntary salary reduction amounts or
employer contributions. Salary reduction payments are, however, subject to FICA
(social security) taxes.
TAXATION OF DISTRIBUTIONS. Distributions from a Section 403(b) tax-deferred
annuity are taxed as ordinary income to the recipient as described under
"Federal Tax Matters" in the Prospectus. Taxable distributions received before
the employee attains age 59 1/2 generally are subject to a 10% penalty tax in
addition to regular income tax. Certain distributions are excepted from this
penalty tax, including distributions following the employee's death, disability,
separation from service after age 55, separation from service at any age if the
distribution is in the form of an annuity for the life (or life expectancy) of
the employee (or the employee and Beneficiary) and distributions not in excess
of deductible medical expenses. In addition, no distributions of voluntary
salary reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death, disability or hardship. (Hardship distributions will be
limited to the lesser of the amount of the hardship or the amount of salary
reduction contributions, exclusive of earnings thereon.)
REQUIRED DISTRIBUTIONS. Generally, distributions from Section 403(b) annuities
must commence not later than April 1 of the calendar year following the calendar
year in which the employee attains age 70 1/2, and such distributions must be
made over a period that does not exceed the life expectancy of the employee (or
the employee and Beneficiary). A penalty tax of 50% would be imposed on any
amount by which the minimum required distribution in any year exceeded the
amount actually distributed in that year. In addition, in the event that the
employee dies before his or her entire interest in the Contract has been
distributed, the employee's entire interest must be distributed in accordance
with rules similar to those applicable upon the death of the Participant or
Payee in the case of a Non-Qualified Contract, as described in the Prospectus.
Certain of these and other provisions are incorporated in a special endorsement
attached
4
<PAGE>
to Contracts that are intended to qualify under Section 403(b), and reference
should be made to that endorsement for its complete terms.
TAX-FREE EXCHANGES AND ROLLOVERS. The Code provides for the tax-free transfer
of one Section 403(b) annuity for another Section 403(b) annuity, and the IRS
has ruled (Revenue Ruling 90-24) that amounts transferred may qualify as
tax-free transfers under certain circumstances. In addition, Section 403(b)(8)
of the code permits tax-free rollovers from Section 403(b) programs to
individual retirement annuities or other Section 403(b) programs under certain
circumstances.
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
PURCHASE PAYMENTS. Subject to certain limitations prescribed by the Code,
purchase payments made by an employer (or a self-employed individual) under a
pension, profit-sharing or annuity plan qualified under Section 401 or Section
403(a) of the Code are generally deductible by the employer and excluded from
the taxable income of the employee for federal income tax purposes, whether made
under a salary reduction agreement or directly by employer contributions.
Salary reduction payments are, however, subject to FICA (social security) taxes.
Purchase payments made directly by an employee generally are made on an
after-tax basis.
TAXATION OF DISTRIBUTIONS. Distributions from Contracts purchased under these
qualified plans are taxable as ordinary income, except to the extent allocable
to an employee's after-tax contributions, as described under "Federal Tax
Matters -- Qualified Plans," in the Prospectus. However, if an employee or
other payee receives a "lump sum" distribution, as defined in the Code, from an
exempt employees' trust, the taxable portion of the distribution may be subject
to special tax treatment. For most individuals receiving lump sum distributions
after attaining age 59 1/2, the rate of tax may be determined under a special
5-year income averaging provision. Those who attained age 50 by January 1, 1986
may instead elect to use a 10-year income averaging provision based on the
income tax rates in effect for 1986. Taxable distributions received prior to
attainment of age 59 1/2 under a Contract purchased under a qualified plan are
subject to the same 10% penalty tax (and the same exceptions) as described above
with respect to Section 403(b) annuities.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these
qualified plans are generally the same as described above with respect to
Section 403(b) annuities.
TAX-FREE ROLLOVERS. If, within 60 days of receipt, an employee who receives a
single sum distribution transfers all of the taxable amount received to another
plan qualified under Section 401 or 403(a), or to an individual retirement
account or annuity as provided for under the Code, the transferred amount will
not be taxed in the year of distribution. Certain "partial" distributions may
also qualify for tax-free rollover treatment, but only if transferred to an
individual retirement account or annuity. However, income tax may be withheld
from the distribution unless the distribution is transferred directly from the
qualified plan to the individual retirement account or individual retirement
annuity.
INDIVIDUAL RETIREMENT ANNUITIES
PURCHASE PAYMENTS. Individuals may make contributions for individual retirement
annuity ("IRA") Contracts. Deductible contributions for any year may be made up
to the lesser of $2,000 or 100% of compensation for individuals who (1) are not
(and whose spouses are not) active participants in another retirement plan, (2)
are unmarried and have adjusted gross income of $25,000 or less, or (3) are
married and have adjusted gross income of $40,000 or less. An individual may
also establish an IRA for his or her spouse if they file a joint return for the
taxable year and his or her spouse earns less than the individual does for that
year. The annual purchase payments for both spouses' Contracts cannot exceed
the lesser of $4,000 or 100% of the couple's combined earned income, and no more
than $2,000 may be contributed to either spouse's IRA for any year. Individuals
who are active participants in other retirement plans and whose adjusted gross
income (with certain special adjustment) exceed the cut-off point ($25,000 for
unmarried, $40,000 for married persons filing jointly, and $0 for married
persons filing a separate return) by less than $10,000 are entitled to make
deductible IRA contributions in proportionately reduced amounts. For example, a
married individual who is an active participant in another retirement plan and
files a separate tax return is entitled to a partial IRA deduction if the
5
<PAGE>
individual's adjusted gross income is less than $10,000 and no IRA deduction if
his or her adjusted gross income is equal to or greater than $10,000.
An individual may make non-deductible IRA contributions to the extent of (1) the
lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of compensation
over (2) the IRA deductible contribution made with respect to the individual.
An individual may not make any contributions to his/her own IRA for the year in
which he/she reaches age 70 1/2 or for any year thereafter. Contributions to a
spouse's IRA may not be made for any year in which that spouse reaches age
70 1/2 or for any year thereafter.
TAXATION OF DISTRIBUTIONS. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the tax-free
return of non-deductible contributions. In addition, taxable distributions
received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are exempted from
this penalty tax including distributions following the owner's death or
disability or distribution in the form of an annuity for the life (or life
expectancy) of the owner (or the owner and beneficiary), or distributions not in
excess of deductible medical expenses or certain distributions to pay health
insurance premiums after an extended period of unemployment.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for IRAs are
generally the same as described above with respect to Section 403(b) annuities.
Certain of these and other provisions are incorporated in a special endorsement
attached to IRA Contracts, and reference should be made to that endorsement for
its complete terms.
TAX-FREE ROLLOVERS. The Code permits funds to be transferred in a tax-free
rollover from a qualified employer pension, profit-sharing, annuity, bond
purchase or tax-deferred annuity plan to an IRA Contract if certain conditions
are met, and if the rollover of assets is completed within 60 days after the
distribution from the qualified plan is received. In addition, not more
frequently than once every twelve months, amounts may be rolled over tax-free
from one IRA to another, subject to the 60-day limitation and other
requirements. The once-per-year limitation on rollovers does not apply to
direct transfers of funds between IRA custodians or trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS
PURCHASE PAYMENTS. Under Section 408(k) of the Code, employers may establish a
type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% of
the employee's earned income. Employees of certain small employers may have
contributions made to a special kind of SEP (SARSEP) on their behalf on a salary
reduction basis if the SARSEP plan was in effect on December 31, 1996. These
salary reduction contributions may not exceed $9,500 in 1997, which is indexed
for inflation. Employees of tax-exempt organizations and state or local
government agencies have never been eligible for the salary reduction type of
SEP.
TAXATION OF DISTRIBUTIONS. Generally, distribution payments from SEPs are
subject to the same distribution rules described above for IRAs.
REQUIRED DISTRIBUTIONS. SEP distributions are subject to the same minimum
required distribution rules described above for IRAs.
TAX-FREE ROLLOVERS. Generally, rollovers and direct transfers may be made to
and from SEPs in the same manner as described above for IRAs, subject to the
same conditions and limitations. Rollovers to other IRAs, excluding SIMPLE IRAs
are also possible. Special rules apply if the rollover is from a SARSEP IRA.
6
<PAGE>
SECTION 408(p) SIMPLE IRA PLANS
PURCHASE PAYMENTS: Under Section 408(p) of the Code, small employers may
establish a type of IRA plan referred to as a Savings Incentive Match Plan for
Employees (SIMPLE Plan). An employee may contribute annually through his or her
employer a pre-tax salary reduction contribution not to exceed the lesser of
$6,000 or 100% of compensation. The employer must annually either (1) match the
employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay
contribution for each eligible employee regardless of whether the employee makes
any salary reduction contribution. In two out of every five years, the employer
has the option to reduce the matching contribution as low as 1% of pay but
advance notice must be provided to employees.
TAXATION OF DISTRIBUTIONS: Generally, distributions from SIMPLE IRA Plans are
subject to the same distribution rules described above for IRAs. However, if an
individual withdraws any amount from his SIMPLE IRA Plan within the first two
years of his or her commencement of participation in the employer's SIMPLE IRA
Plan, the 10% penalty tax for premature distribution, if such tax applies, will
be increased to 25%.
REQUIRED DISTRIBUTIONS: SIMPLE distributions are subject to the same minimum
distribution rules described above for IRAs.
TAX-FREE ROLLOVERS: Generally, rollovers and direct transfers may be made to
and from SIMPLE IRAs in the same manner as described above for IRAs, subject to
the same conditions and limitations. Rollovers or transfers to other IRAs, other
than SIMPLE IRAs, are also possible but only after the second anniversary of
commencement of participation in the employer's SIMPLE IRA Plan.
SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS AND
TAX-EXEMPT ORGANIZATIONS
PURCHASE PAYMENTS. Under Section 457 of the Code, all individuals who perform
services for a state or local government or governmental agency may participate
in a deferred compensation program. Other tax-exempt employers may establish
unfunded deferred compensation plans under Section 457 for employees and/or
independent contractors.
Though not actually a qualified plan as that term is normally used, this type of
program allows individuals to defer the receipt of compensation that otherwise
would be currently payable and therefore to defer the payment of federal income
taxes on such amounts. Assuming that the program meets the requirements to be
considered an eligible deferred compensation plan (an "EDCP"), an individual may
contribute (and thereby defer from current income for tax purposes) the lesser
of $7,500 or 33-1/3% of the individual's includible compensation. (Includible
compensation means compensation from the employer which would be currently
includible in gross income for federal tax purposes.) In addition, during the
last three years before an individual attains normal retirement age, additional
"catch-up" deferrals are permitted.
The amounts which are deferred may be used by the employer to purchase the
Contracts offered by this Prospectus. The Contract is owned by the employer and
is subject to the claims of the employer's creditors. The employee has no
rights or interest in the Contract and is entitled only to payment in accordance
with the EDCP provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from an EDCP are
includible in gross income for the taxable year in which such amounts are paid
or otherwise made available.
DISTRIBUTIONS BEFORE SEPARATION FROM SERVICE. Distributions generally are not
permitted under an EDCP prior to separation from service or reaching age 70 1/2,
except in cases of severe financial hardship. Hardship distributions are
includible in the gross income of the individual in the year in which paid.
REQUIRED DISTRIBUTIONS. The distribution requirements for these qualified plans
are generally the same as described above with respect to Section 403(b)
annuities. However, if distributions do not commence before the employee's
death,
7
<PAGE>
the entire interest in the Contract must be distributed within 15 years if the
beneficiary is not the employee's surviving spouse.
TAX-FREE TRANSFERS. The Code permits the tax-free direct transfer of EDCP
amounts to another EDCP, subject to certain conditions. Any transfers must be
with employer consent.
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
PURCHASE PAYMENTS. Private taxable employers may establish unfunded,
non-qualified deferred compensation plans for a select group of management or
highly compensated employees and/or for independent contractors. Certain
arrangements of tax-exempt employers entered into prior August 16, 1986, and not
subsequently modified, are also subject to the rules for private taxable
employer deferred compensation plans discussed below. (Unfunded deferred
compensation plans of other tax-exempt employers are generally subject to the
requirements of Section 457.)
These types of programs allow individuals to defer receipt of up to 100% of
compensation which would otherwise be includible in income and therefore to
defer the payment of federal income taxes on such amounts. Purchase payments
made by the employer, however are not immediately deductible by the employer,
and the employer is currently taxed on any increase in Contract Value.
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Contract is owned
by the employer and is subject to the claims of the employer's creditors. The
individual has no right or interest in the Contract and is entitled only to
payment from the employer's general assets in accordance with plan provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
WITHHOLDING
Annuity payments and other amounts received under Contracts are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and, with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly to another qualified
retirement plan. Moreover, special "backup withholding" rules may require
Fortis Benefits to disregard the recipient's election if the recipient fails to
supply Fortis Benefits with a "TIN" or taxpayer identification number (social
security number for individuals), or if the Internal Revenue Service notifies
Fortis Benefits that the TIN provided by the recipient is incorrect.
MISCELLANEOUS
The computer systems Fortis Benefits uses to process policy transactions and
valuations need to be adjusted to be able to continue to administer its policies
after Year 2000. Fortis Benefits is devoting all resources necessary to make
these systems modifications and expects that the necessary changes will be
completed on time and in a way that will result in no disruption to its policy
servicing operations. However, as is the case with most system conversion
projects, risks and uncertainties exist, due in part to reliance on third party
vendors. Nonperformance by any of these entities, or other unforeseen
circumstances, could have a material adverse impact on Fortis Benefits' ability
to perform its policy servicing operations. Fortis Benefits is closely
monitoring these entities to avoid any unforeseen circumstances.
VARIABLE ACCOUNT FINANCIAL STATEMENTS
8
<PAGE>
This Statement of Additional Information contains no financial statements for
the Subaccounts of the Variable Account because the available Subaccounts of the
Variable Account have not yet commenced operations, has no assets or
liabilities, and has received no income nor incurred any expenses as of the date
of this Statement of Additional Information.
<PAGE>
[GRAPHIC] FORTIS
FORTIS BENEFITS INSURANCE COMPANY
JANUARY 1, 1999
P R O F I L E OF THE TRIPLE CROWN COMBINATION VARIABLE AND FIXED REFERRED
ANNUITY CONTRACTS. THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
POINTS THAT YOU SHOULD CONSIDER AND KNOW BEFORE PURCHASING THE CONTRACT.
THIS ANNUITY IS MORE FULLY DESCRIBED IN THE PROSPECTUS WHICH ACCOMPANIES
THIS PROFILE. PLEASE READ THE PROSPECTUS CAREFULLY.
1. THE ANNUITY CONTRACT
The Triple Crown Variable Annuity is a contract between you and Fortis
Benefits Insurance Company. It is designed to help you accumulate assets
for your retirement and other long term financial goals on a tax deferred
basis.
The Triple Crown offers you a diverse selection of investment options. You
may divide your money among the 8 investment portfolios of the Federated
Insurance Series and a fixed account of Fortis Benefits.
The investment portfolios offer professionally managed investment options
with goals ranging from capital preservation to aggressive growth. Your
choices are found on the next page. These portfolios are designed to
provide you with better potential return than the fixed account. Your
investment, however, is not guaranteed. The value of your Triple Crown
contract can fluctuate up or down based on your choices and you may
experience a loss. The Triple Crown does provide you with a death benefit
that protects your beneficiaries from such loss.
The fixed accounts provide guaranteed interest rates set by Fortis Benefits
for periods from one to ten years. When you invest in the guarantee periods
fixed account, and leave the money in the contract until the end of the
period, your investment and the interest rates are guaranteed. If you make
any transfers or withdrawals of your investment before the end of the
selected period, your contract value may increase or decrease depending on
interest rate changes. In states where guarantee periods fixed accounts are
not offered, you can choose an interest in a fixed account which has a
minimum interest rate guarantee and a higher current rate which can be
changed from time to time.
Like most annuities, this contract has two phases: the accumulation phase
and the income phase. During the accumulation phase, you invest money in
your contract.
Your contract value is based on your investment choices. You may withdraw
money from your contract. However, as with most other tax-deferred
investments, you will pay taxes on earnings and untaxed contributions when
you withdraw them. You may also be subject to an IRS tax penalty if you
make withdrawals before age 59 1/2.
During the income phase, you can elect to receive regular payments from
your contract. Depending on your choice, these payments can be fixed in
dollar amount or can vary with investment performance. The amount of these
income payments also are determined by the amount you are able to
accumulate during the accumulation phase of your contract.
2. ANNUITY INCOME OPTIONS
(THE INCOME PHASE)
You may select one of four annuity income options:
(1) monthly payments during your lifetime;
(2) monthly payments during your lifetime, but with payments
continuing to your beneficiary for a period from 10 to 20 years
(as you select) if you die before the end of the selected period;
(3) monthly payments during your lifetime and the lifetime of another
person you select; and
(4) monthly payments during your lifetime and the lifetime of
another person, with the payments reduced by 1/2 when one of you
dies.
At the start of the income phase, you can choose to have the payments come
from the fixed account, the investment portfolios, or both. The dollar
amount of your payments coming from the fixed account will be fixed. The
payments from the investment portfolios you select will go up or down
depending on their performance. Once payments begin, you cannot change
your annuity option.
<PAGE>
3. PURCHASING A TRIPLE CROWN
VARIABLE ANNUITY CONTRACT
You can buy this contract through your registered representative who can
help you complete the proper forms. The minimum initial investment is
$5,000 for non-qualified and $2,000 for qualified investments. You can make
additional contributions of at least $500 at any time during the
accumulation period. The minimum investment may be smaller for certain
employer sponsored plans.
4. INVESTMENT OPTIONS
You can invest your money in any of the following investment portfolios
which are described in the fund prospectus:
Federated American Leaders Fund II
Federated Equity Income Fund II
Federated Fund for U.S. Government Securities II
Federated Growth Strategies Fund II
Federated High Income Bond Fund II
Federated International Equity Fund II
Federated Prime Money Fund II
Federated Utility Fund II
In most states you may also choose to invest in a guarantee periods fixed
account. You can choose among guarantee periods ranging from one to ten
years, each with its own interest rate. Once set, the rate will not change
during the selected period. These accounts (except for the one year
period) have a feature known as a market value adjustment (MVA). This
means that if you transfer, withdraw or begin an income phase from one of
these accounts before the end of the selected period, your contract value
may be adjusted up or down depending on current interest rates. In states
where guarantee periods fixed accounts are not offered, you can choose an
interest in a fixed account which has a minimum interest rate guarantee and
a higher current rate which can be changed from time to time.
5. EXPENSES
We also deduct insurance charges equal to an annual percentage of the
average daily value of your contract allocated to the investment
portfolios, as follows:
- If all of the owners of a contract are less than 61 years old
when the contract is purchased, the rate is 1.10%
- If one or more of the owners of the contract is 61 years old, or
older, the rate is 1.30%
As with other professionally managed investments, there are also
investment charges on money in the investment portfolios, estimated to
range from 0.80% to 1.23%.
In a limited number of states, you may also be assessed a state premium tax
charge of up to 3.5%, depending upon the state. In these states, this tax
will be deducted when you cancel the contract, begin the income phase, or
if a death benefit is paid. In many states, there is no tax at all.
If you decide to cancel your contract or take money out in excess of the
annual free withdrawal amount, there may be a withdrawal charge of a
percentage of your investment. The annual free withdrawal amount is 10% of
payments made within the last 7 years plus any earnings. The withdrawal
charge percentage declines with each year the payment is in the contract as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR 1 2 3 4 5 6 7 8+
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawal
Charge 7% 7% 7% 5% 4% 3% 2% 0%
-----------------------------------------------------------------------
</TABLE>
The following chart is designed to help you understand the expenses in your
contract. The column labeled "Total Annual Expenses" shows the total of the
insurance charge and the investment management expenses for each portfolio. The
right side of the chart shows you two examples of the expenses, in dollars, you
would pay under the contract. The examples assume that you invest $1,000, earn
5% annually and withdraw your money: (1) at the end of one year, and (2) at the
end of ten years. The premium tax is assumed to be 0% for both examples.
Please see the Fee Table in the prospectus for more complete examples.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
All contract holders under age 61
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL TOTAL EXAMPLES
ANNUAL ANNUAL TOTAL TOTAL ANNUAL
INSURANCE INVESTMENT ANNUAL EXPENSES AT END OF
PORTFOLIO EXPENSES EXPENSES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Leaders II 1.20% 0.85% 2.05% $21 $234
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II 1.20% 0.85% 2.05% $21 $234
- ------------------------------------------------------------------------------------------------------------------------------------
Fund for U.S Govt Securities II 1.20% 0.80% 2.00% $20 $229
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II 1.20% 0.85% 2.05% $21 $234
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II 1.20% 0.80% 2.00% $20 $229
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II 1.20% 1.23% 2.43% $24 $273
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II 1.20% 0.80% 2.00% $20 $229
- ------------------------------------------------------------------------------------------------------------------------------------
Utility Fund II 1.20% 0.85% 2.05% $21 $234
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
One of more contract owners age 61 or older
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL TOTAL EXAMPLES
ANNUAL ANNUAL TOTAL TOTAL ANNUAL
INSURANCE INVESTMENT ANNUAL EXPENSES AT END OF
PORTFOLIO EXPENSES EXPENSES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
American Leaders II 1.40% 0.85% 2.25% $23 $255
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II 1.40% 0.85% 2.25% $23 $255
- ------------------------------------------------------------------------------------------------------------------------------------
Fund for U.S Govt Securities II 1.40% 0.80% 2.20% $22 $250
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II 1.40% 0.85% 2.25% $23 $255
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II 1.40% 0.80% 2.20% $22 $250
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II 1.40% 1.23% 2.63% $26 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II 1.40% 0.80% 2.20% $22 $250
- ------------------------------------------------------------------------------------------------------------------------------------
Utility Fund II 1.40% 0.85% 2.25% $23 $255
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6. TAXES
Your earnings are not taxed until you withdraw them from the contract. If
you take money out during the accumulation phase, earnings come out first
and are taxable ordinary income. If you make a withdrawal prior to age
59 1/2, you may be charged a 10% federal tax penalty on that amount.
Payments during the income phase are considered partly a return of your
original investment and partly earnings. You will only be taxed on the
earnings portion. However, if your contract is funded with pretax or tax
deductible dollars (qualified plan contributions), then the entire payment
will be taxable.
7. ACCESS TO YOUR MONEY
You can make withdrawals at any time during the accumulation phase. The
minimum amount you can withdraw is $1,000. If you withdraw from the
guarantee periods fixed account, your contract value may be subject to a
market value adjustment. You may also have to pay income tax and a tax
penalty on any money you withdraw.
SYSTEMATIC WITHDRAWALS: You can have money automatically sent to you each
month during the accumulation phase of your contract. Systematic
withdrawals are available for amounts of $100 or more. Of course,
withdrawals may be taxable and subject to an IRS tax penalty.
8. PERFORMANCE
The value of your contract will go up or down depending on the investment
portfolios you choose. The following chart shows the total return for each
investment portfolio for the time periods shown. Insurance charges,
investment management charges and all other expenses of the investment
portfolio have been deducted from these numbers. These numbers do not
reflect any withdrawal charges which, if applied, would reduce the
performance. Past performance is not a guarantee of future results.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
All contract owners under age 61
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
American Leaders II 30.76% 20.12% 32.12% -1.87% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II 23.60% - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Fund for U.S Govt Securities II 07.28% 02.95% 07.47% 2.07% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II 25.52% 22.83% - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II 12.47% 12.94% 18.95% -4.87% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II 08.77% 07.02% - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II 03.69% 03.51% 03.95% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Utility Fund II 25.13% 10.23% 22.71% -4.49% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
One or more contract owners age 61 or older
- -----------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO 1997 1996 1995 1994 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
American Leaders II 30.50% 19.88% 31.85% -2.06% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II 23.35% - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Fund for U.S Govt Securities II 07.07% 02.75% 07.26% 1.87% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II 25.27% 22.58% - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II 12.25% 12.72% 18.71% -5.05% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II 08.55% 06.81% - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II 03.48% 03.30% 03.74% - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Utility Fund II 24.88% 10.01% 22.46% -4.68% - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
9. DEATH BENEFIT
If you die during the accumulation phase, your beneficiary will receive a
death benefit. If all of the owners are less than 61 years old at the sale
of purchase this death benefit will be the greater of three amounts:
1) the value of your contract;
2) the highest anniversary contract value up to your 80th birthday;
plus (a) any money you put in since that anniversary less (b) a
proportionate reduction related to any money you took out since
that anniversary.
3) if you die before your 80th birthday, the accumulation at 4% (3%
for Washington policies) of the payments you put in, less a
proportionate adjustment for any money you took out. If you die
after age 80, the death benefit is slightly different.
If one or more of the owners is 61 years old, or older, as of the date of
purchase, the death benefit will be the same as provided above, except that
the references to age 80 in (2) and (3) are changed to age 75.
10. OTHER INFORMATION
FREE LOOK PERIOD: You may cancel your contract within 10 days of receiving
it (or whatever period is required by your state). We will pay you the
value of your contract without imposing a withdrawal charge. This may be
more or less than the amount you invested. If required by law, we will
return your original payment.
11. INQUIRIES
If you need more information, please contact us at:
Fortis Benefits Insurance Company
P.O. Box 64273
St. Paul, MN 55164
800-963-9222
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENT AND EXHIBITS
a. Financial Statements included in Part A:
With Respect to Fortis Benefits Insurance Company:
Audited Financials:
Report of Independent Auditors.
Balance Sheets for the years ended at December 31, 1997 and 1996.
Statements of Income, Statements of Changes in Shareholder's
Equity and Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Financial Statements.
Unaudited Financials:
Balance Sheet for the nine months ended at September 30, 1998.
Statement of Income for the three months ended
September 30, 1998.
Statements of Income and Statements of Cash Flow for the nine
months ended September 30, 1998 and 1997.
Notes to Financial Statements.
Financial Statements included in Part B:
With Respect to Variable Account D of Fortis Benefits Insurance
Company:
None since available subaccounts have not begun operations.
b. Exhibits:
1. Resolution of the Board of Directors of Fortis Benefits Insurance
Company effecting the establishment of Variable Account D
(incorporated by reference from Form N-4 of Fortis Benefits and
its Variable Account D filed on December 31, 1987, File No.
33-19421).
<PAGE>
2. Not applicable.
3. (a) Form of Principal Underwriter and Servicing Agreement
(incorporated by reference from Form N-4 registration
statement filed by Fortis Benefits and its Variable Account
D on January 11, 1994, File No. 33-73986);
(b) Form of Amendment to Principal Underwriting Agreement
(incorporated by reference from Form N-4 Registration
Statement filed by Fortis Benefits and its Variable Account
D on January 11, 1994, File No. 33-73986);
(c) Form of Dealer Sales Agreement -- filed by Fortis Benefits
and its Variable Account D on October 2, 1998 as a part of
this registration statement.
4. (a) Form of Combination Fixed and Variable Annuity Contracts to
be issued where all owners are less than 61 years old at
time of purchase -- filed by Fortis Benefits
and its Variable Account D on October 2, 1998 as a part of
this registration statement.
(b) Form of Combination Fixed and Variable Annuity Contracts to
be issued where one or more owners are 61 years old at time
of purchase -- filed by Fortis Benefits
and its Variable Account D on October 2, 1998 as a part of
this registration statement.
(c) Form of IRA Endorsement (included as part of Pre-effective
Amendment No. 1 to this Form N-4 Registration Statement
filed March 28, 1991);
(d) Form of Section 403(b) Annuity Endorsement (included as part
of Pre-effective Amendment No. 1 to this Form N-4
Registration Statement filed March 28, 1991);
5. Form of Application -- filed by Fortis Benefits and its Variable
Account D on October 2, 1998 as a part of this registration
statement.
6. (a) Articles of Incorporation of Fortis Benefits Insurance
Company (incorporated by reference from Form S-6
Registration Statement of Fortis Benefits and its Variable
Account C filed on March 17, 1986, File No. 33-03919);
(b) By-laws of Fortis Benefits Insurance Company (incorporated
by reference from Form S-6 Registration Statement of Fortis
Benefits and its Variable Account C filed on March 17, 1986,
File No. 33-03919);
<PAGE>
(c) Amendment to Articles of Incorporation and Bylaws dated
November 21, 1991 (included as part of Post-Effective
Amendment No. 1 to this Form N-4 Registration Statement
filed March 2, 1992).
7. None.
8. None.
9. Opinion and consent of Douglas R. Lowe, Esq., Assistant General
Counsel of Fortis Benefits Insurance Company, as to the legality
of the securities being registered (included as part of the
original filing of this Form N-4 Registration Statement filed on
November 1, 1990).
10. (a) Consent of Ernst & Young LLP - filed herewith.
(b) Power of Attorney for Messr. Freedman and Clayton
(incorporated by reference from Form S-6 Registration
Statement of Fortis Benefits and its Variable Account C
filed on December 17, 1993, File No. 33-73138).
11. Not applicable.
12. Not applicable.
13. Schedules of computation of each performance quotation provided
in the registration statement pursuant to Item 21--none.
14. Financial Data Schedule - not applicable since financials were
previously filed.
Item 25. DIRECTORS AND OFFICERS OF FORTIS BENEFITS
The directors, executive officers, and, to the extent responsible for
variable insurance product operations, other officers of Fortis Benefits are
listed below.
<TABLE>
<CAPTION>
Name and Principal
Business Address Offices with Depositor
- ------------------ ----------------------
<S> <C>
Officer-Directors
- -----------------
Robert Brian Pollock (4) President and Chief Executive
Officer
<PAGE>
Dean C. Kopperud (1) President - Fortis Financial Group
Other Directors
- ---------------
Allen Royal Freedman (2) Chairman of the Board
J. Kerry Clayton (2)
Arie Aristide Fakkert (3)
Other Officers
- --------------
Michael John Peninger (4) Senior Vice President and
Chief Financial Officer
Peggy L. Ettestad (1) Senior Vice President--Life
Operations
Rhonda J. Schwartz (1) Senior Vice President and General
Counsel--Life and Investment Products
Jon H. Nicholson (1) Senior Vice President--Annuities
Melinda S. Urion (1) Senior Vice President and Chief
Financial Officer
Dickson W. Lewis (1) Senior Vice President--Distribution
and Marketing
</TABLE>
- -------------------------
(1) Address: Fortis Benefits Insurance Company, P.O. Box 64271, St. Paul, MN
55164.
(2) Address: Fortis, Inc., One Chase Manhattan Plaza, New York, NY 10005.
(3) Address: Fortis AMEV, Archmideslaan 10, 3584 BA Utrecht, The Netherlands.
(4) Address: 2323 Grand Avenue, Kansas City, MO 64108.
(5) Address: 515 West Wells, Milwaukee, WI 53201.
Item 26. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
<PAGE>
Variable Accounts C and D of Fortis Benefits Insurance Company are separate
accounts of Fortis Benefits. These separate accounts, certain separate accounts
assumed from St. Paul Life Insurance Company, and Fortis Series Fund, Inc. may
be deemed to be controlled by Fortis Benefits, although Fortis Benefits follows
voting instructions of variable insurance contract owners with respect to voting
on certain important matters in connection with these entities. All of these
entities are created under Minnesota law and are the funding media for variable
life insurance and annuity contracts issued or assumed by Fortis Benefits.
The chart indicating the persons controlled by or under common control with
Fortis Benefits is hereby incorporated by reference from the response to Item 26
in Post-Effective Amendment No. 24 to this Form N-4 registration statement filed
on April 28, 1994. Fortis Benefits has no subsidiaries.
Items 27. NUMBER OF CONTRACT OWNERS
There are no contract owners.
Item 28. INDEMNIFICATION
Pursuant to the Principal Underwriter and Servicing Agreement filed as Exhibit
3(a) and (b) to this Registration Statement and incorporated herein by this
reference, Fortis Benefits has agreed to indemnify Fortis Investors (and its
agents, employees, and controlling persons) for damages and expenses arising out
of certain material misstatements and omissions in connection with the offer and
sale of the Certificates, unless the misstatement or omission was based on
information supplied by Fortis Investors; provided, however, that no such
indemnity will be made to Fortis Investors or its controlling persons for
liabilities to which they would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of their duties or
by reason of reckless disregard of their obligations under such agreement. This
indemnity could apply to certain directors, officers or controlling persons of
the Separate Account by virtue of the fact that they are also agents, employees
or controlling persons of Fortis Investors. Pursuant to the Principal
Underwriter and Servicing Agreement, Fortis Investors has agreed to indemnify
Variable Account D, Fortis Benefits, and each of its officers, directors and
controlling persons for damages and expenses (1) arising out of certain material
misstatements and omissions in connection with the offer and sale of the
Certificates, if the misstatement or omission was based on information furnished
by Fortis Investors or (2) otherwise arising out of Fortis Investors'
negligence, bad faith, willful misfeasance or reckless disregard of its
responsibilities. Pursuant to its Dealer Sales Agreements, a form of which is
filed as Exhibit 3-C- and (d) to this registration statement and is incorporated
herein by this reference, firms that sell the Certificates agree to indemnify
Fortis Benefits, Fortis Investors, the Separate Account, and their officers,
directors, employees, agents, and controlling persons from liabilities and
expenses arising out of the wrongful conduct or omissions of said selling firm
or its officers, directors, employees, controlling persons or agents.
Also, Fortis Benefit's By-Laws (see Article VI, Section 5 thereof, which is
incorporated herein by reference from Exhibit 6(b) to this Registration
Statement) provide for indemnity and payment of
<PAGE>
expenses of Fortis Benefits's officers, directors and employees in connection
with certain legal proceedings, judgments, and settlements arising by reason of
their service as such, all to the extent and in the manner permitted by law.
Applicable Minnesota law generally permits payment of such indemnification and
expenses if the person seeking indemnification has acted in good faith and in a
manner that he reasonably believed to be in the best interests of the Company
and if such person has received no improper personal benefit, and in a criminal
proceeding, if the person seeking indemnification also has no reasonable cause
to believe his conduct was unlawful.
Insofar as indemnification for any liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of Fortis
Benefits or the Separate Account pursuant to the foregoing provisions, or
otherwise, Fortis Benefits and the Separate Account have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Fortis Benefits of expenses incurred or paid by a director,
officer or controlling person of Fortis Benefits or the Separate Account in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the precedent, submit
to a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 29. PRINCIPAL UNDERWRITERS
(a) Fortis Investors, Inc. is the principal underwriter for Variable
Account D. Fortis Investors, Inc. also acts as the principal
underwriter for the following registered investment companies (in
addition to Variable Account D and Fortis Series Fund, Inc.):
Variable Account C of Fortis Benefits, Variable Account A of First
Fortis Life Insurance Company, Fortis Advantage Portfolios, Inc.,
Fortis Equity Portfolios, Inc., Fortis Fiduciary Fund, Inc., Fortis
Growth Fund, Inc., Fortis Money Portfolios, Inc., Fortis Tax-Free
Portfolios, Inc., Fortis Income Portfolios, Inc., and Special
Portfolios, Inc.
(b) The following table sets forth certain information regarding the
officers and directors of the principal underwriter, Fortis Investors,
Inc.:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address with Underwriter
- ------------------ ---------------------
<S> <C>
Roger W. Arnold * Vice President
Robert W. Beltz, Jr.* Vice President and Director
Jeffrey R. Black * Business Development and Sales Desk
Officer
Mark C. Cadalbert* Compliance Officer
<PAGE>
Peter M. Delahanty* Vice President
Tamara L. Fagely* Vice President
Joanne M. Herron* Assistant Treasurer
John E. Hite* Vice President and
Assistant Secretary
Carol M. Houghtby* Vice President, Treasurer and
Director
Dean C. Kopperud* President and Director
Christine D. Pawlenty* Customs Solutions Group Officer
Mary B. Petersen* 2nd Vice President
Scott R. Plummer* Vice President and Associate General
Counsel
</TABLE>
- -------------------------
* Address: 500 Bielenberg Drive, Woodbury, MN 55125.
(c) None.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the Investment Company
Act of 1940 and Rules 31a-1 and 31a-3 thereunder are maintained by Fortis
Benefits, Fortis Investors, Inc. and Fortis Advisers, Inc., at 500 Bielenberg
Drive, Woodbury, Minnesota 55125.
Item 31. MANAGEMENT SERVICES
None.
Item 32. UNDERTAKINGS
The Registrant hereby undertakes:
(a) To file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in the registration statement are never more than 16 months
old for so long as payments under the variable annuity contracts may
be accepted;
<PAGE>
(b) To include either (1) as part of any application to purchase a
Contract offered by the Prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a
toll-free phone number, postcard, or similar written communication
affixed to or included in the Prospectus that the applicant can call
or remove to send for a Statement of Additional Information;
(c) To deliver a Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
Fortis Benefits Insurance Company represents:
(a) that the fees and charges imposed under the provisions of the Contract
covered by this registration statement, in the aggregate, are
reasonable in relation to the services to be rendered by the
Registrant associated with the Contracts, the expenses to be incurred
by the Registrant associated with the Contracts, and the risks assumed
by the Registrant associated with the Contracts.
The Registrant intends to rely on the no-action response dated November 28, 1988
from Ms. Angela C. Goelzer of the Commission staff to the American Council of
Life Insurance concerning the redeemability of Section 403(b) annuity contracts
and the Registrant has complied with the provisions of paragraphs (1)-(4)
thereof.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this amended Registration Statement to be signed
on its behalf in the City of St. Paul, State of Minnesota on this 15th day of
December, 1998.
VARIABLE ACCOUNT D OF
FORTIS BENEFITS INSURANCE COMPANY
(Registrant)
By: FORTIS BENEFITS INSURANCE COMPANY
By: /s/
-----------------------------------------------
Robert Brian Pollock, President
FORTIS BENEFITS INSURANCE COMPANY
(Depositor)
By: /s/ Robert Brian Pollock
-----------------------------------------------
Robert Brian Pollock, President
As required by the Securities Act of 1933 and the Investment Company Act of
1940, this Registration Statement has been signed by the following persons, in
the capacities indicated, on December 15, 1998.
Signature Title With Fortis Benefits
- --------- --------------------------
* Chairman of the Board
--------------------------------
Allen Royal Freedman
* Director
--------------------------------
J. Kerry Clayton
Director
--------------------------------
Arie Aristide Fakkert
/s/ Robert Brian Pollock President and Director
--------------------------------
Robert Brian Pollock (Chief Executive Officer)
/s/ Dean C. Kopperud Director
--------------------------------
Dean C. Kopperud
<PAGE>
/s/ Michael John Peninger Senior Vice President, Controller
-------------------------------- and Treasurer (Principal
Michael John Peninger Accounting Officer and
Principal Financial Officer)
*By: /s/ Robert Brian Pollock
--------------------------------
Robert Brian Pollock
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
10(a) Consent of Auditors
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 27, 1998 on the financial statements of
Fortis Benefits Insurance Company Pre-Effective Amendment No. 1 to the
Registration Statement (Form N-4 No. 333-65233) and related Prospectus and
Statement of Additional Information of Fortis Benefits Insurance Company for
the registration of flexible premium deferred combination variable and fixed
annuity contracts.
/s/
Ernst & Young LLP
Minneapolis, Minnesota
December 18, 1998
