<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1999.
Registration Nos. 333-79701
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
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 66
----------------------------------
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:
651-738-4000
---------------------------------
RHONDA J. SCHWARTZ, ESQ.
500 Bielenberg Drive
Woodbury, Minnesota 55125
(Name and Address of Agent for Service)
<PAGE>
It is proposed that this filing will be come effective (check appropriate box):
____immediately upon filing pursuant to paragraph (b) of Rule 485.
____on_____________________ 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; Information Concerning
Fees and Charges
4. Condensed Financial Summary -- Financial information
Information
5. General Description of Summary--Separate Account
Registrant, Depositor and Investment Options; Fortis
Portfolio Companies Benefits and the Separate
Account; Fixed Account
6. Deductions Summary--Charges and Deductions;
Charges and Deductions
7. General Description of Variable Accumulation Period; General
Annuity Contracts Provisions
8. Annuity Period The Annuity Period
9. Death Benefit Summary--Death Benefit;
Accumulation Period -- Benefit
Payable on Death of Annuitant or
Contract Owner
10. Purchases and Contract Value Accumulation Period -- Issuance
of a Contract and Purchase
Payments- Contract Value
11. Redemptions Summary--Total and Partial
Surrenders; Accumulation Period--
Total and Partial Surrenders
12. Taxes Summary--Tax Implications;
Federal Tax Matters
<PAGE>
FORM N-4 PROSPECTUS OR
-------- STATEMENT OF ADDITIONAL
(cont'd.) INFORMATION CAPTION
-----------------------
13. Legal Proceedings
None
14. Table of Contents of the Contents of the Statement of
Statement of Additional Information Additional Information
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and History Fortis Benefits
18. Services Services
19. Purchases of Securities Being Reduction of Charges
Offered
20. Underwriters Services
21. Calculation of Performance Data Appendix A
22. Annuity Payments Calculation of Annuity Payments
23. Financial Statements Financial Statements
<PAGE>
FORTIS
INCOME
PREFERRED
VARIABLE
ANNUITY
Individual Flexible
Premium Deferred
Variable Annuity Contract
PROSPECTUS DATED
September 1, 1999
FORTIS-R-
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE:
P.O. BOX 64272 500 BIELENBERG DRIVE 1-800-800-2000
ST. PAUL, MN 55164 WOODBURY, MN 55125 (EXTENSION 3057)
This prospectus describes an individual flexible premium deferred variable
annuity contract issued by Fortis Benefits Insurance Company ("Fortis
Benefits").
The 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 of Fortis Series Fund, Inc.:
<TABLE>
<S> <C>
Money Market Series S&P 500 Index Series
U.S. Government Securities Series Blue Chip Stock Series
Diversified Income Series Global Growth Series
Global Bond Series Growth Stock Series
High Yield Series International Stock Series
Asset Allocation Series Aggressive Growth Series
Global Asset Allocation Series Small Cap Value Series
Value Series Mid Cap Stock Series
Growth & Income Series Large Cap Growth Series
</TABLE>
The accompanying prospectus for these investment
portfolios describes the investment objectives, policies
and risks of each portfolio.
This prospectus gives you information about the contract
that you should know before investing. This prospectus
must be accompanied by a current prospectus for the
portfolios. All of the prospectuses should be read
carefully and kept for future reference.
A Statement of Additional Information, dated September
1, 1999, about 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
21 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.
100045 (9/99)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SPECIAL TERMS USED IN THIS PROSPECTUS................................. 3
INFORMATION CONCERNING FEES AND CHARGES............................... 4
SUMMARY............................................................... 6
FORTIS BENEFITS AND THE SEPARATE ACCOUNT.............................. 7
- Fortis Benefits/Fortis Financial Group Member................... 7
- The Separate Account............................................ 8
- The Portfolios.................................................. 8
ACCUMULATION PERIOD................................................... 8
- Issuance of a Contract and Purchase Payments.................... 8
- Contract Value.................................................. 9
- Allocation of Purchase Payments and Contract Value.............. 10
- Total and Partial Surrenders.................................... 10
- Telephone Transactions.......................................... 11
- Fortis Guaranteed PayoutPlan Benefit............................ 11
- Benefit Payable on Death of Contract Owner (or Annuitant)....... 11
THE ANNUITY PERIOD.................................................... 12
- Annuity Commencement Date....................................... 12
- Commencement of Annuity Payments................................ 12
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 13
- Annuity Options................................................. 13
- Death of Annuitant or Other Payee............................... 14
CHARGES AND DEDUCTIONS................................................ 14
- Premium Taxes................................................... 14
- Charges Against the Separate Account............................ 14
- Surrender Charge................................................ 14
- Nursing Care/Hospitalization Waiver of Surrender Charges........ 15
- Disability Waiver of Surrender Charges.......................... 15
- Miscellaneous................................................... 16
- Reduction of Charges............................................ 16
FIXED ACCOUNT......................................................... 16
- General Description............................................. 16
- Fixed Account Value............................................. 16
- Fixed Account Transfers, Total and Partial Surrenders........... 16
GENERAL PROVISIONS.................................................... 17
- The Contract.................................................... 17
- Postponement of Payments........................................ 17
- Misstatement of Age or Sex and Other Errors..................... 17
- Assignment and Ownership Rights................................. 17
- Beneficiary..................................................... 17
- Reports......................................................... 17
RIGHTS RESERVED BY FORTIS BENEFITS.................................... 17
DISTRIBUTION.......................................................... 18
FEDERAL TAX MATTERS................................................... 18
VOTING PRIVILEGES..................................................... 20
STATE REGULATION...................................................... 21
LEGAL MATTERS......................................................... 21
YEAR 2000 ISSUE....................................................... 21
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION....................... 21
APPENDIX A--Sample Death Benefit Calculations......................... A-1
APPENDIX B--Explanation of Expense Calculations....................... B-1
APPENDIX C--Pro Rata Adjustments...................................... C-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 date and the Annuity Period.
Period
Accumulation A unit of measure used to calculate the interest of the contract owner in the Separate Account
Unit during the Accumulation Period.
Annuitant A person during whose life annuity payments are to be made by us under the contract. The
Annuitant is the person named in the application for the contract. If that person dies before
the annuity commencement date and there is an additional annuitant named in the application,
the additional annuitant will become the Annuitant. If there is no named additional annuitant,
or the additional annuitant has died before the annuitant who is named in the application, the
contract owner, if he or she is a natural person, will become the Annuitant.
Annuity Period The time period following the Accumulation Period, during which annuity payments are made by
us.
Annuity Unit A unit of measurement used to calculate variable annuity payments.
Fixed Annuity An annuity option under which we promise to pay the Annuitant or any other properly designated
Option payee one or more fixed payments.
Non-Qualified Contracts that do not qualify for the special federal income tax treatment applicable in
Contracts connection with certain retirement plans.
Qualified Contracts that are qualified for the special federal income tax treatment applicable in
Contracts connection with certain retirement plans.
Separate The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance
Account Company established to receive and invest purchase payments made under contracts.
Valuation Date Each business day of Fortis Benefits except, with respect to any subaccount, 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 An annuity option under which we promise to pay the Annuitant, or any other properly
Annuity Option designated payee, 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
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Front End Sales Charge Imposed on
Purchases................................... 0%
Maximum Surrender Charge for Sales Expenses
(as a percentage of purchase payments)...... 8%(1)
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF YEARS
SINCE SURRENDER CHARGE AS A
PURCHASE PAYMENT WAS PERCENTAGE OF PURCHASE
CREDITED PAYMENT
- -------------------- -------------------------
<S> <C>
Less than 2 8%
At least 2 but less
than 4 7%
At least 4 but less
than 5 6%
At least 5 but less
than 6 5%
At least 6 but less
than 7 3%
At least 7 but less
than 8 2%
At least 8 but less
than 9 1%
9 or more 0%
</TABLE>
<TABLE>
<S> <C> <C>
Other Surrender Fees.................................. 0%
Exchange Fee.......................................... 0%
ANNUAL CONTRACT ADMINISTRATION CHARGE........................ $0
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge..................... 1.40%
Fortis Guaranteed PayoutPlan Benefit
Expense Charge.............................. .35%
Separate Account Administrative Charge..... .10%
---
Total Other Account Fees.............................. .45%
Total Separate Account Annual Expenses................ 1.85%
</TABLE>
- ------------------------
(1) This charge does not apply in certain cases such as partial surrenders each
year of up to 10% of "new purchase payments" as defined under the heading
"Surrender Charge" or, payment of a death benefit.
PORTFOLIO ANNUAL EXPENSES(A)
<TABLE>
<CAPTION>
MONEY US GOVERNMENT
FBIC AND FIRST FORTIS MARKET SECURITIES DIVERSIFIED INCOME GLOBAL BOND HIGH YIELD
- -------------------------------------- ----------- ----------------- -------------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Investment Advisory and Management
Fee.................................. 0.30% 0.47% 0.47% 0.75% 0.50%
Other Expenses........................ 0.05% 0.04% 0.05% 0.13% 0.06%
Total Series Fund Operating
Expenses............................. 0.35% 0.51% 0.52% 0.88% 0.56%
<CAPTION>
GLOBAL ASSET ASSET
FBIC AND FIRST FORTIS ALLOCATION ALLOCATION VALUE GROWTH & INCOME
- -------------------------------------- -------------- ------------ ---------- ------------------
<S> <C> <C> <C> <C>
Investment Advisory and Management
Fee.................................. 0.90% 0.47% 0.70% 0.64%
Other Expenses........................ 0.11% 0.04% 0.06% 0.03%
Total Series Fund Operating
Expenses............................. 1.01% 0.51% 0.76% 0.67%
</TABLE>
<TABLE>
<CAPTION>
S&P 500 BLUE CHIP MIDCAP STOCK
INDEX STOCK INTERNATIONAL STOCK SERIES
------------ ---------- -------------------- --------------
<S> <C> <C> <C> <C>
Investment Advisory and Management Fee...................... 0.40% 0.89% 0.85% 0.90%
Other Expenses.............................................. 0.06% 0.05% 0.09% 0.35%
Total Series Fund Operating
Expenses................................................... 0.46% 0.94% 0.94% 1.25%
<CAPTION>
SMALL CAP GLOBAL LARGE CAP GROWTH
VALUE SERIES GROWTH SERIES GROWTH STOCK
-------------- ----------- ---------------- ---------------
<S> <C>
Investment Advisory and Management Fee...................... 0.90% 0.70% 0.90% 0.61%
Other Expenses.............................................. 0.34% 0.05% 0.35% 0.04%
Total Series Fund Operating
Expenses................................................... 1.24% 0.75% 1.25% 0.65%
<CAPTION>
AGGRESSIVE
GROWTH
-------------
Investment Advisory and Management Fee...................... 0.68%
Other Expenses.............................................. 0.04%
Total Series Fund Operating
Expenses................................................... 0.72%
</TABLE>
- ------------------------
(a) As a percentage of portfolio average net assets based on 1998 historical
data.
4
<PAGE>
EXAMPLES
If you SURRENDER your contract in full on the last day of any of the time
periods shown below, 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>
Money Market Series......................................... 94 131 170 250
U.S. Government Securities Series........................... 96 136 178 266
Diversified Income Series................................... 96 136 179 267
Global Bond Series.......................................... 99 147 197 303
High Yield Series........................................... 96 137 181 271
Global Asset Allocation Series.............................. 101 151 203 315
Asset Allocation Series..................................... 96 136 178 266
Value Series................................................ 98 143 191 291
Growth & Income Series...................................... 97 140 186 282
S&P 500 Index Series........................................ 95 134 176 261
Blue Chip Stock Series...................................... 100 149 200 308
International Stock Series.................................. 100 149 200 308
Mid Cap Stock Series........................................ 103 158 215 338
Small Cap Value Series...................................... 103 157 215 337
Global Growth Series........................................ 98 143 190 290
Large Cap Growth Series..................................... 103 158 215 338
Growth Stock Series......................................... 97 140 185 280
Aggressive Growth Series.................................... 98 142 189 287
</TABLE>
If you COMMENCE AN ANNUITY payment option, or do NOT 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>
Money Market Series......................................... 22 68 116 250
U.S. Government Securities Series........................... 24 73 124 266
Diversified Income Series................................... 24 73 125 267
Global Bond Series.......................................... 27 84 143 303
High Yield Series........................................... 24 74 127 271
Global Asset Allocation Series.............................. 29 88 149 315
Asset Allocation Series..................................... 24 73 124 266
Value Series................................................ 26 80 137 291
Growth & Income Series...................................... 25 77 132 282
S&P 500 Index Series........................................ 23 71 122 261
Blue Chip Stock Series...................................... 28 86 146 308
International Stock Series.................................. 28 86 146 308
Mid Cap Stock Series........................................ 31 95 161 338
Small Cap Value Series...................................... 31 94 161 337
Global Growth Series........................................ 26 80 136 290
Large Cap Growth Series..................................... 31 95 161 338
Growth Stock Series......................................... 25 77 131 280
Aggressive Growth Series.................................... 26 79 135 287
</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, prescribed by the SEC, are included to assist
contract owners 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 set forth above.
5
<PAGE>
SUMMARY
The following summary should be read in conjunction with the detailed
information in this prospectus. This prospectus generally describes only the
portion of the contract involving the Separate Account. For a brief description
of Fortis Benefits' fixed account, please refer to the heading "Fixed Account"
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 contract is 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.
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 $25,000 ($10,000
for a contract which is part of a qualified plan). Additional purchase payments
must be at least $50. For contracts issued in the states of Washington and
Oregon, a single purchase payment, only, may be made and no further purchase
payments can be accepted. See "Issuance of a Contract and Purchase Payments."
ALLOCATION OF PURCHASE PAYMENTS
The initial purchase payment is allocated on the contract date, as specified by
you in the contract application, among one or more of the available investment
portfolios, or to the fixed account, or to both. Subsequent purchase payments
are allocated in the same way or pursuant to different allocation percentages
that you may subsequently request.
SEPARATE ACCOUNT INVESTMENT OPTIONS
Each of the subaccounts of the Separate Account invests in shares of a
corresponding investment portfolio. The investment objective of each of the
subaccounts of the Separate Account and that of the corresponding portfolio is
the same.
Contract value in each of the subaccounts of the Separate 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 and is managed
by Fortis Advisers, Inc. or a subadviser of Fortis Advisers, Inc. For providing
investment management services to the portfolios, Fortis Advisers, Inc. receives
fees from Fortis Series based on the average daily net assets of each portfolio.
The portfolios also bear most of their other expenses. A full description of the
portfolios and their investment objectives, policies, and risks can be found in
the current prospectus for the portfolios, which accompanies this prospectus,
and the portfolios' Statement of Additional Information, which is available upon
request from Fortis Benefits at the address and phone number on the cover of
this prospectus.
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. Additionally,
during the Accumulation Period we may, in our discretion, permit a continuing
request for transfers of specified amounts automatically on a periodic basis.
There is currently no charge for any of 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 Values--Transfers."
TOTAL OR PARTIAL SURRENDERS
All or part of the contract value of a contract may be surrendered by you before
the earlier of the Annuitant's death or the annuity commencement date. Amounts
surrendered may be subject to a surrender charge. See "Total and Partial
Surrenders," and "Surrender Charge." 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 rate of 1.40% per annum of the value of the average
net assets in the Separate Account for the mortality and expense risks we
assume, .35% per annum for the investment market risk we assume associated with
the Fortis Guaranteed PayoutPlan benefit, and .10% per annum of the value of the
average net assets in the Separate Account to cover certain administrative
expenses. See "Mortality and Expense Risk Charge", "Investment Risk Expense
Charge" and "Administrative Expense Charge" under the heading "Charges Against
the Separate Account."
In order to permit investment of the entire purchase payment, we do not deduct
sales charges at the time of investment. However, a surrender charge is imposed
on certain total or partial surrenders of the contract to help defray expenses
relating to the sale of the contract, including commissions to registered
representatives and other promotional expenses. Certain amounts may be
surrendered without the imposition of any surrender charge. The amount of such
charge-free surrender depends on how much is being withdrawn and how recently
the purchase payments to which the surrender relates were made. The maximum
surrender charge is 8% of the purchase payment and reduces to zero over the nine
year period after the purchase payment is made. See "Charges and
Deductions--Surrender Charge."
Certain states and other jurisdictions impose premium taxes or similar
assessments upon us, either at the time purchase payments are made
6
<PAGE>
or when contract value is applied to an annuity option. Where such taxes or
assessments are imposed by your state or other jurisdiction upon receipt of
purchase payments, we will deduct a charge for these amounts from the contract
value upon surrender, payment of a death benefit, reduction of the benefit under
the Fortis Guaranteed PayoutPlan or annuitization of the contract. In
jurisdictions where such taxes or assessments are imposed at the time of
annuitization, we will deduct a charge for such amounts at that time.
FORTIS GUARANTEED PAYOUTPLAN BENEFIT
The contracts have a living benefit referred to as the Fortis Guaranteed
PayoutPlan. This benefit guarantees that you can, with certain limitations, make
withdrawals over the life of the contract up to the amount of your purchase
payments regardless of whether your contract value is less. (See "Accumulation
Period--Fortis Guaranteed PayoutPlan Benefit").
ANNUITY PAYMENTS
The contract provides several types of annuity benefits to Annuitants or their
beneficiaries, 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 contract owner, or the Annuitant if the
contract owner is a non-natural person, prior to the annuity commencement date,
a death benefit is payable to the beneficiary of the contract. See "Benefit
Payable on Death of Contract Owner (or Annuitant)."
LIMITATIONS IMPOSED BY RETIREMENT PLANS
Certain rights a contract owner would otherwise have under a contract may be
limited by the terms of any employee benefit plan in connection with which the
contract is issued. 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.
TAX IMPLICATIONS
The tax implications for contract owners, Annuitants and beneficiaries, 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 or the contract should be directed to your sales
representative, or Fortis Benefits' home office: P.O. Box 64272, St. Paul,
Minnesota 55164; 1-800-800-2000 (Ext. 3057). For certain current information
relating to contract values such as subaccount unit values, interest rates in
the fixed account, and your contract value, call 1-800-800-2000 (ext. 5448).
Purchase payments and written requests should be mailed or delivered to the same
home office address. All communications should include the contract number, the
contract owner's name and, if different, the Annuitant's name. The number for
telephone transfers is 1-800-800-2000 (Ext. 3057).
Any purchase payment or other communication, except a 10-day cancellation
notice, is deemed received at our 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 Separate Account because no contracts had been sold as of
December 31, 1998 and therefore no Accumulation Units had been issued as of that
date.
Audited financial statements of the available subaccounts of the Separate
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 Separate 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 figures
do not reflect the surrender charge and yield and total return figures do not
reflect premium tax charges. This makes the performance shown more favorable.
FORTIS BENEFITS AND THE SEPARATE ACCOUNT
FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER
Fortis Benefits Insurance Company is the issuer of the contracts. At the end of
1998, Fortis Benefits had approximately $99 billion of total life insurance in
force. Fortis Benefits is a Minnesota corporation 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.
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Fortis Benefits is a member of the Fortis Financial Group. This Group is a joint
effort by Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc. and
Fortis Insurance Company (formerly Time Insurance Company) to offer financial
products through the management, marketing and servicing of mutual funds,
annuities, 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, 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 $390 billion in assets at the end of 1998.
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 Separate 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 SEPARATE ACCOUNT
The Separate 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 assets allocated to the Separate Account are the
exclusive property of Fortis Benefits. The Separate Account is an integral part
of Fortis Benefits. However, the Separate Account is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940. Registration does not involve supervision of the
management, or investment practices, or policies of the Separate Account or of
Fortis Benefits by the Securities and Exchange Commission.
All income, gains and losses, whether or not realized, from assets allocated to
the Separate Account are credited to or charged against the Separate Account
without regard to other income, gains or losses of Fortis Benefits. Assets in
the Separate Account representing reserves and liabilities will not be
chargeable with liabilities arising out of any other business of Fortis
Benefits. Fortis Benefits may accumulate in the Separate Account proceeds from
charges under variable annuity contracts and other amounts in excess of the
Separate Account assets representing reserves and liabilities. Fortis Benefits
may from time to time transfer to its general account any of such excess
amounts.
The Separate Account has subaccounts. The assets in each subaccount are invested
exclusively in a distinct class (or series) of stock issued by the portfolios,
each of which represents a separate investment portfolio within the Separate
Account. Income and both realized and unrealized gains or losses from the assets
of each subaccount of the Separate Account are credited to or charged against
that subaccount without regard to income, gains or losses, from any other
subaccount of the Separate Account or arising out of any other business we may
conduct. We may add or eliminate new subaccounts as new portfolios are added or
are eliminated.
THE PORTFOLIOS
You may choose from among a number of different portfolios. Each portfolio is a
mutual fund available for purchase only as a funding vehicle for benefits under
variable life insurance and variable annuity products. These variable life
insurance and variable annuity products are issued by Fortis Benefits and by
other life insurance companies. Each portfolio corresponds to one of the
subaccounts of the Separate Account. The assets of each portfolio are separate
from the assets of other portfolios. In addition, each portfolio operates as a
separate investment portfolio whose investment performance has no effect on the
investment performance of any other portfolio. More detailed information for
each investment portfolio is available to you. This information includes the
investment policies, investment restrictions, charges, and risks attendant to
investing in each portfolio is available to you. This information also includes
other aspects of each portfolio's operations. You can find this information in
the current prospectus for each portfolio. These portfolio prospectuses must
accompany this prospectus, and you should read them in conjunction with it. You
can obtain a copy of each prospectus from us, free of charge, by calling
1-800-800-2000, ext. 3057, or by writing P.O. Box 64272, St. Paul, Minnesota
55164.
As noted, the investment portfolios may be available to registered separate
accounts of other participating insurance companies. These portfolios may also
be available to the Separate 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 Separate Account and one or more of the other separate accounts
participating in the portfolios. For example, a conflict may occur due to (1) a
change in law affecting the operations of variable life and variable annuity
separate accounts, (2) differences in the voting instructions of the contract
owners and those of other companies, or (3) some other reason. In the event of
conflict, Fortis Benefits will take any steps necessary to protect the contract
owners and variable annuity payees.
We purchase and redeem portfolio shares for the Separate Account at their net
asset value without any sales or redemption charges. We automatically reinvest
dividends or capital gain distributions attributable to contracts in shares of
the portfolio from which they are received at that 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 that
portfolio. However, the value of the interests of contract owners, Annuitants
and beneficiaries in the corresponding subaccount will not change as a result of
any these dividends and distributions.
ACCUMULATION PERIOD
ISSUANCE OF A CONTRACT AND PURCHASE PAYMENTS
We reserve 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 our home office. If we cannot apply the initial
purchase payment within five
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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 applying it as of the end of the Valuation
Period in which the necessary requirements are fulfilled. The initial purchase
payment must be at least $25,000 ($10,000 for a contract issued as a part of a
qualified plan).
The date that we apply the initial purchase payment to the purchase of the
contract is the contract date. The contract date is the date used to determine
contract years, regardless of when we deliver the contract. Our crediting of
investment experience in the Separate Account, or a fixed rate of return in the
fixed account, begins as of the contract date, even if that date is delayed due
to an incomplete application.
Except for contracts issued in the states of Washington and Oregon, we will
accept additional purchase payments at any time after the contract 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 accounts to be credited with purchase
payments) to our home office. We will apply 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. For contracts issued in the states of Washington
and Oregon, a single purchase payment, only, may be made and no further purchase
payments can be accepted.
Each additional purchase payment must be at least $50. The total of all purchase
payments for all contracts having the same owner or annuitant may not exceed $1
million (not more than $500,000 allocated to the fixed account) without our
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
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. We will
provide the contract owner with 90 days' written notice so that additional
purchase payments may be made in order to raise the contract value above the
applicable minimum. Otherwise, we may cancel the contract as of the end of the
Valuation Period which includes the next anniversary of the contract date. We
will consider this a surrender of the contract and impose the same charges we
would impose upon a surrender. See "Total and Partial Surrenders." So long as
the contract value remains above $1,000, no additional purchase payments under a
contract are ever required.
CONTRACT VALUE
Contract value is the total of any Separate Account value in all the subaccounts
of the Separate Account, plus any fixed account value. For a discussion of how
fixed account value is calculated, see "The Fixed Account."
The contract does not guarantee a minimum Separate Account value. The Separate
Account value will reflect the investment experience of the chosen subaccounts
of the Separate Account, all purchase payments made, any partial surrenders, and
all charges assessed in connection with the contract. Therefore, the Separate
Account value changes from Valuation Period to Valuation Period. Subject to the
exception provided under the Fortis Guaranteed PayoutPlan benefit (see
"Accumulation Period--Fortis Guaranteed PayoutPlan Benefit"), you bear the
entire investment risk for the contract value that you allocate to the Separate
Account.
DETERMINATION OF SEPARATE ACCOUNT VALUE. A contract's Separate Account value is
based on 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 directly below) for the Valuation
Period ending on that Valuation Date. Purchase payments applied to a given
subaccount will be used to purchase Accumulation Units at the unit value of that
subaccount next determined after receipt of a purchase payment. See "Allocation
of Purchase Payments and Contract Value-- Allocation of Purchase Payments."
At the end of any Valuation Period, a contract's Separate 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:
- The initial Accumulation Units purchased on the contract date; plus
- Accumulation Units purchased at the time that additional purchase payments
are allocated to the subaccount; plus
- Accumulation Units purchased through transfers from another subaccount or
from the fixed account; less
- Accumulation Units redeemed to pay for the portion of any partial
surrenders allocated to the subaccount; less
- Accumulation Units redeemed as part of a transfer to another subaccount or
to the fixed account; 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 operations of the subaccount or any other taxes which are
attributable to the contract, by (2) the net asset value per share of the
portfolio shares held in the subaccount as
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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.
A subaccount's net investment factor for a Valuation Period is an index number
that reflects certain charges to a contract and the investment performance of
the subaccount during the Valuation Period. If the 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. We guarantee a contract's fixed account
value. Therefore, we bear the investment risk for amounts allocated to the fixed
account, except to the extent that we may vary the current interest rate
(subject to the 3% effective annual minimum).
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 Separate Account, or
- to the fixed account, or
- to both
Percentages must be in whole numbers and the total allocation must equal 100%.
The percentage allocations for future purchase payments may be changed, without
charge, at any time by sending a written request to our 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.
You may request transfers by either (1) a written request sent to our home
office, or by (2) a telephone transfer as described below. Currently, we do not
charge for any transfer.
All or part of the contract value in one or more subaccounts of the Separate
Account may be transferred at one time. We may permit a continuing request for
transfers automatically and 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 out of a
subaccount during the Accumulation Period. Currently, our only restriction on
the frequency of transfers is a prohibition of making transfers INTO the fixed
account within six months of a transfer out of the fixed account. We restrict
transfers of contract value FROM the fixed account in both amount and timing.
See "Fixed Account--Fixed Account Transfers, Total and Partial Surrenders." We
will count all transfers between and among the subaccounts of the Separate
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.
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
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 we
receive the written request for the total surrender at our home office,
less
- any applicable surrender charge.
For a discussion of these charges and the circumstances under which they apply,
see "Surrender Charge."
We must receive written consent of all collateral assignees and irrevocable
beneficiaries prior to any total surrender. We will generally pay surrenders
from the Separate Account within seven days of the date of receipt by our home
office of the written request. However, we may postpone payments in certain
circumstances. See "Postponement of Payment."
Since the contract owner assumes the investment risk with respect to amounts
allocated to the Separate Account, and because certain surrenders are subject to
a surrender charge, 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, (unless at such time
the contract is still in Living Benefit Status--see "Accumulation Period--
Fortis Guaranteed PayoutPlan Benefit.") all rights of the contract owner,
Annuitant, and any beneficiary, will terminate.
PARTIAL SURRENDERS. At any time during the life of the Annuitant and prior to
the commencement date, you may surrender a portion of the fixed account and/or
the Separate Account. You must request partial surrender by a written request to
our home office. The minimum partial surrender amount is $500, including any
surrender charge. We will surrender the entire cash surrender value under the
contract if the total contract value in both the Separate Account and fixed
account would be less than $1,000 after the partial surrender.
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You should specify the subaccounts of the Separate Account or the fixed account
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 Separate 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
partial surrender by the amount of any applicable surrender charge. The partial
surrender will be effective at the end of the Valuation Period in which we
receive the written request for partial surrender at our home office. Payments
will generally be made within seven days of the effective date of such request,
although certain delays are permitted. See "Postponement of Payment."
The Internal Revenue Code provides that a penalty tax will be imposed 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, under tax deferred annuity contracts pursuant to Section
403(b) of the Internal Revenue Code, 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.) This restriction does not apply
to amounts transferred to another investment alternative permitted under a
Section 403(b) retirement arrangement or to amounts attributable to premium
payments received prior to January 1, 1989.
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 programs,
and systematic withdrawals. 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.
FORTIS GUARANTEED PAYOUTPLAN BENEFIT
The contract provides a living benefit referred to as the Fortis Guaranteed
PayoutPlan benefit. This benefit guarantees that your available withdrawals over
the life of your contract will be no less than the amount of your purchase
payments, regardless of your contract value, so long as your contract remains in
Living Benefit Status. The maximum withdrawal which you may make at any time
under this living benefit is the lesser of:
- 7% of your purchase payments less the sum of prior withdrawals during the
current contract year.
- the sum of your purchase payments less the sum of prior withdrawals.
Your contract remains in Living Benefit Status if the following conditions are
met:
- you have not made withdrawals in any contract year totalling more than 7%
of your purchase payments, and
- the total amount of all of your withdrawals from your contract have not
been more than your aggregate purchase payments.
If either limitation is exceeded, your contract is no longer in Living Benefit
Status and this status cannot be regained. So long as your contract is in Living
Benefit Status, it will not terminate by reason of withdrawals under this
benefit reducing the contract value to zero or less. However, in such case the
provisions described below relating to Automatic Periodic Benefit Payments
apply.
If your contract remains in Living Benefit Status, as described above, but your
contract value declines to $1000 or less, we will pay you any remaining living
benefit on a periodic basis. No further purchase payments may be made. The
frequency of such payments may be among those then offered by us, which will
include at least annual payments. These periodic payments will continue until
the sum of your withdrawals, including Automatic Periodic Benefit Payments,
equals the sum of your purchase payments. While Automatic Benefit Payments are
being made, any death benefit otherwise payable under your contract will
continue to apply.
BENEFIT PAYABLE ON DEATH OF CONTRACT OWNER (OR ANNUITANT)
If the owner dies prior to the annuity commencement date, we will pay a death
benefit to the beneficiary. If the contract owner is a non-natural person, then
we will pay a death benefit upon the death of the Annuitant prior to the annuity
commencement date. In such 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 persons so named.
The term "decedent" in the death benefit description below refers to the death
of the contract owner unless the contract owner is a non-natural person, in
which case it refers to the death of the Annuitant. Also, the death benefit
description refers to the age of the contract owner. If the contract owner is a
non-natural person, the relevant age 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 is deemed to be an amount withdrawn), but not for any contract
fee-related surrenders.
The death benefit will equal the greatest of (1), (2) or (3):
(1) The contract value as of the date used for valuing the death
benefit.
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(2) The sum or all purchase payments made, reduced by any prior
withdrawals and previously imposed surrender charges.
(3) If the decedent dies prior to the date the owner reaches age 86,
the amount of the death benefit is the less of (a) and (b), as follows:
(a) the sum of:
(i) the accumulation (without interest) of purchase payments, reduced by
pro rata adjustments for any withdrawals; plus
(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 5.0%
or
(b) 200% of (a)(i).
The resulting amount (the lesser of (a) and (b)) will be referred to as the
"Roll-Up Amount."
If the decedent dies on or after the date the owner reaches age 86, the
amount of the death benefit is equal to:
(a) the "Roll-Up Amount" as of the date the owner reached age 86,
plus
(b) the accumulation (without interest) of purchase payments
made on or after the date the owner reached age 86, reduced by
(c) pro rata adjustments for any withdrawals made on or after the
date the owner reached age 86.
There is a limit on the amount of the death benefit that we will pay in excess
of the contract value. The excess payable by us upon the death of any one person
on all annuity policies issued by us will not be more than $500,000. If there
are multiple annuity contracts providing a death benefit upon the death of an
individual and the other contracts do not contain a similar limitation, the
reduction of the death benefit by the amount of any such excess over $500,000
will be subtracted entirely from the death benefit payable under the contract
offered by this prospectus. If there are multiple contracts and the other
contracts do contain a similar limitation, the death benefit on all of such
contracts will be reduced, each being reduced by a proportionate amount of any
such excess.
The pro rata adjustments referred to above are more fully described in Appendix
C at the end of this prospectus.
See also Appendix A for sample death benefit calculation.
The death benefit may be reduced by premium taxes where such taxes were imposed
upon receipt of purchase payments and were paid by us in behalf of the contract
owner. For further information, see "Charges and Deductions--Premium Taxes."
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 an Annuitant 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; (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 contract 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 in your application. The annuity
commencement date marks the beginning of the period during which an Annuitant
receives annuity payments under the contract. Except for contracts issued in
connection with life insurance policies issued by Fortis Benefits, the annuity
commencement date must be at least two years after the contract date.
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 30
days before the then-scheduled annuity commencement date. The new annuity
commencement date must also be at least 30 days after we receive the 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
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$5,000.We would make the payment in a single sum to the Annuitant or other
properly designated payee and cancel the contract. We would not impose any
charge other than the premium tax charge.
Otherwise, we will apply (1) the fixed account value to provide a Fixed Annuity
Option and (2) the Separate 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 Separate Account value
in different proportions. We must receive 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.
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 the relationship between the
Annuitant's sex and the amount of annuity payments, including special
requirements in connection with employee benefit plans, see "Calculation 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 investment
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,
investment risk and administrative expense charges, which are assessed at an
annual rate of 1.85%.
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 or from subaccounts to the fixed account. The current
procedures for these transfers are the same as we describe above under
"Allocation of Purchase Payments and Contract Value--Transfers." We do not
permit transfers out of the fixed account 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, although 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 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 OR 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.
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We also have other annuity options available. You can get information about
these from your sales representative or by calling or writing to our home
office.
DEATH OF ANNUITANT OR OTHER PAYEE
Under most annuity options offered by us, the amounts, if any, payable on the
death of the annuitant during the Annuity Period are the continuation of annuity
payments for any remaining guarantee period or for the life of any joint
annuitant. In all cases, the person entitled to receive payments also receives
any rights and privileges under the annuity form in effect.
Additional rules applicable to such distributions under Non-Qualified Contracts
are described under "Federal Tax Matters--Required Distributions for
Non-Qualified Contracts". Though the rules there described do not apply to
contracts issued in connection with qualified plans, similar rules apply to the
plans themselves.
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
(3) reduction of the benefit under the Fortis Guaranteed PayoutPlan
benefit or
- when imposed at the time annuity payments begin, we deduct the amount from
your contract value
Applicable premium tax rates depend upon your place of residence. Currently,
premium taxes and similar assessments range from 0% to 3.5% of purchase payments
or the amount annuitized. Rates can change by legislation, administrative
interpretations, or judicial acts.
CHARGES AGAINST THE SEPARATE ACCOUNT
We will assess certain charges against the Separate Account. These charges will
be assessed as a percentage of the net assets of the Separate Account. These
charges compensate us for contract risks and for administrative expenses.
MORTALITY AND EXPENSE RISK CHARGE. We assess each subaccount of the Separate
Account with a daily charge for mortality and expense risk. This charge is a
nominal annual rate of 1.40% of the average daily net assets of the Separate
Account. We guarantee not to increase this charge for the duration of the
contract. We assess this charge daily when we determine the value of an
Accumulation Unit. This charge is assessed during both the Accumulation Period
and the Annuity Period.
The mortality risk we bear arises from our 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. This assures that neither an
Annuitant's own longevity, nor an improvement in life expectancy generally, will
have an adverse effect on the annuity payments the Annuitant will receive under
the contract. This relieves the Annuitant from the risk that he or she will
outlive the funds accumulated for retirement.
In addition, we bear a mortality risk in that we guarantee to pay a death
benefit in a single sum (which may also be taken in the form of an annuity
option) upon the death of the contract owner prior to the annuity commencement
date. We do not impose a surrender charge upon payment of a death benefit. This
places a further mortality risk on us.
The expense risk we assume is that actual expenses incurred in connection with
issuing and administering the contracts will exceed the limits on administrative
charges set in the contracts.
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.
INVESTMENT RISK CHARGE. We bear an investment market risk associated with the
Fortis Guaranteed PayoutPlan benefit. With this benefit, we bear the risk that
the investment performance is insufficient to cover the guarantee of the return
of your purchase payments. We assess each subaccount of the Separate Account
with a daily charge for this risk at a nominal annual rate of .35% of the
average daily net assets of the Separate Account.
ADMINISTRATIVE EXPENSE CHARGE. We assess each subaccount of the Separate Account
with a daily charge at a nominal 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. The daily administrative expense charge helps
cover administrative expenses such as:
- issuing contracts,
- establishing and maintaining 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.
The daily administrative expense charge is designed to defray expenses incurred.
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 this 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 Separate Account.
The charges against the Separate Account described above are for the purposes
described. We may receive a profit as a result of these charges.
SURRENDER CHARGE
We do not deduct a sales charge from purchase payments. We deduct surrender
charges on certain total or partial surrenders. We use the revenue from
surrender charges to partially pay our expenses in the
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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.
FREE SURRENDERS. You can withdraw the following amounts from the contract
without a surrender charge:
- Any purchase payments that we received more than nine years before the
surrender date and that you have not previously surrendered;
- In any contract year, up to 10% of the purchase payments that we received
less than nine years before the surrender date (whether or not you have
previously surrendered the purchase payments).
Surrender charges do not apply to contract earnings. Therefore, we deem purchase
payments not subject to a surrender charge as withdrawn first. If all purchase
payments have been withdrawn, the remaining earnings can be withdrawn without a
surrender charge. We assume that all purchase payments are withdrawn before
earnings are withdrawn. However, for federal income tax purposes, certain
partial surrenders will be deemed to come first from earnings. See "Federal Tax
Matters."
We do not impose a surrender charge on (1) annuitization or (2) payment of a
single sum because the contract value is less than the minimum required to
provide an annuity on 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 these contracts since 1999. 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. We only apply surrender charges if the amount being
withdrawn exceeds the sum of the amounts listed above under Free Surrenders. The
surrender charges are:
<TABLE>
<CAPTION>
NUMBER OF YEARS
SINCE SURRENDER CHARGE AS A
PURCHASE PAYMENT WAS PERCENTAGE OF PURCHASE
CREDITED PAYMENT
- -------------------- -------------------------
<S> <C>
Less than 2 8%
At least 2 but less
than 4 7%
At least 4 but less
than 5 6%
At least 5 but less
than 6 5%
At least 6 but less
than 7 3%
At least 7 but less
than 8 2%
At least 8 but less
than 9 1%
9 or more 0%
</TABLE>
We anticipate the surrender charge will not be sufficient to cover our
distribution expenses. To the extent that 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 do not deduct
surrender charges 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, (2) mental or personality disorders
without a demonstrable organic disease. We consider a degenerative brain disease
such as Alzheimer's Disease an organic disease.
We provide this nursing care/hospitalization waiver of surrender charges by
means of a rider to the contract. This rider has not been approved in all
states. When you apply for a contract you should check with your Fortis Benefits
representative to determine if this rider is available in your state.
DISABILITY WAIVER OF SURRENDER CHARGES. WE WILL waive surrender charges on
total or partial surrenders under the following circumstances:
(1) if you become totally disabled after the contract is issued, or
(2) if the owner is a non-natural person and the Annuitant becomes
totally disabled after the contract is issued.
However, waivers of surrender charges are subject to the following conditions:
(1) We will only waive surrender charges on total or partial
surrenders of purchase payments that were made prior to the owner's or the
Annuitant's total disability, and
(2) the owner's or the Annuitant's total disability must have begun
before the owner or the Annuitant has reached age 64, and
(3) the owner's or the Annuitant's total disability must have been
continuous for a period of twelve months or more.
This benefit terminates on the 65th birthday of the owner, or the 65th birthday
of the Annuitant if the owner is a non-natural person.
"Total Disability" means:
- the inability to engage in an occupation for compensation or profit.
"Occupation" has one of two definitions. The applicable definition depends on
the length of the disability. "Occupation" is defined as:
(1) the owner's or the Annuitant's regular occupation during the
first twelve months of disability, and
(2) any job suited to the owner's or the Annuitant's education,
training, or experience after the first twelve months of disability.
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We provide this "Disability Waiver of Surrender Charges" by attaching a rider to
the contract. This rider has not been approved in all states. You should check
with your sales representative to determine if this rider is available in your
state.
MISCELLANEOUS
The Separate Account invests in shares of the portfolios. Therefore, the net
assets of the Separate Account will reflect the investment advisory fees and
certain other expenses incurred by the portfolios and described in their
prospectuses.
REDUCTION OF CHARGES
We will not impose a surrender charge under any contract owned by:
(A) Fortis, Inc. or its subsidiaries, and the following persons
associated with such companies, if at the contract issue date they are:
(1) officers and directors;
(2) employees; or
(3) spouses of any such persons or any of such persons'
children, grandchildren, parents, grandparents, or siblings--or spouses of any
of these persons;
(B) Series Fund directors, officers, or their spouses (or such
persons' children, grandchildren, parents or grandparents or spouses of any such
persons); and
(C) representatives or employees (or their spouses) of Fortis
Investors (including agencies) or of other broker-dealers having a sales
agreement with Fortis Investors (or such persons' children, grandchildren,
parents, or grandparents--or spouses of any such persons).
FIXED ACCOUNT
You may allocate purchase payments and transfer contract value to the fixed
account. In this case, purchase payments and transfers of contract value are
held in our general account.
Because of exemptive and exclusionary provisions, interests in the fixed account
have not been registered under the Securities Act of 1933, and the fixed account
has not been registered as an investment company under the Investment Company
Act of 1940. Accordingly, neither the fixed account, nor any interests therein,
are subject to the provisions of these acts. As a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosures in this
prospectus relating to the fixed account.
Disclosures regarding the fixed account may, however, be subject to certain
generally applicable provisions of federal securities law relating to the
accuracy and completeness of statements made in prospectuses. This prospectus is
generally intended to serve as a disclosure document only for the aspects of the
contract involving the Separate Account and contains only selected information
regarding the fixed account. More information regarding the fixed account may be
obtained from our home office or from your sales representative.
GENERAL DESCRIPTION
Our obligations with respect to the fixed account are supported by our general
account. Subject to applicable law, we have sole discretion over the investment
of assets in our general account.
Fortis Benefits guarantees that contract value in the 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, although we are not obligated to credit
interest in excess of the guaranteed annual rate of 3%. Any interest rate in
excess of 3% per year with respect to any amount in the fixed account pursuant
to a contract will not be modified more than once each calendar year. Any higher
rate of interest will be quoted at an effective annual rate. The rate of any
excess interest initially or subsequently credited to any amount can vary. This
will depend on when the amount was originally allocated to the fixed account.
Once credited, excess interest will be guaranteed and will be added to the
contract value in the fixed account (from which deductions for fees and charges
may be made).
Charges under the contract are the same as those applied to the Separate
Account. However, the 1.85% annual charge for mortality and expense risk,
investment expense risk and for administrative expenses is not imposed on
amounts of contract value in the fixed account.
FIXED ACCOUNT VALUE
The contract's fixed account value on any Valuation Date is the sum of the:
- purchase payments allocated to the fixed account, plus
- any transfers from the Separate Account, plus
- interest credited to the fixed account, less
- any surrenders, surrender charges or transfers to the Separate Account.
FIXED ACCOUNT TRANSFERS, TOTAL AND PARTIAL SURRENDERS
With respect to total and partial surrenders, amounts in the fixed account are
generally subject to the same rights and limitations as amounts allocated to the
subaccounts of the Separate Account. Therefore, with respect to total and
partial surrenders, amounts in the fixed account are also subject to the same
charges as amounts allocated to the subaccounts of the Separate Account. See
"Fortis Benefits and The Separate Account--Total and Partial Surrenders."
Transfers out of the fixed account have special limitations. Prior to the
annuity commencement date, you may transfer part or all of the contract value
from the fixed account to the Separate Account, provided that (1) no more than
one transfer is made each contract year, (2) no more than 50% of the fixed
account value is transferred at any time (unless the balance in the fixed
account after the transfer would be less than $1,000, in which case up to the
entire balance may be transferred) and (3) at least $500 is transferred at any
one time (or, if less, the entire amount in the fixed account). However, we may
permit a continuing request for transfer of lesser specified amounts
automatically on a periodic basis. We reserve the right to discontinue or modify
any such arrangements at our discretion.
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No transfers from the fixed account may be made after the annuity commencement
date.
GENERAL PROVISIONS
THE CONTRACT
The entire contract includes any application, amendment, rider, endorsement and
revised contract pages. Only the President, Secretary and Registrar 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 one of these representatives of Fortis
Benefits.
The contracts are non-participating and do not share in dividends or earnings of
Fortis Benefits.
POSTPONEMENT OF PAYMENTS
With respect to amounts in the subaccounts of the Separate 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, we may defer the determination, application or payment of any death
benefit, 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 us 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. We 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 rate of 3% annually.
ASSIGNMENT AND OWNERSHIP RIGHTS
Owners and payees may assign their rights and interests under a Qualified
Contract only in certain narrow circumstances referred to in the contract.
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 it to our 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 our home
office. 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.
Upon the death of a contract owner, or the Annuitant if the Annuitant is an
non-natural person, prior to the annuity commencement date the beneficiary will
be deemed to be as follows:
- If there is any surviving contract owner, the surviving contract owner
will be the beneficiary (this overrides any other beneficiary
designation).
- If there is no surviving contract owner, the beneficiary will be the
beneficiary designated by the contract owner.
- If there is no surviving contract owner and no surviving beneficiary who
has been designated by the contract owner, the estate of the last
surviving contract owner will be the beneficiary.
REPORTS
We will mail to the contract owner, at the last known address of record, any
report required by applicable law or regulation. You should therefore give us
prompt written notice of any address change. Each contract owner will also be
sent an annual and a semi-annual report for the portfolios and a list of the
portfolio securities held in each portfolio. All reports will be mailed to the
person receiving payments during the Annuity Period, rather than to the contract
owner.
RIGHTS RESERVED BY FORTIS BENEFITS
We reserve the right to make certain changes if, in our judgement, they would
best serve the interests of contract owners and Annuitants or would be
appropriate in carrying out the purposes of the contract. We will make any
change only as permitted by applicable laws. We will obtain your approval of the
changes and approval from any appropriate regulatory authority if required by
law. Examples of the changes we may make include:
- To operate the Separate Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
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- 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 Separate 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 times 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 us to take, including
to change the way us assess charges, but without increasing, as to any
then outstanding contract, the aggregate amount of the types of charges
that we have guaranteed.
DISTRIBUTION
Fortis Investors, Inc. ("Fortis Investors") is the principal underwriter of the
contracts. The contracts will be sold by individuals who are licensed by state
insurance authorities to sell the contracts of Fortis Benefits and (1) are
registered representatives of Fortis Investors or (2) are registered
representatives of other broker-dealer firms, or (3) are representatives of
other firms that are exempt from broker-dealer regulation. Fortis Investors and
any other broker-dealer firms 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 its registered representatives and
selling brokers in varying amounts. Fortis Investors does not expect the
allowances under normal circumstances to exceed 6.25% 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 selling allowances and larger or smaller service fees to its
registered representatives and other 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, registered
representatives, broker-dealer firms and exempt firms may qualify for additional
compensation based upon meeting certain production standards. Fortis Investors
may "chargeback" commissions paid to others if the contract upon which the
commission was paid is surrendered or canceled within certain specified time
periods.
Fortis Benefits or Fortis Investors may also provide additional compensation to
broker-dealers in connection with sales of contracts. Compensation may include
financial assistance to broker-dealers in connection with (1) conferences, (2)
sales or training programs for their employees, (3) seminars for the public, (4)
advertising, (5) sales campaigns regarding contracts, and (6) other
broker-dealer sponsored programs or events. Compensation may also include trips
taken by invited sales representatives and their family members to locations
within or without the United States for business meetings or seminars. Fortis
Benefits or Fortis Investors may pay travel expenses that arise from these
trips.
Fortis Investors is an indirect subsidiary of Fortis (NL)N.V. and Fortis (B).
Fortis Investors is under common control with Fortis Benefits. Fortis Investors'
principal business address is the same as that of our home office.
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. 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 (the "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 Separate Account or (2) interest credited to the fixed account. Contract
owners who are not natural persons ARE taxed annually for any increase in the
contract value subject to certain 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 contract value, 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 the "investment in the contract" divided by the total number of expected
annuity payments.
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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 such payment that the "investment in the contract" bears to the total
expected return under the contract. 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.
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 reach age 59 1/2, or is
- made to a beneficiary on or after your death, or is
- made upon your disability or that of another payee, or is
- part of a series of substantially equal annuity payments for your life or
life expectancy, or the life or life expectancy of you or your beneficiary
Premature distributions may result, for example, from:
- an early annuity commencement date
- an early surrender or partial surrender of a contract
- an assignment of a contract
- 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 a 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
In order that a Non-Qualified Contract be treated as an annuity contract 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 contract owner's designated beneficiary is the surviving spouse,
the surviving spouse may continue the contract as the new contract owner. Where
the contract 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). However, 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 contract 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 contract may be used with several types of tax-qualified plans. The tax
rules applicable to contract 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 excludible
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 education 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 tax-exempt
organizations and private employer unfunded deferred compensation plans.
19
<PAGE>
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 from the qualified retirement plan to
another qualified retirement plan. Moreover, special "backup withholding" rules
may require that we 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 these requirements. Failure to do so would result in
immediate taxation to you or another person 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 to be treated as the
owners of Separate 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 has stated that it expects to 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. However, an
exchange from an investment that is not a life insurance or annuity contract may
be a taxable event.
Various provisions of the tax laws may "grandfather" certain annuity contracts.
For example, certain annuity contracts issued before January 19, 1985 may not be
subject to the distribution rules of Code Section 72(s), and certain
distributions from contracts issued before the same date may not be subject to
the 10% penalty tax for premature distributions. In addition, if a contract
contained principal on August 13, 1982, that principal may generally be
withdrawn in a partial distribution before the withdrawal of any taxable gain in
the contract. These provisions may be lost if a grandfathered contract is
exchanged for a non-grandfathered contract.
Certain contract exchanges are subject to Code Section 1035. Where an exchange
is subject to this Code Section, certain grandfathered provisions may be
preserved. If your exchange is subject to Section 1035, we may be able to assist
you in preserving grandfathered provisions by "tracking" amounts accumulated
through past purchase payments. Payments made before or after the effective date
of the Tax Equity and Fiscal Responsibility Act of 1982 may have different tax
consequences. Therefore, you must provide us with an accurate history of your
past purchase payments.
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 those 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 which accrues after December 31, 1988.
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 a portfolio. 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. Contract owners have the voting interest during the
Accumulation Period. Persons receiving annuity payments have the voting interest
during the Annuity Period, and beneficiaries have the voting interest after the
death of the Annuitant or contract owner. 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 we determine that we are
permitted to vote shares of the portfolios in our own right, we 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:
20
<PAGE>
- 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.
Under certain contracts, we will vote portfolio shares according to instructions
we receive from the contract owner. However, we adjust this policy where the
Annuitant or payee is not the contract owner. Under this circumstance, the
Annuitant or payee may instruct the contract owner who, in turn, relays this
instruction to us. We will vote those portfolio shares that we can attribute to
the purchase payments of the Annuitant or payee in accordance with the
instruction relayed to us. In addition, in certain circumstances such as an
employee benefit plan, we allow the Annuitant or payee to direct how we vote
additional shares beyond those that we can attribute to the purchase payments of
the Annuitant or payee. However, we do so only to the extent authorized by the
contract. We compute the number of shares that may be attributed to the
Annuitant of payee on a basis consistent with that for attributing portfolio
shares to contract owners, as described above.
Contract owners are to instruct Fortis Benefits to vote in accordance with such
directions from Annuitants and payees. Furthermore, contract owners are to
instruct us to vote shares of any portfolio for which directions could have been
but were not received from Annuitants and other payees in the same proportion as
other shares in that portfolio attributable to the contract owner which are to
be voted in accordance with directions received from Annuitants and other
payees. The contract owner may instruct us as to the voting of any other shares
attributable to contracts as the contract owner may determine. The Separate
Account and Fortis Benefits do not have any obligation to determine whether or
not voting directions are requested or received by a contract owner or whether
or not a contract owner has instructed us in accordance with directions given by
Annuitants and other payees.
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 Separate 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 Separate 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
STATE REGULATION
We are subject to regulation and supervision by the Commerce Department of the
State of Minnesota, which periodically examines our affairs. We are also subject
to the insurance laws and regulations of all jurisdictions where we are
authorized to do business. We intend to satisfy the necessary requirements to
sell contracts in the District of Columbia and in all states other than New York
as soon as possible.
LEGAL MATTERS
David A. Peterson, Esquire, Vice President and Assistant General Counsel with
our legal 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.
YEAR 2000 ISSUES
At Fortis Benefits, we use computer systems to process policy transactions and
valuations. We need to adjust these computer systems so that we may continue to
administer policies after the Year 2000. Fortis Benefits is devoting all
resources necessary to make these systems modifications, and we expect that the
necessary changes will be completed on time, with no disruption to our policy
servicing operations. However, as with most system conversion projects, risks
and uncertainties exist. In part, this is due to our necessary reliance on third
party vendors. Nonperformance by any of these entities, or other unforeseen
circumstances, could have a material adverse impact on our ability to service
policies. As such, we are closely monitoring these entities to avoid any
unforeseen circumstances. See the Note entitled "Year 2000" in the Fortis
Financial Statements in the Statement of Additional Information.
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Fortis Benefits................................
<S> <C>
Calculation of Annuity Payments................
Services.......................................
Safekeeping of Separate Account Assets.........
Principal Underwriter..........................
Limitation On Allocations......................
Change of Investment Adviser or Investment
Policy........................................
Taxation Under Certain Retirement Plans........
Other Information..............................
Financial Statements...........................
APPENDIX A--Performance Information............
</TABLE>
21
<PAGE>
APPENDIX A--SAMPLE DEATH BENEFIT CALCULATIONS
<TABLE>
<CAPTION>
Date of Death is the 3rd Contract Anniversary: Example 1 Example 2
----------- -----------
<S> <C> <C>
a. Purchase Payments Made Prior to Date of Death $ 30,000 $ 30,000
b. Purchase Payments Made Prior to Date of Death, accumulated at 5% $ 34,729 $ 34,729
c. Contract Value on Date of Death $ 25,000 $ 37,000
Death Benefit is the larger of a, b, and c $ 34,729 $ 37,000
<CAPTION>
Date of Death is the 5th Contract Anniversary: Example 1 Example 2
----------- -----------
<S> <C> <C>
a. Purchase Payments Made Prior to Date of Death $ 30,000 $ 30,000
b. Purchase Payments Made Prior to Date of Death, accumulated at 5% $ 38,288 $ 38,288
c. Contract Value on Date of Death $ 40,000 $ 45,000
Death Benefit is larger of a, b, and c $ 40,000 $ 45,000
<CAPTION>
Date of Death is the 10th Contract Anniversary: Example 1 Example 2
----------- -----------
<S> <C> <C>
a. Purchase Payments Made Prior to Date of Death $ 30,000 $ 30,000
b. Purchase Payments Made Prior to Date of Death, accumulated at 5% $ 48,867 $ 48,867
c. Contract Value on Date of Death $ 25,000 $ 60,000
Death Benefit is the larger of a, b, and c $ 48,867 $ 60,000
</TABLE>
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 Growth Stock Series, is calculated as
follows:
<TABLE>
<S> <C> <C>
Total Variable Account Annual Expenses 1.85%
+ Total Series Fund Operating Expenses .65%
= Total Expense Rate 2.50%
</TABLE>
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = 1000.00 X .0250 = $25.00
Year 2 Beginning Policy Value = $1025.00
Year 2 Expense = 1025.00 X .0250 = $25.63
Year 3 Beginning Policy Value = $1050.62
Year 3 Expense = 1050.62 X .0250 = $26.27
So the cumulative expenses for years 1-3 for the Growth Stock Series are equal
to $25.00 + $25.63 + $26.27 = $76.90
If the contract is surrendered, the surrender charge is the surrender charge
percentage times the purchase payment minus the 10% free withdrawal amount:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Surrender Charge (Initial 10% Free Surrender
Percentage X Premium - Withdrawal) = Charge
</TABLE>
0.07 x ($1000.00 - $100.00) = $63.00
So the total expense if surrendered is $76.90 + $63.00 = $139.90
B-1
<PAGE>
APPENDIX C--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 Contract Owner (or Annuitant).
Under the death benefit set forth as (3) in "Benefit Payable on Death of
Contract Owner (or Annuitant)", 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 the withdrawal, plus
(ii) any purchase payments made on or after the date either the contract
owner first reaches his or her 86th birthday and before the given
withdrawal, reduced by
(iii) pro rata adjustments for any withdrawals made on or after the date
either the contract owner first reaches his or her 86th birthday and
before the given withdrawal.
C-1
<PAGE>
Individual Flexible Premium Deferred Variable Annuity Contracts
(Income Preferred Annuity)
Issued by
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
September 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 a flexible premium deferred variable annuity contract
("Contract"), dated September 1, 1999. A copy of the Prospectus may be obtained
without charge from Fortis Investors, Inc. 1-800-800-2000, ext. 3057; mailing
address: P.O. Box 64272, St. Paul, MN 55164. The Contracts are issued by Fortis
Benefits through its Variable Account D (the "Separate Account").
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Fortis Benefits...............................................................2
Calculation of Annuity Payments...............................................2
Services
- Safekeeping of Separate Account Assets...................................3
- Principal Underwriter ...................................................3
Limitation on Allocations.....................................................4
Change of Investment Adviser or Investment Policy.............................4
Taxation Under Certain Retirement Plans.......................................4
Other Information.............................................................8
Financial Statements..........................................................9
Appendix A - Performance Information........................................A-1
</TABLE>
In order to supplement the description in the Prospectus, the following provides
additional information about the Contract and other matters which may be of
interest to Contract Owners, Annuitants and Beneficiaries. 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."
1
<PAGE>
FORTIS BENEFITS
Fortis Benefits 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 Interfinancial Company, Inc., 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). Fortis, Inc. is wholly-owned by AMEV/VSB 1990. The latter is 50%
owned by Fortis (NL) N.V. and 50% owned, through certain subsidiaries, by Fortis
(B).
Fortis (NL) N.V. is a publicly-traded, multi-national insurance and financial
services group headquartered in The Netherlands. Fortis (NL) N.V. is an
international financial services firm that has been in business since 1847. 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 $390 billion.
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 of the Contract 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 Separate Account into
Annuity Units for each 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 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 that 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 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.
2
<PAGE>
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 that 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 of the same age 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 and Massachusetts,
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 SEPARATE ACCOUNT ASSETS
Title to the assets of the Separate Account is held by Fortis Benefits. The
assets of the Separate Account are kept segregated and held separate and apart
from Fortis Benefit's other assets. Fortis Advisers, Inc., an affiliate of
Fortis Benefits, maintains records of all purchases and redemptions of shares of
Fortis Series Fund, Inc. held by each of the Subaccounts of the Separate
Account.
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. Fortis Benefits paid a total of
$30,567,607, $30,705,769 and $32,874,801 to Fortis Investors for annuity
contract distribution services during 1996, 1997 and 1998 respectively. Of these
totals, the sums of $7,531,629, $5,091,431 and $5,389,151 for the years 1996,
1997 and 1998 respectively, was not reallowed to other broker-dealers. Contracts
will be issued for Annuitants from ages zero to ninety in all states, except
that the maximum age is 74 1/2 in Washington state. Contracts are not currently
available in New Jersey and New York.
LIMITATION ON ALLOCATIONS
Under the Contract, Fortis Benefits reserves the right to control the amount of
any assets in any investment alternative. Pursuant to this authority, Fortis
Benefits has established the following administrative procedures for the
protection of the interests of all investors participating in Fortis Series'
Portfolios: a Contract Owner may not invest, allocate, transfer or exchange
Contract Value into any Subaccount if the value allocated to that Subaccount
under the Contract (and under any other insurance or annuity contracts directly
or indirectly controlled by the same person, jointly or individually) would
immediately thereafter equal 25% or more of the related Fortis Series
Portfolio's net assets. Fortis Benefits reserves the right to modify these
procedures at any time.
3
<PAGE>
CHANGE OF INVESTMENT ADVISER OR INVESTMENT POLICY
Unless otherwise required by law or regulation, and subject to Fortis Advisers,
Inc.'s right to terminate its investment advisory arrangements with Fortis
Series, neither the investment adviser nor any investment policy may be changed
without the consent of Fortis Benefits. No investment policy will be changed
unless a statement of change is filed with and approved by the Commerce
Commissioner of the State of Minnesota. If required, approval of or change of
any investment objective will be filed with the Insurance Department of each
state where Contracts have been delivered. The Contract Owner (or, after annuity
payments start, the Annuitant) will be notified of any material investment
policy change which has been approved. Notification of an investment policy
change will be provided to Contract Owners prior to its implementation by the
Separate Account if Contract Owner comment or vote is required for such change.
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 contract 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 made for years after December 31, 1988 (plus
earnings thereon and earnings on Contract values as of December 31, 1988) 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 Contract Owner 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 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 exchange of
one Section 403(b) annuity contract for another Section 403(b) annuity contract,
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.
4
<PAGE>
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) annuity contracts.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these
qualified plans are generally the same as described above with respect to
Section 403(b) annuity contracts.
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 required to be withheld from the distribution unless the
distribution is transferred directly from the qualified plan to an individual
retirement account or 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
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
5
<PAGE>
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) annuity
contracts. 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.
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.
6
<PAGE>
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) annuity
contracts. However, if distributions do not commence before the employee's
death, 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 transfer 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 to 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.
7
<PAGE>
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.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
Contracts discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information concerning the
content of the Contracts and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange
Commission.
Fortis Benefits relies upon an SEC No-Action letter dated December 22, 1988
providing relief from certain restrictions provided in the Investment Company
Act of 1940 relative to restrictions on redemptions and it complies with its
conditions.
FINANCIAL STATEMENTS
The financial statements of Fortis Benefits that are included in this Statement
of Additional Information should be considered only as bearing on the ability of
Fortis Benefits to meet its obligations under the Contracts. 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.
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The 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 (B) and Fortis (NL)
N.V., as of December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its
cash flows for each of three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
February 19, 1999
Minneapolis, MN
F-1
<PAGE>
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost
1998--$2,315,904; 1997--$2,325,589)...................... $ 2,402,343 $ 2,415,915
Equity securities, at fair value (cost 1998--$141,947;
1997--$88,719)........................................... 157,851 109,832
Mortgage loans on real estate, less allowance for possible
losses (1998 and 1997--$11,085).......................... 610,131 602,064
Policy loans.............................................. 74,950 68,566
Short-term investments.................................... 31,868 70,537
Real estate and other investments......................... 56,297 55,035
----------- -----------
3,333,440 3,321,949
Cash and cash equivalents................................... 668 9,901
Receivables:
Uncollected premiums...................................... 61,883 74,220
Reinsurance recoverable on unpaid and paid losses......... 14,853 13,852
Other..................................................... 17,641 19,762
----------- -----------
94,377 107,834
Accrued investment income................................... 42,831 47,376
Deferred policy acquisition costs........................... 331,938 291,742
Property and equipment at cost, less accumulated
depreciation............................................... 30,712 42,773
Deferred federal income taxes............................... 17,904 15,037
Other assets................................................ 3,923 4,250
Assets held in separate accounts............................ 3,742,403 2,978,622
----------- -----------
TOTAL ASSETS................................................ $ 7,598,196 $ 6,819,484
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-2
<PAGE>
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance.............................. $ 450,776 $ 449,017
Interest sensitive and investment products.............. 1,238,125 1,264,227
Accident and health..................................... 861,334 792,249
----------- -----------
2,550,235 2,505,493
Unearned revenues......................................... 13,393 10,653
Other policy claims and benefits payable.................. 255,350 260,596
Policyholder dividends payable............................ 8,189 8,197
----------- -----------
2,827,167 2,784,939
Debt...................................................... 20,141 26,433
Accrued expenses.......................................... 57,860 49,909
Current income taxes payable.............................. 4,168 10,549
Other liabilities......................................... 86,226 113,222
Due to affiliates......................................... 9,479 6,925
Liabilities related to separate accounts.................. 3,707,687 2,947,401
----------- -----------
TOTAL POLICY RESERVES AND LIABILITIES....................... 6,712,728 5,939,378
COMMITMENTS AND CONTINGENCIES
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......................................... 344,605 332,723
Accumulated other comprehensive income.................... 67,863 74,383
----------- -----------
TOTAL SHAREHOLDER'S EQUITY.................................. 885,468 880,106
----------- -----------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S
EQUITY..................................................... $ 7,598,196 $ 6,819,484
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Insurance operations:
Traditional life insurance premiums........................................ $ 260,567 $ 269,540 $ 258,496
Interest sensitive and investment product policy charges................... 85,551 77,429 63,336
Accident and health insurance premiums..................................... 953,652 891,037 974,046
--------- --------- ---------
1,299,770 1,238,006 1,295,878
Net investment income........................................................ 234,043 228,724 206,023
Net realized gains on investments............................................ 52,404 41,101 25,731
Other income................................................................. 44,671 36,458 31,725
--------- --------- ---------
TOTAL REVENUES............................................................. 1,630,888 1,544,289 1,559,357
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance................................................. 189,337 204,497 220,227
Interest sensitive investment products..................................... 96,178 103,077 90,358
Accident and health claims................................................. 798,036 707,113 778,439
--------- --------- ---------
1,083,551 1,014,687 1,089,024
Policyholder dividends......................................................... 3,486 2,935 4,169
Amortization of deferred policy acquisition costs.............................. 33,365 43,931 39,325
Insurance commissions.......................................................... 118,710 107,378 94,723
General and administrative expenses............................................ 299,492 273,128 242,825
--------- --------- ---------
TOTAL BENEFITS AND EXPENSES................................................ 1,538,604 1,442,059 1,470,066
--------- --------- ---------
Income before federal income taxes............................................. 92,284 102,230 89,291
Federal income taxes........................................................... 30,402 35,120 31,099
--------- --------- ---------
NET INCOME..................................................................... $ 61,882 $ 67,110 $ 58,192
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
TOTAL STOCK CAPITAL EARNINGS (LOSS) INCOME
------------ ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996........................ $ 711,098 $ 5,000 $408,000 $207,421 $ 90,677
Comprehensive income (loss):
Net income.................................. 58,192 -- -- 58,192 --
Change in unrealized gains (losses) on
investments, net........................... (48,617) -- -- -- (48,617)
------------
Total Comprehensive income (loss)............. 9,575
Additional paid-in capital.................... 60,000 -- 60,000 -- --
------------ ------ ------------ ------------- -------
Balance, December 31, 1996...................... 780,673 5,000 468,000 265,613 42,060
Comprehensive income:
Net income.................................. 67,110 -- -- 67,110 --
Change in unrealized gains (losses) on
investments, net........................... 32,323 -- -- -- 32,323
------------ ------ ------------ ------------- -------
Total Comprehensive income.................... 99,433
------------
Balance, December 31, 1997...................... 880,106 5,000 468,000 332,723 74,383
Comprehensive income (loss):
Net income.................................. 61,882 -- -- 61,882 --
Change in unrealized gains (losses) on
investments, net........................... (6,520) -- -- -- (6,520)
------------
Total Comprehensive income (loss)............. 55,362
Dividend...................................... (50,000) -- -- (50,000) --
------------ ------ ------------ ------------- -------
Balance, December 31, 1998...................... $ 885,468 $ 5,000 $468,000 $344,605 $ 67,863
------------ ------ ------------ ------------- -------
------------ ------ ------------ ------------- -------
</TABLE>
See accompanying notes.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 61,882 $ 67,110 $ 58,192
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase (decrease) in future policy benefit reserves for traditional,
interest sensitive and acc and health policies............................. 106,135 (2,496) 26,193
(Decrease) increase in other policy claims and benefits and policyholder
dividends payable.......................................................... (2,514) 68,070 18,638
Provision for deferred federal income taxes................................. 417 (6,449) (1,094)
(Decrease) increase in income taxes payable................................. (6,381) (6,875) 12,049
Amortization of deferred policy acquisition costs........................... 33,365 43,931 39,325
Policy acquisition costs deferred........................................... (73,147) (69,694) (66,515)
Provision for mortgage loan losses.......................................... -- 1,388 1,344
Provision for depreciation.................................................. 12,409 14,351 17,312
Write-off of investment..................................................... -- 3,000 --
Amortization of investment (discounts) premiums, net........................ (3,200) (466) 1,821
Change in receivables, accrued investment income, unearned premiums, accrued
expenses and other liabilities............................................. (4,455) (2,720) 38,614
Net realized gains on investments........................................... (52,404) (41,101) (25,731)
Other....................................................................... 169 (12,496) (261)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 72,276 55,553 119,887
INVESTING ACTIVITIES
Purchases of fixed maturity investments....................................... (2,380,511) (3,611,770) (2,778,352)
Sales and repayments of fixed maturity investments............................ 2,428,207 3,378,898 2,652,887
Decrease (increase) in short-term investments................................. 38,669 112,280 (29,318)
Purchases of other investments................................................ (408,998) (209,771) (210,182)
Sales of other investments.................................................... 352,873 205,084 163,569
Purchases of property and equipment........................................... (356) (4,242) (10,992)
Other......................................................................... -- (617) --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..................... 29,884 (130,138) (212,388)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received..................................................... 215,693 200,760 128,446
Surrenders and death benefits............................................... (326,457) (190,361) (125,274)
Interest credited to policyholders.......................................... 49,371 53,613 49,802
Dividend...................................................................... (50,000) -- --
Additional paid-in capital from shareholder................................... -- -- 60,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES..................... (111,393) 64,012 112,974
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents................................ ( 9,233) (10,573) 20,473
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................... 9,901 20,474 1
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $ 668 $ 9,901 $ 20,474
----------- ----------- -----------
----------- ----------- -----------
NON CASH ACTIVITY
Investment acquired through issuance of debt.................................. $ 11,948 $ 18,100 --
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
DECEMBER 31, 1998
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 (B) and Fortis (NL) N.V. 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
During 1998, the Company adopted Statement of Financial Accounting Standards
Board (SFAS) 130, REPORTING COMPREHENSIVE INCOME. SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of this SFAS had no impact on the Company's net income or
shareholder's equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholder's equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
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 1998, 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 and long-term care products (included
as accident and health 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
(excluding long-term care) 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 accumulated other comprehensive
income 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.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
Real estate and other investments consists principally of property acquired in
satisfaction of debt and limited partnerships, respectively. Real estate is
recorded at cost less allowances for depreciation. The Company provides for
depreciation on a straight-line basis over the estimated useful lives. Other
investments are accounted for using the equity basis of accounting.
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.
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. Deferred tax assets
and liabilities are determined based on the temporary 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 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 and represent funds held for the
exclusive benefit of the variable annuity and variable life insurance contract
owners.
The Company receives mortality and expense risk fees from the separate accounts.
The Company also deducts monthly cost of insurance charges, and receives minimum
death benefit guarantee fees and issue and administrative fees from the variable
life insurance separate accounts.
The Company makes contractual mortality assurances to the variable annuity
contract owners that the net assets of the separate accounts will not be
affected by future variations in the actual life expectancy experience of the
annuitants and beneficiaries from the mortality assumptions implicit in the
annuity contracts. The Company makes periodic fund transfers to, or withdrawals
from, the separate account assets for such actuarial adjustments for variable
annuities that are in the benefit payment period. The Company also guarantees
that the rates at which administrative fees are deducted from contract funds
will not exceed contractual maximums.
For variable life insurance, the Company guarantees that the rates at which
insurance charges and administrative fees are deducted from contract funds will
not exceed contractual maximums. The Company also guarantees that the death
benefit will continue payable at the initial level regardless of investment
performance so long as minimum premium payments are made.
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 relating to current insolvencies.
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.
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 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 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).
F-8
<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 FAIR
COST GAIN LOSS VALUE
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
Fixed maturities:
Governments.................................. $ 321,047 $ 5,994 $ 436 $ 326,605
Public utilities............................. 190,792 7,769 1,704 196,857
Industrial and miscellaneous................. 1,723,183 79,137 6,451 1,795,869
Other........................................ 80,882 2,181 51 83,012
----------- --------- --------- -----------
Total fixed maturities....................... 2,315,904 95,081 8,642 2,402,343
Equity securities............................ 141,947 18,238 2,334 157,851
----------- --------- --------- -----------
Total...................................... $ 2,457,851 $113,319 $ 10,976 $ 2,560,194
----------- --------- --------- -----------
----------- --------- --------- -----------
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
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 1998, by contractual maturity, are shown below (in
thousands).
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................................... $ 89,349 $ 89,935
Due after one year through five years................................. 759,046 775,131
Due after five years through ten years................................ 614,280 640,042
Due after ten years................................................... 853,229 897,235
----------- -----------
Total................................................................. $ 2,315,904 $ 2,402,343
----------- -----------
----------- -----------
</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 36% and 37% of outstanding principal
is concentrated in the states of New York, California and Florida, at December
31, 1998 and 1997, respectively. Loan commitments outstanding totaled
$11,590,000 at December 31, 1998.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $19,978,000 and $2,548,000 at
December 31, 1998 and 1997, 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 of $8,132,000 was written-off at December
31, 1997.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS (CONTINUED)
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) on investments recorded in
accumulated other comprehensive income for the year ended December 31, are set
forth below (in thousands):
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (BENEFIT) NET-OF-TAX
AMOUNT EXPENSE AMOUNT
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1998
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ 32,614 $ (11,562) $ 21,052
Decrease (increase) in amortization of deferred policy
acquisition costses..................................... 414 (145) 269
Reclassification adjustment for gains realized in net
income.................................................. (42,832) 14,991 (27,841)
----------- ----------- -----------
Other comprehensive income (loss).......................... $ (9,804) $ 3,284 $ (6,520)
----------- ----------- -----------
----------- ----------- -----------
December 31, 1997
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ 93,826 $ (33,796) $ 60,030
Decrease (increase) in amortization of deferred policy
acquisition costs....................................... (2,096) 771 (1,325)
Reclassification adjustment for gains realized in net
income.................................................. (40,587) 14,205 (26,382)
----------- ----------- -----------
Other comprehensive income................................. $ 51,143 $ (18,820) $ 32,323
----------- ----------- -----------
----------- ----------- -----------
December 31, 1996
Unrealized gains (losses) on investments:
Unrealized gains (losses) on available-for-sale
investments............................................. $ (61,450) $ 24,823 $ (36,627)
Decrease (increase) in amortization of deferred policy
acquisition costs....................................... 3,376 (1,316) 2,060
Reclassification adjustment for gains realized in net
income.................................................. (21,615) 7,565 (14,050)
----------- ----------- -----------
Other comprehensive loss................................... $ (79,689) $ 31,072 $ (48,617)
----------- ----------- -----------
----------- ----------- -----------
</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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Fixed maturities................................................ $ 160,163 $ 160,444 $ 141,973
Equity securities............................................... 8,656 9,306 6,682
Mortgage loans on real estate................................... 57,031 54,662 52,949
Policy loans.................................................... 4,653 4,144 3,195
Short-term investments.......................................... 1,701 2,851 5,175
Real estate and other investments............................... 8,194 4,635 5,358
--------- --------- ---------
240,398 236,042 215,332
Expenses........................................................ (6,355) (7,318) (9,309)
--------- --------- ---------
$ 234,043 $ 228,724 $ 206,023
--------- --------- ---------
--------- --------- ---------
NET REALIZED GAINS ON INVESTMENTS
Fixed maturities................................................ $ 34,320 $ 13,827 $ 3,334
Equity securities............................................... 8,512 26,760 18,281
Mortgage loans on real estate................................... (198) 301 (144)
Short-term investments.......................................... 5 -- 57
Real estate and other investments............................... 9,765 213 4,203
--------- --------- ---------
$ 52,404 $ 41,101 $ 25,731
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from sales of investments in fixed maturities were $2,460,316,000,
$3,360,682,000 and $2,652,887,000 in 1998, 1997 and 1996, respectively. Gross
gains of $44,360,000, $30,860,000 and $28,606,000 and gross losses of
$10,040,000, $17,033,000 and $25,272,000 were realized on the sales in 1998,
1997 and 1996, respectively.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
4. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows
(in thousands):
<TABLE>
<CAPTION>
INTEREST
SENSITIVE AND ACCIDENT
TRADITIONAL INVESTMENT AND
LIFE PRODUCTS HEALTH TOTAL
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance January 1, 1997..................... $ 33,157 $ 221,036 $ 13,882 $ 268,075
Acquisition costs deferred.................. -- 69,694 -- 69,694
Acquisition costs amortized................. (10,988) (24,251) (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.................. 22,169 264,383 5,190 291,742
Acquisition costs deferred.................. -- 69,921 3,226 73,147
Acquisition costs amortized................. (7,609) (20,256) (5,500) (33,365)
Decreased amortization of deferred
acquisition costs from unrealized gains on
available-for-sale securities.............. -- 414 -- 414
----------- --------------- ----------- ---------
Balance, December 31, 1998.................. $ 14,560 $ 314,462 $ 2,916 $ 331,938
----------- --------------- ----------- ---------
----------- --------------- ----------- ---------
</TABLE>
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 was amortized in 1998.
During 1998, 1997 and 1996, 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 $3,357,000, $732,000 and $1,894,000, respectively.
5. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land..................................................................... $ 1,900 $ 1,900
Building and improvements................................................ 24,319 24,148
Furniture and equipment.................................................. 87,714 87,537
--------- ---------
113,933 113,585
Less accumulated depreciation............................................ (83,221) (70,812)
--------- ---------
Net property and equipment............................................... $ 30,712 $ 42,773
--------- ---------
--------- ---------
</TABLE>
6. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverables....... $ 988,036 $ 947,711 $ 928,832
Add: Incurred losses related to:
Current year................................................. 826,009 773,316 865,907
Prior years.................................................. (27,973) (59,634) (64,094)
--------- --------- ---------
Total incurred losses...................................... 798,036 713,682 801,813
Deduct: Paid losses related to:
Current year................................................. 469,881 437,405 549,144
Prior years.................................................. 254,308 235,952 233,790
--------- --------- ---------
Total paid losses.......................................... 724,189 673,357 782,934
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables..... $1,061,883 $ 988,036 $ 947,711
--------- --------- ---------
--------- --------- ---------
</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; and (2) the table above includes accident and health benefits
payable which are included with other policy claims and benefits payable
reported on the balance sheet.
The liability for unpaid accident and health claims includes $915,368,000,
$854,940,000 and $805,510,000 of total disability income reserves as of December
31, 1998, 1997 and 1996, respectively, which were discounted for anticipated
interest earnings assuming a 6.0% interest rate.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
6. ACCIDENT AND HEALTH RESERVES (CONTINUED)
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.
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. (Fortis). 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.
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Separate account assets/liabilities.................................... $ 87,300 $ 56,620
Reserves............................................................... 27,586 43,143
Claims and benefits payable............................................ 8,089 15,238
Accrued liabilities.................................................... 10,113 8,785
Investments............................................................ 3,861 4,795
Other.................................................................. 2,723 3,042
--------- ---------
Total deferred tax assets............................................ 139,672 131,623
Deferred tax liabilities:
Deferred policy acquisition costs...................................... 82,031 72,369
Unrealized gains....................................................... 35,591 39,015
Fixed assets........................................................... 3,150 3,914
Investments............................................................ 982 1,220
Other.................................................................. 14 68
--------- ---------
Total deferred tax liabilities....................................... 121,768 116,586
--------- ---------
Net deferred tax asset............................................... $ 17,904 $ 15,037
--------- ---------
--------- ---------
</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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current............................................................ $ 30,232 $ 41,569 $ 32,193
Deferred........................................................... 170 (6,449) (1,094)
--------- --------- ---------
$ 30,402 $ 35,120 $ 31,099
--------- --------- ---------
--------- --------- ---------
</TABLE>
Federal income tax payments and refunds resulted in net payments of $36,367,000,
$58,859,000 and $16,434,000 in 1998, 1997 and 1996, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--- --- ---
<S> <C> <C> <C>
Statutory income tax rate................................................ 35.0% 35.0% 35.0%
Other, net............................................................... (2.1) (.6) (.2)
--- --- ---
32.9% 34.4% 34.8%
--- --- ---
--- --- ---
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
8. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<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................... $3,707,687 $2,947,401
Assets of the separate accounts owned by the Company, at fair value... 34,716 31,221
---------- ----------
$3,742,403 $2,978,622
---------- ----------
---------- ----------
</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 $5,601,000, $5,742,000 and $6,144,000 of premium from First
Fortis in 1998, 1997 and 1996, respectively. The Company has assumed $9,315,000,
$5,452,000 and $3,599,000 of reserves in 1998, 1997 and 1996, respectively, from
First Fortis.
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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Life insurance..................................................... $ 6,983 $ 8,159 $ 8,680
Accident and health insurance...................................... 13,862 13,712 6,793
--------- --------- ---------
$ 20,845 $ 21,871 $ 15,473
--------- --------- ---------
--------- --------- ---------
</TABLE>
Recoveries under reinsurance contracts for the year ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Life insurance..................................................... $ 4,549 $ 2,973 $ 7,225
Accident and health insurance...................................... 9,465 14,781 5,993
--------- --------- ---------
$ 14,014 $ 17,754 $ 13,218
--------- --------- ---------
--------- --------- ---------
</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 $47,341,000 free from such restrictions
as December 31, 1998. 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 the Minnesota Department of
Commerce. 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. While the NAIC
has recently completed a project to codify statutory accounting practices, which
may result in changes to the accounting practices that insurance enterprises use
to prepare their statutory-basis financial statements, adoption by Minnesota is
not anticipated before 2001.
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.
F-13
<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 (LOSS) SHAREHOLDER'S EQUITY
------------------------------- --------------------
1998 1997 1996 1998 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Based on statutory accounting practices.... $ 14,841 $ 62,593 $ 55,046 $ 478,405 $ 528,671
Deferred policy acquisition costs.......... 39,782 25,763 27,190 331,938 291,742
Investment valuation differences........... 745 (497) (2,219) 100,165 80,245
Deferred and uncollected premiums.......... (103,982) (107,194) (4,096) (7,246) (7,453)
Policy reserves............................ 97,452 89,895 (19,873) (156,889) (150,649)
Commissions................................ -- (3,171) (1,639) -- --
Current income taxes payable............... 925 6,450 2,386 (10,920) 3,712
Deferred income taxes...................... (417) 6,449 (1,094) 17,904 (520)
Realized gains on investments.............. 356 251 2,599 -- --
Realized gains transferred to the Interest
Maintenance Reserve (IMR), net of tax..... 22,748 9,644 2,335 -- --
Amortization of IMR, net of tax............ (7,128) (6,315) (6,130) -- --
Write-off of investment.................... -- (11,705) -- -- --
Pension expense............................ 81 (4,153) -- (6,440) (6,137)
Guaranty Funds............................. -- -- 3,023 -- --
Property and equipment..................... -- -- -- 5,951 15,520
Interest maintenance reserve............... -- -- -- 68,968 53,348
Asset valuation reserve.................... -- -- -- 90,986 75,939
Mortgage loans on real estate.............. -- -- -- (20,141) --
Other, net................................. (3,521) (900) 664 (7,213) (4,312)
--------- --------- --------- --------- ---------
As reported herein......................... $ 61,882 $ 67,110 $ 58,192 $ 885,468 $ 880,106
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis 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, 1998,
1997 and 1996, were $13,077,000, $12,015,000 and $13,319,000, respectively.
During 1997 Fortis, Inc. began providing information technology services to the
Company. Information technology expenses were $55,910,000 and $28,525,000 for
years ended December 31, 1998 and 1997, respectively.
In conjunction with the marketing of its variable annuity products, the Company
paid $72,638,000, $72,105,000 and $68,616,000 in commissions to its affiliate,
Fortis Investors, Inc., for the years ended December 31, 1998, 1997 and 1996,
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.
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. The
carrying amount of policy loans reported in the Balance Sheet approximates fair
value. 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 1998 and 1997, the outstanding balance is considered a
reasonable estimate of fair value. Separate account assets and liabilities are
reported at their estimated fair values in the Balance Sheet.
F-14
<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
-----------------------------------------------------
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturities...................................... $ 2,402,343 $ 2,402,343 $ 2,415,915 $ 2,415,915
Equity securities..................................... 157,851 157,851 109,832 109,832
Mortgage loans on real estate............................. 610,131 662,984 602,064 661,055
Policy loans.............................................. 74,950 74,950 68,566 68,566
Short-term investments.................................... 31,868 31,868 70,537 70,537
Assets held in separate accounts.......................... 3,742,403 3,742,403 2,978,622 2,978,622
Liabilities:
Individual and group annuities (subject to discretionary
withdrawal).............................................. $ 923,102 $ 894,019 $ 977,495 $ 945,558
Debt...................................................... 20,141 20,141 26,433 26,433
Liabilities related to Separate Accounts.................. 3,707,687 3,707,687 2,947,401 2,947,401
</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, 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' 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
$1,627,000, $1,594,000 and $1,354,000 for 1998, 1997 and 1996, respectively.
The Company participates in a contributory profit sharing plan, sponsored by
Fortis, 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 $3,610,000, $3,926,000 and
$3,913,000 for 1998, 1997 and 1996, 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. Health care benefits, either through a
Fortis-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, 1998, 1997 and 1996 were $0, $304,000 and $290,000, 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
$(5,200), $20,000 and $8,000 in 1998, 1997 and 1996, respectively, as claims
were incurred.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
16. DEBT
A summary of debt at December 31 for each year follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Mortgage note bearing a floating interest rate of 200 basis points over
LIBOR, (5.07% at December 31, 1998 and 5.84% at December 31, 1997)
adjustable every six months, principal and interest due monthly, matures
July 2001................................................................. $ 3,088 $ 3,150
Mortgage note bearing fixed interest at 7.6% principal and interest due
monthly, matures October 2002............................................. 5,105 5,183
Mortgage note bearing fixed interest at 6.52%, principal and interest due
monthly, matures July 2009................................................ 5,000 --
Mortgage note bearing fixed interest at 7.14%, principal and interest due
monthly, matures April 2008............................................... 6,948 --
Mortgage note bearing a floating interest rate of 225 basis points over
LIBOR..................................................................... -- 18,100
--------- ---------
$ 20,141 $ 26,433
--------- ---------
--------- ---------
</TABLE>
Maturities of the debt as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................................... $ 280
1999............................................................................... 344
2000............................................................................... 3,328
2001............................................................................... 5,030
2002............................................................................... 251
Thereafter......................................................................... 10,908
---------
$ 20,141
---------
---------
</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 1998 and 1997 on this debt was
approximately $1,362,000 and $1,075,000, respectively.
17. YEAR 2000 (UNAUDITED)
INTRODUCTION. The Company relies heavily on information technology ("IT")
systems to conduct its business. These IT systems include both internally
developed and vendor-supplied systems. The Company also has business
relationships with numerous entities including but not limited to financial
institutions, financial intermediaries, third party administrators and other
critical vendors as well as regulators and customers. These entities are
themselves reliant on their IT systems to conduct their businesses. Therefore,
there is a supply chain of dependency among and between all involved entities.
STATE OF READINESS. In 1997, the Fortis parent company organized a
multi-disciplinary Year 2000 Project Team ("Team"). The Company is a part of the
Team. The Team consists of employees at each subsidiary, audit, legal and
outside consultants. The Team has developed and is currently executing a
comprehensive plan designed to make the Company's IT systems Year 2000 ready.
The plan covers four stages including (i) inventory, (ii) assessment, (iii)
programming, and (iv) testing and certification. The Company has completed the
inventory stage for its internal hardware, software and telecommunications
systems (mainframe and client/server applications). The assessment process is
also complete and the Company is utilizing both internal and external resources
to reprogram or replace the systems where necessary, and testing the
applications for Year 2000 readiness. Programming, testing and certification of
these systems and applications are targeted for completion by the end of 1999.
COSTS. The cost of the Company portion of the Year 2000 project is estimated at
$27.7 million (pre-tax) and is being funded through operating cash flows. Total
Year 2000 project costs are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. Costs to upgrade and replace systems in the normal course of business
are not included in this estimate. As of December 31, 1998, approximately $15.5
million (pre-tax) had already been expensed. The Company believes that its Year
2000 project generally is on schedule.
RISKS. The Company is attempting to limit the potential impact of the Year 2000
by monitoring the progress of its own Year 2000 project and those of its
critical external relationships and by developing contingency/recovery plans.
The Company cannot guarantee that it will be able to identify and/or resolve all
of its Year 2000 issues. Any critical unresolved Year 2000 issues at the Company
or its external relationships, however, could have a material adverse effect on
the Company's results of operations, liquidity or financial condition. If the
Company's Year 2000 issues were unresolved, potential consequence would include,
among other possibilities, the inability to accurately and timely process
benefit claims, update customer's accounts, process financial transactions, bill
customers, assess exposure to risks, determine liquidity requirements or report
accurate data to management, shareholders, customers, regulators and others as
well as business interruptions or shutdowns, financial losses, harm to its
reputation, increased scrutiny by regulators and litigation related to Year 2000
issues.
CONTINGENCY PLANS. Consistent with prudent due diligence efforts, the Company
has defined contingency plans aimed at ensuring the continuity of critical
business functions before and after December 31, 1999, should there be an
unexpected system failure. The Company has developed plans that are designed to
reduce the negative impact on Fortis, and provide methods of returning to normal
operations, if failure occurs.
F-16
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized
cost 1999--$2,290,275; 1998--$2,315,904) $2,261,131 $2,402,343
Equity securities, at fair value (cost
1999--$173,812; 1998--$141,947) 187,473 157,851
Mortgage loans on real estate, less allowance
for possible losses (1999 and 1998--$11,085) 621,937 610,131
Policy loans 78,827 74,950
Short-term investments 38,532 31,868
Real estate and other investments 61,095 56,297
---------- ----------
3,248,995 3,333,440
Cash and cash equivalents (48,230) 668
Receivables:
Uncollected premium 67,782 61,883
Reinsurance recoverable on paid and
unpaid losses 21,576 14,853
Other 13,755 17,641
---------- ----------
103,113 94,377
Accrued investment income 43,825 42,831
Deferred policy acquisition costs 365,184 331,938
Property and equipment, at cost, less
accumulated depreciation 26,848 30,712
Deferred federal income taxes 53,188 17,904
Other assets 9,418 3,923
Assets held in separate accounts 4,139,989 3,742,403
---------- ----------
TOTAL ASSETS $7,942,330 $7,598,196
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance $ 450,258 $ 450,776
Interest sensitive and investment products 1,202,770 1,238,125
Accident and health 897,568 861,334
---------- ----------
2,550,596 2,550,235
Unearned revenues 21,224 13,393
Other policy claims and benefits payable 258,629 255,350
Policyholder dividends payable 8,201 8,189
---------- ----------
2,838,650 2,827,167
Debt 27,172 20,141
Accrued expenses 50,033 57,860
Current income taxes payable 5,779 4,168
Other liabilities 61,007 86,226
Due to Affiliates 20,809 9,479
Liabilities related to separate accounts 4,099,695 3,707,687
---------- ----------
Total policy reserves and liabilities 7,103,145 6,712,728
SHAREHOLDER'S EQUITY:
Common stock, $5 par value:
Authorized, issued and outstanding shares--
1,000,000 5,000 5,000
Additional paid-in capital 468,000 468,000
Retained earnings 369,405 344,605
Unrealized gain on available-for-sale
securities (net of deferred taxes 1999--
$(4,919); 1998--$33,961) (9,135) 63,071
Unrealized gain on assets held in separate
accounts (net of deferred taxes 1999--$3,185;
1998--$2,580 5,915 4,792
---------- ----------
Total Shareholder's equity 839,185 885,468
---------- ----------
Total policy reserves, liabilities &
Shareholder's equity $7,942,330 $7,598,196
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
<S> <C> <C>
REVENUES
Insurance operations:
Traditional life insurance premiums $131,614 $128,061
Interest sensitive and investment product
policy charges 47,447 42,902
Accident and health premiums 502,974 464,033
------- --------
Total Insurance Revenue 682,035 634,996
Net investment income 111,389 119,113
Net realized gains on investments 12,069 41,019
Other income 25,449 22,532
-------- --------
TOTAL REVENUES 830,942 817,660
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 97,296 95,026
Interest sensitive and investment products 45,336 47,882
Accident and health 414,809 383,869
-------- --------
557,441 526,777
Policyholder dividends 1,726 2,034
Amortization of deferred policy acquisition
costs 18,254 25,896
Insurance commissions 50,871 51,690
General and administrative expenses 165,950 152,305
-------- --------
TOTAL BENEFITS AND EXPENSES 794,242 758,702
-------- --------
INCOME BEFORE INCOME TAXES 36,700 58,958
INCOME TAX EXPENSE (BENEFITS)
Current 9,411 24,104
Deferred 2,489 (3,451)
-------- --------
11,900 20,653
-------- --------
NET INCOME 24,800 38,305
-------- --------
-------- --------
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized loss on investments (71,083) (8,104)
-------- --------
COMPREHENSIVE (LOSS) INCOME $(48,006) $ 30,201
-------- --------
-------- --------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1999 1998
<S> <C> <C>
REVENUES
Insurance operations:
Traditional life insurance premiums $65,461 $64,245
Interest sensitive and investment product
policy charges 23,576 21,855
Accident and health premiums 251,812 234,719
---------- ---------
Total Insurance Revenue 340,849 320,819
Net investment income 55,782 60,382
Net realized (losses) gains on investments (990) 2,965
Other income 12,996 11,943
---------- ---------
TOTAL REVENUES 408,638 416,109
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance 46,883 45,203
Interest sensitive and investment products 21,381 22,638
Accident and health 201,657 195,419
---------- ---------
269,921 263,260
Policyholder dividends 699 1,029
Amortization of deferred policy acquisition
costs 9,121 15,553
Insurance commissions 23,261 26,738
General and administrative expenses 88,312 79,104
---------- ---------
TOTAL BENEFITS AND EXPENSES 391,314 385,684
---------- ---------
INCOME BEFORE INCOME TAXES 17,323 30,425
INCOME TAX EXPENSE (BENEFITS)
Current 5,736 13,094
Deferred (618) (2,428)
---------- ---------
5,118 10,666
---------- ---------
NET INCOME 12,205 19,759
---------- ---------
---------- ---------
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized gain (loss) on investments (33,684) (3,469)
---------- ---------
COMPREHENSIVE (LOSS) INCOME $ (21,479) $ 16,290
---------- ---------
---------- ---------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $24,800 $38,305
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefit reserves 42,489 46,090
Increase (decrease)in other policy claims,
benefits and policyholder dividends payable 3,291 (7,946)
Provision for deferred federal income taxes 2,489 (3,451)
Increase in income taxes payable 1,611 10,506
Amortization of policy acquisition costs 18,254 25,896
Policy acquisition costs deferred (45,003) (34,388)
Provision for depreciation 4,212 6,798
Amortization of investment discounts, net 76 (2,210)
Change in uncollected premiums, accrued investment income,
reinsurance recoverable, other receivables, other
assets, debt, accrued expenses, and other liabilities (22,079) (57,532)
Realized gains on investments (12,069) (41,019)
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 18,071 (18,951)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (1,023,173) (1,202,720)
Sales or maturities of fixed maturity investments 1,047,529 1,296,952
Increase in short-term investments (6,664) (80,632)
Purchase of other investments (217,763) (167,227)
Sales or maturities of other investments 175,582 155,431
Purchase of property and equipment (340) (83)
--------- ---------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (24,829) 1,721
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 131,094 107,035
Surrenders and death benefits (193,860) (156,686)
Interest credited to policyholders 20,626 25,593
--------- ---------
NET CASH (USED) BY FINANCING ACTIVITIES (42,140) (24,058)
--------- ---------
DECREASE IN CASH (48,898) (41,288)
Cash and cash equivalents at beginning of period 668 9,901
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $(48,230) $(31,387)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(unaudited)
General: The accompanying unaudited financial statements of Fortis Benefits
Insurance Company contain all adjustments necessary to present fairly the
balance sheet as of June 30, 1999 and the related statement of income for the
six and three months ended June 30, 1999 and 1998, and cash flows for the six
months ended June 30, 1999 and 1998.
Income tax payments for the six months ended June 30, 1999 and June 30, 1998
were $7,800,000 and $13,598,000, respectively.
The classification of fixed maturity investments is to be made at the time of
purchase and, prospectively, that classification is expected to be reevaluated
as of each balance sheet date. At June 30, 1999, all fixed maturity and equity
securities are classified as available-for-sale and carried at fair value.
The amortized cost and fair values of investments available-for-sale were as
follows at June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
Fixed Income Securities:
Governments $ 105,716 $ 217 $ 1,512 $ 104,421
Public Utilities 213,193 1,246 7,593 206,846
Industrial and
miscellaneous 1,801,099 20,319 36,623 1,784,795
Other 170,267 629 5,827 165,069
---------- --------- ------- ----------
Total 2,290,275 22,411 51,555 2,261,131
Equity Securities 173,812 16,735 3,074 187,473
---------- --------- ------- ----------
$2,464,087 $38,309 $54,629 $2,447,767
---------- --------- ------- ----------
---------- --------- ------- ----------
</TABLE>
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(unaudited)
The amortized cost and fair value of fixed maturities at June 30, 1999, by
contractual maturity, are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 90,630 $ 91,338
Due after one year through
five years 677,188 679,529
Due after five years through
ten years 653,244 641,499
Due after ten years 869,213 848,765
---------- ----------
$2,290,275 $2,261,131
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales and maturities of investments in fixed maturities in the
six-month period ended June 30, 1999 were $1,047,529,000, and $39,119,000
respectively. Gross gains of $9,882,000 and $21,917,000 and gross losses of
$11,344,000 and $3,910,000 were realized on sales during the six month period
ended June 30, 1999 and 1998, respectively.
Mortgage Loans: The Company has issued commercial mortgage loans on properties
located throughout the country. Currently, approximately 36% of outstanding
principal is concentrated in the states of Florida, California and New York. The
Company has a diversified loan portfolio with a small average size, which
greatly reduces any loss exposure. The Company has established a reserve for
mortgage loans.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Notes to Financial Statements
June 30, 1999
(unaudited)
Net Investment Income and Realized Gains (Losses) on Investments: Major
categories of net investment income and realized gains and losses on investments
for the first six months of each year were as follows (in thousands):
<TABLE>
<CAPTION>
Investment Realized Gain (Loss)
Income on Investments
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fixed maturities $ 78,475 $ 80,894 $ (1,463) $18,007
Preferred stocks 7 58 3 381
Common stocks 3,953 4,605 13,516 13,099
Mortgage loans on
real estate 27,541 29,073 - (123)
Policy loans 2,564 2,326 - -
Short-term investments 480 965 - -
Real estate and other
investments 1,271 4,392 13 9,655
------- ------- -------- -------
114,291 122,313 $12,069 $41,019
Expenses 2,902 3,200 -------- -------
------- ------- -------- -------
$111,389 $119,113
-------- --------
-------- --------
</TABLE>
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
In advertising and other sales material for the Contracts, yield and total
return information for the Subaccounts of the Separate Account may be included.
The information below provides investment results for the indicated Subaccounts
of the Separate Account. The results shown in this section are not an estimate
or guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Participant.
Fortis Benefits may advertise its relative performance as compiled by outside
organizations. Following is a list of ratings services which may be referred to
in advertisements, along with the category in which the applicable Subaccount is
included:
<TABLE>
<CAPTION>
PORTFOLIO NAME RATING SERVICE CATEGORY
<S> <C> <C>
International Stock Morningstar Publications, Inc. Foreign Stock
Subaccount Lipper Analytical Services, Inc. International Fund
Variable Annuity Research & Data Service International Stock
Global Growth Morningstar Publications, Inc. World Stock
Subaccount Lipper Analytical Services, Inc. Global Fund
Variable Annuity Research & Data Service International Stock
Global Asset Morningstar Publications, Inc. International Hybrid
Allocation Subaccount Lipper Analytical Services, Inc. Global Flexible Portfolio
Variable Annuity Research & Data Service Balanced/International
Aggressive Growth Morningstar Publications, Inc. Small Growth
Subaccount Lipper Analytical Services, Inc. Small Cap Fund
Variable Annuity Research & Data Service Aggressive Growth
Small Cap Value Morningstar Publications, Inc. Small Value
Subaccount Lipper Analytical Services, Inc. Small Cap Fund
Variable Annuity Research & Data Service Small Company Funds
Growth Stock Morningstar Publications, Inc. Mid Cap Growth
Subaccount Lipper Analytical Services, Inc. Mid Cap Fund
Variable Annuity Research & Data Service Growth
Mid Cap Stock Morningstar Publications, Inc. Mid Cap Blend
Subaccount Lipper Analytical Services, Inc. Mid Cap Fund
Variable Annuity Research & Data Service All Equity Funds
Large Cap Growth Morningstar Publications, Inc. Large Blend
Subaccount Lipper Analytical Services, Inc. Growth Fund
Variable Annuity Research & Data Service Growth
Blue Chip Stock Morningstar Publications, Inc. Large Blend
Subaccount Lipper Analytical Services, Inc. Growth Fund
Variable Annuity Research & Data Service Growth
S&P 500 Index Morningstar Publications, Inc. Large Blend
Subaccount Lipper Analytical Services, Inc. Index Fund
Variable Annuity Research & Data Service Growth and Income Funds
Growth & Income Morningstar Publications, Inc. Mid Cap Blend
Subaccount Lipper Analytical Services, Inc. Growth & Income
Variable Annuity Research & Data Service Growth and Income
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C> <C>
Value Subaccount Morningstar Publications, Inc. Large Blend
Lipper Analytical Services, Inc. Growth & Income
Variable Annuity Research & Data Service Equity-Income
Asset Allocation Morningstar Publications, Inc . Domestic Hybrid
Subaccount Lipper Analytical Services, Inc. Flexible Portfolio
Variable Annuity Research & Data Service Balanced
Global Bond Morningstar Publications, Inc. International Bond
Subaccount Lipper Analytical Services, Inc. Global Income
Variable Annuity Research & Data Service International Bonds
High Yield Morningstar Publications, Inc. High Yield Bond
Subaccount Lipper Analytical Services, Inc. High Current Yield
Variable Annuity Research & Data Service Corporate Bond High Yield
Diversified Income Morningstar Publications, Inc. Intermediate-Term Bond
Subaccount Lipper Analytical Services, Inc. Corp Debt BBB Rated
Variable Annuity Research & Data Service Corporate Bond General Funds
U.S. Government Morningstar Publications, Inc. Intermediate Government
Subaccount Lipper Analytical Services, Inc. Intermediate U.S. Govt.
Variable Annuity Research & Data Service Government Bond General Funds
Money Market Morningstar Publications, Inc. Money Market
Subaccount Lipper Analytical Services, Inc. Money Market
Variable Annuity Research & Data Service Money Market
</TABLE>
A-2
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENT AND EXHIBITS
a. Financial Statements included in Part B:
The following financial statements of Variable Account D:
None
The following financial statements of Fortis Benefits Insurance
Company:
Audited Financials:
Report of Ernst & Young LLP, independent auditors for Fortis
Benefits Insurance Company.
Balance Sheets of Fortis Benefits Insurance Company as of
December 31, 1998 and 1997.
Statements of Income, Statements of Changes in Shareholder's
Equity and Statements of Cash Flows of Fortis Benefits
Insurance Company for the years ended December 31, 1998,
1997 and 1996.
Notes to Financial Statements for Fortis Benefits Insurance
Company.
Unaudited Financials:
Balance Sheet for the six months ended at June 30, 1999.
Statement of Income for the three months ended June 30,
1999 and June 30, 1998.
Statements of Income and Statements of Cash Flow for the six
months ended June 30, 1999 and 1998.
Notes to Financial Statements for Fortis Benefits Insurance
Company.
There are no financial statements included in Part A.
<PAGE>
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).
2. Not applicable
3. (a) Form of Principal Underwriter and
Administrative Servicing Agreement
(incorporated by reference from Form N-4
registration statement, File No.
33-73986, filed on January 11, 1994).
(b) Form of Amendment to Principal Underwriter
and Administrative Servicing Agreement
(incorporated by reference from Form N-4
registration statement, File No. 33-73986,
filed on January 11, 1994).
(c) Form of Dealer Sales Agreement (incorporated
by reference from Post- Effective Amendment
No. 12 to Form N-4 registration statement of
Fortis Benefits and its Variable Account D
filed on December 22, 1994, File No.
33-19421).
4. (a) Form of Variable Annuity Contract - filed on
June 1, 1999 as a part of this registration
statement.
(b) Form of Guaranteed Living Benefit Rider - filed
on June 1, 1999 as a part of this registration
statement.
(c) Form of IRA Endorsement (incorporated by
reference from Pre-Effective Amendment No. 1
to Form N-4 registration statement of Fortis
Benefits and its Variable Account D filed on
April 18, 1988).
(d) Tax Deferred Annuity Loan Agreement Form
(incorporated by reference from Post
Effective Amendment No. 9 to Form N-4
registration of Fortis Benefits and its
Variable Account D statement filed April 29,
1993, File No. 33-19421).
(e) Form of Section 403(b) Annuity Endorsement
(incorporated by reference from
Post-Effective Amendment No. 3 to Form N-4
registration statement of Fortis Benefits
and its Variable Account D filed on March 1,
1990, File No. 33-19421).
(f) Nursing Care/Hospitalization Waiver of
Surrender Charge Rider (incorporated by
reference from Post-Effective Amendment No.
13 to Form N-4 registration statement of
Fortis Benefits and its Variable Account D
filed April 27, 1995, File No., 33-19421).
5. (a) Form of Application for Variable Annuity Contract -
filed on June 1, 1999 as a part of this
registration statement.
(b) Annuity Contract Exchange Form (incorporated by
reference from Pre-
<PAGE>
Effective Amendment No. 1 to Form N-4 registration
statement of Fortis Benefits and its Variable
Account D filed on April 18, 1988, File No. 33-
19421).
6. (a) Articles of Incorporation of depositor
(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 depositor (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).
(c) Certificate of Amendment to Articles of
Incorporation and By-laws of depositor dated
November 21, 1991 (incorporated by reference
from Post-Effective Amendment No 6 to Form
N-4 registration statement of Fortis
Benefits and its Variable Account D filed on
March 2, 1992, File No. 33-19421).
7. None.
8. None.
9. Opinion and consent of John W. Norton, Esq, as to the
legality of the securities being registered (incorporated by
reference from Post-Effective Amendment No. 2 to Form N-4
registration statement of Fortis Benefits and its Variable
Account D filed on April 28, 1989, File No. 33-19421).
10. (a) Consent of Ernst & Young LLP-- filed herewith.
(b) Power of Attorney for Messrs. 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 --previously filed.
Item 25. DIRECTORS AND OFFICERS OF FORTIS BENEFITS
The directors, executive officers, and, to the extent responsible for variable
annuity operations, other officers of Fortis Benefits are listed below.
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OFFICES WITH DEPOSITOR
BUSINESS ADDRESS ----------------------
------------------
OFFICER-DIRECTOR
----------------
<S> <C>
Robert Brian Pollock (2) President and Chief
Executive Officer
Benjamin Cutler (5) Executive Vice President--Fortis
Healthcare
Dean C. Kopperud (1) Executive Vice President--Fortis
Financial Group
Michael John Peninger (4) Senior Vice President - Chief
Financial Officer
OTHER DIRECTORS
---------------
Allen Royal Freedman (2) Chairman of the Board
J. Kerry Clayton (2)
Arie Aristide Fakkert (3)
A.W. Feagin (6)
OTHER OFFICERS
Peggy L. Ettestad (1) Senior Vice President - Life
Operations
Rhonda J. Schwartz (1) 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.
<PAGE>
(4) Address: 2323 Grand Avenue, Kansas City, MO 64108.
(5) Address: 515 West Wells, Milwaukee, WI 53201.
(6) Address: 230 Wesley Dobbs Ave., Atlanta, GA 30303
Item 26. PERSONS CONTROLLED BY OR UNDER CONTROL WITH THE DEPOSITOR OR
REGISTRANT
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 the Form N-4 registration statement of
Fortis Benefits and its Variable Account D filed on April 28, 1994, File No. 33-
37577. Fortis Benefits has no subsidiaries.
Item 27. NUMBER OF CONTRACT OWNERS
As of August 1, 1999 there were no Contract owners.
Item 28. INDEMNIFICATION
Pursuant to the Principal Underwriter and Administrative Servicing Agreement
filed as Exhibit 3(a) and (b) to this Registration Statement and incorporated 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 Contracts, 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
Contracts, 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 Contracts 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 expenses of Fortis
<PAGE>
Benefit'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 in a civil
proceeding if it appears that the person seeking indemnification has acted in
good faith and in a manner that he reasonably believed to be in, or not opposed
to, the best interests of Fortis Benefits and if such person has received no
improper personal benefit, or in a criminal proceeding if the person seeking
indemnification also has no reasonable cause of 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 may
be against public policy as expressed in the Act and may be, 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
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, Fortis Benefits
will 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 Growth Fund, Inc.,
Fortis Fiduciary Fund, Inc., Fortis Tax-Free Portfolios, Inc.,
Fortis Money Portfolios, Inc., Fortis Income Portfolios, Inc.,
Fortis Worldwide 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 * Sr. Vice President
Robert W. Beltz, Jr.* Vice President and Director
Jeffrey R. Black * Business Development and
Sales Desk Officer
Mark C. Cadalbert* Compliance Officer
Tamara L. Fagely* Vice President
<PAGE>
Dawn Gores* Marketing Officer
Joanne M. Herron* Assistant Treasurer
John E. Hite* Secretary and
Vice President
Carol M. Houghtby* Vice President, Treasurer and
Director
Dean C. Kopperud* President and Director
Christine D. Pawlenty * Custom Solutions Group Officer
Mary B. Petersen * 2nd Vice President
Jennifer R. Relien* Assistant Secretary
</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 Insurance Company, 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;
(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;
<PAGE>
(c) to deliver any 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 19th day of
August, 1999.
VARIABLE ACCOUNT D OF
FORTIS BENEFITS INSURANCE COMPANY
(Registrant)
By: FORTIS BENEFITS INSURANCE COMPANY
By: /s/
--------------------------------------
Robert Brian Pollock, President
FORTIS BENEFITS INSURANCE COMPANY
By: /s/
--------------------------------------
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 August 19, 1999.
Signature Title With Fortis Benefits
- --------- --------------------------
*
------------------------
Allen R. Freedman Chairman of the Board
*
------------------------ Director
J. Kerry Clayton
- ------------------------- Director
Arie Aristide Fakkert
- ------------------------ Director
Alan W. Feagin
/s/
- ------------------------- Director
Dean C. Kopperud
/s/
- ------------------------- President and Director (Chief
Robert Brian Pollock Executive Officer)
/s/
- ------------------------- President - Group Non-Medical
Michael John Peninger and Director
/s/
- ------------------------- Treasurer (Principal Accounting
Larry M. Cains Officer and Principal Financial
Officer)
*By: /s/
------------------------
Robert Brian Pollock
Attorney-in-Fact
<PAGE>
Exhibit Index
EXHIBIT NO.
10(a) Consent of Independent Auditors
<PAGE>
Consent of Independent Auditors
We consent to the use of our report dated February 19, 1999 on the financial
statements of Fortis Benefits Insurance Company in Pre-Effective Amendment
No. 1 to the Registration Statement (Form N-4 No. 333-79701) 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
August 23, 1999
