SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-71690
FIRST FORTIS LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of
incorporation or organization)
13-2699219
(IRS Identification No.)
220 SALINA MEADOWS PARKWAY,SUITE 255,SYRACUSE, NY 13212
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 315-451-0066
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No <PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<S> <C> <C>
March 31, December 31,
1999 1998
(unaudited)
ASSETS
Investments:
Fixed maturities, at fair value (amortized
cost 1999--$121,296; 1998--$125,787 $122,578
$130,038
Short-term investments 4,550
830
127,128 130,868
Cash and cash equivalents 87 1,160
Receivables:
Uncollected premiums, less allowance of $100
2,718 3,538
Reinsurance recoverable on paid and unpaid losses 28,533 28,458
Securities Receivable 2,548
- -
Other 385 417
34,184 32,413
Accrued investment income 2,001
1,895
Deferred policy acquisition costs 3,185
3,148
Property and equipment at cost, less accumulated
depreciation (1999--$2,137; 1998--$2,086) 274
324
Deferred federal income tax 2,153
1,150
Goodwill, less accumulated amortization
(1999--$380; 1998--$368) 451 462
Assets held in separate accounts 52,434
46,082
Total assets $221,897 $217,502
See accompanying notes.
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
(In thousands, except per share data)
March 31, December 31,
1999
1998
(unaudited)
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Life insurance $ 31,109
$ 30,388
Interest sensitive and investment products 4,021
6,267
Accident and health 69,243
68,206
104,373 104,861
Unearned revenues 8,418
8,535
Other policy claims and benefits payable 11,044
11,084
Income taxes payable 1,412
2,017
Other liabilities 5,511
4,897
Liabilities related to separate accounts 52,434
46,082
Total policy reserves and liabilities 183,192
177,476
SHAREHOLDER'S EQUITY:
Common stock, $20 par value:
Authorized, issued, and outstanding shares
--100,000 2,000
2,000
Additional paid-in capital 37,440
37,440
Retained deficit (1,582)
(2,190)
Unrealized gain on investments, net 847
2,776
Total shareholder's equity 38,705
40,026
Total policy reserves, liabilities, and
shareholder's equity $221,897
$217,502
See accompanying notes.<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months ended
March 31,
1999 1998
REVENUES
Insurance operations:
Life insurance premiums $5,885 $5,198
Interest sensitive and investment products
policy charges 5 11
Accident and health premiums 8,502
7,644
Net investment income 2,135 1,992
Net realized gains on investments 421
369
Other income 337 239
TOTAL REVENUES 17,285 15,453
BENEFITS AND EXPENSES
Benefits to policyholders:
Life insurance 4,504 4,514
Interest sensitive and investment products 136 156
Accident and health 6,859 7,546
11,499 12,216
Amortization of deferred policy
acquisition costs 43 (46)
Insurance commissions 942 1,147
General and administrative expenses 3,866
3,001
TOTAL BENEFITS AND EXPENSES 16,350 16,318
INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 935 (865)
Federal income tax expense (benefit) 327
(303)
NET INCOME (LOSS) 608 (562)
OTHER COMPREHENSIVE LOSS:
Unrealized loss on investments (1,929)
(299)
COMPREHENSIVE LOSS $1,321 $ (861)
See accompanying notes.<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
1999 1998
OPERATING ACTIVITIES
Net income (loss) $ 608
$ (562)
Adjustments to reconcile net loss to net
cash provided by operating activities:
(Gain)loss on disposal of property and equipment (2)
11
Increase in future policy benefit reserves
and other policy claims and benefits 2,893
5,474
(Increase) decrease in federal income taxes (636)
121
(Increase) decrease in other liabilities
(612) 458
Depreciation, amortization and accretion 24
(300)
Amortization of investment premiums, net 9
- -
Increase in uncollected premiums, accrued
investment income and other (1,799)(831)
Increase in reinsurance recoverable (75)(2,963)
Net realized gains on investments (421)
(369)
NET CASH USED PROVIDED BY OPERATING ACTIVITIES (11)
1,039
INVESTING ACTIVITIES
Purchases of fixed maturity investments (25,876)
(72,054)
Sales or maturities of fixed maturity investments 30,780
56,644
(Increase) decrease in short-term investments (3,720)
9,747
Purchase of property and equipment 2 -
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 1,186
(5,663)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received 564 3,731
Surrenders and death benefits (2,903)
(2,542)
Interest credited to policyholders 91
156
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,248)
1,345
DECREASE IN CASH (1,073) (3,279)
Cash and cash equivalents at beginning of period 1,160 7,453
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87
$4,174
See accompanying notes.
/TABLE
<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
Notes to Financial Statements
March 31, 1999
(unaudited)
General: The accompanying unaudited financial statements
of First Fortis Life Insurance Company contain all
adjustments necessary to present fairly the balance sheet
as of March 31, 1999 and the related statements of
operations for the three months ended March 31, 1999 and
1998, and cash flows for the three months ended March 31,
1999 and 1998.
Income tax payments for the three months ended March 31,
1999 and March 31, 1998 were $897,000 and $0,
respectively.
The classification of fixed maturity investments is to be
made at the time of purchase and, prospectively, that
classification is expected to be reevaluated as of each
balance sheet date. At March 31, 1999, all fixed
maturity and equity securities are classified as
available-for-sale and carried at fair value.
The amortized cost and fair values of investments
available-for-sale were as follows at March 31, 1999 (in
thousands):
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
Fixed Income Securities:
Governments $ 11,204 $ 25 $ 65 $ 11,164
Public Utilities 15,429 354 170 15,613
Industrial and
miscellaneous 94,663 1,900 762 95,801
Total $121,296 $2,279 $997 $122,578
</TABLE>
The amortized cost and fair value of fixed maturities at
March 31, 1999, by contractual maturity, are shown below
(in thousands). Expected maturities will differ from
contractual maturities because borrowers may have the
right to call or prepay obligations with or without call
or prepayment penalties.<PAGE>
FIRST FORTIS LIFE INSURANCE COMPANY
Notes to Financial Statements
March 31, 1999
(unaudited)
<TABLE>
<S> <C> <C>
Amortized Fair
Cost Value
Due in one year or less $ 3,360 $
3,412
Due after one year through
five years 34,814 35,263
Due after five years through
ten years 37,411
37,884
Due after ten years 45,710 46,019
$121,295 $122,578
</TABLE>
Proceeds from sales and maturities of fixed maturity
securities were $ 30,780,000 and $ 24,037,000 for the
three month period ended March 31, 1999 and 1998,
respectively. Gross gains of $518,000 and $478,000 and
gross losses of $97,000 and $109,000 were realized on the
sales during the three month period ended March 31, 1999
and 1998.
Net Investment Income and Realized Gains on Investments:
Major categories of net investment income and realized
gains and losses on investments for the first three
months of each year were as follows (in thousands):
<TABLE>
<S> <C> <C>
Realized Gain
Investment Income on Investments
1999 1998 1999 1998
Fixed maturities $2,058 $1,880$421
$369
Short-term investments 111 134 - -
2,169 2,014 $421 $369
Expenses (34) (22)
Net investment income $2,135 $1,992
/TABLE
<PAGE>
First Fortis Life Insurance Company
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March Year-to-Date 1999 Compared to March Year-to-Date 1998
Revenues
First Fortis' (the "Company") insurance premiums increased
during the first quarter of 1999 as compared to the first
quarter of 1998 due to strong group life sales. Group
disability and dental sales account for the increase in
accident and health premiums. Slightly offsetting this is a
decrease in the group medical premiums. This group medical
premium decrease was substantially attributable to the
Company's decision, effective January 1, 1996, to cease new
sales of group medical policies. The Company continues to
service the existing group medical business. The decision to
effectively exit the group medical business has reduced
annualized premiums associated with this line from $11.4
million inforce at January 1, 1997 to $3.4 million in premium
inforce at March 31, 1999. Accident and health premiums are
principally composed of group accident and health coverages.
The discontinuance of group medical sales and strong dental
and disability sales have caused the group accident and health
premium mix to shift. First quarter disability income,
dental, and medical premium represented 45%, 44%, and 11%,
respectively, of total group accident and health premium in
1999 compared to 39%, 43%, and 18%, respectively, in 1998.
The Company continues to match investment portfolio
composition to liquidity needs and capital requirements.
Changes in interest rates during 1999 and 1998 resulted in
recognition of realized gains and losses upon sales of
securities.
Benefits
First quarter 1999 life benefits as compared to premium were
lower than 1998 due to more favorable mortality experience and
higher life premium volumes. The decrease in accident and
health benefits in the first three months of 1999 as compared
to the same period in 1998 is primarily due to improved
experience with the group long term disability claims.
Expenses
The Company continues to monitor its commission rate
structures, and, as indicated by market conditions,
periodically adjusts rates paid. Rates paid vary by product
type, group size and duration.
<PAGE>
The Company's general and administrative expenses as a percent
of premium has increased in 1999 from 1998 due to an increase
in the effective state premium tax rates.
Market Risk and Risk Management
Interest rate risk is the Company's primary market risk
exposure. Substantial and sustained increases and decreases
in market interest rates can affect the profitability of
insurance products and market value of investments. The yield
realized on new investments generally increases or decreases
in direct relationship with interest rate changes. The market
value of the Company's fixed maturity and mortgage loan
portfolios generally increases when interest rates decrease,
and decreases when interest rates increase.
Interest rate risk is monitored and controlled through
asset/liability management. As part of the risk management
process, different economic scenarios are modeled, including
cash flow testing required for insurance regulatory purposes,
to determine that existing assets are adequate to meet
projected liability cash flows. A major component of the
Company's asset/liability management program is structuring
the investment portfolio with cash flow characteristics
consistent with the cash flow characteristics of the Company's
insurance liabilities.
The Company uses computer models to perform simulations of the
cash flow generated from existing insurance policies under
various interest rate scenarios. Information from these
models is used in the determination of interest crediting
strategies and investment strategies. The asset/liability
management discipline includes strategies to minimize exposure
to loss as market interest rates change. On the basis of
these analyses, management believes there is no material
solvency risk to the Company with respect to interest rate
movements up or down of 100 basis points from year end levels.
Equity market risk exposure is not significant. Equity
investments in the general account are not material enough to
threaten solvency and contractowners bear the investment risk
related to the variable products. Therefore, the risks
associated with the investments supporting the variable
separate accounts are assumed by contractowners, not by the
Company. The Company provides certain minimum death benefits
that depend on the performance of the variable separate
accounts. Currently the majority of these death benefit risks
are reinsured which then protects the Company from adverse
mortality experience and prolonged capital market decline.
Year 2000
Introduction. The information provided in this section and in
other communications is to keep the reader informed about
Fortis, Inc. and its subsidiaries ("Fortis")Year 2000 effort.
A list of the Fortis, Inc. subsidiaries is attached hereto as
Exhibit A. This information reflects Fortis' understanding
and expectations as of the date we provide it, and the
situation could change over time. This information is
designated as a Year 2000 Readiness Disclosure pursuant to the
Year 2000 Information and Readiness Disclosure Act.
Fortis relies heavily on information technology ("IT") systems
to conduct its business. These Fortis IT systems include both
internally developed and vendor-supplied systems. Fortis also
has business relationships with numerous entities including
but not limited to financial institutions, financial
intermediaries, third party administrators and other critical
vendors as well as regulators and customers. These entities
are themselves reliant on their IT systems to conduct their
businesses. Therefore, there is a supply chain of dependency
among and between all involved entities.
State of Readiness. In 1997, the Fortis parent company
organized a multi-disciplinary Year 2000 Project Team
("Team"). The Team consists of employees at each subsidiary,
audit, legal and outside consultants. The Team and Fortis have
developed and are currently executing a comprehensive plan
("Plan") designed to make Fortis' IT systems Year 2000 ready.
The Plan covers four stages including (i) inventory, (ii)
assessment, (iii) programming, and (iv) testing and
certification. The Plan covers both I/T systems
(telecommunications, mainframe and client/server applications)
and non I/T systems (i.e. embedded chip systems - elevators,
security systems, heating ventilation and air conditioning
systems etc.) in its scope.
Fortis' progress with respect to the Plan is on target.
Critical dates have been identified and we remain on schedule
with the Plan. Fortis has completed the inventory stage for
its internal hardware, software and telecommunications systems
(mainframe and client/server applications). The assessment
process is also complete and Fortis is utilizing both internal
and external resources to reprogram or replace the systems
where necessary, and testing the applications for Year 2000
readiness. Programming, testing and certification of these
systems and applications are targeted for completion by the
end of 1999. Those I/T systems which have been through all
phases of the Plan have been put back into production and are
currently being maintained and tested to ensure continued Year
2000 readiness. The non-I/T systems have been identified and
are currently being upgraded to a vendor represented Year 2000
compliant version, or are being replaced with new systems
which are represented as Year 2000 compliant. Completion of
this task is scheduled for the end of 1999.
The Plan considers the Year 2000 compliance of those
significant business relationships stated above. Letters have
been sent requesting the status of compliance and are reviewed
as part of the Plan's methodology. Also as part of the Plan
methodology, Fortis does file comparisons of the I/T systems
for records going out to the businesses to assure consistency
and validates record layouts for the input/output of data.
These tasks are part of the programming, testing and
certification of the systems and applications which are
targeted for completion by the end of 1999.
Costs. The cost of the Fortis Year 2000 project is estimated
at $84.8 million (pre-tax) and is being funded through
operating cash flows. Total Year 2000 project costs are based
on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources, third party modification
plans and other factors. Costs to upgrade and replace systems
in the normal course of business are not included in this
estimate. As of December 31, 1998, approximately $44.5
million (pre-tax) had already been expensed to Fortis. Fortis
believes that its Year 2000 project generally is on schedule.
Risks. Fortis is attempting to limit the potential impact of
the Year 2000 by monitoring the progress of its own Year 2000
project and those of its critical external relationships and
by developing contingency/recovery plans. Fortis cannot
guarantee that it will be able to identify and/or resolve all
of its Year 2000 issues. Any critical unresolved Year 2000
issues at Fortis or its external relationships, however, could
have a material adverse effect on the Fortis' results of
operations, liquidity or financial condition. If Fortis' Year
2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to
accurately and timely process benefit claims, update
customer's accounts, process financial transactions, bill
customers, assess exposure to risks, determine liquidity
requirements or report accurate data to management,
shareholders, customers, regulators and others as well as
business interruptions or shutdowns, financial losses, harm to
its reputation, increased scrutiny by regulators and
litigation related to Year 2000 issues.
Contingency Plans. Consistent with prudent due diligence
efforts, Fortis has defined contingency plans aimed at
ensuring the continuity of critical business functions before
and after December 31, 1999, should there be an unexpected
system failure. Fortis has developed plans that are designed
to reduce the negative impact on Fortis, and provide methods
of returning to normal operations, if failure occurs. Each
company has identified its mission critical systems using a
consistent set of requirements. Contingency plans have then
been developed (or are in the process of being developed) for
each of these mission critical systems. These plans include
identification of key I/T and business personnel that will be
on-site or on-call the week of January 1, 2000. Vacations for
all I/T staff have been limited during December, 1999 through
February, 2000 in order to monitor the first month end closing
for the Year 2000. There will be SWAT teams identified to
concentrate on any programming issues that arise with the
systems. Plans for manual processing have also been
identified for the mission critical systems.
<PAGE>
EXHIBIT A
FORTIS, INC. SUBSIDIARIES
First Fortis Life Insurance Company
Fortis Insurance Company (formerly known as Time Insurance
Company)
Fortis Benefits Insurance Company
American Security Insurance Company
Union Security Life Insurance Company
Standard Guaranty Insurance Company
Insureco, Inc.
Fortis Advisers Inc.
Fortis Investors, Inc.
United Family Life Insurance Company
Adultcare, Inc.
Dental Health Alliance, L.L.C.
Remembrance Institute, Inc.
Associated California State Insurance Agencies/Ardiel
Insurance Services, Inc.
John Alden Financial Corporation
John Alden Life Insurance Company
Houston National Life Insurance Company
Pierce National Life Insurance Company
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. No Forms 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
First Fortis Life Insurance Company
(Registrant)
Date: May 14, 1999
/s/ Larry M. Cains
Treasurer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000914804
<NAME> FIRST FORTIS LIFE INSURANCE COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 127,128
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 127,128
<CASH> 87
<RECOVER-REINSURE> 28,533
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 221,897
<POLICY-LOSSES> 104,373
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 8,418
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,000
0
0
<OTHER-SE> 36,705
<TOTAL-LIABILITY-AND-EQUITY> 221,897
14,392
<INVESTMENT-INCOME> 2,135
<INVESTMENT-GAINS> 421
<OTHER-INCOME> 337
<BENEFITS> 11,499
<UNDERWRITING-AMORTIZATION> 43
<UNDERWRITING-OTHER> 4,808
<INCOME-PRETAX> 935
<INCOME-TAX> 327
<INCOME-CONTINUING> 608
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 608
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 62,540
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
